Back to GetFilings.com

Table of Contents

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

For the transition period from                     to                     

Commission file number 0-21958

QRS Corporation

(Exact name of registrant as specified in its charter)

1400 Marina Way South, Richmond, 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:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

Preferred Stock Purchase Rights

(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 amendment to this Form 10-K.    x

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $49.6 million as of June 30, 2003, based upon the closing price on the Nasdaq National Market reported for such date. As of March 2, 2004, there were 15,928,263 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission are incorporated by reference into Part III of this Form 10-K.

Table of Contents

Index to Financial Statements

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a number of risks and uncertainties. All statements that are not historical facts are forward-looking statements, including statements regarding our business strategy, future operations, future financial position, estimated revenues or earnings (losses), projected costs, prospects, plans and objectives. These statements appear in a number of places and can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy.

Actual results may vary materially from those in the forward-looking statements as a result of various factors which are identified in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this document. These factors include: general economic and business conditions; specific conditions in the retail industry; competition; changes in senior management; rapid technological change in our industry; dependence upon key customers and their trading partners; ability to introduce and market acceptance of new products and services; the ability to successfully integrate and manage acquired businesses and technologies; customers’ willingness to purchase products or services offered through or in conjunction with third parties; dependence upon IBM for electronic commerce service; dependence on third parties for licenses to technology that is integrated into certain products and services offered by us; and the ability to protect our proprietary technology and information. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Readers should not place undue reliance on these forward-looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. We assume no obligation to update any forward-looking statements.

2

Table of Contents

Index to Financial Statements

QRS CORPORATION

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

3

Table of Contents

Index to Financial Statements

PART I

Item 1.  BUSINESS

General

QRS Corporation (“QRS,” the “Company,” “we” or “us”) is a technology company that serves the retail trading community with collaborative commerce solutions. We manage the flow of critical commerce information between companies and leverage our retail technology expertise to address fundamental industry challenges such as global data synchronization, compliance mandates, transaction outsourcing and product information management. Our solutions help customers expand into new markets and channels, improve operational efficiency and differentiate their brand. Currently we have more than 10,000 customers, as measured by the number of total, unique corporate customers that purchased or licensed our products and services during 2003. We offer solutions that help meet the diverse needs of members of the global retail trading community, regardless of company size, technology infrastructure or retail segment.

Our products and services help thousands of retailers, vendors, suppliers and brand manufacturers from a variety of retail segments, including general merchandise and apparel, consumer packaged goods, health and beauty, consumer electronics, hardlines, do-it-yourself, sporting goods and grocery. Our products and services are typically used with our customers’ enterprise information technology systems in order to deliver greater benefits and efficiencies to these customers. We market our products and services in three Solutions Groups: Software Applications, Trading Community Management and Global Services.

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

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

Our Global Services include the collection, analysis and delivery of pricing, promotion and distribution information; software implementation and integration services; and technical support and training services for our various solutions.

In 2003, we experienced a decline in revenue from our traditional business, such as QRS Exchange^™ and QRS Catalogue^™, primarily due to continued competitive pricing pressures offset to some degree by increases in transaction volume in our Trading Community Management Solutions Group. This pricing pressure is continuing. Trading Community Management revenue was also impacted by a significant decline in leased lines and dial-up connectivity services due to technological obsolescence. To offset the decline in revenue from our traditional business, we reduced operating expenses and improved gross margin.

The challenge facing our business is to launch new products and services that can generate new revenue to offset the decline in revenue from our traditional business. We plan to continue to reduce costs in our traditional business while investing cash generated by our operations to develop and launch new products and services. Our growth strategy over the next few years is three-fold: 1) deepen our relationships within our traditional customer base, 2) expand our presence in new retail segments and 3) introduce new solutions that deliver value to our

4

Table of Contents

Index to Financial Statements

customers by helping them better differentiate their companies in the marketplace. We believe these new products and services will create long-term growth by serving our customer base of more than 10,000 retail industry companies. The first new product to be launched as part of this strategy is QRS IMPACT^™, our product information management solution, discussed below.

Industry

Generating more than $3 trillion annually in sales, retail is the second largest industry in the United States, as reported by the U.S. Census Bureau in April 2003. The retail industry supply chain process includes hundreds of collaborative steps among thousands of retailers, vendors, suppliers, brand manufacturers and other intermediaries to create, manufacture and move products from source to store. The retail industry is characterized by multiple product sourcing options, a wide array of products and multi-channel shopping venues that include retail stores, outlet malls, mail-order catalogues and Internet sites. Competition for retail customers and wholesale orders is intense. Industry participants must be able to meet consumer demand quickly, accurately and at the most competitive price.

In the mid-1980s, a cooperative industry effort to improve the electronic processing of data led to the creation of certain data format standards, including the adoption of electronic data interchange (EDI), uniform product code (UPC) and, in Europe and other international markets, the European article number (EAN) standards. More recently, the global trade item number (GTIN) has been established.

EDI is a standard data format for electronic data communication between businesses such as retailers and suppliers. Documents in EDI-standard format can be sent over a proprietary network (VAN) or over the Internet. The GTIN, UPC and EAN data formats allow for the consistent identification of merchandise throughout the supply chain process, from product design to the point of sale. The use of GTIN, UPC and EAN data greatly increases the efficiency with which retailers and manufacturers can mark, track and exchange detailed product information. As a result of these standards and technologies, retailers, vendors, suppliers and brand manufacturers have been able to reduce the cost of financial operations, mismatches between purchase orders and invoices, inaccurate product shipments and stock-outs. We remain focused on enabling retail industry participants to connect with each other and transact business through the use of these automated communications and product identification standards.

In recent years, retail companies have sought to differentiate themselves through innovative brand strategies and improved brand execution, which involves every business process associated with delivering products to market, from initial design through the delivery of a product to the consumer. Successful brand execution requires collaboration with partners and automation of mission-critical business processes and transactions across the supply chain. More and more software applications have been used by the retail industry to improve brand execution. Such software applications are generally focused on enabling real-time data sharing and collaboration across various supply chain activities, including product design, sourcing, demand forecasting, collaborative assortment planning, purchasing, logistics, distribution, promotions, pricing, sales analysis and replenishment.

QRS Mission and Strategy

Our mission is to enable retailers, vendors, suppliers and brand manufacturers and their business partners to connect, transact, collaborate and differentiate within their global trading community to significantly improve business performance and global brand execution. QRS focuses on meeting customers’ current and emerging collaborative commerce needs.

We believe that our customers’ competitive advantage is built on their ability to differentiate both their brand and their operational capabilities. To do this, they need to collaborate effectively with other members of their trading community. Internal optimization of a customer’s business is unlikely to be enough to differentiate itself in the current marketplace. To collaborate, trading partners must interact and transact business efficiently.

5

Table of Contents

Index to Financial Statements

Automation of transactions helps make collaboration effective and differentiation easier. To transact, companies must be connected or networked. We believe that we add value to our customers because we offer the products and services that companies need to connect, transact, collaborate and differentiate themselves, ultimately driving overall business performance improvement and improved brand equity as measured through customer awareness, image, preference and loyalty.

Today, QRS provides a suite of collaborative commerce solutions, including networking software and services, automated document exchange, product information management and data synchronization, product sourcing and store-level information gathering services to optimize critical business processes of the retailing industry.

Our growth strategy over the next few years is three-fold: 1) deepen our relationships with our traditional customer base, 2) expand our presence in new retail segments and 3) introduce new solutions that deliver value to our customers by helping them better differentiate their companies in the marketplace.

To support this growth strategy, we plan to invest in further development of new and existing services and supporting technologies.

Deepening Our Relationships Within Our Traditional Customer Base

Our products and services address critical business issues with solutions that quickly deliver benefits to our customers. We deepen our relationships within our traditional customer base in a number of ways, including expanding the number of products a current customer buys (cross-selling), gaining exclusivity with existing customers and enabling a greater number of our customers’ trading partners. In 2003, we continued to win business with our existing customers, including many leading companies in our traditional base of general merchandise and apparel customers.

Expanding Our Presence In New Retail Segments

In 2003, we continued to win business in retail segments adjacent to our traditional market in general merchandise and apparel, such as consumer packaged goods, sporting goods, grocery, consumer electronics, hardlines, do-it-yourself, and health and beauty. These market segments have collaborative needs consistent with those of our traditional customers. To aid our expansion in new retail segments, we actively participate in and support industry initiatives and standards.

Introducing New Solutions That Deliver Value To Our Customers

Our product strategy includes enhancing our current product offerings and introducing new collaborative solutions and service offerings that can help our customers collaborate to improve the execution of their brand strategies. In 2003, we enhanced several of our existing products. In the Software Applications Solutions Group, we continued to make enhancements to QRS Catalogue^™. QRS Catalogue^™ was certified for the UCCnet Communications Solution using the EDI-over-the-Internet, or EDIINT AS2 protocol, during the third quarter 2003, meaning we are able to exchange messages with UCCnet’s data registry via an AS2 connection. QRS Catalogue^™ achieved full UCCnet Certification during the first quarter of 2004.

Within our Trading Community Management Solutions Group, we launched QRS Web Forms^™ 7.0 in the fourth quarter of 2003. QRS Web Forms^™ is an online application that manages data translation and trading partner compliance for small- and mid-sized suppliers.

In response to the movement by many large retailers and government agencies toward adoption of the EDIINT AS2 protocol, QRS also released an EDIINT gateway service offering in the fourth quarter of 2003, which allows current QRS Exchange^™ customers to use their existing EDI solution to meet customers’ EDIINT requirements.

6

Table of Contents

Index to Financial Statements

In addition to these product enhancements, we are developing and introducing new collaborative applications in order to generate future revenue growth. In January 2004, we launched QRS IMPACT^™, a product information management solution, at the National Retail Federation 2004 Convention, one of the retail industry’s largest trade shows. QRS IMPACT^™ is an enterprise software solution that offers a central repository for managing product information throughout its lifecycle. This includes aggregating product information from disparate sources, standardizing content, enforcing business rules and syndicating content to multiple sources both within a company and across channels.

QRS Solutions

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

Software Applications

QRS Catalogue^™.    QRS Catalogue^™ is a leading retail industry product data synchronization application containing information on over 90 million products. It allows suppliers and brand manufacturers to share with retailers their latest product information, such as price, style, color, size, weight, unit of measure and over 450 additional product attributes. QRS Catalogue^™ offers a complete solution for item setup and synchronization, supporting the latest EAN.UCC global standards and initiatives. QRS Catalogue^™ features multiple access options, including an internet-based user interface, EDI, eXtensible Markup Language (XML) and real-time application integration. It also features extensive data synchronization that allows vendors to upload a single catalogue for all their trading partners while tailoring data visibility for each member of their trading community as needed.

QRS IMPACT^™.    QRS IMPACT^™ is a product information management solution designed specifically for retailers, vendors, suppliers and brand manufacturers. This enterprise software application provides quick, complete, accurate and relevant product information across departments, diverse channels and trading partners. By providing a single, global repository of product information within a company, QRS IMPACT^™ promotes the on-time, accurate and relevant flow of information across departments, diverse channels and trading partners. QRS IMPACT^™ works with QRS Catalogue^™ to offer the retail industry an end-to-end data synchronization solution built specifically for the North American retail industry.

QRS Sourcing^™.    Our sourcing software application is designed to enable customers to improve their collaborative sourcing and supply capabilities, financial order management and international logistics and customs management efforts.

7

Table of Contents

Index to Financial Statements

Trading Community Management

QRS Exchange^™.    QRS Exchange^™ is a suite of hosted and point-to-point electronic commerce solutions that help trading partners exchange information such as purchase orders, invoices and ship notices. Through electronic transactions, companies can reduce costs, respond quickly and optimize business operations. QRS Exchange^™ solutions maximize a company’s existing infrastructure through hosted networks and enterprise software solutions. Whatever the standard or protocol—EDI or XML; VAN or EDIINT via AS1/AS2; phone, fax, email, web—QRS Exchange^™ ensures companies can trade with companies of any size through one provider. We also provide trading community enablement services through which we plan, communicate and implement electronic commerce programs for large trading communities. Included within QRS Exchange^™ are the following products and services:

8

Table of Contents

Index to Financial Statements

Global Services

QRS Retail Intelligence Services^SM.    QRS Retail Intelligence Services^SM include competitive price audits, price scan verification and retail experience analysis. We collect store-level data and analyze the information in a market context to deliver fully customized, actionable intelligence for competitive differentiation in the marketplace. We can provide analysis based on national, multi-regional, metropolitan or customer-defined price zones.

QRS Professional Services^SM.    QRS Professional Services^SM provide customers with a variety of consulting services. We believe that an important factor in the success of any collaborative process lies in the ability for customers and trading communities to have access to the enablement, integration and training required to better use their software applications. Our QRS Professional Services^SM group provides customers with comprehensive integration, training and support services.

QRS Product Support and Maintenance.    We offer product support and maintenance to all our customers at the time of product purchase. We offer support via phone, fax, email and an internet-based customer portal called QRS Customer Center. Customers can report problems or inquiries, Monday through Friday during business hours of 6 a.m. to 6 p.m. Pacific Time. We also provide 24X7 support for most customer production outage cases. We have a program to regularly contact customers to increase customer satisfaction and maximize trading partner sales opportunities. Other forms of customer support services include e-mail and internet-based support, documentation and product updates.

Customers

Our historical focus has been on providing products and services to the general merchandise and apparel segment of the retail industry. This remains QRS’ largest and most important segment within the retail industry. However, we have broadened our customer base across other segments of the retail industry. Through our QRS Retail Intelligence Services^SM we have penetrated the grocery and mass merchant segments. We also sell our Trading Community Management services in the grocery and mass merchant segments. Our other products are primarily sold in the general merchandise and apparel segment.

Revenue generated from customers in the United States amounted to $119.1 million, $131.4 million and $135.3 million, or 97%, 97% and 95% of total revenue during 2003, 2002 and 2001, respectively. International customers generated $4.2 million, $4.6 million and $7.8 million is revenue in 2003, 2002 and 2001, respectively.

9

Table of Contents

Index to Financial Statements

Our North American customers include:

Sales and Marketing

We sell our products and services to the global marketplace primarily through our direct field sales force and our telesales group. As of December 31, 2003, we had 64 sales people who are organized in six groups: strategic accounts, new market sales, inside sales, account management, sales operations and industry consulting.

When our sales include Trading Community Management or QRS Catalogue^™, they typically involve an initial focus on large retailers and large vendors with subsequent efforts to sell to their networks of trading partners.

When we sell Enterprise Software Applications, our license agreements are often an enterprise-wide decision and generally require us to provide a significant level of pre-sales education to prospective customers regarding the use and benefits of our products. The implementation involves a significant commitment of resources by prospective customers and commonly occurs in tandem with changes in customer business processes. In recent periods in particular, our sales of Enterprise Software Applications have been adversely affected by the retail industry’s economic difficulties as well as the slowdown in the software industry generally. Many potential customers of our Enterprise Software Applications have delayed or extended their purchasing decisions.

We have a comprehensive marketing program that includes public relations campaigns, media sponsorships, lead generation, partnership marketing programs, industry events including industry conventions, trade shows, user groups, analyst programs and speaking engagements.

Service and Product Development

In order to support our growth strategy, we plan to invest in the development and enhancement of new and existing services and supporting technologies. During 2004, we plan to continue developing our intelligent transaction management (ITM) platform which should help QRS more rapidly and efficiently deliver solutions that bring value to our customers. We intend to continue parallel development and enhancement efforts to our current products on their current technology platforms while building the new base platform. While our current plan is to perform these development efforts using internal resources, we are simultaneously evaluating opportunities to accelerate development, including through alliances, licensing and strategic acquisitions.

We continue to invest in our enterprise software applications, QRS IMPACT^™ and QRS Sourcing^™, to expand their functionality and flexibility.

Today, our QRS Catalogue^™ software application runs on computer systems contained in our data center facility in Richmond, California. The data center operates 24 hours a day, seven days a week. It is connected to

10

Table of Contents

Index to Financial Statements

our network provider through redundant circuits with multiple routings to maximize availability. The data center consists primarily of leased mainframe, client/server, disk storage, tape drive and other peripheral technology to provide online, batch and back-up operations. Customer and content data is backed up and shipped off-site daily. We have also contracted for an alternative operations facility in the event of physical disaster.

Service and product development expenses were $12.3 million, $14.5 million and $13.0 million for 2003, 2002 and 2001, respectively. These expenses exclude capitalized costs. Capitalized service and product development costs totaled $5.4 million, $1.4 million and $2.5 million in 2003, 2002 and 2001, respectively. In 2003, we also expensed $1.8 million of licensed technology used in our QRS IMPACT^™ product that was not yet technologically feasible. We will capitalize another $0.5 million payment to be made after the product reaches technological feasibility in the first quarter of 2004.

Competition

Competition in the market for the provision of our products and services has become more intense in recent years, particularly in light of the entry of new technology platforms and software alternatives. In our traditional connectivity and network services market served by our Trading Community Management Solutions Group, we compete with a number of traditional VAN providers such as Inovis; Sterling Commerce, a division of SBC Communications; and GXS. In addition to the traditional VAN competitors, we also compete with IP-based network providers, such as ICC, and software providers, such as bTrade and IPNet Solutions. In the market for catalogue solutions served by our QRS Catalogue^™, we face competition from traditional providers such as SPS Commerce and GXS. We also face competition from recent entrants such as UCCnet (which already provides a catalogue solution to Home Depot, Wal-Mart and other large retailers) and other industry consortia such as Transora and WWRE. Another competitive threat to our catalogue solutions and QRS IMPACT^™ appears to be from behind-the-firewall software providers (e.g., Trigo and Velosel) that can handle content management and maintain item information.

We believe the primary competitive factors in the retail market for these services and solutions include the breadth and quality of offered services; price; the size and nature of any existing customer base; customer service and support; the focus on, presence in and knowledge of the retail industry; the ability to offer product, merchandise and other related content; and the capacity to enable relationships among trading partners.

While we plan to continue to develop solutions for the Internet, we expect the majority of our Trading Community Management revenue in the foreseeable future to come from our traditional VAN-based services. However, we believe the future success of our services may depend, in part, on our ability to continue developing products and services for the Internet. The increased commercial use of the Internet could require substantial modification and customization of our services and products and the introduction of additional services and products.

The in-store intelligence market is highly fragmented, with many local and regional players offering similar, labor-based solutions. QRS Retail Intelligence Services^SM competes with these local and regional providers, brokers and Mosaic Group Inc., another national provider. In addition, we may encounter competition from the internal field intelligence departments of companies. We believe competition in this market is based primarily on breadth of services, price, service levels, accuracy and ability to serve a customers’ entire geographic footprint.

The service bureau market is highly fragmented. QRS Managed EC^™ competes with many small companies offering fax/e-mail/EDI conversion and with SPS Commerce. We believe competition in this market is based on price, customer service and the retailers who are supported by the service bureau.

11

Table of Contents

Index to Financial Statements

IBM Relationship

Since 1988, QRS has been a reseller of the IBM value-added network that acts as the communication network for some of our QRS Exchange^™ products and services such as Data Exchange, QRS Web Forms^™ and QRS Managed EC^™. Our agreement with IBM includes the purchase of a specified minimum amount of network services at agreed prices. The July 2002 agreement with IBM extended our relationship through June 2005, while simultaneously improving our cost structure when compared with the previous agreement. While we purchase network connectivity and electronic commerce-related services from IBM, a portion of the purchased connectivity services is provided by AT&T, which purchased IBM’s Global Network and corporate networking business in April 1999. IBM resells the AT&T Global Network to us.

We do not develop, maintain or operate the IBM VAN.

Proprietary Rights

We seek to develop and maintain the proprietary aspect of our technologies, software applications, product information database, know-how, processes, company and product identifiers, documents and information in order to enhance our ability to compete and to maintain and grow revenue. The unauthorized use, copying, resale or other misappropriation of our technologies, software applications, database, know-how, processes, identifiers, documents or information could enable third parties to compete with us or to benefit from our technology without paying for it or could otherwise harm our business.

