JDA SOFTWARE GROUP INC - 10-Q Quarterly Report

14400 North 87th 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 28,993,809 as of November 7, 2003.


		Page No.

PART I: INTERIM FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and September 30, 2002		4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2003 and September 30, 2002		5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002		6
	Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			49
PART II: OTHER INFORMATION
Item 1. Legal Proceedings			51
Item 2. Changes in Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 5. Other Information			51
Item 6. Exhibits and Reports on Form 8-K			51
Signature			52

JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)


					September 30,			December 31,
					2003			2002

					(Unaudited)
				ASSETS
Current Assets:
	Cash and cash equivalents				$	77,590		$	71,065
	Marketable securities					37,416			30,790

		Total cash, cash equivalents and marketable securities				115,006			101,855
	Accounts receivable, net					39,685			47,077
	Income tax receivable					2,231			7,479
	Deferred tax asset					4,721			5,564
	Prepaid expenses and other current assets					13,398			12,289

		Total current assets				175,041			174,264
Property and Equipment, net						20,839			21,337
Goodwill						62,397			59,801
Other Intangibles, net						57,651			56,635
Promissory Note Receivable						2,929			3,017
Deferred Tax Asset						1,770			—

			Total assets		$	320,627		$	315,054

				LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable				$	2,982		$	3,020
	Accrued expenses and other liabilities					22,888			26,957
	Deferred revenue					28,416			23,331

			Total current liabilities			54,286			53,308
Deferred Tax Liability						—			4,980
Stockholders’ Equity:
	Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued or outstanding					—			—
	Common stock, $.01 par value; authorized, 50,000,000 shares; issued 29,235,769 and 28,696,688 shares, respectively					292			287
	Additional paid-in capital					242,904			237,120
	Retained earnings					29,780			27,353
	Accumulated other comprehensive loss					(2,083	)		(4,199	)

						270,893			260,561
	Less treasury stock, at cost, 414,702 and 339,702 shares, respectively					(4,552	)		(3,795	)

		Total stockholders’ equity				266,341			256,766

			Total liabilities and stockholders’ equity		$	320,627		$	315,054

JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data)
(unaudited)


			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2003		2002		2003			2002

REVENUES:
	Software licenses		$	19,121	$	10,801	$	42,353		$	48,620
	Maintenance services			18,630		14,851		52,332			41,875

		Product revenues		37,751		25,652		94,685			90,495
	Consulting services			18,451		21,825		52,409			69,568
	Reimbursed expenses			1,749		1,935		5,077			6,083

		Service revenues		20,200		23,760		57,486			75,651
		Total revenues		57,951		49,412		152,171			166,146

COST OF REVENUES:
	Cost of software licenses			429		140		852			1,264
	Amortization of acquired software technology			1,162		1,069		3,332			3,178
	Cost of maintenance services			4,466		3,605		12,754			10,453

		Cost of product revenues		6,057		4,814		16,938			14,895
	Cost of consulting services			14,605		15,158		42,784			47,757
	Reimbursed expenses			1,749		1,935		5,077			6,083

		Cost of service revenues		16,354		17,093		47,861			53,840
		Total cost of revenues		22,411		21,907		64,799			68,735

GROSS PROFIT				35,540		27,505		87,372			97,411
OPERATING EXPENSES:
	Product development			12,711		10,370		35,499			31,175
	Sales and marketing			11,960		9,196		29,744			29,851
	General and administrative			6,082		6,395		17,658			21,130
	Amortization of intangibles			798		711		2,242			2,137
	Relocation costs to consolidate development and client support activities			458		—		1,718			—
	Purchased in-process research and development			—		—		—			800
	Restructuring, office closure costs and other charges			—		—		—			1,295
	Gain on sale of office facility			—		—		(639	)		—

		Total operating expenses		32,009		26,672		86,222			86,388

OPERATING INCOME				3,531		833		1,150			11,023
	Other income, net			217		342		1,141			1,344
INCOME BEFORE INCOME TAXES				3,748		1,175		2,291			12,367
	Income tax provision (benefit)			374		417		(136	)		4,387

NET INCOME			$	3,374	$	758	$	2,427		$	7,980

BASIC EARNINGS PER SHARE			$	.12	$	.03	$	.09		$	.29

DILUTED EARNINGS PER SHARE			$	.11	$	.03	$	.08		$	.27

SHARES USED TO COMPUTE:
	Basic earnings per share			28,659		28,316		28,540			27,927

	Diluted earnings per share			29,368		28,677		28,899			29,273

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)

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


				Nine Months
				Ended September 30,

				2003			2002

OPERATING ACTIVITIES:
	Net income			$	2,427		$	7,980
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			12,247			11,584
		Provision for doubtful accounts			500			2,900
		Tax benefit – stock options and employee stock purchase plan			208			6,762
		Gain on sale of office facility			(639	)		—
		Net loss on disposal of property and equipment			93			30
		Write-off of purchased in-process research and development			—			800
		Deferred income taxes			(5,907	)		(9,011	)
	Changes in assets and liabilities:
		Accounts receivable			7,123			5,938
		Income tax receivable			5,299			3,066
		Prepaid expenses and other current assets			(603	)		(4,803	)
		Accounts payable			(38	)		2,782
		Accrued expenses and other liabilities			(3,848	)		(8,901	)
		Deferred revenue			2,945			8,620

			Net cash provided by operating activities		19,807			27,747

INVESTING ACTIVITIES:
	Purchase of marketable securities				(39,673	)		(31,256	)
	Sales of marketable securities				100			7,641
	Maturities of marketable securities				32,947			9,352
	Payment of direct costs related to the acquisition of E3 Corporation				(633	)		(8,261	)
	Purchase of Vista Software Solutions, Inc.				(4,006	)		—
	Purchase of Engage, Inc.				(3,349	)		—
	Purchase of J•Commerce, Inc.				—			(4,170	)
	Payments received on promissory note receivable				88			318
	Purchase of property and equipment				(7,107	)		(4,998	)
	Proceeds from disposal of property and equipment				1,783			290

			Net cash used in investing activities		(19,850	)		(31,084	)

FINANCING ACTIVITIES:
	Issuance of common stock — stock option plan				1,510			12,275
	Issuance of common stock — employee stock purchase plan				4,071			4,150
	Purchase of treasury stock				(757	)		(22	)
	Payments on capital lease obligations				(205	)		(239	)

			Net cash provided by financing activities		4,619			16,164

Effect of exchange rates on cash					1,949			793

Net increase in cash and cash equivalents					6,525			13,620

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD					71,065			51,865

CASH AND CASH EQUIVALENTS, END OF PERIOD				$	77,590		$	65,485

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


					Nine Months
					Ended September 30,

					2003			2002

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
		Cash paid for:
				Income taxes	$	2,111		$	3,617

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of Vista Software Solutions, Inc.:
	Fair value of current assets acquired				$	(662	)
	Software technology					(1,100	)
	Customer lists					(1,110	)
	Other intangible assets					(80	)
	Goodwill					(2,290	)
	Deferred revenue					681

			Total acquisition cost of Vista Software Solutions, Inc.			(4,561	)
	Accruals for direct costs related to the acquisition					555

			Total cash expended to acquire Vista Software Solutions, Inc.		$	(4,006	)

Acquisition of Engage, Inc.:
	Fair value of fixed assets acquired				$	(350	)
	Software technology					(2,200	)
	Customer lists					(2,100	)
	Goodwill					(306	)
	Deferred revenue					1,488

			Total acquisition cost of Engage, Inc.			(3,468	)
	Accruals for direct costs related to the acquisition					119

			Total cash expended to acquire Engage, Inc.		$	(3,349	)

Acquisition of J•Commerce, Inc.:
	Software technology							$	(2,060	)
	In-process research and development								(800	)
	Goodwill								(1,325	)

			Total acquisition cost of J•Commerce, Inc.						(4,185	)
	Accruals for direct costs related to the acquisition								15

			Total cash expended to acquire J•Commerce, Inc.					$	(4,170	)

JDA SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares, per share amounts, or as otherwise stated)
(unaudited)

The accompanying unaudited condensed 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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 was adopted effective January 1, 2003. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF No. 94-3. Under SFAS No. 146, the liability for costs associated with exit or disposal activities is recognized and measured initially at fair value only when the liability is incurred, rather than at the date the Company committed to the exit plan. All exit or disposal activities that have occurred since January 1, 2003 have been accounted for in accordance with SFAS No. 146.

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” which clarifies the requirement of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for and disclosures of certain guarantee issues. Our standard software license agreements contain an infringement indemnity clause under which we agree to indemnify and hold harmless our customers and business partners against liability and damages arising from claims of copyright or other intellectual property infringement by our products. These terms constitute a form of guarantee that is subject to the disclosure requirements, but not the initial recognition or measurement provisions of FIN 45. We have never lost an infringement claim and our costs to defend such lawsuits have been insignificant. Although it is possible that in the future third parties may claim that our current or potential future software solutions or we infringe on their intellectual property, we do not expect a significant impact on our business, operating results, or financial condition.

In December 2002, 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 is effective for fiscal years ending after December 15, 2002. SFAS No. 148 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. We are currently evaluating which method of transition to fair value accounting we will elect.

The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per share as if stock-based employee compensation had been recognized during the three and nine month periods ended September 30, 2003 and 2002. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” Variable interest entities are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit it to operate on a stand-alone basis. We do not participate in variable interest entities.

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). The provisions of SFAS No. 149 amend and clarify the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. We currently have no derivative instruments and have not engaged in any material foreign currency hedging transactions.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 requires certain financial instruments that embody obligations of the issuer, and which have characteristics of both liabilities and equity, to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. We do not have any financial instruments, as defined in SFAS No. 150, that have characteristics of both liabilities and equity.

Vista Software Solutions, Inc. On April 30, 2003 we acquired substantially all the intellectual property of Vista Software Solutions, Inc. (“Vista”), and Vista’s active customer agreements for a total cost of $4.6 million, which includes the cash purchase price of $3.8 million plus $780,000 in direct costs of the acquisition. Vista is a provider of collaborative business-to-business software solutions that enable retailers and consumer goods manufacturers to more efficiently synchronize and integrate data, including product descriptions, product images, pricing and promotion information throughout their supply and demand chains. Vista’s solutions also enable consumer goods manufacturers to manage trade promotions, minimize trade deductions costs and more accurately forecast product demand. With this acquisition, we have expanded the JDA Portfolio with complementary software products that leverage the Microsoft .Net Platform and address the critical need for server-to-server data synchronization in Internet-based collaborative commerce. The acquisition was accounted for as a purchase, and accordingly, the operating results of Vista have been included in our consolidated financial statements from the date of acquisition. 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.

Engage, Inc. On August 4, 2003 we acquired substantially all the remaining assets of Engage, Inc. (“Engage”) for a total cost of $3.5 million, which includes the cash purchase price of $3.0 million plus $468,000 in direct costs of the acquisition. Engage is a provider of enterprise advertising, marketing and promotion software solutions that improve a retailer’s promotion planning process and their delivery of marketing and advertising content. Engage’s advanced digital asset, content management and ad layout capabilities will merge with our existing Portfolio Revenue Management and Portfolio Knowledge Base applications to further expand our JDA Portfolio with functionality that streamlines the communication and collaboration among a retailer’s merchandising, promotions, production and store operation teams. The acquisition was accounted for as a purchase, and accordingly, the operating results of Engage have been included in our consolidated financial statements from the date of acquisition. 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.

During the nine months ended September 30, 2003, we recorded goodwill of $1.3 million and $306,000 in connection with our acquisition of certain intellectual property of Vista and Engage, respectively. During the nine months ended September 30,2003, we found no indication of impairment of any of the goodwill balances allocated to the individual reporting units. Accordingly, absent future indications of impairment, the next annual impairment test will be performed in fourth quarter 2003.

Earnings per share for the three and nine months ended September 30, 2003 and 2002 is calculated as follows:

Restructuring, Office Closure Costs and Other Charges, and Relocation Costs to Consolidate Development and Client Support Activities

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 a 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”), a worldwide initiative 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.

Implementation of the CVP included adjustments to our workforce and a reallocation of our resources in response to a fundamental shift in the way we develop product and bring it to market, as well as to changes in the demand for the various types of products we sell, the length of implementation efforts required and associated skill requirements. The workforce reduction enabled us to better align our cost structure during the recent economic downturn, which has adversely impacted our revenues, elongated our selling cycles, and delayed, suspended or reduced the demand for certain of our products. 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 (“FTE”) and certain office closures. The workforce reduction included certain employees involved in product development (55 FTE) and client support services (22 FTE) who chose not to relocate, and reductions in consulting services personnel (62 FTE), sales and marketing personnel (37 FTE), and administrative functions (28 FTE). We have hired, expect to hire, or have transferred from other departments within the Company, approximately 45 FTE in product development and client support services to replace those individuals who have chosen not to relocate to our corporate headquarters. All employees potentially impacted by this reorganization were notified of the plan of termination and the related benefits on or before December 31, 2002. Office closure costs pertain to certain US, Latin American, and European offices that were either under-performing or became redundant with the reorganization.

Approximately 150 people were offered the opportunity to relocate as part of the CVP initiative to consolidate our development and client support activities. As of September 30, 2003, a total of 50 employees have relocated and we currently anticipate that two additional employees will relocate in the next three months. We negotiated temporary retention arrangements ranging from nine months to two years with 41 employees who have chosen not to relocate in order to facilitate a smooth transition. We have subsequently offered indefinite full-time employment to 16 of these employees, who we believe are strategic to our current development efforts, and rescinded their retention arrangements. We have incurred $2.2 million in relocation costs through September 30, 2003, including $458,000 and $1.7 million during the three and nine months ended September 30, 2003, respectively. We expect to incur an additional $150,000 to $200,000 in relocation costs during the next three

months to complete the consolidation of development and client support activities. The relocation costs have been reported in income from continuing operations as incurred. Accordingly, there were no accrued liabilities associated with these charges at September 30, 2003 or December 31, 2002.

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

In third quarter 2003, we reduced our estimate of severance, benefits and legal costs by $214,000, primarily as a result of our decision to offer indefinite full-time employment to certain employees previously subject to temporary retention arrangements, and accrued an additional $196,000 for office closure costs based on our revised estimate of the time required to sublease the vacated office space in the current economic environment. Both adjustments were made through the income statement. The remaining balance for severance, benefits and legal costs represents the unpaid amounts under a disputed termination agreement with a foreign employee. The remaining balance for office closure costs is being paid out as the leases and any related subleases run through their remaining terms.

In conjunction with the acquisition of E3 Corporation (“E3”) in September 2001, we recorded initial acquisition reserves of approximately $14.6 million for restructuring charges 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 the E3 acquisition reserves by $1.3 million during 2002 based on our revised estimates of the restructuring costs to exit the activities of E3 and the other direct costs of the acquisition. In third quarter 2003, we reduced our estimate of employee severance and termination benefits costs by $172,000 based upon the final settlement with certain international employees 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. Both adjustments were made through the income statement. The unused portion of the acquisition reserves, which is included in accrued expenses and other liabilities on the balance sheet, was $625,000 at September 30, 2003 and $1.2 million at December 31, 2002. A summary of the charges and adjustments recorded against the reserves is as follows:


		Initial		Cash			Adj to			Balance		Cash			Non-Cash			Adj to			Balance
Description of charge		Reserve		Charges			Reserves			Dec 31, 2002		Charges			Charges			Reserves			Sept 30, 2003

Restructuring charges under EITF 95-3:
Facility termination and sublease costs		$	4,689	$	(5,040	)	$	1,129		$	778	$	(318	)	$	(25	)	$	190		$	625
Employee severance and termination benefits			4,351		(4,115	)		184			420		(248	)					(172	)		—
Termination payments to distributors			500		(100	)		(400	)		—		—			—			—			—
E3 user group and trade show cancellation fees			84		(72	)		(12	)		—		—			—			—			—
Direct costs under SFAS 141:
Legal and accounting costs			2,344		(2,709	)		407			42		(42	)		—			—			—
Investment banker fees			2,119		(2,119	)		—			—		—			—			—			—
Due diligence fees and expenses			350		(376	)		26			—		—			—			—			—
Filing fees, appraisal services and transfer taxes			110		(100	)		(10	)		—		—			—			—			—

	Total	$	14,547	$	(14,631	)	$	1,324		$	1,240	$	(608	)	$	(25	)	$	18		$	625

The facility termination and sublease costs are 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. Immediately following the consummation of the E3 acquisition, the Company engaged real estate advisers and began the necessary activities to shut down the offices and sublet the locations or negotiate early termination agreements with the various landlords. The most significant E3 facility (the former Corporate Headquarters) was difficult to sublet and in July 2002 we settled with the landlord by paying a $3.4 million lease termination fee. This resulted in a $950,000 adjustment to the facility termination and sublease costs acquisition reserve. The remaining amounts in this reserve are being paid out as the leases and any related subleases run through their remaining terms.

