UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 20072008

or

For the transition period from            to            

Commission file number 0-28030

i2 Technologies, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(469) 357-1000

(Registrant'sRegistrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as definedor a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).Act. (check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 1, 2007,3, 2008, the Registrant had 21,432,74821,823,037 shares of $0.00025 par value Common Stock outstanding.

i2 TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 20072008

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION

i2 TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)(unaudited)

See accompanying notes to condensed consolidated financial statements.

i2 TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

(Unaudited)(unaudited)

See accompanying notes to condensed consolidated financial statements.

i2 TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

(Unaudited)(unaudited)

See accompanying notes to condensed consolidated financial statements.

i2 TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)(unaudited)

See accompanying notes to condensed consolidated financial statements.

i2 TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands, except per share data)

(Unaudited)

1. Summary of Significant Accounting Policies

Nature of Operations.We are a provider of supply chain management solutions, includingconsisting of various software and service offerings. In addition to application software, we offer hosted software solutions, such as business optimization and technical consulting, managed services, training, solution maintenance, software upgrades and development. We operate our business in one business segment. Supply chain management is the set of processes, technology and expertise involved in managing supply, demand and fulfillment throughout divisions within a company and with its customers, suppliers and partners. The goals of our solutions include increasing supply chain efficiency and enhancing customer and supplier relationships by managing variability, reducing complexity, improving operational visibility, increasing operating velocity and integrating planning and execution. Our offerings are designed to help customers better achieve the following critical business objectives:

Our application software is often bundled with other service offerings we provide, such as assistance in implementation, integration, customization, training, consulting and maintenance. Our offerings are designed to help customers better achieve the following critical business objectives:

Basis of Presentation.Our unaudited condensed consolidated financial statements have been prepared by management and reflect all adjustments (all of which are normal and recurring in nature, with the exception of certain accruals, mainly related to 2006, discussed inNote 7,Commitments and Contingencies)nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2007.2008. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted under the Securities and Exchange Commission’s (SEC) rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in our Annual Report on Form 10-K for the year ended December 31, 20062007 filed on March 30, 200717, 2008 with the SEC (2006(2007 Annual Report on Form 10-K).

Recent Accounting Pronouncements.PronouncementsIn September 2006, the FASB issuedWe adopted SFAS No. 157,“Fair Value Measurements.”Measurements SFAS No. 157, on January 1, 2008. The statement defines fair value, establishes a framework for measuring fair value, in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies tofair-value measurements required under other accounting pronouncements that requirepronouncements. It does not change existing guidance as to whether or permitnot an instrument is carried at fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.value. Adoption of SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of 2008. We are currently evaluating thedid not have a material impact of SFAS No. 157 on our financial statements.

In February 20072008, the FASB issued FASB Staff Position No. FAS 157-1 (FSP FAS 157-1), which excludes SFAS No. 13, “Accounting for Leases” and certain other accounting pronouncements that address fair value measurements under SFAS 13, from the scope of SFAS 157. In February 2008, the FASB also issued FASB Staff Position No. 157-2 (FSP 157-2), which provides a one-year delayed application of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is required to adopt SFAS 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on January 1, 2009. We are currently assessing the impact on our financial condition and results of operations.

We adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.Liabilities The standard, on January 1, 2008. This statement permits but does not require entities to measure many financial instruments and certain other items at fair value. Once an entity has elected the fair value option for designated financial instruments and other items, changes in fair value must be recognized in the statement of operations. The election is irrevocable once made. The statementAdoption of SFAS No. 159 did not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS No. 141R) which changes how an entity accounts for the acquisition of a business. When effective, SFAS No. 141R will replace existing SFAS No. 141 in its entirety, will amend SFAS No. 109 and Interpretation 48 and also will amend the goodwill impairment test requirements in SFAS No. 142. SFAS No. 141R is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited.

We currently record all changes to a valuation allowance for acquired deferred tax assets or the effect of changes in an acquired tax position that occur after the acquisition date by initially reducing the related goodwill to zero, next by reducing other noncurrent intangible assets related to the acquisition to zero and lastly by reducing income tax expense. However, SFAS No. 141R amends SFAS No. 109 and Interpretation 48 to require us to recognize changes to the valuation allowance for an acquired deferred tax asset or the effect of changes to an acquired tax position as adjustments to income tax expense or contributed capital, as appropriate, and not as adjustments to goodwill. This accounting will be required when SFAS No. 141R becomes effective (January 1, 2009) and applies to valuation allowances and tax positions related to acquisitions accounted for originally under SFAS No. 141 as well as those accounted for under SFAS No. 141R.

We intend to adopt SFAS No. 141R effective January 1, 2009 and apply its provisions prospectively. We are evaluating the impact that the adoption of SFAS No. 141R will have on our financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”). The pronouncement mandates that the GAAP hierarchy reside in the accounting literature as opposed to audit literature. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.

In May 2008, the FASB issued FASB staff position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and shall be applied retrospectively to all periods presented. Early adoption of FSP APB 14-1 is not permitted.

Our 5% Senior Convertible Notes (“Notes”) are within the scope of FSP APB 14-1. During the first fiscal year after November 15, 2007.quarter of 2009, we will be required to report the debt components of the Notes at fair value as of the date of issuance and amortize the discount as an increase to interest expense over the expected life of the debt. The implementation of this standard will result in a decrease to net income and earnings per share for all periods presented; however, there is no effect on our cash interest payments. We are currently evaluatingassessing the impact of adopting FSP APB 14-1 on our financial condition and results of operations.

