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Article by DailyStocks_admin    (11-19-08 07:41 AM)

Filed with the SEC from Nov 06 to Nov 12:

i2 Technologies (ITWO)
Billionaire investor Steven A. Cohen's SAC Capital Management cut its stake to about 1.36 million shares (6.3%) from the 1.82 million (8.5%) it had reported owning on June 30. The move comes after the JDA Software Group (JDAS), which had agreed in August to buy i2 Technologies for $14.86 a share, decided to seek a lower purchase price to close the deal.

BUSINESS OVERVIEW

BUSINESS

Nature of Operations . We are a provider of supply chain management solutions, consisting 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:




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

Globally, we have approximately 500 customers in a variety of industries including:




Technology




Computer & Electronics




Telecommunications Equipment and Services




Semiconductor




Consumer Electronics




Contract Manufacturers




Automotive, Aerospace and Industrial




Automotive Original Equipment Manufacturers




Suppliers




Aerospace and Defense




Industrial Manufacturers





Process Industries




Metals




Consumer Industries & Retail




Retailers




Consumer Packaged Goods




Soft Goods (Textiles/Apparel & Footwear)




Consumer Durables

No individual customer accounted for more than 10% of our total revenues during 2007, 2006 or 2005.

i2 was founded in 1988 and incorporated in Delaware in 1989. Our executive offices are located at One i2 Place, 11701 Luna Road, Dallas, Texas 75234, and our telephone number is (469) 357-1000.

Industry Background

Today’s competitive business environment is driving companies to seek ways to make their businesses more agile and offer greater operating efficiency while improving flexibility and responsiveness to continuously changing market conditions. Many companies are facing higher competitive standards as the economy becomes more consumer-driven. At the same time, globalization is driving an on-going pressure to reduce costs. Consumers are increasingly more specific about when and where they want a product, what they want that product to be and do, and the price they will pay for a product. These demands impact the extended supply chain, leading businesses to seek improvements in asset utilization, lower the cost of goods, reduce inventories, shorten lead times and reduce the cost of fulfilling orders. Furthermore, a company’s extended supply chain may span multiple continents, requiring suppliers in one part of the world to collaborate with a plant in another to serve customers in yet a third location. These forces are prompting companies to collaborate with a broad range of suppliers and customers to improve visibility and efficiency across multi-enterprise supply chains.

We believe that traditional enterprise resource planning (ERP) systems fail to provide both the forward visibility across divisions or enterprises and the high-speed decision-support capabilities that we believe are necessary to quickly plan and execute decisions. To increase competitiveness, we believe companies need solutions that can be integrated with their existing systems to provide tools for managing the variability in their supply chains, allowing them to monitor events throughout the life of a product, from the point of order, through manufacturing and distribution and until it reaches a customer’s hands. Companies need visibility into order, inventory and transportation systems so they can evaluate tradeoffs for fast and accurate decision-making and execute their plans across the critical processes in their supply chains.

The growth of the internet and the proliferation of software applications have accelerated many companies’ efforts to increase efficiencies by leveraging information technology based on open standards. We believe this has prompted demands for a dynamic, open and integrated environment among customers, suppliers and manufacturers. In response to these evolving market forces, many companies have sought to re-engineer their business processes to reduce manufacturing cycle times, shift from mass production to order-driven manufacturing, increase the use of outsourcing and share information more readily with vendors and customers.

Integration and business process management have become an increasingly important issue for enterprises to lower costs and realize value from their diverse environment of applications and distributed systems. Customers seek integration at several levels — business process (design, execution and monitoring), applications, user interface, data and technology. A wide variety of companies are pursuing the integration market opportunity, including ERP companies, leading Independent Software Vendors (ISVs), Enterprise Application Integration (EAI) vendors, Systems Integrators (SIs) and other information technology (IT) services organizations. i2 has demonstrated a complete solution to the various requirements sought by customers by providing a single design, development and integration framework utilizing service oriented architecture — the i2 Agile Business Process Platform.

Leading software and technology companies are developing offshore (global) workforces, in part to take advantage of the technical talent and lower costs of human resources in India, China and other locations. This has led many companies to initiate their own offshore operations or outsource some development, implementation and operations activities to Offshore IT Services (OIS) firms.

Development of the i2 Solutions

Advanced Planning and Scheduling. We have offered a set of supply chain management solutions since our company was founded nearly 20 years ago. Our founders, Sanjiv Sidhu and Ken Sharma, sought to expand enterprise application software beyond traditional ERP systems, which were basically transaction accounting and processing systems that did not consider production constraints or offer more sophisticated monitoring, decision-support and execution capabilities. We took the first step beyond ERP with the development of an advanced planning and scheduling application that took into account actual constraints to improve the flow of materials within a factory. That solution, i2 Factory Planner, has assisted many of our customers in improving the efficiency and profitability of their factories while reducing their materials and inventory costs.

Supply Chain Planning/Supply Chain Management. Our applications evolved into solutions for supply chain planning that encompassed constraint-based planning and scheduling for multiple factories, distribution centers and warehouses. We acquired and developed technologies that help companies manage demand, design distribution and supply networks, and plan and manage fulfillment. The integration of those solutions with our factory and supply planning solutions made us a leader in enterprise solutions for supply chain management.

Supplier Relationship Management. We continued to expand our product base by applying our solutions for the extended supply chain to the supplier relationship processes and functions. To facilitate cost-effective sourcing and product design, we acquired and developed technologies that help customers to more efficiently source, negotiate the pricing of and procure materials and components from suppliers, thereby enabling them to make design decisions while cognizant of the effect on the supply chain of existing products and the total product portfolio.

Distributed Fulfillment and Revenue Management . Our distributed order execution technology has enabled us to develop integrated, closed-loop planning and execution solutions. These solutions are designed to help companies support an “order from anywhere, fulfill from anywhere, return to anywhere” strategy to meet the demands of dynamic multi-channel selling models. We continue to invest in this technology, which provides a scalable and flexible framework for creating new solutions and is used by our customers across multiple entities for transaction processing, visibility and event management capabilities. We have also invested in solutions that help customers optimize merchandising, revenue and pricing.