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. As of September 30, 2003, all employee severance and termination benefits had been paid.

In July 2002, our Board of Directors authorized the repurchase of up to two million shares of our outstanding common stock. Under this repurchase program, we periodically repurchased common shares on the open market at prevailing market prices during a one-year period ended July 22, 2003. We repurchased a total of 175,000 shares of our common stock for $1.8 million under this program, including 75,000 shares that were purchased during the nine months ended September 30, 2003 for $757,000.

We terminated our 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”) on August 15, 2003 because purchases under the 1999 Purchase Plan would be considered compensatory under SFAS No. 123, Accounting for Stock-Based Compensation. The 1999 Purchase Plan provided eligible employees the ability to purchase our common stock semi-annually at 85% of the lesser of (1) the fair market value on the first day of the 24 months offering period, or (2) the fair market value on the last day of each semi-annual purchase period. During the nine months ended September 30, 2003, 385,003 shares were purchased at prices ranging from $10.57 to $10.58.

We recorded a provision for income taxes of $374,000, or 10% of the reported income before income taxes in the three months ended September 30, 2003 compared to a provision for income taxes of $417,000, or 35.5% of income before income taxes in the three months ended September 30, 2002. We recorded an income tax benefit of $136,000, or 6% of the reported income before income taxes in the nine months ended September 30, 2003 compared to a provision for income taxes of $4.4 million, or 35.5% of income before income taxes in the nine months ended September 30, 2002. The provision for income taxes recorded in third quarter 2003, and the income tax benefit in the nine months ended September 30, 2003, are reported net of 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 income tax rate for 2003, excluding the effect of the $938,000 one-time tax benefit, is 35% and takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits.

We have reached a settlement with the Internal Revenue Service on their examination of our 1998 and 1999 federal income tax returns. Under this settlement, the Internal Revenue Service has agreed to allow the Company to take a research and development expense tax credit for most of the qualifying expenses originally reported in the 1998 and 1999 federal income tax returns. However, the Internal Revenue Service has advised that they cannot issue a refund check until they complete a subsequent audit of our 2000 and 2001 federal income tax returns. This audit is expected to take six to nine months and no material adjustments are anticipated.

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 (includes the United States, Canada and Latin America), Europe (includes the Middle East and Africa), 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:

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Retail Enterprise Systems include corporate level merchandise management systems that enable retailers to optimize their inventory control, product mix, pricing and promotional strategies, automate demand forecasting and replenishment, and enhance the productivity and accuracy of warehouse processes. In addition, Retail Enterprise Systems include a comprehensive set of tools for analyzing business results and trends, tracking customer shopping patterns, space management, trade allowance and promotional program management, production planning, layout and delivery of advertising content, and for monitoring strategic plans and tactical decisions.

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In-Store Systems include point-of-sale, e-commerce 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 systems using hand-held, radio frequency devices, point-of-sale workstations or via the Internet.

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Collaborative Solutions include applications that enable business-to-business collaborative planning, forecasting and replenishment between retailers and their suppliers. Collaborative Solutions, which currently include portions of Retail Enterprise Systems applications that can be used by suppliers as well as collaboration specific solutions, enable retailers and their suppliers to optimize the sharing of plans, information and supply chain decisions between trading partners in such areas as inventory replenishment, marketing/promotions, sales planning/execution and category management.

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, 2003 and 2002 is as follows:


		Three Months						Nine Months
		Ended September 30,						Ended September 30,

		2003			2002			2003			2002

Revenues:
	Retail Enterprise Systems	$	43,047		$	32,063		$	107,082		$	112,907
	In-Store Systems		3,873			6,237			10,341			20,473
	Collaborative Solutions		11,031			11,112			34,748			32,766

		$	57,951		$	49,412		$	152,171		$	166,146

Operating income (loss):
	Retail Enterprise Systems	$	7,558		$	5,437		$	13,865		$	24,331
	In-Store Systems		254			802			(202	)		5,009
	Collaborative Solutions		3,057			1,700			8,466			7,045
	Other (see below)		(7,338	)		(7,106	)		(20,979	)		(25,362	)

		$	3,531		$	833		$	1,150		$	11,023

Depreciation:
	Retail Enterprise systems	$	1,518		$	1,432		$	4,792		$	4,394
	In-Store systems		201			312			673			879
	Collaborative Solutions		323			383			1,208			996

		$	2,042		$	2,127		$	6,673		$	6,269

Other:
	Amortization of intangible assets	$	798		$	711		$	2,242		$	2,137
	In-process research and development charge		—			—			—			800
	Relocation costs to consolidate development and support activities		458			—			1,718			—
	Restructuring, office closure costs and other charges		—			—			—			1,295
	Gain on sale of office facility		—			—			(639	)		—
	General and administrative expenses		6,082			6,395			17,658			21,130

		$	7,338		$	7,106		$	20,979		$	25,362

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, sales and marketing expenses, product development expenses, as well as allocations for 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.

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 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 an extended 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.

with suppliers and customers over the Internet at multiple levels within their organization. We also offer maintenance services to our software customers, and enhance and support our software business by offering specific 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 more predictable but generate lower gross margins than software license revenues.

Outlook for Fourth Quarter 2003. We continue to have a strong software sales pipeline, particularly in North America, and we believe there are a significant number of sales opportunities that will support a sustained level of activity. However, we believe at this time there are a limited number of outstanding prospects in the transaction system market for Portfolio Merchandise Management Systems and Portfolio Store Systems. The preponderance of the business in the near term software sales pipeline continues to be for Strategic Merchandise Management Solutions.

We currently anticipate that our software license and maintenance services revenue results in fourth quarter 2003 will improve compared to fourth quarter 2002 and compared to third quarter 2003. We believe the anticipated growth in software and maintenance services revenues will be offset in part by a decline in service revenues and service margins (see “Our Service Revenues and Service Margins Continue to Decline”), and seasonally higher incentive compensation, particularly in sales and consulting as employees begin to hit accelerators in their compensation plans. In addition, we expect total expense in fourth quarter 2003 to increase as a result of owning Engage for a full quarter (see "We Have Completed the Acquisitions of Vista Software Solutions, Inc. and Engage, Inc.”) as compared to only two months in third quarter 2003.

Economic Conditions Continue to Impact our Operating Results. Our operating results continue to be impacted by weak economic conditions in certain geographic regions and the continued weakness in the retail industry. We believe economic conditions in the Americas region may have begun to recover, as our customers appear to have improved confidence and willingness to make capital expenditures for information technology. However, the outlook for the other regions of the world remains inconsistent and we see no broad signs of improvement in Europe or Asia/Pacific. Furthermore, although some of the factors that negatively impacted our operating results in the early months of 2003 are still present, namely (i) the disruption from the early phases of implementation of the Customer Value Program (see “The Implementation of the Customer Value Program Has Impacted Our Operating Results”), (ii) the US war with and continued violence in Iraq, (iii) the economic uncertainty related to the threat of future terrorist attacks and wars, and (iv) the Severe Acute Respiratory Syndrome (“SARS”), we believe their importance and impact on our operating results have diminished.

The retail 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 four large software licenses ($1.0 million or greater) during both third and second quarter 2003 as compared to none during first quarter 2003, three in fourth quarter 2002 and one in second quarter 2002. 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 over one year. We continue to 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.

Economic conditions have negatively impacted the demand for our Portfolio Merchandise Management Systems and Portfolio Store Systems over the past two years and we believe there is still no evidence to support a sustained return to the historical levels of activity in the transaction systems market in the near term. We did, however, sign five new Portfolio Merchandise Management Systems licenses in third quarter 2003. We believe the next drivers for growth in the transaction systems market will be sustained economic improvement, the introduction and acceptance of Portfolio Point of Sales (“PPOS”), our Java-based In-Store System that was commercially released in second quarter 2003, and the .Net Platform version of our Portfolio Merchandise Management Systems, which is still under development, that we believe will provide our customers easier implementation of software applications in a modular format and lower total cost of ownership (see “We Continue to Invest in New

Product Development and Have Expanded Our Markets"). We sold PPOS to our first beta customer in third quarter 2003. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms.

Our Competitive Environment is Changing. The pace of consolidation in our industry continues to accelerate and there is a trend towards fewer, larger software vendors. This will ultimately translate into a smaller number of companies that will offer an enterprise solution set. We believe the JDA Portfolio provides a competitive advantage as it offers the broadest integrated enterprise solution set in the retail supply chain market today and the deepest functionality in any individual solution area, particularly in those functional areas that are of greatest interest to retailers in the current economic environment. Since 2001, the majority of our software license revenues have been associated with our Strategic Merchandise Management Solutions that require lower levels of services to implement and provide a quicker return on investment (“ROI”). None of our competitors have a solution set equivalent to our Strategic Merchandise Management Solutions, and as a result, their competitive impact may have become less relevant. We also believe existing and potential customers are exhibiting an increased desire to purchase solutions from a single vendor that provides an integrated enterprise solution set rather than dealing with multiple smaller point solution vendors. For example, we signed six multi-product licenses during third quarter 2003. We believe our broad enterprise solution set will result in continued sales of multi-product licenses.

We believe decisions to purchase information technology are currently being driven by the competitive nature of the retail industry. Although there is continued weakness in the industry, retailers do not want to get left behind. As a result, we believe retailers may be taking the opportunity now to invest in technologies that will position them for improved performance in the marketplace when the economy improves. We also believe that many of our customers now view JDA as a long-term solution provider with the ability to provide the kind of business solutions partnership they’re looking for. Furthermore, there appears to be a growing confidence in our ability to deliver software solutions to the largest retail customers. During third quarter 2003 we signed licenses with two “Tier 1” retail customers, which we define as retailers with more than $5 billion in annual revenues, one of which included a license for a Portfolio Merchandise Management System and several other JDA Portfolio products.

Software license revenues from existing customers, as a percentage of total software license revenues, has generally increased over the past two years, and represented 70% of total software revenues during the nine months ended September 30, 2003 compared to 60% in the nine months ended September 30, 2002. We believe this trend will continue 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 placed on selling more JDA Portfolio products to existing customers through our Customer Value Program. Over the past three years, the addition of Strategic Merchandise Management Solutions such as Portfolio Space Management by Intactix and Portfolio Replenishment by E3 to the JDA Portfolio have provided significant back-selling opportunities in our customer base. The majority of our customers only own one JDA product.

Our Business Segment Revenue Mix is Changing. The In-Store Systems business segment provided 7% of our total revenues in the nine months ended September 30, 2003 compared to 12% in the nine months ended September 30, 2002. PPOS, our Java-based In-Store System, was commercially released in second quarter 2003 and was sold to our first beta customer in third quarter 2003. We do not believe the In-Store Systems business segment will grow until economic conditions improve and early adopters of the PPOS application complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms.

The Collaborative Solutions business segment, which includes sales of software licenses and services to customers outside our traditional retail market, provided 23% of our total revenues in the nine months ended September 30, 2003 compared to 20% in the nine months ended September 30, 2002. Our collaborative specific solutions enable retailers and their suppliers to optimize the sharing of plans, information and supply chain decisions between trading partners in such areas of inventory replenishment, marketing/promotions, sales planning/execution and category management. As of September 30, 2003, there were 175 trading partners worldwide that are live and

operational on our Marketplace Replenishment application that enables manufacturers, distributors and retailers to work from a single, shared demand forecast.

We are aggressively looking to acquire solutions that will increase the breadth of our JDA Portfolio offerings in the In-Store Systems and Collaborative Solutions business segments.

Our Service Revenues and Service Margins Continue to Decline. Service revenues, which include consulting services, training revenues and reimbursed expenses, decreased 24% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, primarily due to a decrease in demand for the implementation of Portfolio Merchandise Management Systems and Portfolio Store Systems. As a result of the economic downturn, we believe retailers have changed their buying behavior and that this has resulted in a fundamental shift in the mix of demand for the various types of products we sell from high dollar projects to higher ROI point solutions that have shorter implementation timeframes. We also believe the average implementation times for our software products have declined due to increased training and expertise in our consulting organization, and as a direct result of the investments we have made over the past few years to increase the functionality, stability, scalability, integration and ease of implementation of the products in the JDA Portfolio. Furthermore, since 2001 the majority of our product demand has been associated with our Strategic Merchandise Management Solutions that require lower levels of services to implement, and as a result, it is harder to attain optimum productivity from our consulting staff. We expect service revenues to be approximately $1.5 million to $2.0 million lower in fourth quarter 2003 compared to third quarter 2003 due to the normal seasonal impact of the holidays.

Service revenue margins were 17% in the nine months ended September 30, 2003, compared to 29% in the nine months ended September 30, 2002. The decrease in service revenue margins is attributable to lower utilization of our consulting personnel and higher incentive compensation and benefit costs. Our utilization rate decreased to 47% in third quarter 2003 compared to 50% in second quarter 2003 and 50% in third quarter 2002. We do not believe the lower utilization rates are simply a result of excess headcount. Rather, we believe the lower utilization rates result from the continuing weak economic conditions that have decreased the overall demand for Portfolio Merchandise Management Systems and Portfolio Store Systems and the related implementation services, and the improved integration and reduced implementation timeframes for the products in the JDA Portfolio. We believe implementation timeframes will continue to shorten and as a result, our service organization will need to become more efficient while being deployed on multiple short projects instead of more focused longer term engagements. We are currently evaluating new ways to deliver and charge for our services that we believe will address this issue. However, improvement of our service margins is not expected to occur immediately and service margins will decline before they begin to improve. We currently expect service margins to drop approximately $3.0 million to $3.5 million in fourth quarter 2003 compared to third quarter 2003. The anticipated reduction in service margins results from the combination of our product mix, the seasonal impact of the holidays, the timing and acceptance of work performed under fixed bid arrangements, and our expectation of sequentially higher software license sales in fourth quarter 2003 that will trigger accelerators in our compensation plans for service employees. We do not expect the remedial measures we have taken to address this issue will have a significant impact until first quarter 2004. At that time we expect to have the ability to forecast the duration of the depressed service margins with more accuracy.

The effect of lower service revenues on our margins was offset in part by a $1.2 million decrease and a $2.5 million decrease in employee costs during the three and nine months ended September 30, 2003, respectively related to consulting services employees who were used to supplement new product development and quality assurance activities, and to assist with business development and client support activities under the CVP. The cross-utilization of consulting services employees is expected to continue in fourth quarter 2003.

The Implementation of the Customer Value Program Has Impacted Our Operating Results. We reorganized the Company in fourth quarter 2002 in connection with the implementation of the Customer Value Program (“CVP”) effective January 1, 2003. Implementation of the CVP caused initial disruptions in our sales, services and training functions that negatively impacted our revenues and operating results in the early months of 2003. The most significant negative impact of the CVP implementation is behind us and we expect the transition to be completed by the end of 2003. 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 revenues, (v) better align our cost structure, and (vi) improve our operating results. We believe many of these goals have been met, and that the CVP may have resulted in various

invitations from customers in recent quarters to participate in their strategic business development activities.