From time to time, new accounting permittedpronouncements applicable to the Company are issued by the standard and have not determined if the fair value option will be elected for eligible financial instrumentsFASB or other items.standards setting bodies, which we will adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

2. Investment Securities

Short-term time deposits and other liquid investments in debt securities with original maturities of less than three months when acquired are classified as available-for-sale and reported as cash and cash equivalents on our condensed consolidated balance sheet. Based on their maturities, interest rate movements do not affect the balance sheet valuation of these investments. Investment securities reported as cash and cash equivalents as of September 30, 20072008 and December 31, 20062007 were as follows:

Due to volatility in the capital markets, beginning in the third quarter of 2007 we chose not to invest in commercial paper and instead invested in money market instruments. These money market instruments are reflected in cash and cash equivalents on our balance sheet.

We typically invest our cash in a variety of interest-earning financial instruments, including bank time deposits, money market funds and taxable and tax-exempt variable-rate and fixed-rate obligations of corporations and federal, state and local governmental entities and agencies. These investments are primarily denominated in U.S. Dollars. Furthermore, we attemptDue to limiteconomic volatility, at the end of the third quarter 2008, all of our restricted cashshort-term investments were invested in Treasury and cash balances held in foreign locations.Agency securities.

3. Borrowings and Debt Issuance Costs

The following table summarizes the outstanding debt and related capitalized debt issuance costs recorded on our condensed consolidated balance sheet at September 30, 20072008 and December 31, 2006.2007.

We recorded capitalized debt issuance costs, net of accumulated amortization, in other non-current assets and are amortizing these costs over a five-year period, beginning in November 2005.

In connection with the issuance of our 5% senior convertible notes, we issued certain warrants to purchase our common stock. We assessed the characteristics of the warrants and determined that they should be included in additional paid in capital in the stockholders’ equity (deficit) portion of our condensed consolidated balance sheet, valued using a Black-Scholes model. The effect of recording the warrants as equity is that the 5% senior convertible notes are recorded at an original discount to their face value. The discount recorded was originally $3.1 million, and this discount is being accreted as interest expense through earnings over five years. We determined a five-year life to be appropriate due to the conversion features of the 5% senior convertible notes and our assessment of the probability that the debt would be converted prior to the scheduled maturity.

4. Restructuring Charges and Adjustments

Restructuring Plans.In the third quarter of 2007,prior periods, we implemented a restructuring plan eliminating approximately 50 positions. The purpose of the restructuring was to reduce management layers to both decrease cost and increase speed

around decision-making and internal processes. The realignmentplans, which included the elimination of certain management levelspersonnel as well as other targeted cost reductions. The third quarter 2007 charge was approximately $3.9 million, primarily related to severance costs. We expect to complete this restructuring in the fourth quarter of 2007. In previous periods, we implemented restructuring plans to reduce operating expenses. SeeNote 11, Restructuring Charges and Adjustments, in our Notes to Consolidated Financial Statements in our 20062007 Annual Report on Form 10-K for a description of our previous restructuring plans.

The following table summarizes the changes to our restructuring accruals, as well as the components of the remaining restructuring accruals at September 30, 2008 and 2007.

5. Net Income Per Common Share

Net Income Per Common Share. Basic net income per common share was computed by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding for the reporting period following the two-class method. TheUnder the two-class method, participating convertible securities are required to be included in the calculation of basic net income per common share when the effect is dilutive. Accordingly, for the periods presented, the effect of our participatingthe convertible preferred stock is included in the calculation of basic earningsnet income per share under the two-class method per EITF 03-6, “Participating Securities and the Two-Class Method” under FASB No. 128 —Earnings per Share.common share.

Diluted net income per common share includes the dilutive effect of stock options, share rights awards, and warrants granted using the treasury stock method, and the effect of contingently issuable shares earned during the period and shares issuable under the conversion feature of our convertible debt.debt and convertible preferred stock using the if-converted method. A loss causes all common stock equivalents to be anti-dilutive due to an increase of the weighted average shares from the potential dilution that could occur if securities or other contracts were exercised or converted into common stock. EITF 04-8 requires the inclusion of the effect of contingently convertible instruments in the calculation of diluted income per share including when the market price of our common stock is below the conversion price of the convertible security and the effect is not anti-dilutive. Accordingly, the effect of our convertible debt is consideredincluded in the calculation of diluted earnings per share. Convertible instruments are anti-dilutive when conversion would cause diluted earnings per share althoughto be greater than basic earnings per share. The effect of our convertible preferred stock is included in basic earnings per share under the two-class method per EITF 03-6, “Participating Securities and the Two-Class Method” under FASB No. 128 —Earnings per Share; therefore, it is not dilutive for any ofsimilarly included in diluted income per share when the periods presented.effect is dilutive.

The following is a reconciliation of the number of shares used in the calculation of basic income per share under the two-class method and diluted earnings per share and the number of anti-dilutive shares excluded from such computations for the three months and nine months ended September 30, 20072008 and September 30, 2006.2007.

6. Segment Information, International Operations and Customer Concentrations

We operate our business in one segment, as defined by SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information.”This segment is supply chain management solutions which is designed to help enterprises optimize business processes both internally and among trading partners. SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information,” establishes standards for the reporting of information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, who is our Chief Executive Officer (CEO), in deciding how to allocate resources and in assessing performance.

We market our software and services primarily through our worldwide sales organization augmented by other service providers, including both domestic and international systems consulting and integration firms and other industry-related partners. Our Chief Executive Officer (CEO)chief executive officer evaluates resource allocation decisions and our performance based on financial information, presented on a consolidated basis, accompanied by disaggregated information by geographic regions. Sales to our customers generally include products from some or all of our product suites. We have not consistently allocated revenues from such sales to individual products for internal or general-purpose financial statements.

Revenues are attributable to regions based on the locations of ourthe customers’ operations. Total revenues by geographic region, as reported to our CEO, were as follows:

No individual customer accounted for more than 10% of our total revenues during the periods presented.

Long-lived assets by geographic region excluding deferred taxes, as reported to our CEO, were as follows:

		September 30, 2008			December 31, 2007
United States		$	26,606		$	29,251
Europe, Middle East, Africa			89			113
Greater Asia Pacific			1,654			2,047
Total Long Lived Assets		$	28,349		$	31,411

7. Commitments and Contingencies

Derivative Action

On March 7, 2007, a purported shareholder derivative lawsuit was filed in the Delaware Chancery Court against certain of our current and former officers and directors, naming the company as a nominal defendant. The complaint, entitledGeorge Keritsis and Mark Kert v. Michael E. McGrath, Michael J. Berry, Pallab K. Chatterjee, Robert C. Donohoo, Hiten D. Varia, M. Miriam Wardak, Sanjiv S. Sidhu, Stephen P. Bradley, Harvey B. Cash, Richard L. Clemmer, Lloyd G. Waterhouse, Jackson L. Wilson Jr., Robert L. Crandall and i2 Technologies, Inc., alleges breach of fiduciary duty and unjust enrichment in connection with stock option grants to certain of the defendant officers and directors on three dates in 2004 and 2005. The complaint states that those stock option grants were manipulated so as to work to the recipients’ favor when material non-public information about the company was later disclosed to positive or negative effect. The complaint is derivative in nature and does not seek relief from the company, but does seek damages and other relief from the defendant officers and directors. We have entered into indemnification agreements in the ordinary course of business with certain of the defendant officers and directors and may be obligated throughout the pendency of this action to advance payment of legal fees and costs incurred by the defendants pursuant to our obligations under the indemnification agreements and/or applicable Delaware law. The Company reached a settlement agreement with Plaintiffs, which was approved by the Court on November 6, 2008. The settlement required the Company to adopt certain policies regarding the granting of stock options. These policies were implemented prior to the settlement. The settlement does not require the Company to pay any sum to the Plaintiffs except for $200,000 in reasonable attorneys’ fees and costs. These costs have been previously accrued and will be paid in the fourth quarter of 2008.

On October 23, 2007, a purported shareholder derivative lawsuit was filed in the Delaware Chancery Court against certain of our current and former officers and directors, naming the company as a nominal defendant. The complaint, entitledJohn McPadden, Sr. v. Sanjiv S. Sidhu, Stephen Bradley, Harvey B. Cash, Richard L. Clemmer, Michael E. McGrath, Lloyd G. Waterhouse, Jackson L. Wilson, Jr., Robert L. Crandall and Anthony Dubreville and i2 Technologies, Inc.,alleges breach of fiduciary duty and unjust enrichment based upon allegations that the company sold its wholly-owned subsidiary, Trade Services Corporation, for an inadequate price in 2005. The complaint is derivative in nature and does not seek relief from the company, but does seek damages and other relief from the defendant officers and directors. Defendants moved to dismiss the Complaint on December 28, 2007. On August 29, 2008, the Court granted the motion to dismiss as to all defendants but former i2 officer Dubreville.

Shareholder Class Action Lawsuits

On August 11, 2008, two suits were filed in state district court in Texas against (among others) the Company and certain members of its Board of Directors. Each of the two suits sought injunctive relief prohibiting the closing of the sale of the Company’s common stock to an affiliate of JDA Software Group, Inc. (“JDA”), and each of the named plaintiffs purported to represent a class of holders of the Company’s common stock. One of the two suits was thereafter dismissed by the plaintiff; the other, styledJohn D. Norsworthy, on Behalf of Himself and All Others Similarly Situated, v. i2 Technologies, Inc., et al., remains pending in the 134th District Court of Dallas County, Texas. In addition to a restraining order and/or an injunction prohibiting the Defendants from consummating the transaction with JDA, Plaintiff Norsworthy seeks rescission of the transaction, declaratory relief, and attorneys’ fees and costs.

On November 5, 2008, the District Court held a hearing on Plaintiff Norsworthy’s motion for a temporary restraining order, and at the conclusion of the hearing denied the motion in its entirety. To date, the Plaintiff has not requested monetary relief other than his attorneys’ fees and costs. Based on the stage of the litigation, it is not known whether he may hereafter do so, nor is it possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of this matter.

Indemnification Agreements

We have indemnification agreements with certain of our officers, directors and employees that may require us, among other things, to indemnify such officers, directors and employees against certain liabilities that may arise by reason of their status or service as directors, officers or employees and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We have also entered into agreements regarding the advancement of costs with certain other officers and employees.

Pursuant to these indemnification and cost-advancement agreements, we have advanced fees and expenses incurred by certain current and former directors, officers and employees in connection with the governmental investigations and actions related to the 2003 restatement of our consolidated financial statements and other matters. We incurred no such expenses during the three months ended September 30, 2008 and incurred approximately $0.1 million of such expensesexpense during the three months ended September 30, 2007, and incurred approximately $4.0 million ofno such expenses duringexpense in the threenine months ended September 30, 2006; we2008 and incurred approximately $0.2 million and $9.2 million of such expenses during the nine months ended September 30, 2007 and September 30, 2006, respectively.2007.

We may continue to advance fees and expenses incurred by certain current and former directors, officers and employees in the future. The maximum potential amount of future payments we could be required to make under these indemnification and cost-advancement agreements is unlimited. Additionally, our corporate by-laws allow us to choose to indemnify any employee for certain events or occurrences while the employee is, or was, serving at our request in such capacity.

Under the terms of our software license agreements with our customers, we agree that in the event the licensed software infringes upon any patent, copyright, trademark, or any other proprietary right of a third-party, we will indemnify our customer licensees against any loss, expense, or liability from any damages that may be awarded against our customer. We include this infringement indemnification in substantially all of our software license agreements and selected managed service arrangements. In the event the customer cannot use the software or service due to infringement and we can not obtain the right to use, replace or modify the software or service in a commercially feasible

manner so that it no longer infringes, then we may terminate the license and provide the customer a pro-rata refund of the fees paid by the customer for the infringing software or service. We have not recorded any liability associated with this indemnification, as we are not aware of any pending or threatened infringement actions that are probable losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.

If we believe a liability associated with any of the aforementioned indemnification obligations becomes probable and the amount of the liability is reasonably estimable then an appropriate liability will be recorded in our financial statements.

India Tax Examinations and Assessments

We currently are under income tax examinations in India primarily related to our intercompany pricing for services rendered by our Indian subsidiary to other i2 companies, the taxability of certain payments received from our

Indian customers, and our statutory qualification for a tax holiday, and haveholiday. An aggregate of approximately $6.4 million has been assessed an aggregate of $7.0 millionby the tax authorities for the Indian statutory fiscal years ended March 31, 2002, 2003 and 2004. We believe the Indian tax authorities’ positions regarding our intercompany transactions and tax holiday qualification arethese matters to be without merit, that all intercompany transactions were conducted at appropriatearm’s length pricing levels, all payments received from our Indian customers have been properly treated for tax purposes, and that our operations qualify for the tax holiday claimed. Accordingly, we have appealed all of these assessments and have also sought assistance from the United States competent authority under the mutual agreement procedure of the income tax treaty between the United States and India, whichthe Republic of India. This provides us with an opportunity to resolve these matters in an environment whicha forum that includes governmental representatives of both countries.

Pending resolution of these matters, we have paid $3.4approximately $3.2 million of the assessed amount and have arranged for a $1.3$2.4 million in bank guaranteeguarantees in favor of the Indian government in respect of a portion of the balance.balance as required. The bank guarantee isguarantees are supported by a letterletters of credit issued in the United States and isare reflected on our condensed consolidated balance sheet as restricted cash.

On November 10, 2008, we received notification from the Indian transfer pricing authorities of a proposed adjustment to our India fiscal year end March 31, 2005 results. No tax assessment has been issued regarding this period; however, we expect an assessment to be issued in due course. We paid an additional $70,000expect that the tax assessment will not result in a material adjustment to the amounts we have accrued for this issue and will appeal the assessment consistent with previous assessments received. Similar to previous assessments, if we appeal as part of the assessedappeal process, it’s expected that we will have to provide a letter of credit equal to the assessment amount as well as approximately $134,000 of interest in October 2007, and expect to arrange for a $1.9 million bank guarantee in respect of the remainder of the assessed amount later in the fourth quarter of 2007.plus accrued interest.

We expect subsequent tax years to be examined and assessments made similar to those discussed above and no assurances can be given that these issues ultimately will be resolved in our favor. We continue to monitor and assess these issues as they progress through the relevant processes and believe that the ultimate resolution of these matters will not exceed the tax contingency reserves we have established for them.

SAP Litigation

On June 23, 2008 we entered into a settlement agreement with SAP America, Inc., a Delaware corporation, and SAP AG, a German corporation and the parent of SAP America, Inc., to settle existing patent litigation between us and the SAP companies.

Under the terms of the settlement agreement, each party licenses to the other party certain patents in exchange for a one-time cash payment to i2 of $83.3 million, which was received in the third quarter of 2008. In addition, each party has agreed not to pursue legal action against the other party for its actions taken to enforce any of the licensed patents prior to the effective date of the agreement. The agreement also provides for general releases, indemnification for its violation, and dismisses the existing litigations between the parties with prejudice. We have satisfied all our obligations under the agreement and no additional contingencies exist with respect to receipt of the settlement proceeds.

During the nine months ended September 30, 2008, we recorded income from an intellectual property lawsuit settlement. The settlement was for $83.3 million and was recorded net of external litigation expenses of $3.5 million for the nine-month period ending September 30, 2008. The patent licenses received in the settlement have no significant value.

Certain Accruals

We have accrued for estimated losses in the accompanying condensed consolidated financial statements for matters where we believe the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable.

We are subject to various claims and legal proceedings that arise in the ordinary course of our business from time to time, including claims and legal proceedings that have been asserted against us by former employees and certain customers, and have been in negotiations to settle certain of those contingencies. The adverse resolution of any one or more of those matters or the matters described above, over and above the amount, if any, that has been estimated and accrued in our condensed consolidated financial statements could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.

8. Stock-Based Compensation Plans.

For a description of our stock-based compensation plans, seeNote 10, Stock-Based Compensation, in our Notes to Consolidated Financial Statements filed in our 20062007 Annual Report on Form 10-K.

Stock-based compensation expense for the three-month and nine-month periods ended September 30, 20072008 and September 30, 20062007 is as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Services		$	266		$	482		$	1,309		$	1,669
Maintenance			50			55			181		$	185
Sales and marketing			779			425			2,165			2,199
Research and development			556			721			1,938			2,325
General and administrative			1,137			639			3,068			3,290
Total		$	2,788		$	2,322		$	8,661		$	9,668

Included in stock-based compensation expense was restricted stock expense of $0.5$1.1 million and $0.3$0.5 million for the three-month periods ended September 30, 20072008 and September 30, 2006,2007, respectively, and $1.7$3.0 million and $0.5$1.7 million for the nine-month periods ended September 30, 20072008 and September 30, 2006,2007, respectively.

In February 2007, we granted Restricted Stock Units (“RSUs”) to certain key employees that vest based on specified performance over a two-year performance period. This performance period is from January 1, 2008 to December 31, 2009. We are required to assess whether the performance criteria is probable of being achieved, and only recognize compensation expense if the vesting is considered probable. On a quarterly basis, we assess whether vesting is probable and based on that assessment record the appropriate expense. Based on our third quarter 2007 assessment,2008 and prior assessments, no compensation expense associated with these performance-based RSUs is reflected in our results of operations in the three-month periodperiods or nine-month periods ended September 30, 2008 and nine-month period ended September 30, 2007.

Fair values of stock options and employee stock purchase plan (ESPP) shares are estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

9. Income Taxes

Income taxes have beenare provided using the liability method in accordance with SFAS No. 109,Accounting for Income Taxes (“SFAS 109”). In accordance with Accounting Principles Board Opinion No. 28,Interim Financial Reporting (“APB 28”), and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods – an interpretation of APB Opinion No. 28 (“FIN 18”), the provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted by any discrete events which are reported in the period in which they occur. This estimate is re-evaluated each quarter based on our estimated tax expense for the year.

We recognizedrecorded income tax expense of approximately $1.5 million for the three months ended September 30, 2008 and $2.1 million for the three months ended September 30, 2007, and $1.6 million for the three months ended September 30, 2006, representing effective income tax rates of 27.9%35.9% and 25.9%27.9%, respectively. Factors thatVarious factors affect our effective income tax expense include,rate including, among others, changes in our valuation allowance, the effect of foreign operations, state income taxes (net of federal income tax benefits), certain non-deductible meals and entertainment expenses, research and development tax credits, and the effect of foreign withholding taxes. Our effective income tax rates during the three months ended September 30, 2008 and September 30, 2007 differ from the U.S. statutory rate primarily due to the effect these items have on our valuation allowance.

Income tax expense included the effect of foreign withholding taxes of $0.6 million for the three months ended September 30, 20072008 and $0.9$0.6 million for the three months ended September 30, 2006.2007 and $1.7 million for the nine months ended September 30, 2008 and $1.9 million for the nine months ended September 30, 2007. Foreign withholding taxes are incurred on certain payments from international customers and are recorded when incurred,

normally upon receipt of such payments from certain non-US customers,that are received net of the withheld taxes. Foreign withholding taxes generally are available to reduce domestic income tax. Due to our net operating loss carryforwards and affectassociated valuation allowance against our domestic deferred tax assets, these withholding taxes increase our income tax expense due to our domestic valuation allowance. Accordingly, our effective income tax rates duringexpense.

During the threenine months ended September 30, 20072008 we recorded a benefit to operating expense of approximately $83.3 million related to the settlement of the SAP patent litigation. We utilized net operating loss carryforwards and other tax attributes to reduce taxes on the settlement. We recorded federal and state alternative minimum tax (AMT) of approximately $1.0 million and $0.1 million, respectively, and other state income taxes of approximately $0.2 million in income tax expense during the nine months ended September 30, 2006, as well as2008 related to the settlement. Alternative minimum tax generally is available to reduce regular income tax in the future. Due to our net operating loss carryforwards and associated valuation allowance against our domestic deferred tax assets, these AMT amounts increase our income tax expense.

Income tax expense during the nine months ended September 30, 2007 and September 30, 2006, differincluded a benefit of approximately $0.8 million resulting from the U.S. statutory rate primarily due to changes infavorable resolution of our valuation allowance.

We adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, there was no adjustmentUnited Kingdom tax examination related to the January 1, 2007 balance of our accumulated deficit.2003 tax year.

Estimated potential interest and penalties related to our unrecognized tax benefits within our global organization isare recorded in income tax expense and totaled approximately $0.2 million and $0.5 million for the three and nine months ended September 30, 2007.2008, respectively. Accrued interest and penalties were approximately $1.2$2.1 million and $1.8 million as of January 1, 2007 andat September 30, 2007, respectively.2008. Management believes recording interest and penalties related to income tax uncertainties as income tax expense better reflects income tax expense and provides better information reporting.

We or one of our subsidiaries file income tax returns in the United States (U.S.) federal jurisdiction and various state and foreign jurisdictions. We have open tax years for the U.S. federal return back to 1992 with respect to our net operating loss (“NOL”) carryforwards, where the IRS may not raise tax for these years, but can reduce NOLs. Otherwise, with few exceptions, we are no longer subject to federal, state, local or foreign income tax examinations for years prior to 2003.

We are subject to potential changechallenges and assessments by various tax jurisdictions into the inter-company pricing at which we have conducted business within our global related group of companies.companies or our tax treatment of certain types of revenue generated in the conduct of business with our international customers. Additional tax examinations may be opened or existing examinations may be resolved within the next 12 months. We closely monitor developments in this areathese areas and make changes as necessary in the accruals we have maderecorded for what we believe will be the ultimate outcome of any tax adjustments. It is reasonably possible that, within the next 12 months, the accrual we have recorded for this issue may increase by approximately $0.5 million to $1.2 million.

During the fourth quarter of 2007, we plan to file amended state income tax returns related to adjustments made to our 1999-2001 federal taxable income as a result of our previous IRS examination, which was concluded in 2003 and had no material federal income tax effect. We believe we have fully accrued all state income tax liability, including potential interest and penalties, related to these filings. Upon filing the returns, the recorded tax liability will be reduced by the amount of taxes paid with the returns. We expect the state tax authorities will assess interest and potential penalties on the amended tax returns. Any difference between the ultimate income tax liability on the filed returns and our existing accrual will be recorded in the quarter in which the tax filings are ultimately resolved.resulting from such examinations. It is not expected thatpossible to reasonably estimate a range of potential increases or decreases of such difference, if any, will be material.changes.

