UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

x

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

OR

o

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

JDA SOFTWARE GROUP, INC.

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

     Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes x No o

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

     The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, was 29,061,056 as of August 2, 2004.

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JDA SOFTWARE GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

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JDA SOFTWARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

1. Basis of Presentation

     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 six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

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

2. Pending Acquisition of QRS Corporation

     On June 17, 2004, we signed a definitive agreement to acquire QRS Corporation (“QRS”), a leading provider of collaborative commerce solutions with approximately 9,800 retail and manufacturing customers. By combining the two companies, we merge one of the world’s leading trade and product information networks with the existing JDA Portfolio suite of products, significantly enhancing our position in the global field of demand chain solutions providers and positioning ourselves to capitalize on product information and global data synchronization opportunities. Under the terms of the merger agreement, QRS stockholders will receive .5 shares of JDA common stock for each share of outstanding QRS common stock and will own approximately 22% of the outstanding capital stock of the combined company. Completion of the proposed merger, which is expected to close in the third or fourth quarter of 2004, is subject to the approval of JDA and QRS stockholders and other regulatory and customary conditions. There can be no assurance that the merger will be consummated. In the event that the merger agreement is terminated under certain circumstances, QRS will be required to pay us a termination fee of $3.75 million. Risks associated with this pending merger, whether it is consummated or not, appear in Exhibit 99.1 to this quarterly report on Form 10-Q.

     Subsequent to entering into the merger agreement with JDA, QRS’ Board of Directors received four non-binding unsolicited proposals to acquire all the outstanding shares of QRS common stock in exchange for cash, each subject to satisfactory completion of due diligence and execution of definitive documentation. After receipt of the proposals, QRS’ Board of Directors determined that engaging in discussions with each of the potential acquirers was in compliance with the terms of the merger agreement between JDA and QRS, and QRS has initiated discussions with each of the potential acquirers. One of the potential acquirers has subsequently withdrawn its proposal. We cannot predict what the outcome of QRS’ continuing discussions with the other two potential acquirers will be, or if QRS will exercise its right to terminate our merger agreement, upon payment of the $3.75 million termination fee, to accept a superior proposal.

     We intend to account for the merger as a purchase in accordance with generally accepted accounting principles, and we believe the transaction will result in a purchase price in excess of the fair value of net tangible and non-goodwill intangible assets acquired (goodwill). This number is expected to be approximately $45 million based on the average closing market price of JDA common stock for two days before (June 15, 2004 and June 16, 2004) and two days after (June 17, 2004 and June 18, 2004) the announcement of the execution of the merger agreement and the preliminary, estimated fair value of the net assets. The final purchase price and value of the net assets will be determined upon the completion of the merger. The allocation of the purchase price among net assets acquired, developed software, customer relationship intangibles, a non-compete agreement and goodwill will be determined by management with information from a number of sources, including independent appraisers. Amortizable intangible assets arising from the merger, currently estimated at $29 million, will generally be amortized over useful lives ranging from one-and-half years to 10 years, resulting in an estimated accounting charge for amortization attributable to these items of approximately $6 million on an annual basis. Goodwill resulting from the business combination will not be amortized but instead will be tested for impairment at least annually, or more frequently if there are indicators of impairment. We do not currently expect to record any in-process research and development in the merger.

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     If our stock price, or the final valuation of the intangible assets change, the allocation of the purchase price and the amounts allocated to intangible assets with finite lives may increase significantly, which could result in a material increase in amortization of intangible assets.

     Upon completion of the proposed merger, QRS’ deferred revenue will be adjusted to reflect the estimated fair value of our legal performance obligations under QRS’ support contracts and to eliminate historical amounts of QRS’ deferred revenue that do not represent a legal performance obligation to the combined company. The current estimate of the fair value of our legal performance obligations under QRS’ support contracts is approximately $2.6 million, which approximates the carrying value at March 31, 2004.

     On July 26, 2004, we filed a Registration Statement on Form S-4 with the SEC which covers the shares to be issued in this merger. Following the SEC’s review of the Registration Statement, the joint proxy statement/prospectus included therein will be sent to JDA and QRS stockholders in connection with separate stockholder meetings to be held for the purpose of approving the merger.