We recorded a $5.0 million restructuring in fourth quarter 2002 for the workforce reduction and office closure costs to reorganize the Company in connection with the implementation of the CVP. In addition, we have incurred $2.2 million in relocation costs through September 30, 2003, including $458,000 and $1.7 million during the three and nine months ended September 30, 2003, respectively, to consolidate our development and client support activities. We expect to incur an additional $150,000 to $200,000 in relocation costs during the next three months to complete the consolidation of development and client support activities. The relocation costs have been reported in income from continuing operations as incurred. Accordingly, there were no accrued liabilities associated with these charges at September 30, 2003 or December 31, 2002.

We Continue to Invest in New Product Development and Have Expanded Our Markets. We invested $16.1 million and $42.9 million in the three and nine months ended September 30, 2003, respectively, and approximately $292 million from 1998 to 2002 in new product development and the acquisition of complimentary products while remaining profitable and cash flow positive from operations. The acquisitions of Intactix, Zapotec, NeoVista Decision Series, E3, Vista and Engage have expanded our product offerings, and 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 to the JDA Portfolio products, based upon the Microsoft .Net technology platform (“.Net 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. Our goal is to begin delivering applications on the .Net Platform in mid-2004, starting with Portfolio Replenishment by E3, Portfolio Planning by Arthur, and certain of our Intellect applications. This is a significant investment by the Company as we are 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. For example, we announced the commercial availability of PPOS, our Java-based In-Store System in second quarter 2003 and currently plan to deliver JDA Portfolio 2004, a fully synchronized, integrated release of all our existing products, in first quarter 2004.

During second quarter 2003 we announced a JDA Portfolio Investment Protection Program that provides existing customers with an upgrade path 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 currently expect quarterly product development expense to remain at approximately third quarter 2003 levels until the release of our first products on the .Net Platform in mid-2004.

We Have Completed the Acquisitions of Vista Software Solutions, Inc. and Engage, Inc. On April 30, 2003 we acquired substantially all the intellectual property of Vista Software Solutions, Inc. (“Vista”), and Vista’s active customer agreements for a total cost of $4.6 million, which includes the purchase price of $3.8 million plus $780,000 in direct costs of the acquisition. Vista is a provider of collaborative business-to-business software solutions that enable retailers and consumer goods manufacturers to more efficiently synchronize and integrate data, including product descriptions, product images, pricing and promotion information throughout their supply and demand chains.

Vista’s solutions also enable consumer goods manufacturers to manage trade promotions, minimize trade deductions costs and more accurately forecast product demand. With this acquisition, we have expanded the JDA Portfolio with complementary software products that leverage the Microsoft .Net Platform and address the critical need for server-to-server data synchronization in Internet-based collaborative commerce. The acquisition was accounted for as a purchase, and accordingly, the operating results of Vista have been included in our consolidated financial statements from the date of acquisition. In connection with the Vista acquisition, we added 13 new employees, primarily in product development, and recorded $2.3 million of goodwill, $1.1 million in software technology, and $1.2 million for customer lists and other intangibles. Vista contributed $888,000 in total revenues during nine months ended September 30, 2003, including $275,000 in software license revenues and $473,000 in maintenance services revenue. Pro forma operating results have not been presented, as the acquisition is not material to our consolidated financial statements.

On August 4, 2003 we acquired substantially all the remaining assets of Engage, Inc. (“Engage”) for a total cost of $3.5 million, which includes the cash purchase price of $3.0 million plus $468,000 in direct costs of the acquisition. Engage is a provider of enterprise advertising, marketing and promotion software solutions that improve a retailer’s promotion planning process and their delivery of marketing and advertising content. Engage’s advanced digital asset, content management and ad layout capabilities will merge with our existing Portfolio Revenue Management and Portfolio Knowledge Base applications to further expand our JDA Portfolio with functionality that streamlines the communication and collaboration among a retailer’s merchandising, promotions, production and store operation teams. The acquisition was accounted for as a purchase, and accordingly, the operating results of Engage have been included in our consolidated financial statements from the date of acquisition. In connection with the Engage acquisition, we added 31 new employees, approximately half of which are in product development, and recorded $306,000 of goodwill, $2.2 million in software technology, and $2.1 million for customer lists. Engage contributed over $720,000 in total revenues during the three months ended September 30, 2003, including $353,000 in maintenance services revenues and $315,000 in service revenues, and added $820,000 in expense. Pro forma operating results have not been presented, as the acquisition is not material to our consolidated financial statements.

Our Financial Position is Strong and We Have Positive Operating Cash Flow. We continue to maintain a strong financial position during the current difficult economic cycle. As of September 30, 2003, we had $115 million in cash, cash equivalents and marketable securities, and no debt. In addition, during the nine months ended September 30, 2003 we generated $19.8 million in positive cash flow from operations.

Hamish N. J. Brewer Has Been Promoted to Chief Executive Officer. Hamish N. J. Brewer was promoted to Chief Executive Officer on August 4, 2003 having served as our President since April 2001 and as a senior officer of the Company since 1996. He succeeds James D. Armstrong who will continue as Chairman of the Board. As Chairman, Mr. Armstrong will retain his active leadership role, focusing on strategic planning, merger and acquisition opportunities, major product decisions and key customer relationships.

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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Revenue recognition. Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses such as commissions and royalties. We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy.

We license software under non-cancelable agreements and provide related services, including consulting, training and customer support. We recognize revenue in accordance with Statement of Position 97-2 (“SOP 97-2”), Software Revenue Recognition, as amended and interpreted by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions, as well as

Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants. We adopted Staff Accounting Bulletin No. 101 (“SAB 101”), Revenue Recognition in Financial Statements, during first quarter 2000. SAB 101 provides further interpretive guidance for public companies on the recognition, presentation, and disclosure of revenue in financial statements. The adoption of SAB 101 did not have a material impact on our licensing or revenue recognition practices.

Software license revenue is recognized when a license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. If a software license contains an undelivered element, the vendor-specific objective evidence (“VSOE”) of fair value of the undelivered element is deferred and the revenue recognized once the element is delivered. The undelivered elements are primarily training, consulting and maintenance services. VSOE of fair value for training and consulting services is based upon standard hourly rates charged when those services are sold separately. VSOE of fair value for maintenance is the price the customer will be required to pay when it is sold separately (that is, the renewal rate). In addition, if a software license contains customer acceptance criteria or a cancellation right, the software revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period or cancellation right. Payments for our software licenses are typically due in installments within twelve months from the date of delivery. Although infrequent, where software license agreements call for payment terms of twelve months or more from the date of delivery, revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied.

Consulting and training services are separately priced, are generally available from a number of suppliers, and are not essential to the functionality of our software products. Consulting services, which include project management, system planning, design and implementation, customer configurations, and training are billed on both an hourly basis and under fixed price contracts. Consulting services revenue billed on an hourly basis is recognized as the work is performed. Training revenues are recognized when the training is provided and is included in consulting revenues in the Company’s consolidated statements of income. Under fixed price contracts, consulting services revenue is recognized using the percentage of completion method of accounting by relating hours incurred to date to total estimated hours at completion.

We have from time to time provided software and consulting services under fixed price contracts that require the achievement of certain milestones, and the payment terms in these contracts are generally tied to customer acceptance of the milestones. The revenue under such arrangements is recognized as the milestones are achieved or upon customer acceptance. We believe that milestones are a proper measure of progress under these contracts, as the milestones approximate the percentage of completion method of accounting.

Customer support services include post contract support and the rights to unspecified upgrades and enhancements. Maintenance revenues from ongoing customer support services are billed on a monthly basis and recorded as revenue in the applicable month, or on an annual basis with the revenue being deferred and recognized ratably over the maintenance period.

If an arrangement includes multiple elements, the fees are allocated to the various elements based upon VSOE of fair value, as described above.

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Accounts Receivable. Consistent with industry practice and to be competitive in the retail software marketplace, we typically provide installment payment terms on most software license sales. Software licenses are generally due in installments within twelve months from the date of delivery. All significant customers are reviewed for creditworthiness before the Company licenses its software and we do not sell our software or recognize any license revenue unless we believe that collection is probable in accordance with the requirements of paragraph 8 in SOP 97-2. We have a history of collecting software payments when they come due without providing refunds or concessions. Consulting services are billed bi-weekly and maintenance services are billed annually or monthly. If a customer becomes significantly delinquent or its credit deteriorates, we put the accounts on hold and do not recognize any further services revenue (and in most cases we withdraw support and/or our implementation staff) until the situation has been resolved.

We do not have significant billing or collection problems. Although infrequent and unpredictable, from time to time certain of our customers have filed bankruptcy and we have been required to refund the pre-petition amounts collected and settle for less than the face value of their remaining receivable pursuant to a bankruptcy court order. In these situations, as soon as it becomes probable that the net realizable value of the receivable is impaired, we provide reserves on the receivable. In addition, we monitor economic conditions in the various geographic regions in which we operate to determine if general reserves or adjustments to our credit policy in a region are appropriate for deteriorating conditions that may impact the net realizable value of our receivables.

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Intangible Assets. Our business combinations typically result in goodwill and other intangible assets, which affects the amount of future period amortization expense and possible impairment expense that we will incur. The determination of the value of such intangible assets and the annual impairment tests require management to make estimates of future revenues, customer retention rates and other assumptions that affect our consolidated financial statements.

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Income Taxes. Our income tax policy records the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We follow specific and detailed guidelines regarding the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required.

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Stock-Based Compensation. We do not record compensation expense for options granted to our employees as all options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, we do not record compensation expense for shares issued under our employee stock purchase plan. As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), we have elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and provide pro forma disclosure on a quarterly and annual basis of net income (loss) and net income (loss) per common share for employee stock option grants made, and shares issued under our employee stock purchase plan, as if the fair-value method defined in SFAS No. 123 had been applied. We terminated our 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”) on August 15, 2003 because purchases under the 1999 Purchase Plan would be considered compensatory under SFAS No. 123, Accounting for Stock-Based Compensation.

The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per share as if stock-based employee compensation had been recognized during the three and nine-month periods ended September 30, 2003 and 2002. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

Three months ended September 30, 2003 Compared to Three months ended September 30, 2002

Revenues consist of product revenues and services revenue, which represented 65% and 35%, respectively, of total revenues in the three months ended September 30, 2003 compared to 52% and 48%, respectively in the three months ended September 30, 2002. Total revenues for the three months ended September 30, 2003 were $58.0 million, an increase of $8.6 million, or 17%, over the $49.4 million reported in the three months ended September 30, 2002.

Software Licenses. Software license revenues for the three months ended September 30, 2003 increased 77% to $19.1 million from $10.8 million in the three months ended September 30, 2002. The increase results primarily from an increase in sales of Portfolio Merchandise Management Systems and Strategic Merchandise Management Solutions in our Retail Enterprise Systems business segment. Although we signed five new Portfolio Merchandise Management Systems licenses in third quarter 2003, we believe at this time there are a limited number of outstanding prospects in the transaction system market for Portfolio Merchandise Management Systems and Portfolio Store Systems. The preponderance of the business in the near term software sales pipeline continues to be for Strategic Merchandise Management Solutions. We currently anticipate that total software license revenues in fourth quarter 2003 will improve compared to fourth quarter 2002 and compared to third quarter 2003.

Software license revenues from existing customers, as a percentage of total software license revenues, represented 53% of total software revenues during the three months ended September 30, 2003 compared to 69% in the three months ended September 30, 2002. The mix of software license revenues from existing customers can vary significantly from quarter-to-quarter. For example, software license revenues from existing customers, as a percentage of total software license revenues was 92% in second quarter 2003, 69% in first quarter 2003, and 69% in third quarter 2002. We believe that over time this metric will average about 65% to 75% and directly results from our large customer base, principally amassed through our acquisition activities in 2000 and 2001, and the focus we have placed on selling more JDA Portfolio products to existing customers through our Customer Value Program. Over the past three years, the addition of Strategic Merchandise Management Solutions such as Portfolio Space Management by Intactix and Portfolio Replenishment by E3 to the JDA Portfolio have provided significant back-selling opportunities in our customer base. The majority of our customers only own one JDA product.

Software license revenues in the Retail Enterprise Systems Business segment increased 217% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002. This increase results primarily from an increase in sales of Portfolio Merchandise Management Systems and Strategic Merchandise Management Solutions. In-Store Systems software license revenues decreased 49% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002. PPOS, our Java-based In-Store System, was commercially released in second quarter 2003 and was sold to our first beta customer in third quarter 2003. We do not believe the In-Store Systems business segment will grow until economic conditions improve and early adopters of the PPOS application complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms. Collaborative Solutions software license revenues decreased 40% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002. Third quarter 2002 results include an unusually large sale to a non-retail customer. There were no comparable-sized transactions in the Collaborative Solutions business segment in third quarter 2003.

Software license revenues in the Americas increased 104% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002 due to a 482% increase in software license revenues related to Retail Enterprise Systems, offset in part by decreases in software license revenues related to In-Store Systems and Collaborative Solutions of 58% and 54%, respectively. Software license revenues in Europe increased 3% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002 due to increases in software license revenues related to Retail Enterprise Systems and Collaborative Solutions applications of 6% and

99%, respectively, offset in part by a 93% decrease in software license revenues related to In-Store Systems. Software license revenues in Asia/Pacific increased 145% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002 due to increases in software license revenues related to Retail Enterprise Systems, In-Store Systems, and Collaborative Solutions applications of 223%, 40%, and 3%, respectively.

Maintenance Services. Maintenance services revenue for the three months ended September 30, 2003 increased 25% to $18.6 million from $14.9 million in the three months ended September 30, 2002 due primarily to increases in the customer base for Strategic Merchandise Management Solutions. We currently anticipate that maintenance services revenue in fourth quarter 2003 will increase compared to fourth quarter 2002 and compared to third quarter 2003.

Service revenues, which include consulting services, training revenues, and reimbursed expenses, decreased 15% in the three months ended September 30, 2003 to $20.2 million from $23.8 million in the three months ended September 30, 2002, primarily due to a decrease in demand for the implementation of Portfolio Merchandise Management Systems and Portfolio Store Systems. As a result of the economic downturn, we believe retailers have changed their buying behavior and that this has resulted in a fundamental shift in the mix of demand for the various types of products we sell from high dollar projects to higher ROI point solutions that have shorter implementation timeframes. We also believe the average implementation times for our software products have declined due to increased training and expertise in our consulting organization, and as a direct result of the investments we have made over the past few years to increase the functionality, stability, scalability, integration and ease of implementation of the products in the JDA Portfolio. Furthermore, since 2001 the majority of our product demand has been associated with our Strategic Merchandise Management Solutions that require lower levels of services to implement, and as a result, it is harder to attain optimum productivity from our consulting staff. We expect service revenues to be approximately $1.5 million to $2.0 million lower in fourth quarter 2003 compared to third quarter 2003 due to the normal seasonal impact of the holidays.

Total revenues in our Retail Enterprise Systems business segment increased 34% to $43.0 million in the three months ended September 30, 2003 from $32.1 million in the three months ended September 30, 2002, primarily due to an increase in demand for Portfolio Merchandise Management Systems and substantially all Strategic Merchandise Management Solutions. Although we signed five new Portfolio Merchandise Management Systems licenses in third quarter 2003, we believe there are a limited number of outstanding prospects in the transaction system market at this time and there is still no evidence to support a sustained return to the historical levels of activity for these applications in the near term. We believe the next drivers for growth in the Retail Enterprise Systems business segment will be sustained economic improvement and the introduction and acceptance of the .Net Platform version of our Portfolio Merchandise Management Systems, which is still under development, that we believe will provide our customers easier implementation of software applications in a modular format and lower total cost of ownership. In addition, Portfolio Merchandise Management Systems typically have longer implementation time frames and our services group often performs the implementation services. As a result, the decline in software sales for these products is also having a negative impact on our consulting services revenue. The Retail Enterprise Systems business segment represented 74% of our total revenues in the three months ended September 30, 2003, compared to 65% in the three months ended September 30, 2002.

