QUICKRESPONSE SERVICES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-21958

QUICKRESPONSE SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 68-0102251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)

1400 MARINA WAY SOUTH, RICHMOND, CALIFORNIA 94804
(Address of principal executive offices, including zip code)

(510) 215-5000
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
(Title of Class)

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 18, 1998 was approximately $344,166,000 (based upon
the closing price for shares of the Registrant's common stock as reported by the
Nasdaq National Market). Shares of common stock held by each officer, director
and holder of 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

Number of shares of common stock outstanding as of February 18, 1998: 8,537,991.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the following documents are incorporated by reference
into this Report on Form 10-K where indicated:

1. QuickResponse Services, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held on or about May 5, 1998, Part III.

The exhibit index appears on Pages 45-47.

QUICKRESPONSE SERVICES, INC.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

ITEM 1 Business 3

ITEM 2 Facilities 14

ITEM 3 Legal Proceedings 14

ITEM 4 Submission of Matters to a Vote of Security Holders 14

PART II

ITEM 5 Market for Registrant's Common Equity
and Related Stockholder Matters 15

ITEM 6 Selected Financial Data 16

ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17

ITEM 8 Financial Statements 21

ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37

PART III

ITEM 10 Directors and Executive Officers of the Registrant 38

ITEM 11 Executive Compensation 40

ITEM 12 Security Ownership of Certain Beneficial Owners and
Management 40

ITEM 13 Certain Relationships and Related Transactions 40

PART IV

ITEM 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 41

SIGNATURES 44

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PART I
ITEM 1. BUSINESS

EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS
MANAGEMENT. THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS--RISK FACTORS" AND
ELSEWHERE HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE
COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.

QuickResponse Services, Inc. (the "Company" or "QRS") is a leading provider of
electronic commerce merchandising and logistics solutions that optimize its
customers' performance throughout the retail demand chain. The Company's
products and services are organized in five product families: Catalog Services,
Network Services, Inventory Management Services, Logistics Management Services
and Professional Services. The Company provides its retailer, vendor and carrier
customers with a single source for implementing demand chain management
solutions.

The Company's primary products, described more completely in "Business--QRS
Services," are as follows:

- - QRS Catalog Services includes QRS KEYSTONE, a comprehensive product
information database. QRS KEYSTONE was the first independent product
information database using the industry standard Universal Product Code
("U.P.C.") numbering system. It is a central repository of timely,
complete, and accurate vendor product information. Retailers and vendors
access QRS KEYSTONE and electronically exchange industry standard business
documents using QRS CONCOURSE.

- - QRS Network Services includes QRS CONCOURSE and QRS ALLIANCE. QRS CONCOURSE
is a connection that provides two-way electronic transmission of business
data while its partner service, QRS ALLIANCE, allows any size manufacturer,
retailer or vendor to communicate with its partners electronically.

- - QRS Inventory Management Services ("IMS") includes QRS CATALYST, QRS
MARINER and QRS HORIZON. They work together as network-centric applications
to eliminate the costly capital and operating investment of sales analysis,
replenishment and forecasting solutions located at the vendor or retailer
site. QRS CATALYST is a management tool that transforms sales into
actionable information. It enables users to track which products are
selling by U.P.C. and store location to aid in buying and manufacturing
decisions. QRS MARINER is an effectively managed tool for increasing sales
velocity. It is a customized solution for retailers and vendors that
utilizes a series of models and daily sales information in which to run
analyses. The system determines recommended order quantity and
electronically communicates and tracks the flow of reordered items to
ensure timely delivery. QRS HORIZON is a tool to project consumer demand.

- - QRS Logistics Management Services ("LMS") provides logistics information to
improve merchandise movement and inventory management. QRS LMS allows
retailers and vendors to tender and track motor freight shipments to
carriers, using QRS CONCOURSE, and provide delivery performance reporting.
QRS LMS represents a single source of information that provides trading
partners with the data necessary to evaluate carrier performance and
efficiency.

- - QRS Professional Services, formed in 1997, provides education and
consulting services using strategic tools and industry expertise.

The Company's business is subject to various risks and uncertainties that are
described herein under "Risk Factors."

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The Company was incorporated in California in 1985 and reincorporated into
Delaware in October 1997. On October 14, 1997, QRS created a wholly owned
Canadian sales subsidiary, QRS Canada, Inc. Except as otherwise noted, all
references to the Company and QRS refer to the Company and its Canadian
subsidiary.

At December 31, 1997, QRS had 216 employees. The Company's principal executive
offices are located at 1400 Marina Way South, Richmond, California 94804, and
its telephone number is 510-215-5000.

INDUSTRY BACKGROUND

The United States general merchandise retail industry accounts for revenues in
excess of $1.5 trillion, with approximately 1,000 retailers recording sales in
excess of $80 million. As competitive pressures within the industry have
intensified, retailers have focused increasingly upon the importance of
efficient demand chain management to improve their financial performance.
Failure to manage merchandise to meet customer demand results in lost sales.
Kurt Salmon Associates ("KSA"), a global management consulting firm specializing
in the retail industry, in a 1997 study estimated that in the soft goods
industry alone, inefficiencies such as inadequate information, excess
inventories and slow communications between vendors and retailers result in over
$25 billion in lost revenues each year. In addition, KSA estimated that an
opportunity currently exists for $102 billion in annual savings across all
consumer durables. Demand chain management is a complex problem. For example,
the average department store carries more than one million stockkeeping units
("SKUs") at a time--some carry as many as five million--each unique in terms of
product style, size and color. Each retailer's SKUs are produced by hundreds, or
in some cases thousands, of vendors. These vendors are required to manage rapid
production and accurate delivery of ordered merchandise to multiple retail
locations. To address these issues, retailers and vendors have in recent years
sought to develop strategies for optimizing selection, availability and flow of
information and merchandise while minimizing absolute inventory levels. QRS'
network-centric applications align closely with its customers' needs in
providing solutions to improve the efficiencies throughout the retail demand
chain.

Technology has made significant contributions to the evolution of merchandise
management. The replacement of cash registers with point of sale terminals
during the 1980s made possible automatic price look-up and merchandise tracking.
These capabilities, and the rapid spread of bar coding, soon led to the retail
industry's adoption of a standardized product identification, numbering and
communication format. Known as the universal product code, or U.P.C., this
standard has greatly increased the efficiency with which retailers and vendors
can mark, track and exchange product information.

During the same period, advances in data communications and the availability of
public data networks fostered the use of computers for the electronic
transmission of transaction documents, including purchase orders, invoices and
shipping instructions. Such paperless transactions are widely referred to as
electronic data interchange, or EDI. In conjunction with the broad use of
standard U.P.C.-based data, EDI has benefited retailers by lowering costs,
reducing errors and improving the timeliness of the merchandise ordering
process.

Despite the benefits of EDI, retailers have continued to rely on paper U.P.C.
catalogs or magnetic tapes published by each vendor as their primary source of
product information. Although updated frequently, such information quickly
becomes outdated and as a result these catalogs and tapes cannot provide the
real-time information necessary for quick response merchandise management. In
order to efficiently implement merchandise management, retailers and vendors
need an independent, reliable, centralized database containing U.P.C. product
information accessible through a reliable and secure data network.

QRS SERVICES

In order to improve the flow of information, goods and services throughout the
retail demand chain, the Company offers a range of services, including QRS
KEYSTONE (catalog services), QRS CONCOURSE and QRS ALLIANCE (network services),
QRS CATALYST (sales analysis), QRS MARINER (replenishment), QRS HORIZON,
(forecasting), QRS LMS (logistics management services), and QRS Professional
Services (implementation, training and support). These

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services may be implemented incrementally, allowing customers to integrate
functions over time within their organizations and with their trading partners.

QRS CATALOG SERVICES. QRS KEYSTONE, formerly known as The QRS Catalog, is the
retail industry's largest U.P.C. database. As of December 31, 1997, it contained
over 57 million U.P.C. entries and supported a vendor customer base of nearly
5,600 companies. QRS KEYSTONE classifies a vendor's merchandise entries by name,
merchandise classification, style number and U.P.C., as well as by size, color
and other relevant characteristics. The U.P.C. classification system underlies
all subsequent transaction processing. When loaded into the database, the data
is screened for accuracy and completeness by the Company's software and is
further reviewed by a Company customer support representative. Vendor
information is protected and is available only to trading partners approved by
the vendor.

Pricing of QRS KEYSTONE is based upon the formation of trading partnerships
between vendors and retailers. Each time a retailer accesses a vendor's data in
QRS KEYSTONE, a trading partnership is formed and a specific fee is charged for
that month. In addition to the trading partnership charges, a usage fee is
charged based on the actual number of records the retailer retrieves from QRS
KEYSTONE.

There are four methods to access the catalog database: QRS KEYSTONE Genesis, the
original mainframe interface that was developed in 1988; QRS KEYSTONE for
Windows, developed in 1996, which provides additional ordering information
through the enhancement of extended data elements as well as providing new
filtering techniques; QRS KEYSTONE Realtime, which is a proprietary
computer-to-computer communication interface system providing retailers with a
method of data retrieval from QRS KEYSTONE via their own host; and QRS KEYSTONE
Web, developed late in 1997, which is an Internet-based interface for vendors
with under 100 U.P.C. codes.

QRS NETWORK SERVICES. QRS Network Services consists of QRS CONCOURSE and QRS
ALLIANCE. QRS CONCOURSE is a portfolio of services offering one of the
industry's most secure, reliable and cost effective connectivity packages. It is
designed to remove from customers the distracting demands of providing wide area
network connectivity, allowing customers to focus on their core competencies.

QRS ALLIANCE is a family of electronic commerce enablement tools offering a
complete spectrum of solutions for trading partners of all sizes. QRS
ALLIANCE provides services that allow retailers to achieve 100% electronic
data interchange with all of their trading partners. Products such as QRS
ECONNECT, an easy-to-use, Windows-based software package that gets smaller
partners up and running quickly, and EDI to Fax, the simple solution in which
the retailer sends QRS an EDI document that is then translated and faxed to
the small trading partner, make QRS ALLIANCE a complete electronic commerce
enablement solution. In 1997, QRS began developing the next generation of QRS
ECONNECT, a product known as QRS QUICKSTEP. QRS QUICKSTEP will create secure,
encrypted EDI over the Internet for the smaller partners of retailers.

Within QRS Network Services, QRS Internet Services enables organizations to
benefit from a connected world with Internet access, content hosting, web
security, web development and Internet security services.

The Company provides its value-added services in a network-centric model. The
Company's applications for QRS Catalog Services, QRS Inventory Management
Services and QRS Logistics Management Services reside within the Company's data
operations environment and are accessible primarily through the network of
International Business Machines Corporation ("IBM"), which is a Value-Added
Network.

QRS IMS. QRS IMS, formerly known as Collaborative Replenishment Services, or
CRS, is a network-centric suite of applications that includes QRS CATALYST
(sales analysis), QRS MARINER (replenishment), and QRS HORIZON (a forecasting
tool). Based on individual manufacturer and retailer needs, QRS IMS is intended
to increase both retailers' and manufacturers' sales by having the right
merchandise at the right place at the right time.

QRS CATALYST provides tools for the retailer and vendor to enhance inventory
management. With QRS CATALYST, both retailers and their vendors can view daily
sales in an easy-to-use Windows environment. The information is

5

available by product, size, color and specific store location. This information
provides immediate data on which products are doing well and which should be
discontinued.

While customers have a choice of implementing third-party or in-house
replenishment services, QRS believes QRS MARINER is superior to those because it
permits replenishment models to be run daily, by U.P.C. and by store location.
This provides optimum merchandise management at the SKU level on a daily basis.
Most in-house and third-party applications are run monthly or bi-monthly and
require large capital and operating cost investments. Because all components of
QRS MARINER are network-centric, the Company believes that capital and operating
costs for both the retailer and the manufacturer will be reduced. For example,
the initial replenishment program, started in 1996, resulted in a 25% increase
in sales with a 30% decrease in inventory for that customer.

QRS HORIZON enables both retailers and their vendors to forecast sales for up to
53 weeks using seasonal and promotional variables. From the simplest statistical
method to sophisticated neural networking technologies, QRS HORIZON supports a
variety of statistical methods, allowing users to facilitate informed buying
and/or production decisions.

QRS LMS. QRS LMS has approximately 350 enabled customers and is a market leader
in providing logistical information and communication services. QRS LMS enables
shippers to tender and track motor freight shipments to carriers via QRS
CONCOURSE, and provides delivery performance reporting. QRS LMS allows the
capture, transmission, storage and management of shipment information. This
provides customers with electronic access to real-time information and allows
both retailers and manufacturers to conduct electronic commerce for tendering,
freight invoicing and other functions, track the current status of in-transit
shipments and notify affected parties of impending service failures.

The proactive notification of potential service failures and easy access to
accurate, timely information helps eliminate the uncertainty surrounding
individual orders or shipments. This leads to a reduction in costs and
order-fulfillment cycles as distribution channels become more efficient.

QRS PROFESSIONAL SERVICES. QRS Professional Services provides a team of
experienced consultants to assist retailers and manufacturers design and execute
an electronic commerce plan using strategic tools and industry expertise.
Through analysis of their businesses, QRS Professional Services can determine
what solutions are needed within an organization and what changes or
enhancements should be made to internal systems and/or processes.

The components of QRS Professional Services include: Strategic Consulting,
Readiness Study, Operational Analysis, Implementation Management and Educational
Programs.

MARKETING, SALES AND CUSTOMER SUPPORT

The Company's marketing strategy is to provide a comprehensive interenterprise
solution for retail demand chain management. The Company's marketing activities
include participation in industry conventions, trade shows and user groups. The
Company's sales and marketing personnel include numerous individuals with prior
retail, replenishment, transportation and EDI experience.

The Company utilizes experienced software development and customer service
personnel to assist customers in implementing and using the Company's catalog
and network services. The Company operates a 24-hour hotline for customers to
call with questions and problems and has a program to regularly contact its
customers by telephone to ensure customer satisfaction, currency of catalog data
and maximization of trading partner opportunities.

The Company provides the capability for any trading partner to trade with any
other trading partner using electronic commerce solutions. Retailers
generally transact business with a number of vendors and vice versa.
Generally, the larger partner, and more advanced user of electronic commerce,
is referred to as the "hub." The Company works with the larger "hubs" to
facilitate and standardize their electronic commerce processes with their
many "spokes," or smaller partners.

6

In addition to its own sales force, the Company also benefits from the marketing
efforts of IBM. IBM, in coordination with the Company, actively promotes the use
of its network services in the retail industry. The Company cooperates with IBM
marketing teams to generate leads and qualify prospects. IBM field sales
personnel currently are compensated for generating EDI revenue for IBM through
customer use of QRS services.

RETAILERS AND VENDOR CUSTOMERS

The Company markets its services to retailers and vendors, primarily in the
United States and Canada. As of December 31, 1997, the Company's Catalog and
Network Services were being utilized by 241 retailers representing most segments
of the retail industry, with an emphasis in apparel and department store
retailers. The Company's customers also included approximately 5,600 general
merchandise vendors, selling a variety of goods ranging from apparel and shoes
to cosmetics to electronics and automotive goods.

The Company's customer base increased 19% from approximately 5,200 customers at
December 31, 1996 to approximately 6,180 customers at December 31, 1997. Its QRS
KEYSTONE customer base increased by 20% from approximately 1,500 at December 31,
1996 to approximately 1,800 at year-end 1997. The number of U.P.C.s active in
QRS KEYSTONE grew 19% from 48 million at December 31, 1996 to 57 million at
December 31, 1997. By December 31, 1997, 126 retailers used QRS KEYSTONE,
including 22 who required their vendors to use QRS KEYSTONE.

The Company provides services and generates revenues by enabling certain hub
customers and their trading partners to conduct business over the Company's
network. Due to the large number of trading partners that transact business with
each other, including one or more hub customers, the difficulty of allocating
trading partner network services to individual hub customers, and the
differences in the manner in which hub customers and trading partners allocate
the cost of network services among each other, the Company cannot precisely
attribute revenues to particular trading relationships. However, in 1997, the
Company refined its estimation techniques and determined that no individual
customer or hub customer trading partnership exceeded 10% of total revenues for
any of the three years in the period ended December 31, 1997.

COMPETITION

The Company believes it provides a competitive advantage through its
interenterprise database, its retail focus, relationships and expertise, its
daily management of inventory at the U.P.C. and store level, and its
network-centric applications, which significantly lower customers' capital
requirements.

The Company competes on the basis of service offerings, availability and quality
of support, implementation services, sales and marketing resources and price.
The Company's competitors include a number of companies providing EDI and
related network services to retailers and vendors. The EDI services business is
highly competitive, and competitive pricing may materially and adversely affect
the prices the Company can charge for its services. Competition may also affect
the Company's ability to attract new customers and retain and expand business
with its existing customers and may impact negatively the range of services
offered to its customers. The Company expects competition to increase as more
companies enter the market and existing competitors continue to change and
expand their product offerings. Several companies, including General Electric
Information Services Company, Sterling Commerce, Inc. and others, offer EDI and
certain other network services, including a U.P.C. catalog. In-house systems and
third-party software providers are the Company's largest competitors relative to
QRS IMS. Competitors for the Company's QRS LMS offerings are primarily other
freight carriers who provide outsourcing to customers.

The Company differentiates itself from its competitors in part by providing the
U.P.C. catalog containing product information from the largest number of
vendors. The Company's business and results of operations could be materially
and adversely affected if other competitors introduce catalogs or if any
competitor provides a catalog that is superior to the Company's catalog. Many of
the Company's existing and potential competitors have

7

financial, marketing or technological resources that exceed those of the
Company, and there can be no assurance that the Company will be able to compete
successfully. Some large retailers and vendors operate private computer networks
for transacting business with their trading partners. It is possible that
additional retailers and vendors, including certain of the Company's existing
customers, may develop and implement similar private networks, thereby reducing
the demand for the Company's services.

IBM RELATIONSHIP

The Company does not operate its own Value-Added Network and has formed a
strategic alliance with IBM to outsource the Company's network operation
requirements.

The Company entered into an agreement with IBM for the purchase of $250
million of network services over a three-year period commencing January 1,
1998. The agreement includes specified annual minimum purchases and a
graduated adjustment charge if total purchases fall below the total minimum
amount. Based on historical and projected usage, management believes that the
Company will be able to meet the purchase requirements under this agreement.

Additionally, the Company and IBM signed a Retail Industry Marketing agreement
under which the Company provides to IBM certain professional services related to
the retail industry.

DATA CENTER

The Company operates its primary data center at its Richmond, California
offices. The data center operates 24 hours a day, seven days a week, and is
connected to the Company's network provider through three leased data circuits
in two routings to ensure availability. The data center consists primarily of
leased mainframe, client/server, disk storage, tape drive and other peripheral
technology to provide on-line, batch and back-up operations. Catalog data is
backed up and shipped off site daily. The Company's facility and data center are
both secured with controlled access doors and the data center is equipped with a
Halon fire protection system, an Uninterrupted Power Supply, and a diesel
generator permitting 24 hours of continuous electrical power. The data center
has a separate, isolated power source from the remainder of the facility. The
Company has contracted for an alternative operations facility in the event of
physical disaster.

PRODUCT DEVELOPMENT

The Company is focused on the development and upgrading of its valued-added
applications (QRS Catalog Services, QRS IMS and QRS LMS) and its network
services technology and architecture. The Company is not involved with the
development, maintenance and operation of the IBM Value-Added Network used to
run network applications used by the Company and many of its customers.

In 1997, 1996, and 1995, the Company expensed $4,365,000, $3,127,000, and
$2,023,000, respectively, of product development costs and capitalized
$1,114,000, $245,000, and $252,000, respectively, related to the development and
enhancement of the Catalog Services interface, an Internet-based EDI product
(QRS QUICKSTEP), IMS, and new technology and architecture research. In order to
compete actively in the market of EDI applications, the Company plans to
continue to invest in the development of new and existing software products and
technology. Capitalized software development costs are amortized over three
years. The Company's product development effort consists of in-house development
of software applications and integration of third-party software tools to
provide service offerings and contracted software development.

PROPRIETARY RIGHTS

The Company regards certain features of its software and documentation as
proprietary information and relies on a combination of contract, copyright,
trademark and trade secret laws and other measures for its protection. Although

8

data provided to QRS by its vendor customers is not proprietary to the Company,
the Company seeks to protect its U.P.C. catalog applications through copyright
laws. The Company has no patents, and existing copyright laws afford only
limited protection. The Company believes that, because of the rapid pace of
technological change in the EDI and other network services industry, trade
secret and copyright protection are less significant than factors such as the
knowledge, ability and experience of the Company's employees, product
enhancements and the timeliness and quality of support services.

UNIQUEST

On May 20, 1993, the Company sold its software and services business to
Uniquest, a publicly held company. The gain recognized from the sale of this
business for the year ended December 31, 1993 was $1,441,000. In connection with
the sale, the Company entered into various agreements with the buyer, including
the sublease of approximately 40,000 square feet of office space through
June 30, 2000. Minimum monthly lease payments ranged from $53,000 to $75,000
through the seven-year term of the lease.

At December 31, 1993, Uniquest was delinquent in its payments and owed the
Company approximately $1,358,000 under sublease and data center cost sharing
agreements. As a result, the Company provided an allowance of $1,018,000 against
these receivables and made additional provisions of $2,009,000 against
nonpayment of future obligations. The result of the allowance and provision
described was to reduce the gain from the sale of the software and services
business by $3,027,000. A $1,700,000 reserve, provided in 1992 for lease
payments related to another vacant building, was included in the sublease loss
reserves at December 31, 1993.

In May 1995, Uniquest entered into voluntary bankruptcy and subsequently
dissolved, resulting in the termination of the Company's sublease with Uniquest.
The Company received a payment of $923,000 and wrote off the balance of a note
for delinquent rent and data cost sharing amounts of approximately $1,158,000
against the sublease loss reserves. The Company filed a claim with the
Creditors' Committee for unsecured amounts owed by Uniquest totaling
approximately $740,000. During 1995 the Company recorded $164,000 as sublease
income and $77,000 as data center cost reimbursements from Uniquest as
reductions of occupancy expense and data center cost of sales, respectively.

At December 31, 1997, the Company maintains sublease loss reserves of
$2,030,000. The Company may recognize additional gain from the sale of the
software and services business at such time that all outstanding matters with
the discontinued business are resolved. Management believes that certain of
these matters will be resolved in 1998 and, accordingly, $1,691,000 of the total
reserves are classified as current on December 31, 1997.

RISK FACTORS

INTENSE COMPETITION. The Company competes with a number of companies providing
electronic commerce services to retailers and vendors. The electronic commerce
services business is highly competitive, and competitive pricing may materially
adversely affect the prices the Company can charge. Competition may also affect
the Company's ability to gain new customers and retain and expand business with
its existing customers, and the range of services offered to its customers. The
Company expects competition to increase as more companies enter the market and
existing competitors continue to change and expand their product offerings. Many
of the Company's existing and potential competitors have financial, marketing or
technological resources that exceed those of the Company, and there can be no
assurance that the Company will be able to compete successfully. Some large
retailers and vendors operate private computer networks for transacting business
with their trading partners. It is possible that additional retailers and
vendors, including certain of the Company's existing customers, may develop and
implement similar private networks, thereby reducing the demand for the
Company's services. IBM has, under certain license and maintenance agreements
with the Company, the right to market the Company's catalog applications in
competition with the Company, in return for prescribed royalty and maintenance
payments. IBM has informed the Company that various types of information
regarding such matters as IBM's current activities, intentions, plans and
projections with respect to its business are confidential to IBM and,
accordingly, will not be disclosed. Although the Company does not believe that
IBM has any current intention to enter the Company's market, there can be no
assurance that IBM will

9

not exercise its license rights and become a competitor, and the Company's
inability to obtain information may limit the Company's ability to provide for
any such contingency. If IBM were to become a competitor, the Company's business
and results of operations could be materially adversely affected. See
"Dependence on IBM" and "Business - Competition."

DEPENDENCE ON KEY CUSTOMERS. While none of the Company's customers accounted for
more than 10% of total revenues for any of the three years in the period ended
December 31, 1997, the Company's customers include several key hubs who
represent a significant amount of the Company's business. The Company provides
services and generates revenues by enabling certain hub customers and their
trading partners to conduct business over the Company's network. While the
estimated revenues attributable to each hub customer and revenues from its
trading partners related only to that hub customer do not exceed 10%, the
estimated revenues attributable to all of the billings of a certain hub customer
and 100 percent of its trading partners may exceed 10%.

Because of the large number of trading partners that transact business with each
other, the difficulty of allocating trading partner network services to any
particular hub customer, and differences in the manner in which hub customers
and trading partners allocate the cost of network services among each other, the
Company cannot precisely attribute revenues to particular hub customer programs.

In addition, one or more of the Company's retail customers could elect either to
develop their own catalog and EDI services or to transfer all or a significant
portion of their trading activities to a competitor. Any such transfer could
result in many of that retailer's vendor partners electing not to maintain their
U.P.C. catalog information with the Company. Any transfer that results in a loss
or significant reduction in the Company's catalog and network services business
could have a material adverse effect on the Company's business and results of
operations. See "Business - Retailer and Vendor Customers" and Note 8 to the
Financial Statements.

DEPENDENCE ON IBM. Since 1988, the Company has used the IBM Value-Added Network
("VAN") to provide customers with certain electronic commerce services,
including EDI and connectivity. The maintenance and operation of the VAN is
controlled solely by IBM. The Company depends on the IBM VAN for a substantial
part of its revenues and such dependence is expected to continue for the
foreseeable future. Since the Company has no right to control the maintenance
and operation of the VAN, IBM's decision with respect to such matters may have a
material impact on the Company's business and results of operations. In
addition, disruption or unavailability of the IBM VAN could have a material
adverse effect on the Company's business and results of operations.

IBM charges the Company for the network services used by its customers. These
charges are subject to specified volume discounts and allowances. In the event
that IBM decides to increase the prices that it charges the Company or reduces
the amount of discounts or allowances, there can be no assurance that the
Company will be able to pass along these changes to its customers. If it cannot
do so, the Company's business and results of operations could be materially
adversely affected. The Company has an agreement with IBM for the purchase of
$250 million of network services over a three-year period beginning January 1,
1998. See Note 7 to the Financial Statements.

While the Company believes that it is the only remarketer of IBM services to the
retail industry, the Company does not have an exclusive arrangement with IBM. If
IBM marketed its network services directly to the Company's customers or
permitted a competitor of QRS to use and remarket these services to the retail
industry, the Company's business and results of operations could be materially
adversely affected. IBM is free to compete against the Company, and there can be
no assurance that IBM will not choose to compete with the Company in the future.

IBM provides the Company's customers certain EDI implementation and support
services. If IBM were unable or unwilling to provide these services, the Company
would either have to provide these services directly or arrange for a third
party to provide such services. There can be no assurance that the Company would
be able to do so on a timely basis, if at all, or that the costs of any such
arrangements would not materially adversely affect the Company's business and
results of operations. See "Business - Value-Added Network Services."

10

YEAR 2000 COMPLIANCE. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field and
therefore are not designed to handle any dates beyond the year 1999. These date
code fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than two years, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements and to remain functional. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The Company is assessing both the internal
readiness of its computer systems and the compliance of its computer products
and software sold to customers for handling the year 2000. The Company currently
projects that the majority of the compliance effort will be absorbed with the
product enhancements planned for 1998, although there can be no assurance to
that effect. The Company expects to implement successfully the systems and
programming changes necessary to address Year 2000 issues and does not believe
that the cost of such actions will have a material effect on the Company's
results of operations or financial condition. There can be no assurance,
however, that there will not be a delay in, or increased costs associated with,
the implementation of such changes, and the Company's inability to implement
such changes could have an adverse effect on the Company's business, operating
results or financial condition.

The Company believes that purchasing patterns of customers and potential
customers may be affected by Year 2000 issues in a variety of ways. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products or services such as those
offered by the Company. In addition, as the Company is currently in the process
of updating its systems, products and services to be Year 2000 compliant, the
demand for the Company's products and services could decrease in the period
before the Company becomes fully compliant. Many potential customers may also
choose to defer purchasing Year 2000 compliant products until they believe it is
absolutely necessary, thus resulting in potentially stalled market sales within
the industry. Any of the foregoing, or combination thereof, could result in a
material adverse effect on the Company's business, operating results and
financial condition.

Moreover, some of the Company's customers and third-party vendors may use
systems that are not Year 2000 compliant. The Company is currently contacting
such customers and third-party vendors to determine whether their systems are
Year 2000 compliant and, if they are not, obtain a commitment from such
customers and third-party vendors that they will be Year 2000 compliant prior to
December 31, 1998. Any Year 2000 compliance problem of the Company's customers
or third-party vendors could result in a material adverse effect on the
Company's business, operating results or financial condition.

In addition, some commentators have stated that a significant amount of
litigation will arise out of Year 2000 compliance issues, and the Company is
aware of at least two such lawsuits against other software vendors. Because of
the unprecedented nature of such litigation, it is uncertain whether or to what
extent the Company may be affected by it.

TECHNOLOGICAL CHANGE. The EDI services industry is characterized by continuously
evolving standards and technology. The Company's ability to anticipate or guide
retail industry standards, to continue to apply advances in network technology
and to develop new catalog and other applications will be a significant factor
in the Company's ability to grow and remain competitive. Because the Company's
current pricing structure is partially based on the number of characters
transmitted, the Company's business and results of operations could be
materially adversely affected if new compression technology were introduced
which reduces the number of characters needed to electronically transmit
business documents. In addition, new technologies could be developed or enhanced
that could make existing catalog and EDI services technologically obsolete.
There can be no assurance that the Company will be able to respond in a timely
manner to technological changes or that the ability of competitors to
successfully incorporate evolving standards and technologies into new services
will not render the Company's services noncompetitive. The failure by the
Company to adapt to or incorporate new standards or technology could have a
material adverse effect on the Company's business and results of operation.

11

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS. The Company's future growth depends on
its successful and timely introduction of new products and services in markets
that do not currently exist or are just emerging. The Company, however, has not
yet completed development of all of these services and there can be no assurance
that the Company will successfully complete any such development or that if such
development is completed, the Company's planned introduction of these services
will realize market acceptance or will meet the technical or other requirements
of potential customers.

Software products as complex as those used in the electronic commerce industry
may contain undetected errors or failures when first introduced or when new
versions are released. If software errors are discovered after introduction, the
Company could experience delays or lost revenues during the period required to
correct these errors. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of, or delay in, market acceptance, which could have a material adverse
effect on the business, results of operations and financial condition of the
Company. See "Business - Product Development."

DEPENDENCE ON DATA CENTER. QRS Catalog Services runs on a computer system
contained in the Company's data center facility in Richmond, California. The
data center is located in a single facility and the Company has no present
intention of establishing an additional data center in a separate location. The
Company utilizes fault-tolerant IBM mainframe computer equipment. The Company
has arranged for use of off-site computer facilities, if necessary, and has
taken other precautions to protect itself and its customers from events that
could interrupt delivery of the Company's services. These precautions include
off-site storage of back-up data, fire protection and physical security systems
and an early warning detection and Halon fire extinguishing system.
Notwithstanding these precautions, there can be no assurance that a fire,
earthquake or other natural disaster affecting the data center would not disable
the Company's computer system. The Company's data center connects to the IBM San
Francisco hub. In the event that service through this location is interrupted,
the Company has back-up access through the IBM Seattle hub. Any significant
damage to the Company's data center or disruption of its connectivity to the IBM
network could have a material adverse effect on the Company's business and
results of operations. See "Business - Data Center."

ABILITY TO MANAGE GROWTH. The Company has significantly increased its service
offerings and customers. Maintaining profitability during a period of expansion
will depend, among other things, on the Company's ability to manage effectively
its operations. Difficulties in managing continued growth could have a material
adverse effect on the Company's business and results of operations.

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the performance of its executive officers and other key employees,
particularly the members of senior management. The Company has no "key
personnel" life insurance for any of its senior management and does not
currently intend to purchase any such policies. There is no assurance that QRS
will be able to continue to attract and retain the qualified personnel necessary
for the development of its business. The loss of the services of key personnel
or the failure to recruit necessary additional personnel could have a material
adverse effect on the Company's business and results of operations.

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company relies on a
combination of copyright, trade secret and trademark laws and nondisclosure
agreements to protects its proprietary rights. Existing copyright laws afford
only limited protection. While the Company uses both internal proprietary and
IBM network security measures, it may be possible for unauthorized third parties
to copy the Company's products and services or to reverse engineer or otherwise
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products and services is difficult. Further,
the laws of certain countries in which the Company's products or services may be
distributed may not protect the Company's products or services and intellectual
rights to the same extent as the laws of the United States. If unauthorized
third parties copy or reverse engineer or otherwise obtain and use information
the Company regards as proprietary, the Company's business and results of
operations could be materially adversely affected.

12

THE INTERNET. The Internet is an interconnected global network of computer
systems linked together through a common protocol. Although the Company believes
that the Internet will provide opportunities to expand the electronic commerce
market, there can be no assurance that the Company's efforts to exploit such
opportunities will be successful or that increased usage of the Internet for
electronic commerce or increased competition will not adversely affect the
business, results of operations, and financial condition of the Company. To
date, the Company's customers and potential customers have made limited use of
the Internet to exchange their "mission-critical"data.

FACTORS AFFECTING OPERATION RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. The Company's future quarterly operating results may vary and reduced
levels of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including changes in the levels of revenues derived from
each product, the timing of new service announcements by the Company or its
competitors, changes in pricing policies by the Company or its competitors,
market acceptance of new and enhanced versions of the products and services of
the Company or its competitors, the size and timing of significant orders,
changes in operation expenses, changes in the Company's strategy, the
introduction of alternative technologies, the effect of potential acquisitions
and industry and general economic factors. The Company has limited or no control
over many of these factors.

GOVERNMENT REGULATORY AND INDUSTRIAL POLICY RISKS. Current regulations and laws
governing the telecommunications industry generally do not apply to providers of
electronic commerce services and products. Except for government regulations in
certain foreign countries (which may affect the provision of certain of the
Company's services or use of certain of its products) and regulations governing
the ability of the Company to disclose the contents of communications by its
customers, there are no government regulations pertaining to the pricing,
service characteristics or capabilities, geographic distribution or quality
control features of the Company's electronic commerce services or products.
There exists, however, the risk that governmental policies affecting the
electronic commerce industry could be implemented by executive order,
legislation, administrative order, or otherwise. If such policies are adopted,
they could have a material adverse effect on the business, results of
operations, and financial condition of the Company.

VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has
fluctuated significantly since the initial public offering in August 1993. The
market price of the Common Stock could be subject to significant fluctuations in
the future based on factors such as announcements of new products by QRS or its
competitors, quarterly fluctuations in the Company's financial results or other
electronic commerce services companies' financial results, changes in analysts'
estimates of the Company's financial performance, general conditions in the
electronic commerce services industry and conditions in the financial markets.
In addition, the stock market in general has experienced extreme price and
volume fluctuations, which have particularly affected the market prices for many
high technology companies and which have often been unrelated to the operating
performance of the specific companies. Many technology companies, including the
Company, have recently experienced historic highs in the market price of their
equity securities. There can be no assurance that the market price of the
Common Stock will not decline substantially from such historic highs, or
otherwise continue to experience significant fluctuations in the future.

13

ITEM 2. FACILITIES

The Company leases approximately 40,000 square feet of office space in Richmond,
California for its corporate headquarters. The lease expires on June 30, 2010.
Management believes that the Company's facilities are adequate for its level of
business and its near-term growth requirements.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's common stock has been traded in the over-the-counter market on the
Nasdaq National Market under the symbol QRSI since the Company's initial public
offering in August 1993. According to records of the Company's transfer agent,
the Company had approximately 68 stockholders of record as of February 16, 1998.
Because many of such shares are held by brokers and other institutions on behalf
of stockholders, the Company is unable to estimate the total number of
beneficial holders of the common stock. The following table sets forth the low
and high sales prices of the Company's common stock for the two-year period
ended December 31, 1997:

PERIOD ENDED LOW HIGH
- --------------------------------------- -------- --------

Quarters ended December 31, 1996:
First Quarter $ 17.75 $ 26.25
Second Quarter 25.50 37.13
Third Quarter 27.75 41.50
Fourth Quarter 28.00 40.25
Quarters ended December 31, 1997:
First Quarter 26.38 35.25
Second Quarter 23.88 39.06
Third Quarter 31.00 39.50
Fourth Quarter 31.75 38.31

DIVIDEND POLICY

The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has paid no cash dividends on its common stock and does
not anticipate declaring dividends on its common stock in the foreseeable
future.

15

ITEM 6. SELECTED FINANCIAL DATA

YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1997 1996 1995 (1) 1994 1993
------- ------- ------- ------- -------

Revenues $71,632 $56,746 $42,134 $31,382 $22,457
Operating earnings 12,639 9,442 2,479 5,311 3,124
Earnings from continuing
operations before income taxes 14,625 11,019 3,961 5,980 1,911
Discontinued operations:
Gain from sale of software and
services business - - - - 1,441
Income tax expense (benefit) 5,850 4,408 1,574 (7,985) -
Extraordinary loss on extinguishment
of debt - - - - (763)
------- ------- ------- ------- -------
Net earnings $8,775 $6,611 $2,387 $13,965 $2,589
------- ------- ------- ------- -------
------- ------- ------- ------- -------

Basic earnings per share:
Continuing operations $1.04 $0.79 $0.29 $1.74 $0.38
Discontinued operations - - - - 0.29
Extraordinary item - - - - (0.15)
------- ------- ------- ------- -------
Net earnings per share $1.04 $0.79 $0.29 $1.74 $0.52
------- ------- ------- ------- -------
------- ------- ------- ------- -------

Diluted earnings per share:
Continuing operations $1.01 $0.77 $0.28 $1.67 $0.34
Discontinued operations - - - - 0.26
Extraordinary item - - - - (0.14)
------- ------- ------- ------- -------
Net earnings per share $1.01 $0.77 $0.28 $1.67 $0.46
------- ------- ------- ------- -------
------- ------- ------- ------- -------

(1) 1995 results include write-off of purchased in-process research and
development of $4,318,000.

DECEMBER 31,
(IN THOUSANDS)
-------------------------------------------------------------------
BALANCE SHEET DATA 1997 1996 1995 1994 1993
------- ------- ------- ------- -------

Working capital $42,347 $29,416 $30,248 $23,024 $17,946
Total assets 64,002 55,946 46,592 39,910 23,135
Long-term debt - - - - 493
Stockholders' equity 54,729 43,570 35,430 31,427 15,485

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS
MANAGEMENT. THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS - RISK FACTORS"
AND ELSEWHERE HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE
COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.

GENERAL

The Company's product and service families are Catalog Services, Network
Services, Inventory Management Services (IMS), Logistics Management Services
(LMS), and Professional Services. The Company derives revenues from five
principal and related sources: the transmission of standard business documents
over a network, monthly charges for accessing Catalog Services, IMS-related fees
based on negotiated monthly service charges, LMS fees, and consulting fees.
Network Services pricing is based primarily on the volume of characters
transmitted and the type of network access utilized. Network Services pricing
also incorporates discounts based on volume.

DELAWARE REINCORPORATION

On October 21, 1997, the Company completed its plan to reincorporate in Delaware
(the "Reincorporation") through the merger (the "Merger") of QuickResponse
Services, Inc., a California corporation ("QRS-California"), with and into the
Company. As a result of the Merger, the outstanding shares of QRS-California
were automatically converted into shares of the Company.

CANADIAN SUBSIDIARY

On October 14, 1997, QRS created a wholly owned Canadian sales subsidiary, QRS
Canada, Inc.

17

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
revenues represented by certain line items in the Company's statements of
operations:

YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----

Revenues 100% 100% 100%
Cost of sales 56 60 61
---- ---- ----
Gross profit 44 40 39
Operating expenses:
Sales and marketing 13 11 11
Product development 6 6 5
General and administrative 7 7 7
Purchased in-process research
and development - - 10
---- ---- ----
Total operating expenses 26 24 33
---- ---- ----
Operating earnings 18 16 6
Interest income 2 3 3
---- ---- ----
Earnings before income taxes 20% 19% 9%
---- ---- ----
---- ---- ----

REVENUES

Revenues increased from $42.1 million in 1995 to $56.7 million in 1996 and to
$71.6 million in 1997, representing increases of 35% from 1995 to 1996 and 26%
from 1996 to 1997. These increases were primarily attributable to four factors.
First, the number of customers increased from 156 retailers and 4,865 vendors at
December 31, 1995 to 205 retailers and 4,973 vendors as of December 31, 1996 and
to 241 retailers and 5,921 vendors and carriers as of December 31, 1997. Second,
the number of catalog trading partnerships increased significantly as a result
of the increase in the number of customers and their trading links with each
other. Third, customers increased the number, type and size of transactions
transmitted over the network, as well as the utilization of Catalog Services.
Fourth, the Company expanded its product offerings among the Inventory
Management Services and Professional Services.

COST OF SALES

Cost of sales consists primarily of the cost of purchasing network services, the
cost of the Company's data centers and technical customer support services. Cost
of sales increased from $25.5 million in 1995 to $33.8 million in 1996 and to
$40.5 million in 1997. These increases were principally due to increases in
purchased network services reflecting growth in network services purchased under
a long-term contract, discounted based upon a multi-year volume commitment, and
an expanded customer support group reflecting growth in customers and products.
Cost of sales as a percentage of revenue decreased from 61% and 60% in 1995 and
1996, respectively, to 56% in 1997. Cost of sales as a percentage of revenues
decreased in 1997 primarily due to increases in higher margin revenue from
Catalog Services, increased operating efficiencies in data center operations,
and higher discounts on network services. These benefits were partially offset
by increased sales of certain lower margin network services and volume discounts
earned by larger customers.

SALES AND MARKETING EXPENSES

Sales and marketing expenses consist primarily of personnel and related costs in
the Company's sales and marketing organizations as well as the costs of various
marketing programs. Sales and marketing costs increased from $4.7 million in
1995 to $6.5 million in 1996 and to $9.0 million in 1997, reflecting the general
increase in the number of customers and the size of the Company's operations.
Sales and marketing expenses represented 11% of revenues in

18

years 1995 and 1996 and 13% of revenues in 1997. The increase as a percentage of
revenue was due to the Company's expansion of its retailer and vendor-specific
coverage and growth in its Program Sales and Enablement organization, the group
responsible for rapidly enabling trading partners for key hub customers.

PRODUCT DEVELOPMENT EXPENSES

Product development expenses consist primarily of personnel and equipment costs
related to research, development and implementation of new services and
enhancement of existing services. Product development expenses increased from
$2.0 million in 1995 to $3.1 million in 1996 and to $4.4 million in 1997 and
represented 5%, 6% and 6% of revenues, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of personnel and related
costs of the Company's finance and administrative organizations, as well as
professional fees and other costs. General and administrative expenses increased
from $3.1 million in 1995 to $3.9 million in 1996 and to $5.1 million in 1997
and represented 7% in each of three years.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In October 1995, the Company acquired certain assets and liabilities of ShipNet
Systems, Inc. ("ShipNet"), a provider of transportation logistics services. The
total acquisition cost was $4.9 million, including $200,000 paid in cash,
assumption of certain liabilities of $3.3 million, shutdown, relocation and
severance expenses of $1.1 million associated with integrating ShipNet's
operations, and $300,000 in transaction costs related to the acquisition.

The acquisition was accounted for as a purchase transaction. In connection with
the acquisition and in conjunction with the Company's capitalized software
policies, $4.3 million of the purchase price was allocated to purchased
in-process research and development and charged to operations as technological
feasibility had not been established and no alternative future uses existed at
the acquisition date. The Company allocated $0.6 million of the purchase price
to current assets and property and equipment.

In addition, the Company spent approximately $100,000, $600,000, and $330,000 in
1995, 1996 and 1997, respectively, in order to complete the development of the
acquired in-process products. As of December 31, 1997, the Company does not
anticipate further development spending on the acquired in-process products.

INTEREST INCOME

Interest income consists primarily of interest earned on cash, cash equivalents
and investment securities, including cash accumulated from the Company's initial
public offering of common stock in August 1993, as well as subsequent positive
cash flow from operations. Interest income increased from $1.5 million in 1995
to $1.6 million in 1996 and to $2.0 million in 1997. The increase in 1997 is
primarily due to higher balances in the Company's cash, cash equivalents and
investment securities accounts.

INCOME TAX EXPENSE

The Company's income tax expense was $1.6 million, $4.4 million and $5.9 million
for the years 1995, 1996 and 1997, respectively. The Company's effective income
tax rate in 1995, 1996 and 1997 was 40%.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital increased from $29.4 million at December 31, 1996
to $42.3 million at December 31, 1997. Cash, cash equivalents and short-term
marketable securities available-for-sale increased from $24.6 million at
December 31, 1996 to $33.8 million at December 31, 1997. At December 31, 1996
and 1997, $10 million and

19

$1.0 million, respectively, of marketable securities available-for-sale were
classified as non-current assets and, therefore, were not included in working
capital. Total assets increased from $55.9 million at December 31, 1996 to $64.0
million at December 31, 1997, while total liabilities decreased from $12.4
million at December 31, 1996 to $9.3 million at December 31, 1997.

During 1995, the Company acquired certain assets of ShipNet for $4.9 million
including the assumption of certain liabilities, relocation, personnel and
transaction costs. The Company disbursed approximately $2.3 million, $1.2
million, and $1.2 million of such funds in 1995, 1996 and 1997, respectively.
The Company expects no future disbursements related to the acquisition of
ShipNet assets.

Management believes that the cash, cash equivalents and marketable securities
available-for-sale at December 31, 1997, and cash anticipated to be generated
from future operations will be sufficient for the Company to meet its working
capital needs and capital expenditures through 1998. However, the Company may
choose to raise additional cash through the sale of equity or debt prior to such
time. The Company has no plans to pay dividends with respect to common stock in
the foreseeable future.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and therefore are not
designed to handle any dates beyond the year 1999. These date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements and to remain functional. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. The Company is assessing both the internal readiness of its
computer systems and the compliance of its computer products and software sold
to customers for handling the year 2000. The Company currently projects that the
majority of the compliance effort will be absorbed with the product enhancements
planned for 1998, although there can be no assurance to that effect.

The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and does not believe that the cost
of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on the Company's business, operating
results or financial condition.

Moreover, some of the Company's customers and third-party vendors may use
systems that are not Year 2000 compliant. The Company is currently contacting
such customers and third-party vendors to determine whether their systems are
Year 2000 compliant and, if they are not, obtain a commitment from such
customers and third-party vendors that they will be Year 2000 compliant prior to
December 31, 1998. Any Year 2000 compliance problem of the Company's customers
or third-party vendors could result in a material adverse effect on the
Company's business, operating results or financial condition. See "Risk Factors
- - Year 2000 Compliance."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

20

ITEM 8. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

PAGE

Independent Auditors' Report 22

Consolidated Balance Sheets 23

Consolidated Statements of Earnings 24

Consolidated Statements of Stockholders' Equity 25

Consolidated Statements of Cash Flows 26

Notes to Consolidated Financial Statements 27-36

21

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
QuickResponse Services, Inc.:

We have audited the accompanying consolidated balance sheets of QuickResponse
Services, Inc. and subsidiary (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP
San Francisco, California
February 4, 1998

22

QUICKRESPONSE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)

ASSETS

1997 1996
------- -------

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $16,091 $16,022
Marketable securities, available-for-sale . . . . . . . . . . . . . . . . . . 17,694 8,605
Accounts receivable - net of allowance for doubtful accounts of $873 and $722
in 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,567 9,294
Deferred income tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . 870 4,130
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . 1,260 1,141
------- -------

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,482 39,192
------- -------

Property and equipment:
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,162 1,322
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,782 2,993
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 1,344
------- -------
11,744 5,659
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . 4,062 2,572
------- -------
Total property and equipment . . . . . . . . . . . . . . . . . . . . . . . 7,682 3,087
------- -------

Marketable securities, available-for-sale. . . . . . . . . . . . . . . . . . . . 1,000 9,985
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,576 2,308
Capitalized product development costs - net of accumulated amortization of
$2,590 and $2,818 in 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 2,085 1,199
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 175
------- -------

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64,002 $55,946
------- -------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,733 $ 5,480
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,711 3,435
Current portion of sublease loss reserves . . . . . . . . . . . . . . . . . . 1,691 861
------- -------

Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 8,135 9,776

Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799 923
Sublease loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 1,677
------- -------

Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,273 12,376
------- -------

Commitments and contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . - -
Stockholders' equity:
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued
and outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $0.001 par value; 20,000,000 shares authorized; 8,531,366
shares outstanding in 1997 and 8,407,220 in 1996 . . . . . . . . . . . . . . 63,864 61,394
Treasury stock at cost (1,300 shares) . . . . . . . . . . . . . . . . . . . . (35) -
Unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . (9) 42
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,091) (17,866)
------- -------

Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 54,729 43,570
------- -------

Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . $64,002 $55,946
------- -------
------- -------

See notes to financial statements.

23

QUICKRESPONSE SERVICES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997 1996 1995
------- ------- -------

Revenues . . . . . . . . . . . . . . . . . . . . . . . $71,632 $56,746 $42,134

Cost of sales. . . . . . . . . . . . . . . . . . . . . 40,450 33,802 25,520
------- ------- -------

Gross profit . . . . . . . . . . . . . . . . . . . . . 31,182 22,944 16,614

Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . 9,041 6,512 4,707
Product development . . . . . . . . . . . . . . . . 4,365 3,127 2,023
General and administrative. . . . . . . . . . . . . 5,137 3,863 3,087
Purchased in-process research and development . . . - - 4,318
------- ------- -------
Total operating expenses . . . . . . . . . . . . 18,543 13,502 14,135

Operating earnings . . . . . . . . . . . . . . . . . . 12,639 9,442 2,479

Interest income. . . . . . . . . . . . . . . . . . . . 1,986 1,577 1,482
------- ------- -------

Earnings before income taxes . . . . . . . . . . . . . 14,625 11,019 3,961

Income tax expense . . . . . . . . . . . . . . . . . . 5,850 4,408 1,574
------- ------- -------

Net earnings . . . . . . . . . . . . . . . . . . . . . $ 8,775 $ 6,611 $ 2,387
------- ------- -------
------- ------- -------

Basic earnings per share . . . . . . . . . . . . . . . $1.04 $0.79 $0.29
------- ------- -------
------- ------- -------

Shares used to compute basic earnings per share. . . . 8,464 8,346 8,228
------- ------- -------
------- ------- -------

Diluted earnings per share . . . . . . . . . . . . . . $1.01 $0.77 $0.28
------- ------- -------
------- ------- -------

Shares used to compute diluted earnings per share. . . 8,727 8,613 8,499
------- ------- -------
------- ------- -------

See notes to financial statements.

24

QUICKRESPONSE SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

UNREALIZED
GAIN (LOSS)
COMMON STOCK ON ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT INVESTMENT DEFICIT EQUITY
------------------------ ---------- ----------- -------------

Balance, January 1, 1995 . . . . . . . . 8,130,293 $ 58,291 $ (26,864) $ 31,427
Stock option compensation. . . . . . . . 35 35
Exercise of stock options, including tax
benefit . . . . . . . . . . . . . . . 143,951 1,363 1,363
Issuance of common stock under
Employee Stock Purchase Plan. . . . . 16,580 180 180
Exercise of warrant. . . . . . . . . . . 15,000 38 38
Net earnings . . . . . . . . . . . . . . 2,387 2,387
--------- --------- --------- --------- ---------

Balance, December 31, 1995 . . . . . . . 8,305,824 59,907 (24,477) 35,430
Stock option compensation. . . . . . . . 35 35
Exercise of stock options, including tax
benefit . . . . . . . . . . . . . . . 80,190 1,141 1,141
Issuance of common stock under
Employee Stock Purchase Plan. . . . . 19,206 306 306
Exercise of warrant. . . . . . . . . . . 2,000 5 5
Unrealized gain on investments . . . . . $ 42 42
Net earnings . . . . . . . . . . . . . . 6,611 6,611
--------- --------- --------- --------- ---------

Balance, December 31, 1996 . . . . . . . 8,407,220 61,394 42 (17,866) 43,570
Purchase of treasury stock . . . . . . . (1,300) (35) (35)
Stock option compensation. . . . . . . . 26 26
Exercise of stock options, including tax
benefit . . . . . . . . . . . . . . . 103,270 2,015 2,015
Issuance of common stock under
Employee Stock Purchase Plan. . . . . 17,176 416 416
Exercise of warrant. . . . . . . . . . . 5,000 13 13
Unrealized gain (loss) on investments. . (51) (51)
Net earnings . . . . . . . . . . . . . . 8,775 8,775
--------- --------- --------- --------- ---------

Balance, December 31, 1997 . . . . . . . 8,531,366 $ 63,829 $ (9) $ (9,091) $ 54,729
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

See notes to financial statements.

25

QUICKRESPONSE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

1997 1996 1995
-------- -------- --------

Operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,775 $ 6,611 $ 2,387
Adjustment to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 1,718 1,153 618
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . 26 35 35
Purchased in-process research and development. . . . . . . . . . . . - - 4,318
Purchase of trading securities - net . . . . . . . . . . . . . . . . - - (8,401)
Changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (5,273) (1,262) (2,273)
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . (119) (329) (343)
Deferred income tax assets. . . . . . . . . . . . . . . . . . . . 3,902 3,877 1,338
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (8) (5)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . (1,747) 1,898 1,750
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . 510 1,149 61
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . (124) (218) (99)
Sublease loss reserves (net). . . . . . . . . . . . . . . . . . . (508) (464) 326
-------- -------- --------

Net cash provided by (used in) operating activities. . . . . . 7,158 12,442 (288)
-------- -------- --------

Investing activities:
Marketable securities - available for sale, net . . . . . . . . . . . . (155) (572) 2,335
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . (6,085) (1,551) (2,197)
Capitalization of product development costs . . . . . . . . . . . . . . (1,114) (245) (252)
Payment of liabilities assumed in the acquisition of Shipnet. . . . . . (1,234) (1,151) (2,339)
-------- -------- --------

Net cash used in investing activities. . . . . . . . . . . . . (8,588) (3,519) (2,453)
-------- -------- --------

Financing activities:
Proceeds from employee stock purchase plan issuances. . . . . . . . . . 416 306 180
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . 1,105 328 354
Exercise of warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 13 5 38
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . (35) - -
-------- -------- --------

Net cash provided by financing activities. . . . . . . . . . . 1,499 639 572
-------- -------- --------

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . 69 9,562 (2,169)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . 16,022 6,460 8,629
-------- -------- --------

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . $ 16,091 $ 16,022 $ 6,460
-------- -------- --------
-------- -------- --------

Other cash flow information:
Taxes paid during the year. . . . . . . . . . . . . . . . . . . . . . . $ 1,074 $ 498 $ 284
-------- -------- --------
-------- -------- --------

Noncash investing and financing activities:
Tax benefit from non-qualified stock options exercised. . . . . . . . . $ 910 $ 813 $ 1,009
Assumption of liabilities related to ShipNet acquisition. . . . . . . . - - 4,724
Assumption of accounts receivable, property and equipment, and other
assets related to ShipNet acquisition. . . . . . . . . . . . . . . . - - 406
Unrealized gain (loss) on marketable securities, available-for-sale . . (51) 42 -

See notes to financial statements

26

QUICKRESPONSE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: DESCRIPTION OF THE BUSINESS

The Company's product families are Catalog Services, Network Services, Inventory
Management Services (IMS), Logistics Management Services (LMS), and Professional
Services. The Company derives revenues from five principal and related sources:
the transmission of standard business documents over a network, monthly charges
for accessing Catalog Services, IMS-related fees based on negotiated monthly
service charges, LMS fees, and consulting fees. Network Services pricing is
based primarily on the volume of characters transmitted and the type of network
access utilized. Network Services pricing also incorporates discounts based on
volume.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION
The accompanying financial statements include the accounts of QuickResponse
Services, Inc. and its wholly owned subsidiary, QRS Canada, Inc. All
significant intercompany transactions have been eliminated.

REVENUE RECOGNITION
All services revenues are recognized in the month in which the service is
performed.

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.

MARKETABLE SECURITIES, AVAILABLE-FOR-SALE
Effective April 1, 1995, the Company determined that its portfolio of marketable
debt securities met the criteria for being classified as "Available for Sale"
under Statement of Financial Accounting Standard ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities. "Previously the Company
had classified its marketable securities as "Trading Securities" under that
Standard. There was no effect on the financial statements from the change in
classification of these marketable debt securities, since the cost of such
securities approximated the fair market value at March 31, 1995. The Company
classifies those marketable securities that mature in less than one year as
short-term marketable securities.

PRODUCT DEVELOPMENT COSTS
The Company capitalizes certain development costs related to its product
offerings based upon the establishment of technological feasibility. Capitalized
development costs are amortized over various periods up to three years. 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. Costs incurred to maintain existing product
offerings are expensed as incurred.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives, which are generally three years for
software and five years for equipment and hardware. Leasehold improvements are
amortized over the remaining period of the lease or over the estimated useful
life of the improvement, whichever is shorter. Depreciation expense for the
years ended December 31, 1997, 1996 and 1995 was $1,490,000, $924,000 and
$516,000, respectively.

STOCK OPTION COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation "effective for the Company's year ended December 31, 1996. SFAS No.
123 established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. As allowed
under provisions of SFAS No. 123, the Company has chosen to continue the
intrinsic value based method and provides pro forma disclosures of

27

net earnings and earnings per share as if the accounting provisions of SFAS No.
123 had been adopted; therefore such adoption has no effect on the Company's
earnings or cash flows. See note 10.

EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share." The Company adopted SFAS No. 128 in the year
ended December 31, 1997 as required and restated earnings per share ("EPS") data
for all prior periods to conform with SFAS No. 128.

SFAS No. 128 requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income by the weighted average
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and equivalents, customer
receivables, accounts payable, and certain other accrued liabilities. The
carrying amounts of these items are a reasonable estimate of their fair values.

RECENTLY ISSUED ACCOUNTING STANDARDS
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report the change in its net assets
from nonowner sources by major components and as a single total. The FASB also
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these Statements will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. Such Statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.

USE OF ESTIMATES
The preparation of the Company's 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 results could differ from these estimates.

RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.

28

NOTE 3: MARKETABLE SECURITIES, AVAILABLE FOR SALE

Marketable securities, available-for-sale are summarized as follows (in
thousands):

GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------

December 31, 1997
Debt issued by:
Government/Agencies $ 9,995 $10 - $10,005
Corporate bonds 8,708 2 $(21) 8,689
--------- ---------- --------- --------
Total marketable securities 18,703 12 (21) 18,694
Less long-term marketable
securities, available-for-sale 999 1 - 1,000
--------- ---------- --------- --------
Short-term marketable
securities, available-for-sale $17,704 $11 $(21) $17,694
--------- ---------- --------- --------
--------- ---------- --------- --------

GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------

December 31, 1996
Debt issued by:
Government/Agencies $ 7,965 $20 $ - $ 7,985
Corporate bonds 10,583 22 - 10,605
--------- ---------- --------- --------
Total marketable securities 18,548 42 - 18,590
Less long-term marketable
securities, available-for-sale 9,965 20 - 9,985
--------- ---------- --------- --------
Short-term marketable
securities, available-for-sale $ 8,583 $22 $ - $ 8,605
--------- ---------- --------- --------
--------- ---------- --------- --------

The long-term marketable securities held at December 31, 1997 have contractual
maturities of two years or less.

NOTE 4: INCOME TAXES

The Company accounts for income taxes using the asset and liability method under
SFAS No. 109, "Accounting for Income Taxes."

The Company provides a deferred tax expense or benefit for differences between
financial accounting and tax reporting. Deferred income taxes represent
operating loss carryforwards, tax credit carryforwards and future net tax
effects resulting from temporary differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse.

29

The income tax expense (credit) for the years ended December 31, 1997, 1996 and
1995 consisted of (in thousands):

1997 1996 1995
------ ------ ------

Current:
Federal $1,813 $ 906 $ 127
State 1,045 438 284
------ ------ ------
2,858 1,344 411
------ ------ ------

Deferred:
Federal 2,749 2,519 1,303
State 243 545 (140)
------ ------ ------
2,992 3,064 1,163
------ ------ ------

Total $5,850 $4,408 $1,574
------ ------ ------
------ ------ ------

Significant components of the Company's deferred tax balances as of December 31,
1997 and 1996 are as follows (in thousands):

DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------

Deferred tax assets:
Minimum tax credit carryforwards . . . . . . . . . . $393 $ 391
Net operating loss carryforwards . . . . . . . . . . - 1,916
Research and development credit carryforwards. . . . 898 899
Purchased in-process research and development. . . . 898 973
Allowance for doubtful accounts. . . . . . . . . . . 318 282
Other reserves not currently deductible. . . . . . . 1,224 1,807
Deferred rent. . . . . . . . . . . . . . . . . . . . 344 399
State taxes. . . . . . . . . . . . . . . . . . . . . 36 39
------------ ------------
Total deferred income tax assets. . . . . . . . . 4,111 6,706

Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . 247 126
Deducted research and development expenses . . . . . 418 142
------------ ------------
Total deferred income tax liabilities . . . . . . 665 268

------------ ------------
Deferred income tax assets, net . . . . . . . . . . . . $3,446 $6,438
------------ ------------
------------ ------------

A reconciliation of the federal statutory tax rate to the Company's effective
tax rate is as follows (dollars in thousands):

DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------- -------------------------

Provision at statutory tax rate . . . $5,118 35% $3,746 34% $1,347 34%
State income taxes, net of federal
tax benefit . . . . . . . . . . . 880 6 649 6 243 6
Other . . . . . . . . . . . . . . . . (148) (1) 13 - (16) -
---------- ---------- ---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . $5,850 40% $4,408 40% $1,574 40%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------

For income tax purposes, the Company had no remaining and no expired federal
operating loss carryforwards at December 31, 1997. The Company has federal
research and development credit carryforwards of approximately

30

$898,000 which expire from 2005 to 2013, and federal credits for prior-year
minimum tax paid of $393,000 which have an indefinite life. Section 382 of the
Internal Revenue Code imposes limitations on the utilization of loss and credit
carryforwards when changes in control, as defined, have occurred. Primarily as
a result of the sale of shares in the Company's public offering in 1993, a
change of control occurred. As a result, the utilization of the credit
carryforwards is limited annually under Section 382. The Company does not
believe that the Section 382 limitations will result in the loss of any benefits
related to the carryforwards.

NOTE 5: ACQUISITION OF SHIPNET SYSTEMS, INC. ("SHIPNET")

In October 1995, the Company acquired certain assets and liabilities of ShipNet
Systems, Inc. ("ShipNet"), a provider of transportation logistics services. The
total acquisition cost was $4,902,000, comprised of $200,000 paid in cash,
assumption of certain liabilities of $3,302,000, shutdown, relocation and
severance expenses of $1,100,000 associated with rationalizing ShipNet's
operations, and $300,000 in transaction costs related to the acquisition.

The acquisition was accounted for as a purchase transaction. In connection with
the acquisition and in conjunction with the Company's capitalized software
policies, $4,318,000 of the purchase price was allocated to in-process research
and development and, as technological feasibility had not been established and
no alternative future uses existed at the acquisition date, charged to
operations. The Company allocated $584,000 of the purchase price to current
assets and property and equipment.

The Company completed the relocation of acquired assets in the third quarter of
1997 and anticipates no further expense related to the acquisition of Shipnet.

NOTE 6: SUBLEASE LOSS RESERVES

On May 20, 1993, the Company divested its software and services business to
Uniquest, a publicly held company. In connection with the sale, the Company
entered into various agreements with the buyer, including the sublease of
approximately 40,000 square feet of office space through June 30, 2000. Minimum
monthly lease payments ranged from $53,000 to $75,000 through the seven-year
term of the lease.

At December 31, 1993, Uniquest owed the Company approximately $1,358,000 which
was delinquent under sublease and data center cost sharing agreements. As a
result, the Company provided an allowance of $1,018,000 against these
receivables and made additional provisions of $2,009,000 against nonpayment of
future obligations. The result of the allowance and provision described was to
reduce the gain from sale of the software and services business by $3,027,000. A
$1,700,000 reserve provided in 1992 for lease payments related to another vacant
building was added to sublease loss reserves at December 31, 1993.

In May 1995, Uniquest entered into voluntary bankruptcy and subsequently
dissolved, resulting in the termination of the Company's sublease with Uniquest.
The Company received a payment of $923,000 and wrote off the balance of a note
for delinquent rent and data cost sharing amounts of approximately $1,158,000
against the sublease loss reserves. The Company filed a claim with the
Creditors' Committee for unsecured amounts owed by Uniquest totaling
approximately $740,000. During 1995, the Company recorded $164,000 as sublease
income and $77,000 as data center cost reimbursements from Uniquest as
reductions of occupancy expense and data center-cost of sales, respectively.

At December 31, 1997, the Company maintains sublease loss reserves of
$2,030,000. The Company may recognize additional gain from sale of the software
and services business at such time that all outstanding matters with the
discontinued business are resolved. Management believes that certain of these
matters will be resolved in 1998 and, accordingly, $1,691,000 of the total
reserves are classified as current on December 31, 1997.

31

NOTE 7: COMMITMENTS AND CONTINGENCIES

The Company entered into an agreement with IBM for the purchase of $250 million
of network services over a three-year period commencing January 1, 1998. The
agreement includes specified annual minimum purchases and a graduated adjustment
charge if total purchases fall below the total minimum amount. Based on
historical and projected usage, management believes that the Company will meet
the purchase requirements under this agreement.

Additionally, the Company and IBM signed a Retail Industry Marketing agreement
under which the Company provides to IBM certain professional services related to
the retail industry. The Company recognized $1,000,000 of revenue in the fourth
quarter of 1997 as a result of these agreements.

The Company leases office buildings and certain equipment under various
non-cancelable operating lease agreements expiring through the year 2010. The
leases for office buildings generally provide renewal options and additional
rents based on increases in operating expenses of the buildings.

The Company's corporate building lease agreement provides for significant
periods of "free rent" when no cash is required. The total cash payments over
the life of the lease are divided by the total number of months in the lease
period and the average rent is charged to expense each month during the lease
period. During the periods of "free rent", this expense creates a deferred
liability which is amortized to expense over the life of the lease.

Total rent expense charged to continuing operations for the years ended December
31, 1997, 1996 and 1995 was $1,372,000, $1,331,000 and $1,272,000 respectively.

At December 31, 1997, future minimum payments under long-term operating leases
are as follows (in thousands):

Year ending December 31:

1998 . . . . . . . . . . . . . . $ 1,522
1999 . . . . . . . . . . . . . . 1,571
2000 . . . . . . . . . . . . . . 1,602
2001 . . . . . . . . . . . . . . 1,640
2002 & Thereafter. . . . . . . . 10,376
--------

Total. . . . . . . . . . . . . . . $16,710
--------
--------

NOTE 8: MAJOR TRADING PARTNERSHIP PROGRAMS

The Company provides services and generates revenues by enabling certain hub
customers and their trading partners to conduct business over the Company's
network. Due to the large number of trading partners that transact business with
each other, including one or more hub customers, the difficulty of allocating
trading partner network services to individual hub customers, and the
differences in the manner in which hub customers and trading partners allocate
the cost of network services among each other, the Company cannot precisely
attribute revenues to particular trading relationships. However, in 1997, the
Company refined its estimation techniques and determined that no individual
customer or hub customer trading partnership exceeded 10% of total revenues for
any of the three years in the period ended December 31, 1997.

NOTE 9: RETIREMENT SAVINGS PLANS

The Company has a defined contribution retirement savings plan for all eligible
employees. The plan allows discretionary, matching employer contributions of up
to 50% of the maximum allowable employee contribution ($9,500 in 1997 and 1996
and $9,240 in 1995). The amounts charged to continuing operations during 1997,
1996 and 1995 were approximately $324,000, $238,000 and $135,000, respectively.

32

The Company established a nonqualified deferred compensation plan for certain
employees, effective as of December 1, 1997. The specific terms of the plan are
in the process of being determined and management expects to finalize the plan
in the first quarter of 1998.

NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS

In 1989, the Board of Directors approved a Non-Qualified Stock Option Plan (the
"Plan"). The Plan was amended in 1990. The Plan provides for the granting of
options to certain employees and directors to purchase shares of common stock of
the Company at prices determined by the Board of Directors.

In June 1993, the Board of Directors adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan provides for the purchase of common
stock by eligible employees. A total of 150,000 shares of common stock has been
reserved for purchase under the Purchase Plan. The purchase price per share is
85% of the lower of (i) the fair market value of the common stock on the
participant's entry date (first business day in January, April, July and October
each year) into a purchase period (first business day in January and through the
last business day in December each year) or (ii) the fair market value on the
annual purchase date (the last business day in December each year). For a
participant whose entry date is subsequent to the start date of the purchase
period (first business day in January each year), the clause (i) value will not
be less than the fair market value of the common stock on the start date of the
purchase period. In 1997 and 1996, employees acquired 17,176 and 19,206 shares
of common stock, respectively, under the Purchase Plan.

In June 1993, the Board of Directors also approved the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan"). A total of 1,850,000 shares of common stock
has been reserved for issuance under this plan. The 1993 Plan is divided into
three separate components: (i) the Discretionary Option Grant Program under
which key employees (including officers), certain non-employee directors and
consultants may, at the discretion of the Plan Administrator, be granted options
to purchase shares of Common Stock at an exercise price not less than 85% of the
fair market value of such shares on the grant date, (ii) the Automatic Option
Grant Program under which option grants will automatically be made at periodic
intervals to certain non-employee members of the Board to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
option shares on the grant date, and (iii) the Stock Issuance Program under
which key employees (including officers), certain non-employee and consultants
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly, either through the purchase of such shares at a price not less than
85% of their fair market value at the time of issuance or as a bonus tied to the
performance of services or the Company's attainment of financial objectives,
without any cash payment required of the recipient.

All outstanding options under the 1993 Stock Option/Stock Issuance Plan (the
"1993 Plan") have been granted at fair market value on the date of grant and
vest in equal annual installments over periods up to four years. Outstanding
options granted under earlier plans were granted at fair market value or lesser
values, and vest over different periods, primarily over periods up to four
years.

Stockholders approved additional allocations of 500,000 shares of common stock
to the stock option pool under the 1993 Stock Option/Issuance Plan in each of
May 1995 and May 1996 (1,000,000 shares total).

In December 1997, the Board of Directors approved the 1997 Special Non-Officer
Stock Option Plan which permits the Company to grant options to purchase up to
150,000 shares of common stock. The persons eligible to receive options through
this plan are those employees who are neither executive officers of the Company
nor members of the Board of Directors.

33

The following table shows the activity in the Company's stock option plans:

WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------

Balance, December 31, 1994 (97,469 exercisable at $5.25 weighted average price per share). 543,362 $ .45
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,000 17.98
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (143,951) 2.46
Canceled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,125) 12.79
--------- --------
Balance, December 31, 1995 (93,276 exercisable at $9.72 weighted average price per share). 669,286 $12.94
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,750 29.79
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,190) 4.09
Canceled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,500) 12.82
--------- --------
Balance, December 31, 1996 (205,408 exercisable at $13.70 weighted average price per share) 839,346 $18.96
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614,650 31.64
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (103,265) 10.70
Canceled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,250) 23.74
--------- --------
Balance, December 31, 1997 (320,580 exercisable at $18.36 weighted average price per share) 1,308,481 $25.54
--------- --------
--------- --------

Warrants issued in connection with a line of credit and the public offering to
purchase 16,756 shares of common stock at $2.50 to $18.50 were outstanding at
December 31, 1997. Options to purchase approximately 78,596 shares of common
stock are available for future grants under the plans.

The Company applies APB Opinion 25 and related Interpretations in accounting for
its employee stock-based compensation plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock-based plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123,
the Company's net earnings and net earnings per share would have been decreased
to the proforma amounts indicated in the following table. As 1996 was the
initial phase-in period for applying this Statement, the proforma results
indicated are not necessarily representative of the effects on proforma
disclosures of net earnings for future periods as they exclude options that were
granted prior to January 1, 1995, with vesting periods in 1995 and later.

YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------
1997 1996 1995

NET EARNINGS
As reported $ 8,775 $ 6,611 $ 2,387
-------- -------- --------
-------- -------- --------
Proforma $ 6,916 $ 5,489 $ 2,021
-------- -------- --------
-------- -------- --------

BASIC EARNINGS PER SHARE
As reported $ 1.04 $ 0.79 $ 0.29
-------- -------- --------
-------- -------- --------
Proforma $ 0.82 $ 0.66 $ 0.25
-------- -------- --------
-------- -------- --------

DILUTED EARNINGS PER SHARE
As reported $ 1.01 $ 0.77 $ 0.28
-------- -------- --------
-------- -------- --------
Proforma $ 0.79 $ 0.64 $ 0.24
-------- -------- --------
-------- -------- --------

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1997, 1996 and 1995 under the 1993 Stock
Option/Stock Issuance Plan and for purchases made in 1997, 1996 and 1995 under
the Employee Stock Purchase Plan: risk-free interest rates are 5.91% in 1997,
6.07% in 1996 and 5.91% in 1995; expected volatility is 51.4% in 1997 and 51% in
both 1996 and 1995; expected lives in all years are 18 months beyond each
incremental vesting

34

period (total life of 2 to 5.5 years, depending upon each grant's individual
vesting schedule). No dividends are assumed for any plan in any year. The
weighted average fair value of options granted during 1997, 1996, and 1995 was
$14.18, $13.27 and $8.05, respectively.

The status of options outstanding as of December 31, 1997 is summarized as
follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------

$ 5.25- 5.25 40,000 5.3 $ 5.25 40,000 $ 5.25
9.00-10.38 73,420 6.3 10.15 55,795 10.09
12.50-14.13 92,500 6.9 14.04 11,250 13.40
16.00-16.00 75,000 7.2 16.00 39,687 16.00
18.25-19.13 156,536 7.9 18.40 80,036 18.47
21.88-23.00 10,000 7.1 22.44 7,500 22.63
28.00-29.25 353,875 8.9 28.75 63,812 28.96
31.75-31.75 390,500 10.0 31.75 -
35.75-35.75 32,150 9.6 35.75 -
36.00-37.75 84,500 9.1 37.12 22,500 36.96
----------------- ----------- ----------- ---------- ----------- ----------
$ 5.25-37.75 1,308,481 8.6 $ 25.54 320,580 $ 18.36
----------------- ----------- ----------- ---------- ----------- ----------
----------------- ----------- ----------- ---------- ----------- ----------

NOTE 11: QUARTERLY FINANCIAL INFORMATION

1997 QUARTERLY
---------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1997 1997 1997 (1) 1997
--------- -------- --------- --------- --------

Revenues $16,354 $17,003 $18,253 $20,022 $71,632
Gross profit 7,231 7,389 7,759 8,803 31,182
Net earnings 1,925 2,095 2,254 2,501 8,775
Basic earnings per share 0.23 0.25 0.27 0.29 1.04
Diluted earnings per share 0.22 0.24 0.26 0.29 1.01

(1) See Note 7 to Financial Statements.

1996 QUARTERLY
---------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1996 1996 1996 1996
--------- -------- --------- --------- --------

Revenues $12,717 $13,607 $14,657 $15,765 $56,746
Gross profit 4,941 5,319 5,890 6,794 22,944
Net earnings 1,371 1,511 1,713 2,016 6,611
Basic earnings per share 0.16 0.18 0.20 0.24 0.79
Diluted earnings per share 0.16 0.18 0.20 0.23 0.77

35

NOTE 12: EARNINGS PER SHARE

The Company calculates basic earnings per share (EPS) and diluted EPS in
accordance with SFAS No. 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, and uses the average share price 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 EPS:

YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------

Shares used to compute basic EPS 8,464,000 8,345,679 8,228,483

Add: effect of dilutive securities 263,396 267,321 270,517
--------- --------- ---------

Shares used to compute diluted EPS 8,727,396 8,613,000 8,499,000
--------- --------- ---------
--------- --------- ---------

36

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

37

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

NAME AGE POSITION
- ---- --- --------

Peter R. Johnson (2)(3)(4) 49 Chairman of the Board of Directors and the Nomination Committee
H. Lynn Hazlett, Ph.D. 61 Chief Executive Officer and Director
John Simon 40 President
Shawn M. O'Connor 38 Executive Vice President, Chief Operating Officer, Chief Financial Officer,
and Secretary
Paul Benchener 52 Vice President, Marketing
Glenn DuBois 44 Vice President, Sales
Philip Swift 47 Vice President, Information Services
Tania Amochaev (4) 48 Director, Chairman of the Executive Committee
Steven D. Brooks (2)(3)(4) 46 Director, Chairman of the Audit Committee
John P. Dougall 54 Director
Garth Saloner (1)(2) 43 Director
Philip Schlein (1) 64 Director
Garen K. Staglin (1)(3)(4) 53 Director, Chairman of the Compensation Committee

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee
(3) Member of the Nomination Committee
(4) Member of the Executive Committee

Mr. Johnson founded the Company in 1985 and has been Chairman of the Board since
the Company's inception. Mr. Johnson served as the Chief Executive Officer of
the Company from inception to March 1991 and again from January 1992 to May
1993. Before founding the Company, Mr. Johnson was a corporate general manager
of Myer Emporium Limited, a large retailer in Australia. Mr. Johnson served as
the Chief Executive Officer of Uniquest Incorporated from December 1993 to
December 1994. From 1995 to the present, Mr. Johnson was a private investor and
a consultant to technology companies.

Dr. Hazlett was named a director of the Company in May 1994 and was named Chief
Executive Officer in February 1997. He also served as President of the Company
from February 1997 to January 1998. From January 1994 to February 1997, Dr.
Hazlett owned and operated Supply Chain Associates, a retail supply chain
consultancy practice. Dr. Hazlett served as Vice President, Business Systems at
VF Corporation, a global apparel manufacturer, from 1989 to January 1994. From
1984 to 1989, Dr. Hazlett served as President and Chief Executive Officer of
Information and Communications, Inc., a division of Carson Pirie Scott &
Company, a conglomerate comprised of 33 department stores, 400 specialty stores
and a mail order catalog business. Prior to that, Dr. Hazlett also served as
Corporate Vice President and Chief Information Officer at Levi Strauss & Co., a
manufacturer of apparel. Dr. Hazlett is a director of National Industries
for the Blind, a non-profit organization, and TRINET Corporation, a provider
of human resource services.

Mr. Simon was named President of the Company in January 1998. Mr. Simon
previously held various positions with the Company since 1988, including
Executive Vice President from January 1994 to January 1998. From 1980 to 1988,
Mr. Simon was employed by Carter Hawley Hale Stores, Inc., a retail company,
most recently as Senior Program Manager of its Information Services Division,
and prior to that held a number of merchandising, store management, and
information services positions.

Mr. O'Connor was named Executive Vice President and Chief Operating Officer in
January 1998. Mr. O'Connor joined the Company in February 1995 and became Vice
President, Chief Financial Officer and Secretary in March 1995. Before joining
the Company, from 1992 to November 1994, Mr. O'Connor was Vice President and
Chief Financial Officer for Diasonics Ultrasound, Inc., a medical equipment
manufacturer. From 1988 to 1992, Mr. O'Connor held various management positions
with Diasonics Ultrasound.

38

Mr. Benchener joined the Company in August 1996 as Vice President, Marketing.
Prior to joining the Company, from 1992 to August 1996, Mr. Benchener was
Director of Global Quick Response Services at Levi Strauss, where he held
various positions from 1976 to 1991. Mr. Benchener currently serves as Chair of
the Voluntary Interindustry Commerce Standards Board and on the Executive
Committee of the Uniform Code Council.

Mr. DuBois joined the Company in July 1997 as Vice President of Sales. Prior to
joining the Company, from July 1996 to June 1997, he was the Vice President of
Sales for the LizWear Division of Liz Claiborne, Inc., a manufacturer of
apparel. From July 1991 to July 1996, Mr. DuBois was with the Lee Division of VF
Corporation, initially as Director of Business Systems and Planning and,
beginning in 1994, as Regional Vice President of Sales. Prior to that, from 1983
to 1991, Mr. DuBois served in various management roles in both retail relations
and systems for Levi Strauss.

Mr. Swift joined the Company in October 1996 as Vice President, Product
Development and was named Vice President of Information Systems in January 1998.
Before joining the Company, from 1992 to October 1996, Mr. Swift was Department
Head of Information Products at VISA, a credit card transaction processing
company. From 1989 to 1991, Mr. Swift was Senior Project Manager at Matson
Navigation, a shipping company.

Ms. Amochaev was named a director in May 1992 and was named Chairman of the
Executive Committee of the Board of Directors in February 1997. Ms. Amochaev
served as the President of the Company from May 1992 until February 1997, and as
Chief Executive Officer from May 1993 until February 1997. Before joining the
Company, from 1988 to 1992, Ms. Amochaev was Chief Executive Officer of Natural
Language, Inc., a client server database tool software company. From 1984 to
1987, Ms. Amochaev was President and Chief Executive Officer of Comserv
Corporation, a manufacturing applications software company that was sold in 1987
to Management Science America. Ms. Amochaev currently serves as a director of
Walker Interactive Systems, Inc., a financial software company, of Government
Technology Services, Inc., a computer reseller to the government, and of
Symantec Corporation, a software company.

Mr. Brooks was named a director of the Company in January 1994. Since September
1997, Mr. Brooks has been a Managing Director of Donaldson Lufkin & Jenrette
Securities Corporation, an investment banking firm. From 1996 to August 1997,
Mr. Brooks was a private investor and a consultant to technology companies. From
1994 to 1996, Mr. Brooks served as Managing Director and Head of Global
Technology Investment Banking at Union Bank of Switzerland Securities, LLC. From
1988 to 1994, Mr. Brooks was a private investor and consultant to
high-technology firms. From 1986 to 1988, Mr. Brooks served as Managing Partner
of investment banking at Robertson, Stephens & Co., an investment bank. Mr.
Brooks is a Director of Paychex, Inc., a national payroll processing and
business services company, and VERITAS Software Corporation, a systems
management software company, as well as several private companies.

Mr. Dougall has been a director of the company since July 1990. Mr. Dougall has
been employed since November 1996 by Aristocrat Leisure Limited, an Australian
publicly listed company and a supplier to gambling and entertainment companies,
where he currently serves as Chairman and Chief Executive Officer. From January
1992 to September 1996, Mr. Dougall served as Chief Executive Officer of AWA
Limited, an electronics and telecommunications company. Mr. Dougall held various
executive positions with the Company from July 1990 to January 1992, serving as
President of the Company from February 1991 to June 1991 and as President and
Chief Executive Officer from June 1991 to January 1992. From February 1988 to
June 1990, Mr. Dougall was the Executive Director of Paxus Corporation, a
software services and outsourcing firm.

Mr. Saloner was named a director of the Company in December 1993. Mr. Saloner
has served as the Robert A. Magowan Professor of Strategic Management and
Economics at the Graduate School of Business at Stanford University since 1990.
He also serves as Associate Dean for Academic Affairs and Director of Research
and Course Development at Stanford. From 1982 to 1990, Mr. Saloner taught as a
professor in the Economics Department of the Massachusetts Institute of
Technology.

39

Mr. Schlein was named a director of the Company in February 1996. Mr. Schlein
has been a general partner of BMS Partners L.P., a venture partner of U.S.
Venture Partners, a venture capital firm, since April 1985. Mr. Schlein held
various executive positions with R.H. Macy & Company, Inc. from September 1957
to December 1973 and was President and Chief Executive Officer of Macy's
California division from January 1974 to January 1985. Mr. Schlein currently
serves as a director of Burnham Pacific Incorporated, a commercial real estate
development and leasing company, Ross Stores, a clothing store chain, and
Resound Corporation, a hearing device manufacturing company. Additionally, Mr.
Schlein served as a director of Apple Computer, Inc. from 1979 to 1987.

Mr. Staglin was named a director of the Company in 1991. Since 1991, Mr. Staglin
has served as the Chief Executive Officer and Chairman of the Board of Directors
of Safelite Glass Corporation, a replacement auto glass manufacturing and
retailing company. From 1980 to 1991, Mr. Staglin was Vice President and General
Manager of Automatic Data Processing, a computer networking services company.
Mr. Staglin currently serves as a director of First Data Corporation, a supplier
of computer services for credit card processing and other financial services,
Cybercash, Inc., a provider of secure transaction services for the Internet, and
Grimes Aerospace Corporation, a manufacturer of aircraft replacement parts and
repair services. In 1994, he was named a member of the Advisory Council to the
Stanford Graduate School of Business.

The information required in this Item 10 with respect to compliance with Section
16(a) of the Exchange Act is hereby incorporated by reference from the
information under the caption "Compliance with Section 16(a) of the Exchange Act
of 1934" in the Company's definitive proxy statement (the "Proxy Statement").
The Proxy Statement will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the Company's last fiscal year in
connection with the solicitation of proxies for its Annual Meeting of
Stockholders to be held on May 5, 1998.

ITEM 11. EXECUTIVE COMPENSATION

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 11 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1997, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Executive Compensation
and Other Information," the information required by this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 12 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1997, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Security Ownership Of
Certain Beneficial Owners and Management," the information required by this
item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 13 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1997, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Certain Relationships
and Related Transactions" the information required by this item.

40

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed or incorporated by reference as part of this
Form 10-K:

(a) ITEMS FILED AS PART OF REPORT:

1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

2. FINANCIAL STATEMENT SCHEDULES

All schedules are omitted because they are not applicable or not
required or because the required information is included in the
financial statements or notes thereto.

(b) REPORTS ON FORM 8-K

None

(c) EXHIBITS

EXHIBIT
NO. DESCRIPTION

2.1 Agreement and Plan of Merger of QuickResponse Delaware, Inc. and
QuickResponse Services, Inc.

3.1 Certification of Incorporation of the Company.

3.2 Certificate of Correction of Certificate of Incorporation of the
Company.

3.3 Bylaws of the Company.

4.1 Specimen of Common Stock Certificate of the Registrant.*

10.1 1993 Stock Option/Stock Insurance Plan and forms of agreement
thereunder.*

10.2 Employee Stock Purchase Plan.*

10.3 Form of 1990 Nonqualified Stock Option Agreement.*

10.4 Employment Agreement dated April 22, 1992 between the Registrant and
Tania Amochaev.*

10.5 Employment Agreement dated March 1, 1993 between the Registrant and
Tania Amochaev.*

10.6 Form of Indemnification Agreement.*

10.7 Lease Agreement dated April 27, 1990 between the Registrant and
Schooner Drive Associates, a California Limited Partnership.*

10.8 Sublease dated May 1, 1993 between the Registrant and PRJ&, Inc.*

10.9 Preferred Stock Purchase and Debt Consolidation Agreement, dated as of
March 22, 1991 among the Registrant, Peter R. Johnson and International
Business Machines Corporation.*

41

10.10 First Amendment dated as of May 20, 1993 to the Preferred Stock
Purchase and Debt Consolidation Agreement among the Registrant, Peter
R. Johnson, and International Business Machines Corporation.*

10.11 Replacement Consolidated Convertible Notes dated March 22, 1991 issued
to International Business Machines Corporation.*

10.12 Security Agreement dated as of March 22, 1991 between the Registrant
and International Business Machines Corporation.*

10.13 Warrant dated March 22, 1991 issued to International Business Machines
Corporation.*

10.14 License Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*

10.15 First Amendment dated as of May 20, 1993 to the License Agreement
between the Registrant and International Business Machines
Corporation.*

10.16 Maintenance and Support Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*

10.17 First Amendment dated as of May 20, 1993 to the Maintenance and Support
Agreement between the Registrant and International Business Machines
Corporation.*

10.18 Marketing Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*

10.19 Common Stock Purchase Agreement dated April 3, 1989 by and among
Registrant and Retail Shopping International (Aust) Pty. Ltd., Barclays
Investment Pty. Ltd., and Peter R. Johnson.*

10.20 Business Loan Agreement dated May 30, 1990 between Registrant and
Silicon Valley Bank as amended on June 3, 1993.*

10.22 Warrant dated July 16, 1992 issued to Steven D. Brooks.*

10.23 Warrant dated March 31, 1993 issued to Steven D. Brooks.*

10.24 # Volume Discount Agreement dated December 16, 1991 between the
Registrant and International Business Machines Corporation.*

10.25 Facilities and Cost Sharing Agreement dated May 1, 1993 between the
Registrant and PRJ&, Inc.*

10.26 Data Center Services Agreement dated April 30, 1993 between the
Registrant and PRJ&, Inc.*

10.27 Agreement and Plan of Merger dated May 20, 1993 among the Registrant,
Uniquest Incorporated, PRJ Acquisition Corp. and PRJ&, Inc.*

10.28 Consent and Release Agreement dated as of May 20, 1993 among the
Registrant, PRJ&, Inc., Peter R. Johnson, Uniquest Incorporated and
International Business Machines Corporation.*

10.29 Separation Agreement dated May 1, 1993 between the Registrant and PRJ&,
Inc.*

10.30 Assignment, Bill of Sale and Assumption Agreement dated as of May 20,
1993 between the Registrant and PRJ&, Inc.*

10.31 Escrow Agreement dated May 20, 1993 among the Registrant, Uniquest
Incorporated and Bank of America NT&SA.*

10.32 Pledge Agreement dated as of May 20, 1993 between the Registrant and
International Business Machines Corporation.*

10.33 Agreement dated as of July 13, 1993 between the Registrant and
International Business Machines Corporation.*

42

10.34 # Advantis Industry Remarketer Agreement dated as of January 6, 1994
between Advantis and the Registrant.**

10.35 Uniquest Forbearance Agreement between Uniquest Incorporated and the
Registrant.**

10.36 # International Remarketer Agreement dated as of November 11, 1996
between Advantis and the Registrant.***

10.37 # Employment Agreement dated as of February 6, 1997 between Registrant
and Lynn Hazlett.***

10.38 Reserved.

10.39 Fourth Amendment, dated August 7, 1997, to Lease Agreement between the
Registrant and Marina Westhore Partners, LLC, successor in interest to
Schooner Drive Association, a California Limited Partnership.****

10.40 Option Agreement dated August 7, 1997 between the Registrant and Marina
Westshore Partners, LLC.****

10.41 ## Employment Agreement dated as of December 24, 1997 between Registrant
and John Simon.

10.42 ## Employment Agreement dated as of December 24, 1997 between Registrant
and Shawn O'Connor.

10.43 ## Retail Management Agreement dated as of December 31, 1997 between
Registrant and International Business Machines Corporation.

10.44 ## Business Partner Agreement dated December 31, 1997 between Registrant
and International Business Machines Corporation.

10.45 1997 Non-Officer Stock Plan.

10.46 Non-qualified Deferred Compensation Plan.

23.1 Consent of Deloitte & Touche LLP, Independent Auditors.

24.1 Power of Attorney (see page 44).

27.1 Financial Data Schedule.

- --------------------

* Incorporated by reference to Exhibit of same number of the Registrant's
Registration Statement on Form S-1 (Registration No. 33-63938).
** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
*** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
**** Incorporated by reference to Exhibit of same number filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1997.
# Confidential treatment has been granted with respect to portions of this
document.
## Confidential treatment has been requested with respect to portions of
this document.

43

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 5th day of March, 1998.

QUICKRESPONSE SERVICES, INC.

/s/ Shawn M. O'Connor
---------------------------------------
Shawn M. O'Connor, Executive Vice President,
Chief Operating Officer, Chief Financial
Officer, and Secretary

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Lynn Hazlett, acting
alone, his or her true and lawful attorney-in-fact with authority to execute in
the name of each person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 necessary or advisable to enable QuickResponse Services,
Inc. to comply with the Securities Exchange Act of 1934, any rules, regulations
and requirements of the Securities and Exchange Commission in respect thereof,
which amendments may make such other changes in the report as the aforesaid
attorney-in-fact executing the same deems appropriate.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 has been signed
by the following persons in the capacities indicated and on the dates indicated.

SIGNATURE DATE

/s/ H. Lynn Hazlett March 5, 1998
- --------------------------------------------------------
H. Lynn Hazlett, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Peter R. Johnson March 5, 1998
- --------------------------------------------------------
Peter R. Johnson, Chairman of the Board of Directors

/s/ Tania Amochaev March 5, 1998
- --------------------------------------------------------
Tania Amochaev, Director

/s/ Steven D. Brooks March 5, 1998
- --------------------------------------------------------
Steven D. Brooks, Director

/s/ John P. Dougall March 5, 1998
- --------------------------------------------------------
John P. Dougall, Director

/s/ Philip Schlein March 5, 1998
- --------------------------------------------------------
Philip Schlein, Director

/s/ Garen K. Staglin March 5, 1998
- --------------------------------------------------------
Garen K. Staglin, Director

/s/ Garth Saloner March 5, 1998
- --------------------------------------------------------
Garth Saloner, Director

/s/ Shawn M. O'Connor March 5, 1998
- --------------------------------------------------------
Shawn M. O'Connor, Executive Vice President, Chief
Operating Officer, Chief Financial Officer, and
Secretary (Principal Financial and Accounting
Officer)

44

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION

2.1 Agreement and Plan of Merger of QuickResponse Delaware, Inc. and
QuickResponse Services, Inc.

3.1 Certification of Incorporation of the Company.

3.2 Certificate of Correction of Certificate of Incorporation of the
Company.

3.3 Bylaws of the Company.

4.1 Specimen of Common Stock Certificate of the Registrant.*

10.1 1993 Stock Option/Stock Insurance Plan and forms of agreement
thereunder.*

10.2 Employee Stock Purchase Plan.*

10.3 Form of 1990 Nonqualified Stock Option Agreement.*

10.4 Employment Agreement dated April 22, 1992 between the Registrant and
Tania Amochaev.*

10.5 Employment Agreement dated March 1, 1993 between the Registrant and
Tania Amochaev.*

10.6 Form of Indemnification Agreement.*

10.7 Lease Agreement dated April 27, 1990 between the Registrant and
Schooner Drive Associates, a California Limited Partnership.*

10.8 Sublease dated May 1, 1993 between the Registrant and PRJ&, Inc.*

10.9 Preferred Stock Purchase and Debt Consolidation Agreement, dated as of
March 22, 1991 among the Registrant, Peter R. Johnson and International
Business Machines Corporation.*

10.10 First Amendment dated as of May 20, 1993 to the Preferred Stock
Purchase and Debt Consolidation Agreement among the Registrant, Peter
R. Johnson, and International Business Machines Corporation.*

10.11 Replacement Consolidated Convertible Notes dated March 22, 1991 issued
to International Business Machines Corporation.*

10.12 Security Agreement dated as of March 22, 1991 between the Registrant
and International Business Machines Corporation.*

10.13 Warrant dated March 22, 1991 issued to International Business Machines
Corporation.*

10.14 License Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*

10.15 First Amendment dated as of May 20, 1993 to the License Agreement
between the Registrant and International Business Machines
Corporation.*

10.16 Maintenance and Support Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*

10.17 First Amendment dated as of May 20, 1993 to the Maintenance and Support
Agreement between the Registrant and International Business Machines
Corporation.*

10.18 Marketing Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*

10.19 Common Stock Purchase Agreement dated April 3, 1989 by and among
Registrant and Retail Shopping International (Aust) Pty. Ltd., Barclays
Investment Pty. Ltd., and Peter R. Johnson.*

10.20 Business Loan Agreement dated May 30, 1990 between Registrant and
Silicon Valley Bank as amended

45

on June 3, 1993.*

10.22 Warrant dated July 16, 1992 issued to Steven D. Brooks.*

10.23 Warrant dated March 31, 1993 issued to Steven D. Brooks.*

10.24 # Volume Discount Agreement dated December 16, 1991 between the
Registrant and International Business Machines Corporation.*

10.25 Facilities and Cost Sharing Agreement dated May 1, 1993 between the
Registrant and PRJ&, Inc.*

10.26 Data Center Services Agreement dated April 30, 1993 between the
Registrant and PRJ&, Inc.*

10.27 Agreement and Plan of Merger dated May 20, 1993 among the Registrant,
Uniquest Incorporated, PRJ Acquisition Corp. and PRJ&, Inc.*

10.28 Consent and Release Agreement dated as of May 20, 1993 among the
Registrant, PRJ&, Inc., Peter R. Johnson, Uniquest Incorporated and
International Business Machines Corporation.*

10.29 Separation Agreement dated May 1, 1993 between the Registrant and PRJ&,
Inc.*

10.30 Assignment, Bill of Sale and Assumption Agreement dated as of May 20,
1993 between the Registrant and PRJ&, Inc.*

10.31 Escrow Agreement dated May 20, 1993 among the Registrant, Uniquest
Incorporated and Bank of America NT&SA.*

10.32 Pledge Agreement dated as of May 20, 1993 between the Registrant and
International Business Machines Corporation.*

10.33 Agreement dated as of July 13, 1993 between the Registrant and
International Business Machines Corporation.*

10.34 # Advantis Industry Remarketer Agreement dated as of January 6, 1994
between Advantis and the Registrant.**

10.35 Uniquest Forbearance Agreement between Uniquest Incorporated and the
Registrant.**

10.36 # International Remarketer Agreement dated as of November 11, 1996
between Advantis and the Registrant.***

10.37 # Employment Agreement dated as of February 6, 1997 between Registrant
and Lynn Hazlett.***

10.38 Reserved.

10.39 Fourth Amendment, dated August 7, 1997, to Lease Agreement between the
Registrant and Marina Westhore Partners, LLC, successor in interest to
Schooner Drive Association, a California Limited Partnership.****

10.40 Option Agreement dated August 7, 1997 between the Registrant and Marina
Westshore Partners, LLC.****

10.41 ## Employment Agreement dated as of December 24, 1997 between Registrant
and John Simon.

10.42 ## Employment Agreement dated as of December 24, 1997 between Registrant
and Shawn O'Connor.

10.43 ## Retail Management Agreement dated as of December 31, 1997 between
Registrant and International Business Machines Corporation.

10.44 ## Business Partner Agreement dated December 31, 1997 between Registrant
and International Business Machines Corporation.

10.45 1997 Non-Officer Stock Plan.

10.46 Non-qualified Deferred Compensation Plan.

46

23.1 Consent of Deloitte & Touche LLP, Independent Auditors.

24.1 Power of Attorney (see page 44).

27.1 Financial Data Schedule.

- --------------------

* Incorporated by reference to Exhibit of same number of the Registrant's
Registration Statement on Form S-1 (Registration No. 33-63938).
** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
*** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
**** Incorporated by reference to Exhibit of same number filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1997.
# Confidential treatment has been granted with respect to portions of this
document.
## Confidential treatment has been requested with respect to portions of
this document.

47