Supply and Demand Synchronization. i2’s new-generation supply chain management solutions focus on the multi-echelon value chain, encompassing the customer’s customer and the supplier’s supplier. Our new-generation solutions are designed to enable businesses to manage and tune their supply chains simultaneously so that they can quickly change parameters to meet their dynamic business needs. These solutions are built on the i2 Agile Business Process Platform, a unique service-oriented architecture (SOA) that includes a layer of technology services for integration and data management, user interface development and a visual business process workflow engine. The platform is business process management (BPM) compliant and has been designed to interoperate with legacy, ERP and other enterprise architectures.

Business Content Library. Our Business Content Library (BCL) is a collection of i2 workflows and solutions that have incorporated best practices for business processes and can be accessed via the i2 Agile Business Process Platform. These workflows enable systems and individuals to interact and collaborate to do a piece of standardized work. The workflows can be implemented on top of a company’s pre-existing IT systems and applications.

Products

Our solutions — bundles of software products and technology services — are designed to help customers address various supply chain problems and opportunities, including:




Linking certain aspects of planning and decision-making to execution of such plans and the monitoring of changing conditions across the supply chain




Improving current business processes, return on assets and profitability




Reduction of risks, cycle-times and cash needed in operations




Increasing market share




Improving customer service levels and delivering on commitments to customers




Creating an environment for continuous process improvement




Enhancing competitive advantage




Enhancing time to value for process redesign and acquisition integration

In the old generation of supply chain management, process had to adapt to the software. In the new generation of supply chain management, the software adapts to the process. We offer new-generation supply chain management solutions that enable companies to take control of their extended supply chain horizontally with their trading partners and vertically within their enterprise. Our primary products are focused on optimizing the following business processes: manufacturing and planning; transportation and distribution management; merchandising, assortment and allocation planning; execution, collaboration and visibility; supplier relationship management; as well as data management and business analytics. Our products are complemented by our business process consulting, implementation, outsourcing, development and related services.

Manufacturing and Planning: i2 solutions for manufacturing and planning help businesses coordinate the production and distribution of goods and materials throughout the supply chain to final delivery to the customer. They also help businesses analyze their revenues with merchandising, planning and pricing tools.

Solutions for supply planning are designed to provide multi-enterprise visibility, collaboration, decision-support and execution capabilities. Using these tools, a business may estimate future demand for its products to help planners more accurately estimate future supply needs. As a result, businesses can make better decisions about how much of what products to make, when and where to make them, and what parts to utilize to make those products. Solutions for supply planning include i2 Factory Planner, i2 Supply Chain Planner, i2 Inventory Optimization and various scheduling products.

Solutions for demand management and retail management provide tools designed to forecast and continuously manage demand, plan-merchandising strategies, manage markdowns and promotions pricing, and optimize price quoting. Using these products, companies can begin to optimize their revenues by selling products at prices set by analytic products. Demand management products include i2 Demand Manager, i2 Markdown Optimizer, i2 Merchandise Planner, i2 Inventory Optimization, i2 Sales and Operations Planning, i2 Merchandise Financial Planning, i2 Buying and Assortment Management, and i2 Allocation and Replenishment.

Transportation and Distribution Management: Solutions for transportation and distribution management help businesses optimize the flow of goods between suppliers, enterprise supply chain locations and customers. These tools provide integrated products for planning and executing transportation and distribution activities, as well as tools for strategic supply chain design and transportation modeling. Using i2 solutions, a business can procure, plan, execute and monitor freight movements across multiple modes, borders and enterprises. As a result, businesses can make better decisions about where and how to ship products, reducing their transportation costs while executing supply chain plans and achieving customer service objectives. Transportation and distribution management products include i2 Supply Chain Strategist, i2 Transportation Bid Collaboration, i2 Transportation Planner, i2 Transportation Modeler, i2 Transportation Manager and i2 New-Generation Transportation.

Execution, Collaboration and Visibility: Solutions to optimize plan execution and collaboration help businesses integrate the planning and execution processes, creating a closed-loop environment. These solutions provide tools designed to stage inventory, plan replenishment, manage orders and provide visibility to lower fulfillment costs, improve on-time delivery performance and enhance customer satisfaction. The i2 Collaborative Supply Execution solution is designed to provide inventory and plan collaboration, transaction processing, visibility, event management, integration and workflow capabilities. Other solutions in this category include i2 Supply Chain Visibility, i2 Customer Order Management, i2 Collaborative Replenishment and i2 Configurator.

Supplier Relationship Management: Supplier relationship management solutions help companies and their suppliers collaborate on sourcing and procurement for supply management. This solution is designed to bridge product development, sourcing, supply planning and procurement across the supply chain, providing the ability to create, execute and sustain global sourcing strategies. Sourcing solutions provide decision-support and optimization tools that are designed to help companies improve decision-making on supplies and the parts to use in products. During product development, these products can help to optimize designs by considering sourcing and supply chain constraints, as well as allowing design collaboration when outsourcing manufacturing or custom parts. During procurement, supplier relationship management solutions help companies to define sourcing strategies to reduce supply risks and costs, negotiate terms and streamline the requisitioning and buying of materials. Sourcing products include i2 Strategic Sourcing, i2 Product Sourcing and i2 Negotiate.

Data Management: We offer a data management solution that is designed to provide customers with the ability to manage data from multiple sources including legacy, ERP and other applications. i2 Master Data Management can be deployed: to create and maintain application-specific data; to consolidate data from multiple disparate sources; to cleanse, transform, synchronize and validate data; as well as to filter unwanted data. Other data management products include i2 MDM Enterprise, i2 Product Management and i2 Vendor Management.

On-Demand and Software as a Service: i2 offers on-demand and software as a service (SaaS) solutions. With i2 Supply Chain Operations Management, a variety of on-demand services are provided to enable customers to better manage demand sensing, execution, order fulfillment and key account management. i2 FreightMatrix uses private branded internet marketplaces in which companies gain access to i2’s broad logistics footprint in a secure private-labeled, shared-hosting environment, allowing companies to reduce costs, increase efficiencies and manage their supply chain, or their customer’s supply chain, online.