Total revenues in our In-Store Systems business segment decreased 38% to $3.9 million in the three months ended September 30, 2003 from $6.2 million in the three months ended September 30, 2002. The Portfolio Store Systems in the In-Store Systems business segment tend to be heavily impacted during slower economic periods, as the implementation of a new point-of-sale system usually requires a substantial hardware investment. We do not believe the In-Store Systems business segment will grow until economic conditions improve and early adopters of the PPOS application complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms. The In-Store Systems business segment represented 7% of total revenues in the three months ended September 30, 2003 compared to 13% in the three months ended September 30, 2002.

Total revenues in our Collaborative Solutions business segment were $11.0 million in the three months ended September 30, 2003, compared to $11.1 million in the three months ended September 30, 2002. Maintenance service revenues increased in the third quarter 2003 compared to third quarter 2002, offset by decreases in software license revenues and service revenues. Third quarter 2002 results include an unusually large sale to a non-retail customer. There were no comparable-sized transactions in the Collaborative Solutions business segment in third quarter 2003. The Collaborative Solutions business segment is a focus area for growth as most of our customers in this segment currently own only one JDA product. The Collaborative Solutions business segment represented 19% of total revenues in the three months ended September 30, 2003 compared to 22% in the three months ended September 30, 2002.

Total revenues in the Americas (includes the United States, Canada and Latin America) increased 14% to $36.7 million in the three months ended September 30, 2003 from $32.2 million in the three months ended September 30, 2002 due to a 104% increase in software license revenues and a 23% increase in maintenance services revenue, offset in part by a 28% decrease in service revenues. We believe economic conditions in the Americas region may have begun to recover, as our customers appear to have improved confidence and willingness to make capital expenditures for information technology.

Total revenues in Europe increased 20% to $15.6 million in the three months ended September 30, 2003 from $13.0 million in the three months ended September 30, 2002 due to increases in software license revenues, maintenance services revenues, and service revenues of 3%, 30%, and 23%, respectively. The outlook for software sales in this region remains inconsistent and we see no broad signs of improvement in Europe. Maintenance services revenue increased in third quarter 2003 compared to third quarter 2002 as a result of the growing install base in this region. Service revenues increased in third quarter 2003 compared to third quarter 2002 primarily as a result of services that are being provided in connection with a significant multi-million dollar contract signed in second quarter 2002.

Total revenues in Asia/Pacific increased 45% to $7.1 million in the three months ended September 30, 2003 from $4.9 million in the three months ended September 30, 2002 due to increases in software license revenues, maintenance services revenues, and service revenues of 145%, 27%, and 15%, respectively. Software license revenues in this region increased in third quarter 2003 compared to third quarter 2002 primarily as a result of additional fees from an existing Portfolio Merchandise Management Systems contract in Australia. The outlook for software sales in this region remains inconsistent and we see no broad signs of improvement in Asia/Pacific. Maintenance services revenue increased in third quarter 2003 compared to third quarter 2002 as a result of the growing install base in this region.

Cost of Software Licenses. Cost of software licenses was $429,000, or 2% of software license revenues in the three months ended September 30, 2003 compared to $140,000, or 1% of software license revenues in the three months ended September 30, 2002. The increase in cost of software licenses results from the higher volume of software products sold in the three months ended September 30, 2003 that incorporate functionality from third party software providers and require the payment of royalties.

Amortization of Acquired Software Technology. Amortization of acquired software technology was $1.2 million in the three months ended September 30, 2003, compared to $1.1 million in the three months ended September 30, 2002. The increase results from the amortization of software technology acquired in the acquisitions of Vista in second quarter 2003 and Engage in third quarter 2003.

Cost of Maintenance Services. Cost of maintenance services increased 24% to $4.5 million, or 24% of maintenance services revenue, in the three months ended September 30, 2003 from $3.6 million, or 24% of maintenance services revenue, in the three months ended September 30, 2002. The increase results primarily from additional headcount to support our growing customer base, higher incentive compensation costs, and higher travel, training and recruiting costs. In addition, cost of maintenance services increased $83,000 in third quarter 2003 compared to third quarter 2002 for consulting services employees who were used to assist in client support activities.

At September 30, 2003, we had 155 employees in the customer support function compared to 142 at September 20, 2002.

Cost of service revenues decreased 4% to $16.4 million in the three months ended September 30, 2003 from $17.1 million in the three months ended September 30, 2002. This decrease results primarily from a 14% decrease in average consulting services headcount, and a $1.2 million decrease in employee costs related to consulting services employees who were used to supplement new product development and quality assurance activities, and to assist with business development and client support activities under the CVP during third quarter 2003 compared to third quarter 2002. These decreases were offset in part by higher incentive compensation costs in third quarter 2003 compared to third quarter 2002. At September 30, 2003, we had 437 employees in the consulting services and training functions compared to 516 at September 30, 2002. We currently expect seasonally higher incentive compensation in fourth quarter 2003 due to sequentially higher software license sales that will trigger accelerators in our incentive compensation plans for service employees.

Gross profit for the three months ended September 30, 2003 increased 29% to $35.5 million, or 61% of total revenues, from $27.5 million, or 56% of total revenues in the three months ended September 30, 2002. The increased in gross profit dollars and gross margin percentage results primarily from increases in software license revenues and maintenance services revenue 77% and 25%, respectively, offset in part by a 15% decrease in services revenue. Software licenses and maintenance services revenue have substantially higher margins than service revenues.

Service revenue margins were 19% in the three months ended September 30, 2003, compared to 28% in the three months ended September 30, 2002. The decrease in service revenue margins is attributable to lower utilization of our consulting personnel and higher incentive compensation costs. Our utilization rate decreased to 47% in third quarter 2003 compared to 50% in second quarter 2003 and 50% in third quarter 2002. We do not believe the lower utilization rates are simply a result of excess headcount. Rather, we believe the lower utilization rates result from the continuing weak economic conditions that have decreased the overall demand for Portfolio Merchandise Management Systems and Portfolio Store Systems and the related implementation services, and the improved integration and reduced implementation timeframes for the products in the JDA Portfolio. We believe implementation timeframes will continue to shorten and as a result, our service organization will need to become more efficient while being deployed on multiple short projects instead of more focused longer term engagements. We are currently evaluating new ways to deliver and charge for our services that we believe will address this issue. However, improvement of our service margins is not expected to occur immediately and service margins will decline before they begin to improve. We currently expect service margins to drop approximately $3.0 million to $3.5 million in fourth quarter 2003 compared to third quarter 2003. The anticipated reduction in service margins results from the combination of our product mix, the seasonal impact of the holidays, the timing and acceptance of work performed under fixed bid arrangements, and our expectation of sequentially higher software license sales in fourth quarter 2003 that will trigger accelerators in our compensation plans for service employees. We do not expect the remedial measures we have taken to address this issue will have a significant impact until first quarter 2004. At that time we expect to have the ability to forecast the duration of the depressed service margins with more accuracy.

The effect of lower service revenues on our margins was offset in part by a $1.2 million decrease in employee costs in third quarter 2003 compared to third quarter 2002 related to consulting services employees who were used to supplement new product development and quality assurance activities, and to assist with business development and client support activities under the CVP. The cross-utilization of consulting services employees is expected to continue in fourth quarter 2003.

Operating expenses, excluding amortization of intangibles and relocation costs to consolidate development and client support activities, were $30.8 million, or 53% of total revenues, in the three months ended September 30, 2003, compared to $26.0 million, or 53% of total revenues in the three months ended September 30, 2002.

Product Development. Product development expenses for the three months ended September 30, 2003 increased 23% to $12.7 million from $10.4 million in the three months ended September 30, 2002. Product development expense, as a percentage of product revenues, was 34% in the three months ended September 30, 2003 compared to 40% in the three months ended September 30, 2002. The increase in product development during the three months ended September 30, 2003 includes increases in salaries, benefits, and incentive compensation costs for full-time employees involved in the ongoing development of a series of enhancements to the JDA Portfolio products based upon the .Net Platform, as well as higher outside contractor costs. This is a significant investment by the Company as we are 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. In addition, product development expenses increased $364,000 during third quarter 2003 compared to third quarter 2002 for consulting services employees who were used to supplement the new product development and quality assurance activities of our internal developers. We believe development of our software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized for GAAP purposes. At September 30, 2003, we had 400 employees in the product development function compared to 383 at September 30, 2002. We currently expect quarterly product development expense to remain at approximately third quarter 2003 levels until the release of our first products on the .Net Platform in mid-2004.

Sales and Marketing. Sales and marketing expenses for the three months ended September 30, 2003 increased 30% to $12.0 million from $9.2 million in the three months ended September 30, 2002. Sales and marketing expense, as a percentage of total revenues, was 21% in the three months ended September 30, 2003 compared to 19% in the three months ended September 30, 2002. The increase in sales and marketing expenses includes higher commissions due to the $8.3 million increase in software license revenues, and an $867,000 increase in costs in third quarter 2003 compared to third quarter 2002 for consulting services employees who assisted with business development activities under the CVP, offset in part by a 10% decrease in average sales and marketing headcount and lower marketing costs. At September 30, 2003, we had 156 employees in the sales and marketing function including 74 direct sales representatives, 60 individuals in pre-sales positions, and 22 associates involved in the marketing function. At September 30, 2002, we had 173 employees in the sales and marketing function including 108 direct sales representatives, 38 individuals in pre-sales positions, and 27 associates involved in the marketing function. Sales and marketing costs will continue to vary with our overall software and revenue performance. We currently expect seasonally higher incentive compensation in fourth quarter 2003 as sales associates begin to hit accelerators in their compensation plans.

General and Administrative. General and administrative expenses for the three months ended September 30, 2003 decreased 5% to $6.1 million from $6.4 million in the three months ended September 30, 2002. General and administrative expense, as a percentage of total revenues, was 10% in the three months ended September 30, 2003 compared to 13% in the three months ended September 30, 2002. The decrease in general and administrative expenses results primarily from a 10% decrease in average administrative headcount together with a reduction in outside contractor costs, a decrease in legal costs, and a $250,000 lower provision for doubtful accounts, offset in part by higher insurance and incentive compensation costs. We also incurred a $133,000 foreign exchange loss in third quarter 2003 compared to a $355,000 foreign exchange gain in third quarter 2002. Our gross accounts receivable have decreased 20% since December 31, 2002 due to lower revenues in the first half of 2003, changes in our product mix, and the collection of nearly $4.0 million in delinquent receivables. Our days sales outstanding (“DSO”) has improved to 62 days at September 30, 2003 compared to 79 DSO at December 31, 2002 and 95 DSO at September 30, 2002.

Amortization of Intangibles. Amortization of intangibles was $798,000 in the three months ended September 30, 2003 compared to $711,000 in the three months ended September 30, 2002. The increase results from the amortization of customer list intangibles acquired in the acquisitions of Vista in second quarter 2003 and Engage in third quarter 2003.

Relocation Costs to Consolidate Development and Client Support Activities. Approximately 150 people were offered the opportunity to relocate as part of the CVP initiative to consolidate our development and client support activities. As of September 30, 2003, a total of 50 employees have relocated and we currently anticipate that two additional employees will relocate in the next three months. We have incurred $2.2 million in relocation costs through September 30, 2003, including $458,000 in third quarter 2003. We expect to incur an additional $150,000 to $200,000 in relocation costs during the next three months to complete the consolidation of development and client support activities. The relocation costs have been reported in income from continuing operations as incurred.

Operating income increased 324% to $3.5 million in the three months ended September 30, 2003 from $833,000 in the three months ended September 30, 2002. The increase in operating income results primarily from increases in software licenses and maintenance services revenue of 77% and 25%, respectively in third quarter 2003 compared to third quarter 2002, offset in part by a 15% decrease in service revenues and a $5.3 million increase in operating expenses. Operating income in our Retail Enterprise Systems business segment increased 39% to $7.6 million in the three months ended September 30, 2003 from $5.4 million in the three months ended September 30, 2002. The increase results primarily from higher software license and maintenance services revenue in this business segment in the third quarter 2003 compared to third quarter 2002. These increases were offset in part lower service revenues, utilization rates and margins, an increase in product development costs due to development activities on the .Net Platform and new releases of our Strategic Merchandise Management Solutions, and an increase in sales and marketing costs, primarily as a result of higher commissions.

Operating income in our In-Store Systems business segment decreased 68% to $254,000 in the three months ended September 30, 2003 from $802,000 in the three months ended September 30, 2002. The decrease results from lower software license, maintenance services, and service revenues in third quarter 2003 compared to third quarter 2002, offset in part by headcount reductions in consulting services, a reduced investment in product development, and lower sales commissions.

Operating income in our Collaborative Solutions business segment increased 80% to $3.1 million in the three months ended September 30, 2003 from $1.7 million in the three months ended September 30, 2002. The increase results primarily from higher maintenance service revenues and lower sales commissions in the third quarter 2003 compared to third quarter 2002, offset in part by decreases in software license revenues and service revenues, and an increase in product development headcount to support our new CPFR initiatives and future growth of this business segment.

We recorded a provision for income taxes of $374,000, or 10% of the reported income before income taxes in the three months ended September 30, 2003 compared to a provision for income taxes of $417,000, or 35.5% of income before income taxes in the three months ended September 30, 2002. The provision for income taxes recorded in third quarter 2003 is reported net of 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 income tax rate for 2003, excluding the effect of the $938,000 one-time tax benefit, is 35% and takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits.

a refund check until they complete a subsequent audit of our 2000 and 2001 federal income tax returns. This audit is expected to take six to nine months and no material adjustments are anticipated.

Nine months ended September 30, 2003 Compared to Nine months ended September 30, 2002

Revenues consist of product revenues and services revenue, which represented 62% and 38%, respectively, of total revenues in the nine months ended September 30, 2003 compared to 54% and 46%, respectively in the nine months ended September 30, 2002. Total revenues for the nine months ended September 30, 2003 were $152.2 million, a decrease of $13.9 million, or 8%, from the $166.1 million reported in the nine months ended September 30, 2002.

Software Licenses. Software license revenues for the nine months ended September 30, 2003 decreased 13% to $42.4 million from $48.6 million in the nine months ended September 30, 2002. The decrease results primarily from a decrease in sales of Portfolio Store Systems, and a decrease in sales of Portfolio Replenish by E3 products to non-retail customers. Software license sales continue to be impacted by weak economic conditions in certain geographic regions and the continued weakness in the retail industry. Although some of the factors that negatively impacted our operating results in the early months of 2003 are still present, namely (i) the disruption from the early phases of implementation of the Customer Value Program, (ii) the US war with and continued violence in Iraq, (iii) the economic uncertainty related to the threat of future terrorist attacks and wars, and (iv) the Severe Acute Respiratory Syndrome (“SARS”), we believe their importance and impact on our operating results have diminished.

Software license revenues from existing customers, as a percentage of total software license revenues, represented 70% of total software revenues during the nine months ended September 30, 2003 compared to 60% in the nine months ended September 30, 2002. The mix of software license revenues from existing customers can vary significantly from quarter-to-quarter. We believe that over time this metric will average about 65% to 75% and directly results from our large customer base, principally amassed through our acquisition activities in 2000 and 2001, and the focus we have placed on selling more JDA Portfolio products to existing customers through our Customer Value Program. Over the past three years, the addition of Strategic Merchandise Management Solutions such as Portfolio Space Management by Intactix and Portfolio Replenishment by E3 to the JDA Portfolio have provided significant back-selling opportunities in our customer base. The majority of our customers only own one JDA product.

