UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2003~~2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21958

QRS Corporation

(Exact name of registrant as specified in its charter)

Delaware

68-0102251

(State of incorporation)

(I.R.S. Employer

Identification No.)

1400 Marina Way South, Richmond, CA 94804

(Address of principal executive offices, including zip code)

(510) 215-5000

(Registrant’s phone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

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

As of ~~November~~August 52, ~~2003~~2004, 15,~~911~~948,~~896~~007 shares of the issuer’s common stock, par value $.001 per share, were outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that 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 that are identified in “Item 2. 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; customers’ reluctance to purchase products or services due to the announcement of the signing of the merger agreement with JDA Software Group, Inc. (“JDA”); diversion of management’s attention to effectuating the merger with JDA and planning the integration of QRS’ business with JDA; loss of or harm to the Company’s relationships with employees due to the Company’s pending merger with JDA; costs related to the merger and the integration of acquired products, technologies and employees into JDA’s business and product offerings; 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 the factors described above and contained elsewhere in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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.

CAUTION REQUIRED BY CERTAIN SEC RULES

In connection with the proposed merger of JDA and QRS, JDA has filed a registration statement on Form S-4, which includes a prospectus of JDA and a joint proxy statement for each of JDA’s and QRS’ special stockholder meetings, with the Securities and Exchange Commission (“SEC”). Investors and security holders are advised to read the registration statement, prospectus and joint proxy statement because they contain important information about the proposed merger. Investors and security holders may obtain a free copy of the registration statement, prospectus and joint proxy statement and other documents filed by JDA and QRS with the SEC at the SEC’s website at http:/www.sec.gov. Free copies of the registration statement, prospectus and joint proxy statement and other documents filed by QRS with the SEC may also be obtained from QRS directing a request to QRS, attention: Stacey Giamalis, Corporate Secretary, 510.215.5000.

QRS and its directors and its executive officers may be deemed, under SEC rules, to be soliciting proxies from QRS’ and JDA’s stockholders in favor of the proposed merger. Information regarding the identity of these persons, and their interests in the solicitation, is set forth in a Schedule 14A filed with the SEC, as well as the Form S-4, and available free of charge at the SEC website and public reference rooms, and from the QRS corporate secretary.

QRS CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		PageNumber
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	1
	Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2003 and 2002	2
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2004 and 2003	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3126
Item 4.	Controls and Procedures	3226
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	3227
Item 2.	Changes in Securities and Use of Proceeds	3227
Item 3.	Defaults upon Senior Securities	3227
Item 4.	Submission of Matters to a Vote of Security Holders	3227
Item 5.	Other Information	3227
Item 6.	Exhibits and Reports on Form 8-K	3327
	SIGNATURE	3429

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

QRS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF ~~SEPTEMBER~~JUNE 30, ~~2003~~2004 AND DECEMBER 31, ~~2002~~2003

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

(Unaudited)

	September 30,2003			December 31,2002
	June 30,2004			December 31,2003
ASSETS
Current assets:
Cash and cash equivalents	$	2730,~~450~~913		$	3531,~~358~~419
Current portion of marketable securities available-for-sale		6,308			1,998
Marketable securities available-for-sale		2,006			5,203
Accounts receivable—net of allowance for doubtful accounts of $1,167 at September 30, 2003 and $1,613 at December 31, 2002		16,481			14,907
Accounts receivable—net of allowance for doubtful accounts of $728 at June 30, 2004 and $698 at December 31, 2003		15,331			15,426
Prepaid expenses and other		31,~~554~~709			32,~~061~~730
Total current assets		5349,~~793~~959			5554,~~324~~778
Property and equipment:
Furniture and fixtures		2,~~079~~129			12,~~780~~109
Equipment		1517,~~724~~837			1316,~~547~~489
Leasehold improvements		2,~~084~~285			12,~~921~~128
		19,887			17,248
		22,251			20,726
Less accumulated depreciation and amortization		(1115,~~827~~463	)		(813,~~703~~045	)
Total property and equipment		86,~~060~~788			87,~~545~~681
Marketable securities available-for-sale		3,193			2,230
Restricted cash		3,560			—
Capitalized service and product development costs—net of accumulated amortization of $7,898 at September 30, 2003 and $6,934 at December 31, 2002		5,468			2,282
Marketable securities available-for-sale		252			1,500
Goodwill		1,113			1,113
Capitalized service and product development costs—net of accumulated amortization of $9,663 at June 30, 2004 and $8,407 at December 31, 2003		7,930			6,206
Other intangible assets—net of accumulated amortization of $17,756 at September 30, 2003 and $15,268 at December 31, 2002		7,369			9,857
Goodwill		830			830
Other assets		1,689			2,598
Intangible assets		318			504
Total assets	$	80,685		$	81,949
Other assets		1,682			1,280
Total assets	$	71,319		$	72,779
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,~~661~~600		$	86,~~870~~586
Accrued compensation		43,~~803~~534			64,~~289~~424
Accrued vacation		2,~~221~~240			2,~~044~~155
Deferred acquisition payment		~~2,500~~—			2,500
Deferred revenue		2,~~356~~024			12,~~605~~733
Current portion of sublease loss accruals related to business restructuring		62,~~361~~928			23,~~788~~142
Other accrued liabilities		32,~~196~~703			32,~~762~~562
Current portion of note payable		~~561~~—			~~1,070~~284
Total current liabilities		2921,~~659~~029			2824,~~928~~386
Sublease loss accruals related to business restructuring		56,~~461~~949			67,~~315~~884
Note payable		—			290
Deferred rent and other		1,419			2,036
Deferred rent and other		1,776			2,285
Total liabilities		29,397			34,306
Total liabilities		36,896			37,818
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock: $.001 par value; 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock: $.001 par value; 60,000,000 shares authorized; 16,105,280 shares issued and 15,871,549 shares outstanding at September 30, 2003 and 16,032,353 shares issued and 15,801,253 shares outstanding at December 31, 2002		252,468			251,914
Common stock: $.001 par value; 60,000,000 shares authorized; 16,174,968 shares issued and 15,941,237 shares outstanding at June 30, 2004 and 16,154,468 shares issued and 15,920,737 shares outstanding at December 31, 2003		255,547			254,973
Deferred compensation		(2,202	)		(~~157~~2,225	)
Treasury stock: 233,731 shares at September 30, 2003 and 231,100 shares at December 31, 2002		(5,557	)		(5,548	)
Treasury stock: 233,731 shares at June 30, 2004 and December 31, 2003		(5,557	)		(5,557	)
Accumulated other comprehensive earnings (loss):
Unrealized gain on marketable securities available-for-sale		1647			2610
Cumulative translation adjustments		(251	)		(229	)
Cumulative translation adjustment		(259	)		(193	)
Accumulated deficit		(~~202~~205,~~685~~654	)		(~~201~~208,~~875~~535	)
Total stockholders’ equity		4341,~~789~~922			4438,~~131~~473
Total liabilities and stockholders’ equity	$	8071,~~685~~319		$	8172,~~949~~779

See Notes to Condensed Consolidated Financial Statements

QRS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~(LOSS)~~

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2003~~2004 AND ~~2002~~2003

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

(Unaudited)

	Three Months EndedSeptember 30,						Nine Months Ended September 30,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2003			2002			2003			2002
	2004			2003			2004			2003
Revenues:
Revenue:
Software applications	$	8,~~333~~318		$	8,~~649~~329		$	2416,~~803~~520		$	2716,~~399~~470
Trading community management		1614,~~857~~832			1816,~~753~~336			4930,~~859~~964			5633,~~133~~002
Global services		6,~~072~~054			65,~~138~~905			1712,~~973~~226			2011,~~541~~901
Total revenues		31,262			33,540			92,635			104,073
Total revenue		29,204			30,570			59,710			61,373
Cost of revenues:
Cost of revenue:
Software applications		2,~~351~~193			2,~~445~~157			64,~~795~~282			84,~~894~~444
Trading community management		7,~~955~~472			98,~~600~~050			2415,~~062~~442			2916,~~271~~107
Global services		5,~~264~~178			5,~~465~~178			1510,~~753~~573			1810,~~316~~489
Total cost of revenues		15,570			17,510			46,610			56,481
Total cost of revenue		14,843			15,385			30,297			31,040
Gross profit		1514,~~692~~361			1615,~~030~~185			4629,~~025~~413			4730,~~592~~333
Operating expenses:
Sales and marketing		5,~~258~~060			5,~~928~~013			1611,~~058~~332			2210,~~582~~800
Service and product development		32,~~198~~701			3,~~514~~161			95,~~356~~876			116,~~425~~158
General and administrative		45,~~654~~033			54,~~296~~370			139,~~796~~851			179,~~478~~142
Amortization of other intangible assets		800			872			2,488			2,616
Settlement of deferred acquisition payment		—			—			(600	)		—
Restructuring expenses		5,279			—			5,279			—
Amortization of other intangible assets		93			839			186			1,688
Total operating expenses		1912,~~189~~887			1513,~~610~~383			4626,~~977~~645			5427,~~101~~788
Operating income (loss)		(3,497	)		420			(952	)		(6,509	)
Operating income		1,474			1,802			2,768			2,545
Interest income		~~120~~99			~~189~~109			~~346~~177			~~583~~226
Interest expense		(304	)		(5436	)		(~~106~~17	)		(~~108~~76	)
Income (loss) from operations before income taxes		(3,407	)		555			(712	)		(6,034	)
Income from operations before income taxes		1,569			1,875			2,928			2,695
Income tax expense (benefit)		50			—			98			(998	)
Income tax expense		27			48			47			48
Net income (loss)	$	(3,457	)	$	555		$	(810	)	$	(5,036	)
Net income	$	1,542		$	1,827		$	2,881		$	2,647
Other comprehensive income (loss)—
Other comprehensive income:
Unrealized (loss) gain on marketable securities available-for-sale, net of tax		(5	)		27			(10	)		(13	)
Unrealized gain (loss) on marketable securities available-for-sale, net of tax		(15	)		(9	)		37			(5	)
Change in cumulative translation adjustments		(7	)		(217	)		(22	)		(146	)
Change in cumulative translation adjustment		(45	)		19			(66	)		(15	)
Total comprehensive income (loss)	$	(3,469	)	$	365		$	(842	)	$	(5,195	)
Total comprehensive income	$	1,482		$	1,837		$	2,852		$	2,627
Basic net income (loss) per share	$	(0.22	)	$	0.04		$	(0.05	)	$	(0.32	)
Basic net income per share	$	0.10		$	0.12		$	0.18		$	0.17
Shares used to compute basic net income (loss) per share		15,859,472			15,748,712			15,830,162			15,696,153
Shares used to compute basic net income per share		15,936			15,829			15,932			15,815
Diluted net income (loss) per share	$	(0.22	)	$	0.04		$	(0.05	)	$	(0.32	)
Diluted net income per share	$	0.09		$	0.12		$	0.17		$	0.17
Shares used to compute diluted net income (loss) per share		15,859,472			15,772,880			15,830,162			15,696,153
Shares used to compute diluted net income per share		16,358			15,885			16,473			15,858

See Notes to Condensed Consolidated Financial Statements.

QRS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2003~~2004 AND ~~2002~~2003

(~~Dollars~~In in thousands)

(Unaudited)

	Nine Months EndedSeptember 30,
	Six Months EndedJune 30,
	2003			2002
	2004			2003
Cash flows from operating activities:
Net loss	$	(810	)	$	(5,036	)
Net income	$	2,881		$	2,647
Adjustments to reconcile net loss to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		32,~~613~~418			32,~~922~~304
Amortization of capitalized service and product development costs		~~964~~1,256			~~1,648~~587
Amortization of software licenses and other		~~1,008~~43			~~871~~714
Amortization of other intangible assets		~~2,488~~186			21,~~616~~688
Stock-based compensation		~~204~~532			~~516~~83
Provision for allowance for doubtful accounts		80247			~~586~~151
Loss from disposal of property and equipment		63			783
Settlement of deferred acquisition payment		(600	)		—
Changes in assets and liabilities:
Accounts receivable		(~~1,654~~152	)		~~4,087~~(785	)
Prepaid expenses and other		(1,~~143~~021	)		(~~770~~252	)
Income taxes receivable		—			125
Other assets		73			—
Accounts payable		~~(1,209~~812	)		(42,~~370~~209	)
Accrued compensation		(~~1,486~~890	)		(1,~~379~~839	)
Accrued vacation		~~177~~85			~~276~~234
Deferred revenue		751			(796	)
Deferred acquisition payment		(1,900	)		—
Sublease loss accruals related to business restructuring		2,719			(4,702	)
Deferred revenue		(709	)		733
Other accrued liabilities		(931	)		50
Sublease loss accruals related to business restructuring		(1,149	)		(1,415	)
Deferred rent and other		(223	)		658
Other accrued liabilities		397			(1,399	)
Net cash provided by operating activities		4,611			1,843
Deferred rent and other		(555	)		103
Net cash provided by operating activities		3,996			1,345
Cash flows from investing activities:
Sales and maturities of marketable securities available-for-sale		7,089			7,317
Restricted cash		(3,560	)		—
Purchases of marketable securities available-for-sale		(12,372	)		(3,627	)
Sales and maturities of marketable securities available-for-sale		4,482			3,162
Purchases of property and equipment		(2,772	)		(1,824	)
Purchases of marketable securities available-for-sale		—			(8,146	)
Capitalization of service and product development costs		(4,150	)		(1,063	)
Purchases of property and equipment		(1,525	)		(1,781	)
Other assets		552			(246	)
Capitalization of service and product development costs		(2,980	)		(2,819	)
Net cash provided by (used in) investing activities		(11,653	)		557
Purchase of licensed technology		(518	)		—
Other assets		—			532
Net cash used in investing activities		(4,101	)		(9,052	)
Cash flows from financing activities:
Proceeds from employee stock purchase plan issuance		176			296
Proceeds from employee stock purchase plan		49			176
Exercise of stock options		~~129~~16			~~604~~2
Repurchase of common stock		(9—	)		(188	)
Payments on note payable		(~~799~~288	)		(~~489~~528	)
Payments on capital lease obligations		(~~340~~112	)		(~~200~~99	)
Net cash provided by (used in) financing activities		(843	)		193
Net cash used in financing activities		(335	)		(457	)
Effect of exchange rate on cash and cash equivalents		(2366	)		(~~123~~16	)
Net increase (decrease) in cash and cash equivalents		(7,908	)		2,470
Net decrease in cash and cash equivalents		(506	)		(8,180	)
Cash and cash equivalents at beginning of period		3531,~~358~~419			2835,~~911~~358
Cash and cash equivalents at end of period	$	2730,~~450~~913		$	3127,~~381~~178
Cash paid for:
Taxes	$	7697		$	7876
Interest	$	8914		$	8264
Noncash investing and financing activities:
Property and equipment acquired through capital lease	$	~~419~~—		$	~~550~~419
Disposal of fully depreciated assets	$	—		$	1,387
Fair value of restricted stock awarded	$	468		$	210
Note payable exchanged for software licenses	$	—		$	2,100
Fair value of restricted stock awarded	$	210		$	—

See Notes to Condensed Consolidated Financial Statements

QRS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

QRS Corporation (“QRS,” the “Company”,” “we” or “us”) ~~was established in 1988 and~~ is a ~~provider~~technology ofcompany ~~collaborative commerce~~that ~~solutions~~serves ~~for~~ the global retail trading community. ~~Our~~with ~~products~~collaborative ~~and~~commerce ~~services~~solutions. ~~help~~We ~~thousands~~manage ofthe ~~retailers,~~flow ~~manufacturers,~~of ~~suppliers,~~critical ~~vendors,~~commerce ~~wholesalers~~information and ~~distributors~~leverage ~~from~~our ~~a variety of~~ retail ~~segments,~~technology ~~including~~expertise ~~general~~to ~~merchandise~~address ~~and apparel,~~fundamental ~~consumer~~industry ~~packaged~~challenges ~~goods,~~such ~~health~~as ~~and~~global ~~beauty~~data synchronization, ~~consumer~~compliance ~~electronics~~mandates, transaction ~~hardlines,~~management ~~do-it-yourself~~ and ~~sporting~~global ~~goods~~trade management. WeOur solutions help ~~companies~~customers toexpand ~~connect~~into ~~electronically,~~new ~~transact~~markets ~~business~~and channels, ~~collaborate~~improve onoperational ~~processes~~efficiency and ~~decisions, and~~ differentiate their ~~brands~~ ~~in the global marketplace~~brand. ~~Our~~Currently ~~products~~we ~~and~~have ~~services~~approximately ~~are~~9,800 ~~typically integrated with our~~ customers’, ~~enterprise~~as ~~information~~measured ~~technology~~by ~~systems~~the number inof ~~order~~total, tounique ~~deliver~~corporate ~~greater~~customers ~~benefits~~that ~~and~~purchased ~~efficiencies~~or tolicensed ~~these customers. We market~~ our products and services inbetween ~~three~~July ~~Solutions Groups: Software Applications~~1, ~~Trading~~2003 ~~Community Management~~ and ~~Global~~June ~~Services~~30, 2004.

~~Our~~We ~~Software~~have ~~Applications~~prepared ~~automate~~the Condensed Consolidated Balance Sheet as of June 30, 2004, the Condensed Consolidated Statements of Operations and ~~help~~Comprehensive Income ~~optimize~~for ~~business~~the ~~processes~~three ~~between~~and ~~companies.~~six ~~Specifically~~months ended June 30, ~~they~~2004 ~~support~~and 2003, and the ~~following~~Condensed ~~business~~Consolidated ~~functions: product~~Statements ~~data~~of ~~synchronization;~~Cash ~~collaborative~~Flows ~~product~~for ~~planning~~the six months ended June 30, ~~design~~2004 and 2003, ~~production~~without audit. In the opinion and ~~shipment;~~to ~~online~~the ~~merchandising~~knowledge of management, ~~promotions~~all adjustments necessary to present fairly the financial position, results of operations and ~~sales;~~cash flows at June 30, 2004 and ~~supply~~for ~~chain~~all ~~exception~~periods ~~management.~~presented ~~Our~~have ~~Software~~been ~~Applications~~made ~~include~~in ~~both~~accordance ~~Enterprise~~with ~~Software~~generally ~~Applications~~accepted accounting principles. The Condensed ~~installed~~Consolidated onBalance ~~customers’~~Sheet ~~computer~~as ~~systems~~of ~~and~~December ~~hosted~~31, ~~applications~~2003 ~~installed~~is onderived from our ~~computer~~audited ~~systems~~consolidated financial statements as of that date.

~~Our~~Certain ~~Trading~~information ~~Community~~and ~~Management~~footnote ~~solutions~~disclosures ~~allow~~normally ~~retailers,~~included ~~vendors~~in ~~and~~financial ~~their~~statements ~~trading~~prepared ~~partners~~in toaccordance ~~exchange~~with ~~electronic~~generally ~~business~~accepted ~~documents, such as purchase~~accounting ~~orders,~~principles ~~invoices~~have ~~and~~been ~~advance~~condensed ~~ship~~or ~~notices.~~omitted ~~These~~as ~~electronic~~permitted ~~transactions~~by ~~are~~regulations ~~conducted~~of ~~over~~the aSecurities ~~value-added~~and ~~network~~Exchange ~~(VAN)~~Commission. orThese ~~over~~interim ~~the~~Condensed ~~Internet.~~Consolidated ~~Our~~Financial ~~Trading~~Statements ~~Community~~should ~~Management~~be ~~solutions~~read ~~can~~in ~~reduce~~conjunction ~~costs~~with ~~related~~the toannual ~~paper~~audited ~~transactions,~~consolidated ~~mail~~financial statements ~~delays~~ and ~~manual~~ ~~data~~notes ~~input~~thereto ~~errors~~included ~~for~~in our ~~customers.~~Annual ~~The~~Report ~~communication~~on ofForm ~~these~~10-K ~~electronic~~for ~~business~~the ~~documents~~year isended ~~typically~~December ~~integrated~~31, 2003 as filed with the ~~accounting~~Securities and ~~inventory~~Exchange ~~systems~~Commission ofon ~~our~~March ~~customers~~15, ~~and their trading partners~~2004.

~~Our~~The ~~Global~~preparation ~~Services~~of ~~include~~our ~~the~~Condensed ~~collection,~~Consolidated ~~analysis~~Financial ~~and~~Statements ~~delivery~~in ofconformity with generally accepted accounting ~~information,~~principles ~~such~~necessarily asrequires ~~store-level~~management ~~pricing~~to ~~data~~make estimates and ~~metrics,~~assumptions ~~for~~that ~~use~~affect inthe ~~our~~reported ~~customers’~~amounts ~~individual~~of ~~strategic~~assets and ~~tactical~~liabilities ~~decisions;~~and ~~software~~disclosure ~~implementation~~of contingent assets and ~~integration~~liabilities ~~services;~~at ~~and~~the ~~technical~~balance ~~support~~sheet dates and ~~training~~the ~~services~~reported amounts of revenue and expenses for ~~our~~the ~~various solutions~~periods presented. Actual amounts may differ from such estimates.

WeOperating ~~have~~results prepared the Condensed Consolidated Balance Sheet as of September 30, 2003 and the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the Condensed Consolidated Statements of Cash Flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2003~~2004 ~~and~~are ~~2002,~~not ~~without audit.~~necessarily Inindicative ~~the opinion and to the knowledge~~ of ~~management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly~~ the ~~financial~~operating ~~position,~~ results ofanticipated ~~operations~~for ~~and~~any ~~cash~~other ~~flows~~interim atperiod ~~September~~or ~~30, 2003 and 2002 and~~ for ~~all~~the ~~periods~~full ~~presented have been made~~year. ~~The Condensed Consolidated Balance Sheet as of December 31, 2002 is derived from our audited consolidated financial statements as of that date.~~

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

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

The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the operating results anticipated for any other interim period or for the full year.

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

Recent Accounting Pronouncements

In ~~July~~January ~~2002~~2003, the ~~Financial Accounting Standards Board (~~FASB) issued ~~Statement~~FIN of46, ~~Financial~~“Consolidation ~~Accounting~~of ~~Standards~~Variable Interest ~~(SFAS) No~~Entities.” ~~146~~This ~~(FAS~~interpretation ~~146),~~of “Accounting ~~for~~Research ~~Costs~~Bulletin ~~Associated~~No. ~~with~~51, ~~Exit~~“Consolidated orFinancial ~~Disposal Activities~~Statements,” ~~which~~ addresses ~~the~~consolidation ~~measurement,~~by ~~timing~~business enterprises of ~~recognition~~variable ~~and~~interest ~~reporting~~entities ofthat possess certain characteristics. ~~costs~~FIN ~~associated~~46 ~~with~~requires ~~exit~~that orif ~~disposal~~a ~~activities~~business ~~and~~enterprise ~~restructuring~~has ~~activities.~~a ~~FAS~~controlling ~~146~~financial ~~requires~~interest ~~that~~in a ~~liability~~variable ~~for~~interest ~~costs~~entity, ~~associated~~the ~~with~~assets, ~~exit~~liabilities, orand ~~restructuring~~results of the activities of the variable interest entity must be ~~recognized~~included ~~only~~in ~~when~~the Consolidated Financial Statements with those of the ~~liability~~business isenterprise. ~~incurred~~FIN as46 ~~opposed~~applies immediately to atvariable ~~the~~interest ~~time that~~entities acreated ~~company~~after ~~formally~~January ~~approves~~31, 2003 and ~~commits~~ to variable interest entities in which an ~~exit~~enterprise ~~plan~~obtains an interest after that date. We do not have any interest in any variable interest entities as ~~set~~of ~~forth~~June 30, 2004. We will apply the consolidation requirement of FIN 46 in ~~Emerging~~future ~~Issues~~periods if we should have any interest in any variable interest entity.

In May 2003, the FASB issued FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation (or right) of the issuer. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of FAS 150 and still existing at the beginning of the interim period of adoption. We do not have any financial instruments with characteristics of both liabilities and equity as of June 30, 2004. The FASB has deferred the effective date of paragraphs 9, 10 and 22 of FAS 150. During 2003, we adopted all other provisions of FAS 150 and the adoption had no material effect on our financial position or results of operations. We continue to evaluate the impact that adoption of paragraphs 9, 10 and 22 will have on our financial position or results of operations.

In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No03-06. 94Issue 03-3,06 ~~“Liability~~addressed ~~Recognition~~a ~~for~~number ~~Certain~~of ~~Employee~~questions ~~Termination~~regarding ~~Benefits~~the ~~and~~computation ~~Other~~of ~~Costs to~~earnings ~~Exit~~per anshare ~~Activity.”~~(EPS) ~~FAS~~by ~~146~~companies isthat ~~effective~~have ~~for~~issued ~~exit~~securities orother ~~disposal~~than ~~activities~~common stock that ~~are~~contractually ~~initiated~~entitle ~~after~~the ~~December~~holder ~~31,~~to ~~2002.~~participate Wein ~~adopted~~dividends ~~FAS~~and ~~146~~earnings onof ~~January~~the Company 1when, ~~2003~~and if, ~~and~~it declares dividends on its common stock. The issue also provides further guidance in ~~conjunction~~applying ~~with~~the ~~certain~~two-class ~~restructuring~~method ~~activities~~of ~~initiated~~calculating ~~during~~EPS. It clarifies what constitutes a participating security and how to apply the ~~third~~two-class ~~quarter~~method ~~2003~~of computing EPS once it is determined that a security is participating, weincluding ~~recorded~~how to allocate undistributed earnings to such a $1security.8 ~~million~~Issue ~~restructuring~~03-06 ~~expense~~is ineffective ~~accordance~~for ~~with~~the ~~FAS~~first ~~146~~fiscal ~~(See~~period ~~Note~~beginning 3)after its issuance. During the quarter ended June 30, 2004, we adopted Issue 03-06 and the adoption did not have any material effect on our financial position or results of operations.

InOn ~~November~~March ~~2002~~31, 2004, the FASB issued ~~FASB~~an ~~Interpretation~~exposure ~~No.~~draft 45entitled ~~(FIN~~“Share-Based ~~45),~~Payment” ~~“Guarantor’s~~to ~~Accounting~~amend ~~and~~FAS ~~Disclosure~~123, ~~Requirements~~“Accounting for ~~Guarantees,~~Stock-Based ~~Including~~Compensation” ~~Indirect~~and ~~Guarantees~~FAS of95, ~~Indebtedness~~“Statement of ~~Others~~Cash Flows.” ~~FIN~~This 45proposed ~~requires~~standard ~~that~~would aeliminate ~~liability~~the beability ~~recorded~~to inaccount ~~the~~for ~~guarantor’s~~share-based ~~balance~~compensation ~~sheet~~using onthe ~~issuance~~intrinsic ofvalue-based amethod ~~guarantee~~under orAPB ~~indemnification~~Opinion No. ~~In addition~~25, ~~FIN~~“Accounting ~~45 requires disclosures about the~~for ~~guarantees~~Stock orIssued ~~indemnification~~to ~~that~~Employees.” anThis ~~entity~~exposure ~~has~~draft ~~issued,~~would ~~including~~require aus ~~reconciliation~~to ofcalculate ~~changes~~equity-based incompensation ~~the~~expense ~~entity’s~~for ~~product~~stock ~~warranty~~options ~~liabilities. The initial recognition~~ and ~~initial~~employee ~~measurement~~stock ~~provisions~~purchase ofplan ~~FIN~~rights 45granted ~~are~~to ~~applicable~~employees based on athe ~~prospective basis~~fair tovalue ~~guarantees~~of ~~issued~~the orequity ~~modified~~instrument ~~after~~at the ~~December~~time ~~31,~~of ~~2002~~grant. The ~~disclosure~~equity-based ~~requirements~~compensation ofexpense ~~FIN~~is 45recognized ~~are~~ratably ~~effective~~over ~~for~~the ~~financial~~vesting ~~statements~~period ofbeginning ~~interim~~with orthe ~~annual~~grant ~~periods~~date. ~~ending~~Currently, ~~after~~we ~~December~~disclose ~~15,~~the ~~2002.~~pro Weforma ~~adopted~~net ~~the~~income ~~disclosure~~and ~~provisions~~related ~~and recognition~~pro ~~provisions~~forma ofearnings ~~FIN~~per 45share atinformation ~~December~~in ~~31,~~accordance with ~~2002~~FAS 123 and ~~January~~FAS 1148, ~~2003,~~“Accounting ~~respectively.~~for ~~The~~Stock-Based ~~adoption~~Compensation ofCosts-Transition ~~the~~and ~~recognition~~Disclosure.” ~~and~~We ~~measurement~~continue ~~provisions~~to ofevaluate ~~FIN~~the 45impact ~~had~~that nothe ~~material~~exposure ~~effect~~draft will have on our financial position or results of operations.