Product Development

We focus our ongoing product development efforts on meeting the requests of, and delivering on our commitments to, our current customers, enhancing our solutions and the underlying technology across our products, and developing or enhancing products that will enable us to enter new markets. In order to address customer recommendations, we have developed a User Enhancement Voting Process in collaboration with the i2 User Group. This process allows customers to provide input so that our solutions evolve to meet our customers’ business challenges and opportunities. In addition, we invest in solutions that help us more fully complete our solution offerings and enable cross-product workflows. We have continued to invest in products and technologies that we anticipate will be important and differentiated in the future.

Our Solutions Operations activities are primarily conducted in North America and India. Most product management and product marketing employees are based in North America, but many development and services teams are based in India. The India location offers many benefits to i2, including centralization of development efforts and cost structure advantages. For the years ended December 31, 2007, 2006 and 2005, our research and development expense totaled approximately $33.5 million, $35.2 million and $37.3 million, respectively.

Services and Maintenance

Our customer service and support program includes software maintenance, the delivery of functional enhancements and updates, and around-the-clock availability for high severity issues.

We maintain a technical support team that operates through our service and support centers located in North America, Greater Asia Pacific, Europe and Africa. Our customer service and support activities consist of the following:

Consulting Services. We offer our customers both on-site and off-site consulting services for assisting in the implementation of our products and services and integration with the customers’ existing systems. In addition, we offer process and change management-consulting support to key customers. We and our customers also use third-party consulting firms.

Development Services . Customers may also contract with us for services to provide custom development of our applications. In some cases, the modifications or additions to the software may be incorporated into future releases of our products.

Managed Services. We offer our customers outsourced supply chain management planning services providing reports, analysis and recommendations in the on-going operation of business processes. We offer hosted software services on a subscription basis.

Training. We offer education and training programs for our customers and third-party implementation providers with classes offered at our offices or at customer locations. We also offer web-based and self-paced learning programs. These classes focus on the fundamental principles of our software products as well as their implementation and use.

Maintenance and Product Updates . We provide ongoing support services for our products. Maintenance contracts are typically sold to customers at the time of the initial license and may be renewed for additional periods. Our maintenance agreements with our customers provide the right to receive most product updates and enhancements to the products purchased by the customer, as well as telephone and online support. Our support services are packaged into three tiers (silver, gold and platinum), which offer customers the ability to choose the level of service they desire.

Sales and Marketing

We sell our software and services through a direct customer-facing organization that is augmented by other sales channels, including systems consulting and integration firms and other industry-related partners. Our direct customer-facing organization consists of account representatives and client managers that are supported by a team of personnel that includes solution and industry specialists.

We currently have joint marketing agreements with software vendors and other industry-related firms such as IBM and Microsoft. Additionally, we have alliances with top global and regional systems consulting and integration, hardware, software, and other relevant services firms including Accenture, IBM Global Services, Infosys and Tata Consulting Services, among others. These joint-marketing agreements and alliances generally provide the vendors with the ability to market our products and access our marketing materials and product training. By using these indirect sales channels, we seek to capitalize on the installed base of other companies and obtain favorable product recommendations from the business partners, thereby increasing the market coverage of our products.

In addition, we have a partner program with Value Added Resellers (VARs) to serve mid-market customers, provide increased coverage around the world and expand into new industries.


CEO BACKGROUND

Mr. Clark has been Chairman of the Board and Chief Executive Officer of BancTec, Inc., a global provider of document and payment processing solutions, since September 2004. Previously, Mr. Clark retired from EDS as Senior Vice President and head of the Financial and Transportation Industry Groups. This $3.5 billion global operating organization supported more than 1,000 customers including Bank of America, ABN AMRO, Citigroup, Commonwealth Bank of Australia, American Airlines and Continental Airlines. In 1971 Mr. Clark joined EDS in the Systems Engineering Development Program and progressed through a variety of technical, sales and management roles related to the financial and insurance industries. He assumed responsibility for the Financial Industry Group in 1986 and was named a corporate officer in 1989. He was appointed a Senior Vice President in 1996 and served as a member of the Global Operations Council, EDS’ top executive team.

Mr. Clark previously served on the board of Carreker Corporation, a software solutions provider to the financial industry, and FundsXpress, Inc., a provider of internet-based financial products. Mr. Clark is a graduate of The University of Texas at Austin. He served three years in the U.S. Army, attaining the rank of Captain, and served as a company commander in Europe and Southeast Asia.

Mr. Hunter has been Vice President of Dell’s Global Consumer Services and Support team responsible for consumer customer contact centers in the Americas, Asia-Pacific and Japan and Europe, the Middle East and Africa since 2006. Previously, Mr. Hunter served as Vice President of Dell America’s Operations. In this role, he managed the day-to-day operations of Dell’s manufacturing facilities in Austin, TX; Nashville, TN; Winston-Salem, NC; and Eldorado de Sul, Brazil. He also led the Americas Remanufacturing and Returns Center Operations, Worldwide Fulfillment, Engineering and Quality, Demand-Supply, and the Environmental Health and Safety groups. Before that, Mr. Hunter held leadership roles in Portables manufacturing, supply chain management, and the Austin manufacturing operations organizations.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Nature of Operations . We are a provider of supply chain management solutions, consisting 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:




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 with Statement 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,” and SAB 103, “Update of Codification of Staff Accounting Bulletins,” and SAB “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. Our deferred contract revenue balance is 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 early 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 billability of our services personnel 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 mix of revenues we generate. This affects our 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 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. Bookings do not include amounts subject to contingencies, such as optional renewal periods, amounts subject to a customer’s internal approvals, and amounts that are refundable for reasons outside of our standard warranty provisions. 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 years ended December 31, 2007 and December 31, 2006 were $264.7 million and $257.3 million, respectively, an increase of approximately 3% or $7.4 million. A number of the bookings entered into during the fourth quarter of 2007 are multi-year arrangements. We did not begin tracking total bookings until the fourth quarter of 2005, so there is no comparable number available for the year ended December 31, 2005. We have experienced seasonality in our quarterly bookings, with the third quarter typically being the weakest of the year. Although, our fourth quarter 2007 bookings were approximately 28% higher than our fourth quarter 2006 bookings and our total bookings grew approximately 3% in 2007 when compared to 2006, bookings for the year ended December 31, 2007 were below our original expectations. We believe this was due to execution issues, focus on internal organizational and management changes including our restructuring initiatives during the third quarter and public comments made by certain large stockholders regarding our competitive position and future direction. 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 be recognized as revenue. The amount of backlog for which we have received payment is recorded as deferred revenue on our 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 March 31, 2007, so it is not relevant to our on-going operations and we exclude it from comparisons to prior period results.