Software license revenues in the Retail Enterprise Systems business segment increased 2% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. In-Store Systems software license revenues decreased 70% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. PPOS, our Java-based In-Store System, was commercially released in second quarter 2003 and was sold to our first beta customer in third quarter 2003. We do not believe the In-Store Systems business segment will grow until economic conditions improve and early adopters of the PPOS application complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms. Collaborative Solutions software license revenues decreased 26% in the nine months ended September 30, 2003 compared to the nine months ended

September 30, 2002, primarily as a result of a decrease in sales of Portfolio Replenishment by E3 products to non-retail customers.

Software license revenues in the Americas were $28.8 million in the nine months ended September 30, 2003 which is flat compared to the nine months ended September 30, 2002, as a 25% increase in Retail Enterprise Systems software license revenues was offset by decreases in software license revenues related to In-Store Systems and Collaborative Solutions applications of 55% and 29%, respectively. Software license revenues in Europe decreased 43% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 due to decreases in software license revenues related to Retail Enterprise Systems, In-Store Systems, and Collaborative Solutions applications of 45%, 94%, and 13%, respectively. Software license revenues in Asia/Pacific increased 13% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 due to a 51% increase in Retail Enterprise Systems software license revenues, offset in part by decreases in software license revenues related to In-Store Systems and Collaborative Solutions applications of 60% and 29%, respectively.

Maintenance Services. Maintenance services revenue for the nine months ended September 30, 2003 increased 25% to $52.3 million from $41.9 million in the nine months ended September 30, 2002 primarily due to increases in the customer base for Strategic Merchandise Management Solutions.

Service revenues, which include consulting services, training revenues, and reimbursed expenses, decreased 24% in the nine months ended September 30, 2003 to $57.5 million from $75.7 million in the nine months ended September 30, 2002, primarily due to a decrease in demand for the implementation of Portfolio Merchandise Management Systems and Portfolio Store Systems. As a result of the economic downturn, we believe retailers have changed their buying behavior and that this has resulted in a fundamental shift in the mix of demand for the various types of products we sell from high dollar projects to higher ROI point solutions that have shorter implementation timeframes. We also believe the average implementation times for our software products have declined due to increased training and expertise in our consulting organization, and as a direct result of the investments we have made over the past few years to increase the functionality, stability, scalability, integration and ease of implementation of the products in the JDA Portfolio. Furthermore, since 2001 the majority of our product demand has been associated with our Strategic Merchandise Management Solutions that require lower levels of services to implement, and as a result, it is harder to attain optimum productivity from our consulting staff.

Total revenues in our Retail Enterprise Systems business segment decreased 5% to $107.1 million in the nine months ended September 30, 2003 from $112.9 million in the nine months ended September 30, 2002, primarily due to a decrease in demand for implementation services on Portfolio Merchandise Management Systems, offset in part by an increase in maintenance services revenue. We believe there are a limited number of outstanding prospects in the transaction system market at this time and there is still no evidence to support a sustained return to the historical levels of activity for these applications in the near term. We believe the next drivers for growth in the Retail Enterprise Systems business segment will be sustained economic improvement and the introduction and acceptance of the .Net Platform version of our Portfolio Merchandise Management Systems, which is still under development, that we believe will provide our customers easier implementation of software applications in a modular format and lower total cost of ownership. Portfolio Merchandise Management Systems typically have longer implementation time frames and our services group often performs the implementation services. As a result, the decline in software sales for these products is also having a negative impact on our consulting services revenue. The Retail Enterprise Systems business segment represented 70% of our total revenues in the three months ended September 30, 2003, compared to 68% in the three months ended September 30, 2002.

Total revenues in our In-Store Systems business segment decreased 49% to $10.3 million in the nine months ended September 30, 2003 from $20.5 million in the nine months ended September 30, 2002, primarily due to a decrease in software license and service revenues from Portfolio Store Systems. The Portfolio Store Systems in the In-Store Systems business segment tend to be heavily impacted during slower economic periods, as the implementation of a new point-of-sale system usually requires a substantial hardware investment. We do not believe the In-Store Systems business segment will grow until economic conditions improve and early adopters of the PPOS

application complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we are positioned to take advantage of any replacement cycle for point-of-sales systems driven by a shift to new technology platforms. The In-Store Systems business segment represented 7% of total revenues in the nine months ended September 30, 2003 compared to 12% in the nine months ended September 30, 2002.

Total revenues in our Collaborative Solutions business segment increased 6% to $34.7 million in the nine months ended September 30, 2003 from $32.8 million in the nine months ended September 30, 2002, primarily due to an increase in maintenance services revenue, offset in part by decreases in software license and services revenue related to sales of Portfolio Replenishment by E3 products to non-retail customers. The Collaborative Solutions business segment is a focus area for growth as most of our customers in this segment currently own only one JDA product. The Collaborative Solutions business segment represented 23% of total revenues in the nine months ended September 30, 2003 compared to 20% in the nine months ended September 30, 2002.

Total revenues in the Americas (includes the United States, Canada and Latin America) decreased 12% to $95.6 million in the nine months ended September 30, 2003 from $108.4 million in the nine months ended September 30, 2002 due to a 35% decrease in service revenues, offset in part by a 20% increase in maintenance services revenue. Software license revenues in the nine months ended September 30, 2003 were flat compared to the nine months ended September 30, 2002. We believe economic conditions in the Americas region may have begun to recover, as our customers appear to have improved confidence and willingness to make capital expenditures for information technology.

Total revenues in Europe were $44.0 million in the nine months ended September 30, 2003 which is flat with the nine months ended September 30, 2002. Increases in maintenance services revenue and service revenues of 38% and 13%, respectively, were offset by a 43% decrease in software license revenues. The outlook for software sales in this region remains inconsistent and we see no broad signs of improvement in Europe.

Total revenues in Asia/Pacific increased 10% to $17.1 million in the nine months ended September 30, 2003 from $15.5 million in the nine months ended September 30, 2002 due to increases in software licenses, maintenance services, and service revenues of 13%, 24%, and 5%, respectively. The outlook for software sales in this region remains inconsistent and we see no broad signs of improvement in Asia/Pacific.

Cost of Software Licenses. Cost of software licenses was $852,000, or 2% of software license revenues in the nine months ended September 30, 2003 compared to $1.3 million, or 3% of software license revenues in the nine months ended September 30, 2002. The decrease in cost of software licenses results from the lower volume of software products sold in the nine months ended September 30, 2003 that incorporate functionality from third party software providers and require the payment of royalties.

Amortization of Acquired Software Technology. Amortization of acquired software technology was $3.3 million in the nine months ended September 30, 2003 compared to $3.2 million in the nine months ended September 30, 2002. The increase results from the amortization of software technology acquired in the acquisitions of Vista in second quarter 2003 and Engage in third quarter 2003.

Cost of Maintenance Services. Cost of maintenance services increased 22% to $12.8 million, or 24% of maintenance services revenue, in the nine months ended September 30, 2003 from $10.5 million, or 25% of maintenance services revenue, in the nine months ended September 30, 2002. The increase results primarily from additional headcount to support our growing customer base, higher salaries, benefits and incentive compensation, and higher travel and training costs. In addition, cost of maintenance services increased $217,000 in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 for consulting services employees who were used to assist in client support activities.

Cost of service revenues decreased 11% to $47.9 million in the nine months ended September 30, 2003 from $53.8 million in the nine months ended September 30, 2002. This decrease results primarily from a 19% decrease in average consulting services headcount, and a $2.5 million decrease in employee costs during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 related to consulting services employees who were used to supplement new product development and quality assurance activities, and to assist with business development and client support activities under the CVP. These decreases were offset in part by higher salaries, benefits, and incentive compensation, and higher travel and training costs.

Gross profit for the nine months ended September 30, 2003 decreased 10% to $87.4 million, or 57% of total revenues, from $97.4 million, or 59% of total revenues in the nine months ended September 30, 2002. The decrease in gross profit dollars and gross margin percentage results primarily from decreases in software license and service revenues of 13% and 24%, respectively, offset in part by a 25% increase in maintenance services revenue. Software licenses and maintenance services revenue have substantially higher margins than service revenues.

Service revenue margins were 17% in the nine months ended September 30, 2003, compared to 29% in the nine months ended September 30, 2002. The decrease in service revenue margins is attributable to lower utilization of our consulting services personnel and higher salaries, benefits and incentive compensation. Our utilization rate decreased to 44% in the nine months ended September 30, 2003 compared to 50% in the nine months ended September 30, 2002. We do not believe the lower utilization rates are simply a result of excess headcount. Rather, we believe the lower utilization rates result from the continuing weak economic conditions that have decreased the overall demand for Portfolio Merchandise Management Systems and Portfolio Store Systems and the related implementation services, and the improved integration and reduced implementation timeframes for the products in the JDA Portfolio. We believe implementation timeframes will continue to shorten and as a result, our service organization will need to become more efficient while being deployed on multiple short projects instead of more focused longer term engagements. We are currently evaluating new ways to deliver and charge for our services that we believe will address this issue. However, improvement of our service margins is not expected to occur immediately and service margins will decline before they begin to improve. We currently expect service margins to drop approximately $3.0 million to $3.5 million in fourth quarter 2003 compared to third quarter 2003. The anticipated reduction in service margins results from the combination of our product mix, the seasonal impact of the holidays, the timing and acceptance of work performed under fixed bid arrangements, and our expectation of sequentially higher software license sales in fourth quarter 2003 that will trigger accelerators in our compensation plans for service employees. We do not expect the remedial measures we have taken to address this issue will have a significant impact until first quarter 2004. At that time we expect to have the ability to forecast the duration of the depressed service margins with more accuracy.

The effect of lower utilization rates was offset in part by a $2.5 million decrease in employee costs during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 related to consulting services employees who were used to supplement new product development and quality assurance activities, and to assist with business development and client support activities under the CVP. The cross-utilization of consulting services employees is expected to continue in fourth quarter 2003.

Operating expenses, excluding amortization of intangibles, relocation costs to consolidate development and client support activities, purchased in-process research and development, restructuring, office closure costs and other charges, and gain on sale of office facility, increased 1% to $82.9 million, or 54% of total revenues, in the nine months ended September 30, 2003, compared to $82.2 million, or 49% of total revenues in the nine months ended September 30, 2002. We achieved cost savings in the nine months ended September 30, 2003 from decreases in sales and marketing and administrative headcount that resulted from the reorganization of the Company in fourth quarter 2002 in connection with the implementation of the CVP, $2.4 million lower provision for doubtful accounts, and a reduction in legal costs and customer dispute charges. These savings were substantially offset by increases in salaries, benefits and incentive compensation, higher insurance costs and our investment in training to effect the transition to the CVP and the .Net Platform.

Product Development. Product development expenses for the nine months ended September 30, 2003 increased 14% to $35.5 million from $31.2 million in the nine months ended September 30, 2002. Product development expense, as a percentage of product revenues, was 37% in the nine months ended September 30, 2003 compared to 34% in the nine months ended September 30, 2002. The increase in product development during the nine months ended September 30, 2003 includes increases in average headcount, wage increase, and higher incentive compensation costs for full-time employees involved in the ongoing development of a series of enhancements to the JDA Portfolio products based upon the .Net Platform, as well as higher outside contractor costs. This is a significant investment by the Company as we are 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. In addition, product development expenses increased $1.1 million during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 for consulting services employees who were used to supplement the new product development and quality assurance activities of our internal developers, offset in part by lower travel and training costs.

Sales and Marketing. Sales and marketing expenses for the nine months ended September 30, 2003 were $29.7 million, which is flat compared to the nine months ended September 30, 2002. Sales and marketing expense, as a percentage of total revenues, was 20% in the nine months ended September 30, 2003 compared to 18% in the nine months ended September 30, 2002. Sales and marketing expenses increased in the nine months ended September 30, 2003 as a result of higher commissions and a $1.2 million increase in costs for consulting services employees who assisted with business development activities under the CVP, offset in part by a 15% decrease in average sales and marketing headcount and lower marketing costs.

General and Administrative. General and administrative expenses for the nine months ended September 30, 2003 decreased 16% to $17.7 million from $21.1 million in the nine months ended September 30, 2002. General and administrative expense, as a percentage of total revenues, was 12% in the nine months ended September 30, 2003 compared to 13% in the nine months ended September 30, 2002. The decrease in general and administrative expenses results primarily from a decrease in average administrative headcount, $2.4 million lower provision for doubtful accounts, and a reduction in legal costs and customer dispute charges, offset in part by wage increases, and increases in health insurance costs and incentive compensation.

Amortization of Intangibles. Amortization of intangibles was $2.2 million in the nine months ended September 30, 2003 compared to $2.1 million in the nine months ended September 30, 2002. The increase results from the amortization of customer list intangibles acquired in the acquisitions of Vista in second quarter 2003 and Engage in third quarter 2003.

Relocation Costs to Consolidate Development and Client Support Activities. Approximately 150 people were offered the opportunity to relocate as part of the CVP initiative to consolidate our development and client support activities. As of September 30, 2003, a total of 50 employees have relocated and we currently anticipate that two additional employees will relocate in the next three months. We have incurred $2.2 million in relocation costs through September 30, 2003, including $1.7 million in the nine months ended September 30, 2003. We expect to incur an additional $150,000 to $200,000 in relocation costs during the next three months to complete the consolidation of development and client support activities. The relocation costs have been reported in income from continuing operations as incurred.

Purchased In-process Research and Development. We expensed $800,000 of purchased in-process research and development in the nine months ended September 30, 2002 in connection with the acquisition of J•Commerce in April 2002.

Restructuring, Office Closure Costs and Other Charges. We recorded a $1.3 million restructuring charge in second quarter 2002. The restructuring initiatives involved a workforce reduction of 53 full-time employees, primarily in the consulting services function in the United States, Europe, Canada and Latin America. All workforce reductions associated with this charge were made on or before June 30, 2002.

Gain on Sale of Office Facility. We recorded a $639,000 gain in second quarter 2003 on the sale of an excess office facility in the United Kingdom.

Operating income was $1.1 million in the nine months ended September 30, 2003 compared to operating income of $11.0 million in the nine months ended September 30, 2002. The decrease in operating income results primarily from decreases in software licenses and service revenues of 13% and 24%, respectively in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2002 and higher incentive compensation, offset in part by a 25% increase in maintenance services revenues, $2.4 million lower bad debt provision, 145 or 10% fewer employees, $1.2 million lower restructuring and relocation costs, and a $639,000 gain on the sale of an excess office facility.

Operating income in our Retail Enterprise Systems business segment decreased 43% to $13.9 million in the nine months ended September 30, 2003 from $24.3 million in the nine months ended September 30, 2002. The decrease results primarily from lower service revenues, utilization rates and margins, an increase in product development costs due to development activities on the .Net Platform and new releases of our Strategic Merchandise Management Solutions, and an increase in sales and marketing costs, primarily as a result of higher commissions, offset in part by an increase in maintenance services revenue.

We incurred an operating loss of $202,000 in our In-Store Systems business segment in the nine months ended September 30, 2003 compared to operating income of $5.0 million in the nine months ended September 30, 2002. The decrease results from lower product and services revenues in this business segment in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, offset in part by headcount reductions in consulting services, a reduced investment in product development, and lower sales commissions.

Operating income in our Collaborative Solutions business segment increased 20% to $8.5 million in the nine months ended September 30, 2003 from $7.0 million in the nine months ended September 30, 2002. The increase results primarily from an increase in maintenance services revenues due to an increased customer base, and a decrease in sales and marketing costs, offset in part by lower software licenses and service revenues, and an increase in product development headcount to support our new CPFR initiatives and future growth of this business segment.