As part of the process of preparing unaudited condensed consolidated financial statements, we are required to estimate our full-year income and the related income tax expense in each jurisdiction in which we operate. Changes in the geographical mix or estimated level of annual pre-tax income can impact our effective tax rate. This process involves estimating our current tax liabilities in each jurisdiction in which we operate, including the impact, if any, of additional taxes resulting from tax examinations, as well as making judgments regarding the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on, among other things, our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax controversies often involve complex issues across multiple jurisdictions and may require an extended period to resolve.

10. Subsequent EventPending i2 Merger with JDA Software

On October 23, 2007,August 10, 2008, we entered into a purported shareholder derivative lawsuit was filed inMerger Agreement with JDA and the Delaware Chancery Court against certain of our currentMerger Sub. Under the Merger Agreement, the Merger Sub will be merged with and former directors and officers, naminginto i2 (the “Merger”), with i2 continuing after the companyMerger as a nominal defendant. The complaint, entitledJohn McPadden, Sr. v. Sanjiv S. Sidhu, Stephen Bradley, Harvey B. Cash, Richard L. Clemmer, Michael E. McGrath, Lloyd G. Waterhouse, Jackson L. Wilson Jr., Robert L. Crandall, Anthony Dubreville and i2 Technologies, Inc., alleges breach of fiduciary duty and unjust enrichment in connection with the sale of Trade Service Corporation, a wholly-owned subsidiary of JDA. At the company (“TSC”),effective time of the Merger, each issued and outstanding share of our Common Stock, par value $0.00025 per share, will be converted into the right to Anthony Dubreville (“Dubreville”)receive $14.86 in cash, without interest. At the effective time of the Merger, each issued and other membersoutstanding share of TSC managementour Series B Preferred Stock will be converted into the right to receive $1,095.3679 plus all accrued and unpaid dividends thereon through the effective time, in 2005. The complaint states that the individual defendants caused the company to sell TSC to a group led by Dubreville in bad faith for a below-market price. The complaint is derivative in nature and does not seek relief from

the company, but does seek damages and other relief from the defendant directors and officers. We have entered into indemnification agreementsLate in the ordinary courseevening of business with certainNovember 4, 2008, we received a written request from JDA to adjourn the previously scheduled special meeting of our stockholders “to allow the two companies to negotiate a reduced purchase price to close the merger.” In its request, JDA stated that “available credit terms would result in unacceptable risks and costs to the combined company.” Our board of directors considered the request and, based on a number of factors, including that JDA’s obligation to complete the merger is not subject to any financing contingency, did not believe adjourning the special meeting was in the best interests of our stockholders. As of November 5, 2008, proxies in favor of the defendant directorsmerger had been received from stockholders representing more than 80 percent of all votes eligible to be cast at the special meeting.

On November 6, 2008, we held the previously scheduled special stockholder meeting and officers and may be obligated throughoutour stockholders voted to approve the pendency of this action to advance payment of legal fees and costs incurred by the defendantsmerger with JDA pursuant to the Merger Agreement. The number of shares voted in favor of the merger represented more than 80 percent of the total shares outstanding and entitled to vote at the meeting. More than 99 percent of the shares voted at the special meeting were cast in favor of the merger.

Following the stockholder meeting, we received a written proposal from JDA to amend the common share consideration in the merger agreement significantly below $14.86 per share. Our board of directors has reviewed JDA’s proposal and concluded that it is not in the best interest of i2’s stockholders to pursue it.

With the successful stockholder vote of November 6, 2008, we completed all of our conditions to closing the existing merger agreement and have requested that JDA fulfill its obligations under the indemnification agreements and/or applicable Delaware law. Based onagreement. Despite the stageapproval by i2’s stockholders, there can be no assurance that the parties will close the Merger stipulated by the merger agreement.

During the third quarter of 2008 we incurred approximately $5.3 million related to the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of this matter.pending merger. These costs are included in other expense, net.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical or current facts, including, without limitation, statements about our business strategy, plans, objectives and future prospects, are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations, which could have a material adverse effect on our business, results of operations, cash flow and financial condition. Such risks and uncertainties include, without limitation, the following:

$0.00025 per share will be converted into the right to receive $14.86 in cash, without interest. At the effective time of the Merger, each issued and outstanding share of the Company’s Series B 2.5% Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), will be converted into the right to receive $1,095.3679 plus all accrued and unpaid dividends thereon through the effective time, in cash, without interest. Also at the effective time of the Merger, each $1,000.00 principal amount of the Company’s 5% Senior Convertible Notes (“Notes”) will be converted, based on the indenture agreement governing the Notes, into the right to receive $960.72426 as a conversion obligation and $144.10782 as a make-whole premium. Additionally, the Company will also pay to the holders of the Notes $86.9565 for each $1,000.00 principal amount of the Notes as a consent premium. Approximately $1.7 million of the consent premium has been paid to the majority holder of the Notes. Late in the evening on November 4, 2008, JDA notified us in writing that they wished to renegotiate the price of the sale and desired that we adjourn our previously scheduled special stockholder meeting, the purpose of which was to vote on the Merger. We proceeded to hold the previously scheduled meeting and received stockholder approval for the Merger. Following the stockholder meeting, we received a written proposal from JDA to amend the common share consideration in the merger agreement significantly below $14.86 per share. Our board of directors has reviewed JDA’s proposal and concluded that it is not in the best interest of i2’s stockholders to pursue it. There can be no assurance that the Merger will occur. If the Merger is not effected, we could experience downward pressure on our stock, lawsuits and continued uncertainty for our management, sales staff and other employees and existing and potential customers. Such distractions and uncertainty could harm our business, results of operations, cash flow and financial condition. Further, certain costs, such as legal and accounting fees and reimbursement of certain expenses, are payable by us whether or not the Merger is completed.

Many of these risks and uncertainties are beyond our control and, in many cases, we cannot accurately predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. When used in this document, the words “believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should” or the negative of such terms and similar expressions as they relate to us, our customers or our management are intended to identify forward-looking statements.