3. Acquisition of Timera Retail Solutions

     On January 29, 2004, we acquired the intellectual property and certain other assets of Timera Retail Solutions (“Timera”), for a total cost of $13.6 million, which includes the purchase price of $13.0 million plus $600,000 in direct costs of the acquisition. Timera is a provider of integrated workforce management solutions for the retail and consumer goods industry. Timera’s Enterprise Workforce Management product suite expands our JDA Portfolio and complements our existing In-Store Systems with web-based functionality for labor scheduling and budgeting, time and attendance, demand forecasting, labor tracking, and other key processes for proactive store level labor management. The acquisition was accounted for as a purchase, and accordingly, the operating results of Timera have been included in our consolidated financial statements from the date of acquisition. In connection with the Timera acquisition, we extended employment offers to 51 former Timera employees, approximately two-thirds of which are in product development, and recorded $8.0 million of goodwill in our In-Store Systems reporting unit, $4.6 million in software technology, and $1.1 million for customer lists. Pro forma operating results have not been presented as the acquisition is not material to our consolidated financial statements. The following summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

4. Derivative Instruments and Hedging Activities

     During fourth quarter 2003, we began using derivative financial instruments, primarily forward exchange contracts, to manage a majority of the foreign currency exchange exposure associated with net short-term foreign denominated assets and liabilities which exist as part of our ongoing business operations. The exposures relate primarily to the gain or loss recognized in earnings from the revaluation or settlement of current foreign denominated assets and liabilities. We do not enter into derivative financial instruments for trading or speculative purposes. The forward exchange contracts generally have maturities of less than 90 days and are not designated as hedging instruments under Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). Forward exchange contracts are marked-to-market at the end of each reporting period, with gains and losses recognized in other income, net, offset by the gains or losses resulting from the settlement of the underlying foreign denominated assets and liabilities.

     At June 30, 2004, we had forward exchange contracts with a notional value of $8.4 million and an associated net forward contract receivable of $87,000, which is included in prepaid expenses and other current assets. At December 31, 2003, we had forward exchange contracts with a notional value of $10.3 million and an associated net forward contract liability of $147,000, which is included in accrued expenses and other liabilities. The

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notional value represents the amount of foreign currencies to be purchased or sold at maturity and does not represent our exposure on these contracts. We recorded a foreign currency exchange loss of $68,000 in the three months ended June 30, 2004, as compared to a foreign currency exchange gain of $41,000 in the three months ended June 30, 2003. We recorded foreign currency exchange gains of $145,000 and $570,000 in the six months ended June 30, 2004 and 2003, respectively.

5. Promissory Note Receivable

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

     On May 7, 2004, Silvon notified the Company that it would not make the May 8, 2004 payment due under the note and had filed an arbitration claim. We have subsequently filed a counterclaim for the remaining balance on the note. Silvon has represented to us during our continuing discussions that they are attempting to secure alternative financing on the note. No adjustments have been made to the carrying amount of the note as we believe the value of the underlying collateral is sufficient to recover the remaining balance on the note if we are required to exercise our legal remedies.

6. Purchase of Corporate Office Facility

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

     7. Goodwill and Other Intangibles, net

     Goodwill and other intangible assets consist of the following:

     We recorded $8.3 million of goodwill in connection with our acquisition of Timera on January 29, 2004 (see Note 3). We subsequently reduced this goodwill balance by $369,000 in the second quarter 2004 as a result of certain adjustments made to the fair value of the deferred revenue acquired in the transaction. In addition, we reduced goodwill by $692,000 in the three months ended June 30, 2004 for the settlement of certain tax positions taken by the company in connection with our acquisition of E3 Corporation (“E3”) in September 2001. This adjustment increased the deferred tax asset recorded in the acquisition of E3 to the revised tax basis of pre-decisional investigatory expenses, foreign affiliate review, and costs allocated to the assets acquired. We found no indication of

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impairment of our goodwill balances during the six months ended June 30, 2004 and, absent future indicators of impairment, the next annual impairment test will be performed in fourth quarter 2004. As of June 30, 2004, goodwill has been allocated to our reporting units as follows: $42.1 million to Retail Enterprise Systems, $9.3 million to In-Store Systems, and $18.3 million to Collaborative Solutions.