Our annual operating revenue (total revenue excluding contract revenue) was approximately $257.9 million, $275.6 million and $294.3 million in 2007, 2006 and 2005, respectively. These declines represent annual declines of 6% for 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 37% or $28.5 million for the year ended December 31, 2007 compared to the same period in 2006, and declined 15% or $13.7 million for the year ended December 31, 2006 compared to the same period in 2005. In 2005 and 2006 our total software solutions bookings were consistently lower than our software solutions revenue, thereby significantly reducing our backlog and in 2007 our total software solutions bookings were slightly above our software solution revenue, increasing our backlog, as indicated in the table below. This has contributed to sequentially lower software solutions revenue in the three years ended December 31, 2007. This trend will continue unless we experience growth in software solutions bookings in the next several quarters.

Services revenue increased 15% or $16.2 million for the year ended December 31, 2007 when compared to the same period in 2006, and increased 3% or $2.7 million for the year ended December 31, 2006 when compared to the same period in 2005. These increases are due to continual shifts in the demands of the market, changes in our sales approach and an increase in our services offerings. We expect services revenue to continue to be a larger percentage of our total revenue than it has been in previous years. Services revenue generally earns a lower margin than our other revenue types, although we have experienced significantly higher margins in our services business in 2007 compared to 2006 and 2005 due to leverage and efficiency from the services platform.

Maintenance revenue declined 6% or $5.4 million for the year ended December 31, 2007 when compared to the same period in 2006, and declined 8% or $7.8 million for the year ended December 31, 2006 when compared to the same period in 2005. These declines in maintenance revenue were primarily caused when customers failed to renew their maintenance agreements or renewed them at lower rates. Although we have put programs in place that demonstrate the value of maintenance to our customers, we expect maintenance revenue to continue to decline in the near term.

Application of Critical Accounting Policies and Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and judgments related to the application of certain accounting policies.

While we base our estimates on historical experience, current information and other factors deemed relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to our reported financial results if (i) the accounting estimate requires us to make assumptions about matters that are uncertain and (ii) different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements.

Analysis of Financial Results — Twelve Months Ended December 31, 2007 Compared to Twelve Months Ended December 31, 2006

Summary of the Year Ended December 31, 2007 Results




Total revenue decreased $19.4 million from the same period in 2006




Total costs and expenses decreased $15.1 million for the same period in 2006




Net income applicable to common stockholders decreased $6.6 million compared to the same period in 2006




Diluted earnings per share were $0.55 versus $0.82 in the same period in 2006



Cash flow from operations was $16.4 million versus $14.8 million in the same period in 2006




Total bookings were $264.7 million

Revenues

The following table sets forth revenues and the percentages of total revenues of selected items reflected in our condensed consolidated statements of operations and comprehensive income for the twelve months ended December 31, 2007 and December 31, 2006. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Software Solutions Revenue. Total software solutions revenue decreased 37% or $28.5 million for the twelve months ended December 31, 2007 compared to the same period in 2006. Overall we experienced lower software solutions revenue in the twelve months ended December 31, 2007 due to less current period bookings being recognized as revenue and a smaller size of projects being recognized under percentage of completion accounting, when compared to the same period in 2006. In addition, we did not have revenue from platform technology transactions in the 2007 period. The components of the changes in software solutions revenue are explained below.

During the twelve months ended December 31, 2007, we recognized revenue under SOP 97-2 related to 62 contracts at an average of $0.2 million per contract compared to 72 contracts at an average of $0.3 million per contract in the comparable period of 2006.

The primary cause of the decline in revenue recognized under SOP 81-1 for the twelve months ended December 31, 2007 is a decline in the amount of revenue generated on each project as compared to the same period in 2006, due mainly to the continued decline in our backlog. Revenue recognized under SOP 81-1 is dependent upon the amount of work performed and milestones met during the applicable period on projects booked in prior periods. During the twelve months ended December 31, 2007 we recognized revenue under 34 projects at an average of $0.5 million per project compared to 35 projects at an average of $0.6 million per project in the comparable period of 2006.

The decline in revenue from recurring items for the twelve months ended December 31, 2007 was primarily driven by the recognition of $10.5 million in 2006 from a platform technology transaction which was not repeated in 2007.

Services Revenue. Services revenue increased 15% or $16.2 million for the twelve months ended December 31, 2007 compared to the same period in 2006 primarily as a result of a 4% increase in revenue recognized per billable hour together with a 6% increase in total billable hours. Services revenue also increased when compared to 2006 due to an increase of approximately $1.0 million in billable travel costs. The increase in billable hours was due to a 6% increase in average number of services personnel from the twelve-month period ended December 31, 2006.

Maintenance Revenue. Maintenance revenue decreased 6% or $5.4 million for the twelve months ended December 31, 2007 compared to the same period in 2006 primarily as a result of customers not renewing their maintenance agreements or customers renewing on less favorable terms, with such decreases not being offset by initial maintenance agreements with new customers.

International Revenue. Our international revenues included in the categories discussed above are primarily generated from customers located in Europe, Asia, Latin America and Canada. International revenue totaled $110.7 million, or 43% of total revenue, in the twelve months ended December 31, 2007 compared to $120.7 million, or 43% of total revenue, in the same period in 2006. International revenue remained relatively consistent in the twelve-month periods ended December 31, 2007 and December 31, 2006.

Customer Concentration . During the periods presented, no individual customer accounted for more than 10% of total revenues.