We recorded an income tax benefit of $136,000, or 6% of the reported income before income taxes in the nine months ended September 30, 2003 compared to a provision for income taxes of $4.4 million, or 35.5% of income before income taxes in the nine months ended September 30, 2002. The income tax benefit in the nine months ended September 30, 2003 is reported net of 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 income tax rate for 2003, excluding the effect of the $938,000 one-time tax benefit, is 35% and takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits.

We had working capital of $120.8 million at September 30, 2003 compared with $121.0 million at December 31, 2002. Cash and marketable securities at September 30, 2003 were $115.0 million, an increase of $13.1 million over the $101.9 million reported at December 31, 2002. Working capital remained flat at September 30, 2003 compared to December 31, 2002 primarily as a result of an increase in cash and marketable securities and a reduction in accrued expenses and other liabilities, offset by a decrease in accounts receivable and income tax receivable, and an increase in deferred revenue. Cash and marketable securities balances increased in the nine months ended September 30, 2003 primarily as a result of cash provided by operating activities and the cash received from the issuance of common stock under our stock option and employee stock purchase plans. Our net receivables were $39.7 million, or 62 days sales outstanding (“DSOs”) at September 30, 2003 compared to $47.1 million, or 79 DSOs at December 31, 2002, and $52.1 million, or 95 DSOs at September 30, 2002. Collection of receivables continues to be an area of focus during these tentative economic times. DSOs may fluctuate significantly on a quarterly basis due to a number of factors including seasonality, shifts in customer buying patterns, lengthened contractual payment terms in response to competitive pressures, the underlying mix of products and services, and the geographic concentration of revenues.

Operating activities provided cash of $19.8 million in the nine months ended September 30, 2003 and $27.7 million in the nine months ended September 30, 2002. The decrease in cash provided from operating activities results primarily from a $5.6 million decrease in net income in the nine months ended September 30, 2003 compared to the nine months ended September 30 2002, a $6.6 million decrease in the income tax benefits from the exercise of stock options and shares purchased under the employee stock purchase plan, a $5.7 million smaller increase in deferred revenue, and a $2.4 million lower provision for doubtful accounts. The decreases in cash were partially offset by a $4.2 million smaller decrease in prepaid expenses and other current assets in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, a $3.1 million smaller decrease in deferred income taxes due primarily to our election to capitalize a significant portion of our research and development costs for 2002 on our federal income tax return, a $2.2 million larger decrease in income tax receivable, and a $2.2 million smaller decrease in accounts payable, accrued expenses and other liabilities.

Investing activities utilized cash of $19.9 million in the nine months ended September 30, 2003 and $31.1 million in the nine months ended September 30, 2002. Cash utilized by investing activities in the nine months ended September 30, 2003 results primarily from $7.1 million in capital expenditures, the net purchase of $6.6 million of marketable securities, $4.0 million in cash expended to acquire Vista, and $3.3 million in cash expended to acquire Engage, offset in part by $1.8 million in proceeds from the disposal of property and equipment, primarily from the sale of an excess office facility in the United Kingdom. Cash utilized by investing activities in the nine months ended September 30, 2002 includes the net purchases of $14.3 million of marketable securities, the payment of $8.3 million in direct costs related to the acquisition of E3, $4.2 million in cash expended to acquire J•Commerce, and $5.0 million in capital expenditures.

Financing activities provided cash of $4.6 million in the nine months ended September 30, 2003 and $16.2 million in the nine months ended September 30, 2002. The activity in both periods includes proceeds from the issuance of common stock under our stock option and employee stock purchase plans. In addition, the activity for the nine months ended September 30, 2003 includes the repurchase of 75,000 shares of our outstanding stock for $757,000. We terminated our 1999 Employee Stock Purchase Plan on August 15, 2003 because purchases under the 1999 Purchase Plan would be considered compensatory under SFAS No. 123.

Changes in the currency exchange rates of our foreign operations had the effect of increasing cash by $1.9 million in the nine months ended September 30, 2003, compared to $793,000 in the nine months ended September 30, 2002. We currently have no derivative instruments and have not engaged in any material foreign currency hedging transactions. We are considering hedging our assets and liabilities that are denominated in non-functional currencies to minimize the impact of foreign exchange gains and losses on our operations.

We believe there are opportunities to grow our business through the acquisition of complementary and synergistic companies, products and technologies. We look for acquisitions that can be readily integrated and accretive to earnings, although we may pursue smaller non-accretive acquisitions that will shorten our time to market with new technologies. We believe the general size of cash acquisitions we would currently consider to be in the $5 million to $30 million range. Any material acquisition could result in a decrease to our working capital depending

on the amount, timing and nature of the consideration to be paid. In addition, any material acquisitions of complementary or synergistic companies, products or technologies could require that we obtain additional equity financing. There can be no assurance that such additional financing will be available or that, if available, such financing will be obtained on terms favorable to us and would not result in additional dilution to our stockholders.

On April 30, 2003 we acquired substantially all the intellectual property of Vista Software Solutions, Inc. (“Vista”), and Vista’s active customer agreements for a total cost of $4.6 million, which includes the cash purchase price of $3.8 million plus $780,000 in direct costs of the acquisition. Vista is a provider of collaborative business-to-business software solutions that enable retailers and consumer goods manufacturers to more efficiently synchronize and integrate data, including product descriptions, product images, pricing and promotion information throughout their supply and demand chains. Vista’s solutions also enable consumer goods manufacturers to manage trade promotions, minimize trade deductions costs and more accurately forecast product demand. With this acquisition, we have expanded the JDA Portfolio with complementary software products that leverage the Microsoft .Net Platform and address the critical need for server-to-server data synchronization in Internet-based collaborative commerce. The acquisition was accounted for as a purchase, and accordingly, the operating results of Vista have been included in our consolidated financial statements from the date of acquisition. In connection with the Vista acquisition, we added 13 new employees, primarily in product development, and recorded $2.3 million of goodwill, $1.1 million in software technology, and $1.2 million for customer lists and other intangibles. Vista contributed $888,000 in total revenues during nine months ended September 30, 2003, including $275,000 in software license revenues and $473,000 in maintenance services revenue.

We believe that our cash and cash equivalents, investments in marketable securities, and funds generated from operations will provide adequate liquidity to meet our normal operating requirements for at least the next twelve months.

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of these risks and uncertainties that we believe may adversely affect our business, financial condition or results of operations. This section should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2003 and for the nine months then ended contained elsewhere in this Form 10-Q.

Regional And/Or Global Changes in Economic, Political And Market Conditions Could Cause Decreases in Demand For Our Software And Related Services Which Could Negatively Affect Our Revenue And Operating Results And The Market Price of Our Stock.

Our revenue and profitability depend on the overall demand for our software and related services. A regional and/or global change in the economy and financial markets could result in delay or cancellation of customer purchases. We and most of our competitors recently announced that current economic conditions have negatively impacted financial results. In addition, recent developments associated with terrorist attacks on United States’ interests, the US war and continued violence in Iraq, and the Severe Acute Respiratory Syndrome (“SARS”) have resulted in economic, political and other uncertainties, which could further adversely affect our revenue growth and operating results. If demand for our software and related services decrease, our revenues would decrease and our operating results would be adversely affected. Our inability to license software products to new customers may cause our stock price to fall.

Our Quarterly Operating Results May Fluctuate Significantly, Which Could Adversely Affect the Price of Our Stock.

Our quarterly operating results have varied and are expected to continue to vary in the future. If our quarterly operating results fail to meet management’s or analysts’ expectations, the price of our stock could decline. Many factors may cause these fluctuations, including:

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Demand for our software products and services, including the size and timing of individual contracts and our ability to recognize revenue with respect to contracts signed in the quarter, particularly with respect to our significant customers;

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Competitive pricing pressures and the competitive success or failure on significant transactions;

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Customer order deferrals resulting from the anticipation of new products, economic uncertainty, disappointing operating results by the customer, or otherwise;

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The timing of new software product and technology introductions and enhancements to our software products or those of our competitors, and market acceptance of our new software products and technology;

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Changes in the mix of domestic and international revenues, or expansion or contraction of international operations;

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Operational issues resulting from corporate reorganizations (see “We May Encounter Difficulties Successfully Implementing Our Recent Corporate Reorganization”); and

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Lower-than-anticipated utilization in our consulting services group as a result of reduced levels of software sales, reduced implementation times for our products, changes in the mix of demand for our software products, or other reasons.

The trading price of our common stock has in the past and may in the future be subject to wide fluctuations. Examples of factors that we believe have caused fluctuations in our stock price in the recent past include the following:

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Cancelled or delayed purchasing decisions related to the September 11 terrorist attack and the uncertainty related to potential future terrorist attacks and the war with and continued violence in Iraq;

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Our announcement of our reduced visibility and increased uncertainty concerning future demand for our products;

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A limited number of reference accounts with implementations in the early years of product release;

In addition, fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Defending against such lawsuits could result in substantial costs and divert management’s attention and resources. Furthermore, any settlement or adverse determination of these lawsuits could subject us to significant liabilities.

Because the gross margins on product revenues (software licenses and maintenance services) are significantly greater than the gross margins on consulting services revenue, our combined gross margin has fluctuated from quarter to quarter, and it may continue to fluctuate significantly based on revenue mix. As a result of the economic downturn, we believe retailers have changed their buying behavior and that this has resulted in a fundamental shift in the mix of demand for the various types of products we sell. Demand for our Portfolio Merchandise Management Systems and Portfolio Store Systems has declined and customers now appear to be more interested in buying Strategic Merchandise Management Solutions that require lower levels of services to implement, enable lower inventory levels without reducing sales, and provide a quicker return on investment. The decline in software sales of Portfolio Merchandise Management Systems and Portfolio Store Systems is having a corollary negative impact on our service revenues as consulting services revenue typically lags the performance of software revenues by as much as one year. As a result of this change in revenue mix, we expect that our consulting services revenue will continue to decline sequentially each quarter until there is sustained improvement in economic conditions and the demand for Portfolio Merchandise Management Systems and Portfolio Store Systems and the related implementation services returns. In addition, our gross margins on consulting services revenue vary significantly with the rates at which we utilize our consulting personnel, and as a result, our overall gross margins will be adversely affected when there is not enough work to keep our consultants busy. We may face some constraints on our ability to adjust consulting service headcount and expense to meet demand, due in part to our need to retain consulting personnel with sufficient skill sets to implement and maintain our full set of products.

Software license revenues in any quarter depend substantially upon contracts signed and the related shipment of software in that quarter. It is therefore difficult for us to accurately predict software license revenues. Because of the timing of our sales, we typically recognize the substantial majority of our software license revenues in the last weeks or days of the quarter, and we may derive a significant portion of our quarterly software license

revenues from a small number of relatively large sales. In addition, it is difficult to forecast the timing of large individual software license sales with a high degree of certainty due to the extended length of the sales cycle and the generally more complex contractual terms that may be associated with such licenses that could result in the deferral of some or all of the revenue to future periods. Accordingly, large individual sales have sometimes occurred in quarters subsequent to when we anticipated. We expect these aspects of our business to continue. If we receive any significant cancellation or deferral of customer orders, or we are unable to conclude license negotiations by the end of a fiscal quarter, our operating results may be lower than anticipated. In addition, any weakening or uncertainty in the economy may make it more difficult for us to predict quarterly results in the future, and could negatively impact our business, operating results and financial condition for an indefinite period of time.

Our expense levels are based on our expectations of future revenues. Since software license sales are typically accompanied by a significant amount of consulting and maintenance services, the size of our services organization must be managed to meet our anticipated software license revenues. As a result, we hire and train service personnel and incur research and development costs in advance of anticipated software license revenues. If software license revenues fall short of our expectations, or if we are unable to fully utilize our service personnel, our operating results are likely to decline because a significant portion of our expenses cannot be quickly reduced to respond to any unexpected revenue shortfall.

We May Continue to Encounter Difficulties Successfully Implementing Our Recent Corporate Reorganization.

In fourth quarter 2002 we substantially reorganized our Company to improve the profitability of our operations and to implement our Customer Value Program initiative. As part of this reorganization, we terminated a significant number of personnel both domestically and internationally, reassigned certain existing personnel and added a number of new personnel. We will likely continue to encounter difficulties implementing this extensive and complex reorganization. As anticipated, our decision to reorganize the Company and implement the CVP caused initial disruptions in our sales, services and training functions that negatively impacted our revenues and operating results in early months of 2003. Although we believe the most significant negative impact of the CVP implementation is behind us, the costs and risks associated with the widespread changes contemplated in the CVP may continue to adversely affect our operating results throughout the remainder of 2003. Potential risks include, but are not limited to: (i) the possible disruption in our operations caused by such a large and complex reorganization; (ii) the cost of disposing of redundant office facilities; and (iii) the possibility that we will not be able to successfully recruit appropriately skilled and experienced personnel to fill new positions.

Historically, we have derived 80% or more of our revenues from the license of software products and the performance of related services to retail customers. Although the acquisitions of Arthur, Intactix, Zapotec, NeoVista Decision Series, E3, Vista and Engage have expanded our product offerings to provide collaborative applications that address new vertical market opportunities with the manufacturers and wholesalers who supply our traditional retail customers, our future growth is critically dependent on increased sales to retail customers. The success of our customers is directly linked to economic conditions in the retail industry, which in turn are subject to intense competitive pressures and are affected by overall economic conditions. In addition, we believe that the licensing of certain of our software products involves a large capital expenditure, which is often accompanied by large-scale hardware purchases or other capital commitments. As a result, demand for our products and services could decline in the event of instability or potential downturns.

We believe the retail industry remains cautious with their level of investment in information technology during the current difficult economic cycle, perhaps due to poor macroeconomic conditions, and uncertainty related to the threat of future terrorist attacks and any continued violence in Iraq. We remain concerned about weak and uncertain economic conditions, consolidations and the disappointing results of retailers in certain of our geographic regions. The retail industry will be negatively impacted if weak economic conditions or fear of additional terrorists’ attacks and wars persist for an extended period of time. Weak and uncertain economic conditions have in the past, and may in the future, negatively impact our revenues, including a potential deterioration of our maintenance revenue

base as customers look to reduce their costs, elongate our selling cycles, and delay, suspend or reduce the demand for our products. As a result, it is difficult in the current economic environment to predict exactly when specific software licenses will close within a six to nine month time frame. In addition, weak and uncertain economic conditions could impair our customers’ ability to pay for our products or services. Any of these factors could adversely impact our business, quarterly or annual operating results and financial condition.

We also believe that the retail industry may be consolidating, and that the industry is currently experiencing increased competition in certain geographical regions that could negatively impact the industry and our customers’ ability to pay for our products and services. Such consolidation has in the past, and may in the future, negatively impact our revenues, reduce the demand for our products and may negatively impact our business, operating results and financial condition.

There May Be An Increase in Customer Bankruptcies Due to Weak Economic Conditions.

We have in the past and may in the future be impacted by customer bankruptcies that occur in periods subsequent to the software license sale. During weak economic conditions, such as those currently being experienced in many geographic regions around the world, there is an increased risk that certain of our customers will file bankruptcy. When our customers file bankruptcy, we may be required to forego collection of pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period preceding the filing. Accounts receivable balances related to pre-petition amounts may in certain of these instances be large due to extended payment terms for software license fees, and significant billings for consulting and implementation services on large projects. The bankruptcy laws, as well as the specific circumstances of each bankruptcy, may severely limit our ability to collect pre-petition amounts, and may force us to disgorge payments made during the 90-day preference period. We also face risk from international customers that file for bankruptcy protection in foreign jurisdictions, in that the application of foreign bankruptcy laws may be more difficult to predict. Although we believe that we have sufficient reserves to cover anticipated customer bankruptcies, there can be no assurance that such reserves will be adequate, and if they are not adequate, our business, operating results and financial condition would be adversely affected.