     The estimated useful lives of our customer lists range from 5 to 13 years. The estimated economic lives of our software technology range from 5 to 15 years. Amortization expense for the three and six month periods ended June 30, 2004 was $2.1 and $4.2 million, respectively. Amortization expense for the three and six month periods ended June 30, 2003 was $1.8 million and $3.6 million, respectively. These figures are shown as separate line items in the consolidated statements of income within cost of revenues and operating expenses. We expect amortization expense for the next five years to be as follows:

8. Earnings (Loss) per Share

     Earnings (loss) per share for the three and six months ended June 30, 2004 and 2003 is calculated as follows:

     No common stock equivalents were included in the calculation of diluted loss per share for the six months ended June 30, 2003 as such common stock equivalents would be anti-dilutive.

9. 2004 Restructuring Charge

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

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

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     The remaining balance for severance, benefits and legal costs relates to terminated employees in the Americas that we expect to be paid out by September 30, 2004 ($28,000) and in Europe pending the outcome of a tribunal hearing ($45,000). The remaining balance for office closure costs is being paid out as the leases and related subleases run through their remaining terms.

10. 2002 Restructuring Charges

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

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

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

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

11. E3 Acquisition Reserves

     In conjunction with the acquisition of E3 Corporation (“E3”) in September 2001, we recorded acquisition reserves of approximately $14.6 million for restructuring costs to exit the activities of E3 and other direct costs associated with the acquisition. These costs related primarily to facility closures, employee severance, investment banker fees, and legal and accounting costs. We subsequently increased the purchase price and E3 acquisition reserves by $1.3 million during 2002 based on revised estimates of the restructuring costs to exist the activities of E3 and other direct costs of the acquisition. During third quarter 2003, we reduced our estimate of employee severance and termination benefits by $172,000, and accrued an additional $190,000 for facility termination and sublease costs based on our revised estimate of the time required to sublease the vacated office space in the current economic environment. We accrued an additional $150,000 for facility termination and sublease costs in first quarter 2004 because of continuing delays in our ability to sublease one remaining unused facility. All adjustments during 2003 and in first quarter 2004 have been made through the income statement. The first quarter 2004 adjustment is included in the caption “Restructuring Charge and Adjustments to Acquisition-Related Reserves.” All employee severance and termination benefits as well as investment banker fees and legal and accounting costs were fully paid by December 31, 2003, and the only remaining reserves at June 30, 2004 are for facility termination and sublease costs which are being paid out as the leases and any related subleases run through their remaining terms.

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     The unused portion of the acquisition reserves, which is included in accrued expenses and other liabilities on the balance sheet, was $479,000 at June 30, 2004 and $525,000 at December 31, 2003. A summary of the charges and adjustments recorded against the reserves is as follows:

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

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

12. Stock-Based Compensation

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

     The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted income (loss) per share as if stock-based employee compensation had been recognized during the

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three and six month periods ended June 30, 2004 and 2003. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

13. Income Taxes

     We recorded an income tax benefit of $829,000 in the three months ended June 30, 2004, compared to income tax expense of $695,000, or 35% of the reported income before income taxes in the three months ended June 30, 2003, and an income tax benefit of $1.6 million for the six months ended June 30, 2004, compared to an income tax benefit of $510,000, or 35% of the reported loss before income taxes in the six months ended June 30, 2003. The income tax benefits for the three and six months ended June 30, 2004 include $750,000 and $1.1 million in one-time income tax benefits, respectively. The $750,000 one-time tax benefit results from the settlement of an Internal Revenue Service (“IRS”) audit of our 2000 and 2001 federal income tax returns and a favorable income tax adjustment with Inland Revenue in the United Kingdom. The IRS audit settlement allows us to utilize foreign tax credits that we were previously unable to take as a credit. The $1.1 million one-time income tax benefit for the six months ended June 30, 2004 includes the $750,000 plus a $329,000 one-time income tax benefit recognized in the three months ended March 31, 2004 from the settlement of IRS audits of our 1998 and 1999 federal income tax returns, and an agreement with the IRS to allow the Company to take a research and development expense tax credit for most of the qualifying expenses originally reported in these returns. The effective income tax rate for the three and six months ended June 30, 2004, excluding the effect of the one-time tax benefits, is 35%.

     The income tax (benefit) provisions recorded during the three and six months ended June 30, 2004 and 2003 take into account the source of taxable income, domestically by state and internationally by country, and available income tax credits, and do not include the tax benefits realized from the employee stock options exercised during the three and six months ended June 30, 2004 of $7,000 and $55,000, respectively, compared to $24,000, and $33,000 in the three and six months ended June 30, 2003, respectively. These tax benefits reduce our income tax liabilities and are included as an increase to additional paid-in capital.