Impact of Indian Rupee on Expenses

During the twelve months ended December 31, 2007 we experienced margin compression as a result of appreciation in the Indian rupee. Our rupee-denominated expenses increased modestly during 2007, but this translated into a double-digit percentage increase in our dollar-denominated expenses in our India operations. If we assume the same currency exchange rate for our rupee expenditures in 2007 as we experienced in 2006 the impact of rupee appreciation was approximately $2.3 million for the twelve-months ended December 31, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Analysis of Financial Results – Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.

Summary of Third Quarter 2008 Results




Total revenue decreased $1.7 million from the same period in 2007




Total costs and expenses decreased $4.6 million from the same period in 2007




Net income applicable to common stockholders was $1.9 million compared to $4.5 million in the same period in 2007




Diluted earnings per share were $0.07 for the third quarter of 2008 and $0.17 for the third quarter of 2007




Cash flow from operations was $78.5 million reflecting the receipt of $83.3 million from the SAP litigation settlement versus cash flow from operations of $2.9 million in the same period of 2007




Total bookings were $46.5 in the 2008 and the 2007 periods

Revenues

The following table sets forth revenues and the percentages of total revenues of selected items reflected in our condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2008 and September 30, 2007. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Software Solutions Revenue. Total software solutions revenue was relatively unchanged for the three months ended September 30, 2008 compared to the same period in 2007. The components of the changes in software solutions revenue are explained below.

The primary cause of the decline in revenue recognized under SOP 97-2 for the three months ended September 30, 2008 is due to declines in the number and size of deals being recognized from current quarter bookings as well as a decrease in the number and size of deals recognized from backlog. During the three months ended September 30, 2008 we recognized revenue related to 7 contracts at an average of $0.1 million per contract compared to 14 contracts at an average of $0.1 million per contract in the comparable period of 2007.

Revenue recognized under SOP 81-1 is dependent upon the amount of work performed on software solutions projects and milestones met during the applicable period on projects booked in both current and prior periods and typically has a longer recognition period than revenue recognized under SOP 97-2. During the three months ended September 30, 2008 we recognized revenue related to 18 projects at an average of $0.2 million per project compared to 13 projects at an average of $0.2 million in the comparable period of 2007.

Revenue from recurring items increased $0.5 million for the three months ended September 30, 2008 when compared to the same period in 2007 based on the recognition of revenue from transactions booked after September 30, 2007 resulting from the shift in our business to more recurring transactions.

Services Revenue. Services revenue was relatively unchanged for the three months ended September 30, 2008 compared to the same period in 2007.

Services revenue is dependent upon a number of factors, including:




the number, value and rate per hour of services transactions booked during the current and preceding periods,




the mix of our projects between services projects and software solutions (81-1) projects,




the number and availability of service resources actively engaged on billable projects,




the timing of milestone acceptance for engagements contractually requiring customer sign-off, and




the timing of cash payments when collectibility is uncertain

Maintenance Revenue. Maintenance revenue decreased 8% or $1.7 million for the three months ended September 30, 2008 compared to the same period in 2007. This decrease is mainly attributable to the non-renewals a few large maintenance agreements.

Maintenance revenue varies from period-to-period based on several factors, including:




initial maintenance from new Software solutions bookings,




the timing of negotiating and signing of maintenance renewals,




completing a renewal several months into the annual maintenance period resulting in a one-time catch up for the period that maintenance services were performed prior to signature of the contract. A similar catch-up of revenue occurs due to the timing of cash receipts for cash basis customers when cash is not received until several months into the maintenance period,



renewals that occur on less favorable terms than in the prior period, and




customers that do not renew their maintenance agreements.

International Revenue. Our international revenues included in the categories discussed above are primarily generated from customers located in Europe, Asia, Latin America and Canada. International revenue totaled $26.4 million, or 41% of total revenue, in the three months ended September 30, 2008 compared to $31.1 million, or 47% of total revenue, in the same period in 2007.

Customer Concentration. During the periods presented, no individual customer accounted for more than 10% of total revenues.

Impact of Indian Rupee on Expenses

Assuming a constant level of rupee expenditure in 2007 as we experienced in 2008, the impact of the change in the value of the rupee when compared to the dollar was approximately $0.6 million less expense for the three months ended September 30, 2008.

Cost of Revenues

The following table sets forth cost of revenues and the gross margins of selected items reflected in our condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2008 and September 30, 2007. The period-to period comparisons of financial results are not necessarily indicative of future results.

Cost of Software Solutions. These costs consist of:




Salaries and other related costs of employees who provide essential services to customize or enhance the software for the customer




Commissions paid to non-customer third parties in connection with joint marketing and other related agreements, which are generally expensed when they become payable




Royalty fees associated with third-party software utilized with our technology. Such royalties are generally expensed when the products are shipped; however, royalties associated with fixed cost arrangements are generally expensed over the period of the arrangement




The cost of user product documentation




The cost of delivery of software




Provisions for the estimated costs of servicing customer claims, which we accrue on a case-by-case basis

Cost of software solutions increased 11% or $0.2 million for the three months ended September 30, 2008 compared to the same period in 2007 primarily because of an increase in the number of hours worked on projects requiring essential services.

During the three months ended September 30, 2008 and September 30, 2007, the costs attributable to the performance of essential services related to SOP 81-1 was $1.6 million and $0.8 million, respectively. The remaining costs of software solutions are not directly attributable to specific arrangements, so we do not believe there is a reasonable basis to calculate the cost of each type of software solutions transaction or the resulting contribution margin.

Cost of Services . These costs consist of expenses associated with the delivery of non-essential services, such as implementation, integration, process consulting and training. Cost of services decreased 10% or $2.5 million for the three months ended September 30, 2008 compared to the same period in 2007. This decrease was related primarily to a decrease in personnel-related costs of $2.1. The decrease in personnel-related costs was driven by a shift of approximately 28 associates from the services organization to the sales organization. This shift was done as a part of our refocus in late 2007 to a sales approach centered on customer business units.

Cost of Maintenance. These costs consist of expenses including support services such as telephone support and unspecified upgrades/enhancements provided on a when-and-if-available basis. Cost of maintenance decreased 11% or $0.3 million for the three months ended September 30, 2008 compared to the same period in 2007. This decrease was related to a decrease in personnel-related costs of $0.2 million.