Our success is heavily dependent upon our ability to attract, hire, train, retain and motivate skilled personnel, including sales and marketing representatives, qualified software engineers involved in ongoing product development, and consulting personnel who assist in the implementation of our products and services. The market for such individuals is competitive. For example, it may be particularly difficult to attract and retain product development personnel experienced in the Microsoft .Net Platform since the .Net Platform is a new and evolving technology. Given the critical roles of our sales, product development and consulting staffs, our inability to recruit successfully or any significant loss of key personnel would hurt us. A high level of employee mobility and aggressive recruiting of skilled personnel characterize the software industry. We cannot guarantee that we will be able to retain our current personnel, attract and retain other highly qualified technical and managerial personnel in the future, or be able to assimilate the employees from any acquired businesses. We will continue to adjust the size and composition of the workforce in our services organization to match the different product and geographic demand cycles. If we were unable to attract and retain the necessary technical and managerial personnel, or assimilate the employees from any acquired businesses, our business, operating results and financial condition would be adversely affected.

We Have Only Deployed Certain of Our Software Products On a Limited Basis, And Have Not Yet Deployed Some Software Products That Are Important to Our Future Growth.

Certain of our software products, including MMS Multi-Channel, Store Portal, Portfolio Point of Sales, and certain modules of Affinity and Intellect, have been commercially released within the last two years. Other modules of Affinity and Intellect are still in beta or under development. In addition, we have only recently announced our intentions to develop or acquire a series of business-to-business e-commerce solutions, including products in furtherance of our pursuit of the market for Collaborative Solutions. The markets for these products are new and evolving, and we believe that retailers and their suppliers may be cautious in adopting web-based and other new technologies. Consequently, we cannot predict the growth rate, if any, and size of the markets for our e-

commerce products or that these markets will continue to develop. Potential and existing customers may find it difficult, or be unable, to successfully implement our e-commerce products, or may not purchase our products for a variety of reasons, including their inability or unwillingness to deploy sufficient internal personnel and computing resources for a successful implementation. In addition, we must overcome significant obstacles to successfully market our newer products, including limited experience of our sales and consulting personnel. If the markets for our newer products fail to develop, develop more slowly or differently than expected or become saturated with competitors, or if our products are not accepted in the marketplace or are technically flawed, our business, operating results and financial condition will decline.

We Are Investing Heavily in Re-Writing Many of Our Products For The Microsoft ..Net Platform.

We currently plan to begin the migration of PMM, as well as starting to re-write the Portfolio Replenishment by E3 modules and Portfolio Planning by Arthur using the Microsoft .Net technology platform (“.Net Platform”) during 2003. Our goal is to begin delivering applications on the .Net Platform in mid-2004, starting with Portfolio Replenishment by E3, Portfolio Planning by Arthur, and certain of our Intellect applications. We also plan to develop new products as well as shared code components using the .Net Platform. The risks of our commitment to the .Net Platform include, but are not limited to, the following:

•

The possibility that prospective customers will refrain from purchasing the current versions of products to be re-written because they are waiting for the .Net Platform versions;

•

The possibility that our .Net Platform beta customers will not become favorable reference sites;

•

The ability of our development staff to learn how to efficiently and effectively develop products using the .Net Platform;

•

Our ability to transition our customer base onto the .Net Platform when it is available;

•

Microsoft’s ability to achieve market acceptance of the .Net platform; and

•

Microsoft’s continued commitment to enhancing and marketing the .Net platform.

Despite efforts to mitigate the risks of the .Net Platform project, there can be no assurances that our efforts to re-write many of our current products and to develop new products using the .Net Platform will be successful. If the .Net Platform project is not successful, it likely will have a material adverse effect on our business, operating results and financial condition. Moreover, we cannot assure you that, even if we successfully re-write our products on the .Net Platform, our re-written products will achieve market acceptance.

We may introduce new lines of business that are outside our traditional focus on software licenses and related maintenance and implementation services. Introducing new lines of business involves a number of uncertainties, including a lack of internal resources and expertise to operate and grow such new lines of business, immature internal processes and controls, inexperience predicting revenues and expenses for the new lines of business, and the possibility that such new lines of business will divert management attention and resources from our traditional business. The inability of management to effectively develop and operate these new lines of business could have a material adverse effect on our business, operating results and financial condition. Moreover, we may not be able gain acceptance of any new lines of business in our markets, penetrate new markets successfully, or obtain the anticipated or desired benefits of such new lines of business.

Our international revenues represented 45% of total revenues in the nine months ended September 30, 2003 as compared to 43% in the nine months ended September 30, 2002 and 43% for the year ended December 31, 2002.

If our international operations grow, we must recruit and hire a number of new consulting, sales and marketing and support personnel in the countries in which we have or will establish offices. Our entry into new international markets typically requires the establishment of new marketing and distribution channels as well as the development and subsequent support of localized versions of our software. International introductions of our products often require a significant investment in advance of anticipated future revenues. The opening of our new offices typically results in initial recruiting and training expenses and reduced labor efficiencies associated with the introduction of products to a new market. If we are less successful in a new market than we expect, we may not be able to realize an adequate return on our initial investment and our operating results could suffer. We cannot guarantee that the countries in which we operate will have a sufficient pool of qualified personnel from which to hire, that we will be successful at hiring, training or retaining such personnel, or that we can expand or contract our international operations in a timely, cost effective manner.

Our international business operations are subject to risks associated with international activities, including:

•

Greater difficulty in safeguarding intellectual property, licensing and other trade restrictions;

•

Anti-American sentiment due to the war with Iraq, and other American policies that may be unpopular in certain regions;

Consulting services in support of certain international software licenses typically have lower gross margins than those achieved domestically due to generally lower billing rates and/or higher costs in certain of our international markets. Accordingly, any significant growth in our international operations may result in declines in gross margins on consulting services. We expect that an increasing portion of our international software license, consulting services and maintenance services revenues will be denominated in foreign currencies, subjecting us to fluctuations in foreign currency exchange rates. As we continue to expand our international operations, exposures to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward foreign currency exchange contracts or engaging in similar hedging strategies. We cannot guarantee that any currency exchange strategy would be successful in avoiding exchange-related losses. In addition, revenues earned in various countries where we do business may be subject to taxation by more than one jurisdiction, which would reduce our earnings.

We May Face Difficulties In Our Highly Competitive Markets, Particularly if The Current Weak Economic Conditions Persist.

The markets for our software products are highly competitive. However, we believe the number of significant competitors in many of our application markets has diminished over the past five years. We believe the principal competitive factors in our markets are feature and functionality, product reputation and reference accounts, retail and supply chain industry expertise, total solution cost and quality of customer support. We believe that pricing pressure has increased in response to the economic downturn, which could cause us to offer more significant discounts, or in some cases to lose potential business to competitors willing to offer what we believe to be overly aggressive discounts. We encounter competitive products from a different set of vendors in each of our primary product categories.

Our Retail Enterprise Systems compete primarily with internally developed systems and other third-party developers such as Aldata Solutions, Alphameric PLC (formerly Compass Software Group PLC), Connect3 Systems, Inc., Island Pacific, Inc. (formerly SVI Holdings, Inc., Marketmax, Inc. (recently acquired by SAS), Micro Strategies Incorporated, Evant, Inc. (formerly Nonstop Solutions), NSB Retail Systems PLC, Retek, Inc., and SAP AG. In addition, new competitors may enter our markets and offer merchandise management systems that target the retail industry.

The competition for our In-Store Systems is more fragmented than the competition for our Retail Enterprise Systems. We compete primarily with small point-of-sale focused companies such as CRS Business Computers, MICRO Systems, Inc. (formerly Datavantage, Inc.), 360 Commerce, Tomax Technologies and Triversity, Inc. We also compete with other broad solution set providers such as NSB Retail Systems PLC and Retek, Inc.

Our current Collaborative Solutions compete primarily with products from Connect3 Systems, Inc., Marketmax, Inc. (recently acquired by SAS), Evant Inc. (formerly Nonstop Solutions), AC Nielsen Corporation, i2 Technologies, Manugistics Group, Inc., Information Resources, Inc., and Synchra Systems.

In the market for consulting services, we have pursued a strategy of forming informal working relationships with leading retail systems integrators such as Cap Gemini Ernst & Young, IBM Consulting Services (formerly PriceWaterhouseCoopers), Kurt Salmon Associates and Lakewest Consulting. These integrators, as well as independent consulting firms such as Accenture, AIG Netplex, CFT Consulting, SPL and ID Applications, also represent competition to our consulting services group. Moreover, because many of these consulting firms are involved in advising our prospective customers in the software selection process, they may successfully encourage a prospective customer to select software from a software company with whom they have a relationship. Examples of such relationships between consulting firms and software companies include the relationships between Retek, Inc. and Accenture, and between Retek, Inc. and IBM Global Services.

As we continue to develop or acquire e-commerce products and expand our business in the Collaborative Solutions area, we expect to face potential competition from business-to-business e-commerce application providers, including Ariba, Commerce One, Commercialware, i2 Technologies, Manugistics Group, Inc., Microsoft, Inc., Retek, Inc., SAP AG, Synchra Systems, Ecometry Corporation, and others. A few of our existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical, marketing and other resources than we do, which could provide them with a significant competitive advantage over us. We cannot guarantee that we will be able to compete successfully against our current or future competitors, or that competition will not have a material adverse effect on our business, operating results and financial condition.

It May Be Difficult to Identify, Adopt And Develop Product Architecture That is Compatible With Emerging Industry Standards.

The markets for our software products are characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. We continuously evaluate new technologies and implement into our products advanced technology such as our current .Net effort. However, if we fail in our product development efforts to accurately address in a timely manner, evolving industry standards, new technology advancements or important third-party interfaces or product architectures, sales of our products and services will suffer.

Our software products can be licensed with a variety of popular industry standard platforms, and are authored in various development environments using different programming languages and underlying databases and architectures. There may be future or existing platforms that achieve popularity in the marketplace that may not be compatible with our software product design. Developing and maintaining consistent software product performance across various technology platforms could place a significant strain on our resources and software product release schedules, which could adversely affect our results of operations.

Our software products are complex and perform or directly affect mission-critical functions across many different functional and geographic areas of the enterprise. Consequently, implementation of our software products can be a lengthy process, and commitment of resources by our clients is subject to a number of significant risks over which we have little or no control. Although average implementation times have recently declined, we believe the implementation of the UNIX/Oracle versions of our products can be longer and more complicated than our other applications as they typically (i) appeal to larger retailers who have multiple divisions requiring multiple implementation projects, (ii) require the execution of implementation procedures in multiple layers of software, (iii) offer a retailer more deployment options and other configuration choices, and (iv) may involve third party integrators to change business processes concurrent with the implementation of the software. Delays in the implementations of any of our software products, whether by our business partners or us, may result in client dissatisfaction, disputes with our customers, or damage to our reputation. Significant problems implementing our software therefore, can cause delays or prevent us from collecting license fees for our software and can damage our ability to get new business.

We offer a combination of software products, consulting and maintenance services to our customers. Typically, we enter into service agreements with our customers that provide for consulting services on a “time and expenses” basis. Certain clients have asked for, and we have from time to time entered into, fixed-price service contracts, which link services payments, and occasionally software payments, to implementation milestones. We believe fixed-price service contracts may increasingly be offered by our competitors to differentiate their product and service offerings. As a result, we may need to enter into more fixed-price contracts in the future. If we are unable to meet our contractual obligations under fixed-price contracts within our estimated cost structure, our operating results could suffer.

Our success and competitive position is dependent in part upon our ability to develop and maintain the proprietary aspect of our technology. The reverse engineering, unauthorized copying, or other misappropriation of our technology could enable third parties to benefit from our technology without paying for it.

We rely on a combination of trademark, trade secret, copyright law and contractual restrictions to protect the proprietary aspects of our technology. We seek to protect the source code to our software, documentation and other written materials under trade secret and copyright laws. To date, we have not protected our technology with issued patents. Effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. We license our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the software and do not permit the re-sale, sublicense or other transfer of the source code. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and independent consultants to execute confidentiality agreements with us and by restricting access to our source code.

There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. It is possible that in the future third parties may claim that our current or potential future software solutions or we infringe on their intellectual property. We expect that software product developers and providers of e-commerce products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlap. Moreover, as software patents become more common, the likelihood increases that a patent holder will bring an infringement action against us, or against our customers, to whom we have indemnification obligations. In addition,

we may find it necessary to initiate claims or litigation against third parties for infringement of our proprietary rights or to protect our trade secrets. Since we now resell hardware we may also become subject to claims from third parties that the hardware, or the combination of hardware and software, infringe their intellectual property. Although we may disclaim certain intellectual property representations to our customers, these disclaimers may not be sufficient to fully protect us against such claims. We may be more vulnerable to patent claims since we do not have any patents that we can assert defensively against a patent infringement claim. Any claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or license agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect on our business, operating results and financial condition.

If We Lose Access to Critical Third-Party Software or Technology, Our Costs Could Increase And The Introduction of New Products And Product Enhancements Could be Delayed, Potentially Hurting Our Competitive Position.

We license and integrate technology from third parties in certain of our software products. For example, we license the Uniface client/server application development technology from Compuware, Inc. for use in PMM, certain applications from Silvon Software, Inc. for use in IDEAS, IBM’s Net.commerce merchant server software for use in MMS Multi-Channel, and the Syncsort application for use in Portfolio Planning by Arthur. These third party licenses generally require us to pay royalties and fulfill confidentiality obligations. If we are unable to continue to license any of this third party software, or if the third party licensors do not adequately maintain or update their products, we would face delays in the releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our software products. These delays, if they occur, could harm our business, operating results and financial condition. It is also possible that intellectual property acquired from third parties through acquisitions, mergers, licenses or otherwise may not have been adequately protected.

We May Face Liability If Our Products Are Defective Or If We Make Errors Implementing Our Products.

Our software products are highly complex and sophisticated. As a result, they may occasionally contain design defects or software errors that could be difficult to detect and correct. In addition, implementation of our products may involve customer-specific configuration by third parties or us, and may involve integration with systems developed by third parties. In particular, it is common for complex software programs, such as our UNIX/Oracle and e-commerce software products, to contain undetected errors when first released. They are discovered only after the product has been implemented and used over time with different computer systems and in a variety of applications and environments. Despite extensive testing, we have in the past discovered certain defects or errors in our products or custom configurations only after our software products have been used by many clients. In addition, our clients may occasionally experience difficulties integrating our products with other hardware or software in their environment that are unrelated to defects in our products. Such defects, errors or difficulties may cause future delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications or impair customer satisfaction with our products.

We believe that significant investments in research and development are required to remain competitive, and that speed to market is critical to our success. Our future performance will depend in large part on our ability to enhance our existing products through internal development and strategic partnering, internally develop new products which leverage both our existing customers and sales force, and strategically acquire complementary retail point and collaborative solutions that add functionality for specific business processes to an enterprise-wide system. If clients experience significant problems with implementation of our products or are otherwise dissatisfied with their functionality or performance or if they fail to achieve market acceptance for any reason, our market reputation could suffer, and we could be subject to claims for significant damages. Although our customer agreements contain limitation of liability clauses and exclude consequential damages, there can be no assurances that such contract provisions will be enforced. Any such damages claim could impair our market reputation and could have a material adverse affect on our business, operating results and financial condition.

Our performance depends in large part on the continued performance of our executive officers and other key employees, particularly the performance and services of James D. Armstrong our Chairman and Hamish N. J. Brewer our Chief Executive Officer. Mr. Brewer was promoted to Chief Executive Officer on August 4, 2003

having served as our President since April 2001 and as a senior officer of the Company since 1996. He succeeds Mr. Armstrong who will continue as Chairman of the Board. As Chairman, Mr. Armstrong will retain his active leadership role, focusing on strategic planning, merger and acquisition opportunities, major product decisions and key customer relationships. We do not have in place “key person” life insurance policies on any of our employees. The loss of the services of Mr. Armstrong, Mr. Brewer, or other key executive officers or employees without a successor in place, or any difficulties associated with our succession, could negatively affect our financial performance.