InThe ~~November~~following ~~2002,~~table illustrates the ~~Emerging~~effect ~~Issues~~on ~~Task~~our ~~Force~~net ~~reached~~income aand ~~consensus~~net ~~on Issue~~income ~~No.~~per ~~00-21,~~share ~~“Revenue~~if ~~Arrangements~~we ~~with~~would ~~Multiple~~have ~~Deliverables.”~~applied ~~This~~the ~~issue~~fair ~~addresses~~value ~~how~~recognition ~~revenue~~provisions ~~arrangements with multiple deliverables should be divided into separate units~~ of ~~accounting~~FAS ~~and~~123 ~~how the arrangement consideration should be allocated~~ to ~~the identified separate accounting units. EITF No. 00~~stock-21based iscompensation ~~effective~~(in ~~for fiscal periods beginning after June 15~~thousands, ~~2003.~~except Weper ~~adopted~~share ~~the~~amounts): ~~provisions of EITF No. 00-21 during the third quarter of 2003. The adoption had no material effect on our financial position or results of operations.~~

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	1,542		$	1,827		$	2,881		$	2,647
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		252			55			491			83
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(866	)		(702	)		(2,184	)		(2,065	)

Net income, pro forma	$	928		$	1,180		$	1,188		$	665

Basic net income per share, as reported	$	0.10		$	0.12		$	0.18		$	0.17

Basic net income per share, pro forma	$	0.06		$	0.07		$	0.07		$	0.04

Diluted net income per share, as reported	$	0.09		$	0.12		$	0.17		$	0.17

Diluted net income per share, pro forma	$	0.06		$	0.07		$	0.07		$	0.04

The ~~following table~~weighted-average ~~illustrates~~fair ~~the~~value ~~effect~~of options granted were estimated on ~~our~~the ~~net~~date ~~income~~of ~~(loss)~~grant ~~and~~using ~~net~~the ~~income~~multiple ~~(loss)~~options ~~per~~method ~~share~~of ifthe weBlack-Scholes ~~would~~pricing ~~have~~model ~~applied~~with the ~~fair~~following ~~value~~weighted-average ~~recognition~~assumptions ~~provisions~~used offor ~~FAS~~grants ~~123~~made tofor ~~stock-based~~the ~~compensation~~three ~~(in~~and ~~thousands,~~six ~~except~~months ~~per~~ended ~~share~~June ~~amounts)~~30, 2004 and 2003:

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	2004			2003			2004			2003
Net income (loss), as reported	$	(3,457	)	$	555		$	(810	)	$	(5,036	)
Weighted-average fair value of options granted	$	3.66		$	3.10		$	3.99		$	3.25
Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects		121			140			204			516
Risk-free interest rate		2.84	%		2.66	%		2.81	%		2.96	%
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects		(880	)		(1,489	)		(2,944	)		(5,739	)
Expected volatility		108	%		110	%		109	%		105	%
Net loss, pro forma	$	(4,216	)	$	(794	)	$	(3,550	)	$	(10,259	)
Basic net income (loss) per share, as reported	$	(0.22	)	$	0.04		$	(0.05	)	$	(0.32	)
Basic net loss per share, pro forma	$	(0.27	)	$	(0.05	)	$	(0.22	)	$	(0.65	)
Diluted net income (loss) per share, as reported	$	(0.22	)	$	0.04		$	(0.05	)	$	(0.32	)
Diluted net loss per share, pro forma	$	(0.27	)	$	(0.05	)	$	(0.22	)	$	(0.65	)

The ~~weighted~~expected ~~average fair~~life ~~value~~ of options granted during the third quarter 2003 and the third quarter 2002 was $4.50 and $5.30, respectively. Such fair values of each option grant were estimated on the date of grant using the multiple options method of the Black-Scholes pricing model with the following weighted-average assumptions used for grants made in ~~third~~2004 ~~quarter 2003~~ and ~~third quarter 2002: risk-free interest rates are 2.66% in~~ 2003 ~~and 3.96% in 2002; expected volatility~~ is ~~110% in 2003 and 100% in 2002; expected lives in 2003 and 2002 are~~ 12 to 18 months beyond each incremental vesting period (total life of 2 to 5.5 years, depending on each grant’s individual vesting schedule). No dividends are assumed for any plan in any year.

The fair value of the stock ~~purchases~~purchased ~~made~~ under the employee stock purchase program was determined using the Black-Scholes pricing model with the following weighted-average assumptions: risk-free interest rate is 2.6661%; expected volatility is ~~110~~109%; expected life is 6 months. No dividends are assumed.

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a

controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any controlling financial interest in any variable interest entities as of September 30, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

In May 2003, the FASB issued FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation (or right) of the issuer. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of FAS 150 and still existing at the beginning of the interim period of adoption. We do not have any financial instruments with characteristics of both liabilities and equity as of September 30, 2003. We understand the FASB has deferred the effective date of paragraphs 9 and 10 of FAS 150. During the third quarter 2003, we adopted all other provisions of FAS 150 and the adoption had no material effect on our financial position or results of operations. We continue to evaluate the impact that adoption of paragraphs 9 and 10 will have on our financial position or results of operations.

2. OTHER INTANGIBLE ASSETS

Other intangible assets include acquired technology with an estimated useful life of 6 years,; customer lists with ~~estimated~~ useful lives of 3.5 to 5 years, and a weighted-average estimated useful life of 4.8 years; customer contracts with ~~estimated~~ useful lives of 5 to 7 years and a weighted-average estimated useful life of 6.4 years; and non-compete agreements ~~purchased~~entered into in connection with the acquisitions of businesses with estimated useful lives of 3 years. These intangible assets continue to be amortized on a straight-line basis over their useful lives.

As of ~~September~~ June 30, ~~2003~~2004, other intangible assets consisted of the following (in thousands):

	Gross		AccumulatedAmortization			Net
Acquired technology	$	202,~~881~~743	$	(142,~~078~~721	)	$	~~6,803~~22
Customer lists		1,552		(1,~~255~~414	)		~~297~~138
Customer contracts		1,480		(1,~~211~~322	)		~~269~~158
Non-compete agreements		1,212		(1,212	)		—
Total	$	256,~~125~~987	$	(176,~~756~~669	)	$	~~7,369~~318

The estimated future amortization expense of other intangible assets as of ~~September~~June 30, ~~2003~~2004 is as follows (in thousands):

2003 (remaining three months)	$	794
2004 (remaining six months)	$	175
2004		3,161
2005		142
2005		2,943
2006		1
2006		471
Total	$	318
Total	$	7,369

3. RESTRUCTURING EXPENSES

As part of our ~~development~~2001 ~~plans~~restructuring ~~and~~activities, ~~product~~we ~~strategy~~made ~~solidified~~certain inestimates of sublease income on the ~~first~~vacated ~~half~~facility ofadjacent ~~2003,~~to weour ~~began~~corporate aheadquarters ~~project~~in Richmond, California; however, due to ~~review~~a ~~our~~prolonged ~~overall~~difficult ~~cost~~real ~~structure.~~estate ~~During~~market ~~the~~in ~~third~~the ~~quarter~~Bay ~~2003~~Area, wethose ~~completed~~original ~~our~~estimates ~~cost~~proved ~~structure~~optimistic. ~~review~~As ~~with~~a ~~the~~result, ~~goals~~during of2003 ~~creating~~we ~~better~~began ~~alignment~~reevaluating ~~with~~ our ~~growth~~assumptions ~~strategy~~surrounding ~~and~~our ~~finding~~sublease ~~additional~~loss ~~potential~~accrual, ~~efficiencies.~~including Asdiscussions awith ~~result,~~our welandlord ~~recorded~~to ~~restructuring~~renegotiate ~~expenses~~the terms of $5our lease. We recorded a $3.7 million ~~during~~restructuring expense for the ~~quarter~~ year ended ~~September~~December 3031, 2003, ~~consisting~~based on the terms of ~~several~~a ~~components~~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.

WeDuring ~~centralized~~January ~~substantially~~2004, ~~all~~we offinalized ~~our~~agreements ~~development~~with ~~team~~our landlord to ~~our~~sublet ~~Richmond,~~the ~~California~~facility ~~headquarters~~to ~~and~~an ~~streamlined~~affiliate ~~other parts~~ of our ~~operations,~~landlord ~~primarily general~~ and ~~administrative~~reduce ~~services.~~our ~~These~~total ~~actions~~cash ~~resulted~~commitments inover athe ~~restructuring~~remaining ~~charge~~ life of the lease by $16.84 million,. ~~consisting~~The ofsublease ~~$1.2~~agreement ~~million~~for ~~related~~full tocontract ~~the~~rent ~~closure~~and ofoperating ~~our~~expenses ~~Wakefield~~from October 1, ~~Massachusetts~~2008 through ~~facility~~the lease termination on June 30, 2011 is collateralized by a $04.10 million ~~related~~Deed toof ~~the~~Trust. ~~abandonment~~The ~~and~~agreements ~~write-off~~with ofour ~~certain~~landlord ~~equipment~~required ~~and~~us ~~leasehold~~in ~~improvements~~the ~~and~~first quarter 2004 to deposit $03.56 million ~~related~~of tobase ~~the termination~~rent offor 43the ~~employees~~period ~~located~~October ~~in Wakefield~~1, ~~Massachusetts~~2006 ~~and~~through September ~~Richmond~~30, ~~California.~~2008 ~~The~~in ~~restructuring~~an ~~charge~~escrow ~~was~~account ~~somewhat~~for ~~offset~~disbursement byover athe ~~$0.2~~related ~~million~~rental ~~third~~period. ~~quarter~~The ~~reduction~~funds held in aescrow ~~previous~~are ~~severance~~classified ~~accrual.~~as Ofrestricted cash in the 43Condensed ~~terminated~~Consolidated ~~employees,~~Balance ~~the last~~Sheets ~~day~~as of ~~employment~~June ~~for~~30, 292004. ofUnder ~~them~~the ~~was~~terms onof orthe ~~before~~agreements with ~~September~~our 30landlord, ~~2003.~~we ~~Additional~~also ~~severance~~settled ~~and~~a ~~benefit~~$0.8 ~~costs~~million ofcommon uparea maintenance obligation related to aour ~~total~~headquarters offacility for $0.2 million ~~are~~that ~~expected~~we topaid ~~be incurred~~ during the ~~fourth~~first quarter ~~2003~~of ~~and~~2004. ~~the~~The ~~first~~remaining ~~quarter~~$0.6 ~~2004~~million ~~related~~liability towas allocated between our ~~transition~~headquarters ~~costs~~facility ~~associated~~and ~~with~~the ~~terminated~~vacated ~~employees~~adjacent ~~who~~facility ~~will~~based ~~provide~~on ~~ongoing~~square ~~services~~footage. ~~until~~As ~~they~~a ~~leave~~result, ~~the~~$0.3 ~~Company~~million ~~either~~will inbe ~~the~~recognized ~~fourth~~ratably ~~quarter~~as ~~2003~~a orreduction ~~the~~in ~~first~~operating ~~quarter~~expenses ~~2004.~~over ~~These~~the remaining ~~severance~~headquarters lease term and ~~benefit~~$0.3 ~~costs~~million ~~will~~was bereclassified from ~~included~~deferred inrent ~~the Condensed~~and ~~Consolidated~~other ~~Statements~~liabilities ofto ~~Operations~~the ~~and~~sublease ~~Comprehensive~~loss ~~Income~~accrual ~~(Loss)~~for asour ~~restructuring~~vacant ~~expenses~~Richmond, California facility. We ~~expect~~believe that the ~~total~~sublease ~~obligation~~loss inaccrual ~~connection~~related ~~with~~to ~~these~~this ~~restructuring~~facility ~~activities~~as toof beJune ~~slightly~~30, ~~less~~2004, ~~than~~assuming ~~$2.0~~certain ~~million~~amounts of sublease income, will cover all of our revised obligations under the final agreements.

During 2003, we also completed a review of our overall cost structure with the goals of creating better alignment with our growth strategy and finding additional 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 in the year ended December 31, 2003, 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.

During the second quarter 2004, we entered into a non-binding Letter of Intent with a third party to sublease our Wakefield, Massachusetts facility from October 1, 2004 through the term of the lease in June 2007. We recorded an additional restructuring charge of $0.1 million for the quarter ended June 30, 2004 to increase the sublease loss accrual to cover our estimated revised obligations related to this facility. Subsequently, during the third quarter 2004, we finalized a sublease agreement for the property that included the terms specified in the Letter of Intent.

~~Also~~The ~~during~~following ~~the~~is ~~third quarter 2003, we accelerated discussions with our landlord to renegotiate the terms of our lease on~~ a ~~vacated~~summary ~~facility in the San Francisco Bay Area, driven by the difficult real estate market in that region. During the fourth quarter 2003, we entered into a non-binding Letter~~ of ~~Intent with~~ the ~~landlord to reduce both the term of the lease and our total cash commitments over the remaining life of the lease. We recorded a $3.7 million~~ restructuring ~~expense~~liabilities ~~for~~from ~~the~~December ~~period ended September 30~~31, 2003 to ~~cover~~June ~~all~~30, of2004 ~~our estimated revised obligations related to this facility. In~~(in ~~addition,~~thousands): ~~we committed to prepay a portion of the revised future rent obligation.~~

The following is a summary of the restructuring liabilities from December 31, 2002 to September 30, 2003 (in thousands):


	2001 Restructuring Activities			2003 Restructuring Activities						Total
	Facilities Closure (primarily Richmond, CA)			Severance (included in Accrued Compensation)			Facilities Closure (Wakefield, MA)			Total
Balance at December 31, 2003	$	9,995		$	246		$	1,031		$	11,272
Restructuring expense(1)		—			27			105			132
Cash payments		(1,388	)		(270	)		(223	)		(1,881	)
Adjustments(2)		336			—			21			357

Balance at June 30, 2004	$	8,943		$	3		$	934		$	9,880

	Liability as ofDecember 31, 2002		Additions(Reductions)			Cash Payments			Liability as ofSeptember 30, 2003
Severance—2001 (included in Accrued compensation)	$	589	$	(155	)	$	(434	)	$	—
Facilities closure—2001		9,103		3,681			(2,121	)		10,663
Severance—2003 (included in Accrued compensation)		—		527			(57	)		470
Facilities closure—2003		—		1,159			—			1,159
Total	$	9,692	$	5,212		$	(2,612	)	$	12,292

(1)

Restructuring expense of $27,000 related to severance (associated with terminated employees who provided services from their notification of termination in the third quarter 2003 through their last day of employment on March 31, 2004) was included in Service and product development expense in the Condensed Consolidated Statements of Operations and Comprehensive Income for the first quarter 2004. Severance expense was incurred ratably over the severance period. Restructuring expense of $0.1 million related to the sublease loss accrual for our Wakefield, Massachusetts facility was included in General and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income for the second quarter 2004.

~~The Additions~~ (~~Reductions~~2) The adjustment to the restructuring ~~liabilities~~liability ~~of $5.2 million~~ in the ~~table~~first ~~above~~quarter ~~exclude~~2004 ~~the~~was due to $0.13 million ~~portion~~reclassified offrom ~~the~~deferred ~~restructuring~~rent ~~charge related to the abandonment~~ and ~~write-off~~other ofliabilities ~~certain equipment and leasehold improvements. We expect~~ to ~~pay~~ the ~~remaining obligations related to severance and benefits by the end of the second quarter of 2004. Based on our~~ sublease ~~assumptions~~loss ~~described~~accrual inupon ~~Management’s~~settlement ~~Discussion and Analysis~~ of ~~Financial~~a ~~Condition~~common ~~and~~area ~~Results~~maintenance ofobligation ~~Operations and~~per ~~actual subleases in effect on other properties, $6.4 million of~~ the ~~total~~terms ~~facilities closure liability~~ of ~~$11.8 million has been classified as a current liability and~~ the ~~remaining~~agreements ~~$5.5~~with ~~million~~our ~~has been classified as non-current~~landlord.

4We expect to pay remaining employment severance obligations related to restructuring activities by the third quarter of 2004. ~~EARNINGS~~Based ~~(LOSS)~~on ~~PER~~the ~~SHARE~~terms of the agreements with our landlord described above and actual subleases in effect on other properties, $2.9 million of the total facilities closure liability of $9.9 million has been classified as a current liability and the remaining $6.9 million has been classified as non-current with payments through 2008.

~~Basic~~During ~~earnings~~the ~~(loss)~~second ~~per~~quarter ~~share~~of is2004, ~~calculated~~management byreevaluated ~~dividing~~our ~~net~~strategy ~~earnings~~in ~~(loss)~~Europe, ~~for~~primarily the ~~period~~cost byof operating a facility in the ~~weighted~~U.K. ~~average~~While ~~number~~we ofbelieve ~~common~~that ~~shares~~maintaining ~~outstanding~~an international sales presence is appropriate, revenue generated ~~for~~from ~~that~~Europe ~~period.~~has ~~Diluted~~been ~~earnings~~less ~~(loss)~~than ~~per~~expected ~~share~~and ~~takes~~insufficient ~~into~~to ~~account~~offset ~~the~~current ~~effect~~operating ofexpenses. ~~potentially~~As ~~dilutive~~a ~~instruments~~result, ~~such~~we asplan ~~stock~~to ~~options,~~vacate ~~warrants~~the ~~and~~facility ~~restricted~~in ~~common~~August ~~stock~~2004. At June 30, ~~and~~2004, ~~uses~~we ~~the~~were ~~average~~obligated ~~share~~to ~~price~~make ~~under~~future ~~the~~lease ~~treasury~~payments ~~stock~~of ~~method~~$0.3 ~~for~~ million through the lease ~~period~~termination in ~~determining~~February 2006, and the ~~number~~net book value of ~~incremental~~equipment ~~shares~~and ~~that~~leasehold improvements was approximately $0.2 million. We are tocurrently bein ~~added~~negotiations towith ~~the~~our ~~weighted~~landlord ~~average~~for ~~number~~an early-termination of ~~shares~~the ~~outstanding~~lease, which could mitigate future lease payments.

~~The~~4. ~~following~~EARNINGS isPER aSHARE ~~summary of the calculation of the number of shares used in calculating basic and diluted earnings (loss) per share:~~

	Three Months EndedSeptember 30,		Nine Months EndedSeptember 30,
	2003	2002	2003	2002
Shares used to compute basic earnings (loss) per share	15,859,472	15,748,712	15,830,162	15,696,153
Add: effect of dilutive securities	—	24,168	—	—
Shares used to compute diluted earnings (loss) per share	15,859,472	15,772,880	15,830,162	15,696,153

We calculate basic earnings per share (EPS) and diluted EPS in accordance with FAS 128, “Earnings Per Share.” Basic EPS is calculated by dividing net earnings for the period by the weighted-average common shares outstanding for that period, excluding unvested restricted share rights. Diluted EPS takes into account the effect of dilutive instruments, such as stock options and restricted share rights, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding pursuant to the treasury stock method.

~~Additionally, total~~The ~~potentially~~following ~~dilutive~~is ~~shares~~a ~~for~~summary ~~the three-month periods ended September 30, 2003 and 2002~~ of ~~3,369,234 and 3,367,698, respectively, and 3,359,966 and 3,440,737 for~~ the ~~nine-month periods ended September 30, 2003 and 2002, respectively, have been excluded since their inclusion in the~~ calculation ~~would~~of ~~have been anti-dilutive either due to~~ the ~~loss~~number ~~for~~of ~~the~~shares ~~period~~used orin ~~because~~calculating ~~the~~basic ~~options’~~and ~~exercise~~diluted ~~prices~~earnings ~~exceed~~per ~~the~~share: ~~average fair market value of the stock during the period.~~

5. INCOME TAXES


	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Shares used to compute basic EPS	15,935,719	15,829,123	15,931,530	15,815,265
Common stock options	89,923	9,985	225,326	12,065
Restricted share rights	332,540	46,101	316,262	30,611

Shares used to compute diluted EPS	16,358,182	15,885,209	16,473,118	15,857,941

WePotentially ~~recorded~~dilutive shares ~~a $0.1 million income tax expense~~ for the ~~nine~~three-month ~~months~~periods ended ~~September~~June 30, ~~2003~~2004 and a2003 ~~$1.0~~were ~~million~~3,400,159 ~~income~~and ~~tax~~3,293,921 ~~benefit~~shares, ~~for the nine months ended September 30~~respectively, ~~2002.~~with ~~The recorded tax expense for the nine~~weighted-~~month~~average ~~period~~exercise ~~ended~~prices ~~September~~of ~~30,~~$11.18 ~~2003 represents various state~~ and ~~foreign~~$12.82, ~~tax obligations~~respectively. WePotentially ~~did~~dilutive ~~not~~shares ~~incur~~for ~~any current federal tax expense during~~ the ~~nine~~six-month ~~period~~periods ended June ~~September~~ 30, ~~2003~~ ~~primarily~~2004 ~~because~~and of2003 ~~the~~were ~~effect~~3,264,756 ~~of temporary differences arising from the deduction of capitalized service~~ and ~~product~~3,291,842 ~~development costs for tax purposes~~shares, ~~which will not require us to pay any Federal income taxes for 2003~~respectively, ~~but~~with ~~which~~weighted-average ~~will~~exercise ~~result in~~prices aof ~~deferred~~$11.41 ~~tax~~and ~~liability~~$12.82, ~~The deferred tax liability is offset by our unrecognized deferred tax asset~~respectively. AThese ~~valuation~~potentially ~~allowance~~dilutive ~~has~~shares have been ~~placed~~excluded ~~against~~from the ~~remainder~~shares ofused ~~our~~in ~~deferred~~calculating ~~tax~~diluted ~~asset.~~net income ~~The~~per ~~recorded~~share ~~tax~~since ~~benefit for~~ the ~~nine~~options’ ~~months~~and ~~ended September~~warrants’ ~~30,~~exercise ~~2002~~prices ~~reflects~~exceed athe ~~one-time~~average ~~tax~~fair ~~refund,~~market ~~which~~value ~~resulted~~of ~~from new tax law changes that extended~~ the ~~net~~Company’s ~~tax~~common ~~operating~~stock ~~loss~~during ~~carryback period from two to five years and eliminated~~ the ~~limitation on utilization of net operating losses against alternative minimum taxable income~~period.

65. ~~COMMON~~INCOME ~~STOCK,~~TAXES ~~RESTRICTED COMMON STOCK, TREASURY STOCK AND STOCK OPTIONS~~

AtWe ~~September~~recorded $47,000 of income tax expense for the six months ended June 30, ~~2003~~2004 and $48,000 ~~there~~for ~~were~~the 16six months ended June 30,~~105,280~~ ~~shares~~2003. Income tax expense for the second quarter 2004 represents various state and foreign tax obligations. We did not incur any current federal tax expense during the first six months of ~~our~~2004 ~~common~~or ~~stock~~2003 ~~issued~~primarily because of ~~which~~the 15effect of temporary differences arising from the deduction of capitalized service and product development costs for tax purposes,~~871,549~~ ~~were~~which ~~outstanding~~resulted in a deferred tax liability. The deferred tax liability is offset by our unrecognized deferred tax asset. A valuation allowance has been placed against the remainder of our deferred tax asset.

~~Restricted~~6. ~~Stock~~COMMON STOCK, RESTRICTED SHARE RIGHTS, TREASURY STOCK AND STOCK OPTIONS

OnAt ~~December~~June 1930, ~~2000, the Compensation Committee of our Board of Directors~~ approved the implementation of a restricted share award program pursuant to the stock issuance provisions of the 1993 Stock Option/Stock Issuance Plan (the “1993 Plan”). Under the terms of the program2004, ~~each~~there officer (Vice President level and above) was given the opportunity to surrender his or her outstanding options under the 1993 Plan with an exercise price of $15.00 or more per share in return for a restricted share award at an exchange ratio of three option shares surrendered for every one share of common stock awarded under the restricted share program. When the restricted share awards were ~~made under the program on January 3~~16, ~~2001 (“2001 Program”)~~174,968 ~~the fair market value of our common stock was $13.69 per share. The executive officers surrendered options covering a total of 875,126~~ shares of our common stock ~~with~~issued ~~a weighted average exercise price~~ of ~~$41.88~~which ~~per share in return for an aggregate of 286~~15,~~875~~941,237 ~~shares~~were ~~of our common stock subject to vesting~~outstanding. ~~The~~ ~~restricted~~Employee ~~shares~~and ~~subject~~director tostock-based ~~each~~compensation ~~such~~expense ~~award have been~~ and ~~will~~non-employee ~~be issued in a series of six successive equal semi~~stock-~~annual~~based ~~installments~~compensation onexpense for the ~~individuals’~~three ~~completion~~and ~~of each successful~~ six months ofended ~~continued~~June ~~employment with us. The shares~~30, ~~are~~2004 ~~fully vested on their issuance,~~ and ~~at September 30,~~ 2003, wewere ~~had~~as ~~issued~~follows ~~170,340~~(in ~~shares~~thousands): ~~of our common stock under the program.~~

The fair value of the 286,875 shares awarded was $3.9 million based on the market price of our common stock, which was $13.69 per share at January 3, 2001, and has been included in the financial statements as deferred compensation, and is being amortized ratably over the remaining vesting period.


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Employees and directors	$	252	$	55	$	491	$	83
Non-employees		21		—		41		—

Total stock-based compensation expense	$	273	$	55	$	532	$	83

~~The~~Restricted ~~following~~Share ~~table shows the activity under the 2001 Program:~~ Rights

	Number ofShares
Balance at December 31, 2002	11,174
Vested and distributed	(4,582	)
Canceled	(2,002	)
Balance at September 30, 2003	4,590

The following table shows the common stock restricted share rights granted under the provisions of the 1993 Stock Option/Stock Issuance Plan:

On March 18, 2003, we granted 40,000 restricted share rights to two executives under the provisions of the 1993 Plan. These restricted share rights will vest on January 1, 2006 for one executive and March 18, 2006 for the other executive and become issuable as long as the executive remains employed by us through that date. The fair value of the 40,000 restricted share rights granted was $0.2 million based on the market price of our common stock, which was $5.25 per share at March 18, 2003, and has been included in the financial statements as deferred compensation, and is being amortized ratably over the remaining vesting period.


Grant Date	Number of Share Rights	Vesting Completion Date	Fair Value		Market Price per Share on Date of Grant
March 18, 2003	25,000	January 1, 2006	$	131,250	$	5.25
March 18, 2003	15,000	March 18, 2006		78,750		5.25
October 1, 2003	155,000	October 1, 2006		1,317,500		8.50
October 22, 2003	20,000	May 15, 2005		202,200		10.11
November 19, 2003	55,000	December 2, 2006		562,650		10.23
December 3, 2003	15,000	December 2, 2006		132,600		8.84
January 27, 2004	34,813	January 27, 2007		319,583		9.18
March 17, 2004	5,000	March 17, 2007		31,900		6.38
April 29, 2004	25,500	April 29, 2007		137,700		5.40

Total	350,313		$	2,914,133

OnThese ~~October~~common ~~1, 2003 and October 22, 2003, we granted 155,000 and 20,000 restricted share rights, respectively, under the provisions of the 1993 Plan. These~~stock restricted share rights will vest ~~at various dates through October 1, 2006~~ and become issuable as long as the grantee remains employed by or a ~~Director~~director of the Company through the vesting ~~dates.~~date, ~~The~~or ~~fair~~upon ~~value~~a ofchange ~~the~~in ~~175,000~~control ~~restricted~~of ~~share~~the ~~rights granted was $1~~Company.5 ~~million~~The ~~based~~fair onvalue ~~the market price~~ of ~~our~~all common stock, ~~which~~restricted ~~was~~share rights ~~$8.50~~is ~~per~~included ~~share~~in atthe ~~October~~financial 1,statements ~~2003~~as ~~and~~deferred ~~$10.11~~compensation ~~per~~and ~~share~~is atbeing ~~October~~amortized ~~22,~~ratably ~~2003.~~over ~~The~~the ~~fair~~vesting ~~value~~period. ofDuring the ~~restricted~~six ~~share~~months ~~rights~~ended ~~will~~June be30, ~~included~~2004, inwe ~~the~~issued ~~financial~~10,416 ~~statements as~~shares ~~deferred~~of ~~compensation~~common asstock, of ~~December~~which 313,723 ~~2003~~shares ~~and~~were surrendered ~~will~~to bethe ~~amortized~~Company ~~ratably~~as ~~over~~payment ~~the~~of ~~vesting~~minimum ~~period~~payroll tax withholding.

~~Restricted~~The ~~stock-based~~following ~~compensation~~table ~~expense~~shows ~~recognized during~~ the ~~three~~activity ~~months~~under ~~ended~~the ~~September~~common ~~30, 2003 and 2002 was $0.05 million and $0.1 million, respectively. Restricted~~ stock~~-based~~ ~~compensation~~restricted ~~expense~~share ~~recognized~~rights ~~during~~program: ~~the nine months ended September 30, 2003 and 2002 was $0.1 million and $0.5 million, respectively.~~


	Number of Unvested Share Rights
Balance at December 31, 2003	285,000
Vested and issued	(10,416	)
Restricted share rights surrendered as payment of minimum payroll taxes withheld	3,723
Granted	65,313

Balance at June 30, 2004	343,620

Treasury Stock

During the ~~nine~~six months ended ~~September~~June 30, ~~2003~~2004, we ~~repurchased~~did ~~2,631~~not ~~shares~~repurchase any shares of our common stock ~~for $0~~.01 ~~million in connection with the termination of two employees. These shares have been included in Treasury Stock as of September 30, 2003.~~

Stock Option Plans

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

	Number ofOptionsAvailable forGrant		Number ofOptionsOutstanding		WeightedAverageExercisePrice
Balance at December 31, 2001 (1,786,246 exercisable at $27.99 weighted average price per share)	812,411		3,212,884		$	24.33
Balance at December 31, 2002 (1,273,850 exercisable at $18.51 weighted-average price per share)	1,667,199		2,932,887		$	14.67
Authorized	750,000		—			—
Granted	(1,345,490	)	1,345,490			6.77
Granted	(1,547,500	)	1,547,500			10.47
Exercised	—		(35,670	)		4.89
Exercised	—		(70,556	)		8.62
Canceled	923,087		(923,087	)		14.84
Canceled	1,756,941		(1,756,941	)		28.77
Restricted share rights	(285,000	)	—			—
Expired	(104,653	)	—			11.12
Restricted stock canceled	111,945		—			—
Balance at December 31, 2002 (1,273,850 exercisable at $18.51 weighted average price per share)	1,667,199		2,932,887			14.67
Expired	(21,767	)	—			26.25
Granted	(939,640	)	939,640			5.26
Balance at December 31, 2003 (1,282,769 exercisable at $16.60 weighted-average price per share)	1,049,974		3,319,620			11.46
Exercised	—		(28,297	)		4.58
Granted	(269,500	)	269,500			5.89
Canceled	669,720		(669,720	)		14.47
Exercised	—		(2,915	)		5.35
Restricted stock	(40,000	)	—			—
Canceled	236,123		(236,123	)		11.42
Restricted stock canceled	111,946		—			—
Restricted share rights	(65,313	)	—			—
Expired	(201,~~866~~752	)	—			2613.8486
Balance at September 30, 2003 (1,353,508 exercisable at $17.30 weighted average price per share)	1,448,359		3,174,510		$	11.95
Balance at June 30, 2004 (1,610,325 exercisable at $14.46 weighted-average price per share)	949,532		3,350,082		$	11.02

The activity during the nine-month period ended September 30, 2003 reflects the effect of new option grants and options that were canceled when former employees elected not to exercise their options within the specified exercise period as provided in our stock option plans.