We rely on a combination of copyright, trade secret, trademark, service mark and other intellectual property laws, confidentiality procedures and contractual provisions to protect our proprietary rights as appropriate or available in each case. To date, no patents have been issued to us. Effective proprietary rights protection may be unavailable or limited in certain countries. We typically license our proprietary products and services under agreements that impose restrictions on the licensee’s ability to use the products and services and do not permit the resale, sublicense, or other transfer of the product or service. Also, our agreements with customers and third parties typically restrict access to our source code. Finally, we seek to avoid disclosure of our intellectual property and confidential or proprietary information by requiring employees and independent consultants to execute non-use and non-disclosure agreements with us and by restricting access to our source code.

Employees

At December 31, 2003, we had 499 full-time employees including:

In addition, at December 31, 2003, we employed 5 part-time employees. We also use contractors from time to time as our business requires.

Our employees are not covered by a collective bargaining agreement. We have never experienced an employment-related work stoppage, and we consider our employee relations to be good.

12

Table of Contents

Index to Financial Statements

Executive Officers and Key Employees of the Registrant

The executive officers and key employees of the Company and their positions as of March 15, 2004 are as follows:

Elizabeth A. Fetter has served as President, Chief Executive Officer and a Director of QRS since October 2001. Prior to joining QRS, Ms. Fetter served as President, Chief Executive Officer and a Director of NorthPoint Communications, Inc., a DSL broadband services provider, from March 2000 to April 2001, after serving as a Director since January 2000 and as the company’s President and Chief Operating Officer from March 1999 to March 2000. NorthPoint Communications filed for Chapter XI bankruptcy protection in January 2001 and subsequently sold the majority of its assets to AT&T in early 2001. From January 1998 until joining NorthPoint, Ms. Fetter was Vice President and General Manager of the Consumer Services Group at U S WEST, an integrated wireline, wireless and data services provider. Ms. Fetter serves on the Board of Directors of Berbee, a provider of electronic commerce, infrastructure, and networking solutions, and Symmetricom, Inc., a manufacturer of high-speed data, timing and frequency products. Ms. Fetter holds a B.A., High Honors, in communications from Pennsylvania Sate University, and an M.S. in industrial administration and public policy, Highest Honors, from Carnegie Mellon University.

David B. Cooper, Jr. has served as Senior Vice President and Chief Financial Officer since November 2003. Prior to joining QRS, Mr. Cooper served as Chief Financial Officer of AvantGo, Inc., a publicly-traded software and mobile data integration company, from August 2000 to February 2003. Prior to that, he was Chief Financial Officer at PowerBar, Inc. from August 1998 to May 2000. Over the course of his career, Mr. Cooper has held finance leadership positions with Edison Brothers Stores, Inc., Del Monte Fresh Produce Company, Dole Food Company, Inc., Castle & Cooke Homes, Inc. and Felxi-Van Corporation. Mr. Cooper holds a B.A. in Economics from Yale University and an M.B.A. in Finance with Honors from New York University.

Ray Rike has served as Senior Vice President of Worldwide Sales and Field Operations since September 2003 after joining QRS as Vice President, North America Sales in December 2002. Before joining QRS, Mr. Rike was a Principal at CrossCommerce Consulting from May 2001 to November 2002. Previously, Mr. Rike served as the President and Chief Executive Officer of ECtone, Inc. from September 2000 to May 2001. Mr. Rike also served as the Global Vice President, Sales and Business Development at MarketFirst Software, Inc. from January 1998 to September 2000. Mr. Rike earned his B.S. from Ohio State University.

James G. Rowley has served as Senior Vice President, Engineering and Chief Technology Officer since May 2002. Prior to joining QRS, Mr. Rowley served from February 1998 to December 2001 as the Chief Technology Officer and Senior Vice President, Engineering of CrossWorlds Software. Prior to that, he served as the Vice President of Applications Engineering for Scopus Technology from March 1997 to February 1998. Mr. Rowley earned a B.S. and M.B.A. at New York University.

Renee d’Ouville Cullinan has served as Vice President of Product Strategy since January 2003. Before joining QRS, Ms. Cullinan served as Senior Director of Product Management for Vicinity Corporation from June 2002 to December 2003 when it was acquired by Microsoft Corporation. Prior to that, Ms. Cullinan worked for Trigo Technologies, Exemplary Software and MarketFirst Software in senior marketing management positions from January 1998 to June 2002. Ms. Cullinan earned a B.S. in biochemistry from the University of California at Davis.

13

Table of Contents

Index to Financial Statements

Available Information

QRS maintains a website at http://www.qrs.com. In the Investor Relations section at http://www.qrs.com/financial/index.asp, QRS posts its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, free of charge and as soon as reasonably practicable after they are filed with, or furnished to, the SEC. In the Corporate Governance area of the Investor Relations section at http://www.qrs.com/governance/index.asp, QRS posts its corporate governance policies, financial officer code of ethics, charters of the committees of its Board of Directors and general code of conduct and ethics.

Item 2.   PROPERTIES

As of December 31, 2003, we leased the following properties:

Of the 253,000 total square feet of office space, approximately 125,000 square feet remain vacant as of December 31, 2003 and are not used in our current operations. As further discussed in Note 7 to the Consolidated Financial Statements, we recorded restructuring expense during the years ended December 31, 2001 and 2003 pertaining to the vacated facility in Richmond, California near our corporate headquarters. Additionally, we recorded restructuring expense during the year ended December 31, 2003 related to the closure of our Wakefield, Massachusetts facility. We continue to monitor and evaluate our facility requirements and total square feet under lease.

Item 3.   LEGAL PROCEEDINGS

In connection with the merger agreement relating to our acquisition of Image Info, we paid to the former shareholders of Image Info a deferred acquisition payment of $2.5 million in 2001. We also would have been required to pay the former shareholders of Image Info an additional $2.5 million in 2002 if revenue attributable to the acquired business met the minimum amount described in the merger agreement for 2001. We have

14

Table of Contents

Index to Financial Statements

determined that the revenue attributable to the acquired business did not reach the minimum amount required for 2001. On October 8, 2002, Craig Schlossberg, purporting to act on behalf of the former shareholders of Image Info, Inc. filed a lawsuit against the Company and WS Acquisition Corp., one of our wholly owned subsidiaries (which was renamed Image Info Inc.), in the Superior Court of California for the City and County of San Francisco, Action No. 413225. The Complaint alleges claims for Breach of Contract, Breach of the Covenant of Good Faith and Fair Dealing, and Declaratory Relief based upon plaintiff’s contention that the Company is obligated to make the second payment of $2.5 million, with interest thereon, even though the revenue attributable to the Image Info business did not reach the minimum amount specified in the merger agreement for 2001. The Company believes that the lawsuit is without merit and is vigorously defending the action. The $2.5 million deferred acquisition payment has already been accounted for in the acquisition cost for the original transaction.

From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business. As of the date hereof, except as previously disclosed or discussed herein, the Company is not a party to any legal proceedings with respect to which an adverse outcome would, in management’s opinion, have a material adverse effect on the Company’s business, financial condition or results of operations.

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

None.

15

Table of Contents

Index to Financial Statements

PART II

Market Information

Our common stock is traded on the Nasdaq National Market under the symbol “QRSI.” According to records of our transfer agent, we had approximately 188 stockholders of record as of March 2, 2004. The following table sets forth the low and high closing sales prices of our common stock for the 2-year period ended December 31, 2003, as furnished by The Nasdaq Stock Market.

Dividend Policy

Our policy has been to reinvest earnings, if any, to fund future growth. Accordingly, we have paid no cash dividends on our common stock and do not anticipate declaring dividends on our common stock in the foreseeable future.

16

Table of Contents

Index to Financial Statements

Item 6.  SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, and with the Consolidated Financial Statements and Notes thereto which are included elsewhere in this Form 10-K. The Consolidated Statements of Operations Data for the years ended December 31, 2003, 2002 and 2001 and the Consolidated Balance Sheets Data at December 31, 2003 and 2002 are derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K. The Consolidated Statements of Operations Data for the years ended December 31, 2000 and 1999 and the Consolidated Balance Sheets Data as of December 31, 2001, 2000 and 1999 are derived from audited Consolidated Financial Statements that are not included in this Form 10-K. Historical results are not necessarily indicative of results to be anticipated in the future.

17

Table of Contents

Index to Financial Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to those set forth under this Item, “Item 1—Business,” as well as those discussed elsewhere in this document and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

This discussion should be read together with the selected financial data set forth in “Item 6—Selected Financial Data” and the Consolidated Financial Statements and the related notes thereto set forth in “Item 8 —Financial Statements and Supplementary Data.”

Overview

We are a technology company that serves the retail trading community with collaborative commerce solutions. We manage the flow of critical commerce information between companies and leverage our retail technology expertise to address fundamental industry challenges such as global data synchronization, compliance mandates, transaction outsourcing and product information management. Our products and services are typically used with our customers’ enterprise information technology systems in order to improve overall business performance.

Our revenue consists of fees generated from the transmission of standard business documents over a network, monthly fees for leased line connections, fees for EDI translation services, the licensing and maintenance of enterprise software applications, usage of our hosted applications, field services and professional services. Our revenue is derived primarily from the North American general merchandise and apparel segment. General merchandise and apparel represented 81%, 84% and 87% of total revenue in 2003, 2002 and 2001, respectively. The remainder of our revenue was derived from customers in other retail segments, primarily grocery and consumer packaged goods customers. Revenue generated from customers in the United States amounted to $119.1 million, $131.4 million and $135.3 million, or 97%, 97% and 95% of total revenue during 2003, 2002 and 2001, respectively. International customers generated $4.2 million, $4.6 million and $7.8 million in revenue in 2003, 2002 and 2001, respectively. We market our products and services in three Solutions Groups: Software Applications, Trading Community Management and Global Services.

Our Software Applications, which represented 26% of revenue in 2003, support product information management and data synchronization; and collaborative product planning, design, production and shipment. Our Software Applications include both Enterprise Software Applications installed on customers’ computer systems and hosted applications installed on our computer systems.

Our Trading Community Management Solutions Group, which represented 54% of revenue in 2003, allows retailers, vendors and their trading partners to exchange electronic business documents, such as purchase orders, invoices and advance ship notices. These electronic transactions are conducted over a proprietary value-added network (VAN) or over the Internet.

Our Global Services, which represented 20% of revenue in 2003, include the collection, analysis and delivery of pricing, promotion and distribution information; software implementation and integration services; and technical support and training services for our various solutions.

Substantially all of the revenue generated by our Trading Community Management Solutions Group and by our QRS Catalogue^™ product, totaling approximately 80% of our overall revenue, is recurring in nature. This

18

Table of Contents

Index to Financial Statements

revenue is billed to customers on a month-to-month basis or under contractual arrangements generally ranging from one to three years.

In 2003, we experienced a decline in revenue from our traditional business, such as QRS Exchange^™ and QRS Catalogue^™. Trading Community Management revenue was also impacted by a significant decline in leased lines and dial-up connectivity services due to technological obsolescence. The changing technology landscape and the growth of other providers have resulted in continuing price competition, particularly for our QRS Exchange^™ products. In addition, the department store sector of the general merchandise and apparel segment, an important part of the customer base for our Trading Community Management and QRS Catalogue^™ products and services, has been and continues to be particularly affected by current economic conditions. During the third quarter of 2002, one of our major retail customers consolidated certain of its retail operations which resulted in lower usage of the QRS Catalogue^™. We expect that retailers will continue to reorganize their operations in attempts to improve operating efficiencies.

To offset the decline in revenue from our traditional business, we reduced operating expenses and improved gross margin throughout 2003 and 2002. Gross margin of 50% in 2003 improved three percentage points from 2002, largely due to cost savings from our network services agreement with IBM, which we amended in mid-2002, and to reductions in personnel-related costs as part of an ongoing focus on reducing cost. Gross margin of 47% in 2002 improved from the 38% reported in 2001, primarily due to $6.7 million in impairment losses included in cost of revenue in 2001, cost savings from the IBM agreement, and reduced headcount and facilities expenses.

The challenge facing our business is to launch new products and services that can generate new revenue to offset the decline in revenue from our traditional business. We continue to focus on maintaining a cost structure that is appropriate for our existing revenue base and revenue expectations. Our plan is to invest the cash generated from our traditional business in the development and launch of new products and services. We believe these new products and services will create long-term growth by serving our customer base of more than 10,000 retail industry companies.

19

Table of Contents

Index to Financial Statements

Revenue and Cost of Revenue

The following table sets forth the revenue, cost of revenue, gross profit (loss) and gross margin (loss) for our three Solution Groups for the years ended December 31, 2003, 2002 and 2001 (in thousands) and associated headcount information at December 31, 2003, 2002 and 2001:

Software Applications

The Software Applications Solutions Group includes the QRS Catalogue^™ a hosted application; Enterprise Software Applications, including QRS Sourcing^™ and QRS Merchandising^™; and Other Hosted Software Applications, including QRS Showroom^™ as well as Tradeweave Logistics and Tradeweave Sales and Inventory

20

Table of Contents

Index to Financial Statements

Analysis. We discontinued selling Tradeweave Logistics and Tradeweave Sales and Inventory Analysis in mid-2002. We discontinued selling QRS Insight and QRS Showroom^™ at the end of 2003. Going forward, any license revenue from our recently introduced QRS IMPACT^™ product will be included in Enterprise Software Applications. We plan to recognize QRS IMPACT^™ license and professional services revenue after each customer implementation is completed.

Revenue for the Software Applications Solutions Group was down $2.6 million, or 7%, in 2003 compared to 2002. This decline was due largely to the $1.2 million impact of discontinuing several unprofitable products which were included in Other Hosted Software Applications in 2002. This decline was also caused by a $0.8 million decline in QRS Catalogue^™ revenue and a $0.5 million decline in Enterprise Software Applications revenue due to a lack of additional license sales to existing customers during 2003. Between 2001 and 2002, Software Applications revenue declined $3.5 million, or 9%, primarily due to the $5.0 million impact of fewer new Enterprise Software Applications license sales during 2002. The 2001 to 2002 decline was also due to the mid-2002 discontinuation of several unprofitable products, which caused an additional $1.5 million decline. These declines were partially offset by an increase of $2.9 million in QRS Catalogue^™ revenue.

Gross margin for the Software Applications Solutions Group improved during 2003 and 2002, primarily due to the mid-2002 discontinuation of several unprofitable products.

For 2003, 2002 and 2001, QRS Catalogue^™ comprised the substantial majority of revenue for the Software Applications Solutions Group. In the third quarter 2002, a large customer consolidated certain of its retail divisions which resulted in lower usage of the QRS Catalogue^™. This consolidation has reduced the number of trading partnerships which, under the current pricing structure, reduces current and expected future QRS Catalogue^™ revenue associated with this customer. We expect that retailers will continue to reorganize their operations to reduce cost and improve efficiency. To the extent that such reorganizations reduce the number of their retail operations, the number of their trading partnerships could also be reduced, which, under our present pricing structure, would reduce revenue in future periods.

Cost of revenue for QRS Catalogue^™ consists primarily of customer and technical support personnel, allocated costs of our data center and purchased network services to transmit catalogue data to and from our data center. Cost of revenue for QRS Catalogue^™ increased during 2003 and 2002 due to an increase in data center costs allocated from other hosted applications discontinued in mid-2002, and the costs of opening a customer support center in Europe, partially offset by reductions in headcount costs for our US-based customer support team. In spite of this increase in cost of revenue, QRS Catalogue^™ gross margin remained steady in 2003 and 2002.

Enterprise Software Applications revenue decreased during 2003 and 2002, due to a lack of additional license sales to new and existing customers. We attribute this reduction in revenue to an economic environment in which companies were hesitant to make large IT purchases and the high average sales price of the QRS Sourcing^™ product. The implementation of our QRS Sourcing^™ product at a new customer location typically requires an upfront assessment of the customer’s business process and the design and development of interfaces to the customer’s existing systems. As a result, the implementation requires a significant amount of professional services, which we believe are essential to the functionality of the QRS Sourcing^™ software. During 2003, we recognized revenue from new QRS Sourcing^™ license sales on the percentage-of-completion basis as the professional services were delivered. Also during the fourth quarter 2003, we wrote off the remaining intangible asset related to our 2000 acquisition of RockPort Trade Systems, Inc. which produced the QRS Sourcing^™ product. This write-off is discussed further in Impairment Loss.

Cost of revenue for Enterprise Software Applications for 2002 and 2003 consists primarily of amortization costs related to the IBM CrossWorlds licenses purchased during the first quarter of 2002. We entered into a licensing agreement with IBM Corporation for the license of their CrossWorlds enterprise application integration tool in order to enable customers to implement QRS Sourcing^™ more quickly. We amortized the license fees to

21

Table of Contents

Index to Financial Statements

cost of revenue at the greater of the pro rata of licenses sold or straight-lined over the two-year estimated life of the licenses (see Note 11 to the Consolidated Financial Statements). We did not sell any IBM CrossWorlds software licenses, and therefore we wrote off the remaining unamortized asset in the fourth quarter 2003, as discussed below in Impairment Loss.

Other Hosted Software Applications contributed essentially no revenue in 2003. We discontinued Tradeweave Sales and Inventory Analysis and Tradeweave Logistics in mid-2002. At the end of 2003, we also stopped selling QRS Showroom^™ since it had produced minimal revenue to date and the market for this product had not developed as much as we originally expected. Cost of revenue for Other Hosted Software Applications in 2003 consisted primarily of data center and customer support costs related to QRS Showroom^™. 2001 cost of revenue included a $4.3 million write-off of capitalized service and product development costs for QRS Showroom^™. Our 2001 decision to discontinue Tradeweave Sales and Inventory Analysis and Tradeweave Logistics reduced customer and technical support personnel costs for these hosted applications. Certain data center costs that were associated with the discontinued products and which remain fixed in the short term were reallocated across the remaining products that use our data center, including QRS Catalogue^™ and QRS hosted products within our Trading Community Management Solutions Group.

Trading Community Management

The Trading Community Management Solutions Group includes QRS Exchange^™ products and services: Data Exchange, Internet Transaction Exchange, Enterprise Business Exchange, QRS Web Forms^™, QRS Managed EC^™, QRS Compliance Link^™, QRS EDIINT Gateway^™ and Access Services. Revenue consists primarily of fees charged for the transmission of standard business documents measured in kilocharacters (KCs) over the IBM VAN, monthly fees for leased line connections, and fees for EDI translation services. Revenue is recognized in the month that the services are performed.

Trading Community Management revenue declined $7.3 million, or 10%, from 2002 to 2003. The decline was caused by continued pricing pressure on Data Exchange offset to some extent by an increase in volumes. Unit pricing was relatively stable between the second, third and fourth quarters of 2003. We believe this is primarily related to our previously announced industry-standard minimum pricing thresholds for our lower volume customers, which we implemented in the second quarter of 2003. We do not believe that the long-term pricing pressure has abated in our Data Exchange business. If in future periods we are required to reduce prices further, these reductions in our net revenue per kilocharacter will reduce our Trading Community Management revenue to the extent that pricing changes are not offset by increased unit volume or other factors. The overall Trading Community Management revenue decline was also caused by a 31% decline in Access Services revenue from $10.6 million in 2002 to $7.4 million in 2003 as newer technology alternatives replaced our leased lines and dial-up connectivity services and put pricing pressure on those same services. We expect further declines in Access Services revenue in future years as new technologies continue to replace and lower the market price of these services.

Trading Community Management revenue declined $7.0 million, or 9%, from 2001 to 2002. The primary reason was a decline in revenue from Data Exchange which resulted from continued pricing pressure offset to some extent by an increase in volumes. The volume increases were due to the addition of new customers, volume growth by existing customers, and the expansion of our product capabilities to support a broader range of available technologies, including Internet, XML and AS2 technologies, helping customers to communicate with trading partners of any size.

Trading Community Management gross margin for 2003 improved to 52% from 49% in 2002 and from 46% in 2001. The trends in gross margin are primarily due to savings from a 2002 amendment to our network services agreement with IBM and to decreases in headcount costs for our customer services organization, partially offset by increases in data center costs which were reallocated from certain discontinued products across the remaining products that utilize our self-hosted data center. The agreement with IBM was effective as of July 1, 2002 and

22

Table of Contents

Index to Financial Statements

extends to June 30, 2005. The agreement supersedes and replaces the previous agreement that was due to have expired on December 31, 2002 (see Note 9 to the Consolidated Financial Statements). During 2004, if our use of purchased network services from IBM were to fall below specified minimum amounts per the terms of our contract, we would expect our Trading Community Management gross margin to decrease. Additional Trading Community Management cost of revenue components include: customer support services, including QRS Managed EC^™ personnel; allocated costs for our data center and other technical support personnel; and amortization of capitalized service and product development costs for technology used in our QRS Managed EC^™ operations center.

Global Services

The Global Services Solutions Group consists primarily of QRS Retail Intelligence Services^SM; QRS Professional Services^SM, primarily services provided to help our customers with the implementation of our licensed software products; and maintenance for our QRS Sourcing^™ and QRS Merchandising^™ products, including post-contract support services for licensed software applications.

Global Services revenue declined $2.8 million, or 11%, in 2003 from 2002 levels primarily due to a significant decline in QRS Professional Services^SM revenue caused by fewer professional services engagements for existing QRS Sourcing^™ customers in 2003 compared to 2002. Our QRS Retail Intelligence Services^SM revenue declined 1% from $19.7 million in 2002 to $19.5 million in 2003 in part as a result of the bankruptcy of our former customer Fleming Co. in April, 2003. In 2002, Global Services revenue increased $3.4 million, or 15%, over 2001 levels due to strong demand for QRS Retail Intelligence Services^SM, partially offset by a decline in QRS Professional Services^SM. QRS Retail Intelligence Services^SM revenue increased 36% in 2002 from $14.5 million in 2001, in part due to the deferral of $1.6 million of 2001 revenue and the subsequent 2002 recognition of $0.6 million of revenue upon the sale of receivables related to Kmart, a QRS Retail Intelligence Services^SM customer. During the same period, QRS Professional Services^SM revenue declined due to the completion of engagements related to enterprise license sales made in prior periods. QRS Professional Services^SM and software maintenance revenue remains dependent, to a large extent, on new sales of our licensed software products.

Cost of revenue for Global Services consists primarily of payroll for software application consultants and technical support personnel for our licensed software applications and of outsourcing costs for QRS Retail Intelligence Services^SM field personnel. Global Services gross margin remained steady from 2002 to 2003. We reduced our QRS Professional Services^SM team by roughly half during 2003 which somewhat offset the negative impact of fewer engagements resulting from a decline in QRS Sourcing^™ sales. Global Services gross margin improved from negative 11% in 2001 to 11% in 2002, largely due to the absence of a $2.5 million impairment loss recorded in 2001 related to the discontinuation of the Tradeweave Digital Photography service, the deferral of $1.6 million of fourth quarter 2001 revenue associated with the January 2002 Kmart bankruptcy filing, and ongoing efficiency improvements in our QRS Retail Intelligence Services^SM.

23

Table of Contents

Index to Financial Statements

Operating Expenses

The following table sets forth operating expenses and the related percentages of total revenue and a breakdown of full-time headcount by sales and marketing, service and product development and general and administrative for the years ended December 31, 2003, 2002 and 2001 (dollars in thousands):

Overview

Sales and marketing, service and product development and general and administrative expenses declined in total by 21% from $65.5 million in 2002 to $51.5 million in 2003, reflecting our ongoing focus on reducing cost while investing for future growth. Total operating expenses were nearly flat, declining 1% from $69.0 million in 2002 to $68.3 million in 2003, due in part to the inclusion of a technology license expense, restructuring expenses and an impairment loss in 2003 results. Sales and marketing, service and product development and general and administrative expenses declined in total by 4% from $68.2 million in 2001 to $65.5 million in 2002, reflecting a focus on cost controls. Total operating expenses declined more significantly from 2001 to 2002 due to the inclusion in 2001 results of significant charges for restructuring expenses and impairment losses. 2002 amortization expense declined because the 2001 impairment losses reduced the value of goodwill and other intangible assets and, because we ceased amortizing goodwill under Statement of Financial Accounting Standards No. (FAS) 142, “Goodwill and Other Intangible Assets.” Our strategy is to continue to reduce costs in our traditional business while investing cash generated by our operations to develop and launch new products and services.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related costs in our sales and marketing organizations as well as the costs of various marketing programs. We sell our products and services to the global marketplace primarily through our direct field sales force and our telesales group. At December 31, 2003, we had 64 full-time employees in our sales organization, comprised of 54 employees located in North America and 10 employees located in Europe, primarily in the United Kingdom.

24

Table of Contents

Index to Financial Statements

Our sales and marketing expenses declined $7.1 million, or 25%, from $28.6 million in 2002 to $21.5 million in 2003. The reduction was primarily due to declines in several areas: payroll-related and travel expenses of $4.1 million; corporate marketing costs of $1.1 million; business license and tax-related expenses of $0.7 million; provision for bad debt of $0.5 million; and professional fees of $0.3 million. Sales and marketing expenses declined $2.6 million, or 8%, from 2001 to 2002, primarily due to a $1.4 million decline in our provision for bad debt and $0.7 million in decreased corporate marketing costs. We anticipate increased sales and marketing expenses during the first quarter of 2004 as we invest in new products, primarily the introduction of QRS IMPACT^™.

Service and Product Development Expenses

Service and product development expenditures consist primarily of personnel, consulting and equipment costs related to research, development and enhancements of our products, a portion of which is capitalized under American Institute of Certified Public Accountants’ (AICPA) Statement of Position (SOP) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” For our hosted and internal use products, we capitalize, as prescribed by the SOP 98-1, all the costs incurred during the application development stage, which include designing the software configuration and interfaces, coding, installation and testing. For our Enterprise Software Applications, we did not capitalize any amounts in 2003 under SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” because products and enhancements have generally reached technological feasibility and have been released for sale at substantially the same time.

Service and product development expenses were $12.3 million, $14.5 million and $13.0 million for 2003, 2002 and 2001, respectively. These expenses exclude capitalized costs. Capitalized service and product development costs totaled $5.4 million, $1.4 million and $2.5 million in 2003, 2002 and 2001, respectively.

We review service and product development expenses and capitalized costs on a combined basis in order to measure our investment in new and existing products. Total spending was $17.7 million in 2003, $15.8 million in 2002 and $15.5 million in 2001. Total spending increased during 2003 associated with the increase in headcount of 19 employees as we invested in new applications to create long-term growth. Spending increased only slightly between 2001 and 2002, related primarily to additional payroll costs. We anticipate spending a similar amount in 2004 as we did in 2003 on total expensed and capitalized service and product development, as we invest in new products. We continue to evaluate opportunities to accelerate product and service introduction, including through alliances, licensing and strategic acquisitions. In the fourth quarter 2003, we accelerated the introduction of our QRS IMPACT^™ product through a source code license that is further described in Licensed Technology.

General and Administrative Expenses

General and administrative expenses consist primarily of the personnel and related costs of our administrative organizations, such as finance, legal, human resources and management information systems (MIS), as well as professional fees and other costs. General and administrative expenses declined by $4.7 million, or 21%, from 2002 to 2003. The decline in expenses was primarily due to reductions in insurance, accounting, legal, consulting and other professional fees of $1.9 million; lower facilities, depreciation and asset disposal costs of $1.2 million, and the favorable resolution of various tax-related matters amounting to $1.4 million, offset by an increase in payroll-related costs of $0.4 million. This decline reflects our ongoing efforts to improve efficiency in the general and administrative area. General and administrative expenses declined by $1.5 million, or 6%, from 2001 to 2002, despite an increase in headcount, due to a decrease in consulting, facilities and telecommunications expenses resulting from cost controls and our 2001 restructuring activities.

Additional spending in legal, accounting and internal systems, partly due to new regulatory requirements, partially offset the decline in general and administrative expenses in 2003 and 2002. We expect to incur additional costs in 2004 in connection with our internal controls systems to document our compliance with regulatory requirements.

25

Table of Contents

Index to Financial Statements

Amortization of Other Intangible Assets and Goodwill

Amortization of other intangible assets, including current technology, trade names, customer lists and non-compete agreements, was $3.3 million in 2003, $3.5 million in 2002 and $12.6 million in 2001. On January 1, 2002, we adopted FAS 142 and ceased amortizing goodwill, which had a remaining balance of $0.8 million as of December 31, 2002, which included $0.4 million of acquired workforce previously included in other intangible assets. Amortization of goodwill was $16.6 million in 2001. We recorded impairment losses of $115.4 million during the year ended December 31, 2001 related to the write-down of intangible assets (including goodwill) associated with the acquisitions referenced in the chart below (see Note 8 to Consolidated Financial Statements).

The following table shows the original goodwill and other intangible asset balances following the acquisitions (in thousands):

Licensed Technology

During the fourth quarter 2003, we expensed $1.8 million of licensed technology used in our QRS IMPACT^™ product that was not yet technologically feasible. We will capitalize another $0.5 million payment to be made after the product reaches technological feasibility in the first quarter of 2004. The cash payments for the licensed technology are $1.3 million in the fourth quarter 2003, $0.5 million in the first quarter 2004 and $0.5 million in the second half of 2004.

Restructuring Expenses

2001 Restructuring Activities

On February 6, 2001, we announced a reorganization plan that included the full integration of the operations of QRS and Tradeweave (see Note 7 to Consolidated Financial Statements) and an alignment of our organization with a single go-to-market strategy focused on enhanced synergies within QRS with resulting cost reductions. In connection with the implementation of the February 2001 reorganization, we recorded restructuring expenses of $4.3 million during the year ended December 31, 2001, comprised of severance of $1.6 million, accelerated stock-based compensation expense under the 2001 restricted stock program of $0.5 million for 77 involuntary terminations throughout QRS, and facilities closure expense of $2.2 million.

During September 2001, we discontinued our Tradeweave Digital Photography service due to underperformance. As a result, we recorded restructuring expenses of $3.0 million during the year ended December 31, 2001, comprised of severance of $0.1 million for 17 involuntary terminations within the Tradeweave Digital Photography Group, and facilities closure expense of $2.9 million.

Additionally, during the fourth quarter of 2001, we restructured our operations, which included the realignment and certain eliminations of our products and services, the elimination of full-time positions and the consolidation of real estate. As a result, we recorded restructuring expenses of $12.0 million during the quarter ended December 31, 2001, comprised of severance of $2.0 million for 69 involuntary terminations throughout QRS, and facilities closure expense of $10.0 million primarily related to the vacant facility adjacent to our corporate headquarters.

26

Table of Contents

Index to Financial Statements

Given the difficult real estate market in the Bay Area, our original expectations for sublease income on the vacated facility adjacent to our corporate headquarters proved optimistic. As a result, we began reevaluating our assumptions surrounding our sublease loss accrual during 2003, including discussions with our landlord to renegotiate the terms of our lease. We recorded a $3.7 million restructuring expense for the year ended December 31, 2003 based on the terms of a non-binding Letter of Intent with the landlord to reduce the term of the lease and our total cash commitments over the remaining life of the lease. During January 2004, we finalized agreements with our landlord to sublet the facility to an affiliate of our landlord and reduce our total cash commitments over the remaining life of the lease by $6.4 million. The sublease agreement for full contract rent and operating expenses from October 1, 2008 through the lease termination on June 30, 2011 is collateralized by a $4.0 million Deed of Trust. The agreements with our landlord require us in the first quarter 2004 to deposit $3.6 million of base rent for the period October 1, 2006 through September 30, 2008 in an escrow account for disbursement over the related rental period. We believe that the sublease loss accrual related to this facility as of December 31, 2003 is sufficient to cover all of our revised obligations under the final agreements. Also during the year ended December 31, 2003, we recorded a $0.2 million reduction in the 2001 severance accrual.

The 2001 restructuring activities (and subsequent changes to those liabilities resulting in restructuring expenses in 2003) were accounted for in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Our restructuring activities in 2001 resulted in operating expense reductions of approximately $10.9 million in real estate and salary expense in 2002. We had estimated expense reductions of between $6 and $8 million.

2003 Restructuring Activities

During 2003, we completed a review of our overall cost structure with the goals of creating better alignment with our growth strategy and finding additional potential efficiencies. As a result, we centralized substantially all of our development team to our Richmond, California headquarters and streamlined other parts of our operations, primarily general and administrative services. These actions resulted in a restructuring charge of $1.9 million, consisting of $1.2 million related to the closure of our Wakefield, Massachusetts facility, $0.1 million related to the write-off of certain equipment and leasehold improvements and $0.7 million related to the severance of 43 employees located in Wakefield, Massachusetts, Richmond; California and New York, New York.

The 2003 restructuring activities were accounted for under the provisions of FAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Beginning in 2004, we expect the savings from this restructuring activity to be in the range of $2 million for the year.

27

Table of Contents

Index to Financial Statements

The following is a summary of the restructuring activities from January 1, 2001 to December 31, 2003 (in thousands):