We continually evaluate potential acquisitions of complementary businesses, products and technologies, including those that are significant in size and scope. In pursuit of our strategy to acquire complementary products, we completed the acquisition of the assets of Zapotec Software, Inc. in February 2001, the NeoVista Decision Series from Accrue Software, Inc. in June 2001, the acquisition of all the common stock of E3 in September 2001, the acquisition of certain intellectual property from J•Commerce in April 2002, and the acquisition of certain intellectual property from Vista Software Solutions, Inc. in April 2003, and the acquisition of substantially all remaining intellectual property and certain other assets of Engage, Inc in August 2003. The E3 acquisition was our largest to date, and involved the integration of E3’s products and operations in 12 countries. The risks we commonly encounter in acquisitions include:

•

We may have difficulty assimilating the operations and personnel of the acquired company;

•

We may have difficulty effectively integrating the acquired technologies or products with our current products and technologies;

•

We may not be able to retain key technical and managerial personnel from the acquired business;

•

We may be unable to achieve the financial and strategic goals for the acquired and combined businesses;

•

We may have difficulty in maintaining controls, procedures and policies during the transition and integration;

•

Our relationships with partner companies or third-party providers of technology or products could be adversely affected;

•

Our due diligence process may fail to identify significant issues with product quality, product architecture, legal contingencies, and product development, among other things;

•

We may be subject to as a successor, certain liabilities of our acquisition targets; and

•

We may be required to sustain significant exit charges if products acquired in business combinations are unsuccessful.

It May Become Increasingly Expensive to Obtain And Maintain Liability Insurance at Current Levels.

We contract for insurance to cover a variety of potential risks and liabilities. In the current market, insurance coverage is becoming more restrictive and expensive, and when certain insurance coverage is offered, the deductible for which we are responsible is larger. In light of these circumstances, it may become more difficult to maintain insurance coverage at historical levels, or if such coverage is available, the cost to obtain or maintain it may increase substantially. This may result in our being forced to bear the burden of an increased portion of risks for which we have traditionally been covered by insurance, which could negatively impact the Company’s results of operations.

We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.

Foreign currency exchange rates. Our international operations expose us to foreign currency exchange rate changes that could impact translations of foreign denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. International revenues represented 45% of our total revenues in the nine months ended September 30, 2002, as compared with 43% in the nine months ended September 30, 2002 and 43% in the year ended December 31, 2002. In addition, the identifiable net assets of our foreign operations totaled 21% of consolidated net assets at September 30, 2003 as compared to 20% of consolidated assets at December 31, 2002. Our exposure to currency exchange rate changes is diversified due to the number of different countries in which we conduct business. We operate outside the United States primarily through wholly owned subsidiaries in Europe, Asia/Pacific, Canada and Latin America. We have determined that the functional currency of each of our foreign subsidiaries is the local currency and as such, foreign currency translation adjustments are recorded as a separate component of stockholders’ equity. Changes in the currency exchange rates of our foreign subsidiaries resulted in our reporting unrealized foreign currency exchange gain of $2.1 million in the nine months ended September 30, 2003 compared to a foreign currency exchange gain of $705,000 in the nine months ended September 30, 2002. We did not engage in any material foreign currency hedging transactions during 2002 or the nine months ended September 30, 2003. Foreign currency gains and losses will continue to result from fluctuations in the value of the currencies in which we conduct operations as compared to the U.S. Dollar, and future operating results will be affected to some extent by gains and losses from foreign currency exposure. We prepared sensitivity analyses of our exposures from foreign net working capital as of September 30, 2003 to assess the impact of hypothetical changes in foreign currency rates. Based upon the results of these analyses, a 10% adverse change in all foreign currency rates from the September 30, 2003 rates would result in a currency translation loss of $2.0 million before tax.

Interest rates. We invest our cash in a variety of financial instruments, including bank time deposits, and variable and fixed rate obligations of the U.S. Government and its agencies, states, municipalities, commercial paper and corporate bonds. These investments are denominated in U.S. dollars. We classify all of our investments as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Cash balances in foreign currencies overseas are operating balances and are invested in short-term deposits of the local operating bank. Interest income earned on our investments is reflected in our financial statements under the caption “Other income, net.” Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have suffered a decline in market value due to a change in interest rates. We hold our investment securities for purposes other than trading. The fair value of securities held at September 30, 2003 was $37.4 million, which is approximately the same as amortized cost, with interest rates generally ranging between 1% and 2%.

During and subsequent to the reporting period, and under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that were in effect at the end of the period covered by this quarterly report. Based on their evaluation, our principal executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures that were in effect on September 30, 2003 were effective to ensure that information required to be disclosed in our reports to be filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. However, such officers also concluded that there are certain weaknesses in our Information Technology area (“IT”), including access security and change control. We have dedicated resources to correcting these issues and are

in the process of implementing the necessary corrections. These weaknesses did not have a material impact on our ability to prepare this report including the financial statements contained herein. Other than the steps we have taken, or are in the process of taking, to correct certain weaknesses in our IT area with respect to access security and change control, there have been no significant changes in our internal controls over financial reporting, or to our knowledge, in other factors that could significantly affect these controls subsequent to September 30, 2003, including corrective actions with regard to significant deficiencies and material weaknesses.

We are involved in legal proceedings and claims arising in the ordinary course of business. Although there can be no assurance, management does not believe that the disposition of these matters will have a material adverse effect on our business, financial position, results of operations or cash flows.

We filed a Form 8-K dated August 4, 2003 with the Securities and Exchange Commission on August 5, 2003 to announce that Hamish N. J. Brewer, our President since April 2001 and as a senior officer of the Company since 1996, has been promoted to Chief Executive Officer. He succeeds James D. Armstrong who will continue as Chairman of the Board. As Chairman, Mr. Armstrong will retain his active leadership role, focusing on strategic planning, merger and acquisition opportunities, major product direction and key customer relationships.

We filed a Form 8-K dated October 20, 2003 with the Securities and Exchange Commission on October 20, 2003 to furnish a copy of our October 20, 2003 press release announcing financial results for the quarter ended September 30, 2003. In addition, the Form 8-K included a discussion of the non-GAAP financial measures of operating income, operating income as a percentage of revenue, and earnings per share provided in the October 20, 2003 press release.

This information provided in this report on Form 8-K and the Exhibits attached thereto was furnished under “Item 12. Disclosure of Results of Operations and Financial Condition.” The information shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall these reports be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such filing.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Exhibit #		Description of Document

2.1**	- -	Asset Purchase Agreement dated as of June 4, 1998, by and among JDA Software Group, Inc., JDA Software, Inc. and Comshare, Incorporated.

2.2##	- -	# Asset Purchase Agreement dated as of February 24, 2000, by and among JDA Software Group, Inc., Pricer AB, and Intactix International, Inc.

2.3###	- -	# Agreement and Plan of Reorganization dated as of September 7, 2001, by and among JDA Software Group, Inc., E3 Acquisition Corp., E3 Corporation and certain shareholders of E3 Corporation.

3.1####	- -	Third Restated Certificate of Incorporation of the Company together with Certificate of Amendment dated July 23, 2002.

3.2***	- -	First Amended and Restated Bylaws.

4.1*	- -	Specimen Common Stock certificate.

4.2*(1)	- -	Stock Redemption Agreement among the Company, James D. Armstrong and Frederick M. Pakis dated March 30, 1995.

10.1*(1)	- -	Form of Indemnification Agreement.

10.2*(1)	- -	1995 Stock Option Plan, as amended, and form of agreement thereunder.

10.3••(1)	- -	1996 Stock Option Plan, as amended.

10.4*(1)	- -	1996 Outside Directors Stock Option Plan and forms of agreement thereunder.

10.5 (1)####	- -	Executive Employment Agreement between James D. Armstrong and JDA Software Group, Inc. dated July 23, 2002.

10.6**** (1)	- -	Executive Employment Agreement between Hamish N. Brewer and JDA Software Group, Inc. dated January 22, 2003.

10.7 (1)####	- -	Executive Employment Agreement between Kristen L. Magnuson and JDA Software Group, Inc. dated July 23, 2002.

10.8#(1)	- -	1998 Nonstatutory Stock Option Plan.

10.9#(1)	- -	1998 Employee Stock Purchase Plan.

10.10†	- -	1999 Employee Stock Purchase Plan.

10.11††††	- -	Lease Agreement between Opus West Corporation and JDA Software Group, Inc. dated April 30, 1998, together with First Amendment dated June 30, 1998, Second Amendment dated November 23, 1998, revised and restated Third Amendment dated October 20, 1999, Fourth Amendment dated May 30, 2001, Fifth Amendment dated May 31, 2001, Sixth Amendment dated August 2001, Seventh Amendment dated June 30 2003, and Letter Agreement dated June 30, 2003.

10.12**	- -	Software License Agreement dated as of June 4, 1998 by and between Comshare, Incorporated and JDA Software, Inc.

10.14••••(2)	- -	Value-Added Reseller License Agreement for Uniface Software between Compuware Corporation and JDA Software Group, Inc. dated April 1, 2000, together with Product Schedule No. Two dated September 28, 2001.

10.15*(1)	- -	JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as amended effective January 1, 1995.

10.17***(1)	- -	#Form of Amendment of Stock Option Agreement between JDA Software Group, Inc and Kristen L. Magnuson, amending certain stock options granted to Ms. Magnuson pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan on September 11, 1997 and January 27, 1998.

10.18††(1)	- -	# Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, as Rights Agent (including as Exhibit A the Form of Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the From of Right Certificate, and as Exhibit C the Summary of Terms and Rights Agreement).


Exhibit #		Description of Document

10.19†††(1)	- -	Form of Incentive Stock Option Agreement between JDA Software Group, Inc. and Kristen L. Magnuson to be used in connection with stock option grants to Ms. Magnuson pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan.

10.20•(1)(3)	- -	Form of Incentive Stock Option Agreement between JDA Software Group, Inc. and certain Senior Executive Officers to be used in connection with stock options granted pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan.

10.21• (1)(3)	- -	# Form of Nonstatutory Stock Option Agreement between JDA Software Group, Inc. and certain Senior Executive Officers to be used in connection with stock options granted pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan.

10.22• (1) (4)	- -	#Form of Amendment of Stock Option Agreement between JDA Software Group, Inc and certain Senior Executive Officers, amending certain stock options granted pursuant to the JDA Software Group, Inc. 1995 Stock Option Plan

10.23• (1)(5)	- -	#Form of Amendment of Stock Option Agreement between JDA Software Group, Inc and certain Senior Executive Officers, amending certain stock options granted pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan

10.24• (1)(6)	- -	Form of Incentive Stock Option Agreement between JDA Software Group, Inc. and certain Senior Executive Officers to be used in connection with stock options granted pursuant to the JDA Software Group, Inc. 1996 Stock Option Plan

10.25•••	- -	# Secured Loan Agreement between JDA Software Group, Inc. and Silvon Software, Inc. dated May 8, 2001, together with Secured Promissory Note and Security Agreement.

31.1	- -	Rule 13a-14(a) Certification of Chief Executive Officer

31.2	- -	Rule 13a-14(a) Certification of Chief Financial Officer

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


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003

		OR

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


PART I: FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3: Quantitative and Qualitative Disclosures About Market Risk
	Item 4: Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K:
SIGNATURE
EXHIBIT INDEX
EX-31.1
EX-31.2
EX-32.1


	Three Months						Nine Months
	Ended September 30,						Ended September 30,

	2003			2002			2003			2002

Net income — as reported	$	3,374		$	758		$	2,427		$	7,980
Less: stock-based compensation expense, net of related tax effects		(1,494	)		(2,442	)		(4,727	)		(7,477	)

Pro forma net income (loss)	$	1,880		$	(1,684	)	$	(2,300	)	$	503
Basic earnings per share — as reported	$	.12		$	.03		$	.09		$	.29
Diluted earnings per share — as reported	$	.11		$	.03		$	.08		$	.27
Basic earnings (loss) per share — pro forma	$	.07		$	(.06	)	$	(.08	)	$	.02
Diluted earnings (loss) per share											—
pro forma	$	.06		$	(.06	)	$	(.08	)	$	.02


		September 30, 2003					December 31, 2002

		Gross Carrying		Accumulated			Gross Carrying		Accumulated
		Amount		Amortization			Amount		Amortization

Goodwill		$	62,397		—		$	59,801		—

Other intangibles:
Amortized intangible assets
	Customer Lists		39,598		(8,139	)		36,348		(5,897	)
	Software technology		35,061		(12,569	)		31,721		(9,237	)
Unamortized intangible assets Trademarks			3,700		—			3,700		—

			78,359		(20,708	)		71,769		(15,134	)

		$	140,756	$	(20,708	)	$	131,570	$	(15,134	)


							Loss on								Loss on
		Initial		Cash			disposal of			Balance at		Cash			disposal of			Adjustments to			Balance at
Description of the charge		Reserve		Charges			assets			Dec 31, 2002		Charges			assets			Reserve			Sept 30, 2003

Severance, benefits and legal costs		$	5,204	$	(2,635	)	$	—		$	2,569	$	(2,211	)	$	—		$	(214	)	$	144
Office closure costs			1,083		(28	)		(47	)		1,008		(424	)		(77	)		196			703

	Total	$	6,287	$	(2,663	)	$	(47	)	$	3,577	$	(2,635	)	$	(77	)	$	(18	)	$	847


Delaware (State or other jurisdiction of incorporation or organization)		86-0787377 (I.R.S. Employer Identification No.)


Fair value of current assets acquired		$	662
Software technology			1,100
Customer lists			1,110
Other intangible assets			80
Goodwill			2,290
Deferred revenue			(681	)

	Total acquisition cost of Vista Software Solutions, Inc.		4,561
Accruals for direct costs related to the acquisition			(555	)

	Total cash expended to acquire Vista Software Solutions, Inc.	$	4,006


Fair value of fixed assets acquired		$	350
Software technology			2,200
Customer lists			2,100
Goodwill			306
Deferred revenue			(1,488	)

	Total acquisition cost of Engage, Inc.		3,468
Accruals for direct costs related to the acquisition			(119	)

	Total cash expended to acquire Engage, Inc.	$	3,349


		JDA SOFTWARE GROUP, INC

Dated: November 12, 2003		By: /s/ Kristen L. Magnuson

		Kristen L. Magnuson Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

*		Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-748), declared effective on March 14, 1996.

**		Incorporated by reference to the Company’s Current Report on Form 8-K dated June 4, 1998, as filed on June 19, 1998.

***		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998, as filed on August 14, 1998.

****		Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed on March 19, 2003.

†		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, as filed on August 19, 1999.

††		Incorporated by reference to the Company’s Current Report on Form 8-K dated October 2, 1998, as filed on October 28, 1998.

†††		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, as filed on November 13, 1998.

††††		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, as filed on August 13, 2003.

#		Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, as filed on March 31, 1998.

##		Incorporated by reference to the Company’s Current Report on Form 8-K dated February 24, 2000, as filed on March 1, 2000.

###		Incorporated by reference to the Company’s Current Report on Form 8-K dated September 7, 2001, as filed on September 21, 2001.

####		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, as filed on November 12, 2002.

•		Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as filed on March 16, 2000.

••		Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, as filed on April 2, 2001.

•••		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, as filed on August 14, 2001.

••••		Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 29, 2002.

(1)		Management contracts or compensatory plans or arrangements covering executive officers or directors of the Company.

(2)		Confidential treatment has been granted as to part of this exhibit.

(3)		Applies to James D. Armstrong.

(4)		Applies to Hamish N. Brewer and Gregory L. Morrison.

(5)		Applies to Hamish N. Brewer, Peter J. Charness, Scott D. Hines, Gregory L. Morrison and David J. Tidmarsh.

(6)		Applies to Senior Executive Officers with the exception of James D. Armstrong and Kristen L. Magnuson.