7. COMMITMENTS AND CONTINGENCIES

We use IBM Information Exchange as the Value Added Network (VAN) over which we provide customers with some of our QRS Exchange™ products and services, such as Data Exchange, QRS Catalogue™, QRS Web Forms™ and QRS Managed EC™. We depend on IBM Information Exchange for a substantial part of our ~~revenues~~revenue. In July 2002, we entered into a three-year agreement with IBM effective July 1, 2002 and ending June 30, 2005. Pursuant to the agreement, we pay fees to IBM based on our usage of its network and other specified services, subject to minimum payments set forth in the agreement. During April 2004, we modified our agreement with IBM to eliminate our obligation to purchase specified minimum annual amounts of IBM’s Business Exchange Services – Internet Transfer (BES-IT), formerly Internet Data and Document Exchange (IDDX).

InWe ~~July~~have ~~2002,~~established wethree ~~entered~~irrevocable ~~into~~letters aof ~~new~~credit ~~three-year agreement~~ with ~~IBM~~Wells ~~effective July~~Fargo 1Bank, ~~2002 and ending June 30, 2005~~N.A. ~~The~~as ~~new~~security ~~agreement~~for ~~replaces~~real ~~and~~property ~~supersedes~~leases; aone ~~previous~~in ~~agreement~~the ~~with~~amount ~~IBM~~of ~~that~~$0.4 million ~~would~~and ~~have~~two ~~expired~~in onthe ~~December~~amount ~~31,~~of ~~2002~~$0.2 ~~Pursuant~~million toeach. ~~the~~These ~~new~~letters ~~IBM~~of ~~contract,~~credit weremained ~~pay~~outstanding ~~fees~~as ~~to IBM based on the amount~~ of ~~our~~June ~~use~~30, of2004 ~~its network~~ and ~~other~~are ~~specified~~collateralized ~~services~~by ~~subject~~three tocertificates ~~minimum~~of ~~payments set forth in the agreement~~deposit, which weare ~~have~~classified ~~met~~as toother ~~date.~~assets ~~Under~~in ~~this~~the ~~contract~~Condensed weConsolidated ~~also~~Balance Sheets. ~~offer~~In athe ~~real-time~~first ~~Internet~~quarter ~~Protocol (IP)-based transaction network product~~2004, ~~Internet~~$3.6 ~~Transaction Exchange~~million ~~(ITX), through the use~~ of ~~IBM’s~~cash ~~Business~~was ~~Exchange~~placed ~~Services~~in –escrow ~~Internet~~to ~~Transfer~~fund ~~(BES-IT),~~various ~~formerly~~future ~~Internet~~lease ~~Data~~payments ~~and~~for ~~Document~~the ~~Exchange~~period ~~(IDDX).~~October We1, ~~have~~2006 ~~committed~~through toSeptember ~~purchase~~30, ~~specified~~2008 ~~minimum~~as ~~annual~~discussed ~~amounts~~in ofNote ~~the~~3 ~~BES-IT services beginning in 2003~~above. The ~~new~~funds ~~agreement~~held ~~allows~~in usescrow toare ~~purchase~~classified ~~additional~~as restricted ~~services~~cash ~~beyond~~in ~~IBM~~the ~~Information~~Condensed ~~Exchange~~Consolidated ~~and~~Balance ~~the~~Sheets ~~BES-IT~~as ~~services~~of atJune ~~a discounted rate~~30, ~~with no volume commitments or penalties~~2004.

InWe ~~connection~~have ~~with~~made ~~the~~guarantees ~~merger~~and ~~agreement~~indemnities, ~~relating~~under towhich ~~our~~we ~~acquisition~~may ofbe ~~Image Info,~~required ~~we paid~~ to ~~the~~make ~~former~~payments ~~shareholders~~to ~~of Image Info~~ a ~~deferred~~guaranteed ~~acquisition~~or ~~payment~~indemnified ofparty, ~~$2.5 million~~ in ~~2001.~~relation Weto ~~also~~certain ~~would~~transactions. ~~have~~In ~~been~~connection ~~required~~with tosome ~~pay the former shareholders~~ of ~~Image~~our ~~Info~~facility anleases, ~~additional $2.5 million in 2002 if revenue attributable~~we tohave ~~the~~indemnified ~~acquired business met~~ the ~~minimum~~lessors ~~amount described in the merger agreement~~ for ~~2001.~~certain Weclaims ~~have determined~~ that ~~the~~could ~~revenue~~arise ~~attributable~~from toour ~~the~~use ~~acquired business did not reach the minimum amount required for 2001. On October 8, 2002, one~~ of the ~~former~~ ~~shareholders of Image Info Inc~~facility., ~~purporting~~In toconnection ~~act~~with onsome ~~behalf~~ of ~~the~~our ~~former~~vendor ~~shareholders~~and ofpartner ~~Image Info~~agreements, ~~Inc.,~~we ~~filed~~have aindemnified ~~lawsuit against~~ the ~~Company~~vendors and WSpartners ~~Acquisition~~for ~~Corp.,~~certain ~~one~~claims ofthat ~~our~~could ~~wholly~~arise ~~owned~~from ~~subsidiaries (which was renamed Image Info~~these ~~Inc~~agreements.) Typically, ~~purporting~~these toguarantees ~~act~~and onindemnities ~~behalf~~do ofnot ~~himself~~provide ~~and~~for ~~the~~any ~~other~~limitation ~~former~~of ~~Image~~the ~~Info,~~maximum ~~Inc.~~potential ~~shareholders~~future ~~claiming~~payments we ~~are~~could ~~nonetheless~~be obligated to make ~~the second payment~~. ~~The~~We ~~Company~~believe ~~believes that~~ the ~~lawsuit~~estimated isfair ~~without~~value ~~merit~~of ~~and~~these ~~intends~~indemnification toagreements ~~vigorously defend~~is ~~the action~~minimal. ~~The~~No liability ~~deferred~~associated ~~acquisition~~with ~~payment~~this indemnification has ~~already~~ been ~~accounted for in the acquisition cost for the original transaction~~recorded.

WePursuant ~~have~~to ~~established~~our ~~three~~bylaws ~~irrevocable~~and ~~letters~~indemnification agreements with each of ~~credit~~our ~~with~~directors ~~Wells~~and ~~Fargo~~executive ~~Bank~~officers, ~~N.A.~~we asare ~~security~~obligated to indemnify each of them against expenses and losses incurred for ~~real~~claims ~~property~~brought ~~leases~~against inthem ~~the~~by ~~amounts~~reason of ~~$0.6~~being ~~million,~~a ~~$0.4~~director ~~million~~or ~~and~~executive ~~$0.2~~officer ~~million~~of the Company. ~~These~~The ~~letters~~term of ~~credit~~the ~~remained~~indemnification ~~outstanding~~period asis offor ~~September~~the ~~30,~~director’s ~~2003~~or ~~and~~officer’s ~~are~~lifetime. ~~collateralized~~The bymaximum ~~three~~potential ~~certificates~~amount of ~~deposit~~future payments we could be required to make under these indemnification agreements is unlimited; however, ~~which~~we have ~~been~~a ~~included~~directors inand ~~Other~~officers ~~Assets~~liability ininsurance policy that may be called upon to contribute to the ~~Condensed~~satisfaction ~~Consolidated~~of ~~Balance~~any ~~Sheets~~liability. We believe the estimated fair value of these indemnification agreements is minimal. No liability associated with this indemnification has been recorded.

We have made guarantees and indemnities, under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. In connection with some of our facility leases, we have indemnified the lessors for certain claims that could arise from our use of the facility. In connection with some of our vendor and partner agreements, we have indemnified the vendors and partners for certain claims that could arise from these agreements. Pursuant to our Bylaws and indemnification agreements with each of our directors and executive officers, we are obligated to indemnify each of them against expenses and losses incurred for claims brought against them by reason of being a director or executive officer of

Under the ~~Company.~~terms ~~The~~of ~~majority~~our enterprise software applications license agreements and certain other sales agreements with our customers, in the event the software, products or services sold infringe upon any patent, copyright, trademark or any other proprietary right of ~~guarantees~~a third party, we must indemnify our customer and ~~indemnities~~licensees doagainst any loss, expense or liability from any damages that may be awarded against its customer. In the event our customer cannot use the software or service due to infringement and we can not obtain the right to use, replace or modify the license, product or service in a commercially feasible manner so that it no longer infringes, we may terminate the license and agreement and provide ~~for~~our ~~any~~customer ~~limitation~~a pro-rata refund of the ~~maximum~~fees ~~potential~~paid ~~future~~by our customer for the infringing license, product or service. The ~~payments~~agreements wetypically ~~could~~do not stipulate a maximum liability that can be ~~obligated~~incurred tounder ~~make~~the indemnification. We ~~have~~believe ~~not~~the ~~recorded~~estimated ~~any~~fair ~~liability~~value ~~for~~of these ~~guarantees~~indemnification ~~and~~agreements ~~indemnities~~is inminimal. ~~the~~No ~~accompanying~~liability ~~Condensed~~associated ~~Consolidated~~with ~~Balance~~this ~~Sheets~~indemnification has been recorded.

~~Under~~In ~~the~~connection ~~terms~~with ofthe ~~our~~merger ~~Enterprise~~agreement ~~Software~~relating ~~Applications~~to our ~~license~~2000 ~~agreements~~acquisition ~~with~~of ~~our~~Image ~~customers~~Info, we ~~agree~~would ~~that~~have inbeen ~~the~~required ~~event~~ to pay the ~~software~~former ~~sold~~shareholders ~~infringes~~of ~~upon~~Image ~~any~~Info ~~patent,~~an ~~copyright,~~additional ~~trademark~~$2.5 ormillion ~~any~~in ~~other~~2002 ~~proprietary~~if ~~right~~revenue ofattributable ato ~~third~~the ~~party,~~acquired webusiness ~~will~~for ~~indemnify~~2001 ~~our~~met ~~customer~~the ~~and~~minimum ~~licensees~~amount ~~against~~described ~~any~~in ~~loss,~~the ~~expense~~merger agreement. orThe ~~liability~~deferred ~~from~~acquisition ~~any~~payment ~~damages~~was ~~that~~accounted ~~may~~for bein ~~awarded~~the ~~against~~acquisition ~~its customer.~~cost Infor the ~~event~~original ~~our~~transaction ~~customer~~and ~~cannot~~included ~~use~~as ~~the~~a ~~software~~liability orin ~~service~~our ~~due~~Condensed toConsolidated ~~infringement~~Balance ~~and~~Sheets. weWe ~~can~~determined ~~not~~that ~~obtain~~ the ~~right~~revenue attributable to ~~use,~~the ~~replace~~acquired business ordid ~~modify~~not reach the ~~license~~minimum inamount arequired ~~commercially~~for ~~feasible~~2001. ~~manner~~On soOctober ~~that~~8, it2002, noCraig ~~longer infringes~~Schlossberg, wepurporting ~~may~~to ~~terminate~~act on behalf of the ~~license~~ ~~and~~former ~~provide~~shareholders ~~our~~of ~~customer~~Image aInfo, ~~pro-rata~~Inc. ~~refund~~filed ofa lawsuit against the ~~fees~~Company ~~paid~~and byWS Acquisition Corp., one of our wholly-owned ~~customer~~subsidiaries ~~for~~(which ~~the~~was ~~infringing~~renamed ~~license~~Image orInfo, ~~service~~Inc.), ~~The~~in ~~licensing~~the ~~agreements~~Superior ~~typically~~Court doof ~~not~~California ~~stipulate~~for athe ~~maximum~~City ~~liability~~and ~~that~~County ~~can~~of beSan ~~incurred~~Francisco, ~~under~~alleging ~~the~~claims ~~indemnification.~~for Asbreach ~~we are~~of ~~not~~contract ~~aware~~and ofseeking ~~any~~to ~~pending~~recover or$2.5 ~~threatened~~million, ~~infringement~~plus ~~actions~~interest, ~~that~~under ~~are~~a provision ~~probable~~of ~~losses,~~the nomerger ~~liability~~agreement. ~~associated~~We ~~with~~vigorously ~~this~~defended ~~indemnification~~the ~~has~~lawsuit, ~~been~~which ~~recorded~~we believed was without merit.

~~Subsequent~~To ~~Event~~avoid further litigation, in April 2004, we reached a mutually satisfactory settlement agreement with the former shareholders of Image Info that resolves the lawsuit and terminates all claims against the Company. The action has been dismissed. Under the terms of the settlement agreement, we paid $1.9 million during the second quarter 2004, which was less than the $2.5 million liability classified as deferred acquisition payment in our Condensed Consolidated Balance Sheets as of December 31, 2003. The effect of this settlement on our liability was recorded in the first quarter 2004 operating results as a benefit of $0.6 million.

~~Early~~In in the ~~fourth~~second quarter ~~2003~~of 2004, we ~~entered~~were ~~into~~notified anby ~~agreement~~a tocustomer of ~~acquire~~a ~~certain~~contract ~~rights~~dispute tothat ~~technology.~~could Aresult ~~total~~in ofpotential $1litigation.25 ~~million~~We ~~will~~have benot ~~paid~~yet inbeen ~~the fourth~~able ~~quarter,~~to ~~and~~estimate weour ~~expect~~potential toexposure, ~~pay~~nor ando ~~additional~~we ~~$1.0~~know ~~million during~~ the ~~first~~probability ~~half~~ of ~~2004~~an onunfavorable ~~completion~~outcome; oftherefore, ~~certain~~no ~~deliverables.~~liability Ithas isbeen ~~currently~~recorded. ~~expected~~However, ~~that during the fourth quarter a portion~~ settlement of the ~~total~~contract ~~purchase~~dispute ~~price~~could ~~will~~have bea ~~charged~~material ~~to operating~~impact ~~expense~~on asour ~~in-process~~results ~~research~~of ~~and~~operations ~~development~~ and afinancial ~~portion will be capitalized~~position.

8. MERGERS & ACQUISITIONS

On June 17, 2004, we entered into a definitive agreement for QRS to merge with a wholly-owned subsidiary of JDA Software Group, Inc. (JDA), with QRS continuing as the surviving corporation and a wholly-owned subsidiary of JDA. Under the terms of the transaction, QRS shareholders will receive 0.50 of a share of JDA common stock for each share of QRS common stock. QRS stockholders will own approximately 22 percent of the outstanding capital stock of the combined company. Completion of the merger, which is expected to close in the third or fourth quarter of 2004, is subject to the approval of JDA and QRS stockholders and other regulatory and customary conditions. There can be no assurance that the merger will be consummated. In the event that the merger agreement is terminated, under certain circumstances, we will be required to pay JDA a termination fee of $3.75 million. Included in general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income are $0.7 million and $1.0 million of merger-related costs for the three and six months ended June 30, 2004, respectively.

Subsequent to entering into the merger agreement with JDA, the Board of Directors received four unsolicited non-binding proposals to acquire all of the outstanding shares of QRS common stock in exchange for cash, each subject to satisfactory completion of due diligence and execution of definitive documentation. After receipt of the proposals, the Board of Directors determined that engaging in discussions with each of the potential acquirers was in compliance with the terms of the merger agreement with JDA, and QRS began discussions with each of the potential acquirers. See Part II, Item 5 of this report for additional information regarding the status of our merger agreement with JDA and our discussions with the other potential acquirers.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~GENERAL~~The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. 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, as well as those discussed elsewhere in this report and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

~~The~~This ~~following~~discussion ~~information~~ should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Item 1 of this quarterly report and the Consolidated Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our annual report on Form 10-K as filed with the Securities and Exchange Commission on March 2815, ~~2003~~2004.

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

~~QRS~~We ~~Corporation~~are ~~provides~~a ~~collaborative~~technology ~~commerce~~company ~~solutions~~that ~~for~~serves the global retail trading community. with ~~Our~~collaborative ~~products~~commerce ~~and~~solutions. ~~services~~We ~~help~~manage ~~thousands~~the flow of ~~retailers,~~critical ~~marketers/manufacturers,~~commerce ~~suppliers,~~information ~~vendors, wholesalers~~ and ~~distributors~~leverage ~~from~~our ~~a variety of~~ retail ~~segments~~technology expertise to ~~connect~~address ~~electronically,~~fundamental ~~transact~~industry ~~business,~~challenges ~~collaborate~~such onas ~~processes~~global ~~and~~data ~~decisions~~synchronization, ~~and~~compliance ~~differentiate~~mandates, ~~their~~transaction management ~~brands~~and ~~in the~~ global ~~marketplace~~trade management. Our solutions help ~~our~~ customers: expand into new markets and channels, improve operational efficiency and differentiate their brand.

•Our ~~Accelerate~~products ~~the~~and ~~speed~~services help thousands of ~~doing~~retailers, ~~business~~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.

• Identify and resolve problems across trading communities in real time

• Bring products to market more profitably

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 Trading Community Management Global Services QRS Catalogue™ QRS Exchange™ QRS Retail Intelligence ServicesSM QRS ~~Sourcing~~IMPACT™ Data Exchange QRS Professional ServicesSM QRS ~~Insight~~QuickSync™ Internet Transaction Exchange QRS Product Support and Maintenance QRS ~~Merchandising~~Sourcing™ Enterprise Business Exchange QRS ~~Showroom™ QRS~~ Web Forms™ QRS Managed EC™ QRS Compliance Link™ QRS EDIINT Gateway™ Access Services QRS Reveal™

Our Software Applications ~~automate~~Solutions ~~and~~Group, ~~help~~which ~~optimize~~represented ~~business~~28% ~~processes~~of ~~between~~revenue ~~companies.~~in ~~Specifically,~~the ~~they~~second ~~support~~quarter ~~the~~2004, ~~following~~supports ~~business~~product ~~functions:~~information ~~product~~management and data synchronization; as well as collaborative product planning, design, production and shipment~~; online merchandising, promotions and sales; and supply chain exception management~~. ~~Our~~ Software Applications include both ~~Enterprise~~enterprise ~~Software~~software ~~Applications~~applications installed on customers’ computer systems and hosted applications installed on our computer systems.

Our Trading Community Management ~~solutions~~Solutions ~~allow~~Group, which represented 51% of revenue in the second quarter 2004, allows retailers, vendors and their trading partners to exchange electronic business documents, such as purchase orders, invoices and advance ship notices. ~~These~~We ~~electronic~~recently ~~transactions~~initiated ~~are conducted over~~ a ~~value~~beta ~~added~~program ~~network~~for ~~(VAN)~~the ornewest ~~over~~solution ~~the~~in ~~Internet. Our~~this ~~Trading~~group, ~~Community~~QRS ~~Management~~Reveal™, ~~solutions~~which ~~can~~offers ~~reduce~~transaction ~~costs~~lifecycle ~~related~~visibility to ~~paper~~proactively ~~transactions,~~monitor ~~mail~~business ~~delays~~transactions ~~and~~across the ~~manual~~trading ~~data input errors for our customers~~community. ~~The~~These ~~communication of these~~ electronic ~~business~~transactions ~~documents~~are isconducted ~~typically~~over ~~integrated~~a ~~with~~proprietary ~~the accounting~~value-added ~~and~~network ~~inventory~~(VAN) ~~systems~~or ofover ~~our~~the ~~customers and their trading partners~~Internet.

Our Global Services ~~include~~Solutions ~~the collection~~Group, ~~analysis~~which ~~and~~represented ~~delivery~~21% of ~~information,~~revenue ~~such~~in asthe ~~store-level~~second ~~pricing~~quarter ~~data~~2004, ~~and~~includes ~~metrics~~the collection, ~~for~~analysis ~~use~~and indelivery ~~our~~of pricing, ~~customers’~~promotion ~~strategic~~ and ~~tactical~~distribution ~~decisions~~information; software implementation and integration services; ~~retail solutions consulting;~~ and technical support and training services for our various solutions.

~~Since~~Revenue ~~the~~from ~~beginning~~our oftraditional ~~2002~~business, wewhich ~~executed~~includes onour ~~and~~Trading ~~completed~~Community ~~the~~Management ~~first~~Solutions ~~phase~~Group ofand our ~~long-term~~QRS Catalogue™ ~~strategy~~product, tototaled ~~become~~approximately ~~the~~79% ~~market~~of ~~leader~~our inoverall ~~collaborative~~revenue ~~commerce solutions~~in ~~for~~ the ~~global~~second quarter ~~retail trading community~~2004. InThis ~~this~~revenue ~~turnaround~~is ~~phase,~~billed ~~we rationalized our product and real estate portfolios; reduced operating expenses and returned the Company~~ to ~~profitability;~~customers ~~improved~~on ~~our overall organizational effectiveness with~~ a ~~particular~~month-to-month ~~focus~~basis onor ~~sales,~~under ~~marketing~~contractual ~~and~~arrangements ~~development;~~generally ~~and~~ranging ~~stabilized~~from ~~our~~one ~~revenues. We also strengthened our existing customer relationships and added leading retail industry names~~ to ~~our~~three ~~strong customer list~~years.

WeSecond ~~are~~quarter ~~now~~2004 innet ~~the~~income ~~early~~improved ~~stage~~to of$1.5 ~~the~~million ~~second~~from ~~phase~~the of$1.3 ~~our~~million ~~long-term~~reported ~~strategy,~~in ~~which~~the ~~is focused on revenue~~first ~~growth.~~quarter ~~Our~~2004, ~~growth~~as ~~strategy~~a isresult ~~three-fold:~~of 1)our ~~deepen~~continued ~~our~~efforts ~~relationships~~to ~~within~~contain ~~our~~costs. ~~traditional~~Total ~~customer~~revenue ~~base,~~of $29.2) ~~expand~~million ~~our~~decreased ~~presence~~from inthe ~~new~~$30.5 ~~retail~~million ~~segments,~~reported in ~~Europe~~the ~~and~~first ~~with~~quarter ~~additional~~2004, ~~trading~~primarily ~~partners,~~due ~~and~~to 3)the ~~introduce~~decline ~~new~~in ~~solutions~~QRS ~~that~~Exchange™ ~~deliver value~~revenue toresulting ~~our~~from ~~customers~~ongoing bycompetitive ~~helping~~trends ~~them~~and ~~better~~seasonality. ~~differentiate~~Gross ~~their~~margin ~~companies~~remained insteady at 49% for the ~~marketplace~~second quarter 2004.

~~Deepening~~During ~~Our~~the ~~Relationships~~second ~~Within~~quarter ~~Our~~2004, ~~Traditional~~unit ~~Customer~~pricing ~~Base~~and volume for Data Exchange™ declined slightly compared to the first quarter of 2004. The reduction in unit price was driven by competition from traditional providers of VAN-based services and increasing competition from new technologies such as AS2.

~~Our~~During ~~products~~the ~~and~~first ~~services~~six ~~address~~months ~~real~~of ~~business~~2004, ~~issues~~we ~~with~~launched ~~solutions~~two ~~that~~new ~~quickly~~product ~~deliver~~information ~~benefits~~management toand ~~our~~data ~~customers~~synchronization solutions, QRS IMPACT™ and QRS QuickSync™. In addition, as discussed above, QRS Reveal™ is currently in the ~~current~~beta ~~challenging~~testing ~~economic~~ stage and ~~market~~we ~~environment,~~anticipate ~~this~~the isproduct ~~especially~~will ~~important.~~become ~~During~~generally available in the ~~third~~second ~~quarter~~half of ~~2003,~~2004. weWe continue ~~continued~~ to ~~win~~focus ~~business~~on ~~with~~introducing ~~our~~new ~~existing~~products ~~customers,~~and ~~including~~services ~~many~~that ~~leading~~can ~~retail~~generate ~~companies~~new revenue to offset the decline in revenue from our traditional ~~base~~business. ofWe ~~general~~expect ~~merchandise~~to ~~and~~maintain ~~apparel customers.~~profitability ~~For~~for ~~example,~~the weremainder ~~expanded~~of ~~our~~2004 ~~relationship~~by ~~with~~continuing ~~long-time~~to ~~QRS~~reduce ~~Exchange~~the ~~and~~cost structure ~~QRS~~of ~~Catalogue~~our ~~customer,~~traditional ~~Saks~~business ~~Inc,~~while ~~when~~investing wethe ~~signed~~cash anit ~~agreement~~generates ~~with~~in ~~Saks~~the todevelopment ~~license~~and ~~QRS~~launch ~~Sourcing™~~of tonew ~~manage~~products and ~~track~~services. ~~its~~We believe these new products’ ~~development~~and services will create long-term growth and ~~delivery~~position QRS for leadership in collaborative commerce solutions for the retail industry.

WeOn June ~~believe~~17, 2004, we ~~can~~entered ~~further~~into ~~grow~~a ~~our~~definitive ~~business~~agreement ~~with~~for ~~existing~~QRS ~~customers~~to bymerge ~~helping~~with ~~them~~a ~~automate~~wholly-owned ~~more~~subsidiary ~~transactions~~of JDA, with ~~their trading~~QRS ~~partners~~continuing as the surviving corporation and a wholly-owned subsidiary of JDA. ToCompletion ~~this~~of ~~end~~the merger, wewhich ~~will~~is ~~continue~~expected to ~~augment~~close in ~~our~~the ~~existing~~third ~~solutions~~or ~~with~~fourth ~~support~~quarter of 2004, is subject to the approval of JDA and QRS stockholders and other regulatory and customary conditions. Included in general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income are $0.7 million and $1.0 million of merger-related costs for ~~evolving~~the ~~industry~~three ~~standards~~and six months ended June 30, 2004, respectively. ~~Today~~Subsequent to entering into the merger agreement with JDA, wethe ~~support~~Board aof ~~breadth~~Directors received four unsolicited non-binding proposals to acquire all of ~~offerings~~the ~~including~~outstanding ~~data~~shares of QRS common stock in exchange for ~~EDI~~cash, each subject to satisfactory completion of due diligence and ~~eXtensible~~execution ~~Markup~~of ~~Language~~definitive ~~(XML)~~documentation. After receipt of the proposals, the ~~over~~Board ~~both~~of Directors determined that engaging in discussions with each of the potential acquirers was in compliance with the terms of the merger agreement with JDA, and QRS began discussions with each of the potential acquirers. See Part II, Item ~~VANs~~5 of this report for additional information regarding the status of our merger agreement with JDA and our discussions with the ~~Internet~~other potential acquirers.

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

Our second area of focus is to expand the retail trading communities we support. During the third quarter, we continued to win business in retail segments beyond general merchandise and apparel such as consumer packaged goods, sporting goods, grocery, consumer electronics, and health and beauty. To aid our expansion in new retail segments, we actively participate in and support industry initiatives and standards.

In October 2003, we announced the general availability of QRS Catalogue™ 3.6, which represents a major advancement toward QRS’ goal to offer the leading global data synchronization solution for all of our target retail segments. New capabilities include: support for the global trade identification number, or “GTIN,” the new global industry standard for identifying retail products; support for over 400 item attributes; and UCCnet Communications Certification. These enhancements, among others, help QRS to deliver data synchronization to our traditional customer base as well as the European market and adjacent retail segments. The UCCnet Communications Certification in particular is a valuable enhancement to the many data formats and communication protocols currently supported by the QRS Catalogue™, and it is an important step towards helping our manufacturing customers comply with their Wal-Mart requirements.

QRS is certified for the UCCnet Communication Solution using the EDIINT AS2 protocol, meaning QRS is able to exchange messages via an AS2 connection. We are currently working toward becoming a certified and preferred data pool solution provider to UCCnet’s global registry. These steps advance our goal of achieving global interoperability with the Global Data Synchronization Network (GDSN).

We continue to invest in our European sales and operations to increase our share of the supply chain technology market in the region. Retail companies in this region are recognizing that inaccurate product information within their supply chain applications can negatively impact performance. European standards are being developed, facilitating inter-company and international communication. We also see some recognition in the market of the value of supply chain management and visibility solutions. We may pursue additional strategic relationships to help advance our efforts in the European market while leveraging our experience in North American general merchandise and apparel.

We have historically focused primarily on supporting the trading relationships between vendors and retailers. We are now looking for opportunities to sell our products and services to the communities of tens of thousands of service providers, manufacturers, suppliers and distributors serving those vendors and retailers.

Introducing New Solutions That Deliver Value To Our Customers

We believe that we are well positioned to leverage and augment our strength in helping companies connect, transact, collaborate and differentiate themselves. Our product strategy includes enhancing our current product offerings and introducing new products or service offerings that will help our customers continue to work together and collaborate to improve the performance of their supply chains.

We recently enhanced several of our existing products. In the Software Applications Group, we have continued to make enhancements to both QRS Catalogue™, as described above, and to QRS Sourcing™. In the second quarter and again early in the third quarter, we launched two new releases of QRS Sourcing™, enhancing the product’s configurability, streamlining order processing for our customers, and adding new web functionality.

~~Within~~Revenue ~~our Trading Community Management Solutions Group, we launched QRS Web Forms™ 7.0 early in the fourth quarter 2003. QRS Web Forms™ is an online application that manages all data translation~~ and ~~trading~~Cost ~~partner compliance for small- and mid-sized suppliers. Version 7.0 offers enhanced functionality that allows suppliers to respond more quickly to their retail customers with the intention~~ of ~~increasing~~Revenue ~~customer satisfaction and reducing the risk of chargebacks resulting from late shipments.~~

InThe ~~addition~~following totable ~~these~~sets ~~product~~forth ~~enhancements~~the revenue, wecost ~~continue~~of torevenue, ~~develop~~gross ~~new collaborative~~profit ~~applications~~and ingross ~~order~~margin tofor ~~generate~~our ~~future~~three ~~growth.~~Solution ~~Two~~Groups ~~products are currently in development~~ for ~~introduction in~~ the ~~first~~three ~~half of 2004: a product information management (PIM) solution~~ and ansix ~~intelligent~~months ~~transaction~~ended ~~management~~June ~~(ITM) platform~~30, on2004 ~~which~~and we2003 ~~will deliver collaborative commerce solutions. Much of our energy~~ (in ~~the~~thousands) ~~third~~and ~~quarter~~associated ~~was~~headcount ~~focused~~information onat ~~validation,~~June ~~prototyping~~30, ~~packaging~~2004 and ~~getting~~2003: ~~early customer feedback for both PIM and solutions built on the ITM platform.~~

Just as QRS Catalogue™ enables cross-company product information synchronization, PIM is an enterprise software solution that offers a central repository for managing product information within a company. PIM solves a critical need for both retailers and suppliers: without a single, accurate source of product information, costly errors result. Currently, there are often many places within a company where item data is stored, created and edited. Many different people, organizations and internal systems need access to the most updated product information, often simultaneously. In the apparel industry, the additional dimensions of color and size only add potential complexity. In addition, there are typically groups outside of an enterprise that also need to receive product information, each with their own requirements for attributes and formatting of the data. PIM solutions focus on these pain points.


	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2004			2003			$			%		2004			2003			$			%
Software Applications:
Revenues	$	8,318		$	8,329		$	(11	)	(0	)%	$	16,520		$	16,470		$	50		0	%
Cost of revenues		2,193			2,157			36		2	%		4,282			4,444			(162	)	(4	)%

Gross profit		6,125			6,172			(47	)	(1	)%		12,238			12,026			212		2	%

Gross margin		74	%		74	%							74	%		73	%
Percentage of total revenues		28	%		27	%							28	%		27	%

Trading Community Management:
Revenues		14,832			16,336			(1,504	)	(9	)%		30,964			33,002			(2,038	)	(6	)%
Cost of revenues		7,472			8,050			(578	)	(7	)%		15,442			16,107			(665	)	(4	)%

Gross profit		7,360			8,286			(926	)	(11	)%		15,522			16,895			(1,373	)	(8	)%

Gross margin		50	%		51	%							50	%		51	%
Percentage of total revenues		51	%		53	%							52	%		54	%

Global Services:
Revenues		6,054			5,905			149		3	%		12,226			11,901			325		3	%
Cost of revenues		5,178			5,178			—		0	%		10,573			10,489			84		1	%

Gross profit		876			727			149		20	%		1,653			1,412			241		17	%

Gross margin		14	%		12	%							14	%		12	%
Percentage of total revenues		21	%		19	%							20	%		19	%

Total:
Revenues		29,204			30,570			(1,366	)	(4	)%		59,710			61,373			(1,663	)	(3	)%
Cost of revenues		14,843			15,385			(542	)	(4	)%		30,297			31,040			(743	)	(2	)%

Gross profit	$	14,361		$	15,185		$	(824	)	(5	)%	$	29,413		$	30,333		$	(920	)	(3	)%

Gross margin		49	%		50	%							49	%		49	%

Full-time headcount for customer support, operations and services		204			242			(38	)	(16	)%

~~Through~~Software ~~a combination of acquired code~~Applications and internal development resources, we plan to bring our PIM solution to market in the first quarter of 2004. We are already showing an early prototype of our PIM solution to prospective customers and the response has been very positive.

WeThe ~~are~~Software ~~also~~Applications ~~developing~~Solutions anGroup ~~intelligent~~includes ~~transaction management (ITM)~~QRS ~~platform~~Catalogue™, ~~which consists of~~ a ~~series~~hosted ofapplication; ~~shared~~and ~~services~~enterprise tosoftware ~~support~~applications, ~~various~~such ~~collaborative~~as ~~applications~~QRS Sourcing™. ~~This~~License ~~innovative,~~revenue ~~open~~from ~~architecture~~our ~~platform~~recently isintroduced ~~made~~QRS upIMPACT™ ofand aQRS ~~set~~QuickSync™ ofproducts ~~reusable~~will ~~components~~be ~~for~~included ~~services~~in ~~such~~enterprise assoftware ~~security,~~applications. ~~translation~~We ~~and~~plan ~~business rules.~~to ~~The~~recognize ~~platform~~QRS ~~enables~~IMPACT™ ~~rapid~~and ~~solution~~QRS ~~deployment~~QuickSync™ license and ~~serves~~professional asservices ~~the~~revenue ~~foundation~~after ofeach ~~our~~customer ~~future~~implementation ~~collaborative~~is ~~product offerings~~completed.

~~The~~Software ~~first~~Applications ~~two~~revenue ~~ITM-based~~for ~~solutions~~the –second ~~transaction~~quarter ~~outsourcing~~2004 ~~and~~increased ~~transaction~~$0.1 million, ~~lifecycle~~or ~~management~~1%, –from ~~will~~the ~~address~~first ~~two~~quarter ~~critical~~2004. ~~problems~~Revenue infor the ~~retail~~ ~~industry.~~three ~~Transaction~~and ~~outsourcing,~~six ~~which~~months weended ~~believe~~June to30, be2004 awere ~~large~~flat ~~and~~in ~~growing~~comparison ~~market,~~to ~~will~~the ~~enable~~same usperiods toone ~~manage~~year aago. ~~company’s~~The ~~entire~~improvement ~~electronic~~over ~~commerce~~the ~~program~~first onquarter ~~their~~2004 ~~behalf,~~was ~~allowing~~due ~~the~~to ~~company~~growth toin ~~reduce~~the ~~internal~~number ~~infrastructure~~of ~~costs~~QRS ~~and~~Catalogue™ ~~focus~~trading onpartnerships, ~~transaction~~which ~~management~~offset ~~and~~certain ~~more~~retailer ~~time~~customer ~~on their core competencies~~consolidations. During ~~Our~~the ~~transaction~~first ~~lifecycle~~half ~~management~~of ~~solution~~2004, ~~will~~we ~~help~~recognized ~~companies~~license ~~that~~revenue ~~need~~from ~~added~~an ~~visibility~~existing ~~and~~enterprise ~~exception~~software ~~management~~applications ~~capabilities~~customer ~~for~~as ~~improved~~the ~~trading~~related ~~community effectiveness~~professional ~~and~~services ~~communication.~~were ~~The~~delivered, ~~need~~using ~~for transaction lifecycle management has grown as~~ the ~~speed~~ percentage-of-completion ~~business in retail has accelerated and trading communities have expanded across continents and time zones~~methodology.

For the second quarter 2004 and all periods presented, QRS Catalogue™ comprised the majority of revenue for the Software Applications Solutions Group. We expect that retailers will continue to ~~bring~~reorganize their operations to reduce cost and improve efficiency. To the ~~first~~extent ofthat ~~our~~such ~~ITM-based~~reorganizations ~~solutions~~reduce tothe ~~market~~number inof their retail operations, the ~~first~~ ~~half~~number of ~~2004~~their trading partnerships could also be reduced, ~~and~~which, weunder ~~continue~~our topresent ~~develop~~pricing ~~the~~structure, ~~road~~would ~~map~~reduce ~~for~~QRS ~~additional~~Catalogue™ revenue ~~collaborative~~in ~~solutions~~future periods.

~~Finally,~~Gross wemargin ~~continue~~for tothe ~~actively~~Software Applications ~~evaluate~~Solutions ~~potential~~Group ~~partners~~was ~~for~~74% ~~solutions~~during ~~that~~the ~~complement~~second ~~our~~quarter ~~existing~~2004 ~~offerings,~~compared ~~have applicability~~ to ~~the~~75% ~~retail~~reported ~~market and~~for ~~meet~~the ~~our~~first ~~technology~~quarter ~~criteria~~2004. WeThe ~~are~~decline ~~assessing~~in ~~products~~gross ~~that~~margin wewas ~~can~~primarily ~~quickly~~due ~~bring~~ to ~~market~~the ~~either~~increase ~~through~~in aamortization ~~co-sell,~~of ~~OEM~~capitalized orservice ~~other~~and ~~partnering~~product ~~relationship.~~development costs Wefor ~~are~~QRS ~~also~~Catalogue™ ~~evaluating~~and ~~opportunities~~the toamortization ~~accelerate~~of ~~development~~licensed oftechnology ~~our~~associated ~~new~~with ~~collaborative~~QRS ~~applications,~~IMPACT™. ~~through~~Gross ~~alliances,~~margin ~~licensing~~for ~~and~~the ~~strategic~~second ~~acquisitions~~quarter 2004 was consistent with the 74% reported in the second quarter 2003.

CRITICAL ACCOUNTING POLICIES

Except as described below, there have been no significant changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002.

Revenue recognition

Software Applications: During the second quarter 2003, we sold a QRS Sourcing™ license to Woolworth Germany. We recognized a small portion of the license revenue in the second quarter and a larger portion in the third quarter, using the percentage of completion methodology. During the third quarter 2003, we sold an additional QRS Sourcing™ license to Saks Incorporated, a long-time customer for QRS Exchange™ and QRS Catalogue™. We currently expect to recognize license revenue from both Woolworth Germany and Saks Incorporated during the fourth quarter 2003.

Use of estimates

The calculation of the estimated sublease loss reserve for vacated facilities requires that we make estimates of potential future sublease income. We analyze current market conditions for real estate with the assistance of reputable commercial real estate brokers. However, future actual sublease income may materially differ from estimated amounts as a result of the timing of obtaining a sublease tenant and the amount of the sublease income. As of September 30, 2003, we had one vacated facility near our corporate headquarters in Richmond, California and another in Wakefield, Massachusetts that were not yet subleased.

During the third quarter 2003, we accelerated discussions with our landlord to renegotiate the terms of our lease on a vacated facility in Richmond, California. During the fourth quarter 2003, we entered into a non-binding Letter of Intent with the landlord to reduce both the term of the lease and our total cash commitments over the remaining life of the lease. The Letter of Intent amends the termination date of the lease from 2011 to September 30, 2008 and requires us to prepay on a discounted basis the final two years of the amended term. Our sublease loss accrual takes into consideration the terms from this Letter of Intent, the likelihood that this Letter of Intent will be finalized into a definitive agreement, and our estimate of the likely sublease income to be generated from this facility.

As of September 30, 2003, we vacated our Wakefield, Massachusetts facility, for which our lease obligation continues through June 2007. To determine our sublease loss accrual, we, together with our professional real estate advisors, developed three sublease scenarios. We then assigned probabilities to each scenario. Our sublease liability associated with this facility is based on the weighted average probability of the three scenarios. For each month beyond July 2005 during which the property is not subleased, we would incur an additional $0.03 million of rental expense. If this facility were to be subleased at 50% of our lease rate, we would incur an additional $0.1 million in expense annually over the life of the lease.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146 (FAS 146), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the measurement, timing of recognition and reporting of costs associated with exit or disposal activities and restructuring activities. FAS 146 requires that a liability for costs associated with exit or restructuring activities be recognized only when the liability is incurred as opposed to at the time that a company formally approves and commits to an exit plan as set forth in Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted FAS 146 on January 1, 2003, and in conjunction with certain restructuring activities initiated during the third quarter 2003, we recorded a $1.8 million restructuring expense in accordance with FAS 146 (See Note 3 to the Condensed Consolidated Financial Statements).

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

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. We adopted the provisions of EITF No. 00-21 during the third quarter of 2003. The adoption had no material effect on our financial position or results of operations.

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

to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any controlling financial interest in any variable interest entities as of September 30, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

In May 2003, the FASB issued FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation (or right) of the issuer. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of FAS 150 and still existing at the beginning of the interim period of adoption. We do not have any financial instruments with characteristics of both liabilities and equity as of September 30, 2003. We understand the FASB has deferred the effective date of paragraphs 9 and 10 of FAS 150. During the third quarter 2003, we adopted all other provisions of FAS 150 and the adoption had no material effect on our financial position or results of operations. We continue to evaluate the impact that adoption of paragraphs 9 and 10 will have on our financial position or results of operations.

Employee Headcount

The following table sets forth the employee headcount information at September 30, 2003 and 2002:

	September 30,
	2003	2002
Full-time headcount:
Customer support, operations and services included in cost of revenues	227	258
Sales and marketing	96	99
Service and product development	117	89
General and administrative	69	70
Total full-time headcount	509	516

The increase in our service and product development headcount reflects our technology investment in our ITM platform and additional collaborative applications.

During the periods through September 30, 2002, our QRS Retail Intelligence ServicesSM utilized part-time employees to provide services to customers. The cost of these employees was included in cost of revenues. At September 30, 2002, in addition to the 516 full-time headcount from the table above were 304 full-time equivalents of part-time employees who were part of QRS Retail Intelligence ServicesSM. During October 2002, we outsourced the administration of essentially all of our QRS Retail Intelligence ServicesSM part-time workforce to a third-party provider. These outsourcing costs are included in cost of revenues.

Revenues and Gross Margins

The following table sets forth the revenues, cost of revenues, gross profit and gross margins for our three Solutions Groups for the three and nine months ended September 30, 2003 and 2002 (dollars in thousands):

	Three Months EndedSeptember 30,						Change					Nine Months EndedSeptember 30,						Change
	2003			2002			$			%		2003			2002			$			%
Software Applications:
Revenues	$	8,333		$	8,649		$	(316	)	(4	)%	$	24,803		$	27,399		$	(2,596	)	(9	)%
Cost of revenues		2,351			2,445			(94	)	(4	)%		6,795			8,894			(2,099	)	(24	)%
Gross profit		5,982			6,204			(222	)	(4	)%		18,008			18,505			(497	)	(3	)%
Gross margin		72	%		72	%							73	%		68	%
Percentage of total revenues		27	%		26	%							27	%		26	%
Trading Community Management:
Revenues		16,857			18,753			(1,896	)	(10	)%		49,859			56,133			(6,274	)	(11	)%
Cost of revenues		7,955			9,600			(1,645	)	(17	)%		24,062			29,271			(5,209	)	(18	)%
Gross profit		8,902			9,153			(251	)	(3	)%		25,797			26,862			(1,065	)	(4	)%
Gross margin		53	%		49	%							52	%		48	%
Percentage of total revenues		54	%		56	%							54	%		54	%
Global Services:
Revenues		6,072			6,138			(66	)	(1	)%		17,973			20,541			(2,568	)	(13	)%
Cost of revenues		5,264			5,465			(201	)	(4	)%		15,753			18,316			(2,563	)	(14	)%
Gross profit		808			673			135		20	%		2,220			2,225			(5	)	(0	)%
Gross margin		13	%		11	%							12	%		11	%
Percentage of total revenues		19	%		18	%							19	%		20	%
Total:
Revenues		31,262			33,540			(2,278	)	(7	)%		92,635			104,073			(11,438	)	(11	)%
Cost of revenues		15,570			17,510			(1,940	)	(11	)%		46,610			56,481			(9,871	)	(17	)%
Gross profit	$	15,692		$	16,030		$	(338	)	(2	)%	$	46,025		$	47,592		$	(1,567	)	(3	)%
Gross margin		50	%		48	%							50	%		46	%

Overview

Revenues for the third quarter ended September 30, 2003, which totaled $31.3 million, improved from the $30.6 million reported for the second quarter ended June 30, 2003, primarily due to anticipated seasonal strength in Trading Community Management revenue, growth in QRS Retail Intelligence ServicesSM revenue and the recognition of incremental QRS Sourcing™ revenue. During the third quarter 2003, we won business across the retail industry in segments such as general merchandise and apparel, consumer packaged goods, hardlines, do-it-yourself, sporting goods, consumer electronics and health and beauty segments. Substantially all of the revenues within our Trading Community Management Solutions Group and for our QRS Catalogue™ product, totaling approximately 80% of our overall revenue, remain recurring in nature. Substantially all of these revenues continue to be billed to customers on a month-to-month basis or under contractual arrangements generally ranging from one to three years.

There remain many external economic and competitive challenges. Additionally, our fourth quarter total revenue has historically been impacted by seasonal weakness in our Trading Community Management Solutions Group at the end of the year. However, we currently expect to offset that seasonal trend in other areas such that we currently expect fourth quarter 2003 total revenues to be roughly in-line with third quarter 2003 total revenues. Looking further ahead to 2004, with the introduction of our two new products during the first half of 2004, we expect to generate revenues from these products beginning in the second half of 2004.

Third quarter 2003 revenues declined 7% from the $33.5 million reported for the third quarter ended September 30, 2002, primarily due to the difficult economic and competitive environment during much of the comparison periods, pricing pressure, a decline in revenue from our Trading Community Management services targeted at small- and medium-sized businesses and a decline in Enterprise Software Applications revenue. Revenues for the nine-month period ended September 30, 2003, declined 11% from revenues reported for the nine-month period ended September 30, 2002, primarily due to the difficult economic and competitive environment during much of the comparison periods and the discontinuation of several unprofitable software products in mid-2002. The challenging economic environment contributed to a lack of new Enterprise Software Application sales during most of the nine-month periods which resulted in a decline in our QRS Professional ServicesSM revenues. In addition to the economic pressures, competitive pressures caused us to reduce the unit pricing in our Trading Community Management products throughout most of the nine-month periods, and the Company expects that these external factors will continue.

Gross margins for the third quarter 2003 remained steady with the second quarter 2003 at 50%. Third quarter 2003 gross margins were up slightly from the 48% reported for the third quarter 2002. Nine-month 2003 gross margins were 50%, up from 46% for the nine-month 2002 period. These improvements are primarily due to our focus on operational improvement and cost controls, including the impact of reduced headcount included in cost of revenues, largely in our QRS Managed EC™ operations centers and our QRS Professional ServicesSM team; the renegotiation of our network reseller agreement with IBM which resulted in the early renewal of this contract effective July 2002; and the mix of revenues within our Trading Community Management Solutions Group. Based on our 2003 results to date, we currently expect overall gross margins, as a percentage of revenues, to be in the upper-forties to 50% range for the fourth quarter 2003.

The sections below provide commentary on the performance of each of our Solutions Groups.

Software Applications

The Software Applications Solutions Group includes the QRS Catalogue™, a hosted application; Enterprise Software Applications, including QRS Sourcing™, QRS Insight and QRS Merchandising™; and Other Hosted Software Applications, including QRS Showroom™ as well as Tradeweave Logistics and Tradeweave Sales and Inventory Analysis. We discontinued selling Tradeweave Logistics and Tradeweave Sales and Inventory Analysis as stand-alone products in mid-2002.

The following table sets forth the revenues, cost of revenues, gross profit (loss) and gross margins (loss) for our Software Application categories for the three- and nine-month periods ended September 30, 2003 and 2002 (dollars in thousands):

	Three Months Ended September 30,						Change					Nine Months EndedSeptember 30,						Change
	2003			2002			$			%		2003			2002			$			%
QRS Catalogue™:
Revenues	$	8,041		$	8,120		$	(79	)	(1	)%	$	24,321		$	25,175		$	(854	)	(3	)%
Cost of revenues		2,006			2,061			(55	)	(3	)%		5,850			5,631			219		4	%
Gross profit		6,035			6,059			(24	)	(0	%)		18,471			19,544			(1,073	)	(5	)%
Gross margin		75	%		75	%							76	%		78	%
Enterprise Software Applications:
Revenues		292			515			(223	)	(43	)%		471			986			(515	)	(52	)%
Cost of revenues		306			260			46		18	%		829			519			310		60	%
Gross profit (loss)		(14	)		255			(269	)	(105	)%		(358	)		467			(825	)	(177	)%
Gross margin (loss)		(5	)%		50	%							(76	)%		47	%
Other Hosted Software Applications:
Revenues		—			14			(14	)	(100	)%		11			1,238			(1,227	)	(99	)%
Cost of revenues		39			124			(85	)	(69	)%		116			2,744			(2,628	)	(96	)%
Gross profit (loss)		(39	)		(110	)		71		(65	)%		(105	)		(1,506	)		1,401		(93	)%
Gross margin (loss)		(100	)%		(786	)%							(955	)%		(122	)%
Total Software Applications:
Revenues		8,333			8,649			(316	)	(4	)%		24,803			27,399			(2,596	)	(9	)%
Cost of revenues		2,351			2,445			(94	)	(4	)%		6,795			8,894			(2,099	)	(24	)%
Gross profit	$	5,982		$	6,204		$	(222	)	(4	)%	$	18,008		$	18,505		$	(497	)	(3	)%
Gross margin		72	%		72	%							73	%		68	%

Software Applications revenues for the third quarter 2003 were consistent with the second quarter 2003 at $8.3 million. Continued recognition of the previously announced QRS Sourcing™ license sold to Woolworth Germany offset a slight decline in QRS Catalogue™ revenues. Recognition of the third quarter QRS Sourcing™ license sale to Saks Incorporated, a long-time customer for QRS Exchange™ and QRS Catalogue™, is currently expected to begin in the fourth quarter.

Third quarter 2003 revenues declined 4% from third quarter 2002 revenues of $8.6 million primarily due to a decline in Enterprise Software Applications revenue. Although we sold QRS Sourcing™ licenses in both the second and third quarters of 2003, the third quarter portion of the multi-quarter revenue stream generated by these sales was less than the revenue generated by the follow-on sales to existing customers that occurred in the third quarter 2002. Nine-month 2003 revenues declined 9% from nine-month 2002 revenues primarily due to the discontinuation of several unprofitable software products in mid-2002 for which revenues totaled $1.2 million for the nine-month period 2002 as well as the consolidation of certain retail divisions of a large QRS Catalogue™ customer in mid-2002.

Software Applications gross margins for the third quarter 2003 of 72% were comparable to the 74% reported for the second quarter 2003, and were consistent with the gross margin range for this Solutions Group over the previous four quarters. Third quarter 2003 Software Applications gross margins remained steady with the third quarter 2002 at 72%. Nine-month 2003 Software Applications gross margins of 73% are up from 68% for the nine-month 2002 period. This improvement is primarily due to cost savings realized from the discontinuation of several unprofitable software products in mid-2002 and our focus on operational improvement and cost controls, including the impact of reduced headcount included in cost of revenues.

As indicated in the table above, our QRS Catalogue™ product represented nearly all of the revenues in the Software Applications Solutions Group in the third quarter 2003. QRS Catalogue™ revenues consist of fees charged for the transmission of Uniform Product Code (UPC) records to and from vendors and retailers and of monthly fees for trading partnerships established between vendors and retailers.

QRS Catalogue™ revenues for the third quarter 2003, which totaled $8.0 million, were roughly flat with the $8.2 million reported for the second quarter 2003 and with third quarter 2002 revenues of $8.1 million. The minor variations in revenues are due to slight changes in the number of trading partnerships. Nine-month 2003 revenues declined 3% from nine-month 2002 revenues primarily due to the consolidation of certain retail divisions of a large customer, May Company, which resulted in lower usage of the QRS Catalogue™ by May Company-related trading partners, offset in part by an increase in the number of non-May Company-related trading partnerships. This consolidation has reduced the number of May Company-related trading partnerships, which, under the current pricing structure, reduced current and expected future QRS Catalogue™ revenues associated with this customer. We expect that retailers will continue to reorganize their operations in attempts to improve operating efficiencies. To the extent that such

reorganizations reduce the number of their retail operations, the number of our trading partnerships could also be reduced, which, under our present pricing structure, would reduce revenues in future periods.

To date, essentially all QRS Catalogue™ revenues have been derived from North American general merchandise and apparel customers, and we expect this to continue throughout the remainder of 2003. Our European sales team began focusing on sales of QRS Catalogue™ this year, and we are currently implementing a QRS Catalogue™ trading community enablement program with Selfridges, plc, one of the top department store groups in Europe.

Cost of revenues 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. QRS Catalogue™ gross margins for the third quarter 2003 of 75% were down slightly from the 77% reported for the second quarter 2003, in part due to some additional amortization charges included in cost of revenues during the period and additional customer support costs. Third quarter 2003 gross margins were steady with third quarter 2002 gross margins of 75%. Nine-month 2003 gross margins of 76% were down slightly from the 78% for the nine-month 2002 period, primarily due to the change in revenue.

Enterprise Software Applications revenues for the third quarter 2003, which totaled $0.3 million, improved slightly from the $0.2 million reported for the second quarter 2003. Our QRS Sourcing™ software application is designed to enable customers to improve their collaborative sourcing and supply capabilities, financial order management, international logistics and customs management, and collaborative merchandising efforts. We typically provide substantial services to assist our customers with their implementation of our QRS Sourcing™ application through our QRS Professional ServicesSM team. As a result, we recognize the license fee and the associated service fees over the implementation period as the professional services are provided. Typical implementation periods range from two to four quarters. During the second quarter 2003, we sold a QRS Sourcing™ license to Woolworth Germany. We recognized a small portion of the license revenue in the second quarter and a larger portion in the third quarter, using the percentage of completion revenue recognition methodology. During the third quarter 2003, we sold an additional QRS Sourcing™ license to Saks Incorporated, a long-time customer for QRS Exchange™ and QRS Catalogue™. We currently expect to recognize license revenue from both Woolworth Germany and Saks Incorporated during the fourth quarter 2003. We would ideally like to be on a pace to close three to four QRS Sourcing™ transactions per year.

Third quarter 2003 Enterprise Software Applications revenue declined from third quarter 2002 revenues of $0.5 million, and nine-month 2003 Enterprise Software Applications revenues of $0.5 million were down from the $1.0 million reported for the nine-month 2002 period. Although we sold QRS Sourcing™ licenses in both the second and third quarters of 2003, the multi-quarter revenue stream generated by these sales was less than the revenue generated by the follow-on sales to existing customers that occurred in the third quarter 2002. We intend to continue investing in QRS Sourcing™ to meet customer needs. We released upgrades to QRS Sourcing™ during each of the first three quarters of 2003, and we have upgrades to the product scheduled from the fourth quarter into next year.

Enterprise Software Applications cost of revenues for the third quarter remained steady with the second quarter 2003 and the third quarter 2002 at $0.3 million. Nine-month 2003 Enterprise Software Applications cost of revenues of $0.8 million increased from the $0.5 million reported for the nine-month 2002 period. Cost of revenues for all of the comparison periods consisted primarily of amortization costs related to the IBM CrossWorlds licenses purchased during the first quarter 2002. Amortization began in the second quarter 2002 and has been constant each quarter since, driving the increase in the nine-month comparison periods’ results. We entered into a licensing agreement with IBM CrossWorlds for the license of their enterprise applications integration tools to enable QRS’ retail industry customers to accelerate the implementation of QRS® solutions. We amortize the license fees to cost of revenues at the greater of the cost of licenses sold or pro-rated on a straight line basis over the two-year estimated life of the licenses. While we did not sell any licenses of IBM CrossWorlds software in 2002 or in 2003 to date, we seek to sell IBM CrossWorlds licenses together with Enterprise Software Applications. We believe, based on recent sales of QRS Sourcing™ and our current sales projections, that the $6.8 million of intangible assets related to QRS Sourcing™ and the $0.5 million asset associated with the IBM CrossWorlds software are fully recoverable. We continue to monitor these assets for potential impairment.

We recognized essentially no Other Hosted Software Applications revenues during 2003 or during the third quarter 2002. We recognized a total of $1.2 million for the nine-month 2002 period. As previously announced, we discontinued Tradeweave Sales and Inventory Analysis and Tradeweave Logistics in mid-2002. In the third quarter of 2001, we entered into a marketing relationship with MAGIC International, a subsidiary of Advanstar, Inc. and a leading organizer of tradeshows for the fashion and apparel industry, to establish an on-line trading community, “MAGIConline Powered by QRS.” This marketing agreement was renegotiated in the third quarter of 2002 and will expire on December 31, 2003. To date, revenues for our QRS Showroom™ product have been insignificant.

Cost of revenues for Other Hosted Software Applications consists primarily of customer and technical support personnel and allocated costs of our data center. The decline in cost of revenues for Other Hosted Applications is primarily the result of our mid-2002 discontinuation of Tradeweave Sales and Inventory Analysis and Tradeweave Logistics, which 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 have been reallocated across the remaining products that utilize our internal data center, including QRS Catalogue™ and hosted products within our Trading Community Management Solutions Group.

Trading Community Management

The Trading Community Management Solutions Group includes ~~the~~ QRS Exchange™ products and services: (Data Exchange, Internet Transaction Exchange, Enterprise Business Exchange, QRS Web Forms™, QRS Managed EC™, QRS Compliance Link™ ~~and Access Services. These services encompass all broadly adopted communication standards enabling our customers to communicate electronically using EDI over a VAN~~, ~~EDI~~QRS ~~over~~EDIINT ~~the~~Gateway™ ~~Internet,~~and ~~XML, AS2,~~Access ~~phone,~~Services) ~~fax,~~and ~~paper,~~QRS ~~or a web form~~Reveal™. ~~This~~Revenue ~~broad~~consists ~~range of communication options helps our customers accommodate collaboration with trading partners of any size. Revenues consist~~ primarily of fees charged for the transmission of standard business documents measured in kilocharacters (KCs) over the IBM VAN, monthly fees for leased line connections, and ~~service~~ fees tofor ~~convert~~EDI ~~documents~~translation ~~from paper to electronic format~~services. ~~Revenues~~Revenue ~~are~~is recognized in the month that the services are performed.

Trading Community Management ~~revenues~~revenue for the ~~third~~second quarter ~~2003,~~2004 ~~which~~declined ~~totaled~~ $161.93 million, ~~improved~~or 8%, from the ~~$16.3~~first ~~million~~quarter ~~reported~~2004, ~~for~~and ~~the second quarter 2003~~$1.5 ~~Third~~million, ~~quarter~~or ~~2003~~9%, ~~volumes~~from ~~increased~~the ~~over~~ second quarter 2003 ~~levels on seasonal strength~~. ~~Third~~Revenue ~~quarter~~for ~~2003~~the ~~unit~~six ~~pricing~~months ~~remained~~ended ~~relatively steady~~June ~~with~~30, ~~the~~2004 ~~second~~declined ~~quarter~~$2.0 ~~2003~~million, ~~reflecting~~or ~~our~~6% ~~previously~~from ~~announced~~the ~~implementation~~same ofperiod ~~industry standard minimum pricing thresholds for our lower volume customers, which we implemented~~ in ~~the second quarter~~2003.