References in this report to the terms “optimal” and “optimization” and words to that effect are not intended to connote the mathematically optimal solution, but may connote near-optimal solutions, which reflect practical considerations such as customer requirements as to response time, precision of the results and other commercial factors.

Overview

Merger of i2 with JDA Software

On August 10, 2008, we entered into a Merger Agreement with JDA and the Merger Sub. Under the Merger Agreement, the Merger Sub will be merged with and into i2 (the “Merger”), with i2 continuing after the Merger as a wholly-owned subsidiary of JDA. At the effective time of the Merger, each issued and outstanding share of our Common Stock, par value $0.00025 per share, will be converted into the right to receive $14.86 in cash, without interest. At the effective time of the Merger, each issued and outstanding share of our Series B Preferred Stock will be converted into the right to receive $1,095.3679 plus all accrued and unpaid dividends thereon through the effective time, in cash, without interest.

Late in the evening of November 4, 2008, we received a written request from JDA to adjourn the previously scheduled special meeting of our stockholders “to allow the two companies to negotiate a reduced purchase price to close the merger.” In its request, JDA stated that “available credit terms would result in unacceptable risks and costs to the combined company.” Our board of directors considered the request and, based on a number of factors, including that JDA’s obligation to complete the merger is not subject to any financing contingency, did not believe adjourning the special meeting was in the best interests of our stockholders. As of November 5, 2008, proxies in favor of the merger had been received from stockholders representing more than 80 percent of all votes eligible to be cast at the special meeting.

On November 6, 2008, we held the previously scheduled special stockholder meeting and our stockholders voted to approve the merger with JDA pursuant to the Merger Agreement. The number of shares voted in favor of the merger represented more than 80 percent of the total shares outstanding and entitled to vote at the meeting. More than 99 percent of the shares voted at the special meeting were cast in favor of the merger.

Following the stockholder meeting, we received a written proposal from JDA to amend the common share consideration in the merger agreement significantly below $14.86 per share. Our board of directors has reviewed JDA’s proposal and concluded that it is not in the best interest of i2’s stockholders to pursue it.

With the successful stockholder vote of November 6, 2008, we completed all of our conditions to closing the existing merger agreement and have requested that JDA fulfill its obligations under the agreement. Despite the approval by i2’s stockholders, there can be no assurance that the parties will close the Merger stipulated by the merger agreement.

Nature of Operations

We are a provider of supply chain management solutions, includingconsisting of various software and service offerings. In addition to application software, we offer hosted software solutions, such as business optimization and technical consulting, managed services, training, solution maintenance, software upgrades and development. We operate our business in one business segment. Supply chain management is the set of processes, technology and expertise involved in managing supply, demand and fulfillment throughout divisions within a company and with its customers, suppliers

and partners. The goals of our solutions include increasing supply chain efficiency and enhancing customer and supplier relationships by managing variability, reducing complexity, improving operational visibility, increasing operating velocity and integrating planning and execution.

Our application software is often bundled with other service offerings we provide, such as assistance in implementation, integration, customization, training, consulting and maintenance. Our offerings are designed to help customers better achieve the following critical business objectives:

Visibility – a clear and unobstructed view up and down the supply chain

Planning – supply chain optimization to match supply and demand considering system-wide constraints

Collaboration – interoperability with supply chain partners and elimination of functional silos

Control – management of data and business processes across the extended supply chain

Revenue Categories

We recognize revenue for software and our related service offerings in accordance withStatement of Position (SOP) 81-1, “Accounting for Certain Construction Type and Certain Production Type Contracts,” SOP 97-2, “Software Revenue Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” SEC Staff Accounting Bulletin (SAB) 104, “Revenue Recognition,” andSAB 103, “Update of Codification of Staff Accounting Bulletins,” andSABSEC Staff Accounting Bulletin “Topic 13, Revenue Recognition.”

Software Solutions.Software solutions revenue includes core license revenue, recurring license revenue, and fees received to develop the licensed functionality. We recognize these revenues under SOP 97-2 or SOP 81-1 based on our evaluation of whether the associated services are essential to the licensed software as described within SOP 97-2. If the services are considered essential, revenue is generally recognized on a percentage of completion basis under SOP 81-1. Services are considered essential to the software when they involve significant modifications or additions to the software features and functionality. In addition, we have several subscription and other recurring revenue transactions, which are recognized ratably over the life of each contract.

Services.Services revenue is primarily derived from fees for services that are not essential to the software, including implementation, integration, training and consulting, and is generally recognized when services are performed. In addition, services revenue may include fees received from arrangements to customize or enhance previously purchased licensed software, when such services are not essential to the previously licensed software. Services revenue also includes reimbursable expense revenue, with the related costs of reimbursable expenses included in cost of services.

Maintenance. Maintenance revenue consists of fees generated by providing support services, such as telephone support, and unspecified upgrades/enhancements on a when-and-if available basis. A customer typically prepays maintenance and support fees for an initial period, and the related revenue is deferred and generally recognized over the term of such initial period. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the contract.

Contract Revenue. As explained in more detail below, we do not consider contract revenue to be an indication of the current performance of our business. We collected the cash associated with contract revenue in prior periods and recorded the revenue as we fulfilled the contract obligations. As of March 31, 2007 our deferred contract revenue balance was zero.

Transition to a Solutions-Oriented Provider

Our software and service offerings have changed in recent years in response to market demands as well as the introduction of new technology and products. We are transitioning our business approach to being a solutions-oriented provider, and accordingly have experienced a shift to a greater level of services revenue versus software solutions revenue.

In earlyBeginning in 2006, we increased our hiring of services personnel based on our expectations regarding the demand for our services and our existing services backlog. In addition to generating increased services revenue from the increased headcount, we have also increased the billabilityutilization of our services personnel so more revenue is generated for each person and have been successful at strategically placing certain of our research and development staff on billable services projects when their skill sets are appropriate.

These changes impact the

The focus on services impacts our mix of revenues we generate. This affects ourand profitability because services will typically earn a lower margin than software solutions. These changes also influence the proportion of revenue recognized on a percentage of completion basis or subscription basis. We now expect that a higher proportion of our software solutions revenue will be recognized under a percentage of completion basis or subscription basis, rather than being recognized in the period the contract is signed.

Key Performance Indicators and Operating Metrics

The markets in which we operate are highly competitive. Our competitors are diverse and offer a variety of solutions targeting various segments of the extended supply chain as well as the enterprise as a whole. Some competitors offer suites of applications, while most offer solutions designed to target specific processes or industries. We believe our principal competitors continue to strengthen, in part based on consolidation within the industry. In addition, our shift to a more solutions-oriented approach, where services are more critical, increases our exposure to competition from offshore providers and consulting companies. All of these factors are creating pricing pressure for our software and service offerings. However, we believe our focus on a solutions-oriented approach that leverages our deep supply chain expertise differentiates us from our competitors.

In managing our business and reviewing our results, management focuses most intently on our revenue generation process, including bookings, backlog, and operating revenue (total revenue excluding contract revenue), as well as our cash flow from operations and liquidity.

Bookings. We define bookings as the total value of non-contingent fees payable to the company pursuant to the terms of duly executed contracts. Bookings are expected to result in revenue as products are delivered or services are performed, and may reflect contracts from which revenue will be recognized over multi-year periods.periods, however there can be no assurance that bookings will result in future revenue. Bookings do not include amounts subject to contingencies, such as optional renewal periods, amounts subject to a customer’s internal approvals, amounts subject to customer specific cancellation provisions and amounts that are refundable for reasons outside of our standard warranty provisions. Based on the nature of the transactions, certain of our subscription bookings have termination provisions upon payment of a penalty. Because our revenues are recognized under several different accounting standards and thus are subject to period-to-period variability, we closely monitor our bookings as a leading indicator of future revenues and the overall performance of our business.

Total bookings for the three months ended September 30, 20072008 and September 30, 2006 were $46.5 million and $56.4 million, respectively, a decline of 17.6% or $9.9 million. While third quarter bookings are typically the weakest of the year, bookings for the three months ended September 30, 2007 were below our expectations. We believe this was due to execution issues, our restructuring initiatives during the third quarter and public comments made by certain large stockholders regarding our competitive position and future direction.$46.5 million in each period. Total bookings for the nine months ended September 30, 20072008 and September 30, 20062007 were $183.0$177.0 million and $193.3$183.0 million, respectively, a decline of approximately 5.3%3% or $10.3$6.0 million. Unless we are able to generate bookings growth in the next several quarters, in the future our revenue will continue to decline.

Backlog.Backlog represents the balance of bookings that has yet to benot been recognized as revenue. The amount of backlog for which we have received payment is recorded as deferred revenue on our condensed consolidated balance sheet. We review our backlog to assess future revenue that may be recognized from bookings in previous fiscal periods. This review allows us to determine whether we are recognizing more or less revenue compared to the bookings in that period and whether our backlog is increasing or decreasing.

Revenue.In our internal analysis of revenue, we focus on operating revenue (total revenue excluding contract revenue). Contract revenue is the result of the recognition of certain revenue that was carried on our balance sheet as a portion of deferred revenue and was a result of our 2003 financial restatement. Inclusion of contract revenue in the evaluation of our performance would skew comparisons of our periodic results since recognition of that revenue was based on fulfillment of contractual obligations which often required only minimal cash outlays and generally did not involve any significant activity in the period of recognition. Additionally, the cash associated with contract revenue had been collected in prior periods. All remaining contract revenue was recognized by March 31, 2007, so it is not relevant to our on-going operations and we exclude it from comparisons to prior period results.

For the three months ended September 30, 20072008 operating revenue (total revenue excluding contract revenue) was down 6.8%2.6% or $4.9$1.7 million compared to the same period in 2006,2007, and for the nine months ended September 30, 20072008 operating revenue was down 2.7%1.3% or 5.4$2.5 million compared to the same period in 2006.2007. Our annual operating revenue was approximately $275$257.9 million, $294$275.6 million and $289$294.3 million in 2007, 2006 and 2005, and 2004, respectively. We currently expect total operating revenue will be lowerThese declines represent annual declines of 6% for the full year 2007 then it was in 2006.each period. As part of our transition to being a solutions-oriented provider, we have experienced a shift to a greater level of services revenue, which has partially offset our decline in software solutions and maintenance revenue.

Software solutions revenue declined 48.8% or $10.0 millionwas relatively unchanged for the three months ended September 30, 20072008 compared to the same period in 2006,2007, and declined 33.1%2% or $17.5$0.6 million for the nine months ended September 30, 20072008 compared to the same period in 2006. In 2005,2007. During the 12 months ended December 31, 2006 and the nine months ended September 30, 2007 our total2008, we have recognized more revenue from backlog than from new software solutions bookings were consistently lower then our software solutionsbookings. We monitor whether we are recognizing more or less revenue thereby significantly reducingin each period compared to the amount we book in that period as an indicator of whether we are adding to or subtracting from our backlog as indicated in the table below. This has contributed to lower software solutionsand deferred revenue. We have generally been recognizing more revenue in each quarter than the threecorresponding amount of bookings, leading to a decline in our backlog. As a result, in order to increase future revenues, our future bookings need to increase and nine months ended September 30, 2007 versus the comparable periods in 2006. This trend will continue unless we experience growth in software solutions bookings in the next several quarters.