14. Business Segments and Geographic Data

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

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     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 (“Merchandise Management Systems”) that enable retailers to manage their inventory, product mix, pricing and promotional execution, and enhance the productivity and accuracy of warehouse processes. In addition, Retail Enterprise Systems include a comprehensive set of tools for planning inventory and in-store space decisions throughout the demand chain, analyzing business results and trends, automating demand forecasting and replenishment, tracking customer shopping patterns, optimizing revenues through trade allowance and promotional program management (“Strategic Merchandise Management Solutions”).

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In-Store Systems include point-of-sale, labor scheduling and back office applications that enable retailers to capture, analyze and transmit certain sales, store inventory and other operational information to corporate level merchandise management and payroll systems using hand-held, radio frequency devices, point-of-sale workstations or via the Internet. In addition, In-Store Systems include a workforce management solution to optimize the scheduling of in-store labor which typically represents the next largest operational cost for a retailer after inventory.

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Collaborative Solutions provide applications that enable business-to-business collaborative activities such as collaborative planning, forecasting and replenishment (“CPFR”), collaborative category management including collaborative space and assortment planning, and collaborative revenue management through trade funds management programs. Our Collaborative Solutions offerings leverage existing solutions deployed to retailers within our Retail Enterprise Systems business segment.

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

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

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

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 reflecting management’s current forecast of certain aspects of our future. It is based on current information that we have assessed but which by its nature is dynamic and subject to rapid and even abrupt changes. Forward-looking statements include statements regarding future operating results, liquidity, capital expenditures, product development and enhancements, numbers of personnel, strategic relationships with third parties, acquisitions and strategy. The forward-looking statements are generally accompanied by words such as “plan,” “estimate,” “expect,” “intend,” “believe,” “should,” “would,” “could,” “anticipate” or other words that convey uncertainty of future events or outcomes. Our actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with our business. These risks are described in this item, Exhibit 99.1, as well as throughout this Quarterly Report on Form 10-Q, which you should read carefully. We would particularly refer you to the section under the heading “Factors That May Affect Our Future Results or The Market Price of Our Stock” for a discussion of the risks confronting our business and Exhibit 99.1 for a discussion of specific risks relating to our pending merger with QRS Corporation. The forward-looking statements in this Quarterly Report on Form 10-Q should be considered in the context of these risk factors.

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

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

Overview

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

Significant Trends and Developments in Our Business

     Outlook for Third Quarter 2004. We currently expect total revenues to be flat to slightly higher in third quarter 2004. We believe small sequential increases in software license and maintenance services revenues in third quarter 2004 will be substantially offset by a seasonal decline in services revenue due to the heavy vacation period in Europe and the Americas, and continued softness in the demand for services in Europe.

     We expect to deliver increased software license revenues in the second half of 2004 compared to the first half of 2004, but do not anticipate any significant shifts in the mix of revenues between our geographic regions. The pipeline for new business in Europe and Asia/Pacific appears stronger than it has been over the past couple of quarters; however we do not yet see broad signs of consistent, robust spending on IT by retailing organizations in these regions. Results in the European region have also been impacted by operational issues since the departure of our regional vice president in fourth quarter 2003. We hired a new regional vice president for Europe in July 2004 and as a result, we believe our execution in this region will improve in the second half of 2004. A higher proportion of the software sales pipeline in the Americas region is with larger customers that typically have longer and more complex buying cycles.

     Consulting service hourly rates have increased; however, our utilization rate has declined and we currently expect a modest sequential decline in service revenues in third quarter 2004 due to the heavy vacation period in Europe and the Americas, and continued softness in the demand for services in Europe. We expect consulting services revenue to improve in Europe and Asia/Pacific by the end of 2004 as a result of increased software license sales in these regions. We do not expect any substantial changes in our consulting service margins in third quarter 2004 other than the possible impact that sequentially higher software license sales may have on incentive compensation costs. Our worldwide utilization was 45% in second quarter 2004, compared to 52% in second quarter 2003 and 49% in first quarter 2004. We are beginning to experience resource constraint pressure in some parts of our consulting practice that we believe is a positive indicator that our utilization rates may improve modestly in fourth quarter 2004. However, we do not anticipate any significant improvement in our utilization rates until our ePathways program to deliver services electronically is fully rolled out in late 2004. The ePathways program is designed to optimize the delivery of services related to the shorter implementation cycle projects typically associated with our Portfolio Space Management, Portfolio Planning and Portfolio Replenishment applications. We are reviewing our consulting resources by region and will be balancing our staffing levels as appropriate in third quarter 2004 to improve utilization in the second half of 2004.