~~Third~~Data ~~quarter~~Exchange ~~2003~~revenue ~~Trading~~for ~~Community~~the ~~Management~~second ~~revenues declined 10% from third~~ quarter ~~2002~~2004 ~~revenues~~was ofdown ~~$18.8~~compared ~~million, primarily due~~ to ~~continued~~the first ~~unit~~quarter ~~pricing~~due ~~pressure and~~ to aexpected ~~decline~~seasonal declines in ~~revenue~~volume ~~from~~during ~~Access~~the ~~Services~~second quarter. ~~Access~~In ~~Services~~spite isof the ~~portion~~relative ofstability ~~our~~in ~~business~~unit ~~focused~~pricing, onData ~~reselling~~Exchange ~~leased~~revenue ~~lines~~for ~~and~~the ~~dial-up connectivity,~~three ~~representing~~and ~~roughly~~six ~~10%~~months ofended ~~our~~June ~~Trading~~30, ~~Community~~2004 ~~Management~~also ~~revenues~~decreased inon ~~the~~a ~~third~~year-over-year ~~quarter~~basis due ~~2003,~~to ~~down~~decreases ~~from~~in ~~14%~~volume aand ~~year~~customer ~~ago~~losses. ~~Third~~Data ~~quarter~~Exchange ~~2003~~revenue ~~volumes~~continued ~~were~~to upbe ~~slightly~~impacted ~~from~~by ~~third~~competition ~~quarter~~from ~~2002~~traditional ~~levels.~~providers ~~Nine~~of VAN-~~month~~based ~~Trading~~services, ~~Community Management~~which ~~revenues~~reduced ~~were~~the ~~down~~overall ~~11%~~number ~~from~~of ~~nine-month~~Data ~~2002~~Exchange ~~revenues~~trading ~~primarily~~partnerships, ~~due~~as towell ~~continued~~as ~~unit~~by increasing ~~pricing~~competition ~~pressure,~~from ~~impacting~~new ~~pricing~~technologies ~~for~~such ~~both~~as ~~new~~AS2. ~~and~~We ~~existing~~do ~~customers.~~not ~~Nine~~believe that the long-~~month~~term ~~2003~~pricing ~~volumes~~pressure ~~were~~has upabated ~~from~~in ~~nine-month~~our ~~2002~~Data ~~levels~~Exchange business. If in future periods we are required to reduce prices further, these reductions in our net revenue per kilocharacter ~~will~~may reduce our Trading Community Management ~~revenues~~revenue to the extent that pricing changes are not offset by increased unit volume or other factors.

~~Trading~~The ~~Community~~migration ~~Management~~of ~~revenues~~customers ~~include revenues~~to ~~from~~Internet ~~our~~protocols ~~trading~~continues ~~community~~to ~~enablement~~reduce ~~solutions~~revenue ~~that~~from ~~support~~leased ~~smaller~~lines ~~trading~~and ~~partners,~~dial-up ~~such~~connectivity services. asAccess ~~our~~Services ~~QRS~~revenue ~~Managed~~for ~~EC™~~the ~~and~~second ~~QRS~~quarter ~~Web~~2004 ~~Forms™~~remained ~~offerings.~~consistent ~~These~~with ~~two products~~the ~~help~~prior ~~small-~~quarter ~~and~~but ~~medium-sized~~declined ~~businesses~~on ~~communicate~~a year-over-year basis by ~~converting~~26%. ~~paper~~We ~~transactions~~expect tofurther ~~the~~declines ~~electronic~~in ~~transmissions~~Access ~~supported~~Services byrevenue ~~their~~in ~~larger~~future ~~trading~~years ~~partners.~~as ~~Revenues~~internet ~~for~~technologies continue ~~these~~to ~~two~~replace ~~products~~and ~~totaled~~lower ~~$2.8~~the ~~million~~market ~~for~~price ~~the~~of ~~third~~these ~~quarter 2003~~services. Additionally, ~~consistent~~second ~~with~~quarter ~~the~~2004 ~~$2.8~~revenue ~~million~~from ~~for~~QRS ~~the~~Managed ~~second~~EC™ ~~quarter~~services ~~2003~~targeted ~~and~~towards ~~down~~small- ~~from~~and ~~the~~medium-sized ~~$3.4~~businesses ~~million~~declined ~~for~~10% from the ~~third~~prior quarter ~~2002.~~and ~~The~~23% on a year-over-year ~~decline~~basis ~~primarily~~due ~~reflects~~to a ~~decline~~decrease in the number of customers and revenue per customer.

Trading Community Management gross ~~margins~~margin for the second ~~third~~ quarter ~~2003~~2004 ofdeclined 53to 50% ~~improved~~ ~~slightly~~ from 51% in the first quarter 2004 and 51% ~~reported~~in ~~for~~ the second quarter 2003. The trends in gross margin are primarily due to the ~~seasonal~~revenue ~~improvement~~decline in ~~revenue.~~Access ~~Third~~Services ~~quarter~~and ~~2003~~QRS ~~Trading~~Managed ~~Community~~EC™ ~~Management~~while ~~gross~~costs ~~margins~~for ~~also~~those ~~improved~~products ~~from~~have ~~the~~remained ~~49%~~relatively ~~reported~~flat. ~~for~~On ~~the~~a ~~third quarter 2002. Nine~~year-~~month~~over-year ~~2003~~basis, ~~gross~~the ~~margins~~decline ofin ~~52%~~payments ~~were~~under upour agreement ~~from~~with ~~nine-month~~IBM ~~2002~~was ~~gross~~offset ~~margins~~by ofhigher ~~48%.~~costs ~~The~~allocated ~~three-month~~from ~~and~~our ~~nine~~self-~~month~~hosted ~~year-over-year~~data ~~improvements~~center. ~~were~~Additionally, ~~primarily~~during ~~due~~the tosecond ~~savings~~quarter ~~from~~2004, our ~~2002~~use ~~amended~~of purchased network services ~~agreement~~from ~~with~~ IBM ~~(See~~fell ~~Note~~below 7specified ~~to the~~minimum ~~Condensed~~amounts ~~Consolidated~~per ~~Financial~~the ~~Statements).~~terms ~~These~~of ~~cost~~our contract, ~~decreases~~causing ~~were~~our ~~partially~~Trading ~~offset~~Community byManagement ~~increases~~gross inmargin ~~costs~~to ~~allocated from our data center~~decrease. ~~Additional~~Other 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 ~~centers~~center.

Global Services

The Global Services Solutions Group consists primarily of: QRS Retail Intelligence ServicesSM; QRS Professional ServicesSM, ~~primarily~~mainly services provided to help our customers with ~~their~~the ~~implementations~~implementation of our licensed software products; and ~~software~~ maintenance for our ~~Enterprise~~QRS ~~Software~~Sourcing™ ~~Applications products~~product, including post-contract support services for licensed software applications.

Global Services ~~revenues~~revenue for the ~~third~~second quarter ~~2003,~~2004 ~~which totaled~~decreased $60.1 million, or ~~increased~~2%, from the ~~$5.9~~first ~~million~~quarter ~~reported~~2004. Revenue for the ~~second~~three ~~quarter~~and ~~2003~~six ~~primarily~~months ~~driven~~ended byJune 30, 2004 increased ~~QRS~~$0.1 ~~Retail~~million, ~~Intelligence~~or ~~ServicesSM~~3%, ~~revenue~~and $0.3 ~~Third~~million, ~~quarter~~or ~~2003~~3%, ~~revenues~~respectively, ~~were~~over ~~consistent~~the ~~with~~same ~~third~~periods ~~quarter~~in ~~2002~~the ~~revenues~~prior ofyear, ~~$6.1~~primarily ~~million~~resulting asfrom ~~declines~~growth in our QRS Retail ~~Professional~~Intelligence ServicesSM ~~revenues~~business. ~~caused~~QRS byRetail aIntelligence ~~lack~~ServicesSM revenue of ~~Enterprise~~$5.3 ~~Software~~million ~~Applications sales~~ in ~~previous~~the ~~periods~~second ~~were~~quarter ~~offset~~2004 byincreased ~~gains~~3% infrom ~~our~~the ~~QRS~~$5.2 ~~Retail~~million ~~Intelligence ServicesSM~~reported ~~revenues.~~in ~~Nine-month~~the ~~2003~~first ~~revenues~~quarter ~~declined~~2004 13and 10% from ~~nine-month~~the ~~2002~~$4.8 million ~~revenues~~reported ~~primarily~~in ~~due to~~ the ~~decline~~ insecond ~~QRS~~quarter ~~Professional~~2003. ~~ServicesSM~~These ~~revenues~~improvements ~~caused~~were offset by a ~~lack~~decline ~~of Enterprise Software Applications sales~~ in ~~previous~~ ~~periods. Both~~ QRS Professional ServicesSM revenue and software maintenance ~~revenues~~revenue ~~will~~associated ~~continue~~with toour beQRS ~~dependent, to~~Sourcing™ ~~a large extent~~product, onwhich ~~new~~we ~~sales~~expect ofwill ~~Enterprise~~continue ~~Software~~to ~~Applications~~decline.

19Cost of revenue for Global Services consists primarily of outsourcing costs for QRS Retail Intelligence ServicesSM field personnel and payroll for software application consultants and technical support personnel for our licensed software applications. Global Services gross margin improved to 14% in the second quarter 2004, compared to 13% for the first quarter 2004 and 12% in the second quarter 2003. Headcount reductions in our QRS Professional ServicesSM team and declining technical support costs contributed to the improvement in gross margin over the prior quarter and the second quarter of the prior year.

Global Services revenues include revenues from QRS Retail Intelligence ServicesSM, which includes offering for competitive price comparisons in local markets, price accuracy checking, product merchandising evaluations and store employee performance assessments. QRS Retail Intelligence ServicesSM revenues totaled $5.0 million for the third quarter 2003, up 4% from the $4.8 million for the second quarter 2003, and up 9% from the $4.6 million for the third quarter 2002. The sequential improvement in QRS Retail Intelligence ServicesSM revenues was driven, in part, by the results of our marketing efforts outside of our traditional base of grocery retailer customers, which we substantially began in the second quarter 2003. During the third quarter 2003, we sold or initiated new projects with national general merchandise and apparel chains, national specialty retailers and consumer packaged goods suppliers. The year-over-year revenue growth reflects additional revenues from new and existing customers, which more than compensated for revenue losses associated with the bankruptcies of two major customers, Kmart and Fleming.

Cost of revenues for Global Services consists primarily of payroll and outsourcing costs for data-collecting field personnel, software application consultants and technical support personnel for our Enterprise Software Applications. Global Services gross margins for the third quarter 2003 of 13% were up slightly from the 12% for the second quarter 2003, driven by the improvement in revenue. Third quarter 2003 gross margins were up slightly from the 11% reported for the third quarter 2002 partly due to the improvement in revenue and the improved utilization of our QRS Professional ServicesSM team driven by reductions in headcount and additional sales of QRS Sourcing™. Nine-month 2003 gross margins of 12% are up slightly from 11% for the nine-month 2002 period primarily due to the improved utilization of our QRS Professional ServicesSM team.

Operating Expenses

The following table sets forth ~~our~~ operating expenses (in thousands) and the related percentages of ~~our~~ total ~~revenues~~revenue byfor ~~sales~~the three and ~~marketing,~~six ~~service~~months ~~and~~ended ~~product~~June ~~development~~30, 2004 and ~~general~~2003 and ~~administrative~~associated ~~expenses~~headcount ~~for~~information ~~the~~at ~~three~~June ~~and nine months ended September~~ 30, ~~2003~~2004 and ~~2002 (dollars in thousands)~~2003:

	Three Months Ended September 30,								Nine Months Ended September 30,
	Three Months Ended June 30,								Six Months Ended June 30,
	2003		% ofRevenues		2002		% ofRevenues		2003			% ofRevenues			2002			% ofRevenues
	2004		% ofRevenues		2003		% ofRevenues		2004				% ofRevenues			2003			% ofRevenues
Operating expenses:
Sales and marketing	$	5,~~258~~060	17	%	$	5,~~928~~013	1816	%	$	1611,~~058~~332		17	%19	%	$	~~22,582~~$	10,800	22	%18	%
Service and product development		32,~~198~~701	109	%		3,~~514~~161	10	%		95,~~356~~876		10	%10			~~11,425~~	6,158	11	%10
General and administrative		45,~~654~~033	1517	%		54,~~296~~370	1614	%		139,~~796~~851		15	%16			~~17,478~~	9,142	17	%15
Operating expenses before amortization and restructuring expenses		13,110				14,738				39,210						51,485
Settlement of deferred acquisition payment		—	—			—	—			(600	)		(1	)			—		—
Amortization of other intangible assets		~~800~~93	3—	%		~~872~~839	3	%		~~2,488~~186		3	%—			~~2,616~~	1,688	3	%3
Restructuring Expenses		5,279	17	%		—	—			5,279		6	%			—		—
Total operating expenses	$	12,887	44	%	$	13,383	44	%	$	26,645			45	%		$	27,788		45	%
Total operating expenses	$	19,189	61	%	$	15,610	47	%	$	46,977		51	%		$	54,101		52	%
Full-time headcount:
Sales and marketing		90				92
Service and product development		104				116
General and administrative		59				76

~~Overview~~Operating expenses for the second quarter 2004 were down $0.9 million, or 6%, from the first quarter 2004, due to a decline in sales and marketing expenses following the completion of our first quarter launch of QRS IMPACT™. Operating expenses for the three and six months ended June 30, 2004 declined by 4% on a year-over-year basis. Factors contributing to the six month period decline included the $1.5 million reduction in amortization expense resulting from the fourth quarter 2003 impairment of intangible assets, the benefit of $0.6 million due to a favorable legal settlement related to a deferred acquisition payment, and reductions in payroll-related costs as headcount declined, offset by $1.0 million of merger-associated costs.

Operating expenses for the third quarter 2003, which totaled $19.2 million, were up from the $13.4 million reported for the second quarter 2003 primarily due to the inclusion in the third quarter 2003 of a $5.3 million restructuring charge and the inclusion in the second quarter 2003 of approximately $0.5 million of operating expense benefits, primarily related to the favorable resolution of various tax related matters.

Third quarter 2003 operating expenses increased from the $15.6 million reported in the third quarter 2002 primarily due to the inclusion of the third quarter 2003 restructuring charge. We continue to focus on cost controls, process improvements and operational discipline. Nine-month 2003 operating expenses declined 13% from nine-month 2002 operating expenses, in spite of the inclusion of the third quarter 2003 restructuring charge. We expect to realize a small decrease in operating expenses in the fourth quarter of 2003 due to the centralization of our development team in our Richmond, California headquarters, which is discussed in Restructuring Expenses below. Beginning in the first quarter 2004, we expect the savings from this restructuring to be in the range of half a million dollars per quarter.

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. At ~~September~~June 30, ~~2003~~2004, we ~~sold~~had ~~our~~67 ~~products~~full-time ~~and~~employees ~~services~~in toour ~~the~~sales ~~global~~organization, ~~marketplace~~comprised ~~primarily~~of ~~through~~60 ~~our~~employees ~~direct~~located ~~field~~in ~~sales~~North ~~force~~America and ~~our~~7 ~~telesales~~employees ~~group.~~located Atin ~~September 30~~Europe, ~~2003,~~primarily wein ~~had~~the 96United ~~full-time~~Kingdom.

20For the second quarter 2004, sales and marketing expenses overall were down $1.2 million, or 19%, from the $6.3 million reported for the first quarter 2004, and flat compared to the second quarter 2003. First quarter 2004 included $0.8 million in higher marketing, travel and meeting expenses attributed to launching QRS IMPACT™, participation in trade shows and our annual customer conference. Second quarter 2004 severance costs and employer contributions to the 401(k) plan costs declined $0.2 million. In addition, the provision for bad debt decreased by $0.1 million from the prior quarter due to improvement in the aging of our accounts receivable.

Sales and marketing expenses for the six months ended June 30, 2004 increased $0.5 million, or 5%, from the same period in 2003, primarily resulting from $0.1 million of additional payroll costs and $0.4 million in consulting expenses from projects focused on our solution selling capability and product strategy.

employees in our sales and marketing groups, compared to 92 at the end of the second quarter 2003 and 99 at the end of the third quarter 2002. At September 30, 2003, we had 69 full-time employees in our sales organization, the majority of whom carry quota, comprised of 58 employees located in North America and 11 employees located in Europe, primarily in the United Kingdom. Included in the North American sales team are 36 quota carrying field sales representatives and management. The remaining members of the North American sales team are quota carrying internal sales representatives and non-quota carrying operations and administrative employees.

Sales and marketing expenses for the third quarter 2003, which totaled $5.3 million, were up 5% from the $5.0 million reported for the second quarter 2003, reflecting increased spending related to preparations for the launch of our product information management solution and intelligent transaction management platform which are scheduled for delivery in the first half of next year. Third quarter sales and marketing expenses declined 11% from third quarter 2002 expenses of $5.9 million, and nine-month 2003 expenses declined 29% from nine-month 2002 expenses. These declines were primarily due to declines in headcount and payroll related costs totaling $4.4 million for the nine-month period, reductions in marketing costs and other professional fees of $1.5 million for the nine-month period and reductions of bad debt expense of $0.4 million for the nine-month period.

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 ~~Enterprise Software Applications and hosted software applications~~products, ~~our intelligent~~a ~~transaction management platform and additional collaborative applications, our QRS Web Forms™ solution, and other software for internal use at our QRS Managed EC™ operations centers. A~~ portion of ~~these~~which ~~expenditures, including those associated with our investment in an intelligent transaction management platform and additional collaborative applications,~~ is capitalized asunder ~~required by~~ 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,.” ~~which~~For ~~applies~~our to hosted ~~services~~and ~~such~~internal use products, we capitalize, as ~~this~~prescribed ~~platform~~by ~~and~~SOP ~~our~~98-1, ~~QRS Catalogue™.~~all ~~Another~~the ~~portion~~costs ofincurred ~~these~~during ~~expenditures~~the application development stage, ~~including~~which ~~those~~include ~~associated~~designing ~~with~~the software configuration and ~~upgrades~~interfaces, tocoding, installation and testing. For our ~~QRS~~enterprise ~~Sourcing™~~software ~~application~~applications, awe ~~licensed~~capitalize ~~Enterprise~~products ~~Software~~and ~~Applications that~~enhancements isonce ~~installed~~they atreach ~~our~~technological ~~customer’s~~feasibility ~~business,~~until ~~will~~they beare ~~expensed~~released for sale, under the provisions of FAS 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” At September 30, 2003, we had 117 full-time employees in our service and product development groups, compared to 116 at the end of the second quarter 2003 and 89 at the end of the third quarter 2002. During 2002 and 2003, we supplemented our internal development resources through several arrangements with outsourced development companies which were substantially completed by mid-year 2003.

~~Service~~We review service and product development expenses, ~~for~~capitalized ~~the~~costs ~~third~~and ~~quarter~~licensed ~~2003~~technology ~~were~~on ~~consistent~~a ~~with~~combined ~~second~~basis ~~quarter~~in ~~2003~~order ~~expenses~~to atmeasure ~~$3.2 million.~~our ~~Third~~investment ~~quarter~~in ~~2003~~new ~~expenses~~and ~~were~~existing ~~down 9% from third quarter 2002 expenses of $3~~products.5 ~~million.~~The ~~Nine-month~~following ~~2003~~table ~~expenses~~sets ~~were~~forth ~~down~~(in ~~18%~~thousands) ~~from~~total ~~nine-month 2002 expenses. All of these amounts are net of capitalized~~ service and product development ~~costs~~expenditures ~~which totaled $1.3 million~~ for the ~~third~~three ~~quarter~~months ~~2003,~~ended ~~$1.4~~June ~~million~~30, ~~for~~2004, ~~the~~March ~~second quarter 2003~~31, ~~$0.4~~2004 ~~million~~and ~~for~~June ~~the third quarter 2002~~30, ~~$4.2 million for the nine-months~~ 2003: ~~and $1.1 million for the nine-months 2002.~~

The sum of our expensed and capitalized amounts, reflecting our total investment, was sequentially flat between the second and third quarters of 2003 at $4.5 million, and was up 17% from the $3.9 million for the third quarter 2002 to the third quarter 2003. For the nine-month 2003 period, the sum of our expenses and capitalized amounts was $13.5 million, up 8% from the $12.5 million for the nine-month 2002 period. These increases reflect our ongoing investment in technology to better serve our customers in the future and help drive future growth. During the third quarter, we continued to invest in improvements to QRS Catalogue™, QRS Sourcing™ and QRS Web Forms™ and in the development and upgrading of our product technology and architecture. We released upgrades to QRS Sourcing™, QRS Catalogue™ and QRS Web Forms™ during the third quarter and early fourth quarter 2003.


	Three Months Ended
	June 30, 2004		March 31, 2004		June 30, 2003
Service and product development	$	2,701	$	3,175	$	3,161
Capitalized service and product development		1,389		1,591		1,353

Total internal costs		4,090		4,766		4,514
Licensed technology – capitalized(1)		—		518		—

Total service and product development expenditures	$	4,090	$	5,284	$	4,514

~~During~~(1) ~~the~~In ~~remainder~~accordance ofwith ~~2003~~FAS ~~and part of 2004~~86, we plan to utilize a combination of internal resources and, where appropriate, externally acquire technology components to develop a new base technology platform that 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 and development of our product information management solution while building the new base platform. We completed several initial components of our intelligent transaction management platform during the ~~third~~ first quarter, ~~keeping us on track and progressing well. While hitting our development milestones~~2004, we ~~have~~capitalized ~~been using our resources more efficiently than we anticipated~~$0.5 Asmillion aof ~~result,~~licensed wetechnology ~~now~~used ~~believe~~in our ~~capitalized~~QRS ~~service~~IMPACT™ ~~and internal~~ product ~~development~~ ~~costs~~after ~~for~~ the ~~full~~product ~~year~~reached ~~2003~~technological ~~will be in the $6 to $8 million range, slightly below what we had previously anticipated~~feasibility. ~~We currently expect to continue investing and capitalizing roughly at or slightly above our fourth quarter 2003 run rate during 2004.~~

21Total spending on internal costs in the second quarter 2004 decreased from the prior quarter by $0.7 million, primarily due to higher first quarter 2004 payroll and related costs of $0.5 million that included severance and employer contributions to the 401(k) plan, and $0.1 million spent in the first quarter 2004 to improve the efficiency and design of employee work stations and IT equipment. Total spending on internal costs for the three and six months ended June 30, 2004 decreased on a year-over-year basis by $0.4 million and $0.1 million, respectively, due primarily to headcount reductions following the closure of our Wakefield, Massachusetts facility in the third quarter 2003.

We regularly evaluate opportunities to accelerate our technology development, including through alliances, licensing and strategic acquisitions. To the extent we license or acquire pre-existing technologies or businesses to accelerate development, we would expect to invest less in internal service and product development resources.

During the third quarter 2003, we amortized to cost of revenues approximately $0.4 million of capitalized software development costs related primarily to QRS Catalogue™ and another $0.3 million related to various software licenses. In accordance with the provisions of AICPA SOP No. 98-1, amortization of the costs associated with the intelligent transaction management platform and additional collaborative applications will begin as each version is completed and ready for use. We expect to begin amortization in the first half of 2004. Amortization of these costs will occur over the products’ useful lives, which we estimate to be approximately three years. Based on our current estimate of total 2003 capitalized development costs, we anticipate that by the end of 2004, our software development amortization expense, to be included as a component of cost of revenues, will increase by approximately $0.5 million per quarter over our 2003 levels.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and the related costs of our administrative organizations, such as finance, legal, human resources and ~~MIS~~management information systems, as well as professional fees and other costs. ~~At September 30, 2003, we had 69 full-time employees in our general and administrative groups, compared to 76 at the end of the second quarter 2003 and 70 at the end of the third quarter 2002.~~

General and administrative expenses for the ~~third~~second quarter ~~2003,~~2004 ~~which~~were ~~totaled~~up $40.72 million, ~~were~~or ~~up 6~~4%, from the $4.48 million reported for the ~~second~~first quarter 2004, and $0.7 million, or 15%, from the second quarter 2003. AGeneral ~~substantial~~and ~~portion~~administrative ofexpenses for the six months ended June 30, 2004 increased $0.57 million, ~~second~~or ~~quarter~~8%, ~~operating~~over ~~expense~~the ~~benefits,~~same ~~which~~period ~~were~~a ~~primarily~~year ~~related~~ago. toThe ~~the~~first half of 2003 included $0.3 million from the favorable resolution of various tax -related matters, ~~were~~while ~~credited~~the tofirst ~~general~~half ~~and~~of ~~administrative~~2004 ~~expenses~~included $1.0 ~~After adding~~million ~~back~~of ~~those~~legal, ~~credits~~accounting toand ~~the~~other ~~second~~professional ~~quarter~~fees ~~2003~~associated ~~net~~with ~~expense~~merger ~~amount,~~activities ~~general~~ and ~~administrative~~$0.1 million of restructuring expense ~~declined~~associated ~~slightly~~with ~~from~~our Wakefield, ~~the~~Massachusetts ~~second~~facility, ~~quarter~~offset ~~2003~~by toa ~~the~~reduction ~~third~~of ~~quarter~~$0.7 ~~2003~~million in payroll-related and consulting expenses.

~~Third~~In ~~quarter~~addition, ~~2003~~ general and administrative expenses ~~declined~~for ~~12%~~the ~~from~~six ~~third~~months ~~quarter~~ended ~~2002~~June ~~expenses~~30, of2004 included $50.34 million, ~~and nine-month~~of ~~2003~~accounting ~~expenses~~fees ~~declined~~associated ~~21%~~with ~~from~~the review ~~nine-month~~and ~~2002~~testing ~~expenses.~~of ~~These~~our ~~significant~~material ~~year-over-year~~internal ~~reductions~~controls insystems, ~~spending~~processes ~~are~~and aprocedures ~~result~~in ofcompliance ~~our~~with ~~ongoing~~the ~~commitment~~requirements toof ~~improve~~Sarbanes-Oxley ~~efficiency~~Regulation ~~throughout our general and administrative functions~~404.

~~While~~Settlement ~~we have reduced overall general and administrative expenses, we have incurred additional costs associated with evolving regulatory requirements such as the Sarbanes-Oxley Act~~ of ~~2002.~~Deferred ~~While~~Acquisition wePayment will continue to focus on overall general and administrative spending, we expect to continue incurring additional costs in connection with our internal controls systems primarily to maintain compliance with these evolving requirements and also to address ongoing business needs.

Operating expenses for the six months ended June 30, 2004 include a benefit of $0.6 million resulting from the April 2004 settlement of litigation surrounding our acquisition of Image Info in 2000. In order to avoid further litigation, we entered into a settlement agreement under which we paid $1.9 million during the second quarter 2004 to settle all claims made by the former shareholders of Image Info. The $1.9 million settlement was less than the $2.5 million liability classified as deferred acquisition payment in the Condensed Consolidated Balance Sheets as of December 31, 2003. The effect of this settlement on our liability was recorded in the first quarter 2004 operating results as a benefit of $0.6 million. See Note 7 to the Condensed Consolidated Financial Statements.

Amortization of Other Intangible Assets

~~Other intangible assets totaled $7.4 million at September 30, 2003, comprised primarily of $6.8 million related to acquired technology associated with our QRS Sourcing™ product.~~ Amortization of other intangible assets for the ~~third~~second quarter ~~2003~~ 2004 was $0.81 million, compared to $0.81 million in the ~~second~~ first quarter ~~2003~~2004 and $0.98 million in the ~~third~~second quarter ~~2002~~of 2003. The ~~year-over-year~~ decrease in amortization expense from the second quarter of ~~other~~the ~~intangible~~prior ~~assets~~year resulted primarily from ~~our~~the ~~non-compete~~impairment ~~agreements~~of ~~becoming fully~~intangible ~~amortized~~assets ~~during~~that occurred in the ~~first~~fourth quarter of 2003.

During 2003, we have experienced slower revenue growth than previously anticipated and have been negatively impacted by difficult industry and economic trends. During the third quarter of 2003, we assessed whether our other intangible assets have been impaired as prescribed by SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We prepared our impairment analysis in accordance with SFAS No. 144 and concluded that our estimate of future net cash flows would be sufficient to recover the carrying value of the intangible assets as of September 30, 2003.

Restructuring Expenses

As part of our ~~development~~2001 ~~plans~~restructuring ~~and~~activities, ~~product~~we ~~strategy~~made ~~solidified~~certain inestimates of sublease income on the ~~first~~vacated ~~half~~facility ofadjacent ~~2003~~to our corporate headquarters in Richmond, weCalifornia; ~~began~~however, due to a ~~project~~prolonged todifficult ~~review~~real ~~our~~estate ~~overall~~market ~~cost~~in ~~structure~~the Bay Area, those original estimates proved optimistic. ~~During~~As ~~the third~~a ~~quarter~~result, during 2003, we began ~~completed~~reevaluating our ~~cost~~assumptions ~~structure~~surrounding ~~review~~our sublease loss accrual, including discussions with our landlord to renegotiate the ~~goals~~terms of ~~creating~~our ~~better~~lease. ~~alignment~~We ~~with~~recorded ~~our~~a ~~growth~~$3.7 ~~strategy~~million ~~and~~restructuring ~~finding~~expense ~~additional~~for ~~potential~~the ~~efficiencies.~~year Asended aDecember ~~result~~31, we2003 ~~recorded~~based ~~restructuring~~on the ~~expenses~~terms of ~~$5.3~~a ~~million~~non-binding ~~during~~Letter of Intent with the ~~quarter~~ ~~ended~~landlord ~~September~~to ~~30,~~reduce ~~2003,~~the ~~consisting~~term of ~~several~~the ~~components~~lease and our total cash commitments over the remaining life of the lease.