Amortization of Acquired Technology . In connection with our business acquisitions, we acquired developed technology that we offer as a part of our solutions. In accordance with applicable accounting standards, the amortization of acquired technology is included as a part of our cost of revenues because it relates to software products that are marketed to potential customers.

CONF CALL

Tom Ward

We released our second quarter 2008 results today. The release crossed the wire at 6:55 am Eastern Time. Joining me today are Pallab Chatterjee, i2's Chief Executive Officer, and Mike Berry, i2's Chief Financial Officer, who will deliver some prepared remarks, and we will then take questions afterwards. Those of you wishing to access the webcast of today's conference call may do so by going to www.i2.com/investor and clicking on the Webcast link in the center of the page.

I would like to remind that the comments we will make today are subject to the SEC's Safe Harbor provisions. During our commentary and during the question-answer session, we will make estimates and forward-looking statements that are the current beliefs and opinions of certain members of i2 management. These statements are indicated by such terms as "plans to", "preliminary", "goal", "will", "believe", "targeting", "expect", "anticipate", "intend", and "likely".

They may include statements regarding the objectives and timing of the Strategic Review Committee's actions and the company's ability to enhance stockholder value. They may also include statements regarding future revenues or expenses, earnings, operations, and cash flows as well as statements regarding demand for the company's solutions and services and the company's ability to achieve its targets, goals, and initiatives. We can give no assurances regarding the achievement of these forward-looking statements as they are only estimates and the actual outcomes may be significantly different.

Additionally, we expect that some of these forward-looking statements will change in the normal course of our business, and the company expressly disclaims any current intention to update forward-looking statements that we may make on today's call. Please refer to the forward-looking statements portion of the MD&A section and the Risk Factors section of our most recent 10-K filing and the section titled ‘i2 Cautionary Language’ in the press release attached to the form 8-K filed with the SEC today, which are available on our website.

During the call, we may make reference to certain non-GAAP financial measures. We have posted the appropriate reconciliations of our non-GAAP to GAAP financial measures on the Investor Relations page of our Web site.

I would now like to turn the call over to Pallab Chatterjee, i2's CEO.

Pallab Chatterjee

I will take just a few minutes to provide you with some highlights from the second quarter of 2008 and then give you an update of the progress of our Supply Chain Results company strategies and the initial customer feedback to our introduction of SCM 2.0.

First, we are pleased to have a reached a settlement in our patent infringement lawsuit against SAP. We believe that settlement is a strong validation of the value of our intellectual property and the settlement alone will further strengthen our balance sheet and growing net cash position.

Second, we are pleased with our bookings and cash flow performance in the second quarter. It was challenging to our match our second quarter 2007 bookings performance because it included the renewal of two our supply chain leaders' agreement. However, we recorded more than $64 million in total bookings in the second quarter of 2008 and our total bookings for the quarter exceeded our expectation.

We recorded a solid year-over-year growth in service bookings for the quarter which I believe is yet another proof of our sales execution model, Supply Chain Results company strategy and introduction of SCM 2.0 is resonating with what the market needs today.

We also sold additional multiyear manage service contract that are excluded from the reported total bookings because of certain contingencies. We continue to make strides on our strategic priorities during the second quarter and that is best seen through some of the bookings highlights in the quarter.

Some of the examples of where we are going to establish long-term customer partnerships based on supply chain innovation and delivering valuable outcomes include one of the world's top five automotive manufacturers and successful user of i2 solutions signed a combined license and service agreement to implement solutions for global visibility, capability management and sales and operations management.

The manufacturer aims to gain global visibility for vehicles anywhere in the world and manage supply and demand on a global scale. An already successful user of i2 solutions for global transformation project, a global computer manufacturer is expanding its relationship with i2 to manage and support its configured order web channel. Working closely with i2, this customer aims to increase demand and drive higher margins through its web channel.

Another long term customer, a leading computer manufacturer is expanding its relationship with i2 to transform itself to Supply Chain 2.0 including process playbooks, total supply chain management solutions and manage inventory visibility services to its retail customers.

During the second quarter, we continue to see strong interest in our retail and transportation solution offering. These wins during the quarter are further example of the progress we made on our initiatives of solutions by outcome and service excellence. These include a large consumer package good company, expanded its relationship with i2 and we will work with this customer to improve the logistics planning and execution through the use of hosted transportation solution freight matrix.

A worldwide leader in premium sleep mattresses and a new customer for i2 also selected freight matrix to help improve service levels and decrease transportation cost. Finally, one of America's leading retailers, who has already benefited from multiple i2 solutions selected i2 to improve their lead times associated with private label business. These examples of deals signed in the second quarter validates the benefit of our solution base approach where we utilize client business manages to establish strong, long-lasting customer relationships with a focus on outcomes.

These deals also demonstrate our sales execution continues to improve. A significant percentage of our Client Business Managers' (CBM) plan business managers close deals from their focus accounts during the second quarter and we recorded more than one million in combined contract volume from 15 individual customers. Now, I would like to give you a quick update on some of the customer feedback we have received from our introduction of SCM 2.0.

We had assigned the initial customer feedback on our approach to SCM 2.0 and the momentum has gained recently. If you recall from our earnings call in May, I introduced our approach to Supply Chain Management 2.0 a new paradigm with a supply chain operations that combines domain expertise, process innovation tools and services to make business plans happen. SCM 2.0 is all about getting result and it is all about getting result spot.

The three quarter elements of SCM 2.0 are process playbook, our business content library and our supply chain wisdom network. Running other apply approach to the SCM 2.0 is our managed services business offering. Our managed service offering is an area we have seen significant interest from both existing and new customers. Since no two business environment are likely designed flexibility into our results based solutions delivery approach, working with our customers we offer a delivery approach that allows them to tap into their own internal domain expertise or to leverage i2 resources, infrastructure and expertise or use a combination of the two.

The flexibility enables the customers to effectively maximize the internal resources by achieving better quality and results more quickly. For our managed services offering, customers can outsource individual supply chain processes, all the entire supply chain bundling the services and solutions they need to meet their business requirements. Our managed services success is evident in the second quarter bookings highlight mentioned previously where we continue to see great success about freight matrix both for transportation solution.

We have and we will continue to introduce other fast software service offerings particularly focused on serving the retail industry and we look forward to sharing our success from those with you in the next few quarter. As you can see from the highlight of this quarter, our supply chain results company strategy is working and it has presented additional revenues for us to pursue. We are excited about the opportunities ahead of us and we look forward to sharing our progress with you.

With that, I would like to turn it over to Mike who will review the second quarter financial results with you.

Michael Berry

Great. Thank you, Pallab. Good morning everyone. This morning I will go over our second quarter financial results, provide high level outlook for the third quarter of 2008 and also provide a brief update on the status of the strategic review committee. Additionally, you can find the presentation of our supplemental financial results for the second quarter and the second quarter year-to-date period on the presentation's page of the Investor Relations section of our website.

Okay, let us get started.

First, let us go over some of the financial highlights for the quarter. Total bookings in the second quarter were $64.1 million which includes $8.3 million of software solutions bookings. The $64.1 million represents the contracted value of nine contingent bookings signed during the second quarter across all of our revenue category. The $64.1 million total booking in the second quarter was higher than our expectations due to better than expected services and maintenance booking. When comparing our total bookings for the second quarter of 2007, it is important to remember that we recorded approximately $13.1 million in bookings from two supply chain leader renewals in the second quarter of 2007.

Included in the $8.3 million are software solutions booking for the second quarter slightly more than half or $4.6 million is related to subscription agreement. Total revenue for the second quarter was $64.7 million. Our GAAP net income applicable to common stock holders was $80.7 million or $3.05 per share on a diluted basis. Included in our financial results for the quarter is $79.9 million related to our patent infringement settlement with SAP. This is the net amount of the $83.3 million in gross proceeds less $2 million in external patent litigation expenses and $1.4 million in income taxes recorded during the second quarter.

I will discuss in more detail in a few minutes. Our second quarter 2008 non GAAP net income applicable to common stock holder which is GAAP net income applicable to common stock holders excluding $81.9 million from the SAP settlement and $2 million in stock option expense was $784,000 or $0.03 per share on a diluted basis. We generated cash from operating activities in the second quarter of $11.5 million. This was higher than our expectations due mainly to stronger than expected cash collection. Importantly, this is the fifth quarter in a row that we have reported positive cash flow from operations and on a trailing four-quarter basis; we have generated nearly $32 million in cash flow from operations.

Finally, we ended the second quarter of 2008 with total cash balance of a $149.7 million which include $6.7 million of restrictive cash. Okay, before I go into the income statement, I would like to address the effect of the SAP settlement on our financial results for the second quarter 2008. We recorded the SAP settlement proceed, net of the external expanses related to the litigation as a credit to operating expenses and listed it as a separate line item on the incomes statement. For the second quarter of 2008, operating costs and expenses was $60.7 million.

The gross amount of the settlement was $83.3 million and we spent approximately $2 million in our patent litigation activities during the quarter. So, the net credit of the settlement to operating expenses in the second quarter was $81.3 million. So, adding the $81.3 million net credit to the $60.7 million in operating cost and expenses yields a net expense benefit of $20.6 million for the second quarter of 2008.

Now, as far as income taxes related to the settlement, under the rules governing Alternative Minimum Tax or AMT, regular taxable income maybe offset a maximum of 90% fine net operating losses. Therefore, a portion of our taxable income resulting from the settlement is subject to AMT. So, even though we were able to utilize our net operating loss carry forward in other book effect attributes to reduce the tax effect of the settlement, we then incurred a tax expense of $1.4 million related to AMT as well as other state taxes.

We have included the settlement net of taxes as a non GAAP adjusting item for the quarter. We did not include the external patent litigation expenses related to the lawsuit as an adjusting item as we incurred similar expenses in prior periods and we do not non GAAP those out at that time. I would discuss this further during our discussion of the non GAAP result but please see the non GAAP schedule included with our press release from this morning or in the Investor Relations section of our website for a detailed reconciliation of the GAAP to non GAAP amount.

Finally with regard to the settlement, we did receive the cash payment on July 28. Okay, now let us go with into the income statement in more detail. As I mentioned previously, total revenue for the second quarter of 2008 was $64.7 million which was $255,000 or 0.04% lower than total revenue in the second quarter of 2007. Software solutions' revenue was $12.6 million in the second quarter of 2008 versus $11.4 million in the second quarter of 2007, an increase of $1.2 million or 10% year-over-year which again was better than our expectations for the quarter.

The year-over-year increase in the second quarter is due primarily to the recognition of software solutions projects from our backlog as a result of the strong bookings we have recorded over the last several quarters. In the second quarter of 2008, we recorded approximately $5.5 million in revenue from prior period bookings compared only $3.4 million in the second quarter of 2007. As I mentioned in my opening remarks, more than half of our software solutions bookings in the second quarter of 2008 were from subscription transactions where the related revenue from those deals is generally recognized over a multiyear period.

Now, let us go to services revenue. Services revenue was $30.5 million in the second quarter of 2008, down $1 million or 3% compared to the second quarter of 2007. The year-over-year drop in services revenue was primarily due to a mix shift in the type of services we outperformed during the second quarter of 2008. However, services revenue was slightly ahead of our expectations for the quarter and increase $1.7 million or 6% sequentially from Q1.

Maintenance revenue finish at $21.7 million for the second quarter of 2008, a decrease of $400,000 or less than 2% compared to the second quarter of 2007. Maintenance revenue was below our expectations for the quarter primarily due to a few renewals that push into the third quarter. While we are disciplined in maintenance revenue decline on year-over-year basis in the second quarter, we remain encouraged with the trends we are seeing in maintenance revenue.

On a year-to-date basis, maintenance revenue has increased 2%. In over the trailing four quarter period, maintenance revenue has decreased by less than 2%. Okay, let us move on to the total costs and expenses. As I mentioned earlier, we recorded the SAP settlement as a credit to operating expenses net of the related external litigation expenses incurred in the second quarter so our total cost and expenses for the period were a benefit of $20.6 million. As a result of the benefit in the period, let us go through total costs and expenses excluding the settlement.

Costs and expenses subtotal for the second quarter of 2008 were $60.7 million compared to total costs and expenses of $61.7 million in the prior year period, a decrease of $1 million or approximately 2%. Cost of services was $23.6 million in the second quarter of 2008, a decrease of $800,000 or 3% year-over-year compared to the second quarter of 2007. The year-over-year decrease was due primarily to the movement of certain services associates in the first quarter of 2008 whose job responsibility has changed and were move to the sales organization.

Our services gross margin for the second quarter of 2008 was 22.6% flat year-over-year and up 50 basis points compared to the first quarter of 2008. Cost of maintenance was $2.7 million in the second quarter of 2008. Our maintenance margin in the second quarter of 2008 was 87.7%, up 60 basis points in the first quarter of 2008 and consistence with the maintenance margin for the full year 2007. Our next expense category is sales and marketing expense. As a reminder, our sales and marketing expense is typically higher in the second quarter compared to other quarters in the year because of the expense associated with our annual i2 planner conference.

For the second quarter of 2008 sales and marketing expense includes approximately $1.5 million relate to Plan-It [ph] which was relatively consistent to what was incurred in 2007. Research and development expenses decline $1.2 million or 14% year-over-year in the second quarter. This decrease was primarily due to a reduction in contractor cost in the second quarter of 2008 compared to the second quarter of 2007 and lower overall payroll related expenses.

Our general and administrative expense for the second quarter increase $400,000 year over year or 4%. This is primarily due to $1.8 million in unplanned expense related to the resolution of certain litigation activities which dates back to 2005. One of the litigation items was an arbitrator's ruling for approximately $1 million which we accrued during the second quarter. However, we respectfully disagree with the ruling and have appealed. The $1.8 million was partially offset by lower payroll and employee related expenses and lower stock compensation expense in the second quarter of 2008 compared to the second quarter of 2007.

We have $1.1 million of non operating expense in the second quarter of 2008 which reflects the net amount of interest income, interest expense, bank fees, foreign exchange gains or losses and other miscellaneous income and expenses. We experienced lower interest income in the second quarter of 2008 due primarily to lower rates on our invested balances. Our income tax provision was $2.7 million from the second quarter of 2008 and was comprised primarily of two main areas. First, we estimated domestic AMT and other state taxes related to the SAP settlement of $1.4 million and second, our ongoing taxes related to our foreign operations and withholding taxes for payments made to the US.

After subtracting out the preferred stock dividend and accretion of discount, net income applicable to common stockholders finish at $80.7 million and diluted earnings per share applicable to common stockholders for the quarter was $3.05. For those of you joining us today who use non GAAP measures to evaluate our performance for the second quarter of 2008 non GAAP diluted EPS was $0.03 per share compared to non GAAP diluted EPS of $0.17 per share in the second quarter of 2007.

As I mentioned previously, in addition to the stock option expense, we included the impact of the SAP settlement, net of applicable income taxes only as a non GAAP adjusting item for the quarter. I would like to remind you that we have a full reconciliation of our GAAP to non GAAP amounts on our website under the investor relation section. The reconciliations posted are consistent with items and definitions we have discussed today and all historical amounts have been previously disclosed in company's filing.

Okay, let us move on to the balance sheet. I will provide comparisons of the second quarter 2008 balance sheet versus the balance sheet as of the end of the first quarter of 2008. Total assets increased $91.9 million from the end of the first quarter 2008 primarily due to an increase in other current assets of $81.1 million and an increase in cash and equivalent including restricted cash of $10.9 million. The increase in other current assets was due mainly to the specific receivable associated with the SAP settlement and the increase in cash and equivalent was due mainly to the strong cash generated from operations during the quarter.

Current liabilities increase $8.1 million primarily due to increases in accrued compensation of $4.9 million and an increase in our net preferred revenue of $3.4 million. At the end of the second quarter of 2008, our total cash and equivalents balance including restricted cash of $6.7 million was a $149.7 million. We ended the quarter with approximately $63 million more cash than the face value of our total debt of $86.3 million. Finally, as I mentioned earlier, we receive the full $83.3 million from the SAP settlement on July 28, the list will be reflected in our third quarter ending cash balances.

Moving on to the cash flow statement, as I mentioned earlier we generated cash from operating activities of $11.5 million in the second quarter of 2008. The $11.5 million in the second quarter 2008 was better than our expectations due to higher than expected cash collection. Cash provided by investing activities was $200,000 in the second quarter and was primarily provided by restrictions release on our restricted cash. We are very pleased that we have now recorded our fifth quarter in a row of positive cash flow from operation.

Over the last four quarters, we have generated approximately $32 million in cash flow from operation. We will continue to focus on this important metric going forward. Okay, now I want to discuss our current outlook. We currently expect third quarter 2008 financial results to be reasonably comparable to the third quarter of 2007. While we do not expect to have any material expense related to patent litigation in the third quarter, we currently expect cost related to the company's strategic review process to be between $2 million and $2.5 million in the third quarter.

We expect stock option expense to be approximately $2 million in the third quarter of 2008. Finally, we expect cash flow operations to be greater than $80 million in the third quarter of 2008 primarily due to the cash from the patent settlement offset slightly by the cash payments associated with the external patent litigation cost, estimated tax payments and SRC- related expenses. Before we get to the Q&A, I would like to give you a quick update on the status of the strategic revenue committee's process.

The SRC is continuing its discussions in review of transactions that it believes would deliver value to i2 stakeholders. The SRC expects to provide an update on the project within the next two weeks. There can be no assurance that the ongoing exploration of the strategic options will result in any new or different course of action. We will do that one more time if I could. The SRC is continuing its discussions in review of transactions that it believes would deliver value to i2 stakeholders.

The SRC expects to provide an update on the process within the next two weeks. There can be no assurance that the ongoing exploration of strategic options will result in any new or different course of action. Though we know that many of you have a lot of questions regarding the SRC process and potential outcomes, please understand that because we cannot address those questions during this call, we would ask that you please limit your questions to those focused on our solution strategy and financial result.

With that, this concludes my prepared remarks.

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