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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 0-21958

QRS Corporation

(Exact name of registrant as specified in its charter)

1400 Marina Way South, Richmond, CA 94804

(Address of principal executive offices, including zip code)

(510) 215-5000

(Registrant’s phone 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

As of May 2, 2003, 15,843,637 shares of the issuer’s common stock, par value $.001 per share, were outstanding.

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QRS CORPORATION

FORM 10-Q

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PART I.    FINANCIAL INFORMATION

ITEM 1.    Financial Statements

QRS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2003 AND DECEMBER 31, 2002

(Dollars in thousands, except share and per share amounts)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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QRS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(Dollars in thousands, except share and per share amounts)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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QRS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(Dollars in thousands)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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QRS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    GENERAL

QRS Corporation (“QRS,” the “Company”, or “we” or “us”) was established in 1988 and is a provider of collaborative commerce solutions for the global retail trading community. Our products and services help thousands of retailers, manufacturers, suppliers, vendors, wholesalers and distributors from a variety of retail segments, including general merchandise and apparel, grocery, consumer packaged goods, health and beauty, consumer electronics, hardlines, do-it-yourself and sporting goods. We help companies to connect electronically, transact business, collaborate on processes and decisions, and differentiate their brands in the global marketplace. Our products and services are typically integrated with our customers’ enterprise information technology systems in order to deliver greater benefits and efficiencies to these customers. We market our products and services in three Solutions Groups: Software Applications, Trading Community Management and Global Services.

Our Software Applications automate and help optimize business processes between companies. Specifically, they support the following business functions: product data synchronization; collaborative product planning, design, production and shipment; online merchandising, promotions and sales; and supply chain exception management. Our Software Applications include both Enterprise Software Applications installed on customers’ computer systems and hosted applications installed on our computer systems.

Our Trading Community Management solutions allow retailers, vendors and their trading partners to exchange electronic business documents, such as purchase orders, invoices and advance ship notices. These electronic transactions are conducted over a value added network (VAN) or over the Internet. Our Trading Community Management solutions can reduce costs related to paper transactions, mail delays and manual data input errors for our customers. The communication of these electronic business documents is typically integrated with the accounting and inventory systems of our customers and their trading partners.

Our Global Services include the collection, analysis and delivery of information, such as store-level pricing data and metrics, for use in our customers’ individual strategic and tactical decisions; software implementation and integration services; retail solutions consulting; and technical support and training services for our various solutions.

We have prepared the Condensed Consolidated Balance Sheet as of March 31, 2003 and the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002, without audit. In the opinion and to the knowledge of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2003 and 2002 and for all periods presented have been made. The Condensed Consolidated Balance Sheet as of December 31, 2002 is derived from our audited consolidated financial statements as of that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by regulations of the Securities and Exchange Commission. These interim Condensed Consolidated Financial Statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

The preparation of our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual amounts may differ from such estimates.

The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the operating results anticipated for any other interim period or for the full year.

Certain reclassifications have been made to the financial information reported in 2002 to conform to the 2003 presentation.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146 (FAS 146), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the measurement, timing of recognition and reporting of costs associated with exit or disposal activities and restructuring activities. FAS 146 requires that a liability for costs associated with exit or restructuring activities be recognized only when the liability is incurred as opposed to at the time that a

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company formally approves and commits to an exit plan as set forth in Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the Statement had no material effect on our financial position or results of operations. There were no such exit or disposal activities initiated during the three month period ended March 31, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet on issuance of a guarantee or indemnification. In addition, FIN 45 requires disclosures about the guarantees or indemnification that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions and recognition provisions of FIN 45 at December 31, 2002 and January 1, 2003, respectively. The adoption of the recognition and measurement provisions of FIN 45 had no material effect on our financial position or results of operations.

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company has not yet determined the impact of adopting EITF No. 00-21 on its consolidated financial statements.

In December 2002, the FASB issued FAS 148, “Accounting for Stock-Based Compensation Costs-Transition and Disclosure.” FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation”, and provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based compensation. It also requires additional disclosures about the effects on reported net income of an entity’s accounting policy with respect to stock-based employee compensation. We account for stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and have adopted the disclosure-only alternative of FAS 123. We adopted the disclosure provisions of FAS 148 in December 2002.

The following table illustrates the effect on our net income (loss) and net income (loss) per share if we would have applied the fair value recognition provisions of FAS 123 to stock-based employee compensation:

The weighted average fair value of options granted during the first quarter 2003 and the first quarter 2002 was $3.37 and $8.51, respectively. Such fair values of each option grant were estimated on the date of grant using the multiple options method of the Black-Scholes pricing model with the following weighted-average assumptions used for grants made in first quarter 2003 and first quarter 2002: risk-free interest rates are 3.25% in 2003 and 4.19% in 2002; expected volatility is 100% in 2003 and 2002; expected lives in 2003 and 2002 are 12 to 18 months beyond each incremental vesting period (total life of 2 to 5.5 years, depending on each grant’s individual vesting schedule). No dividends are assumed for any plan in any year.

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The fair value of the stock purchases made under the employee stock purchase program was determined using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate is 3.25%; expected volatility is 100%; expected life is 6 months. No dividends are assumed.

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any controlling financial interest in any variable interest entities as of March 31, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

2.    OTHER INTANGIBLE ASSETS

Other intangible assets include acquired technology with an estimated useful life of 6 years, customer lists with estimated useful lives of 3.5 to 5 years, customer contracts with estimated useful lives of 5 to 7 years and non-compete agreements purchased in connection with the acquisitions of businesses with estimated useful lives of 3 years. These intangible assets continue to be amortized on a straight-line basis over their useful lives.

As of March 31, 2003, other intangible assets consisted of the following (in thousands):

The estimated future amortization expense of other intangible assets as of March 31, 2003 is as follows (in thousands):

3.    RESTRUCTURING EXPENSES

During the fourth quarter of 2001, under the leadership of our new management, we restructured our operations, which included the realignment and certain eliminations of our products and services, the elimination of full-time positions and the consolidation of our use of real estate. As a result, we recorded restructuring expenses of $12.0 million during the quarter ended December 31, 2001, comprised of severance of $2.0 million for 69 involuntary terminations throughout QRS and facilities closure expense of $10.0 million.

Restructuring liability activity from December 31, 2002 to March 31, 2003 was as follows (in thousands):

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The employee severance of $0.2 million includes severance benefits and outplacement services. We expect to settle the severance liability of $0.2 million (included in accrued compensation) in full by the second quarter of 2003. The outstanding liability related to facilities closure totaled $8.4 million at March 31, 2003, of which we expect to pay $4.0 million during the next 12 months and we expect to pay $4.4 million from April 1, 2004 through September 30, 2011.

4.    EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated by dividing net earnings (loss) for the period by the weighted average number of common shares outstanding for that period. Diluted earnings (loss) per share takes into account the effect of potentially dilutive instruments, such as stock options, warrants and restricted common stock, and uses the average share price under the treasury stock method for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.

The following is a summary of the calculation of the number of shares used in calculating basic and diluted earnings (loss) per share:

For the three month period ended March 31, 2002, 239,884 in-the-money and potentially dilutive shares were excluded from the above calculation of diluted loss per share because the effect would have been anti-dilutive on the loss per share calculation.

Additionally, out-of-the-money but potentially dilutive shares for the three month periods ended March 31, 2003 and 2002 of 3,252,525 and 3,309,499 have been excluded because their inclusion in the calculation would have been anti-dilutive.

5.    INCOME TAXES

We recorded no income tax for the three months ended March 31, 2003 and a $1.0 million income tax benefit for the three months ended March 31, 2002. No income tax was recorded for the three months ended March 31, 2003 due to the valuation allowance placed against the deferred tax assets. The recorded tax benefit for the three months ended March 31, 2002 reflects a one-time tax refund, which resulted from new tax law changes that extended the net tax operating loss carryback period from two to five years and eliminated the limitation on utilization of net operating losses against alternative minimum taxable income.

6.    COMMON STOCK, RESTRICTED COMMON STOCK AND STOCK OPTIONS

At March 31, 2003, there were 16,032,353 shares of our common stock issued of which 15,801,253 were outstanding.

Restricted Stock

On December 19, 2000, our Compensation Committee approved the implementation of a restricted share award program pursuant to the stock issuance provisions of the 1993 Stock Option/Stock Issuance Plan (the “1993 Plan”). Under the terms of the program, each officer (from Vice President level and above) was given the opportunity to surrender his or her outstanding options under the 1993 Plan with an exercise price of $15.00 or more per share in return for a restricted share award at an exchange ratio of three option shares surrendered for every one share of common stock awarded under the restricted share program. When the restricted share awards were made under the program on January 3, 2001 (“2001 Program”), the fair market value of our common stock was $13.69 per share. The executive officers surrendered options covering a total of 875,126 shares of our common stock with a weighted average exercise price of $41.88 per share in return for an aggregate of 286,875 shares of our common stock subject to vesting. The restricted shares subject to each such award have been and will be issued in a series of six successive equal semi-annual installments on the individuals’ completion of each successful six months of continued employment with us. The shares are fully vested on their issuance, and at March 31, 2003, we had issued 165,758 shares of our common stock under the program.

The fair value of the 286,875 shares awarded was $3.9 million based on the market price of our common stock, which was $13.69

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per share at January 3, 2001, and has been included in the financial statements as deferred compensation, and is being amortized ratably over the remaining vesting period.

The following table shows the activity under the 2001 Program:

On March 18, 2003, we granted 40,000 restricted share rights to two executives under the provisions of the 1993 Plan. One executive was granted 25,000 restricted share rights, all of which will vest on January 1, 2006 and become issuable as long as the executive remains employed by us through that date. The other executive was granted 15,000 restricted share rights, all of which will vest on March 18, 2006 and become issuable, as long as the executive remains employed by us through that date.

The fair value of the 40,000 restricted share rights granted was $0.2 million based on the market price of our common stock, which was $5.25 per share at March 18, 2003, and has been included in the financial statements as deferred compensation, and is being amortized ratably over the remaining vesting period.

Restricted stock-based compensation expense recognized during the three months ended March 31, 2003 and 2002 was $0.02 million and $0.3 million, respectively.

Stock Option Plans

The following table shows the activity under our stock options plans:

7.    COMMITMENTS AND CONTINGENCIES

We use the IBM Value Added Network (VAN) as the network platform over which we provide customers with some of our QRS Exchange^™ products and services, such as Data Exchange, QRS Web Forms^™ and QRS Managed EC^™. We depend on the IBM VAN for a substantial part of our revenues.

In July 2002, we entered into a new three-year agreement with IBM effective July 1, 2002 and ending June 30, 2005. The new agreement replaces and supersedes a previous agreement with IBM that would have expired on December 31, 2002. Pursuant to the new IBM contract, we pay fees to IBM based on the amount of our use of its network and other specified services subject to minimum payments set forth in the agreement, which we have met to date. We also have agreed to order a specified minimum amount of the IBM Business

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Exchange Services—Internet Transfer (BES-IT) service, formerly Internet Data and Document Exchange (IDDX), in 2003. The new agreement continues to allow us to purchase additional services beyond VAN and the BES-IT services at a discounted rate, with no volume commitments or penalties.

In connection with the merger agreement relating to our acquisition of Image Info, we paid to the former shareholders of Image Info a deferred acquisition payment of $2.5 million in 2001. We also would have been required to pay the former shareholders of Image Info an additional $2.5 million in 2002 if revenue attributable to the acquired business met the minimum amount described in the merger agreement for 2001. We have determined that the revenue attributable to the acquired business did not reach the minimum amount required for 2001. On October 8, 2002, one of the former shareholders of Image Info Inc., purporting to act on behalf of the former shareholders of Image Info, Inc., filed a lawsuit against the Company and WS Acquisition Corp., one of our wholly owned subsidiaries (which was renamed Image Info Inc.), purporting to act on behalf of himself and the other former Image Info, Inc. shareholders claiming we are nonetheless obligated to make the second payment. The Company believes that the lawsuit is without merit and intends to vigorously defend the action. The deferred acquisition payment has already been accounted for in the acquisition cost for the original transaction.

In August 2001, we entered into an alliance agreement with MAGIC International, a subsidiary of Advanstar, Inc. (“Advanstar”) to market our QRS Showroom^™ product. The expense to be recorded under this agreement for the remainder of 2003 is $0.2 million.

We have established three irrevocable letters of credit with Wells Fargo Bank, N.A. as security for real property leases in the amounts of $0.6 million, $0.4 million and $0.2 million. These letters of credit remained outstanding as of March 31, 2003 and are collateralized by three certificates of deposit, which have been included in Other Assets in the Condensed Consolidated Balance Sheets.

We have made guarantees and indemnities, under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. In connection with some of our facility leases, we have indemnified the lessors for certain claims that could arise from the facility or the lease. Pursuant to our Bylaws and indemnification agreements with each of our directors and executive officers, we are obligated to indemnify each of them against expenses and losses incurred for claims brought against them by reason of being a director or executive officer the Company. The majority of guarantees and indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these guarantees and indemnities in the accompanying Condensed Consolidated Balance Sheets.

Under the terms of our Enterprise Software Applications license agreements with our customers, we typically agree that in the event the software sold infringes upon any patent, copyright, trademark or any other proprietary right of a third party, we will indemnify our customer and licensees against any loss, expense or liability from any damages that may be awarded against its customer. We include this infringement indemnification in all of our software license agreements. In the event our customer cannot use the software or service due to infringement and we can not obtain the right to use, replace or modify the license in a commercially feasible manner so that it no longer infringes, we may terminate the license and provide our customer a pro-rata refund of the fees paid by our customer for the infringing license or service. The licensing agreements typically do not stipulate a maximum liability that can be incurred under the indemnification. As this indemnification is related to the performance of the software and we are not aware of any pending or threatened infringement actions that are probable losses, no liability associated with this indemnification has been recorded.

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

GENERAL

The following information should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Item 1 of this quarterly report on Form 10-Q and the Consolidated Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K as filed with the Securities and Exchange Commission on March 28, 2003.

The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements in this report are based on information available to us as of the date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ significantly from the results discussed in the forward-looking statements as a result of a number of factors and risks discussed in “Risks and Uncertainties Relating to Our Business” below and elsewhere in this report, and in our other filings with the Securities and Exchange Commission.

QRS Corporation provides collaborative commerce solutions for the global retail trading community. Our products and services help thousands of retailers, manufacturers, suppliers, vendors, wholesalers and distributors from a variety of retail segments to connect electronically, transact business, collaborate on processes and decisions, and differentiate their brands in the global marketplace. Our solutions help our customers:

We market our products and services in three Solutions Groups: Software Applications, Trading Community Management and Global Services. The following chart shows our current product set within each Solutions Group:

Our Software Applications automate and help optimize business processes between companies. Specifically, they support the following business functions: product data synchronization; collaborative product planning, design, production and shipment; online merchandising, promotions and sales; and supply chain exception management. Our Software Applications include both Enterprise Software Applications installed on customers’ computer systems and hosted applications installed on our computer systems.

Our Trading Community Management solutions allow retailers, vendors and their trading partners to exchange electronic business documents, such as purchase orders, invoices and advance ship notices. These electronic transactions are conducted over a value added network (VAN) or over the Internet. Our Trading Community Management solutions can reduce costs related to paper transactions, mail delays and manual data input errors for our customers. The communication of these electronic business documents is typically integrated with the accounting and inventory systems of our customers and their trading partners.

Our Global Services include the collection, analysis and delivery of information, such as store-level pricing data and metrics, for use in our customers’ individual strategic and tactical decisions; software implementation and integration services; retail solutions consulting; and technical support and training services for our various solutions.

In 2002, we focused on the first phase of our long-term strategy to become the market leader in collaborative commerce solutions for the global retail trading community. During 2002, we returned the Company to profitability and significantly improved our operational and financial performance. We strengthened the Company’s governance and leadership by increasing the independence of our board of directors and brought on seasoned directors with retail and finance experience in 2002 and early 2003. We hired a new management team made up of leaders with broad technology, industry and functional experience. We rationalized our product set and established strategic alliances that will help us provide even greater value to our more than 8,000 customers. We also strengthened our existing customer relationships and added leading retail industry names to our strong customer list.

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We plan to complete our work in this first phase of our long-term strategy by stabilizing our revenue, which we expect to accomplish by mid-2003. With the foundation of profitability in place, we have begun to enter the second phase of our long-term strategy that is focused on growth. Our growth strategy is three-fold: 1) deepen our relationships within our traditional customer base, 2) expand our presence in new retail segments, in Europe and with additional trading partners, and 3) introduce new solutions that deliver value to our customers by helping them better differentiate their companies in the marketplace.

Deepening Our Relationships Within Our Traditional Customer Base

Our products and services address real business issues with solutions that quickly deliver benefits to our customers. In the current challenging external environment, this is especially important. During the first quarter of 2003, we continued to win business with our existing customers, including many leading retail companies in our traditional base of general merchandise and apparel customers. During the quarter, we also strengthened our sales organization with a team of experienced software application specialists who will work with our existing account teams to sell more of our applications to our existing customer base.

We believe we can continue to grow our business with existing customers by helping them automate more transactions with their trading partners. To this end, we will continue to augment our existing solutions with support for evolving industry standards. Today, we support a breadth of offerings including data exchange for EDI and eXtensible Markup Language (XML), over both value added networks (VANs) and the Internet.

Expanding Our Presence In New Retail Segments, in Europe And With Additional Trading Partners

Our second area of focus is to expand our trading community. During the first quarter, we continued to win business in retail segments beyond general merchandise and apparel, including consumer packaged goods, health and beauty, sporting goods and grocery companies. To aid our expansion in new retail segments, we actively participate in and support industry initiatives and standards. To this end, we formed an alliance with UCCnet in the fourth quarter 2002 through which QRS Catalogue^™ will be a preferred partner to the UCCnet GLOBALregistry.

We continue to invest in our European sales and operations to increase our share of the supply chain technology market in the region. We believe that the U.K., France and Germany markets are ready to begin adopting comprehensive data synchronization solutions. Retail companies in this region are recognizing that inaccurate product information within their supply chain applications can negatively impact retail sales. European standards are being developed, facilitating inter-company and international communication. We also anticipate demand for supply chain visibility and proactive error detection and resolution solutions in the region. In the first quarter, we announced an agreement with Influe, a Paris-based e-commerce products and services company with strong multi-lingual capabilities. Influe will provide a web-based, language-specific interface to help customers upload their product information to the QRS Catalogue^™, and Influe has agreed to co-sell QRS Catalogue^™ to its current base of customers. Early in the second quarter 2003, Woolworth Germany, a mid-market variety store group, signed an agreement with us to license QRS Sourcing^™ to manage and track products from concept creation to final delivery. We may pursue additional strategic relationships to help advance our efforts in the European market while leveraging our experience in North American general merchandise and apparel.

We have historically focused primarily on supporting the trading relationships between vendors and retailers. Under our current sales model, we will also look for opportunities to expand our footprint in the communities of tens of thousands of service providers and upstream manufacturers, suppliers and distributors serving our existing customer base.

Introducing New Solutions That Deliver Value To Our Customers

We believe that we are well positioned to leverage and augment our current strength of helping companies connect, transact and collaborate, and ultimately differentiate themselves. Our product strategy includes introducing new product or service offerings that will help our customers continue to work together and collaborate so that they can improve the performance of their supply chains. To that end, in the first quarter, we introduced an exception management application, QRS Insight, to help our customers obtain greater visibility into ordering, planning and payment processes. Also during the first quarter, we released a new version of QRS Web Forms^™ which enables consolidated invoicing, meeting a key need expressed by vendors. This release and our sales efforts will help us reach deeper in our existing trading communities and attract additional vendor and manufacturing customers. In addition to the new QRS Web Forms^™ release, our development team released enhancements to QRS Sourcing^™ in the first quarter.

Many of our customers have expressed a need to further manage product information within their supply chain to, among other things, meet Wal-Mart’s requirements, bring products to market more quickly and more tightly manage trade promotions. We believe that product information management, a market that includes QRS Catalogue^™, is undergoing transformation and growth. We plan to

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enhance QRS Catalogue^™ and introduce other value-added applications to try to exploit this transformation and growth. Historically, we have primarily delivered our transaction-centric solutions through a combination of VAN and Internet-based connectivity, combined with product information transactions using the QRS Catalogue^™.

Our customers have requested that we enhance our current services with additional intelligent transaction management, data transformation and inter-enterprise business process capabilities. Our internal development team is designing and building an innovative, scalable, component-based, multi-tier platform that will interface with the latest technologies to meet these customer needs. Our market analysis suggests that existing customers would be willing to pay us more for these additional services than they pay us for our existing services. With our technology development investment, we believe we will be able to more quickly develop and deploy targeted collaborative applications that address our customers’ specific business problems.

We continue to actively evaluate potential partners for solutions that complement our existing offering, have applicability to the retail market and meet our technology criteria. We are assessing products that we can quickly bring to market either through a co-sell, OEM or other partnering relationship. We are also evaluating opportunities to accelerate development of our new technology platform, including through alliances, licensing and strategic acquisitions.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are as follows:

Revenue recognition

For all of our revenues, we use our judgment to determine whether:

Depending on the facts and circumstances of revenue contracts and customer credit-worthiness, both the timing and the amount of revenue to be recognized can be affected by our judgments.

We derive our revenue from three principal sources:

1)    Software Applications: Software Applications revenues represented 26% of our revenues in the first three months of 2003. Revenues consist primarily of fees charged for QRS Catalogue^™, a hosted application.

Revenues for QRS Catalogue^™ are recognized in the month that the services are performed based on fixed or determinable prices identified in a standard license agreement. We assess collectibility based on a number of factors, including past transaction history and credit worthiness.

Revenues for Enterprise Software Applications are recognized in accordance with Statement of Position (SOP) 97-2. When services are an integral element of the contract, we recognize the software license fees over the service period as the services are provided. When the professional services are deemed to result in significant production, customization or modification of the software, both license and services revenue are recognized using contract accounting, primarily the percentage-of-completion method.

When the percentage of completion method is employed, labor hours incurred is generally used as the measure of progress towards completion. Revenue for these arrangements is classified as license revenue and services revenue based on our estimates of fair value for each element. A provision for estimated losses on engagements is made in the period in which the loss becomes probable and can be reasonably estimated.

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From time to time, customers may request that we amend certain terms of our standard agreement or negotiate a software license contract separate from our standard software license agreement.

In certain instances, we have deferred recognition of revenue from our Enterprise Software Applications after entering into a license agreement when factors such as the following exist:

Our contracts may contain multiple elements including non-essential services, training, consulting or customer support services. In cases where vendor-specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the residual method prescribed by SOP 98-9. This means that we defer revenue equivalent to the fair value of the undelivered elements until the element is delivered to the customer. Fair values for the ongoing support obligations are based on separate sales of support renewals sold to customers or on renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based on the value of stand-alone sales of these services to customers. To the extent that we do not have vendor-specific evidence for undelivered contract elements, revenue is deferred until the undelivered elements are delivered to the customer.

We assess collectibility based on a number of factors, including past transaction history and credit worthiness. We generally do not require collateral from our customers and our bad debt experience has not been significant in relation to our overall revenues. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally on receipt of cash.

If an arrangement includes an acceptance provision, acceptance occurs on the earlier of receipt of a written customer acceptance or expiration of the acceptance period and revenue is not recognized until the time of acceptance.

2)    Trading Community Management: Trading Community Management revenues represented 54% of our revenues in the first three months of 2003. Revenues consist primarily of fees charged for the transmission of standard business documents measured in kilocharacters (KCs) over the IBM VAN, monthly fees for leased line connections and service fees to convert documents from paper into electronic format. Revenues are recognized in the month that the services are performed.

Based on the type of service provided, the evidence of arrangement for these services varies between a service order and a standard written contract. All of these arrangements contain fixed or determinable prices for volumes or types of services. We rely on IBM to provide information to us about the volumes of KCs delivered to our customers.

We assess collectibility based on a number of factors, including past transaction history and credit worthiness. Based on our historical experience, a small portion of our customers requests credits for service or billing related issues. We examine each request and when the claim is bona fide, we adjust the customer’s account. As a result, we provide a reserve against revenues for customer credits related to service or billing issues. The reserve is based on current period actual experience and our estimate of future customer credits based on the prior six months actual experience.

3)    Global Services: Global Services revenues represented 20% of our revenues in the first three months of 2003. Global Services revenues consist of QRS Retail Intelligence Services^SM, QRS Professional Services^SM and software application customer support and maintenance.

Fees for QRS Retail Intelligence Services^SM and QRS Professional Services^SM are recognized as the related services are performed. Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year.

Based on the type of service provided, the evidence of arrangement for these services varies between a service order and a standard written contract. All of these arrangements contain fixed or determinable prices for each type of service. We assess collectibility based on a number of factors, including past transaction history and credit worthiness.

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Service and product development costs, identifiable intangible assets and goodwill

We account for costs incurred to develop our computer software for internal use in accordance with AICPA SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” As required by SOP 98-1, we capitalize the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Capitalized development costs are amortized over various periods up to three years. Costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors including, but not limited to, technological and economic feasibility and estimated economic life. For the quarters ended March 31, 2003 and March 31, 2002, we capitalized service and product development costs of $1.5 million and $0.2 million, respectively, bringing the total net capitalized service and product development costs balance to $3.5 million as of March 31, 2003.

We assess the impairment of identifiable intangible and long-lived assets (including service and product development costs) whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:

In performing our review for recoverability of identifiable intangible and long-lived assets, we estimate the future cash flows expected to result from the use and eventual disposition of those assets. When we estimate the future cash flows from those assets, we use our judgment to determine the assumptions underlying the estimates. To determine revenue estimates, we assess the future market potential for our products and our expected product market share. Additionally, we make judgments about our future operating costs, interest rates and our cost of capital as well as the economic life of the assets. Our judgments are based on the Company’s experience as well as consultation with external advisors. If the actual results differ from those estimates, the carrying amount of certain assets may not be recoverable. Net intangible assets, goodwill and capitalized service and product development costs amounted to $13.6 million as of March 31, 2003.

Additionally, at least once per year we perform a review of the potential impairment of goodwill. In performing our review of the recoverability of goodwill, we compare the net book value of the Company to its market capitalization after considering any impairment to identifiable intangibles and long-lived assets. Goodwill amounted to $1.1 million as of March 31, 2003.

Use of estimates

The preparation of our financial statements in conformity with generally accepted accounting principles necessarily requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Areas where management makes estimates and assumptions include, but are not limited to, allowance for doubtful accounts, sublease loss reserve, valuation allowance for deferred taxes, long-lived and intangible asset lives, and the establishment of accrued liabilities. Actual results could differ from these estimates.

We must make estimates as to the overall collectibility of accounts receivable and provide an allowance for amounts deemed to be uncollectible. We analyze accounts receivable balances, historical bad debt trends, current economic conditions, and specific customer experience when evaluating the adequacy of the allowance for doubtful accounts. At March 31, 2003 and December 31, 2002, our allowance for doubtful accounts balance was $1.5 million and $1.6 million, respectively.

The calculation of the estimated sublease loss reserve for vacated facilities requires that we make estimates of potential future sublease income. We analyze current market conditions for real estate with the assistance of reputable commercial real estate brokers. However, future actual sublease income may materially differ from estimated amounts as a result of the timing of obtaining a sublease tenant and the amount of the sublease income. Currently, we have one vacated facility that is not yet subleased. We expect to sublease

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this facility by January 2004. For each month beyond January 2004 during which the property is not subleased, the Company would incur an additional $0.1 million of expense. The current estimated sublease income is approximately 63% of the lease rate. If this facility were to be subleased at 50% of the leased rate, we would incur an additional $0.2 million in expense annually over the life of the lease.

Our current estimated range of liability related to pending litigation and asserted claims is based on claims for which we can estimate the amount or range of loss. We analyze the merits of claims and obtain assistance from outside counsel in order to arrive at our estimates. We have recorded the probable settlement amount and associated legal fees related to those claims, and where there is a range of loss and no amount in the range is any more probable than another, we record the low end of the range as our estimate of the probable outcome.

Income taxes

We account for income taxes using the asset and liability method under SFAS No. 109, “Accounting for Income Taxes.” This involves estimating current tax expense and temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. To the extent that recovery is not more likely than not, we establish a valuation allowance. We use our judgment to determine the amount of the income tax provision and any valuation allowance to be recorded against the deferred tax assets.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146 (FAS 146), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the measurement, timing of recognition and reporting of costs associated with exit or disposal activities and restructuring activities. FAS 146 requires that a liability for costs associated with exit or restructuring activities be recognized only when the liability is incurred and not at the time that a company formally approves and commits to an exit plan as set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the Statement had no material effect on our financial position or results of operations. There were no such exit or disposal activities initiated during the three month period ended March 31, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet on issuance of a guarantee or indemnification. In addition, FIN 45 requires disclosures about the guarantees or indemnification that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions and recognition provisions of FIN 45 at December 31, 2002 and January 1, 2003, respectively. The adoption of the recognition and measurement provisions of FIN 45 had no material effect on our financial position or results of operations.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company has not yet determined the impact of adopting EITF No. 00-21 on its Consolidated Financial Statements.

In December 2002, the FASB issued SFAS No. 148 (FAS 148), “Accounting for Stock-Based Compensation Costs-Transition and Disclosure.” This statement amends SFAS No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” and provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based compensation. It also requires additional disclosures about the effects on reported net income of an entity’s accounting policy with respect to stock-based employee compensation. We account for stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and have adopted the disclosure-only alternative of FAS 123. We adopted the disclosure provisions of FAS 148 in December 2002 (See Note 1 to the Condensed Consolidated Financial Statements).

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to

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variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any controlling financial interest in any variable interest entities as of March 31, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

Employee Headcount

The following table sets forth the employee headcount information at March 31, 2003 and 2002:

The increase in total full-time headcount reflects our technology investment in our collaborative commerce platform and value-added applications and the transition of certain previously outsourced general and administrative functions in-house. During October 2002, we outsourced essentially all of our QRS Retail Intelligence Services^SM part-time workforce to a third-party provider.

Revenues and Cost of Revenues

The following table sets forth the revenues, cost of revenues, gross profit and gross margins for our three Solutions Groups for the three months ended March 31, 2003 and 2002 (amounts in thousands):