WeDuring ~~centralized~~January ~~substantially~~2004, ~~all~~we offinalized agreements with our ~~development~~landlord ~~team~~to sublet the facility to ~~our~~an ~~Richmond,~~affiliate ~~California~~of ~~headquarters~~our landlord and reduce ~~streamlined~~our ~~other~~total ~~parts~~cash commitments over the remaining life of ~~our~~the ~~operations,~~lease ~~primarily~~by ~~general~~$6.4 million. The sublease agreement for full contract rent and ~~administrative~~operating ~~services.~~expenses ~~These~~from ~~actions~~October ~~resulted~~1, in2008 athrough ~~restructuring~~the ~~charge of~~lease termination on June 30, 2011 is collateralized by a $14.80 million, ~~consisting~~Deed of $1Trust.2 ~~million~~The ~~related~~agreements towith our landlord required us in the ~~closure~~first quarter 2004 to deposit $3.6 million of ~~our~~base ~~Wakefield~~rent for the period October 1, ~~Massachusetts~~2006 ~~facility~~through September 30, ~~$0.1~~2008 ~~million~~in an escrow account for disbursement over the related rental toperiod. The funds held in escrow are classified as restricted cash in the ~~abandonment~~Condensed ~~and~~Consolidated ~~write-off~~Balance Sheets as of ~~certain~~June ~~equipment~~30, ~~and~~2004. ~~leasehold~~Under ~~improvements~~the ~~and~~terms of the agreements with our landlord, we also settled a $0.58 million common area maintenance obligation related to ~~termination~~ ofour 43headquarters ~~employees~~facility ~~located~~for in$0.2 ~~Wakefield,~~million ~~Massachusetts~~that ~~and~~we ~~Richmond,~~paid ~~California~~during the first quarter of 2004. The ~~restructuring~~remaining ~~charge~~$0.6 million liability was ~~somewhat~~allocated ~~offset~~between byour headquarters facility and the vacated adjacent facility based on square footage. As a result, $0.23 million ~~third~~will ~~quarter~~be recognized ratably as a reduction in aoperating ~~previous~~expenses ~~severance~~over ~~accrual~~the remaining headquarters lease term and $0.3 Ofmillion was reclassified from deferred rent and other liabilities to the 43sublease ~~terminated~~loss ~~employees~~accrual for our vacant Richmond, California facility. We believe that the ~~last~~ ~~day~~sublease loss accrual related to this facility as of ~~employment~~June 30, 2004, assuming certain amounts of sublease income, will cover all of our revised obligations under the final agreements.

22During 2003, we also completed a review of our overall cost structure with the goals of creating better alignment with our growth strategy and finding additional 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 in the year ended December 31, 2003, 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 following is a summary of the restructuring liabilities from December 31, 2003 to June 30, 2004 (in thousands):


	2001 Restructuring Activities			2003 Restructuring Activities
	Facilities Closure (primarily Richmond, CA)			Severance (included in Accrued Compensation)			Facilities Closure (Wakefield, MA)			Total
Balance at December 31, 2003	$	9,995		$	246		$	1,031		$	11,272
Restructuring expense(1)		—			27			105			132
Cash payments		(1,388	)		(270	)		(223	)		(1,881	)
Adjustments(2)		336			—			21			357

Balance at June 30, 2004	$	8,943		$	3		$	934		$	9,880

(1)

~~for 29 of them was on or before September 30, 2003. Additional severance and benefit costs of up to a total of $0.~~(2) ~~million~~The ~~are~~adjustment ~~expected~~ to ~~be incurred during~~ the ~~fourth~~restructuring ~~quarter~~liability ~~2003 and the first quarter 2004 related to transition costs associated with terminated employees who will provide ongoing services until they leave the Company either~~ in the ~~fourth quarter 2003 or the~~ first quarter 2004~~. These~~ ~~remaining~~was ~~severance~~due and benefit costs will be included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as restructuring expenses. We expect the total obligation in connection with these restructuring activities to ~~be slightly less than~~ $2.0.3 million. Wereclassified ~~expect~~from todeferred ~~realize~~rent aand ~~small~~other ~~decrease~~liabilities into ~~operating expenses in~~ the ~~fourth~~sublease ~~quarter~~loss ofaccrual ~~2003~~upon ~~due~~settlement ~~to the centralization~~ of ~~our~~a ~~development~~common ~~team~~area inmaintenance ~~our~~obligation ~~Richmond,~~per ~~California headquarters, as discussed in Operating Expenses, Overview above. Beginning in~~ the ~~first~~terms ~~quarter~~of ~~2004, we expect~~ the ~~savings~~agreements ~~from~~with ~~this~~our ~~restructuring to be in the range of half a million dollars per quarter~~landlord.

AsWe ~~further~~expect ~~discussed in Critical Accounting Policies, Use of Estimates,~~ to ~~determine~~pay ~~our~~remaining ~~sublease~~employment ~~loss~~severance ~~accrual~~ obligations related to ~~our~~restructuring ~~Wakefield,~~activities ~~Massachusetts~~by ~~facility,~~the ~~we,~~third ~~together~~quarter ~~with~~of ~~our professional real estate advisors, developed three sublease scenarios~~2004. WeBased ~~then assigned probabilities to each scenario. Our sublease liability associated with this facility is based~~ on the ~~weighted~~terms ~~average probability~~ of the agreements ~~three~~with ~~scenarios.~~our ~~For~~landlord ~~each~~described ~~month~~above ~~beyond~~and ~~July~~actual ~~2005~~subleases ~~during~~in ~~which~~effect ~~the~~on ~~property~~other ~~is not subleased~~properties, ~~we would incur an additional~~ $02.039 million of ~~rental~~the ~~expense.~~total Iffacilities ~~this~~closure ~~facility~~liability ~~were~~of to$9.9 bemillion ~~subleased~~has atbeen ~~50% of~~classified ~~our~~as ~~lease~~a ~~rate,~~current weliability ~~would~~and ~~incur~~the anremaining ~~additional~~ $06.19 million inhas been ~~expense~~classified ~~annually~~as ~~over~~non-current ~~the~~with ~~life~~payments ofthrough ~~the lease~~2008.

~~Also~~During ~~during~~ the ~~third~~second quarter ~~2003~~of 2004, wemanagement ~~accelerated~~reevaluated ~~discussions with~~ our ~~landlord~~strategy toin ~~renegotiate~~Europe, primarily the ~~terms~~cost of ~~our~~operating ~~lease on~~ a ~~vacated~~ facility in the ~~San Francisco Bay Area, driven by the difficult real estate market in that region~~U.K. ~~During~~While ~~the fourth quarter 2003,~~ we ~~entered~~believe ~~into~~that amaintaining ~~non-binding~~an ~~Letter~~international ofsales ~~Intent~~presence ~~with~~is ~~the~~appropriate, ~~landlord~~revenue togenerated from ~~reduce~~Europe ~~both~~has ~~the~~been ~~term~~less ofthan ~~the~~expected ~~lease~~ and ~~our~~insufficient ~~total~~to ~~cash~~offset ~~commitments~~current ~~over the~~operating ~~remaining life of the lease~~expenses. ~~The~~As ~~Letter~~a ofresult, ~~Intent~~we ~~amends~~plan ~~the~~to ~~termination~~vacate ~~date of~~ the ~~lease~~facility ~~from~~in ~~2011~~August to2004. ~~September~~At June 30, ~~2008~~2004, ~~and~~we ~~requires~~were usobligated to ~~prepay~~make onfuture alease ~~discounted~~payments ~~basis the final two years~~ of ~~the amended term. Under the terms of the non-binding Letter of Intent, the total prepayment will be approximately~~ $30.3 million, ~~half~~through ofthe lease ~~which~~termination ~~would be paid on completion of a binding agreement which is expected to occur~~ in ~~the~~February ~~fourth quarter 2003~~2006, and the ~~other~~net ~~half~~book value of ~~which~~equipment ~~would~~and beleasehold ~~paid in~~improvements ~~early~~was ~~first~~approximately ~~quarter 2004. We recorded a~~ $30.72 million ~~restructuring expense for the period ended September 30, 2003 to cover all of our estimated revised obligations related to this facility~~. AsWe ~~further~~are ~~discussed~~currently in ~~Critical~~negotiations ~~Accounting Policies,~~with ~~Use of Estimates,~~ our ~~sublease~~landlord ~~loss accrual~~ for ~~the~~an ~~Richmond,~~early-termination ~~California~~of ~~facility takes into consideration~~ the ~~terms from this Letter of Intent~~lease, ~~the~~which ~~likelihood~~could ~~that~~mitigate ~~this Letter of Intent will be finalized into a definitive agreement,~~future ~~and~~lease ~~our estimate of the likely sublease income to be generated from this facility~~payments.

The following is a summary of the restructuring liabilities from December 31, 2002 to September 30, 2003 (in thousands):

	Liability as of December 31, 2002		Additions(Reductions)			CashPayments			Liability as ofSeptember 30, 2003
Severance—2001 (included in Accrued compensation)	$	589	$	(155	)	$	(434	)	$	—
Facilities closure—2001		9,103		3,681			(2,121	)		10,663
Severance—2003 (included in Accrued compensation)		—		527			(57	)		470
Facilities closure—2003		—		1,159			—			1,159
Total	$	9,692	$	5,212		$	(2,612	)	$	12,292

The Additions (Reductions) to the restructuring liabilities of $5.2 million in the table above exclude the $0.1 million portion of the restructuring charge related to the abandonment and write-off of certain equipment and leasehold improvements. We expect to pay the remaining obligations related to severance and benefits by the end of the second quarter of 2004. Based on our sublease assumptions described above and actual subleases in effect on other properties, $6.4 million of the total facilities closure liability of $11.8 million has been classified as a current liability and the remaining $5.5 million has been classified as non-current.

Operating Income

Operating ~~loss~~income for the ~~third~~second quarter ~~2003,~~2004 ~~which~~improved ~~totaled~~ $30.52 million, or 1114%, compared ofto ~~revenues,~~the ~~declined~~first ~~from~~quarter ~~operating~~2004, ~~income~~but ofwas down $10.8 3 million, or 618% ~~of revenues,~~from ~~reported for~~ the second quarter 2003. ~~primarily~~Operating ~~due~~income tofor the ~~inclusion,~~six inmonths ~~the~~ended ~~third~~June ~~quarter 2003~~30, of2004 aincreased ~~$5.3 million~~on ~~restructuring~~a ~~charge~~year-over-year ~~and~~basis ~~the~~by ~~inclusion, in the second quarter 2003, of approximately~~ $0.52 million, ofor ~~operating~~9%, ~~expense benefits~~despite declining revenue, due primarily ~~related~~ to ~~the~~reductions ~~favorable~~in ~~resolution~~cost of ~~various~~revenues ~~tax~~and ~~related~~operating ~~matters.~~expenses ~~The~~in ~~third~~addition ~~quarter~~to ~~restructuring charge had~~ the ~~effect of reducing our operating margins, as a percentage of revenues, by 17%~~$0.6 ~~The~~million ~~second~~benefit ~~quarter~~resulting ~~operating expense~~from ~~benefit~~the ~~had~~favorable ~~the~~legal ~~effect~~settlement of ~~improving our operating margins, as~~ a ~~percentage~~deferred ofacquisition ~~revenues, by approximately 2%~~payment.

Third quarter 2003 operating loss declined from operating income of $0.4 million, or 1% of revenues, reported in the third quarter 2002 primarily due to the inclusion of the third quarter restructuring charge. Nine-month 2003 operating loss of $1.0

million improved from nine-month 2002 operating loss of $6.5 million despite the inclusion of the third quarter restructuring charge.

As we look ahead, we continue to target ongoing improvements in our operating margin, tempered by our objective of reinvesting for revenue growth.

Interest Income

Interest income consists primarily of interest earned on cash, cash equivalents and marketable securities available-for-sale. Interest income ~~decreased~~of ~~from~~ $0.2 1 million in the ~~third~~second quarter of2004 ~~2002~~was tocomparable ~~$0.1~~with ~~million in~~ the ~~third~~prior quarter ~~of 2003~~and ~~due~~the tosecond aquarter ~~reduction~~of inthe ~~investment~~prior ~~yields~~year.

Net Income and Earnings Per Share

Net ~~loss~~income for the ~~third~~second quarter ~~2003~~2004, which totaled $31.5 million, or 229 cents per diluted share, ~~declined~~improved from ~~net~~the ~~income of~~ $1.83 million, or 128 cents per ~~share~~ diluted share, reported for the ~~second~~first quarter ~~2003 primarily due to the inclusion~~2004, inbut ~~the~~was ~~third~~down ~~quarter~~from ~~2003, of a $5.3 million restructuring charge and~~ the ~~inclusion, in the second quarter 2003, of approximately~~ $01.58 million ~~of operating expense benefits~~, ~~primarily~~or ~~related~~12 tocents ~~the~~per ~~favorable resolution of various tax related matters. The third quarter restructuring charge had the effect of reducing our~~ diluted ~~earnings per~~ share, byreported 33in ~~cents.~~the ~~The~~ second quarter ~~operating expense benefit had the effect of improving our diluted earnings per share by approximately 4 cents~~2003.

~~Third~~For ~~quarter~~information ~~2003~~regarding ~~net~~the ~~loss~~number ~~declined~~of ~~from~~shares ~~the~~used ~~$0.6~~to ~~million,~~compute orearnings ~~4 cents~~ per share ~~diluted~~, ~~net~~see ~~income~~Note ~~reported~~4 ~~in the third quarter 2002 primarily due~~ to the ~~inclusion~~Condensed ofConsolidated ~~the~~Financial ~~third quarter restructuring charge~~Statements. ~~Nine-month 2003 net loss of $0.8 million improved from nine-month 2002 net loss of $5.0 million, despite of the inclusion of the third quarter restructuring~~ ~~charge.~~

For information regarding the number of shares used to compute earnings per share, please refer to Note 4 to the Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities available-for-sale decreased ~~increased~~ to $3733.02 million at ~~September 30, 2003 from $36.4 million at~~ June 30, ~~2003,~~2004 ~~and decreased~~ from $3938.61 million at December 31, ~~2002~~2003. The decline ~~from year-end 2002~~ was due primarily to ~~our~~the ~~investment~~$3.6 million deposit of restricted cash, the $43.20 million incapitalization ~~capitalized~~of service and product development costs, and the $2.8 0 million inpurchase ~~other~~of ~~capital~~property, ~~expenditures~~equipment and licensed technology, offset by $4.0 million of positive cash flows from operations. Working capital ~~was~~decreased to $2428.19 million at ~~September~~June 30, ~~2003~~ ~~compared~~2004 tofrom $2630.4 million at December 31, ~~2002~~2003. Our days sales outstanding (DSOs) were 47 days at ~~September~~June 30, ~~2003~~2004, ~~comparable~~compared to 4645 days at ~~June~~December 3031, 2003 and 4746 days at ~~September~~June 30, ~~2002~~2003. ~~We expect to maintain DSOs in the mid-forties going forward.~~

Total assets ~~decreased~~of ~~from~~ $8171.93 million at ~~December 31~~June 30, ~~2002~~2004 todecreased from $8072.78 million at ~~September~~December 3031, 2003~~, due to a reduction in cash, cash equivalents, and marketable securities, the amortization of other intangible assets and the amortization of IBM CrossWorlds licenses~~. Total liabilities ~~decreased~~of ~~from~~ $3729.84 million at ~~December~~June 3130, ~~2002~~2004 decreased tofrom $3634.93 million at ~~September~~December 3031, 2003, ~~resulting~~due ~~from~~primarily to the ~~decline~~settlement inof ~~our~~a ~~accounts~~deferred ~~payable~~acquisition ~~balance~~payment and ~~the decline in our accrued compensation balance due to~~ payments of annual corporate bonuses inand ~~the~~other ~~first~~long-term ~~quarter~~obligations ofassociated ~~2003~~with facilities leases.

WeFor ~~have~~the ~~previously~~quarter ~~incurred~~ended ~~significant~~June ~~losses~~30, ~~including~~2004, ~~net losses~~we ofexperienced ~~$4.1~~a ~~million~~decline ~~and~~in ~~$173.3~~revenue ~~million~~of 4% ~~for~~from the prior fiscal ~~years~~year. ~~ended~~We ~~December~~offset ~~31,~~this ~~2002~~revenue ~~and~~decline ~~2001,~~by ~~respectively~~reducing our operating expenses in the second quarter 2004. AThe ~~substantial~~challenge ~~amount~~facing ofour ~~these~~business ~~losses~~is into ~~2001~~launch ~~was~~new inproducts ~~connection~~and ~~with~~services ~~non-cash~~that ~~charges~~can ~~relating~~generate new revenue to offset the ~~impairment~~decline in ofrevenue ~~remaining~~from ~~intangible assets,~~our ~~including~~traditional ~~technology~~business. ~~and~~We ~~goodwill,~~may ~~acquired~~not ~~through~~be able to continue reducing our ~~acquisitions~~operating expenses in ~~recent~~future ~~years~~periods ofand ~~RockPort~~our ~~Trade~~revenue ~~Systems~~may ~~Inc~~continue to decline. As a result, ~~Image~~we ~~Info~~may ~~Inc~~experience losses in future periods. During the second quarter 2004, ~~and~~a ~~Retail~~significant ~~Data~~portion ~~Services~~of ~~Inc~~our cash inflows was generated by our operations., asBecause ~~well~~our operating results may fluctuate significantly as ~~our~~a ~~acquisition~~result of decreases in customer demand or lack of acceptance of our future products, our ability to generate positive cash flow from operations may be jeopardized. To the ~~outstanding~~extent ~~minority~~that ~~interest~~our operating results fall below our expectations, we may need to obtain debt financing or sell additional shares of our equity securities. There can be no assurance ~~Tradeweave~~that ~~Inc~~we will be able to obtain debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our ability to achieve our intended business objectives.

~~During~~18 2002 and the first half of 2003, a significant portion of our cash inflows was generated by our operations. Because our operating results may fluctuate significantly due to decreases in customer demand or decreases in acceptance of our future products, our ability to generate positive cash flow from operations may be jeopardized. To the extent that our operating results fall below our expectations, we may need to obtain debt financing or sell additional shares of our equity securities. There can be no assurance that we will be able to obtain debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our ability to achieve our intended business objectives.

We believe that cash, cash equivalents, and marketable securities available-for-sale at September 30, 2003 and cash forecasted to be generated from future operations, excluding any lease prepayments, will be sufficient to continue funding capital expenditures and our planned technology investments for the fourth quarter 2003. We currently believe that cash, cash equivalents, and marketable securities available-for-sale at the end of 2003 will be in the mid-$30’s million range.

~~Early~~We inbelieve ~~the~~that ~~fourth quarter 2003~~cash, wecash ~~entered~~equivalents ~~into~~and anmarketable ~~agreement~~securities toavailable-for-sale ~~acquire~~at ~~certain~~June ~~rights~~30, to2004 ~~technology. A~~and ~~total~~cash offorecasted ~~$1.25~~to ~~million will~~ be ~~paid~~generated infrom ~~the~~future ~~fourth~~operations quarter, and we expect to pay an additional $1.0 million during the first half of 2004 on completion of certain deliverables. It is currently expected that during the fourth quarter a portion of the total purchase price will be ~~charged~~sufficient to ~~operating~~continue ~~expense~~funding ascapital ~~in-process~~expenditures ~~research~~ and ~~development~~our ~~and~~planned atechnology ~~portion~~investments ~~will~~for bethe ~~capitalized~~next twelve months.

~~Also~~We ~~during~~expect ~~the third quarter 2003, we accelerated discussions with~~ our ~~landlord~~investment toin ~~renegotiate~~ the ~~terms~~development of ~~our~~new ~~lease~~applications onand aimprovements ~~vacated~~to ~~facility~~QRS inCatalogue ~~the~~™ ~~San Francisco~~to ~~Bay~~occur ~~Area,~~throughout ~~driven by~~ the ~~difficult~~year. ~~real~~While ~~estate~~our ~~market~~current inplan is ~~that~~to ~~region.~~perform ~~During~~these ~~the~~development ~~fourth~~efforts ~~quarter~~using ~~2003~~internal resources, we ~~entered~~are ~~into~~simultaneously aevaluating ~~non-binding~~opportunities ~~Letter of Intent with the landlord~~ to ~~reduce~~accelerate ~~both~~development, ~~the~~including ~~term~~through ofalliances ~~the lease~~ and ~~our total cash commitments over the remaining life of the lease~~licensing. ~~The~~During ~~Letter of Intent amends~~ the ~~termination~~fourth ~~date~~quarter of ~~the lease from 2011 to September 30~~2003, ~~2008~~we ~~and~~licensed ~~requires~~technology usutilized in toour ~~prepay~~QRS onIMPACT a™ ~~discounted basis the final two years of the amended term~~product. ~~Under~~We ~~the~~made ~~terms~~cash ~~of the~~payments ~~non-binding~~for ~~Letter of Intent,~~ the ~~total~~licensed ~~prepayment~~technology ~~will~~of ~~be approximately~~ $31.3 million, ~~half~~in ofthe ~~which~~fourth ~~would~~quarter be2003 ~~paid~~and on$0.5 ~~completion~~million ofin athe ~~binding~~first ~~agreement~~quarter ~~which~~2004. isWe ~~expected~~expect to ~~occur~~pay in the ~~fourth~~remaining ~~quarter~~$0.5 ~~2003,~~million ~~and~~in the ~~other~~second half of ~~which~~2004. ~~would~~To bethe ~~paid in~~extent ~~early~~we ~~first~~license ~~quarter~~or ~~2004.~~acquire Wecomplementary ~~recorded~~technologies or abusinesses, ~~$3.7~~which ~~million~~require ~~restructuring~~additional ~~expense~~cash ~~for~~utilization, ~~the~~we ~~period~~may ~~ended~~seek ~~September~~to ~~30,~~sell ~~2003~~additional todebt ~~cover~~or ~~all~~equity ofsecurities, ~~our~~which ~~estimated~~may ~~revised~~result ~~obligations~~in ~~related~~additional dilution to ~~this~~our ~~facility~~stockholders. WeHowever, ~~will~~we ~~continue~~cannot tobe ~~manage~~certain ~~the~~that ~~business~~additional ~~with~~funding awill ~~strong focus~~be available on ~~our~~acceptable ~~cash~~terms or at all.

As discussed in Restructuring Expenses above, 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 required 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. The funds held in escrow are classified as restricted cash in the Condensed Consolidated Balance Sheets as of June 30, 2004. We believe that the sublease loss accrual related to this facility as of June 30, 2004, assuming certain amounts of sublease income, will cover all of our revised obligations under the final agreements.

As discussed in Note 7 to the Condensed Consolidated Financial Statements, in April 2004, in order to avoid further litigation we reached a mutually satisfactory settlement agreement with the former shareholders of Image Info that resolves the lawsuit without any admission of liability and terminates all claims against the Company. The action has been dismissed. Under the terms of the settlement agreement, we paid $1.9 million during the second quarter 2004, which was less than the $2.5 million liability classified as deferred acquisition payment in the Condensed Consolidated Balance Sheets as of December 31, 2003.

As discussed in Note 8 to the Condensed Consolidated Financial Statements, on June 17, 2004, we entered into a definitive agreement for QRS to merge with a wholly-owned subsidiary of JDA, with QRS continuing as the surviving corporation and a wholly-owned subsidiary of JDA. Under the terms of the transaction, QRS shareholders will receive 0.50 of a share of JDA common stock for each share of QRS common stock. QRS stockholders will own approximately 22 percent of the outstanding capital stock of the combined company. Completion of the merger, which is expected to close in the third or fourth quarter of 2004, is subject to the approval of JDA and QRS stockholders and other regulatory and customary conditions. There can be no assurance that the merger will be consummated. In the event that the merger agreement is terminated, under certain circumstances, we will be required to pay JDA a termination fee of $3.75 million. Included in general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income are $0.7 million and $1.0 million of merger-related costs for the three and six months ended June 30, 2004, respectively. Subsequent to entering into the merger agreement with JDA, the Board of Directors received four unsolicited non-binding proposals to acquire all of the outstanding shares of QRS common stock in exchange for cash, each subject to satisfactory completion of due diligence and execution of definitive documentation. After receipt of the proposals, the Board of Directors determined that engaging in discussions with each of the potential acquirers was in compliance with the terms of the merger agreement with JDA, and QRS began discussions with each of the potential acquirers. See Part II, Item 5 of this report for additional information regarding the status of our merger agreement with JDA and our discussions with the other potential acquirers.

We have no plans to pay dividends with respect to our common stock in the foreseeable future.

~~During 1997,~~At ~~1998,~~June ~~and 2000~~30, ~~our board of directors authorized the repurchase of an aggregate of $15 million of our common stock in both open market and block transactions~~2004, offuture ~~which~~payments ~~approximately $7 million has been repurchased as of September 30, 2003.~~under ~~Shares~~contractual ~~purchased~~obligations ~~under this program~~ are ~~held~~as follows (in ~~the~~thousands): ~~corporate treasury for future use including employee stock option grants and the Employee Stock Purchase Plan.~~

At September 30, 2003, future payments under contractual arrangements are as follows (in thousands):


	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Capital Lease Obligations	$	129	$	129	$	—	$	—	$	—
Operating Lease Commitments(1)		28,446		6,650		11,136		7,805		2,855
Vendor Commitments		12,427		8,013		4,414		—		—

Total	$	41,002	$	14,792	$	15,550	$	7,805	$	2,855

	Minimum Lease Commitments (1)		Vendor Commitments		Total
2003 (remaining 3 months)	$	1,989	$	2,918	$	4,907
2004		7,247		13,700		20,947
2005		5,291		6,635		11,926
2006		5,170		—		5,170
2007		5,010		—		5,010
2008 & thereafter		13,978		—		13,978
Total	$	38,685	$	23,253	$	61,938

(1)	Minimum lease commitments for vacant facilities that are available for sublease are included in these amounts. Income to be received from subleased real property is excluded from these amounts.

~~(1)~~19 Represents operating lease commitments for facilities in use and other equipment, as well as capital lease obligations. The table also includes minimum lease commitments for vacant facilities that are available for sublease. Receipt of these estimated sublease payments has not been included. The table excludes the effect of the terms of the non-binding Letter of Intent related to our Richmond, California vacated facility, discussed above in Restructuring Expenses, which would result in a reduction of the total minimum lease commitments and require a prepayment of approximately $3.3 million of payments scheduled to be paid in 2007 and 2008 & thereafter.

Stock Options

As illustrated in the table included in Note 6 to the Condensed Consolidated Financial Statements, outstanding stock options totaled 3.2 million as of September 30, 2003, up from the total outstanding options of 2.9 million as of December 31, 2002. The change reflects the effect of new option grants and options that were canceled when former employees elected not to exercise their options within the specified exercise period as provided in our stock option plans. These canceled stock options become available for future issuances under our stock option plans. At September 30, 2003, we had 1.4 million options available for grant under our stock option plans.

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003.

Recent Accounting Pronouncements

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the Consolidated Financial Statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any interest in any variable interest entities as of June 30, 2004. We will apply the consolidation requirement of FIN 46 in future periods if we should have any interest in any variable interest entity.

In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 03-06. Issue 03-06 addressed a number of questions regarding the computation of earnings per share (EPS) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. Issue 03-06 is effective for the first fiscal period beginning after its issuance. During the quarter ended June 30, 2004, we adopted Issue 03-06 and the adoption did not have any material effect on our financial position or results of operations.

On March 31, 2004, the FASB issued an exposure draft entitled “Share-Based Payment” to amend FAS 123, “Accounting for Stock-Based Compensation” and FAS 95, “Statement of Cash Flows.” This proposed standard would eliminate the ability to account for share-based compensation using the intrinsic value-based method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This exposure draft would require us to calculate equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. The equity-based compensation expense is recognized ratably over the vesting period beginning with the grant date. Currently, we disclose the pro forma net income and related pro forma earnings per share information in accordance with FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Costs-Transition and Disclosure” (see Note 1 to the Condensed Consolidated Financial Statements). We continue to evaluate the impact that the exposure draft will have on our financial position or results of operations.

RISKS AND UNCERTAINTIES RELATING TO OUR BUSINESS

Set forth below, ~~and~~ elsewhere in this ~~quarterly~~ report and in ~~other~~Exhibit ~~documents~~99.1 wehereto ~~file~~(which ~~with~~is ~~Securities~~incorporated ~~and~~herein ~~Exchange Commission~~by ~~are~~reference) are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this ~~quarterly~~ report.

~~The~~Our ~~economic~~business ~~slowdown~~ and ~~changes~~results inof ~~the~~operations ~~retail~~may ~~industry~~be ~~make~~affected by our ~~future~~announced ~~operating results~~merger ~~uncertain.~~agreement with JDA

~~Historically,~~On weJuly ~~have~~17, ~~generated all~~2004, ofwe ~~our~~entered ~~revenues~~into ~~from~~a ~~the~~definitive ~~sale~~agreement ofto ~~products~~merge ~~and~~with ~~services~~a wholly-owned tosubsidiary ~~the~~of ~~retail industry~~JDA. ~~The~~Subsequent ~~retail~~to ~~industry~~the isannouncement ~~experiencing~~of aour ~~marked~~merger ~~slowdown~~agreement ~~that~~with JDA, we ~~believe~~received ~~has~~four ~~been~~unsolicited ~~caused~~proposals byregarding the ~~general~~acquisition ~~economic~~of ~~downturn~~all ~~since~~of ~~2000~~our ~~and~~outstanding ~~uncertain global, geopolitical and economic factors~~stock. WeThe ~~believe~~announcement ~~that~~of ~~continuing~~the ~~poor~~merger ~~economic~~agreement ~~conditions~~ and ~~increased~~the unsolicited ~~competition~~bids incould ~~the~~cause ~~retail~~our ~~industry~~customers ~~are~~to ~~negatively~~delay, ~~impacting~~defer, ~~the~~or ~~industry~~cancel ~~and~~purchases of our ~~customers’~~services ~~ability~~ and ~~willingness~~software topending ~~pay~~consummation ~~for~~of ~~our~~the ~~products~~planned ~~and~~merger ~~services~~with JDA. ~~These~~ ~~adverse~~While ~~conditions~~we ~~continue~~are attempting to ~~negatively~~mitigate ~~impact~~this ~~our~~risk ~~ability~~through tocommunications ~~sell~~with our customers, ~~products~~current and ~~services~~prospective tocustomers ~~existing~~could ~~and~~be ~~potential~~reluctant ~~customers~~to inpurchase ~~the~~our ~~retail~~services ~~industry.~~and ~~The~~software ~~department~~due ~~store~~to ~~sector~~potential ofuncertainty about the ~~general~~future ~~merchandise~~of ~~and~~our ~~apparel~~business ~~segment,~~or ~~which~~the isdirection ~~an important part~~ of ~~our~~the ~~customer~~combined ~~base~~company’s ~~for~~product ~~our~~offerings ~~Trading~~and ~~Community~~its ~~Management~~support and service ~~QRS~~of ~~Catalogue™~~existing products. ~~and~~If ~~services,~~our ~~has~~customers ~~been~~delay ~~particularly~~or ~~affected~~cancel bypurchases ~~these~~of ~~adverse conditions, and~~ our ~~products~~services and ~~services~~software ~~are~~as ~~less~~a ~~well~~result ~~established in other sectors~~ of the ~~general~~announcement ~~merchandise~~of ~~and apparel segment, such as mass merchants. If~~ the ~~department~~merger ~~store~~agreement ~~sector~~with ~~continues to experience greater challenges or adversity than other sectors~~JDA, our ~~business, financial condition and~~ results of operations would be ~~adversely~~negatively affected.

WeIn ~~believe~~addition, ~~that~~planning for the ~~retail~~merger ~~industry~~with isJDA ~~consolidating.~~and ~~During~~addressing the ~~third~~unsolicited ~~quarter~~proposals ofreceived ~~2002,~~by ~~one~~the ofCompany ~~our~~have ~~major~~and ~~retail~~may ~~customers consolidated certain of its retail operations. Moreover, we expect that retailers will~~ continue to ~~reorganize~~divert ~~their~~some ~~operations~~of inour ~~attempts~~management’s toattention ~~improve~~away ~~operating~~from ~~efficiencies. To~~ the ~~extent~~day-to-day ~~that~~operation ~~such reorganizations~~of ~~reduce~~ the ~~number~~business. ofThe ~~their~~diversion ~~retail operations, the number~~ of ~~our~~management’s ~~trading~~attention ~~partnerships could also be reduced, which~~ may ~~reduce~~adversely ~~net~~affect ~~sales in future periods and could have a material adverse impact on~~ our ~~business,~~ financial ~~condition and~~ results ~~of operations~~.

~~Such~~The ~~weakening~~announcement ~~economic~~of ~~conditions in~~ the ~~retail~~merger ~~industry~~ and ~~consolidation have in~~ the ~~past,~~unsolicited ~~and~~bids may also indistract ~~the future, negatively impact~~ our ~~ability~~employees ~~to sell our products~~ and ~~services~~cause them to ~~existing~~seek ~~and~~other ~~potential~~employment ~~customers~~opportunities. inSince the ~~retail~~announcement ~~industry. We are dependent on key customers and their trading partners. The loss~~ of ~~any~~the ~~large~~merger ~~retail~~agreement, orour ~~vendor~~employee ~~customer~~attrition ~~may~~rate ~~also~~has ~~result~~exceeded in our ~~loss~~historical ofrates. ~~all~~To of the ~~trading~~extent ~~partners~~our ofemployees ~~that~~are ~~retailer~~less orfocused ~~vendor~~and ~~that~~we are not ~~also~~able ~~our~~to ~~customers,~~retain ~~which~~our ~~would~~key ~~have~~employees, aemployee ~~material~~productivity ~~adverse~~may ~~effect~~decline onand our business~~, financial~~ ~~condition~~ and results of operations may be adversely affected.

InAdditional ~~addition, the~~risks ~~licensing~~associated ofwith ~~our~~this ~~Enterprise~~pending ~~Software Applications involves substantial capital expenditures by our retail customers. As a result of the economic slowdown in the retail industry~~merger, wewhether ~~believe~~it ~~that~~is ~~our~~consummated ~~current~~or ~~and potential retailer customers have been~~not, ~~and~~appear ~~will~~in beExhibit ~~less likely to, make such capital expenditures~~99.1 ~~Unless~~of ~~the~~this ~~retail industry recovers from its current economic slowdown, our business, operating results and financial condition may continue to suffer materially~~report. ~~Even if conditions in the retail industry do improve, the extended economic downturn may have changed purchasing preferences for software products in ways that we cannot predict.~~

WeChanges ~~have experienced significant losses~~ in ~~previous~~the ~~fiscal~~retail ~~periods~~industry ~~and~~make ~~may~~our ~~experience~~future ~~losses~~operating inresults ~~future periods~~uncertain.

WeHistorically, we have ~~previously~~generated ~~incurred~~all ~~significant~~of ~~losses,~~our ~~including~~revenue from ~~net~~the ~~losses~~sale of ~~$4.1 million~~products and ~~$173.3~~services ~~million~~to ~~for~~ the ~~fiscal~~retail ~~years~~industry. ~~ended~~We ~~December~~believe ~~31,~~that ~~2002~~current ~~and~~economic ~~2001,~~conditions ~~respectively.~~and Aincreased ~~substantial~~competition ~~amount~~in ofthe ~~these~~retail ~~losses~~industry innegatively ~~2001~~affect ~~was~~our incustomers’ ~~connection~~ability ~~with~~and ~~non-cash~~willingness ~~charges relating~~ to ~~the~~pay ~~impairment~~for ofour ~~remaining~~products ~~intangible assets, including~~and ~~technology~~services and ~~goodwill, acquired through~~ our ~~acquisitions~~ability into ~~recent~~sell ~~years~~certain of ~~RockPort~~our ~~Trade~~products ~~Systems~~and ~~Inc.,~~services ~~Image~~to ~~Info~~existing ~~Inc.,~~ and ~~Retail~~potential ~~Data~~customers ~~Services~~in ~~Inc.,~~the asretail ~~well~~industry. asThe ~~our~~department ~~acquisition~~store sector of the ~~outstanding~~general ~~minority~~merchandise ~~interest~~and ofapparel ~~Tradeweave~~segment, ~~Inc.~~which Weis ~~may continue~~an toimportant ~~incur~~part ~~non-cash~~of ~~charges~~our ~~related~~customer base tofor ~~the~~our ~~impairment~~Trading ofCommunity ~~other~~Management ~~intangible~~and ~~assets,~~QRS asCatalogue™ ~~well~~products asand ~~non-cash~~services, ~~charges~~has ~~related~~been toand ~~stock~~continues ~~compensation.~~to ~~Further~~be ~~impairment~~particularly ofaffected ~~intangible~~by ~~assets~~these ~~could~~adverse ~~occur~~conditions, ~~since the revenue~~ and ~~income potential of some of~~ our ~~services~~products and ~~products~~services are ~~unproven,~~less ~~and~~well ~~some~~established ofin ~~the~~other ~~markets~~sectors weof ~~are addressing are in~~ the ~~early~~general ~~stages~~merchandise ofand ~~development~~apparel segment. ~~There~~If ~~can~~the bedepartment nostore ~~assurance~~sector ~~that~~continues ~~new~~to ~~services~~experience ~~and~~greater ~~products~~challenges ~~introduced~~or byadversity usthan ~~will~~other ~~gain market acceptance~~sectors, orour ~~that new technologies or~~ business, ~~methods~~financial ~~will~~condition ~~not~~and beresults ~~developed that replace or reduce the importance~~ of ~~our~~operations ~~current~~would ~~offerings, and thus there can~~ be noadversely ~~assurance that we will not need to take additional impairment charges~~affected.

InWe ~~addition,~~believe ~~quarterly~~that ~~revenues~~the ~~have~~retail ~~declined~~industry ~~sequentially~~is ~~from~~consolidating. ~~the~~Moreover, ~~first~~retailers are ~~quarter~~reorganizing ~~2002~~and consolidating their operations in attempts to improve operating efficiencies. During the ~~second~~third quarter ~~2003.~~of ~~Our~~2002, ~~revenues~~one ~~may~~of ~~continue~~our major retail customers consolidated certain of its retail operations, which caused us to ~~decline~~lose expected revenue. If such consolidations and wereorganizations ~~may~~reduce ~~not~~the benumber ~~able~~of toretailers, ~~continue~~reduce ~~reducing~~retail operations, or reduce the number of our ~~operating~~trading ~~expenses~~partnerships, ~~sufficiently~~this ormay ~~quickly~~reduce ~~enough~~our revenue in future periods toand ~~offset~~could ~~such~~have ~~revenue~~a ~~reductions~~material adverse impact on our business, financial condition and results of operations. WeAlso, we are dependent on key retailers and vendors and their trading partners. The loss of any large retail or vendor customer may also ~~incur~~result in our loss of all of the trading partners ~~additional~~of ~~restructuring~~that ~~charges~~retailer inor ~~future~~vendor ~~periods.~~that Asare aalso ~~result~~our customers, wewhich ~~may~~would ~~experience~~have ~~losses~~a inmaterial ~~future~~adverse ~~periods~~effect on our business, financial condition and results of operations.

~~During~~We ~~2002~~have ~~and~~experienced ~~the~~losses ~~first~~and ~~nine~~revenue ~~months~~declines ofin ~~2003,~~recent afiscal ~~significant~~periods ~~portion~~and ~~of our cash inflows was generated by our operations. Because our operating results~~ may ~~fluctuate~~experience ~~significantly~~losses asand arevenue ~~result~~declines ~~of decreases~~ in ~~customer demand, decreases in acceptance of our~~ future ~~products, or additional restructuring expenses, our ability to generate positive cash flow from operations may be jeopardized. As a~~ ~~result, we may need to obtain debt financing or sell additional shares of our equity securities~~periods. ~~There can be no assurance that we will be able to obtain debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient~~

26We have recently incurred losses, including net losses of $6.7 million, $4.1 million and $173.3 million for the fiscal years ended December 31, 2003, 2002 and 2001, respectively. A substantial amount of these losses in 2003 and 2001 were in connection with non-cash charges relating to the impairment of remaining intangible assets, including technology and goodwill, acquired through our acquisitions in recent years of RockPort, Image Info, and RDS, as well as our acquisition of the outstanding minority interest of Tradeweave. We have incurred, and may continue to incur, non-cash charges related to the impairment of intangible assets, as well as non-cash charges related to stock compensation. Further impairment of intangible assets could occur since the revenue and income potential of some of our services and products are unproven, and some of the markets we are addressing are in the early stages of development. There can be no assurance that new services and products introduced by us will gain market acceptance, or that new technologies or business methods will not be developed that replace or reduce the importance of our current offerings, and thus there can be no assurance that we will not need to take additional impairment charges.

In addition, we have experienced sequential quarterly declines in revenue since the third quarter of 2003. Our revenue may continue to decline and we may not be able to continue reducing our operating expenses sufficiently or quickly enough in future periods to offset such revenue reductions. We may also incur additional restructuring charges in future periods. As a result, we may experience losses in future periods.

During the second quarter 2004, a significant portion of our cash inflows was generated by our operations. Because our operating results may fluctuate significantly as a result of decreases in customer demand, pricing pressures, lack of acceptance of our future products, or additional restructuring expenses, our ability to generate positive cash flow from operations may be jeopardized. As a result, we may need to obtain debt financing or sell additional shares of our equity securities. There can be no assurance that we will be able to obtain debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our ability to achieve our intended business objectives.

We have recently experienced significant changes in our senior management team.

In recent years, we have experienced significant turnover in our management team. Our current Chief Financial Officer joined us in November 2003. Other members of management have also joined us in the last few years, and the management team as a whole has had a limited time to work together. A number of executives have also left the Company. Our success depends on the performance of our executive officers and other key employees and the ability of our management team to work together effectively. There can be no assurance that the management team will be able to work together effectively, that we can continue to retain or recruit necessary additional personnel, or that such new personnel will be efficiently integrated or be adequate for our current or future operations.

~~funds~~Our onindustry ~~acceptable~~is ~~terms~~characterized ~~when~~by ~~needed~~rapid ~~could~~technological ~~have~~change, aand ~~material~~our ~~adverse~~business ~~effect~~is onmarked ~~our~~by ~~ability~~substantial toprice competition, ~~achieve~~which may cause our ~~intended business~~revenue ~~objectives~~to decline.

WeThe supply chain management industry is characterized by rapid technological innovation and a long-term trend towards Internet-based communications instead of proprietary VAN-based communications. While we offer solutions that take advantage of the Internet’s potential, we expect the majority of our Trading Community Management revenue for the foreseeable future to be derived from our traditional VAN-based services. Also, the increased commercial use of the Internet could require substantial modification and customization of our services and products and the introduction of new services and products, which services and products may not produce as much revenue or be as profitable as our traditional VAN-based services. If customers adopt Internet-based communication more quickly than expected, that may also have ~~experienced~~a significant ~~changes~~negative inimpact on our revenue. Our competitors and potential competitors may develop competing technologies that are more effective or more ~~senior~~effectively ~~management~~marketed ~~team~~than the services and products marketed by us or that render our services or products obsolete or noncompetitive.

In recent years, we have experienced significant turnover in our management team. Our current President and Chief Executive Officer joined us in October 2001, and our current Chief Financial Officer joined us in January 2002. Other members of management have also joined us only recently, and the management team as a whole has had a limited time to work together. A number of executives have also left the Company. Our success depends on the performance of our executive officers and other key employees and the ability of our management team to work together effectively. There can be no assurance that the management team will be able to work together effectively, that we can continue to retain or recruit necessary additional personnel, or that such new personnel will be efficiently integrated or be adequate for our current or future operations.

Our industry is characterized by rapid technological change, and there are risks associated with new product development.

The increasing use of the Internet as a communications medium has changed the competitive environment of our industry. The supply chain management industry is now characterized by rapid technological innovation and a long-term trend towards Internet-based communications over proprietary VAN-based communications. While we continue to develop solutions that take advantage of the Internet’s potential, we expect the majority of our Trading Community Management revenues for the foreseeable future to be derived from our traditional VAN-based services. The future success of our services and products will depend, in part, on our ability to continue developing products and services that are compatible with the Internet. The increased commercial use of the Internet could require substantial modification and customization of our services and products and the introduction of new services and products. Additionally, should we not develop, release, and achieve commercial acceptance of Internet-based solutions, accelerated adoption of Internet-based communication could have a significant negative impact on our revenues. Our competitors and potential competitors may develop competing technologies that are more effective or more effectively marketed than the services and products marketed by us or that render our services or products obsolete or noncompetitive.

In addition, the markets for our Software Applications are subject to rapid technological change, changing client needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. Our growth and future operating results will depend, in part, on our ability to enhance existing applications and develop and introduce new applications or capabilities, such as product information management.

~~Our~~We ~~product~~are ~~development~~subject ~~and~~to ~~testing~~continuing ~~efforts~~price ~~have required~~competition, ~~and~~particularly ~~are~~for ~~expected~~our toData ~~continue~~Exchange product. This competition has caused us to ~~require,~~reduce ~~substantial~~prices ~~investments~~on these services. We ~~may~~expect ~~not~~that ~~possess~~as ~~sufficient resources~~the toretail ~~continue~~industry continues to ~~make~~adopt ~~the~~existing ~~necessary~~and ~~investments~~new information intechnologies, ~~technology.~~competition Inand ~~addition~~pricing pressures will increase further, weand ~~may~~our ~~not~~competitors ~~successfully~~may ~~identify~~adopt new ~~software~~pricing ~~applications,~~and orsales ~~bring~~models ~~new~~to ~~software~~which towe ~~market~~are inunable ato ~~timely~~adapt ~~and~~or ~~efficient~~adequately ~~manner~~respond. If we ~~are~~have ~~unable~~ to ~~develop~~make orfurther price reductions in ~~introduce~~connection ~~new~~with ~~and~~such ~~enhanced~~increased ~~software~~competition, such reductions would reduce revenue in afuture ~~timely~~periods ~~manner,~~to wethe ~~may~~extent ~~lose~~not ~~existing~~offset ~~customers~~by toincreased ~~our~~unit ~~competitors~~sales ~~and~~or ~~fail~~other tofactors ~~attract~~and ~~new~~could ~~customers,~~have ~~which~~a ~~may~~material ~~adversely~~adverse ~~affect~~effect on our ~~performance~~business, ~~and~~financial condition and results of operations.

We may not ~~successfully~~be ~~complete~~successful ~~our~~in ~~development~~introducing ~~of our~~ new products ~~ITM~~in ~~platform,~~order ~~improvements~~ to ~~our~~maintain ~~QRS~~or ~~Catalogue™,~~grow ~~and~~our ~~development of additional collaborative applications including product information management~~revenue, ~~transaction outsourcing,~~ and ~~transaction~~there ~~lifecycle~~are ~~management.~~risks Inassociated ~~addition,~~with ~~the conversion of customers, products and services to this~~ new ~~platform~~product ~~may experience problems or be unsuccessful~~development.

InTo ~~2003~~maintain and ~~2004~~grow our revenue, wepart ~~expect~~of our strategy is to ~~significantly increase~~introduce ~~our~~new ~~investment~~products inand services. ~~and~~Our product development, ~~including~~and ~~total~~testing ~~projected~~efforts ~~capitalized~~have required, ~~expenditures~~and ~~during~~are ~~2003~~expected ofto $6continue to 8require, ~~million~~substantial ~~for~~investments. ~~the~~We ~~development~~may ofnot ~~our~~generate ~~new~~from ~~ITM~~operations ~~platform,~~or ~~improvement~~raise from third parties sufficient funds to ~~our~~continue ~~QRS~~to ~~Catalogue™,~~make ~~and~~the ~~development~~necessary ofinvestments ~~additional~~in ~~collaborative~~technology. ~~applications~~For ~~including~~instance, ~~transaction~~at ~~outsourcing~~the ~~and~~end of ~~transaction~~2003, ~~lifecycle~~we ~~management~~stopped inselling ~~order~~QRS toInsight ~~address~~due ~~the~~to ~~needs~~a lack of ~~our~~sales. ~~current~~QRS ~~and~~Insight ~~future~~was ~~customers.~~launched Wein ~~currently~~January ~~expect~~2003 and allowed companies to ~~continue~~monitor, ~~investing~~escalate and ~~capitalizing~~resolve ~~roughly~~supply atchain orproblems ~~slightly~~in ~~above~~real-time. ~~our~~While ~~fourth~~we ~~quarter~~launched ~~2003~~QRS ~~run~~IMPACT™ ~~rate~~and ~~during~~QRS ~~2004.~~QuickSync™ Inearlier ~~addition,~~this ~~we regularly~~year ~~evaluate~~and ~~opportunities~~ to ~~accelerate~~date ~~our~~two ~~technology~~customers ~~development,~~have ~~including~~licensed ~~through~~these ~~alliances~~products, ~~licensing~~there ~~and~~is ~~strategic~~no assurance ~~acquisitions.~~that Wethese ~~believe~~new ~~that~~products ~~the~~will be commercially successful ~~development~~or ofthat the ~~ITM~~potential ~~platform,~~customer ~~improvements~~leads towill ~~our~~result ~~QRS Catalogue™~~in actual sales. In addition, ~~and~~we ~~additional~~may ~~collaborative~~not ~~applications~~successfully ~~including~~identify ~~product~~new ~~information management~~software applications, ~~transaction~~or ~~outsourcing,~~bring ~~and~~new ~~transaction~~software ~~lifecycle~~to ~~management~~market isin ~~important~~a totimely and ~~our~~efficient ~~future~~manner. ~~success~~If inwe ~~continuing~~are unable to ~~sell~~develop ~~products~~or introduce new and ~~services~~enhanced tosoftware ~~our~~in a timely manner, we may lose existing customers ~~and~~to ~~expanding~~ our ~~presence~~competitors inand fail to attract new ~~retail~~customers, ~~sectors~~which may adversely affect our performance and ~~geographies.~~results of operations.

WeThe dolicensing ~~not~~of ~~have~~our ~~experience~~enterprise insoftware applications ~~developing~~may ainvolve ~~technology~~substantial ~~platform of~~capital ~~the~~expenditures ~~magnitude~~by ~~and~~our ~~complexity~~retail ~~we are planning~~customers. IfWe ~~the~~believe ~~complexity~~that isour ~~greater~~current ~~than~~and ~~anticipated~~potential orretailer wecustomers are ~~unable~~currently toless ~~recruit~~likely ~~and retain individuals with the necessary skills, we may be unable~~ to ~~build~~make ~~the~~such ~~technology~~capital ~~platform~~expenditures atand ~~all~~as ~~or in the time expected or at an appropriate cost. Delays or~~ a ~~failure~~result, ~~in the development of~~ our ~~ITM~~revenue ~~platform~~could decline or fail ~~value-added~~to ~~applications may have an adverse effect on our performance and operating results~~grow.

27We may not successfully complete improvements to QRS Catalogue™ and QRS IMPACT™ and development and enhancement of additional collaborative applications for transaction outsourcing and transaction lifecycle visibility as part of an Intelligent Transaction Management technology framework. In addition, the conversion of customers, products and services to these new applications may experience problems or be unsuccessful.

We are investing significant resources and capital in the improvement to our QRS Catalogue^™ and QRS IMPACT^™ and development and enhancement of additional collaborative applications within an Intelligent Transaction Management technology framework for transaction outsourcing and transaction lifecycle visibility, in order to address the needs of our current and future customers. In addition, we regularly evaluate opportunities to accelerate our technology development, including through alliances and licensing. We believe that the successful improvements to QRS Catalogue^™ and QRS IMPACT^™ and additional collaborative applications within a new technology framework are important to our future success in continuing to sell products and services to our existing customers and expanding our presence in new retail sectors and geographies.

IfWe we do ~~complete~~not have experience in developing a technology framework of the ~~platform,~~magnitude and complexity we ~~may~~are planning. ~~not~~If bethe ~~able~~complexity tois ~~convert~~greater ~~our~~than ~~customers~~anticipated ~~from~~or ~~existing~~we ~~technologies~~are unable to ~~the~~ ~~new~~recruit ~~platform~~and ~~quickly~~retain orindividuals ~~without~~with ~~problems.~~the Innecessary ~~addition~~skills, we ~~have~~may ~~less~~be ~~expertise~~unable ~~and~~to ~~experience~~build ~~with~~ the ~~non-general~~technology ~~merchandise~~framework ~~and~~in ~~apparel~~the ~~retail~~time ~~segments,~~expected ~~which~~or ~~could~~at ~~lead~~an toappropriate ~~difficulty~~cost. ~~obtaining~~Delays ~~market~~or ~~acceptance~~a failure ofin the development of our value-added applications may have an adverse effect on our performance and operating results.

~~Our~~We ~~business~~may isnot ~~marked~~be byable ~~substantial~~to ~~price~~convert ~~competition~~our customers from existing technologies to these new applications quickly or without problems.

The changing technological landscape and the desire of companies to obtain market share has resulted in very strong and continuing price competition, particularly for our Data Exchange product. This competition has caused us from time to time to reduce prices on these services. We expect that as the retail industry continues to adopt existing and new information technologies, competition and pricing pressures will increase, and our competitors may adopt new pricing and sales models to which we are unable to adapt or adequately respond. If we have to make further price reductions in connection with such increased competition, such reductions would reduce net sales in future periods to the extent not offset by increased unit sales or other factors. Price reductions in response to competitive pressures could have a material adverse effect on our business, financial condition and results of operations.

The market for business-to-business electronic commerce services in the retail industry is intensely competitive.

Many other companies participate in the general supply chain management industry. Some of our competitors and potential competitors have longer operating histories, greater brand recognition, larger customer bases and greater financial and other resources with which to improve and aggressively market their products. In addition, new competitors, such as standards-based organizations or consortia, may enter the market. Our competitors and potential competitors may market, develop or adapt to ~~and market~~ competing technologies more effectively than we do. A number of our competitors are now under new ownership. We cannot predict the impact of such changed ownership on how these entities may compete with us in the future. In addition, some larger potential customers have chosen to develop their own supply chain management systems internally rather than to utilize the service and product offerings of external providers. All of these competitive factors may adversely affect our business.

WeIf ~~have~~we ~~experienced~~are ~~difficulty~~unable into ~~effectively~~successfully ~~integrating~~integrate ~~and~~or ~~managing~~manage other acquired companies and their products, or licensed technologies, our business, results of operations and financial condition may be harmed.

We have experienced difficulty in effectively integrating and managing acquired companies and their products. In 2000, we acquired Image Info, ~~Inc.~~ and ~~Rockport Trade Systems~~ RockPort, ~~Inc.,~~ companies whose products included software applications. In early 2001, we acquired the minority interest of our subsidiary, Tradeweave, ~~Inc.,~~ and integrated its operations into ours. In September 2001, we discontinued our Tradeweave Digital Photography service, which had been acquired through our acquisition of Image Info ~~Inc.~~ in January 2000. We have limited experience in integrating and managing acquired companies and selling products such as enterprise software applications and ~~related~~ related services, such as those acquired from RockPort ~~Trade Systems, Inc~~. Moreover, certain of these acquired services and products do not fit in our traditional network-based recurring revenue business model. ~~Revenues~~Revenue to date from products obtained through these acquisitions has ~~have~~ been below our expectations at the times of the acquisitions resulting in the recognition of a significant impairment loss at the end of 2001 and 2003. We continue to evaluate the recoverability of the remaining intangible asset. We may experience additional impairment losses in the future. If we are unable to successfully integrate or manage other acquired companies and their products, or licensed technologies that we use in new products and services, our business, results of operations and financial condition may be harmed.

We may choose to continue to acquire new solutions or to expand our market presence through mergers, acquisitions, joint ventures or other strategic alliances with, or investments in, third parties.

We may choose to continue to acquire new solutions or to expand our market presence through mergers, acquisitions, joint ventures or other strategic alliances with, or investments in, third parties. There are a number of risks associated with such transactions, such as the difficulty of assimilating the operations, technology and personnel of the combined companies; the potential disruption of our ongoing business; the potential disruption or discontinuance of the third party’s business; the diversion of attention of management; the inability to retain key technical and managerial personnel; additional expenses associated with the amortization or impairment of acquired intangible assets; the potential use of cash or assumption of additional debt, and/or a potential issuance of equity that could be dilutive to existing stockholders; the maintenance of uniform standards, controls and policies; and the impairment of relationships with existing employees and customers. We may not succeed in overcoming these risks or any other potential problems encountered in connection with such mergers or other transactions, and such transactions may have a material adverse effect on our business, financial condition and results of operations.

Our operating results may fluctuate from quarter to quarter.

We anticipate that our results of operations may fluctuate for the foreseeable future due to several factors, including changes in the demand for our services and the use of our existing services; changes in customer buying patterns; changes in our pricing policies or those of our competitors; market acceptance of new and enhanced versions of our services and products; customer willingness to purchase products or services offered through or in conjunction with third parties; changes in operating expenses; changes in our strategy; introduction of alternative technologies by our competitors; effect of potential acquisitions and the integration and management of acquired products; and global and economic factors generally and in the industry. In addition, these factors and our limited operating history with enterprise software application licensing make accurate prediction of future operating results difficult or impossible. We have experienced, and may experience in one or more future quarters, operating results that are below our expectations or the expectations of public market analysts and investors. In such an event, the price of our common stock has been, and would likely be, materially and adversely affected.

2823

~~these~~In ~~factors~~addition, the period between initial contact and the implementation of our ~~limited~~Enterprise ~~operating~~Software Application ~~history~~products ~~with~~is ~~enterprise~~often ~~software~~lengthy ~~application~~and ~~licensing~~subject ~~make~~to ~~accurate~~a ~~prediction~~ number of ~~future~~factors ~~operating~~that ~~results~~may ~~difficult~~cause orsignificant ~~impossible~~delays. WeThese ~~have~~factors ~~experienced,~~include the size and ~~may~~complexity ~~experience~~of inthe ~~one~~overall orproject ~~more~~and ~~future~~delays ~~quarters,~~in ~~operating~~our ~~results~~customers’ ~~that~~implementation ~~are~~of ~~below~~the ~~our~~required software ~~expectations~~and orhardware environments. As a result, the ~~expectations~~timing of ~~public~~any ~~market~~enterprise ~~analysts~~software license revenue is difficult to predict, and ~~investors~~we are subject to significant variations in license revenue. InDelays ~~such~~or ancancellations of sales or implementations of ~~event~~any software licenses have had, ~~the~~and ~~price~~may ofhave, a material adverse effect on our ~~common~~business, ~~stock~~operating ~~has~~results ~~been~~and financial condition, and ~~would~~have ~~likely~~caused, beand may continue to cause, ~~materially~~our ~~and~~operating ~~adversely~~results ~~affected.~~to vary significantly from quarter to quarter.

InBecause ~~addition, the period between initial contact and the implementation of~~ our ~~Enterprise Software Application~~ products ~~is often lengthy~~ and ~~subject~~services toare ~~a number~~complex ~~of factors that may cause significant delays. These factors include the size~~ and ~~complexity of the overall project and delays in our customers’ implementation of web~~perform mission-~~based~~critical ~~computing environments. A significant portion of any QRS Sourcing™ revenues realized in a quarter is typically derived from a small number of license sales. As a result~~functions, ~~the timing of any enterprise software license revenue is difficult to predict, and~~ we are ~~subject~~vulnerable to ~~significant~~product ~~variations~~defect ~~in license revenues. Delays or cancellations of sales or implementations of even a few license transactions have had,~~ and ~~may~~product-related have, a material adverse effect on our business, operating results and financial condition, and have caused, and may continue to cause, our operating results to vary significantly from quarter to quarterclaims.

~~Because~~Our ~~our~~software products are complex and ~~services~~perform critical functions for our customers, and consequently carry inherent risks. For example, our software products may contain undetected errors or failures when first introduced or as new versions are ~~complex~~released. The possibility for program errors and ~~perform~~failures ~~mission~~may increase due to factors including the use of new technologies, the integration of third-~~critical~~party software, or the need for more rapid product development that is characteristic of the software market. We undergo pre-release product testing by our current and potential customers to minimize risks, and our customer license agreements ~~functions~~typically contain provisions designed to limit our exposure to potential product-related claims. Nevertheless, such provisions may not always be enforced or enforceable in the various legal jurisdictions in which we operate. There can be no assurance that any errors or failures by our products and services will not subject us to substantial product-related claims. Also, the implementation involves a significant commitment of resources by prospective customers and commonly occurs in tandem with changes in customer business processes. If a customer is unable or unwilling to implement our software products or to adequately change their business process, or if we are ~~vulnerable~~unable to adequately support our customers’ implementations or develop our products as quickly as customers expect, our existing and future revenue may be adversely affected and we may be subject to product-related claims by customers.

~~Our~~We ~~software products~~ are ~~complex~~dependent ~~and~~on perform critical functions for our customers, and consequently carry inherent risks. For example, our software products may contain undetected errors or failures when first introduced or as new versions are released. The possibility for program errors and failures may increase due to factors including the ~~use~~IBM ~~of new technologies, the integration of third~~value-~~party~~added ~~software,~~network orand the ~~need for more rapid product development that is characteristic of the software market. We undergo pre~~BES-~~release~~IT ~~product~~(formerly ~~testing~~IDDX) ~~by our current and potential customers to minimize risks, and our customer license agreements typically contain provisions designed to limit our exposure to potential product-related claims~~service. ~~Nevertheless,~~ such provisions may not always be enforced or enforceable in the various legal jurisdictions in which we operate. There can be no assurance that any errors or failures by our products and services will not subject us to substantial product-related claims.

WePursuant ~~are~~to ~~dependent~~a contract with IBM that expires on June 30, 2005, we use IBM Information Exchange as the VAN over which we provide customers with most of our QRS Exchange™ products and services. We depend on IBM Information Exchange for a substantial part of our revenue. Under this contract we also offer a real-time IP-based transaction network product, ~~and~~ITX, through the use of IBM’s Business Exchange Services – Internet Transfer (BES-IT). ~~(formerly~~When ~~IDDX)~~our contract with IBM expires, should IBM decide to increase the prices that it charges us or reduce the amount of discounts or allowances we currently receive, and we are not able to pass along such increased costs to our customers, our business, financial condition and results of operations could be materially adversely affected. In addition, pursuant to the IBM contract, we will pay fees to IBM based on the amount of our use of its network services subject to specified minimum payment amounts. If our use of the network services declines, our gross margin will decrease, thereby also adversely affecting our business and operating results.

~~Pursuant~~Because towe ~~a contract~~have ~~with~~no ~~IBM~~right ~~that~~to ~~expires~~control onthe ~~June~~maintenance and ~~30,~~operation ~~2005,~~of weeither ~~use~~ IBM Information Exchange asor ~~the~~BES-IT, ~~VAN over which~~ we ~~provide~~are ~~customers~~subject ~~with~~to ~~most~~factors outside of our ~~QRS~~control ~~Exchange™~~that ~~products~~may ~~and~~adversely ~~services.~~affect Wethe ~~depend~~operation onof IBM Information Exchange ~~for~~and aBES-IT ~~substantial~~services, ~~part~~such ofas ~~our~~network ~~revenues.~~outages ~~Under~~and ~~this~~an ~~contract~~inability weto ~~also~~obtain ~~offer~~usage ainformation ~~real-time~~for ~~Internet~~billing ~~Protocol~~purposes, ~~(IP)-based~~and ~~transaction~~thus ~~network~~may ~~product,~~adversely ~~Internet~~affect ~~Transaction~~our ~~Exchange (ITX)~~business, ~~through~~results ~~the use~~ of ~~IBM’s~~operations ~~Business Exchange Services – Internet Transfer (BES-IT), formerly Internet Data~~ and ~~Document~~financial ~~Exchange (IDDX)~~condition. ~~When~~In ~~our~~addition, ~~contract~~if ~~with~~ IBM ~~expires,~~becomes ~~should~~unable ~~IBM~~or ~~decide~~unwilling to ~~increase~~provide ~~the prices that it charges us~~ or ~~reduce~~continue ~~the~~to ~~amount~~support ofIBM ~~discounts~~Information Exchange or ~~allowances we currently receive~~BES-IT services, ~~and~~ we ~~are~~would ~~not~~either ~~able~~have to ~~pass~~provide ~~along~~these ~~such~~services ~~increased~~directly ~~costs~~or toarrange ~~our~~for ~~customers, our~~another ~~business,~~third ~~financial~~party ~~condition~~to ~~and~~provide ~~results~~such ofservices. ~~operations~~We ~~could~~cannot beprovide ~~materially~~assurance ~~adversely~~that ~~affected.~~we Inwould ~~addition,~~be ~~pursuant~~able to ~~the~~do ~~IBM~~so ~~contract,~~on wea ~~will~~timely ~~pay~~basis, ~~fees~~if toat ~~IBM~~all, ~~based~~or onthat the ~~amount~~costs of ~~our~~any ~~use~~such arrangements ofwould ~~its~~not ~~network~~materially ~~services~~adversely ~~subject~~affect toour ~~specified minimum~~business ~~payment~~and ~~amounts~~results of operations. IfDisruption ~~our~~or ~~use~~unavailability of ~~the~~IBM ~~network~~Information ~~services~~Exchange ~~declines,~~or ~~our~~BES-IT ~~gross~~services ~~margins~~may ~~will~~have ~~decrease,~~a ~~thereby~~material ~~also~~adverse ~~adversely~~effect ~~affecting~~on our business, ~~and~~results ~~operating~~of ~~results~~operations and financial condition.

~~Because~~While we ~~have~~purchase nonetwork ~~right to control the maintenance~~ connectivity and ~~operation~~electronic ofcommerce-related ~~either~~services from IBM, ~~Information~~a ~~Exchange~~portion orof ~~BES-IT,~~the weconnectivity ~~are subject~~services topurchased ~~factors~~under ~~outside of~~ our ~~control~~agreement ~~that~~with ~~may~~IBM ~~adversely~~are ~~affect~~actually ~~the~~provided ~~operation~~by ofAT&T. IBM ~~Information Exchange~~ and ~~BES-IT~~AT&T ~~services~~are ~~and~~free ~~thus~~to ~~our~~compete ~~business~~against us, and ~~results~~either of ~~operations.~~them Inmay ~~addition,~~compete ifwith us ~~IBM~~now ~~becomes~~or ~~unable~~in orthe ~~unwilling~~future. toIf ~~provide~~IBM, AT&T or ~~continue to~~any ~~support~~other entity markets IBM Information Exchange or BES-IT services, ~~we would either have~~ to ~~provide~~the ~~these~~retail ~~services~~industry ~~directly~~ or ~~arrange~~directly ~~for another third party~~ to ~~provide~~our ~~such services. We cannot assure you that we would be able to do so on a timely basis~~customers, ~~if at all,~~ or ~~that~~permits ~~the~~one ~~costs~~or more of ~~any~~our ~~such~~competitors ~~arrangements~~to ~~would~~use ~~not materially adversely affect our business~~ and ~~results~~remarket ~~of operations. Disruption or unavailability of~~ IBM ’s Information Exchange or BES-IT services ~~may~~to ~~have~~the aretail ~~material~~industry, ~~adverse~~it ~~effect~~could onadversely affect our business, ~~results~~financial ofcondition ~~operations~~ and ~~financial~~results ~~condition~~of operations.

~~While we~~We ~~purchase~~license ~~network~~technologies ~~connectivity and electronic commerce-related services~~ from ~~IBM,~~third aparties ~~portion~~for certain of ~~the~~our ~~purchased~~products ~~connectivity services are actually provided by AT&T, which purchased IBM’s Global Network~~ and ~~corporate networking business in April 1999~~services. ~~IBM~~If ~~resells~~we ~~the~~are ~~AT&T~~unable ~~Global Network~~ to ~~us.~~continue ~~IBM and AT&T are free~~ to ~~compete~~license ~~against~~such ustechnologies, ~~and either of them may compete with us now~~ or inif ~~the~~such ~~future. If IBM, AT&T or any other entity markets IBM Information Exchange or BES-IT~~third ~~services~~parties todo ~~the~~not ~~retail~~adequately ~~industry~~support orthese ~~directly to our customers~~technologies, ~~or permits one or more of~~ our ~~competitors to use and remarket IBM’s Information Exchange or BES-IT services to the retail industry, it could adversely affect our~~ business, ~~financial condition~~may ~~and~~be ~~results of operations~~harmed.

We ~~may~~license ~~not~~and beintegrate ~~successful~~technologies ~~in achieving~~from orthird ~~maintaining~~parties ~~acceptance~~in certain of our products and services. inIf ~~retail~~we ~~segments~~are ~~adjacent~~unable to continue to license any of this third party software, or if the ~~general~~third ~~merchandise~~party ~~and~~licensors ~~apparel~~do ~~segment~~not adequately maintain or update their products for any reason, ~~which~~do ~~could~~not ~~have~~support aus ~~material~~as ~~adverse~~expected ~~effect~~or onrevoke our ~~business~~licenses, ~~and~~we ~~results~~may face delays in the releases of ~~operations~~the affected products and services until equivalent technologies can be identified, licensed or developed, and integrated into our products and services. Any such delays

~~Customers~~24 in our target segments may have different requirements than customers in the general merchandise and apparel segment for which our products and services were initially developed. In addition, we may need to adopt or adapt to new

~~technologies~~or inlack ~~order to address the requirements~~ of ~~customers~~expected inrevenue ~~these~~could ~~target~~harm ~~segments, and we may be unable to do so. Many of~~ our ~~competitors~~business, ~~and potential competitors in these target segments have longer~~ operating ~~histories,~~results ~~greater brand recognition~~ and ~~larger~~financial ~~customer~~condition. ~~bases~~Also, inif ~~these~~the ~~segments.~~third Weparty licensors do not ~~know~~support ifus ~~customers~~as inexpected, ~~our~~revoke ~~target markets will prefer~~ our ~~products~~ ~~and~~licenses ~~services~~or toviolate ~~other~~agreed ~~products~~terms and ~~services~~conditions ~~available~~with tothe ~~them.~~effect Ifthat wethey are ~~unable~~better able to ~~establish~~compete awith ~~sufficient base of customers in our target segments~~us, ~~our~~we ~~efforts~~ may ~~not~~experience ~~result~~a inloss ~~expected~~of revenue or ~~any~~an ~~revenues~~inability ~~from these segments, and our ability~~ to ~~sell~~gain ~~our~~new ~~products and services to additional customers in those segments may be significantly reduced~~revenue.

~~Failure~~We toare ~~enter~~currently ~~into~~reviewing aand ~~binding~~testing ~~agreement~~our tomaterial ~~restructure~~internal ~~the~~control ~~lease~~systems, ofprocesses and aprocedures ~~vacated~~in ~~facility~~compliance inwith the ~~San~~requirements ~~Francisco~~of ~~Bay~~Sarbanes-Oxley ~~Area~~Regulation ~~could have a material adverse effect on our business and results of operations~~404.

~~Recently, we entered into a non~~Sarbanes-~~binding~~Oxley ~~Letter~~Regulation ~~of Intent~~404 ~~with~~requires ~~the~~us ~~landlord~~to ofreview aand ~~vacated~~test ~~facility near~~ our ~~corporate~~material ~~headquarters~~internal incontrol ~~Richmond~~systems, ~~California.~~processes ~~This~~and ~~Letter~~procedures ofto ~~Intent~~ensure ~~reduces~~compliance. ~~both~~There ~~the~~can ~~term~~be ofno ~~the~~assurances ~~lease~~that ~~and~~such ~~our~~a ~~total~~review ~~cash~~will ~~commitments~~not ~~over~~result ~~the~~in ~~remaining life of~~ the ~~lease. If we fail to enter~~ ~~into~~identification aof ~~binding~~significant ~~agreement~~control ~~formalizing~~deficiencies ~~the~~or ~~terms~~that ofour ~~this~~auditors ~~Letter~~will ~~of Intent, we may~~ be ~~required~~able to ~~increase~~attest ~~our sublease loss accrual and incur cash expenditures related~~ to ~~this facility by as much as $6 million. The increased sublease loss accrual and~~ the ~~associated~~adequacy ~~cash~~of ~~payments could have a material adverse effect on~~ our ~~business,~~internal ~~financial condition and results of operations~~controls.

We may not be successful in achieving or maintaining acceptance of our products and services in segments adjacent to the general merchandise and apparel segment, which could have a material adverse effect on our business and results of operations.

We have less expertise and experience with the non-general merchandise and apparel (GMA) retail segments, which could lead to difficulty obtaining market acceptance of our products and services. Customers in these non-GMA target segments may have different requirements than our traditional customers in the general merchandise and apparel segment for which many of our products and services were initially developed. In addition, we may need to adopt or adapt to new technologies in order to address the requirements of customers in these non-GMA target segments, and we may be unable to do so. Many of our competitors and potential competitors in these non-GMA target segments have longer operating histories, greater brand recognition and larger customer bases in these segments. We do not know if customers in these segments will prefer our products and services to other products and services available to them. If we are unable to establish a sufficient base of customers in these non-GMA target segments, our efforts may not result in expected or any revenue from these segments, and our ability to sell our products and services to additional customers in those segments may be significantly reduced.

Damage to our data center facility could have a material adverse effect on our business and results of operations.

Our main data center is located in a single facility ~~and we have no present intention of establishing an additional data center~~ in aRichmond, ~~separate location~~California. Notwithstanding the precautions that we have taken to protect ourselves and our customers from delivery interruption events, a fire, earthquake or other natural disaster, a ~~virus~~ virus attack or an accident affecting the data center could disable our computer system. Any significant damage to our data center, or disruption of its connectivity to IBM Information Exchange, BES-IT services or the AT&T network, could have a material adverse effect on our business, financial condition and results of operations.

If our consolidation of our internal customer billing systems and our related price changes for certain products and services are unsuccessful, our revenues could be adversely impacted.

As of June 30, 2003, we consolidated our multiple internal customer billing systems and converted to an integrated billing system for all customers. All customer invoices were converted to the new system. We also changed our price structure for certain of our products and services as part of this process. We must continue to identify, successfully address and verify the resolution of many complex issues associated with the consolidation and conversion. If we encounter future problems related to the consolidation and conversion, we may experience difficulty in providing accurate, timely invoices to our customers. Also, we cannot be certain that our new pricing structure will be acceptable to our customers. If we are unable to provide accurate, timely invoices to our customers or our customers respond adversely to our new pricing structure, our revenues could be adversely impacted.

If our European operations do not perform as expected, our revenue may decline or fail to increase, and operating losses may occur or increase.

We have committed and may continue to commit resources to ~~the~~our ~~opening of~~ European ~~offices~~operations and the maintenance ~~and expansion~~ of European sales and support capabilities in order to increase revenue from European customers. We expect to incur expenses for adapting our products and services to existing and new technology and business standards in Europe and for localizing our products and services for the European market. We may be unable to adapt our products and services to existing and new technology and business standards in Europe. We do not know if European customers will adopt technology-based solutions for electronic commerce such as ours, nor do we know if European customers will prefer our products and services to other products and services available to them. Geopolitical factors may slow or prevent European customers’ acceptance of products and services by companies in the United States. Even if European customers do accept our products, material ~~revenues~~revenue may not be generated until we enable these customers’ trading partners to use our products and services, which may take a significant amount of time and expense. Our European operations may not generate expected or any ~~revenues~~revenue, and if our European operations do not generate sufficient revenue to offset our expenditures, we may experience operating losses.

WeDuring ~~may~~the ~~not~~second bequarter ~~able~~of to2004, ~~protect~~management reevaluated our ~~proprietary~~strategy ~~technology~~in Europe, ~~and~~primarily ~~information~~the cost of operating a facility in the U.K. While we believe that maintaining an international sales presence is appropriate, revenue generated from Europe has been less than expected and insufficient to offset current operating expenses. As a result, we ~~may~~plan beto ~~subject~~vacate the facility in August 2004. At June 30, 2004, we were obligated to ~~claims~~make future lease payments of ~~infringement~~$0.3 million through the lease termination in February 2006, and the net book value of equipment and leasehold improvements was approximately $0.2 million. We are currently in negotiations with our landlord for an early-termination of the lease, which could mitigate future lease payments.

~~Intellectual property laws, including copyright and trade secret laws, afford only limited protection.~~ We may not be able to ~~police~~adequately ~~unauthorized use of our services, proprietary technology or information. In addition, the laws of certain countries in which our products and services may be distributed may not~~ protect our proprietary ~~rights in the same way as the laws of the United States. If unauthorized third parties obtain and use our proprietary~~ technology and information, ~~our business, results of operations~~ and ~~financial~~we ~~condition~~ may be ~~materially~~subject ~~adversely~~to ~~affected. In addition,~~ claims ~~by third parties regarding the infringement~~ of ~~alleged intellectual property rights are a frequent occurrence in our industry~~infringement. ~~Although we do not believe that we are infringing~~

30Intellectual property laws, including copyright and trade secret laws, and contractual provisions afford only limited protection. We may not be able to police unauthorized use of our technologies, software applications, product information database, experience, processes, company and product identifiers, documents or information or enforce intellectual property laws or contractual provisions. In addition, the laws of certain countries in which our products and services may be distributed may not protect our proprietary rights in the same way as the laws of the United States. If unauthorized third parties obtain or use our proprietary technologies, software applications, product information database, experience, processes, company and product identifiers, documents or information, our business, results of operations and financial condition may be materially adversely affected.

Claims by third parties regarding the infringement of alleged intellectual property rights are common in our industry. Although we do not believe that we are infringing or misappropriating any proprietary rights or information of others, ~~any~~we ~~such~~cannot ~~third-party~~be certain that our products or services do not infringe. Any claims ~~may~~alleging ~~similarly~~infringement ~~materially~~or misappropriation of proprietary rights or information of others, with or without merit, may adversely affect our business, operating results and financial condition.

We may be unable to form successful relationships with systems integrators and other sales channels.

We seek to establish and maintain relationships with system integrators and consulting firms that may recommend our products and services to prospective customers. We also seek to establish and maintain relationships with service providers, resellers and other sales channels that may sell our products to customers or in markets that we are unable or less able to address. Many of these third parties have similar and often more established relationships with our competitors. In addition, these third parties, many of which have significantly greater resources than the Company, may market services and products in competition with us. We may experience “channel conflicts” with these third parties in which our pricing, discount and licensing programs, or our internal compensation programs, present instances of overlapping or competing interests with these third parties. Our failure to successfully establish and maintain relationships with system integrators, consulting firms, service providers, resellers and other sales channels and alliance partners may adversely affect our business, financial condition and results of operations.

Certain anti-takeover provisions could discourage attempts to acquire control of us.

We are a Delaware corporation. The Delaware General Corporation Law contains certain provisions that may make a change in control of our company more difficult or prevent the removal of incumbent directors. In addition, our Certificate of Incorporation and Bylaws and our stockholders rights plan contain provisions that may have the same effect. These provisions may have a negative impact on the price of our common stock, may discourage third-party bidders from making a bid for our company or may reduce any premiums paid to stockholders for their common stock.

Our stock price may fluctuate substantially.

The market price of our common stock has fluctuated significantly since the initial public offering of our common stock in August 1993 and could be subject to significant fluctuations in the future based on any number of factors, such as announcements of new services by us or by our competitors; fluctuations in our quarterly financial results or our competitors’; failure to meet guidance we provide to the market; changes in categorization of our stock (e.g., value vs. growth) by third parties; conditions in the Internet commerce, retail information service and high technology industries generally; and conditions in the financial markets generally. The low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur. The market price of our common stock may continue to experience significant fluctuations in the future.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market risk associated with changes in interest rates relates primarily to our investment portfolio of marketable securities. We do not use derivative financial instruments in our investment portfolio. The stated objectives of our investment guidelines are to preserve principal, meet liquidity needs and deliver maximum yield subject to the previous conditions. The guidelines limit maturity, concentration, and eligible investments to high credit quality U.S. issuers, such as the U.S. Treasury and other federal, state and local government agencies and highly rated banks and corporations. Our marketable securities profile includes only those securities with active secondary or resale markets to ensure portfolio liquidity.

The table below presents principal amounts and related weighted -average interest rates due by date of maturity for the marketable securities. Our guidelines do not permit investments with maturities in excess of 24 months. At ~~September~~June 30, ~~2003~~2004, the weighted -average maturity of the marketable securities portfolio was ~~227~~218 days.

(Amounts in thousands)	Maturity 2003			Maturity 2004			Maturity 2005			Total			Fair Value atSeptember 30,2003
(in thousands)	Maturity2004			Maturity2005			Total			Fair Value atJune 30,2004
Governmental Agencies	$	~~602~~230		$	~~507~~1,480		$	1,~~510~~710		$	21,~~619~~703		$	~~2,619~~
Corporations		~~5,387~~501			~~1,495~~—			—501			~~6,882~~555			~~6,882~~
Total	$	~~5,989~~731		$	21,~~002~~480		$	12,~~510~~211		$	92,~~501~~258		$	~~9,501~~
Weighted average interest rate		1.55	%		2.22	%		1.75	%		1.72	%		1.72	%
Weighted-average interest rate		2.04	%		1.69	%		1.81	%		1.81	%

Foreign Currency Risk

We have no significant investments outside the United States of America and do not have material transactional foreign currency risk because less than 5% of our billings are in a currency other than the U.S. dollar. We have no significant hedging activity.

Item 4.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-1415(ce) and 15d-1415(ce) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in internal controls. No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

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 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~~Country of San Francisco, ~~Action~~alleging ~~No.~~claims ~~413225.~~for ~~The Complaint~~breach ~~alleges~~of ~~claims~~contract ~~for~~and ~~Breach~~seeking ofto ~~Contract~~recover $2.5 million, ~~Breach~~plus ofinterest, ~~the~~under ~~Covenant~~a provision of ~~Good~~the ~~Faith~~merger ~~and~~agreement ~~Fair~~relating ~~Dealing,~~to ~~and~~our ~~Declaratory~~acquisition ~~Relief~~of ~~based~~Image ~~upon~~Info ~~plaintiff’s~~in ~~contention~~2000. ~~that~~We vigorously defended the ~~Company~~lawsuit, iswhich ~~obligated~~we tobelieved ~~make~~was ~~the~~without ~~second~~merit. ~~payment~~To ofavoid ~~$2.5~~further ~~million~~litigation, ~~even~~in April 2004, we reached a ~~though~~mutually ~~the~~satisfactory ~~revenue~~settlement ~~attributable~~agreement towith the former shareholders of Image Info ~~business~~that ~~did~~resolves ~~not~~the ~~reach~~lawsuit ~~the~~and ~~minimum~~terminates ~~amount~~all ~~specified~~claims inagainst the ~~merger~~Company. ~~agreement~~The ~~for~~action ~~2001~~has been dismissed. ~~The~~Under ~~Company~~the ~~believes~~terms ~~that~~of the ~~lawsuit~~settlement isagreement, ~~without~~we ~~merit~~paid ~~and~~$1.9 million ~~intends~~during tothe ~~vigorously~~second ~~defend~~quarter 2004 which was less than the ~~action~~$2.5 ~~The~~million liability classified as deferred acquisition payment ~~has~~in ~~already~~our ~~been~~Condensed ~~accounted~~Consolidated ~~for~~Balances inSheets ~~the~~as ~~acquisition~~of ~~cost~~December ~~for~~31, 2003. See Note 7 to the ~~original~~Condensed ~~transaction~~Consolidated Financial Statements.

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 2.

Changes in Securities and Use of Proceeds

~~None~~(a) On June 17, 2004 the Company and Mellon Investor Services LLC entered into the Second Amendment to the Rights Agreement dated as of October 17, 2002, as amended (the “Rights Agreement”), which exempts the transactions contemplated by the Agreement and Plan of Merger, dated as of June 17, 2004, by and among the Company, JDA Software Group, Inc. and CVP2 Corp., from the application of the Rights Agreement.

Item 3.

Defaults upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

~~None~~The Company’s annual meeting of stockholders was held on June 8, 2004 to consider and vote upon three matters. The first matter related to the election of two director nominees, Charles K. Crovitz and John P. Dougall, to serve a three-year term ending in 2007. The votes cast and withheld for such nominees were as follows:


Name	For	Withheld
Charles K. Crovitz	13,692,170	622,096
John P. Dougall	13,285,670	1,028,596

The second matter related to the ratification of the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for the fiscal year ending December 31, 2004. 13,889,500 votes were cast for ratification, 423,258 votes were cast against, and there were 1,508 abstentions and no broker non-votes.

The third matter related to the adoption of the 2004 Employee Stock Purchase Plan, under which 250,000 of the Company’s common stock would be reserved for issuance. 8,707,526 votes were cast for approval, 1,777,517 votes were cast against, and there were 72,866 abstentions and 3,756,357 broker non-votes.

Based on these voting results, each of the directors nominated was elected and the second and third matters were passed.

Item 5.

Other Information

~~None~~As previously disclosed, JDA has filed a registration statement on Form S-4 with the SEC in connection with the proposed merger between the Company and JDA. The registration statement covers the shares to be issued as part of the merger between the two companies. Following any SEC review of the registration statement, the joint proxy statement/prospectus, which is a part of the registration statement, will be sent to JDA’s and the Company’s stockholders in connection with separate stockholder meetings to be held for the purpose of approving the merger. In connection with the proposed merger, JDA has also cleared antitrust regulatory review with written notice from the Federal Trade Commission Pre-merger Notification Office of early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act.

32In addition, as previously disclosed, the Company received an unsolicited proposal to acquire all of the outstanding shares of the Company from a group led by Avling Partners, LLC, an affiliate of Mr. Peter R. Johnson, who is a greater than 5% stockholder of the Company, and GTCR Golder Rauner, LLC (the “Avling/GTCR Group”). The proposal from the Avling/GTCR Group contemplated an acquisition of the Company for $6.75 per share in cash, subject to satisfactory completion of due diligence and execution of definitive documentation. On August 3, 2004, the Schedule 13D of Mr. Johnson was amended to indicate that the Avling/GTCR Group had withdrawn its proposal to acquire the outstanding shares of the Company.

~~Table~~In addition, as previously disclosed, the Company has received two other unsolicited proposals to acquire all of ~~Contents~~the outstanding shares of the Company’s common stock for cash. Each proposal was non-binding and subject to satisfactory completion of due diligence and execution of definitive documentation. The Company continues to engage in discussions with these two potential acquirers. In connection with these discussions, the Company has received a revised non-binding proposal from one of these potential acquirers, a privately-held company and its majority investor. The revised proposal increased the price per share from $6.25 to $7.25 per share in cash, and remains subject to satisfactory completion of due diligence and execution of definitive documentation.

In addition to these acquisition proposals, the Company has received an additional unsolicited proposal from a public company and a private equity firm to acquire the outstanding shares of the Company’s common stock for cash consideration between $6.00 - $7.00 per share, subject to satisfactory completion of due diligence and execution of definitive documentation. The Board of Directors of the Company reviewed this proposal and determined that engaging in discussions with these potential acquirers was in compliance with the terms of the JDA merger agreement, and the Company has begun discussions with these potential acquirers regarding their proposal.

The Company’s Board of Directors has not withdrawn, modified or changed its recommendation of the proposed merger with JDA, and the Company intends to fully comply with the terms of the JDA merger agreement and proceed to close the proposed merger with JDA, subject to the Company’s rights to terminate the JDA merger agreement contained therein. The Board of Directors of the Company, with the assistance of its legal and financial advisors, will continue to discuss and evaluate the acquisition proposals it has received in accordance with the Board’s fiduciary duties and the terms of the JDA merger agreement. At this time, the Company’s Board of Directors cannot predict whether any potential acquirers will amend or withdraw their proposals, whether any of the unsolicited acquisition proposals it has received will develop into a firm offer for the acquisition of the Company, whether any firm offer will be considered to be superior to the proposed merger with JDA, or whether, if the Company accepted any firm offer, a resulting transaction would be completed.

Item 6.

Exhibits and Reports on Form 8-K

A. Exhibits

ExhibitNumber		Description
10.46		Agreement, dated September 23, 2003 between the Company and Phil Schlein.
10.47		Employment Agreement, dated April 1, 2003 between the Company and Jack Parsons.
10.48		Employment Agreement, dated September 1, 2003 between the Company and Ray Rike.
31.1		Form of Rule 13a-14(a) Certification
31.2		Form of Rule 13a-14(a) Certification
32.1		Section 1350 Certification


Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of June 17, 2004, by and among the Company, JDA Software Group, Inc. and CVP2 Corp., including the forms of Voting Agreements attached as Exhibits A and B thereto (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K dated June 18, 2004).
4.4		Second Amendment to the Rights Agreement, dated as of June 17, 2004, between the Company and Mellon Investor Services LLC (incorporated by reference to Exhibit 4.3 to the Company’s Amendment No. 2 to Registration Statement on Form 8-A/A filed with the Securities Exchange Commission on June 17, 2004).
10.58		Amendment to IBM Business Partner Agreement dated April 27, 2004 between the Company and IBM Corporation.
10.59		Employment Agreement between the Company and James Rowley, dated May 1, 2004.
10.60		2004 Employee Stock Purchase Plan (incorporated by reference to Appendix A filed with Company’s Definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders on June 8, 2004).
10.61		Employment Offer Letter among JDA Software, James Rowley and the Company, dated June 16, 2004.
10.62		Employment Offer Letter among JDA Software, Ray Rike and the Company, dated June 16, 2004.
31.1		Form of Rule 13a-14(a) Certification
31.2		Form of Rule 13a-14(a) Certification
32.1		Section 1350 Certification
99.1		Specific Risk Factors Relating to the Pending Merger of QRS Corporation and JDA Software Group, Inc. These risk factors appear on pages 15 through 20 of the Preliminary Joint Proxy Statement/Prospectus included in the Registration Statement on Form S-4 (file No. 333-117674) filed by JDA Software Group, Inc. with the Securities and Exchange Commission on July 26, 2004.

B. Reports on Form 8-K

Date		Item Reported
July 29, 2003		We furnished a Current Report on Form 8-K dated July 29, 2003 in connection with our issuance of a press release of the financial results for the second quarter ended June 30, 2003.
May 5, 2004		We filed a Current Report on Form 8-K dated May 5, 2004 to furnish our press release announcing our financial results for the first quarter ended March 31, 2004 under Item 12 thereof.
June 18, 2004		We filed a Current Report on Form 8-K dated June 18, 2004 announcing the Agreement and Plan of Merger, dated as of June 17, 2004, by and among the Company, JDA Software Group, Inc. and CVP2 Corp. under Item 5 thereof.

3328

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the ~~Registrant~~registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized ~~and in the capacity indicated~~.

	QRS CORPORATION	~~QRS CORPORATION~~
November 10, 2003		/s/ JOHN C. PARSONS, JR.
Date: August 6, 2004	/s/ ELIZABETH A. FETTER
		Senior Vice President, Chief Financial Officer (Principal Accounting and Financial Officer)
	Elizabeth A. Fetter President, Chief Executive Officer and Director (Principal Executive Officer)
Date: August 6, 2004	/s/ DAVID B. COOPER, JR.
	David B. Cooper, Jr. Senior Vice President, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)

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Filing Compare · QRS CORP