     We expect total operating expenses to be flat to down slightly in third quarter 2004 compared to second quarter 2004 primarily due to the seasonal timing of certain marketing events and marketing expenditures. We expect third quarter 2004 product development expenses to remain flat sequentially compared to second quarter 2004, and will remain at this elevated level as a percentage of product revenues at least until we begin delivering significant components of our .Net launch initiatives in late 2004.

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     The modest increases in product revenues and moderate operating expense savings are expected to produce sequentially higher earnings in third quarter 2004 compared to second quarter 2004, before unusual items including any charges that may result from our balancing of staffing levels in third quarter 2004.

     Economic Conditions Continue to Impact our Operating Results. Our operating results continue to be impacted by uncertain economic conditions in our international regions. We believe economic conditions in the Americas region are recovering, as our customers appear to have improved confidence and willingness to make capital expenditures for information technology; however even in the Americas we are not experiencing strong sequential growth every quarter and the timing of larger software license sales remains difficult to predict.

     The retail and demand chain industry continues to exercise significant due diligence prior to making large capital outlays, and the decision-making process for investments in information technology remains highly susceptible to deferral. As a result, our sales cycles remain elongated and we continue to experience uncertainty predicting the size and timing of individual contracts. For example, we signed no large software licenses ($1.0 million or greater) in second quarter 2004, as compared to two in first quarter 2004, none in fourth quarter 2003, and four during both third and second quarter 2003. Although orders for certain of our products can be taken over the telephone, the average sales cycle for larger software license contracts can range from six months to over one year. Based upon the overall size of our pipeline, 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. Our competitive losses remain low and we continue to experience a steady pattern of multi-product deals, including seven in second quarter 2004, nine in both first quarter 2004 and fourth quarter 2003, six in third quarter 2003 and two in second quarter 2003.

     Economic conditions have negatively impacted the demand for our Merchandise Management Systems and In-Store Systems over the past two years. We did, however, sign five new Merchandise Management Systems licenses in second quarter 2004 compared to four in first quarter 2004, three in fourth quarter 2003, five in third quarter 2003, and two in second quarter 2003. We believe that significant growth in the transaction systems market will require sustained macroeconomic improvement.

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

     In the six months ended June 30, 2004, 70% of our software license revenues came from existing customers compared to 84% in the six months ended June 30, 2003. We believe that sales to existing customers will continue to comprise a majority of our software revenues and that this metric is a direct result of our large customer base, principally amassed through our acquisition activities in 2000 and 2001, and the focus we have and will continue to place on back-selling opportunities for JDA Portfolio products to existing customers through our Customer Value Program. 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 has provided significant back-selling opportunities in our customer base. The majority of our customers still only own one JDA product family.

     The Prospects For Our In-Store Systems Business Segment Are Improving. The In-Store Systems business segment provided 9% of our total revenues in the six months ended June 30, 2004 compared to 7% in the six months ended June 30, 2003. Total revenues in this business segment increased $3.2 million, or 50% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. The acquisition of Timera Retail Solutions on January 29, 2004 provided $1.9 million of this increase (see “We Continue to Grow Our Business Through Acquisitions”). PPOS, our Java-based In-Store System, was commercially released in second quarter 2003 and we are in the early adopter phase for this new platform. We do not believe the In-Store Systems business segment will experience any significant organic growth until the product becomes more mature and early adopters of the PPOS

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application complete their implementations and become reference-able. 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. Furthermore, industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers, and we believe potential customers may look to partner with broad solutions providers such as JDA that can bring all aspects of store operations into one integrated suite, rather than software vendors that only offer in-store systems.

     We Continue to Invest in New Product Development and Have Expanded Our Markets. We invested $40.8 million in the six months ended June 30, 2004 and approximately $347.7 million from 1998 to 2003 in new product development and the acquisition of complementary products. The acquisitions of Arthur and Timera (see “We Continue to Grow Our Business Through Acquisitions”) extended our product offerings in the Retail Enterprise Systems and In-Store Systems segments of our business. The acquisitions of Intactix, NeoVista Decision Series, E3, Vista, and Engage not only have expanded our product offerings, but have also provided us with collaborative applications that address new vertical market opportunities with the manufacturers and wholesalers who supply our traditional retail customers. We believe our strategy of expanding our product portfolio and increasing the scalability of our products has been the key element in attracting larger retail customers, and we believe that it has resulted in a steady pattern of new customers licensing multiple products, as well as enhanced back-selling opportunities in our customer base.

     We are developing a series of enhancements to the JDA Portfolio products, based upon the Microsoft .Net technology platform (“.Net Platform”) and the Java platform, which we believe will position us uniquely in the retail and collaborative solutions markets. Our goals are to ensure that our solutions offer: (i) increased ease of use, (ii) increased integration of business processes, (iii) reduced cost of ownership, (iv) faster implementation, and (v) faster return on investment. We believe our next generation technology will enhance our competitive position since we will be able to offer significant features and functionality using an advanced technology platform. We released Portfolio 2004, a fully synchronized, integrated release of all our existing products, in first quarter 2004. Portfolio 2004 included our first .Net Platform application, Portfolio Registry. Our goal is to begin delivering the next applications on the .Net Platform in fourth quarter 2004, starting with Portfolio Replenishment by E3, followed by the first components of Portfolio Enterprise Planning by Arthur, the first components of our Revenue Management solutions, 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.

     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. During first quarter 2004, we announced a similar investment protection program for In-Store Systems customers that provides an upgrade path from Win/DSS to PPOS. As of June 30, 2004, approximately one-third of our domestic Win/DSS customers have indicated they intend to participate in the In-Store Systems investment protection program and upgrade to PPOS.

     We expect third quarter 2004 product development expenses to remain flat sequentially compared to second quarter 2004, and will remain at this elevated level as a percentage of product revenues until we begin delivering significant components of our .Net launch initiatives in late 2004. We may adjust this spending rate in late 2004 depending upon the outlook for IT spending and other product specific delivery requirements.

     We Continue to Grow Our Business Through Acquisitions. We believe there are opportunities to grow our business through the acquisition of complementary and synergistic companies, products and technologies. We 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 are primarily interested in

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acquiring solutions that will increase the breadth of our JDA Portfolio offerings in the In-Store Systems and Collaborative Solutions business segments, and believe the general size of cash acquisitions we would currently consider are in the $5 million to $20 million range.

     On January 29, 2004 we acquired the intellectual property and certain other assets of Timera Retail Solutions (“Timera”), for a total cost of $13.6 million, which includes the purchase price of $13.0 million plus $600,000 in direct costs of the acquisition. Timera is a provider of integrated workforce management solutions for the retail and consumer goods industry. Timera’s Enterprise Workforce Management product suite expands our JDA Portfolio and complements our existing In-Store Systems with web-based functionality for labor scheduling and budgeting, time and attendance, demand forecasting, labor tracking, and other key processes for proactive store level labor management. The acquisition was accounted for as a purchase, and accordingly, the operating results of Timera have been included in our consolidated financial statements from the date of acquisition. In connection with the Timera acquisition, we extended employment offers to 51 former Timera employees, approximately two-thirds of which are in product development, and recorded $8.0 million of goodwill in our In-Store Systems reporting unit, $4.6 million in software technology, and $1.1 million for customer lists. Timera contributed approximately $1.9 million in total revenues during the six months ended June 30, 2004, including $1.0 million of software license revenues and $692,000 in maintenance services, and added $2.6 million in costs and expenses, including $230,000 in amortization of software technology and other intangibles. Pro forma operating results have not been presented as the acquisition is not material to our consolidated financial statements.

     Pending Acquisition of QRS Corporation. On June 17, 2004, we signed a definitive agreement to acquire QRS Corporation (“QRS”), a leading provider of collaborative commerce solutions with approximately 9,800 retail and manufacturing customers. By combining the two companies, we merge one of the world’s leading trade and product information networks with the existing JDA Portfolio suite of products, significantly enhancing our position in the global field of demand chain solutions providers and positioning ourselves to capitalize on product information and global data synchronization opportunities. Under the terms of the merger agreement, QRS stockholders will receive .5 shares of JDA common stock for each share of outstanding QRS common stock and will own approximately 22% of the outstanding capital stock of the combined company. Completion of the proposed merger, which is expected to close in the third or fourth quarter of 2004, is subject to the approval of JDA and QRS stockholders and other regulatory and customary conditions. There can be no assurance that the merger will be consummated. In the event that the merger agreement is terminated under certain circumstances, QRS will be required to pay us a termination fee of $3.75 million. Risks associated with this pending merger, whether it is consummated or not, appear in Exhibit 99.1 to this quarterly report on Form 10-Q.

     Subsequent to entering into the merger agreement with JDA, QRS’ Board of Directors received four non-binding unsolicited proposals to acquire all the outstanding shares of QRS common stock in exchange for cash, each subject to satisfactory completion of due diligence and execution of definitive documentation. After receipt of the proposals, QRS’ Board of Directors determined that engaging in discussions with each of the potential acquirers was in compliance with the terms of the merger agreement between JDA and QRS, and QRS has initiated discussions with each of the potential acquirers. One of the potential acquirers has subsequently withdrawn its proposal. We cannot predict what the outcome of QRS’ continuing discussions with the other two potential acquirers will be, or if QRS will exercise its right to terminate our merger agreement, upon payment of the $3.75 million termination fee, to accept a superior proposal.

     We intend to account for the merger as a purchase in accordance with generally accepted accounting principles, and we believe the transaction will result in a purchase price in excess of the fair value of net tangible and non-goodwill intangible assets acquired (goodwill). This number is expected to be approximately $45 million based on the average closing market price of JDA common stock for two days before (June 15, 2004 and June 16, 2004) and two days after (June 17, 2004 and June 18, 2004) the announcement of the execution of the merger agreement and the preliminary, estimated fair value of the net assets. The final purchase price and value of the net assets will be determined upon the completion of the merger. The allocation of the purchase price among net assets acquired, developed software, customer relationship intangibles, a non-compete agreement and goodwill will be determined by management with information from a number of sources, including independent appraisers. Amortizable intangible assets arising from the merger, currently estimated at $29 million, will generally be amortized over useful lives ranging from one-and-half years to 10 years, resulting in an estimated accounting charge for amortization attributable to these items of approximately $6 million on an annual basis. Goodwill resulting from the business combination will not be amortized but instead will be tested for impairment at least annually, or more frequently if there are indicators of impairment. We do not currently expect to record any in-process research and development in the merger.

     If our stock price, or the final valuation of the intangible assets change, the allocation of the purchase price and the amounts allocated to intangible assets with finite lives may increase significantly, which could result in a material increase in amortization of intangible assets.

     Upon completion of the proposed merger, QRS’ deferred revenue will be adjusted to reflect the estimated fair value of our legal performance obligations under QRS’ support contracts and to eliminate historical amounts of QRS’ deferred revenue that do not represent a legal performance obligation to the combined company. The current estimate of the fair value of our legal performance obligations under QRS’ support contracts is approximately $2.6

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million, which approximates the carrying value at March 31, 2004.

     On July 26, 2004, we filed a Registration Statement on Form S-4 with the SEC which covers the shares to be issued in this merger. Following the SEC’s review of the Registration Statement, the joint proxy statement/prospectus included therein will be sent to JDA and QRS stockholders in connection with separate stockholder meetings to be held for the purpose of approving the merger.

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

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

     Our Financial Position is Strong and We Have Positive Operating Cash Flow. We continue to maintain a strong financial position during the difficult economic cycle of the last few years. As of June 30, 2004, we had $86.6 million in cash, cash equivalents and marketable securities, compared to $114.7 million at December 31, 2003. In addition, we generated $15 million in positive cash flow from operations during the six months ended June 30, 2004. The purchase of our corporate office facility, together with the acquisition of Timera, utilized $37.4 million, or approximately 33% of our December 31, 2003 cash, cash equivalents, and marketable securities balances. We believe our cash position is sufficient to meet our operating needs for the next twelve months.

     Management Changes. Bob Fedorciow joined the Company in July 2004 as regional vice president of our Europe, Middle East and Africa operations. Mr. Fedorciow has nearly 15 years of experience working in regional vice president positions for international supply chain software and services companies.

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Results of Operations

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

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     The following tables set forth selected comparative financial information on our Business Segments and geographical revenues, expressed as a percentage change between the comparable three and six month periods ended June 30, 2004 and 2003: