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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

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. ¨

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

As of March 18, 2003, there were 15,803,721 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $78.3 million based upon the closing price for shares of the registrant’s common stock on that date as reported by The Nasdaq National Market.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

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QRS CORPORATION

2002 FORM 10-K ANNUAL REPORT

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PART I

Item 1. BUSINESS

Except for the historical financial information contained herein, the matters discussed in this report may be considered “forward looking” statements under federal securities laws. Such statements include declarations regarding our intentions, beliefs, expectations or strategies. We assume no obligation to update any forward looking statements. 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 and “Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risks Relating to Our Business” as well as those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

General

QRS Corporation (“QRS,” the “Company”, or “we” or “us”) was established in 1988 and is a provider of collaborative commerce solutions for the retail industry trading community. Our products and services help thousands of retailers, vendors, manufacturers, suppliers, wholesalers and distributors to connect and communicate electronically, transact business, collaborate on processes and decisions, and differentiate their brands in the global marketplace. Our products and services are typically integrated with our customers’ enterprise information technology systems in order to deliver greater benefits and efficiencies to these customers.

We market our products and services in three Solutions Groups: Software Applications, Trading Community Management and Global Services. Our Software Applications automate and help optimize business processes between companies. Specifically, they support the following business functions: product data synchronization; collaborative product planning, design, production, and shipment; online merchandising, promotions and sales; and supply chain exception management. Our Software Applications include both enterprise 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) and collaborate on business processes (such as inventory management and financial reconciliation). These electronic transactions are conducted over a value added network (VAN) or over the Internet. Our products and services eliminate paper transactions, mail delays and manual data entry errors as the communication of these electronic business documents is typically integrated with the accounting and inventory systems of our customers and their trading partners.

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

In 2002, we improved our operations. During the year, we reduced operating expenses and improved gross margins. While we recognized an operating loss for the full year, we were profitable for the third and fourth quarters. We also replaced members of our senior management team, executed previously planned real estate consolidations and discontinued several unprofitable software applications, as announced in the fourth quarter of 2001.

In 2001, we integrated our subsidiary, Tradeweave, Inc., which we formed in 1999 as an Internet-based services company to provide an on-line marketplace for the disposition of surplus and mark-down apparel. In 2000, we acquired Rockport Trade Systems, Inc., which offered a sourcing software application for improved supply capabilities, financial order management, international logistics and customs management, and Image Info Inc., which offered imaging software and services. In 1999, we purchased Retail Data Services, Inc., a market research and data management firm that collected, verified and analyzed pricing, promotion and

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distribution information. In 1998, we acquired Custom-Designed Information Systems Corp. and Mueller Associates, Inc. to enhance our EDI-based services.

Information concerning our 2001 restructuring expenses and impairment losses and related financial information is summarized in Notes 7 and 8 to the Consolidated Financial Statements and elsewhere under “Item 8—Financial Statements and Supplementary Data.”

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. The retail industry supply chain process includes hundreds of collaborative steps among thousands of retailers, vendors, suppliers, 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, so industry participants must be able to meet consumer demand quickly, accurately and at the most competitive price. This is particularly true in difficult economic conditions.

In the mid-1980s, a cooperative industry effort to better enable 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.

EDI is a standard data format for electronic data communication between businesses such as retailers and suppliers, which can be sent over a private value added network (VAN) or over the Internet. The 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 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 manufacturers have been able to significantly reduce the cost of financial operations, mismatches between purchase orders and invoices, inaccurate product shipments and stock-outs. A major portion of QRS’ business remains 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, more and more software applications have been used by the retail industry to improve collaboration with partners and to automate mission-critical processes and transactions across their supply chains. 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 seeks to help retail industry participants improve the quality and efficiency of their inter-enterprise processes to improve business performance. QRS^® collaborative commerce solutions speed electronic communication and commerce between retail trading partners. QRS also offers additional supply chain automation and intelligence to improve cross-company productivity, increase supply chain visibility and help resolve supply chain issues before they cause business problems. QRS offers solutions that help meet the diverse needs of members of the global retail trading community, essentially regardless of company size, technology infrastructure, or retail segment.

QRS Mission and Strategy

Our mission is to enable retailers, vendors, suppliers and manufacturers and their supporting business partners to connect, transact, collaborate and differentiate within their global trading community to improve business performance. QRS plans to focus on meeting customers’ current and emerging needs, adding value to their existing technology and anticipating future market requirements in the highly dynamic retail market. We currently target a portion of the supply chain software and services market that is both large and growing, according to AMR Research estimates.

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We believe that our customers’ competitive advantage is built on their ability to differentiate both their offering 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 in the marketplace today. To collaborate, trading partners must interact and transact business together. Automation of transactions helps makes collaboration effective and differentiation possible. To transact, companies must be connected or networked. We believe that QRS is well positioned to add value to our customers because we offer the products and services that companies need to connect, transact, collaborate and differentiate.

In 2002, we focused on returning the Company to profitability. We reported net and operating profits in the third and fourth quarters. We are now shifting our focus to identifying opportunities for potential future growth. Today, QRS provides a suite of solutions including networking software and services, automated document exchange, product data synchronization, product sourcing and merchandising applications, exception management application, web-based sales tool and store-level information gathering services to optimize the business processes of the retailing industry.

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

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

Deepening Our Relationships With Our Existing Customers

We believe we can grow our business with existing customers by helping them automate more transactions with their trading partners. To this end, we will continue to augment our existing solutions with support for evolving industry standards. We did this in 2002 with the expansion of our Trading Community Management offering to better support the Internet, in part through a partnership with Cyclone Commerce. Today, we support a breadth of offerings including data exchange for EDI and eXtensible Markup Language (XML) via both value added networks (VANs) and the Internet. We will continue to support a broad range of communications options to help our customers automate more of their business processes as newer technologies gain widespread adoption. We will additionally look for ways to help our customers realize the benefits of automating more business processes with current trading partners and of automating new business processes with new trading partners.

With our more than 8,000 customers, primarily in the North American general merchandise and apparel segment, we also plan to cross-sell and up-sell services across our product offering. We plan on increasing our penetration within our existing customer base by actively marketing and selling the full range of QRS Software Applications, Trading Community Management solutions and Global Services.

Expanding Our Presence In New Retail Segments And Geographies And With Additional Trading Partners

Our second area of focus is to expand our trading community, building on the success we had in 2002 with retail segments beyond general merchandise and apparel. Our leadership position in the North American general merchandise and apparel segment gives us credibility to achieve further adoption of our solutions in other retail industry segments such as grocery, consumer packaged goods, hard lines, consumer electronics and food and drug. During 2002, we obtained business in these segments from existing and new customers including Food Lion, Huffy Bicycles, Ingram Micro, L’Oreal, Modell’s Sporting Goods, Sears, Roebuck & Co. and The Kroger Company.

To aid our expansion in new retail segments, we support the formation of communication standards to help retailers, vendors, suppliers and manufacturers realize the benefits of automated communication. To this end, we have formed an alliance with UCCnet through which QRS Catalogue^™ will be a preferred partner to the UCCnet

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GLOBALregistry. We expect this alliance will help increase our presence in the grocery and consumer packaged goods segment while helping our existing customers extend their reach to new retail formats and markets.

We will continue to invest in our European sales and operations to increase our share of the supply chain technology market in the region. We believe that the U.K., France and Germany markets are ready to begin adopting comprehensive data synchronization solutions because retail companies in this region are recognizing that inaccurate product information negatively impacts retail sales and because standards are being developed, facilitating inter-company communication. We also anticipate demand for supply chain visibility and proactive error detection and resolution solutions in the region. In early 2003, we announced a new agreement with Tibbett & Britten Group, a leading European logistics service provider, to allow it to incorporate QRS Sourcing^™ in its global supply chain management solution, giving us an expanded avenue to serve top European retailers. Also in early 2003, we announced an agreement with Influe, a Paris-based e-commerce products and services company with strong multi-lingual capabilities. Influe will provide a web-based, language-specific interface to help customers upload their product information to the QRS Catalogue^™, and Influe has agreed to co-sell QRS Catalogue^™ to its current base of 4,500 customers. We may form additional strategic relationships to help multiply our efforts in the European market while leveraging our experience in North American general merchandise and apparel.

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

Introducing New Solutions That Deliver Value To Our Customers

We believe that we are well positioned to leverage and augment our current strength of helping companies connect, transact and collaborate to deliver solutions that help our customers successfully differentiate themselves in the marketplace. Our product strategy will help our customers continue to work together and collaborate so that they can improve the performance of their supply chains. To that end, in early 2003, we introduced an exception management application, QRS Insight, to help our customers obtain greater visibility into ordering, planning and payment processes. We will continue to look for additional ways to enhance our solutions set and form strategic alliances to help our customers collaborate and differentiate themselves in the marketplace.

We additionally believe that we can increase our presence in the growing supplier relationship management, international trade logistics and supply chain event management markets. Given current poor economic conditions generally, the retail industry is experiencing an even greater imperative to anticipate consumer trends, offer competitive pricing and minimize operating costs. This situation puts pressure on the retail industry to accelerate product lifecycles and deliver products to market more quickly, both of which require an increased reliance on global trading partners. We believe that our current and future solutions can help our customers meet these needs by more effectively transacting and collaborating with their trading partners.

To aid in the adoption of our current and future solutions, we will look to form additional channel partnerships. Historically, our own direct sales force has generated the great majority of our sales, although we have also established relationships with system integrators, consulting firms and similar sales channels. While our direct sales presence allows us to focus attention on our customer communities, system integrators and other secondary sales channels can play an important role in the technology selection process of many of our larger customers. We believe that expanding our relationships with these other channel partners, both in depth and in number, will benefit our competitive position.

QRS Solutions

Our collaborative commerce solutions provide the capability for companies of virtually any size or technology infrastructure to connect and transact business with each other. Through a combination of QRS Exchange^™ for electronic communication and QRS Catalogue^™ for reliable product information management,

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we believe our customers reduce errors, time and cost. QRS Exchange^™ is a suite of networking software and services for electronic communication between companies. QRS Catalogue^™ synchronizes product information, which facilitates accurate purchases between retail trading partners and forms the basis for effective communication throughout the retail supply chain. With these two products, QRS has established one of the largest networks of trading partners in the retail industry and the largest source for product information in the North America general merchandise and apparel retail segment.

Beyond QRS Exchange^™ and QRS Catalogue^™, QRS Sourcing^™ supports supply chain management and accountability from product concept creation to final delivery, facilitating the entire end-to-end process in a single system. With communication, costing and tracking capabilities, QRS Sourcing^™ optimizes supplier selection and saves time and effort in developing branded goods, relaying changes to manufacturing partners, handling purchasing and finance, clearing customs, and tracking orders for on-time shipments. With our newly launched QRS Insight application, retail industry trading partners can gain visibility into the activities of their supply chain and can take proactive steps to minimize the potential impacts of supply chain disruptions.

We market our solutions in three primary 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^™. The QRS Catalogue^™ data synchronization application features the largest centralized product information database for the retail industry consisting of information on over 90 million products. QRS Catalogue^™ features multiple access options, including a web-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 Catalogue^™ enables retailers and their vendors to complete orders more quickly, better check product prices, simplify returns processing and feed product replenishment systems with more accurate and relevant models.

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

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QRS Insight. This enterprise software application helps companies and their business managers proactively resolve supply chain problems. It monitors enterprise systems and databases, detects problems, alerts the appropriate users, enables collaborative resolution, and escalates issues as necessary. QRS Insight also provides reporting and analysis based on Key Performance Indicators (KPIs).

QRS Merchandising^™. The merchandising application allows planners to create buy plans with multiple “what if” scenarios and to work at the store cluster level to update style information as a product line is developed. The visibility provided into both factory commitments and market-week sales data allows vendors to order against seasonal plans in real time. As a result, vendors are able to respond more quickly to changing market conditions and to better manage supply and demand.

QRS Showroom^™. The QRS Showroom^™ software application enables vendors and private label groups to create customized, targeted on-line merchandise presentations for their retail buyers. Users can perform a visual review of merchandise simply via access to a standard Web browser. A simple point-and-click interface creates targeted, customized merchandise presentations and pricing, and multiple data formats (including EDI, XML, fax and e-mail) enable integration with legacy communications systems.

Trading Community Management

QRS Exchange^™. This value-added communications solution suite allows trading partners to send, receive, route, and store for retrieval various data, commercial transactions and documents in multiple technologies. We also provide trading community enablement services through which we plan, communicate, and implement electronic commerce programs for large trading communities consisting of companies who may have disparate technological capabilities. We do this through a proven and repeatable process that brings together our experienced team of enablement professionals and an array of enablement solutions that support companies of virtually any size and infrastructure. Included within QRS Exchange^™ are the following products and services:

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QRS Compliance Link^™. This web-based product is designed to simplify and streamline the trading community enablement process and allow companies to realize the benefits of their e-commerce initiatives more quickly. The solution gives companies the ability to monitor the status of vendors, while offering vendors an intuitive tool to automate the start-up processes. QRS Compliance Link^™ provides tracing, program management, online transaction testing and a standards repository to simplify what might otherwise be a complex and time-consuming task.

Global Services

QRS Retail Intelligence Services^SM. QRS Retail Intelligence Services^SM include competitive price audit, price scan verification and data collection services. Such competitive intelligence enables our customers to leverage important product and consumer information at the store level to aid in their individual strategic and tactical decision making processes.

QRS Professional Services^SM. QRS Professional Services^SM provide customers with expertise in a wide variety of retail technology situations. 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 take full advantage of the applications being used. 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 a web-based customer portal called QRS Customer Center. Customers can report problems or inquiries five days a week, Monday through Friday during business hours of 8 a.m. to 5 p.m. Eastern Time. We also operate a 24-hour hotline for most business critical situations for customers and have a program to regularly contact customers to ensure customer satisfaction, currency of catalogue data, and maximization of trading partner opportunities. Other forms of customer support services include e-mail and web-based support, documentation and 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, and our QRS Sourcing^™ software has assisted us in expanding to a number of specialty retailing segments. We have also had some success selling our Trading Community Management services in the grocery and mass merchant segments. The remainder of our products are still primarily sold in the general merchandise and apparel segment.

The Company’s North American customers are among the most recognizable names in retail, such as Duane Reade Inc., Federated Department Stores Inc., Group Clarins USA, Sears, Roebuck and Co., Stride Rite Corp. and The Kroger Co. QRS’ customers include:

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We have a number of international customers including Argos Retail Group, KarstadtQuelle AG and Selfridges plc.

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, 2002, we had 66 sales people who are organized by strategic accounts, new market sales, inside sales, account management, sales operations and industry consulting. In addition, we are also considering forming channel sales agreements to leverage partner expertise and contacts with complementary business objectives. Sales leads come from many sources including retail industry conventions, trade shows, technology user groups and referrals. Our sales force utilizes a consultative approach, focused on establishing the benefits of our products and services to senior executives, information technology executives, and other management of existing and prospective customers. Sales compensation is dependent on meeting a predetermined minimum percentage of the sales quota and amounts vary depending on the size of sales and type of products and services sold.

Our sales model involves an initial focus on large retailers and large vendors with subsequent efforts to sell to their networks of trading partners. When large retailers or vendors use our services, they may recommend or require their trading partners to use our products and services to transact with them. Large retailers or vendors may have thousands of trading partners. Once a large retailer or vendor becomes a customer, our telesales group then contacts their trading partners to explain our services and how to transact business with the retailer or vendor using those services. This sales model may change as we expand to other retail segments and to additional trading community participants.

We offer our Enterprise Software Applications to customers through license agreements. The licensing of these products is often an enterprise-wide decision and generally requires us to provide a significant level of education to prospective customers regarding the use and benefits of our products. In the case of QRS Sourcing^™, the implementation involves a significant commitment of resources by prospective customers and commonly occurs in tandem with changes in customer business processes. The cost to the customer of a license to QRS Sourcing^™ is typically only a portion of the hardware, software, development, training and integration costs of implementing a large-scale electronic commerce software system. 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 pronounced 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. We renewed our marketing effort in 2002 by simplifying and re-branding the full suite of QRS products and services and engaged a full-service public relations firm to help us promote our message. We also use our website to enhance our market presence and generate additional leads.

Service and Product Development

In order to support our growth strategy, we will invest in the development and enhancement of new and existing services and supporting technology. During 2003 and part of 2004, we plan to utilize internal resources to develop a new base technology platform which will 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

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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.

Our platform investment will create an engine for common processes and functions for QRS applications. For example, the QRS Catalogue^™ application currently has synchronization functionality used to match and validate Uniform Product Code (UPC) data. By moving the synchronization function to a common base product platform, future applications could leverage this synchronization function to match and validate other important supply chain data. In addition, we intend to include common administrative functions in the base product platform such as common user sign-on and permissions.

For our customers, we believe development and deployment of this new platform may yield incremental benefits in areas such as performance, scalability, availability and reliability. We believe that our current customers may also benefit from simpler integration to their own key business processes and from lower cost options that may become available for self-servicing customers. We believe our platform is a key part of our plan to bring our services to additional retail segments, allowing us to deliver value to new customers as well.

For QRS, this platform investment will help us develop new collaborative products and services more rapidly and more efficiently. Technologies that allow us to efficiently re-use our assets in new products, such as web services, will be available in our multi-tier, component-based, J2EE and .NET compliant architecture. There are potential revenue benefits available to us from reducing the time to market of new product introductions. The improvements to our QRS Catalogue^™ will allow us to better service non-general merchandise and apparel retail segments and to move beyond our capabilities in data synchronization. We believe expanded capabilities for our QRS Catalogue^™ application will help position us to address the emerging needs of new segments. We also believe this platform will reduce our overall operational costs due to greater automation of internal product operations, support and maintenance.

Once complete, we will add new customers to this new technology platform and migrate existing customers as quickly as they are ready for the migration through new releases and upgrades to existing software applications.

Also during 2003, we intend to upgrade the application server and database technology of our QRS Sourcing^™ application. We plan on adding additional functionality to the web-enabled version of the QRS Sourcing^™ application and on developing an application tool set to allow our customers and third parties to perform basic modifications to and extensions of the product.

Today, our QRS Catalogue^™ and QRS Showroom^™ software applications run 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 our network provider through redundant circuits with multiple routings to ensure 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. Our facility and data center are secured with controlled access doors and on-site security services. The data center is equipped with a Halon fire protection system, an uninterruptible power supply, and a diesel generator permitting continuous electrical power. We have also contracted for an alternative operations facility in the event of physical disaster.

Process Management

To ensure profitability and maximize our opportunities for cost optimization, we will assess and re-engineer business processes company-wide. In early 2003, we formed a corporate process management function that coordinates and manages cross-functional initiatives. Although each functional organization is responsible for delivery against these initiatives, the process management function ensures everyone is working in concert to meet the overall company goals. Initiatives such as pricing and billing, which involve sales, marketing, finance, legal and IT, or product rollout programs, which involve sales, marketing, finance, legal, support and trading community enabling, are coordinated and monitored for deliverables and dependencies. In addition, the process management function is chartered to document all internal processes and evaluate opportunities for improvement and efficiencies.

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Competition

Competition in the market for the provision of our products and services has become more intense in recent years. In our traditional connectivity and network services market, served by our Trading Community Management Solutions Group, we compete primarily with GXS, formerly General Electric’s Information Services division (GEIS); and Sterling Commerce, a division of SBC Communications. In addition to the traditional VAN competitors, we also compete with smaller IP-based network providers, such as ICC, and software providers, such as bTrade and IPNet Solutions. In the market for catalogue solutions, our main competitor is GXS.

We believe the primary competitive factors in the retail market for these 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.

We believe the retail industry will continue for some time to utilize private or value added networks (VAN) for its supply chain management because significant variation remains in the form and sophistication of other retail electronic commerce solutions and because purchasers of such alternative solutions must often expend significant resources to integrate their existing electronic commerce technologies with any new technology. The management of trading partner communities will continue to be important to the retail industry, even as new technologies develop. We believe that industry participants will rely on external providers such as QRS for supply chain management solutions that can be integrated with existing equipment and infrastructure.

While we will continue to develop solutions for the Internet, we expect the majority of our Trading Community Management revenues for the foreseeable future to come from our traditional VAN-based EDI services. However, we believe the future success of our services will 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.

In addition, the changed technological landscape and the desire of companies to obtain market share have resulted in very strong and continuing price competition, particularly for our Data Exchange services. This competition has caused us from time to time to reduce prices on these services. As the industry continues to develop, we expect competition and pricing pressures to remain intense.

In the sourcing applications market, the competitive landscape is more fragmented. While we generally do not compete on the feature/function level with Retek, Manugistics, i2 Technologies, and JDA Software, we do compete from a market perspective. While QRS focuses within specific retail supply chain products and services, these companies offer broad supply chain solutions, and may solve a similar business problem. We also compete with Freeborders in the general merchandise and apparel segment. In addition, we may encounter competition from internal departments of companies that decide to develop their own supply chain management systems rather than to utilize the service and product offerings of external providers.

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 supply chain event management and problem resolution market primarily involves three types of competitors. QRS Insight competes with point solution providers focused solely on supply chain event management such as Categoric Software, reporting tool companies which offer portions of event management functionality, and ERP providers who have developed event management tools for their own software suites. We believe competition in this market is based primarily on the breadth of applications covered by the event management tool, geographic and industry focus, the ability to collaborate, and the magnitude of hardware requirements.

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The service bureau market is highly fragmented. QRS Managed EC^™ competes with many small players offering fax/e-mail/EDI conversion and with SPS Commerce, a larger player. We believe competition in this market is based on price, breadth of retail subscribers, and service.

IBM Relationship

Since 1988, QRS has been a reseller of the IBM Value Added Network (VAN) that acts as the platform for some of our QRS Exchange^™ suite of 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. This July 2002 agreement extended our relationship through June 2005, while simultaneously improving our cost structure when compared with the previous agreement. The agreement also allows for the purchase of other related services at a discounted rate, with no volume commitments or penalties. While we purchase network connectivity and electronic commerce-related services from IBM, a portion of the purchased connectivity services are actually 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 are not involved with the development, maintenance and operation of the IBM VAN.

Proprietary Rights

Our success and ability to compete is dependent in part on our ability to develop and maintain the proprietary aspect of our technology. The unauthorized copying or other misappropriation of our technology could enable third parties to benefit from our technology without paying for it.

We rely on a combination of copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our software, source code, documentation and other written materials under copyright and trade secret laws. We seek to protect our product information database through copyright laws.

Effective copyright and trade secret protection may be unavailable or limited in certain countries. We license our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the software and do not permit the resale, sublicense, or other transfer of the source code. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and independent consultants to execute confidentiality agreements with us and by restricting access to our source code.

Employees

At December 31, 2002, we had 512 full-time employees including:

In addition, at December 31, 2002, we employed 11 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.

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Executive Officers and Key Employees

The executive officers and key employees of the Company and their positions as of March 19, 2003 are as follows: