<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-K

(Mark One)
    X             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
  -----              OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended March 31, 1998

                                       OR

                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 0-6355

                               COMNET CORPORATION
             (Exact name of registrant as specified in its charter)



<TABLE>
<S>                                            <C>
             DELAWARE                                     52-0852578
   (State or other jurisdiction                (IRS Employer Identification No.)
of incorporation or organization)              

4200 Parliament Place, Suite 600, Lanham, MD                       20706-1860
    (Address of principal executive offices)                       (ZIP Code)
</TABLE>

       Registrant's telephone number, including area code: (301) 918-0400

<TABLE>
<S>                                                         <C>
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.50 par value
</TABLE>

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

                                  YES   X      NO
                                       ---         ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 23, 1998, was $39,633,938.

The number of shares of the Registrant's Common Stock outstanding on June 23,
1998, was 3,279,040.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1998 Annual Meeting of Shareholders (Part III
of Form 10-K).


<PAGE>   2


                                     PART I


ITEM 1.   BUSINESS

THE COMPANY

        COMNET Corporation ("COMNET" or "Company") through its subsidiary, Group
1 Software, Inc. ("Group 1") develops, manufactures, licenses, sells and
supports specialized marketing and mail management software.

        COMNET owns approximately 81.2% of Group 1's issued and outstanding
shares of common stock, with the remaining 18.8% or 809,109 shares held by
others. The trading of the common stock of Group 1 is reported on the NASDAQ
National Market System under the symbol GSOF. During the fiscal year ended March
31, 1998, Group 1's common stock price ranged from a high of $11.00 to a low of
$6.00. Based on the closing price of Group 1's common stock on June 23, 1998, of
$13.13, COMNET's holdings in Group 1 represented a market value of approximately
$45.7 million.

        COMNET Corporation is incorporated under the laws of the state of
Delaware. Unless otherwise indicated, the term "Company" shall refer to COMNET
and its subsidiaries, exclusive of discontinued operations. The executive
offices of COMNET are located at 4200 Parliament Place, Suite 600, Lanham, MD
20706-1860, and the telephone number at that location is (301) 918-0400.

        Group 1 Software, Inc. and its wholly and majority owned subsidiaries
("Group 1") develops, manufactures, licenses, sells and supports software
products for specialized marketing and mail management applications. Group 1
markets a broad range of software solutions in each of three major categories:
Database Marketing, Electronic Document Systems and Mailing Efficiency. The
operating systems utilized for Group 1's products vary as to category. Database
Marketing products operate in a client/server architecture with server support
for UNIX or Windows NT (NT) and with client support in Windows 3.x, 95 and NT.
Electronic Document Systems run under MVS and OS/400, as well as under UNIX,
IBM OS/2 and NT. Mailing Efficiency products run on IBM and IBM compatible
mainframe computers, IBM AS/400, Digital, UNIX, NT and IBM OS/2 platforms. Group
1's Electronic Document Systems support Kodak, IBM and Xerox print architectures
(AFP and Metacode) for high-speed, high-volume production laser printing.

        Group 1 distributes all of its products in North America and certain of
its products throughout the world. Group 1 believes it is a leading vendor of
Mailing Efficiency and Electronic Document System software products in North
America.

        Group 1's software products serve the needs of a wide variety of
clients, including those in the financial, insurance, utility,
telecommunications, manufacturing, retailing, hospitality, publishing and mail
order industries, plus service bureaus, associations and various activities of
educational institutions and governmental agencies. In general, Group 1's
software systems are designed to minimize the costs and maximize the opportunity
to sell products and services to existing and potential customers by obtaining
maximum postal discounts, ensuring name and address data integrity, targeting
marketing campaigns, and printing high impact customer correspondence. On its
own and through its wholly owned subsidiary, Group 1 Europe, Ltd., Group 1
provides systems for highly effective document preparation of customized forms
or personalized correspondence. This is achieved through the use of advanced
document design workstation software coupled with sophisticated host-based
document composition software, resulting in highly targeted and individualized
documents (e.g., statements, invoices, policies, direct mail). Group 1 believes
that the continuing growth of database marketing, data warehousing and targeted,
direct communication, together with increased postal rates and postage discounts
for coded and/or sorted mail, can expand the market potential for Group 1's
existing and future products.


                                       1
<PAGE>   3


        Group 1 also offers a broad variety of professional services to its
clients, including systems and business analysis, installation assistance,
operations support, programming services, technical education and training and
operational reviews. These services are designed to assist clients in obtaining
maximum utilization from their Group 1 products and/or in improving the
efficiency and effectiveness of their business operations.

        Group 1 markets its Mailing Efficiency and Database Marketing products
through a direct sales force in the United States and Canada, and, where
appropriate, through distributors in Europe and South America. Electronic
Document Systems Products are marketed directly to its clients in North America,
the United Kingdom, and Scandinavia and through distributors in the remainder of
Europe.

MARKETS SERVED

        Group 1 markets its products within a broad span of industries to
fulfill database marketing, database publishing/electronic printing and mailing
efficiency requirements. Included among the industry groups served by Group 1
are banking, insurance, credit card companies and financial institutions,
retailers, hospitality and gaming, catalog mailers, publishers, manufacturers,
telecommunication companies, non-profit associations, educational institutions,
fund raisers and governmental agencies. All of these industry groups use Group
1's mailing efficiency systems, although use by retailers, catalog mailers and
publishers is particularly significant due to the large volume of heavy and
expensive mail pieces typically involved. Associations, educational institutions
and fundraisers are also extensive users of Group 1's list management and
personalization products.

        The banking and insurance segments, while requiring address correction
products, additionally use Group 1's products to build and maintain Customer
Information Systems (CIS's) and to clean transaction based, operational data
prior to loading into a data warehouse. Both CIS's and data warehouses are being
built by these organizations primarily to provide a more complete picture of
their customers and their business. Geographic and demographic overlays may be
used to gauge market penetration, demographic targets and competitive position.
Cross-selling opportunities among groups can also be identified. While banking
and insurance organizations have led in the CIS applications of Group 1
products, such applications have potential within many other market segments as
well. Banking and insurance organizations also have increasing need for software
tools to assist in certain record keeping and analysis used to demonstrate
compliance with government regulations. These industry segments use Group 1's
geocoding and demographic coding products for Credit Reporting Act and Home
Mortgage Disclosure Act compliance.

        Many industries that have adopted database marketing utilize Group 1
products that append demographic and geographic data to provide enhancements to
existing customer databases. Use of Group 1's modeling products provides
automated predictive modeling to identify more precise buying patterns, or by
clustering, identify differences in behavioral characteristics across product
lines or over time allowing more effective, targeted marketing campaigns. Group
1's DataDesigns system extracts raw customer data from existing client systems
for conversion into a useful marketing database. Meticulous filtering,
correcting and consolidating of large amounts of operational data from multiple
sources create a highly accurate database. The system provides the capability to
query for relevant customer information and to prepare target market profiles
and market segmentation analysis, to help plan more effective media and direct
mail programs. Organizations are able to discover the lifetime value of each
customer, as a guide to the development of stronger relationships with the more
profitable customers. Group 1's DataDesigns system currently addresses the
hospitality and gaming industries, but the product recently has been applied to
other industry segments.

        Information-intensive organizations are seeking automated solutions that
combine their customer data with today's advanced printing technology to produce
individualized, well-designed business documents. These organizations, which
include banks, credit card processors, insurance companies, public utilities,
health care providers, telecommunication companies and others, use Group 1's
electronic document composition software and in many instances, Group 1's
consulting services to generate and manage customized statements using
conditional statement logic. The format, content and language of each statement
may be individually structured relative to specific information contained in
each customer record; individualized marketing messages can also be


                                       2
<PAGE>   4


incorporated. Increasing numbers of organizations are integrating complete
marketing strategies with automated document design and composition systems to
improve sales and customer satisfaction.

PRODUCTS AND SERVICES

        As of March 31, 1998, Group 1 offered approximately 60 software
products.

        The multi-platform electronic document composition system is offered
with enhanced PC-based WYSIWYG technology. The system directly converts and
imports IBM and Xerox laser printing resources such as fonts, images and
overlays. DOC 1 can operate in centralized, or distributed, departmental or
desktop environments. The DOC 1 workstation runs under OS/2 and Windows NT and
the DOC 1 production engines can run under MVS, OS/2, MS-DOS, OS/400, UNIX and
NT operating systems. The system is printer independent and supports AFP,
Metacode and PCL output.

        Most of the mailing efficiency products are offered in an Open Systems
format that enables the specific application to operate on all major computer
systems from NT to mainframe. This approach allows the user to migrate from one
platform to another without lost productivity or added training.

        The database marketing products are offered for a variety of operating
systems. The DataDesigns database marketing system with a proprietary database
operates in a client/server environment. The server software, Oracle 7, runs
under Windows 3.x, 95, or NT, OS/2 and Novell NetWare; the client utilizes
Windows 3.x, 95 or NT. Support for SQLRouters is available to access Oracle,
SYBASE and SQLBASE databases. The Model 1 predictive modeling system utilizes
all traditional predictive techniques and selects the best fit to your data.
Model 1 runs under Windows 95 or NT. Demographic and geographic coding products
operate in most open system operating environments. NADIS products are offered
in open systems format compatible with most mainframe and mid size operating
systems.

        Group 1's software products can each operate on a stand-alone basis or
in conjunction with other Group 1 products to create an integrated system
tailored to a client's requirements.

        Group 1 professional services include data migration, integration with
other systems, document analysis, consultation and design, installation and
training, file conversion and operational review.

    ELECTRONIC DOCUMENT SYSTEMS

        Group 1's Electronic Document system (DOC 1) makes possible advanced
electronic preparation of high volumes of individualized documents for worldwide
markets. The software supports all major printing architectures and can operate
in centralized, distributed or desktop environments under NT, OS/2, OS/400, MVS,
and UNIX operating systems. DOC 1 produces individualized statements, insurance
policies, invoices, medical bills, letters, etc. that allow one-on-one targeted
communication with the recipient. The system is a truly visual application that
allows the user to extract information from multiple systems, and place text,
images and graphics on the page in a dynamic WYSIWYG process. The Portable
Document Format (PDF) supported by DOC 1 permits on-line document delivery over
the Internet. DOC 1 can be integrated with Group 1's MailStream Plus system to
produce output documents in a sequence that qualifies for USPS presorting
discounts.

        Group 1's EZ- Letter Plus and PRES Products offer a complete system to
create, print and manage individualized business documents. The systems use
conditional statement logic and variable processing to generate customized
documents such as statements, invoices, and policies, all based on
customer-unique information. The EZ-Letter Plus system is a tailored solution
for IBM and IBM-compatible mainframes, while the PRES product offers a PC based
solution. EZ-Letter features a menu-driven interface that lets users define
documents interactively, as well as manage printer resources and documents
within a secure environment. The system supports all major printing
architectures.


                                       3
<PAGE>   5


        EZ- Letter Plus and PRES are used to create, compose, edit and produce
direct mail, mass correspondence and other forms of written material on a highly
individualized basis. Specific information for each individual can be extracted
from computer databases for incorporation into a mail piece. Words, sentences
and/or entire paragraphs can be automatically added, changed or deleted based
upon the target recipient's information file and the creative wishes of the
user. The resulting personalized letters, forms, coupons, reports, labels and
other correspondence can be produced economically on high-speed laser, impact or
ink-jet printers.

    MAILING EFFICIENCY

        Group 1's postal mailing efficiency software products provide a fully
automated means for clients to take advantage of significant postal discounts
offered in both the United States and Canada for presorted and coded mail.
Within this group of software products are also the tools to improve lettershop
efficiency, palletize mail, speed mail delivery, allow in-plant truck loading,
print barcodes and produce the necessary United States Postal Service (USPS)
reports and Canada Post Corporation (CPC) statements of mailing.

        Group 1's U.S. mailing efficiency products include Code-1 Plus,
MailStream Plus, Palletization Plus, POSTNET Barcoding Plus, Barcoded Bag/Tray,
Manifest Reporting, Line of Travel, and MOVEforward. Group 1's Code-1 Plus and
MailStream Plus products are Coding Accuracy Support System (CASS) and Presort
Accuracy Validation and Evaluation (PAVE) certified by the USPS. These products
allow mailers to qualify for enhanced carrier route, presort and automation
postal discounts and to optimize discounts among various postal rate categories.
Clients can currently save nearly 28% of the cost of first-class mail and up to
48% of the cost of Standard mail by presorting and coding. Significant savings
can also be achieved with other classes of mail. Similar benefits are provided
to Canadian mailers using Group 1's products accepted under the Software
Evaluation and Recognition Program (SERP) of CPC. Canadian clients can avoid the
$0.05 per piece surcharge by demonstrating an address accuracy level of at least
95%, and can qualify for certain other postal rate incentives.

        Group 1's list management products, Merge/Purge Plus, Generalized
Selection, List Manager, SmartMatch and List Conversion Plus, allow clients to
convert name and address lists into desired formats, to standardize address
information, to identify and/or eliminate duplicates on business and consumer
mailing files, add gender codes and to make targeted demographic selections.

        Group 1's recently released Code-1 Plus International product validates
and corrects address elements to the street level for approximately 31 countries
worldwide; validates and corrects address elements to the city, province (or
state) level for approximately 41 countries and formats address data to comply
with the formats of all 195 countries recognized by the United Nations.

    DATABASE MARKETING

        Group 1's DataDesigns database marketing system allows the user to
develop a composite profile of its best customers and prospects. Raw customer
data is extracted from existing client systems for conversion into a useful
marketing database. Meticulous filtering, correcting and consolidating of the
large amounts of operational data from multiple sources creates a highly
accurate database. The system provides the capability to query for relevant
customer information, and to prepare target market profiles and market
segmentation analysis, to help plan more effective media and direct mail
programs. Organizations are able to discover the lifetime value of each customer
as a guide to the development of stronger relationships with the most profitable
customers.

        Group 1's demographic and geographic systems allow census-based
information and longitude and latitude information compiled by R.L. Polk &
Company and the U.S. Bureau of the Census to be appended to the customer or
prospect database. The Generalized Selection System provides a flexible method
of target marketing and mailing list manipulation. The GeoTAX system offers
taxing entities great improvement in accurately assigning sales use tax to
customer addresses.

        The Model 1 automated predictive modeling system permits the analysis of
volumes of data quickly, to identify buying patterns of individuals for more
precise, profitable targeted marketing. This sophisticated, easy to


                                       4
<PAGE>   6


use system utilizes all traditional predictive modeling techniques including
RFM, linear regression, logistic regression, CHAID, neural networks and genetic
algorithms. The system selects the best fit with your data. Other Group 1
products provide data analysis and decision support tools to identify
motivational behavioral characteristic and changes across products or over time.

        To process name and address data for Customer Information Files (CIF's),
Group 1 offers the NADIS System (Name and Address Data Integrity Software). An
expert system technology, NADIS offers capabilities to verify data integrity and
to identify relationships within and across files.

    PROFESSIONAL SERVICES AND CUSTOMER SUPPORT SERVICES

        Professional services are available including operations support,
systems analysis, data migration, system integration, document design, file
conversion, technical education and training, and operational reviews. These
services are designed to assist clients in obtaining maximum utilization from
their Group 1 products and in improving other areas of their operations.

        Group 1 offers with its product licenses an annual service agreement
that provides telephone support and continuing updates and enhancements, as
available, to its products and documentation. Educational and training seminars
specific to Group 1 products are offered as part of the initial product
licensing agreement at no additional charge; thereafter, such seminars, together
with a variety of more general educational seminars, are available for a fee.

PRICING

        The Database Marketing software products offered by Group 1 carry
one-time perpetual license fees of $5,000 to $175,000 except for the Demographic
Coding System for which a full national package is currently priced on an annual
license basis at $50,500 (regional editions are available). A complete Group 1
mail and list management system would have a list price of more than $136,000

        The DOC 1 software product carries a one-time perpetual license fee
ranging from $50,000 to over $400,000 depending on platform chosen, number of
workstations and number of composition systems licensed. Enterprise-wide
corporate licenses of DOC 1 are available at additional costs generally
exceeding $250,000.

        License agreements and products sold to distributors generally call for
payment in full, 30 days after execution, although extended payment terms may be
granted. Alternatively, a customer may elect an installment payment program
(typically from one to three years) with a minimum down payment of 20% of the
license and first year maintenance fees, and an interest charge of 10% to 12%
per annum depending on credit-worthiness. Actual prices and terms charged by
Group 1 for its products and services may reflect volume and other discounts.

        To receive maintenance, enhancements and telephone support for Group 1's
software products, a customer must pay an annual fee in advance which is
presently 16.5% (currently 15% in the U.K. and the European marketplace) of the
then-current license fee for the product. U.S. and Canadian postal master files
are available for an additional fee.

        Professional services are provided on hourly or daily rates. The list
price for professional services is $1,500 per day plus out-of-pocket expenses.

        Group 1's Code-1 Plus and MailStream products are subject to annual
subscription fees ranging from $585 to $8,800 annually in order for customers to
receive the required bimonthly database updates.

LICENSING

        With the exception of the Demographic Coding System, Group 1's products
are licensed on a perpetual "right to use" basis pursuant to non-exclusive
license agreements. The Demographic Coding System is licensed on


                                       5
<PAGE>   7


an annual basis. Group 1 does not sell or transfer title to its software
products to clients. A client is generally entitled to use a product only for
internal purposes on a single computer at a single location. Multi-site,
multi-computer corporate license agreements are available as well. Certain
postal products are required by the USPS and CPC regulations ("CASS" and "SERP",
respectively) to have an expiration date (quarterly or monthly) and must be
under subscription or re-licensing arrangements with Group 1 in order to be used
for postal discounts or price qualification.

        Group 1 warrants that its products will perform substantially in
accordance with their standard documentation for the defined warranty period or
as long as a service agreement is in effect, whichever is longer. The software
is generally licensed in conjunction with a first year maintenance agreement to
provide an initial warranty for twelve months from the date of the license
agreement.

CUSTOMERS

        Group 1's customer base includes approximately 2,650 clients who have
licensed one or more of its large software systems.

        Group 1's clients range from small businesses to a large number and
broad variety of the foremost businesses and other organizations in North
America and internationally. Included are utilities such as Pacific Gas and
Electric, Scottish Power, Kansas City Power & Light and PEPCO, telecommunication
companies such as AT&T, Iridium, LCI International and MCI; major banks such as
Citibank, National Westminster Bank, Bank One, Chase Manhattan Bank, ABN AMRO
and Banque Nationale du Canada; insurance companies such as The Hartford
Insurance Group, American International Group, Scottish Widows and Metropolitan
Life; publishers such as Time, Inc., McGraw-Hill and Encyclopedia Britannica;
computer services companies such as EDS and Neodata; financial services
companies such as Prudential Securities, Charles Schwab and General Electric
Credit; retailers such as Nordstrom, J.C. Penney, May Department Stores and
Wal-Mart; manufacturers such as GTE, Caterpillar, Eastman Kodak, Lucent
Technologies, General Mills and Xerox; governmental bodies such as the U.S.
Senate, U.S. Customs, the Internal Revenue Service and U.S. Government Printing
Office; credit companies such as GE Data Services and TRW Information Services;
direct marketers such as Publishers Clearing House, Lands End and L.L. Bean;
service companies such as American Express, Avis, Terminix and Tru Green Chem
Lawn; educational institutions such as The Johns Hopkins University, Duke
University Medical Center and MIT; health and leisure companies such as Nordic
Track; non-profit service groups such as The Girl Scouts of America, National
Geographic Society and AARP; cultural organizations such as the Metropolitan
Museum of Art and Metropolitan Opera Association; and hospitality and
entertainment companies such as Marriott, Mirage Resorts and Westin Hotels. The
United States Postal Service is also a client of Group 1.

        All of Group 1's operations are in the one business segment broadly
defined as marketing support software; during the fiscal year ended March 31,
1998, 4 customers individually accounted for more than 1% of Group 1's revenue.
No customer accounted for 3% or more of revenue. Traditionally, Group 1 does not
have a material order backlog for its software products at any given time. Group
1 recognizes maintenance and enhancement revenue over the life of the service
agreement, usually from one to five years.

SALES AND MARKETING

        Group 1 markets all of its software products in North America and Europe
through a direct sales and sales support organization of 90 employees located in
the U.S., Canada, Scandinavia and the United Kingdom. To serve existing clients
and to solicit new additions to the client base, Group 1 has two sales and
support offices in the Washington, D.C. area and eight other regional offices in
the New York City, Chicago, Los Angeles, Las Vegas, Atlanta, Dallas,
Minneapolis, and Toronto metropolitan areas. European offices are located in the
London, England and Copenhagen, Denmark metropolitan areas.

        The Group 1 sales organization is supported by a comprehensive marketing
program administered from Group 1's Lanham, Maryland headquarters. Marketing is
conducted through direct mail, print advertising, trade


                                       6
<PAGE>   8


show exhibitions and speaking engagements, product training seminars,
telemarketing and a broad variety of public relations activities including the
Group 1 Report and the annual Group 1 Software Users Conference.

        Through its Group 1 Europe subsidiary, Group 1 has entered into software
distribution and support agreements for the DOC 1 product with companies
throughout Europe. These agreements provide for a royalty payment to Group 1,
with the distributor performing sales and marketing, customer service and
support activities. Group 1 continues to pursue additional international sales
and marketing opportunities for its products.

        Group 1 has entered into joint marketing agreements with a number of
business partners including IBM, Xerox, Data General Corp., R.L. Polk, Campaign
Mail & Data, MapInfo, Software Pursuits, Mastersoft International Pty.,
Geographic Data Technology, Claritas/NPDC, AMS, UNICA Technologies, PrintSoft,
Bell & Howell and OBIMD International, InterTrak Corporation and Data Tech
Business Enterprises. Generally, the agreements provide for distribution of
Group 1 products in conjunction with the business partner's products. A sale may
arise from either sales organization, and territories are non-exclusive. The
agreements provide for a commission payment to Group 1 when it has contributed
to a sale of the other company's products. Conversely, Group 1 may pay a
commission when a partner contributes to a sale of Group 1 products or services.

SUPPORT

        Group 1 believes that effective support of its customers and products
has been a substantial factor in its success to date and will continue to be so
in the future. Customer support for these software products is provided by
telephone for assistance in product installation and problem resolution during
normal business hours. Automated call tracking, client-specific call routing and
on-line bulletin board services are also provided for maintenance customers.
Customer support is provided by telephone and, if necessary for large systems,
on-site by qualified Company personnel. Group 1 Europe also has modem links with
many of its worldwide customers to provide even higher levels of
mission-critical support.

        In the fiscal years ended March 31, 1998, 1997 and 1996, maintenance and
enhancement fees represented approximately 35%, 33% and 37%, respectively, of
Group 1's revenue.

        Professional services, including operations support, business analysis,
programming services, technical education and training, and operational reviews,
are provided at the client's location and at Group 1 training facilities
throughout the U.S., Canada and the U.K.

PRODUCT DEVELOPMENT

        The computer industry is characterized by rapid change in hardware and
software technology and in user needs, requiring a continuing expenditure for
product development. It is likely that such circumstances will continue in the
future. Accordingly, Group 1 must be able to provide new products and to modify
and to enhance existing products on a continuing basis to meet the requirements
of its customers and of regulatory agencies, particularly the US Postal Service
and the Canada Post Corporation. Group 1 may also have to adapt its products to
accommodate future changes in hardware and operating systems. To date, Group 1
has been able to adapt its products to such changes and believes that it will be
able to do so in the future. Most of the company's products are developed
internally. The company also purchases technology, licenses intellectual
property rights and oversees third party development of certain products.
Quality assurance testing of Group 1's new or enhanced products is conducted by
teams of experienced individuals drawn from all segments of Group 1's
organization under the direction of testing specialists. Whether the product is
developed internally or acquired from another company, Group 1 considers it
important to control the marketing, distribution, enhancement and evolution of
each of its products.

        Significant investment was made during the year in new software
development for migration of products to the Open Systems platform.
Additionally, extensive work was performed on enhancing existing mainframe,
midrange and open system products.


                                       7
<PAGE>   9


        During 1998, additional enhancements and new product releases including
a new release of Code 1 Plus, were made to help mailing efficiency customers
meet the expanding requirements of the U.S. Postal Service in order to qualify
for postal discounts.

        Other major product enhancements begun in FY 1998 include substantial
enhancements to Canadian postal products.

        Doc 1 version 3.0 was released in the second quarter of FY 1998
including support for Windows NT, as well as Internet connectivity.

        During 1998 a new version of the Data Designs product was released
allowing for application into new vertical market places.

        Group 1 continued development of its enhanced Code-1 Plus International
system during FY 1998, including the second-generation product released during
the fourth quarter of FY 1998.

COMPETITION

        The computer software and service industry is highly competitive, and no
published data are available regarding Group 1's relative position in the
markets in which it operates. Although no major competitor currently competes
against Group 1 across its entire product line, competitive products offer many
similar features. Group 1's existing and potential competitors include companies
having greater financial, marketing and technical resources than Group 1. Group
1 believes that there are at least thirty-four companies that offer products
competitive with one or more of Group 1's products. Group 1 believes at least
twelve companies offer database marketing systems. At least four competitors are
in the document composition and production marketplace. For mailing efficiency
products, at least two competitors offer products that compete with Group 1 on
open system and mainframe platforms. During the year, Group 1 continued to
experience strong competition in the market for postal coding and presorting
software from these competitors.

        There can be no assurance that one or more of these competitors will not
develop products that are equal or superior to the products Group 1 expects to
market. In addition, many potential clients for which Group 1's products are
targeted have in-house capability to develop computer software programs.

        Group 1 believes that the principal, distinguishing competitive factors
in the selection of its software products are price/performance characteristics,
marketing and sales expertise, ease of use, product features and functions,
reliability and quality of technical support, integration of the product line
and the financial strength of the publisher. Group 1 believes that it competes
favorably with regard to these factors including pricing and credit terms. Group
1's primary strengths are the technical capabilities of its personnel and
products, marketing and sales expertise, service and support, and industry
product leadership.

PRODUCT PROTECTION

        Group 1 regards its software, in source and object code, as proprietary
and relies upon a combination of contract, trade secret and copyright laws to
protect its products and related manuals and documentation. The license
agreements under which clients use Group 1's products generally restrict the
client's use to its own operations and always prohibit unauthorized disclosure
to third persons. Notwithstanding these restrictions, it may be possible for
other persons to obtain copies of Group 1's products. Group 1 believes that
because of the rapid pace of technological change in the computer industry and,
in addition, changes in postal regulations that affect several core products,
copyright and trade secret protection are less significant than factors such as
the knowledge and experience of Group 1's management and other personnel and
their ability to develop, enhance, market and acquire new products.


                                       8
<PAGE>   10


TRADEMARKS

        Group 1 Software (name and logo), MailStream Plus, CODE-1 Plus, CODE-1
Canada, CODE-1, EZ Letter and Mail Canada are registered trademarks of Group 1
Software, Inc. CODE-1 Plus International, SmartMatch, List Manager,
Palletization Plus, POSTNET Barcoding, Bar Code Bag/Tray, Manifest Reporting,
Merge/Purge Plus and List Conversion Plus are trademarks of Group 1 Software,
Inc. The trademark applications for registration of Model 1, MOVEforward, DOC1,
DataDesigns and GeoTax are pending. All other trademarks referenced herein are
the property of their respective owners.

EMPLOYEES

        As of March 31, 1998, the Company employed 296 persons on a full-time
basis. Of those employees, 139 were in management, professional and technical
positions, 106 in marketing, sales and support and 51 in administrative
positions. None of the Company's employees is represented by a labor union and
the Company has experienced no work stoppages. The Company believes its employee
relations are satisfactory.

COM-MED SYSTEMS

        COM-MED Systems, a wholly owned subsidiary of the Company, provided the
long-term health care industry with computer software systems for management and
operations support. As of March 31, 1995, the Company sold the assets of COM-MED
Systems for up to $4.5 million, to be paid as a percentage of the acquiring
company's future revenues. Additionally, the Company was issued warrants to
acquire up to 25% of the acquiring company's common stock. In September, 1995
the acquiring company ceased operations, whereupon the Company repossessed the
assets and sold them, in turn, to another entity for up to $4.5 million, to be
paid as a percentage of that company's future earnings.

        As of March 31, 1998 all amounts currently due or contingent were
settled in exchange for a note receivable of $75,000 payable over eighteen
months. Reserves in the amount of $27,450 have been established to cover
disposition cost and contingencies associated with the sale of the assets..


ITEM 2.   PROPERTIES

        The Company's executive and administrative offices are located in
Lanham, Maryland, a Washington, DC suburb, where the Company leases 51,900
square feet under a lease that expires in 2004. These facilities also include
Group 1's headquarters and principal operations base. COMNET has options to
lease additional space at specified periods during the term and to extend its
lease. Group 1 leases additional sales and support offices in the Chicago,
Dallas, Los Angeles, Las Vegas, Atlanta, New York City, Herndon Virginia,
Minneapolis, San Juan Puerto Rico, London England and Toronto Canada
metropolitan areas. See Note 14 of notes to consolidated financial statements.


ITEM 3.   LEGAL PROCEEDINGS

        The Company is not a party to any legal proceedings, which in its
belief, after review by legal counsel, could have a material adverse effect on
the consolidated financial position or results of operations of the Company.

        COMNET, Group 1 and certain of Group 1's directors have been named as
defendants in a purported shareholder class action filed on April 28, 1998 in
the Court of Chancery of the State of Delaware (CA. No. 16349), Brickell
Partners, Individually and on Behalf of All Others Similarly Situated v. Robert
S. Bowen, et al. The suit alleges breaches of fiduciary duties in that COMNET,
as majority stockholder of Group 1, "has greater knowledge of Group 1 than the
public shareholders and has timed the merger transaction to take advantage of
Group 1's increased efficiency and prospects of profitability", to the unfair
disadvantage of Group 1's public shareholders. Both COMNET and Group 1 believe
that the complaint is meritless and are actively pursuing dismissal of all the
claims made by Plaintiff in the lawsuit.


                                       9
<PAGE>   11


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


          NONE


                                       10
<PAGE>   12


PART II


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

        The trading of the common stock of the Company is reported on the
National Market System under the symbol CNET. The table below sets forth the
highest and lowest closing prices between dealers for the quarter indicated.
These prices, as reported by NASDAQ, do not include retail markup, markdown or
commissions and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                        CLOSING COMMON STOCK PRICES
                                                        ---------------------------
1998                                     HIGH          LOW             1997                                   HIGH         LOW
----                                ----------------------------       ----                              ---------------------------
<S>                                    <C>           <C>               <C>                                  <C>          <C>
First - June 30, 1997                  $11.00        $ 7.50            First - June 30, 1996                $15.00       $10.00
Second - September 30, 1997            $ 9.75        $ 7.13            Second - September 30, 1996          $16.50       $ 8.00
Third - December 31, 1997              $ 9.25        $ 6.50            Third - December 31, 1996            $15.50       $ 8.00
Fourth - March 31, 1998                $ 8.75        $ 6.00            Fourth - March 31, 1997              $11.00       $ 8.50
</TABLE>

        No cash dividends have been paid on the Company's common stock. The
Company pays dividends on the 6% Cumulative Convertible Preferred Stock
discussed in Note 9. The Board of Directors intends to retain, for the
foreseeable future, the Company's remaining earnings for use in the development
of the business.

        At June 15, 1998, there were approximately 1,608 holders of record of
the Company's common stock, including persons who wish to be identified as
having an interest in shares held or recorded in "street name" with
broker-dealers.


ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
(In thousands except per share amounts)                                                      Year Ending March 31,
                                                                        ---------------------------------------------------------
                                                                          1998        1997         1996        1995        1994
                                                                        --------    --------     --------    --------    --------
<S>                                                                     <C>         <C>          <C>         <C>         <C>
Statement of Earnings Data: (1)
Revenue                                                                 $ 61,004    $ 54,547     $ 45,873    $ 37,883    $ 31,370
Earnings (loss) from continuing operations                              $  2,335    $ (2,710)    $  5,472    $  5,241    $  3,303
Net earnings (loss) from continuing operations                          $  1,150    $ (1,600)    $  2,832    $  2,658    $  1,776
Net loss from discontinued operations                                   $  - - -       - - -     $  - - -    $   (282)   $ (1,571)
Net earnings (loss)                                                     $  1,150    $ (1,600)    $  2,832    $  2,376    $    204
Basic earnings (loss) per share from continuing
   Operations                                                           $   0.30    $  (0.54)    $   0.85    $   0.82    $   0.54
Basic loss from discontinued operations per
       Share                                                            $  - - -    $  - - -     $  - - -    $  (0.09)   $  (0.53)
Basic net earnings (loss) per share                                     $   0.30    $  (0.54)    $   0.85    $   0.73    $   0.01
Basic weighted average number of shares                                    3,274       3,263        3,140       3,016       2,978
Diluted earnings (loss) per share from continuing
    Operations                                                          $   0.29    $  (0.54)    $   0.79    $   0.78    $   0.47
Diluted loss from discontinued operations per
     share                                                              $  - - -    $  - - -     $  - - -    $  (0.09)   $  (0.46)
Diluted net earnings (loss) per share                                   $   0.29    $  (0.54)    $   0.79    $   0.69    $   0.01
Diluted weighted average number of shares                                  3,299       3,263        3,340       3,164       3,386

Balance Sheet Data:
Working capital                                                         $  6,692    $  4,491     $  6,829    $  6,787    $  8,958
Total assets                                                            $ 70,630    $ 75,856     $ 67,192    $ 57,148    $ 49,047
Long-term debt                                                          $    389    $    304     $    320    $    561    $    719
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>   13


<TABLE>
<S>                                                                     <C>         <C>          <C>         <C>         <C>
Stockholders' equity                                                    $ 27,158    $ 26,212     $ 27,433    $ 24,881    $ 20,337
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Restated to report separately, as a discontinued operation, the results of
    operations of COM-MED Systems.

(2) See Note 1 of notes to Consolidated Financial Statements.

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

RESULTS OF OPERATIONS

1998 as Compared with 1997

        Any statements in this annual report on Form 10-K concerning the
Company's business outlook or future economic performance; anticipated
profitability, revenues, expenses or other financial items; together with other
statements that are not historical facts, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
in currency exchange rates, changes and delays in new product introduction,
customer acceptance of new products, changes in government regulations, changes
in pricing or other actions by competitors and general economic conditions, as
well as other risks detailed in the Company's filings with the Securities and
Exchange Commission.

        The Company derives its earnings from Group 1 Software, Inc., its 81%
owned subsidiary, which develops, acquires, markets and supports specialized
marketing and mail management software. For the year ended March 31, 1998, the
Company's revenue was $61.0 million compared with $54.5 million the prior year.
The Company had net earnings of $1.1 million or $0.29 per share compared with a
net loss of $1.6 million or $0.54 per share the prior year. The increase in
profitability is primarily attributed to write downs in the net realizable value
of certain capitalized software products taken during 1997.

        For the year ended March 31, 1998, Group 1's revenue was $61.0 million
compared with $54.5 million for the prior year. Group 1 had net earnings for the
year of $1.4 million compared with a net loss of $1.6 million for fiscal 1997.
The increase in profitability is primarily attributed to write downs in the net
realizable value of certain capitalized software products taken during 1997.

        All of Group 1's operations are in the one business segment broadly
defined as marketing support software. Traditionally, Group 1 does not have a
material order backlog for its software products at any given time. Group 1
recognizes maintenance and enhancement revenue over the life of the service
agreement, usually from one to five years. International revenues account for
15.4% of Group 1's total revenue in fiscal 1998 and 15.7% in fiscal 1997. That
1998 percentage is expected to increase with the continued growth of European
revenue.

        Software license fees and related revenue of $32.8 million represented
an increase of 7% over the prior year attributable primarily to increased sales
of the Doc 1 product offset by lower sales of the mailing efficiency products as
well as World Trak and PC Postal Products which were licensed on a long term
basis to third parties for distribution during 1998. As a percent of total
revenue, software license and related revenue was 54% and 56% for fiscal years
1998 and 1997, respectively.

        Licensing of Electronic Document Systems increased by 40% over the prior
fiscal year. Sales of the DOC 1 system continue to grow both in North America
and Europe.

        The Company's core Mailing Efficiency software license fees for fiscal
1998 decreased 34% over the prior year. The decreases were in both mainframe and
open systems platforms resulting from price competition on the open systems
platform.

        License fees from Database Marketing Systems increased 138% for the
fiscal year. The increase resulted from higher sales in the Geocoding, Model 1
and NADIS products. The increases were offset by lower sales in the Data Designs
product along with lower sales in other coding products.


                                       12
<PAGE>   14


        License fees for Customer Information Management Systems decreased 94%
in fiscal 1998 due to lower sales of the World Trak products which were licensed
on a long term basis to a third party for distribution during 1998.

        Maintenance and other revenue of $28.2 million for the year increased
18% over the prior year. Maintenance and other revenue accounted for 46% of
total revenue in 1998 and 44% of total revenue in 1997. Recognized maintenance
fees were $21.2 million in 1998 and $18.2 million in 1997, an increase of 16%.
Professional service and educational training revenues of $7.0 million in 1998
and $5.7 million in 1997 represented an increase of 23%. The maintenance renewal
rate was 84% for fiscal year 1998 compared with 83% in fiscal 1997.

        Group 1 expects maintenance renewal revenue to grow at a lower
percentage than in prior years due to the high rate of conversion to Open System
products, which conversion typically includes multi-year maintenance agreements
and increased sales of certain third party products for which maintenance is
provided by the third party. It is anticipated that the other service revenues
will continue to increase as a percentage of Group 1's total revenue, resulting
from the growth of DOC 1 and Data Designs products whose customers typically
request more consulting and professional services than do the Company's
customers for traditional products.

        Total operating costs of $58.2 million amounted to 95% of revenue in
1998 compared with $56.8 million or 104% of revenue during 1997.

        Software license expense decreased to $10.5 million in fiscal 1998
representing 32% of software license and related revenues compared with $12.5
million in 1997 representing 41% of software license and related revenues. The
decrease was due to the write-downs of software at the end of fiscal 1997 offset
by increases in royalty expense in 1998 from the sale of third party products.
Excluding the write-downs, software license expense in 1997 was $8.3 million or
27% of software license revenue. The Company believes these costs, as a
percentage of revenue will remain at approximately the current levels.

        Maintenance and service expense decreased to $12.5 million in 1998 from
$12.9 million in 1997, 44% and 54% of maintenance and service revenue,
respectively. The decrease in expense is due to the new distribution agreements
for the WorldTrak and PC Postal products along with other cost saving measures
taken during the year partially offset by higher costs of professional service
and education training related to these services.

        Included in maintenance and service expense above are professional
service and educational training costs of $5.1 million which were 73% of
professional services revenue during 1998 and $4.6 million and 81% of
professional services revenue for the prior year.

        Costs of maintenance were $7.4 million for 1998 representing 35% of
maintenance revenue compared with costs of $8.3 million and 45% of revenue in
1997. The decreased costs as a percentage of maintenance revenue were primarily
due to increased maintenance revenue along with the new licensing agreements for
the WorldTrak and PC Postal product lines, which shifted the support costs for
these products to the respective licensees. The company anticipates these costs
to remain relatively close to their current levels.

        Research, development and indirect support expenses (after
capitalization of certain development costs) totaled $2.9 million in 1998 and
$2.7 million in 1997, representing 5% of total revenue for both periods. The
company anticipates these costs to remain relatively close to their current
levels.

        Selling and marketing expenses totaled $20.9 million or 34% of revenue
in 1998 and $20.2 million or 37% of total revenue in 1997. The decrease in costs
as a percentage of revenue are primarily due to lower costs associated with the
WorldTrak and PC licensing agreements along with other cost saving measures
taken during the year. These savings were offset by slightly higher marketing
costs in fiscal 1998. The company expects these costs to remain relatively close
to current levels as a percentage of revenue.


                                       13
<PAGE>   15


        General and administrative expenses were $7.9 million or 13% of total
revenue in 1998 compared with $6.6 million or 12% for 1997. The increase in the
current year is primarily due to higher executive compensation accruals.

        The provision for doubtful accounts was $3.5 million or 5.8% of revenue
in fiscal 1998 as compared with $2.0 million or 3.6% of revenue in fiscal year
1997. The increase in the current year provision is primarily based upon
increased reserves for WorldTrak and PC accounts receivables.

        Net non-operating expense was $0.5 million in 1998 compared to net
non-operating expense of $0.4 million in 1997. The difference primarily reflects
higher expense from loss on disposal of assets offset by lower net interest
expense. The company expects this expense to decrease due to lower short-term
borrowing requirements.

        The Company's effective tax rate was 39% in 1998 and 30% in 1997. The
current year's rate is the net effect of a 10% domestic tax benefit on taxable
loss combined with a 33% foreign tax rate on taxable net income.

The Year 2000 Issue

        The year 2000 issue affects virtually all companies and organizations.
Many existing computer programs and digital systems used by, and sold by, Group
1 Software, use only two digits to identify a year in the data field. These
programs and systems were designed and developed without considering the impact
of the upcoming change in the century.

In 1997, the Company formed two special task forces:

The first task force was established to identify and evaluate our internal
systems and applications that may be affected by the year 2000 issue; modify or
replace those systems and applications so they will work properly in the year
2000, and communicate with our suppliers to make sure they are prepared for the
year 2000.

The second task force was established to evaluate the products sold by us, to
ensure they will function as designed after the Year 2000.

The Company has identified and evaluated all of our systems and applications
that may be affected by the Year 2000 issue, and have developed plans to ready
these systems and applications for the century change. Modification and
replacement projects are currently under way. We plan to have our internal
systems and applications ready for the year 2000 by mid-1999 and to have all of
the products sold by us Year 2000 compliant by December 1998. We do not expect
the costs to address the year 2000 issue to be material


1997 as Compared with 1996

        The Company derives its earnings from Group 1 Software, Inc., its 81%
owned subsidiary, which develops, acquires, markets and supports specialized
marketing and mail management software. For the year ended March 31, 1997, the
Company's revenue was $54.5 million compared with $45.9 million the prior year.
The Company had a net loss from continuing operations of $1.6 million or $0.54
per share compared with net earnings of $2.8 million or $0.79 per share the
prior year. The decline in profitability is primarily attributed to write-downs
in the net realizable value of certain capitalized software products. The write
downs result from decisions to de-emphasize certain products, principally DOS
based PC products which are being replaced with Windows based products and
certain mainframe products which are being replaced with new Open Systems
products. Additionally, Group 1 incurred additional costs associated with
implementation of the United States Postal Service's new mail classification
regulations that became effective July 1, 1996.

        For the year ended March 31, 1997, Group 1's revenue was $54.5 million
compared with $45.9 million for the prior year. Group 1 had a net loss for the
year of $1.6 million compared with net earnings of $3.7 million for fiscal 1996.
The decline in profitability is primarily attributed to write downs in the net
realizable value of


                                       14
<PAGE>   16


certain capitalized software products. The write downs result from decisions to
de-emphasize certain products, principally DOS based PC products that are being
phased out and replaced with Windows based products and certain mainframe
products which are being replaced with new Open Systems products. Additionally,
Group 1 incurred additional costs associated with implementation of the United
States Postal Service's new mail classification regulations that became
effective July 1, 1996.

        All of Group 1's operations are in the one business segment broadly
defined as marketing support software. Traditionally, Group 1 does not have a
material order backlog for its software products at any given time. Group 1
recognizes maintenance and enhancement revenue over the life of the service
agreement, usually from one to five years. International revenues account for
15.7% of Group 1's total revenue. That percentage is expected to increase with
the continued growth of European revenue.

        Software license fees and related revenue of $30.6 million represented
an increase of 19% over the prior year attributable primarily to new product
licenses. As a percent of total revenue, software license and related revenue
was 56% for fiscal years 1997 and 1996.

        Licensing of Electronic Document Systems increased by 38% over the prior
fiscal year. Sales of the DOC 1 system continue to grow both in North America
and Europe.

        The Company's core Mailing Efficiency software license fees for fiscal
1997 increased 20% over the prior year. The increases were primarily due to
continued growth of the Open Systems product suite and the new international
postal software introduced in the third quarter of fiscal 1997, partially offset
by declines in PC product revenue. Mainframe revenue also increased during the
period.

        License fees from Database Marketing Systems increased 12% for the
fiscal year. The increase resulted from higher revenues from DataDesigns
products (acquired in August 1995) and also increased sales of traditional
Database Marketing products. These increases were offset by lower sales of the
NADIS product. During most of fiscal 1997 the NADIS product was sold through a
direct sales force. The NADIS product continues to be sold through a direct
sales; however, it is now sold by the Mailing Efficiency sales force, rather
than a dedicated sales force. During the third quarter, the Company completed an
exclusive product licensing agreement with Unica Technologies to market its
predictive modeling software under the trademark "Model 1." Sales of these
products during the fourth quarter also contributed to the increases in this
category.

        License fees from Customer Information Management Systems software
decreased by $0.1 million for fiscal year 1997 compared with the prior year. As
a result of the decrease in sales of the WorldTrak product acquired in November
1995, the Company has revised its distribution strategy for this product line.
The market for the WorldTrak product changed significantly during fiscal 1997.
Several competitors with greater resources emerged during the year. In order to
address the changing market, Group 1 has entered into distribution agreements
with business partners for this product and has discontinued its direct sales
effort.

        Maintenance and other revenue of $23.9 million for the year increased
19% over the prior year. Maintenance and other revenue accounted for 44% of
total revenue in 1997 and 1996. Recognized maintenance fees were $18 million in
1997 and $17.1 million in 1996, an increase of 5%. Professional service and
educational training revenues of $5.9 million in 1997 and $3 million in 1996
represented an increase of 97%. The maintenance renewal rate was 83% for fiscal
year 1997 compared with 85% in fiscal 1996.

        Group 1 expects maintenance renewal revenue to grow at a lower
percentage than in prior years due to the high rate of conversion to Open System
products, which conversion typically includes multi-year maintenance agreements.
In addition, as a result of the delay in releasing certain software that fully
complied with all new United States Postal Service reclassification regulations,
the Company extended maintenance contracts by six months for users of its
MailStream products. It is anticipated that the other service revenues will
continue to increase as a percentage of Group 1's total revenue, resulting from
the growth of DOC 1, WorldTrak and Data Designs products whose customers
typically request more consulting and professional services than do the
Company's traditional customers.


                                       15
<PAGE>   17


        Total operating costs of $56.8 million amounted to 104% of revenue in
1997 compared with $40.6 million or 89% of revenue during 1996. Of the increase
in cost, approximately $3.1 million was related to DataDesigns, WorldTrak and
Latin American operations which were $0.8 million in the prior and $4.2 million
was attributed to the write downs to net realizable value of capitalized
software. Excluding the capitalized software write downs, total operating costs
represented 96% of revenue during 1997.

        Software license expense increased to $12.5 million in 1997 (including
the write-downs) representing 41% of software license and related revenues
compared with $6.1 million or 24% in 1996. Excluding the write-downs to
capitalized software, software license expense increased to $8.3 million in 1997
representing 27% of software license and related revenues.

        Maintenance and service expense increased to $12.9 million in 1997 from
$8.1 million in 1996, 54% and 40% of maintenance and service revenue,
respectively. The increase in expense as a percent of maintenance and service
revenue reflects the proportionately higher percentage of lower margin revenue
derived from service versus maintenance, as well as the costs of distribution
and service of Group 1's software associated with the implementation of the
United States Postal Service's new mail classification regulations effective
July, 1, 1996.

        Included in maintenance and service expense above are professional
service and educational training costs of $4.6 million which were 79% of
professional services revenue during 1997 and $2.3 million and 77% of
professional services revenue for the prior year.

        Costs of maintenance were $8.3 million for 1997 representing 46% of
maintenance revenue compared with costs of $5.4 million and 32% of maintenance
revenue in 1996. The increased cost as a percentage of maintenance revenue was
primarily due to continued higher distribution costs and technical support
expenses for its mail classification software stemming from the United States
Postal Service's postal reclassification regulations which became effective July
1, 1996. The Company anticipates the cost as a percentage of revenue to decline
as the incremental cost associated with the new postal regulations declines.

        Research, development and indirect support expenses (after
capitalization of certain development costs) totaled $2.7 million in 1997 and
$1.8 million in 1996, representing 5% and 4% of total revenue, respectively. The
increases are due to increased support requirements for Group 1's expanded
computer platforms and internal network systems, as well as expenses for
DataDesigns and WorldTrak for which there were no material amounts in the prior
year. The Company anticipates that these costs as a percentage of revenue will
increase due to expanded product offerings.

        Selling and marketing expenses totaled $20.2 million or 37% of revenue
in 1997 and $17 million in 1996 which also represented 37% of revenue. The
current year expenses include $2.1 million for DataDesigns, WorldTrak and Latin
America, which were $0.7 million in the prior year. Additionally, the current
year expenses reflect higher sales compensation expense associated with the
increased revenue, as well as increased staffing and marketing for the DOC 1,
NADIS and Open System products. The Company believes these costs, as a
percentage of revenue, will remain at approximately these levels.

        General and administrative expenses were $6.6 million or 12% of total
revenue in 1997 compared with $6.1 million or 13% for 1996. The decrease in the
current year as a percent of revenue is primarily due to lower executive
compensation accruals and economies of scale achieved with costs spread over a
larger revenue base.

        The provision for doubtful accounts was $2 million or 3.6% of revenue in
fiscal 1997 as compared with $1.6 million or 3.5% in fiscal year 1996. The
increase in the current year provision is based upon the larger accounts
receivable balances at March 31, 1997 as compared with the same period the prior
year.

        Net non-operating expense was $0.4 million for 1997 compared to net
non-operating income of $0.2 million for 1996. These differences primarily
reflect higher net interest expense.


                                       16
<PAGE>   18


        The Company's effective tax rate was <30%> in 1997 and 36% in 1996. The
current year's rate is the net effect of a <37%> domestic tax benefit on
taxable loss combined with a 33% foreign tax rate on taxable income.

SEASONALITY AND INFLATION

        Group 1 in the past has experienced greater sales and earnings in the
January-March quarter, the fourth quarter of its fiscal year, however, there can
be no certainty that this will occur in the future. This seasonal factor is
believed to be attributable to buying patterns of major accounts and also to a
fiscal year incentive program for Group 1's sales representatives. Group 1's
revenue and resultant earnings have shown substantial variation on a
quarter-to-quarter basis. A substantial portion of revenue in any given quarter
is comprised of a relatively limited number of high-value software license
agreements. These license agreements represent the culmination of a sales cycle
averaging three to six months. Any significant lengthening in the sales cycle
can have the effect of moving revenue from one quarter into the next,
contributing to quarter-to-quarter variations.

        Prices remain stable for Group 1's products. Inflation directly affects
Group 1's cost structure principally in the areas of employee compensation and
benefits, occupancy and support services and supplies.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's working capital was $6.7 million at March 31, 1998 as
compared with $4.5 million in the prior year. The current ratio was 1.2 to 1 at
March 31, 1998, compared with 1.1 to 1 at March 31, 1997. Note that the current
portion of deferred revenue related to maintenance and enhancement contracts is
included in current liabilities. Accordingly, working capital and current ratios
may not be directly comparable to such data for companies in other industries
where similar revenue deferrals are not typical.

        The Company provides for its cash requirements through cash funds
generated from operations. Additionally, its Group 1 Software, Inc. subsidiary
maintains a line of credit facility. At March 31, 1998, Group 1 maintained a
2-year $10,000,000 bank line of credit arrangement with Crestar bank expiring
August 31, 1998. The line of credit bears interest at the bank's prime rate
(8.5% at March 31, 1998) or Libor plus 175 basis points at Group 1's option. The
line of credit arrangement is collateralized by trade accounts receivable and
maintenance and renewal accounts receivable (excluding installment accounts
receivable) and among other things requires Group 1, to maintain an EBIT to
interest expense ratio of at least 1.5 to 1 through March 31, 1998 and at least
2.0 to 1 thereafter. The arrangement also requires Group 1 to maintain a total
liabilities to EBITDA ( earnings before interest, taxes, depreciation and
amortization ratio of no more than 5.0 to 1 through March 31, 1998 and no more
than 4.0 to 1 thereafter. At March 31, 1998, there were no borrowings under the
facility, at March 31, 1997, borrowings under the line of credit were $7.1
million.

        During fiscal 1998 net income of $1.1 million along with non-cash
expenses of $11.3 million provided a total of $ 12.4 million cash from operating
activities. A decrease in accounts receivables added $4.1 million cash during
the year from operating activities.. This decrease was due to improved
collections during the year. Deferred revenues increased cash by $0.3 million,
other working capital items increased cash by $2.0 million. Cash flows from
investing activities consist of expenditures for investments in software
development and capital equipment of $9.5 million. Short-term borrowings
decreased by $7.1 million while long-term debt increased $0.1 million.

        Group 1's practice of accepting license agreements under installment
payment arrangements substantially increases its working capital requirements.
Generally, these arrangements are for a period of one to three years after a
minimum down payment of 20% of the principal amount of the contract. Interest
currently ranges from 10% to 12%. In the years ended March 31, 1998, 1997, and
1996, the principal amount of installment agreements entered into during the
year represented 3%, 10%, and 15% of the Company's revenue, respectively.
Installment receivables included in accounts receivable are $8.0 million and
$11.9 million at March 31, 1998 and 1997, respectively. The Company continues to
experience a significant interest in financing of software purchases by a broad
range of customers, in every industry segment served. The installment receivable
balance, in addition to the Company's policy of offering competitive trade terms
of payment, make it difficult to accurately portray a relationship between the
outstanding accounts receivable balance and the current year revenues.


                                       17
<PAGE>   19


        Group 1 continually evaluates the credit and market risks associated
with outstanding receivables. In the course of this review, Group 1 considers
many factors specific to the individual client as well as to the concentration
of receivables within industry groups. Group 1's installment receivables are
predominately with clients (service bureaus) who provide computer services to
the direct marketing industry. Many of these clients have limited capital and
insufficient assets to secure their liability with the Group 1. The service
bureaus are highly dependent on Group 1's software and services to offer their
customers the economic benefit of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates from
the Company. The service bureau industry is also highly competitive and subject
to general economic cycles, as they impact advertising and direct marketing
expenditures. The Company is aware of no current market risk associated with the
installment receivables. Service bureaus represent approximately $5.1 million or
63 %, of the installment receivables at March 31, 1998.

        As of March 31, 1998, the Company's capital resource commitments
consisted primarily of non-cancelable operating lease commitments for office
space and equipment. The Company believes that its current debt services,
minimum lease obligations and other short-term and long-term liquidity needs can
be met from cash flows from operations and current credit facility. The Company
believes that its long-term liquidity needs are minimal and no large capital
expenditures are anticipated, except for the continuing investment in
capitalized software development costs, which the Company believes can be funded
from operations. Historically, the Company has been able to negotiate capital
leases for its acquisition of equipment.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        See pages 19 through 39.


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

        None.


                                       18
<PAGE>   20


                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders and
   Board of Directors
   COMNET Corporation


        We have audited the accompanying consolidated balance sheets of COMNET
Corporation (COMNET) and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of COMNET's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of COMNET
Corporation and Subsidiaries as of March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.


COOPERS & LYBRAND, L.L.P.

McLean, Virginia
June 12, 1998


                                       19
<PAGE>   21


                               COMNET CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          MARCH 31,
                                                                -----------------------------
                                                                    1998             1997
                                                                ------------     ------------
<S>                                                             <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                    $  3,683,398     $  1,628,552
   Trade and installment accounts receivable, less
     allowance of $3,603,400 and $3,208,000                       27,232,842       32,460,267
   Deferred income taxes                                           3,408,086        2,385,099
   Prepaid expenses and other current assets                       3,085,453        4,532,748
                                                                ------------     ------------
Total current assets                                              37,409,779       41,006,666

Installment accounts receivable, long-term                         3,810,279        6,169,987
Property and equipment, net                                        3,543,502        3,666,782
Computer software, net                                            23,358,862       21,870,529
Other assets                                                       2,507,090        3,142,336
                                                                ------------     ------------
   Total assets                                                 $ 70,629,512     $ 75,856,300
                                                                ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Short-term borrowings                                        $      - - -     $  7,096,854
   Accounts payable                                                2,098,820        3,168,485
   Current portion of long-term debt                                 157,017          163,748
   Accrued expenses                                                6,278,611        5,932,607
   Accrued compensation                                            4,699,110        3,984,139
   Current deferred revenues                                      17,484,138       16,169,758
                                                                ------------     ------------
Total current liabilities                                         30,717,696       36,515,591

Long-term debt, net of current portion                               389,144          303,504
Deferred revenues, long-term                                       3,653,055        4,605,606
Deferred income taxes                                              3,029,299        2,801,078
Minority interest in net earnings of consolidated subsidiary       5,682,486        5,418,731
                                                                ------------     ------------
  Total liabilities                                               43,471,680       49,644,510
                                                                ------------     ------------
Commitments and contingent liabilities

Stockholders' equity:
6% cumulative convertible preferred stock (Note 9)                 2,845,857        2,845,857
Common stock $0.50 par value; 10,000,000 shares authorized;
    3,593,690 and 3,587,990 issued and outstanding                 1,796,845        1,793,995
Capital contributed in excess of par value                        17,763,064       17,728,151
Retained earnings                                                  6,480,530        5,507,940
Cumulative foreign currency translation                              286,886          351,197
                                                                ------------     ------------
                                                                  29,173,182       28,227,140
Less treasury stock at cost, 316,244 shares                       (2,015,350)      (2,015,350)
                                                                ------------     ------------
Total stockholders' equity                                        27,157,832       26,211,790
                                                                ------------     ------------
Total liabilities and stockholders' equity                      $ 70,629,512     $ 75,856,300
                                                                ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       20
<PAGE>   22


                               COMNET CORPORATION
                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                     Year Ended March 31,
                                                        ----------------------------------------------
                                                            1998             1997             1996
                                                        ------------     ------------     ------------
<S>                                                     <C>              <C>              <C>
Revenue:
   Software license and related revenues                $ 32,786,215     $ 30,620,800     $ 25,785,598
   Maintenance and other revenue                          28,217,682       23,926,149       20,087,224
                                                        ------------     ------------     ------------
     Total revenue                                        61,003,897       54,546,949       45,872,822
                                                        ------------     ------------     ------------
Costs and expenses:
   Software license expense                               10,491,100       12,511,000        6,107,200
   Maintenance and service expense                        12,544,100       12,914,285        8,109,000
   Research, development and indirect support              2,857,700        2,654,500        1,770,100
   Selling and marketing                                  20,893,408       20,243,908       16,952,140
   General and administrative                              7,913,233        6,551,044        6,083,501
   Provision for doubtful accounts                         3,505,000        1,956,403        1,617,637
                                                        ------------     ------------     ------------
     Total costs and expenses                             58,204,541       56,831,140       40,639,578
                                                        ------------     ------------     ------------
Operating earnings (loss)                                  2,799,356       (2,284,191)       5,233,244

Non-operating income (expense), net                         (464,651)        (425,627)         238,871
                                                        ------------     ------------     ------------
Earnings (loss) from operations before provision for
    income taxes                                           2,334,705       (2,709,818)       5,472,115

Provisions (benefit) for income taxes                        921,360         (799,630)       1,985,000

Minority interest in net earnings (loss) of
    consolidated subsidiary                                  263,755         (309,882)         655,578
                                                        ------------     ------------     ------------
Net earnings (loss)                                        1,149,590       (1,600,306)       2,831,537

Preferred stock dividend requirements                       (177,000)        (177,000)        (177,000)
                                                        ------------     ------------     ------------
Net earnings (loss) available to common stockholders    $    972,590     $ (1,777,306)    $  2,654,537
                                                        ============     ============     ============

Basic earnings (loss) per share of common stock         $       0.30     $      (0.54)    $       0.85

Diluted earnings (loss) per share of common stock       $       0.29     $      (0.54)    $       0.79
                                                        ============     ============     ============

Basic Weighted average common shares outstanding           3,273,826        3,262,749        3,139,863
                                                        ============     ============     ============
Diluted Weighted average common and common
    Equivalent shares outstanding                          3,299,285        3,262,749        3,340,126
                                                        ============     ============     ============
</TABLE>

See notes to consolidated financial statements.


                                       21
<PAGE>   23
                               COMNET CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    Years Ended March 31, 1998, 1997 and 1996

Common Stock

<TABLE>
<CAPTION>
                                                   6%                             Capital
                                               Cumulative          $0.50       Contributed In
                                              Convertible           Par        Excess of Par      Retained
                                             Preferred Stock       Value           Value          Earnings
                                             ---------------   ------------    -------------    ------------
<S>                                          <C>               <C>             <C>              <C>
Balance, March 31, 1995                          $2,845,857      $1,691,874      $15,738,644      $4,630,709

Dividends to preferred stockholders                   - - -           - - -            - - -        (177,000)
Issuance of stock upon exercise of options            - - -          89,471        1,733,217           - - -
Gain on foreign currency translation                  - - -           - - -            - - -           - - -
Unrealized gain on investments                        - - -           - - -            - - -           - - -
Net earnings                                          - - -           - - -            - - -       2,831,537
                                              -------------    ------------    -------------    ------------
Balance, March 31, 1996                           2,845,857       1,781,345       17,471,861       7,285,246

Dividends to preferred stockholders                   - - -           - - -            - - -        (177,000)
Issuance of stock upon exercise of options            - - -          12,650          256,290           - - -
Gain on foreign currency translation                  - - -           - - -            - - -           - - -
Unrealized gain on investments                        - - -           - - -            - - -           - - -
Net loss                                              - - -           - - -            - - -      (1,600,306)
                                              -------------    ------------    -------------    ------------
Balance, March 31, 1997                           2,845,857       1,793,995       17,728,151       5,507,940

Dividends to preferred stockholders                   - - -           - - -            - - -        (177,000)
Issuance of stock upon exercise of options            - - -           2,850           34,913           - - -
Gain on foreign currency translation                  - - -           - - -            - - -           - - -
Net earnings                                          - - -           - - -            - - -       1,149,590
                                              =============    ============    =============    ============
Balance, March 31, 1998                          $2,845,857      $1,796,845      $17,763,064      $6,480,530
                                              =============    ============    =============    ============
</TABLE>


<TABLE>
<CAPTION>
                                                                Unrealized      Cumulative
                                               Treasury         Gain (Loss)       Foreign           Total
                                                 Stock             from          Currency       Stockholders'
                                                at Cost         Investments     Translation        Equity
                                              ------------     ------------    -------------    ------------
<S>                                          <C>               <C>             <C>              <C>
Balance, March 31, 1995                        $(2,015,350)        $(44,720)         $18,486     $22,865,500

Dividends to preferred stockholders                  - - -            - - -            - - -        (177,000)
Issuance of stock upon exercise of options           - - -            - - -            - - -       1,822,688
Gain on foreign currency translation                 - - -            - - -           47,801          47,801
Unrealized gain on investments                       - - -           42,545            - - -          42,545
Net earnings                                         - - -            - - -            - - -       2,831,537
                                              ------------     ------------    -------------    ------------
Balance, March 31, 1996                         (2,015,350)          (2,175)          66,287      27,433,071

Dividends to preferred stockholders                  - - -            - - -            - - -        (177,000)
Issuance of stock upon exercise of options           - - -            - - -            - - -         268,940
Gain on foreign currency translation                 - - -            - - -          284,910         284,910
Unrealized gain on investments                       - - -            2,175            - - -           2,175
Net loss                                             - - -            - - -            - - -      (1,600,306)
                                              ------------     ------------    -------------    ------------
Balance, March 31, 1997                         (2,015,350)           - - -          351,197      26,211,790

Dividends to preferred stockholders                  - - -            - - -            - - -        (177,000)
Issuance of stock upon exercise of options           - - -            - - -            - - -          37,763
Gain on foreign currency translation                 - - -            - - -          (64,311)        (64,311)
Net earnings                                         - - -            - - -            - - -       1,149,590
                                              ============     ============    =============    ============
Balance, March 31, 1998                        $(2,015,350)           - - -         $286,886     $27,157,832
                                              ============     ============    =============    ============
</TABLE>


See notes to consolidated financial statements.


                                       22
<PAGE>   24


                               COMNET CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              Year Ended March 31,
                                                               ----------------------------------------------
                                                                   1998             1997             1996
                                                               ------------     ------------     ------------
<S>                                                            <C>              <C>              <C>
Cash flows from operating activities:
     Net earnings (loss)                                       $  1,149,590     $ (1,600,306)    $  2,831,537
   Adjustments to reconcile net earnings (loss) from
   operations to net cash provided by operating activities:
        Amortization expense                                      7,159,139       10,849,115        5,165,487
        Depreciation expense                                      1,151,354          986,284          861,499
        Provision for doubtful accounts receivable                3,505,000        1,956,403        1,634,638
        Net loss on disposal of assets                               51,306            - - -            - - -
        Deferred income taxes                                      (801,637)        (807,875)       1,511,172
        Minority interest in earnings of
          consolidated subsidiary                                   263,755         (309,882)         655,578
   Changes in assets and liabilities:
        (Increase) decrease in accounts receivable                4,070,387      (10,472,721)      (9,620,017)
        (Increase) decrease in other current assets               1,290,940         (556,073)         (64,651)
        (Increase) decrease in other assets                          89,657         (441,139)         299,317
        Increase in deferred revenues                               292,385        2,640,269        3,580,187
        Increase (decrease) in accounts payable                  (1,068,385)         676,928         (320,329)
        Increase (decrease) in accrued expenses                   1,596,964          (56,069)         388,735
                                                               ------------     ------------     ------------
     Net cash provided by operating activities                   18,750,455        2,864,934        6,923,153
                                                               ------------     ------------     ------------

Cash flows from investing activities:
        Purchase and development of computer software            (8,328,238)     (10,614,891)      (8,733,446)
        Purchase of equipment and improvements                   (1,150,602)      (1,255,531)      (1,317,307)
        Purchase of marketable securities                             - - -            - - -      (18,067,097)
        Sale of marketable securities                                 - - -        1,981,341       19,910,100
                                                               ------------     ------------     ------------
     Net cash used in investing activities                       (9,478,840)      (9,889,081)      (8,207,750)
                                                               ------------     ------------     ------------

Cash flows from financing activities:
        Proceeds from short-term borrowings                      11,853,526       20,961,666        8,384,995
        Reduction of short-term borrowings                      (18,950,380)     (13,864,812)      (8,384,995)
        Proceeds from exercise of stock options                      37,763          268,940        1,822,688
        Proceeds from exercise of subsidiary stock options            - - -            - - -            4,967
        Increase of long-term-debt                                  199,511          559,295            - - -
        Reduction of long-term debt                                (120,600)        (976,124)        (331,251)
        Dividend paid on preferred stock                           (177,000)        (177,000)        (177,000)
                                                               ------------     ------------     ------------
     Net cash provided by (used in) financing activities         (7,157,180)       6,771,965        1,319,404
                                                               ------------     ------------     ------------

     Net increase (decrease) in cash and cash equivalents         2,114,435         (252,182)          34,807
     Effect of currency translation on cash                         (59,589)          36,213         (129,082)
     Cash and cash equivalents at beginning of period             1,628,552        1,844,521        1,938,796
                                                               ------------     ------------     ------------
     Cash and cash equivalents at end of period                $  3,683,398     $  1,628,552     $  1,844,521
                                                               ============     ============     ============
</TABLE>


See notes to consolidated financial statements.


                                       23
<PAGE>   25


                               COMNET CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MARCH 31, 1998, 1997 AND 1996


(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

        COMNET Corporation ("COMNET" through its majority owned subsidiary, 
Group 1 Software, Inc. ("Group 1") develops, acquires, markets and supports
specialized marketing and mail management software. The Company distributes all
of its products in North America and its Electronic Document Systems throughout
the World.

Principles of Consolidation

        The consolidated financial statements of the Company include the
accounts of COMNET Corporation and its wholly and majority owned subsidiaries.
All material intercompany transactions and balances have been eliminated in
consolidation.

Estimates

        The preparation of financial statements in conformity with generally
accepted accounting principles 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 date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Revenue Recognition

        The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants' Statement of Position 91-1 on Software Revenue
Recognition. Revenue from perpetual licenses and the portion of royalty revenues
not subject to future obligations is generally recognized after execution of a
licensing agreement and shipment of the product provided that no significant
vendor obligations remain and the resulting receivable is deemed collectible by
management.

        Maintenance and enhancement (post contract support) revenues are
deferred and recognized ratably over the life of each contract. Costs related to
performance under post-contract support agreements are expensed as incurred.

        The amount of deferred revenue at March 31, 1998, to be recognized
during the subsequent years is:

<TABLE>
<S>                                                    <C>
           1999                                        $  17,484,138
           2000                                            2,477,433
           2001                                              831,003
           2002                                              234,517
           2003                                                7,087
           2004 & beyond                                     103,015
                                                       --------------
                                                       $  21,137,193
                                                       ==============
</TABLE>

        Contracts for professional services are negotiated individually and are
non-cancelable. The Company generally recognizes revenues from professional
service contracts on a time and materials basis as the work is performed. Fixed
price professional service contracts are recognized using the
percentage-of-completion method as work is performed, measured primarily by the
ratio of labor hours incurred to total estimated labor hours for


                                       24
<PAGE>   26


each specific contract. When the total estimated cost of a contract is expected
to exceed the contract price, the total estimated loss is charged to expense in
the period when the information is known.

Cash Equivalents

        Cash equivalents consist of investments with original maturities of 90
days or less, which are readily convertible into cash.

Installment Accounts Receivable

        License agreements may be executed under installment contracts, which
provide for interest charges and monthly payments, with terms up to three years.
Interest income from such contracts, which is included in software licenses and
related revenue, was $462,000, $468,000, and $440,000, in 1998, 1997, and 1996,
respectively.

Property and Equipment

        Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from three to
ten years. Leasehold improvements are amortized on a straight-line basis over
the shorter of their useful lives or the lives of the respective leases.

Research and Product Development

        Research and product development costs not subject to Financial
Accounting Standards Board ("FASB") Statement No. 86, "Accounting for the Cost
of Computer Software to be Sold, Leased, or Otherwise Marketed," are expensed as
incurred and relate mainly to the development of new products and on-going
maintenance of existing products.

        Software development costs incurred subsequent to establishment of the
software's technological feasibility are capitalized. Capitalization ceases when
the software is available for general release to customers. All costs not
meeting the requirements for capitalization are expensed in the period incurred.
Capitalized software development costs are amortized by the greater of (a) the
ratio that current gross revenues for the product bear to the total of current
and anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. At the balance sheet date, the Company evaluates the
net realizable value of the capitalized costs and adjusts the current period
amortization for any impairment of the capitalized asset value.

        Costs for research and development incurred in 1998, 1997, and 1996 were
approximately $11,493,000, $11,986,000, and $9,445,000, respectively. Under FASB
Statement No. 86, software development costs amounting to $8,635,000,
$9,331,000, and $7,675,000, respectively, were capitalized. During the years
ended March 31, 1998, 1997, and 1996, amortization of capitalized internally
developed computer software costs, based on an estimated economic life of no
more than five years, was $6,068,000, $8,540,000, and $4,010,000, respectively.


Goodwill

        The Company has classified as goodwill the cost in excess of fair value
of the net assets of companies acquired in purchase transactions. Goodwill is
being amortized on a straight-line basis over periods not exceeding 9 years.
Amortization charged to operations amounted to $251,000, $171,000, and $71,000,
for 1998, 1997, and 1996, respectively. At each balance sheet date, the Company
evaluates the net realizable value of goodwill based upon expectations of
non-discounted cash flows and operating income. Based upon its most recent
analysis, Group 1 believes that no impairment of goodwill existed at March 31,
1998.


                                       25
<PAGE>   27


Foreign Currency Translation

        Assets and liabilities of the Company's foreign operation are translated
into U.S. dollars using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at the monthly average exchange rate. Gains
and losses from foreign currency transactions are included in the results of
operations currently, while those resulting from translation of financial
statement amounts are included as a separate component of stockholders' equity.

Income Taxes

        The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying currently enacted statutory
tax rates applicable to future years to differences between the financial
statements carrying amounts and the tax bases of existing assets and
liabilities.

Minority Interest

        Minority interest of approximately 18.8% for each of the years ending
March 31, 1998, 1997, and 1996, is reflected in consolidation and is the portion
of Group 1 Software, Inc. ("Group 1") that is not owned by the Company.

Earnings (loss) per Share of Common Stock

        The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, issued by the Financial Accounting Standards Board ("FASB")
in February 1997, requiring dual presentation of basic and diluted per share
earnings on the face of the income statement. Basic earnings per share is based
on the weighted average number of shares of common stock outstanding. On a
diluted basis, earnings and shares outstanding are adjusted for stock options
for each year presented. The adoption of SFAS No. 128 did not have a material
effect on the Company's financial statements. Prior years' presentations of
earnings per share have been restated to conform to the guidelines of SFAS No.
128.
        
Calculation of diluted earnings per share:

<TABLE>
<CAPTION>
                                                     Year Ended March 31,
                                          -----------------------------------------
Reconciliation of Denominator:              1998            1997            1996
------------------------------            ---------       ---------       ---------
<S>                                       <C>             <C>             <C>
Weighted shares outstanding - basic       3,273,826       3,262,749       3,139,863
Effect of dilutive securities:
Stock options                                25,459           - - -         200,263
                                          ---------       ---------       ---------
Adjusted denominator - diluted            3,299,285       3,262,749       3,340,126
                                          =========       =========       =========
</TABLE>

There were additional potentially dilutive stock options of 163,992 in 1997
which were not included in the loss per share calculation due to their
anti-dilutive effect.  There were additional potentially dilutive convertible
securities of 147,500 in 1998, 1997 and 1996 which were not included in the
earnings (loss) per share calculation due to their anti-dilutive effect.

Concentration of Credit Risk

        The Company designs, develops, manufactures, markets and supports
computer software systems to customers in diversified industries. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. The Company's installment receivables are
predominately with clients (service bureaus) who provide computer services to
the direct marketing industry. Certain of these service


                                       26
<PAGE>   28


bureau clients may have limited capital and insufficient assets to secure their
liability to the Company. The service bureau industry is also highly competitive
and subject to general economic cycles as they impact advertising and direct
marketing expenditures. These clients represent approximately $5.0 million or
63% of the installment receivables at March 31, 1998 versus $9.2 million or 78 %
the prior year.

Impairment of Long-Lived Assets

        FAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review indicates that
the carrying amount of an asset exceeds the sum of its expected future cash
flows, the asset's carrying value must be written down to fair value.

Recent Accounting Pronouncements

        In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements and is required to be adopted by the
Company beginning in fiscal 1999. Additionally, the Financial Accounting
Standards Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will be effective for the Company
for fiscal 1999 and will apply to both annual and interim financial reporting.
The Company will adopt the required disclosures in conjunction with these
statements.

        In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, which provide guidance on applying generally accepted accounting
principles in recognizing revenue on software and are effective for the
Company's transactions entered into beginning April 1, 1998. The Company does
not expect the adoption of the SOP's to have a material impact on the Company's
financial condition or results of operations.

Fair Value of Financial Instruments

        The Company estimates the fair value of its notes and extended term
receivables by discounting the required future cash flows using borrowing rates
at which similar types of borrowing arrangements could be currently obtained by
the Company. Since the Company's notes payable and Line of Credit are short
term, carrying value approximates fair value in nature.


Reclassification

        Certain prior year amounts have been reclassified to conform with the
current year presentation.

(2)   ACCOUNTS RECEIVABLE

        Accounts receivable are comprised of the following:


                                       27
<PAGE>   29


<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
            <S>                                                <C>                    <C>
            Trade                                              $ 26,610,092            $29,974,239
            Installment accounts receivable, interest
              typically at 8.5% to 13%                            8,036,429             11,864,015
            Allowance for doubtful accounts                      (3,603,400)            (3,208,000)
                                                               ------------           ------------
                                                                 31,043,121             38,630,254
            Less non-current portion of installment
              accounts receivable                                 3,810,279              6,169,987
                                                               ------------           ------------
            Current portion                                    $ 27,232,842            $32,460,267
                                                               ============           ============
</TABLE>


(3)   PREPAID EXPENSE AND OTHER ASSETS

        Prepaid expenses and other current assets are comprised of the
following:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
            <S>                                                <C>                    <C>
            Prepaid expense                                      $  956,947             $1,095,771
            Prepaid commission                                      932,764              1,046,266
            Prepaid royalty                                         425,919                545,495
            Other assets                                            769,823              1,845,216
                                                               ============           ------------
                                                                 $3,085,453             $4,532,748
                                                               ============           ============
</TABLE>

        Prepaid commissions and royalties primarily relate to amounts paid, as
of the balance sheet date, on initial maintenance and enhancement revenues
deferred into future periods.

(4)   PROPERTY AND EQUIPMENT

        Property and equipment is comprised of the following:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
         <S>                                                   <C>                    <C>
         Data processing equipment                               $5,134,781             $5,983,096
         Furniture and fixtures                                   2,478,222              2,558,849
         Leasehold improvements                                     926,617                618,483
                                                               ------------           ------------
                                                                  8,539,620              9,160,428
         Less accumulated depreciation and
            amortization                                         (4,996,118)            (5,493,646)
                                                               ------------           ------------
                                                                 $3,543,502             $3,666,782
                                                               ============           ============
</TABLE>


                                       28
<PAGE>   30


(5)   COMPUTER SOFTWARE

        Computer software is comprised of the following:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
            <S>                                                <C>                    <C>
            Developed software                                  $50,367,557            $41,858,190
            Acquired software                                     5,877,290              5,708,419

            Software purchased for internal use                   3,841,354              3,536,870
                                                               ------------           ------------
                                                                 60,086,201             51,103,479

            Less accumulated amortization                       (36,727,339)           (29,232,950)
                                                               ------------           ------------
                                                                $23,358,862            $21,870,529
                                                               ============           ============
</TABLE>

(6)   ACCRUED EXPENSES

        Accrued expenses are as follows:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
            <S>                                                <C>                    <C>
            Accrued sales and other taxes                         $ 926,013             $1,084,772
            Accrued royalties                                     1,738,371              1,228,770
            Accrued sales incentives                                343,882                326,418
            Accrued rent abatements                                  86,927                106,424
            Accrued dividends                                        44,250                 44,250
            Income taxes payable                                  1,149,105                446,943
            Other accrued expenses                                1,925,419              2,591,221
            Accrued expense for disposition of AIM
               operations                                            37,191                 28,283
            Accrued expense for disposition of COM-MED
               operations                                            27,453                 75,526
                                                               ------------           ------------
                                                                 $6,278,611             $5,932,607
                                                               ============           ============
</TABLE>

(7)   SHORT-TERM BORROWINGS

        At March 31, 1998, the Company's Group 1 Software, Inc. Subsidiary,
maintained a 2-year $10,000,000 bank line of credit arrangement with Crestar
bank expiring August 31, 1998. The line of credit bears interest at the bank's
prime rate (8.5% at March, 31 1998) or Libor plus 175 basis points at Group 1's
option. The line of credit arrangement is collateralized by trade accounts
recievable and maintenance and renewal accounts recievable (excluding
installment accounts recievable) and among other things requires Group 1, to
maintain an EBIT to interest expense ratio of at least 1.5 to 1 through March
31, 1998 and at least 2.0 to 1 thereafter. The arrangement also requires Group 1
to maintain a total liabilities to EBITDA (earnings before interest, taxes,
depreciation and amortization) ratio of no more than 5.0 to 1 through March 31,
1998 and no more than 4.0 to 1 thereafter. At March 31, 1998, there were no
borrowings under the facility, at March 31, 1997, borrowings under the line of
credit were $7.1 million.


                                       29
<PAGE>   31


(8)   LONG-TERM DEBT

        Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                               -----------------------------------
                                                                   1998                   1997
                                                               ------------           ------------
         <S>                                                   <C>                    <C>
         Installment notes payable                                 $122,339               $363,505
         Capitalized lease obligations                              423,822                103,747
                                                               ------------           ------------
         Sub-total                                                  546,161                467,252
         Less current portion                                       157,017                163,748
                                                               ------------           ------------
         Long-term portion                                         $389,144               $303,504
                                                               ============           ============
</TABLE>

        Installment notes and capital lease obligations are payable monthly and
bear interest at rates ranging from 6% to 10%. The notes are collateralized by
certain furniture and equipment with a net book value that approximates the
outstanding loan balance. These lease obligations were entered into at then
current market rates.


        The aggregate maturities of the long-term debt during the years
subsequent to March 31, 1998 are:

<TABLE>
            <S>                                      <C>
            1999                                       $157,017
            2000                                        148,929
            2001                                        131,627
            2002                                         94,579
            2003 and beyond                              14,009
                                                     ----------
                                                       $546,161
                                                     ==========
</TABLE>

        The Company believes that there are no material differences between
carrying amounts and market value of its long-term obligations.

(9)   STOCKHOLDERS' EQUITY

        Preferred Stock

        On January 22, 1993, the Company issued a series of Preferred Stock par
value $0.25 per share, to be designated "6% Cumulative Convertible Preferred
Stock" consisting of 147,500 shares. Dividends have been paid semi-annually in
January and July since July, 1993. The 6% Preferred Stock shall be convertible
at any time at the sole option of the holder into fully paid and non-assessable
Common Stock, at the rate of one share of Common Stock for each share of
preferred stock, subject to a specified adjustment rate.

        The Company shall have the right to redeem the outstanding 6% Preferred
Stock, in whole or in part, at any time and from time to time after March 31,
1993, by paying to the holders thereof in cash the redemption price per share,
110% through March 31, 1994, and decreasing 2% per year through April 1, 1998,
together with all accrued and unpaid dividends thereon through the Redemption
Date.

        Stock Option Plans

        The Company has five stock option programs currently in effect, and two
predecessor plans for which option grants are still outstanding.


                                       30
<PAGE>   32


        The COMNET Corporation Stock Option Plan of 1995 authorizes the grant of
incentive stock options, non-qualified stock options and stock appreciation
rights, at the sole discretion of the Compensation Committee of the Board of
Directors, to officers and other employees of the Company, and reserved 600,000
shares of common stock for issuance on exercise of options under the Plan. The
option and rights vest over five years; however, all options and rights expire
ten years after the date of the grant. No stock appreciation rights have been
granted under this Plan. The plan activity was as follows:

<TABLE>
<CAPTION>
                                                                                         Option
                                                                                         Shares
        <S>                                                                           <C>
        Shares under option March 31, 1995                                                     - -
        Options Granted - 1995 exercise price of $10.00                                    316,200
        Options cancelled - 1996                                                            (1,000)
                                                                                            ------
        Shares under option, March 31, 1996                                                315,200

        Options granted - 1997 - exercise prices of $9.00 - $13.00                          92,500
        Options cancelled - 1997                                                           (47,960)
                                                                                           -------
        Shares under option, March 31, 1997 - exercise prices of $9.00 - $13.00            359,740

        Options granted - 1998 - exercise price of $8.00                                    17,500
        Options cancelled - 1998                                                           (59,860)
                                                                                           -------
        Shares under option, March 31, 1998 - exercise prices of $8.00 - $10.25            317,380
                                                                                      ============
</TABLE>



        At March 31, 1998 options for 109,540 shares were exercisable at $9.00 -
$13.00. Options outstanding at March 31, 1998, expire in years ending March 31,
2006 through 2008. Options for 85,240 shares become exercisable in the year
ending March 31, 1999, 367,976 shares were available for future grants of
options.

        The COMNET Corporation Stock Option and Stock Appreciation Unit Plan of
1986 for employees permitted the grant of options to purchase common stock of
the Company, or stock appreciation rights redeemable in cash or common stock at
the sole discretion of the Compensation Committee of the Board of Directors, at
prices not less than fair market value on the date of grant. The options and
rights vest over five years; however, all options and rights expire ten years
after the grant date. The plan's activity was as follows:

<TABLE>
<CAPTION>
                                                                                         Option
                                                                                         Shares
                                                                                      ------------
            <S>                                                                       <C>
            Shares under option, March 31, 1995 - exercise prices of $6.625 - $30.25       647,254

            Options granted - 1996 - exercise prices of  $10.00                             78,216
            Options exercised - 1996 - exercise prices $5.375 - $14.00                     (78,983)
            Options canceled - 1996                                                        (34,730)
                                                                                      ------------
            Shares under option, March 31, 1996 - exercise prices of $6.625 - $30.25       611,757

            Options exercised - 1997 - exercise prices of $6.625 - $8.25                   (25,300)
            Options canceled - 1997                                                        (30,890)
                                                                                      ------------
            Shares under option, March 31, 1997 - exercise prices of $6.625 - $30.25       555,567

            Options exercised  - 1998 - exercise price of $6.25                             (5,700)
            Options cancelled - 1998                                                      (109,306)
                                                                                      ------------
            Shares under option, March 31, 1998                                            440,561
                                                                                      ============
</TABLE>


                                       31
<PAGE>   33


        As of March 31, 1998, options for 380,938 shares were exercisable at
prices ranging from $6.625 to $30.25. Options outstanding at March 31, 1998
expire in years ending March 31, 1999 through 2006. Options for 37,953 shares
become exercisable in the year ending March 31, 1999. No stock appreciation
units have been granted under the plan. As of March 31, 1996, the 1986 Stock
Option and Stock Appreciation Unit Plan had terminated and no future grants of
options will be made under the plan.

        The COMNET Corporation Stock Option Plan for Non-Employee Directors of
1995 provides for annual automatic grants of non-qualified stock options to
non-employee directors of the Company, at an exercise price set by the market
price of the stock under conditions defined by the plan. The options vest over
five years and expire fifteen years after the date of the grant. The plan
activity was as follows:

<TABLE>
<CAPTION>
                                                                                         Option
                                                                                         Shares
                                                                                      ------------
            <S>                                                                       <C>
            Shares under option, March 31, 1996                                              - - -
            Options granted - 1997 - exercise price of $10.00                               25,000
                                                                                      ------------
            Shares under option, March 31, 1997 - exercise price of $10.00                  25,000

            Options granted 1998 - exercise price of $8.00 - $8.50
            Options cancelled 1998                                                          35,000
                                                                                      ------------
            Shares under option March 31, 1998                                              60,000
                                                                                      ------------
</TABLE>


        At March 31, 1998, 5,000 shares under option were vested and
exercisable. Options for 12,000 shares became exercisable in the year ending
March 31, 1999. At March 31, 1998, 90,000 shares were available for future
options.

        The Company's 1986 Stock Option Plan for Non-Employee Directors provided
for annual automatic grants of non-qualified stock options to non-employee
directors of the Company who served from 1986 to 1992, under conditions defined
by the plan. The options vest over five years and expire ten years after the
grant date. On January 22, 1993, the shareholders approved an amendment to
eliminate restrictions on vesting of stock options granted to the plan so that
options will become fully exercisable in whole or in part, upon resignation as a
director. The plan's activity was as follows:

<TABLE>
<CAPTION>
                                                                                         Option
                                                                                         Shares
                                                                                      ------------
            <S>                                                                       <C>
            Shares under option March 31, 1995 - exercise prices of $5.375 - $30.00        146,834
            Options exercised - 1996 - exercise price of $5.375 - $11.00                   (99,959)
                                                                                      ------------
            Shares under option March 31, 1996, 1997, and 1998
            Exercise price of $16.50 - $30.00                                               46,875
                                                                                      ============
</TABLE>

        As of March 31, 1998, 46,875 shares under option were vested and
exercisable. Options outstanding at March 31, 1998 expire in years ending March
31, 2001 through 2002. The plan has issued options to the full extent of the
number of shares of common stock reserved for issuance; no further grants will
be made thereafter.

        In 1991, the Company granted options to purchase an aggregate of 465,000
shares of common stock at an exercise price of $21.75 per share to the
individuals then serving on the reconstituted Board of Directors, as an
inducement to such individuals to serve on the board. Currently options to
purchase 210,000 shares remain granted. The options are exercisable for 10 years
from the date of grant and vest 20% per year, subject to potential acceleration
as defined in the stock option agreements. As of March 31, 1998, 210,000 shares
were vested and exercisable.


                                       32
<PAGE>   34


        In 1992, the Company granted options to purchase an aggregate of 15,000
shares of common stock at an exercise price of $30.25 per share to the
individuals serving on the Advisory Committee. The options are exercisable for
ten years from the date of grant and vest 20% per year. As of March 31, 1998,
15,000 shares were vested and exercisable.

        The Company's 1992 Stock Option Plan for Non-Employee Directors provides
for annual automatic grants of non-qualified stock options to non-employee
directors of the Company, under conditions defined by the plan, and reserves
120,000 shares of common stock for issuance on exercise of options under the
plan. The options vest progressively over five years and expire fifteen years
after the grant date. The plan's activity was as follows:

<TABLE>
<CAPTION>
                                                                                         Option
                                                                                         Shares
                                                                                      ------------
            <S>                                                                       <C>
            Shares under option, March 31, 1995 - exercise price of $8.75 - $30.50          60,000
            Options granted - 1996 - exercise price of $10.125                              30,000
            Options canceled - 1996                                                        (20,000)
                                                                                      ------------
            Shares under option, March 31, 1996, 1997, and 1998 - exercise prices
            of  $8.75 - $24.25                                                              70,000
                                                                                      ============
</TABLE>


        As of March 31, 1998, 42,000 options were exercisable. Options
outstanding at March 31, 1998, expire in the years ending March 31, 2003 through
2004. Options for 14,000 shares become exercisable in the year ending March 31,
1999. At March 31, 1996 the 1992 Stock Option Plan for Non-Employee Directors
had terminated and no future grants of options will be made under the plan.

        A summary of the status of the Plans is presented below:

<TABLE>
<CAPTION>
                                                                         Year Ended March 31
                                            -----------------------    -----------------------    -----------------------
                                                     1998                       1997                       1996
                                            -----------------------    -----------------------    -----------------------
                                                           Weighted                   Weighted                   Weighted
                                                           Average                    Average                    Average
                                                           Exercise                   Exercise                   Exercise
                                              Shares         Price       Shares        Price        Shares        Price
                                            -----------------------    -----------------------    -----------------------
<S>                                         <C>            <C>         <C>            <C>         <C>            <C>
Options outstanding beginning of period      1,282,182       12.97      1,268,832      $13.05      1,079,938      $13.61
Options exercised                               (5,700)       6.63        (25,300)     $ 7.39       (178,942)      $8.48
Options canceled                              (169,166)      10.20        (78,850)     $11.62        (49,100)     $14.16
Options granted                                 52,500        8.09        117,500      $10.04        414,333      $10.01
Options outstanding end of period            1,159,816       13.19      1,282,182      $12.97      1,266,229      $13.06
Options exercisable at end of period           809,353       14.50        802,226      $14.28        731,531      $12.71
Weighted-average fair value of options
granted during the Period                                    $8.09                     $10.04                      $7.08
</TABLE>


        As of March 31, 1998, the weighted average remaining contractual life of
the options that range from $9.00 to $10.25 is 5.41 years.

        As of March 31, 1998, 1997 and 1996, the pro forma tax effects under
SFAS 109 are not material to the Company's Financial Statements.


                                       33

<PAGE>   35
        The Company accounts for the activity under the Plans in accordance with
APB 25. Accordingly, no compensation expense has been recognized for the Plans.
Had compensation expense been determined based on the fair value of the stock
options for awards under the Plans in accordance with SFAS 123, the Company's
net earnings (loss) and earnings (loss) per common share would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                 1998                       1997                      1996
                                                            --------------             --------------            --------------
              <S>                                           <C>                        <C>                       <C>
              Net earnings (loss)
                   As reported                                   $ 972,590               $(1,777,306)                $2,654,537
                   Pro forma                                     $ 481,114               $(2,613,126)                $2,300,574
              Earnings (loss) per common share
                   As reported                                       $0.29                    $(0.54)                     $0.79
                   Pro forma                                         $0.15                    $(0.80)                     $0.69
</TABLE>


        The fair value of each option is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 1998, 1997 and 1996
respectively; dividend yield of 0%, expected volatility of 111%, 107% and 95%
respectively, a risk-free interest rate of 6.30%, 6.34% and 5.68% respectively,
and an expected term of 7 years.

(10)  INCOME TAXES

        The provision for income taxes for continuing operations consists of the
following components:

<TABLE>
<CAPTION>
                                                                                    Year Ended March 31,
                                                            -------------------------------------------------------------------
                                                                 1998                       1997                      1996
                                                            --------------             --------------            --------------
            <S>                                             <C>                        <C>                       <C>
            Federal:
               Current                                      $        - - -             $     (764,302)           $      244,000
               Deferred                                           (202,448)                  (751,613)                  945,000
                                                            --------------             --------------            --------------
                                                                  (202,448)                (1,515,915)                1,189,000
                                                            --------------             --------------            --------------
            State:
               Current                                             123,000                     68,000                    76,000
               Deferred                                             24,701                      3,088                    73,000
                                                            --------------             --------------            --------------
                                                                   147,701                     71,088                   149,000
                                                            --------------             --------------            --------------

            Foreign:
               Current                                             989,508                    694,926                   362,000
               Deferred                                            (13,401)                   (49,729)                  285,000
                                                            --------------             --------------            --------------
                                                                   976,107                    645,197                   647,000
                                                            --------------             --------------            --------------

                                                            $      921,360             $     (799,630)           $    1,985,000
                                                            ==============             ==============            ==============
</TABLE>


                                       34
<PAGE>   36


        The provision for income taxes for continuing operations varied from
that computed using the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended March 31,
                                                                     ---------------------------------
                                                                      1998         1997          1996
                                                                     ------       ------        ------
        <S>                                                          <C>          <C>           <C>
        Statutory tax rate                                             34.0%       (34.0)%        34.0%
        State income taxes, net of federal income tax benefit           4.2          1.7           1.9
        Research and development tax credits                          - - -        - - -          (0.9)
        Foreign taxes                                                   0.2         (0.7)          1.5
        Other, net                                                      1.1          3.5          (0.2)
                                                                     ------       ------        ------
           Effective tax rate                                          39.5        (29.5)%        36.3%
                                                                     ======       ======        ======
</TABLE>

        The significant components of the current deferred tax asset and the
long-term deferred tax liabilities are:

<TABLE>
<CAPTION>
                                                                              March 31,
                                                                ------------------------------------
                                                                   1998                     1997
                                                                -----------              -----------
            <S>                                                 <C>                      <C>
            Current:
               Deferred maintenance revenue                     $   530,974               $  530,974
               Allowance for doubtful accounts                    1,278,444                1,329,597
               Reserve for the disposition of AIM                    12,645                    9,616
               Net operating loss carryforward                      534,372                      ---
               Accrued compensation                               1,108,627                  678,992
               Other, net                                          (56,976)                 (164,080)
                                                                -----------              -----------
                  Total current deferred tax assets             $ 3,408,086               $2,385,099
                                                                ===========              ===========

            Long-term:
               Deferred maintenance revenue - long-term         $  (624,767)             $(1,134,164)
               Allowance for doubtful accounts                      (20,400)                (500,963)
               Capitalized software                               6,257,903                5,854,463
               Depreciation                                        (440,978)                (426,313)
               Net operating loss carryforward                     (635,581)                     ---
               Research and development tax credits              (1,555,116)              (1,244,486)
               Other, net                                            48,238                  252,541 
                                                                -----------              -----------
                  Total long-term deferred tax liabilities      $ 3,029,299              $ 2,801,078
                                                                ===========              ===========
</TABLE>

        The Company has consolidated research and development tax credit carry
forwards of $1,555,116 which will expire in 2001 through 2013 and consolidated
net operating loss carry forwards of $3,441,040 expiring 2012 through 2013.


(11)  BENEFIT PROGRAMS

        The Company maintains a 401(k) retirement savings plan and trust for the
benefit of the Company's employees which provides for a contribution to be made
by the Company out of current operating earnings based upon the contributions
made by participating Company employees with established limits. Company
contributions for the years ended March 31, 1998, 1997 and 1996 were, $259,893,
$254,000, and $226,000, respectively.


                                       35
<PAGE>   37


(12)  INCOME DATA (UNAUDITED)

        Quarterly financial information for the years ended March 31, 1998 and
1997 was as follows:

<TABLE>
<CAPTION>
                                                                  First        Second         Third        Fourth
                                                                 Quarter       Quarter       Quarter       Quarter        Year
                                                                ---------     ---------     ---------     ---------     ---------
        <S>                                                      <C>           <C>           <C>           <C>           <C>
        (Dollars in thousands except earnings per share)

        Fiscal Year 1998:
        Revenue                                                  $11,870       $15,364       $15,859       $17,911       $61,004
        Earnings (loss) before taxes                              (1,649)          937           911         2,136         2,335
        Net Earnings (loss)                                         (909)          481           423         1,155         1,150
        Basic earnings (loss) per share                           $(0.29)        $0.13         $0.12         $0.34         $0.30
        Diluted earnings (loss) per share                         $(0.29)        $0.13         $0.11         $0.34         $0.29

        Fiscal Year 1997:
        Revenue                                                  $10,720       $13,059       $14,631       $16,137       $54,547
        Earnings (loss) before taxes                                (234)          246           640        (3,362)       (2,710)
        Net Earnings (loss)                                         (165)          154           316        (1,905)       (1,600)
        Basic earnings (loss) per share                           $(0.06)        $0.03         $0.08        $(0.60)       $(0.54)
        Diluted earnings (loss) per share                         $(0.06)        $0.03         $0.08        $(0.60)       $(0.54)
</TABLE>

(13)  NON-OPERATING INCOME (EXPENSE) AND SUPPLEMENTAL INFORMATION

        Non-operating income and expense is comprised of the following:

<TABLE>
<CAPTION>
                                                                   Year Ended March 31,
                                                        -------------------------------------------
                                                          1998             1997             1996
                                                        ---------        ---------        ---------
        <S>                                             <C>              <C>              <C>
        Interest income                                 $ 118,289        $ 130,435        $ 209,422
        Interest expense                                 (469,983)        (554,237)        (125,809)
        Gain on sales of investment                         - - -           14,332          109,595
        Loss on sale of assets                            (51,555)           - - -            - - -
        Other income (expense), net                       (61,402)         (16,157)          45,663
                                                        =========        =========        =========
        Total non-operating income (expense), net       $(464,651)       $(425,627)       $ 238,871
                                                        =========        =========        =========
</TABLE>


                                       36
<PAGE>   38


        The following supplemental information summarizes the disclosure
pertaining to the Statement of Cash Flows:

<TABLE>
<CAPTION>
                                                                                                  Year Ended March 31,
                                                                                         --------------------------------------
                                                                                           1998           1997           1996
                                                                                         --------       --------       --------
        <S>                                                                              <C>            <C>            <C>
        Cash paid during the year for:
           Interest                                                                      $534,891       $553,673       $145,176
           Income taxes                                                                   132,496        190,597        165,251
        Non-cash investing and financing activities:
           Notes payable incurred in connection with the
              purchase of the assets of Data Designs, Inc.                                  - - -          - - -        180,000
           Notes payable incurred in connection with the
              purchase of the assets of WorldTrak, Inc.                                     - - -          - - -        100,000
        Capital lease obligations incurred                                                238,289        249,378         47,102
</TABLE>

(14)  COMMITMENTS AND CONTINGENCIES

        Purchased Services

        Effective April 6, 1994, Group 1 entered a three-year contract with a
supplier of computer time-sharing services. Effective April 6, 1997, the
agreement was extended for two additional years. The agreement requires Group 1
to purchase all of its internal IBM mainframe computer requirements, from this
supplier. The Agreement provides for a fixed monthly fee. Group 1's actual costs
of services with this vendor for the years ended March 31, 1998, 1997, and 1996
were $1,183,600 , $1,273,000, and $1,056,000, respectively.

        Leasing Arrangements

        The Company leases its office facilities and some of its equipment under
operating and capital lease arrangements, some of which contain renewal options
and escalation clauses for operating expenses and inflation. The Company is
obligated for the following minimum operating and capital lease rental payments
that have initial and remaining non-cancelable lease terms in excess of one
year:

<TABLE>
<CAPTION>
                                                                   Operating                        Capital
                                                                --------------------           ------------------
<S>                                                            <C>                            <C>
            1999                                               $         2,944,250            $         124,125
            2000                                                         2,609,182                      124,125
            2001                                                         2,495,936                      124,125
            2002                                                         2,149,989                       84,346
            2003 and beyond                                              3,896,042                       14,201
                                                                --------------------           ------------------
    Total minimum lease payments                               $        14,095,399            $         470,922
                                                                ====================
    Amount representing interest                                                                         47,099
                                                                                               ------------------
    Net minimum lease payments                                                                          423,823
    Current portion of capital lease obligations                                                         97,017
                                                                                               ------------------
    Long-term portion of capital lease obligations                                            $         326,806
                                                                                               ==================
</TABLE>

        The Company entered into capital lease transactions aggregating,
$238,289, $249,378, and $47,102 for the years ended 1998, 1997 and 1996,
respectively. As of March 31, 1998, the book value of assets recorded under
capital leases was $437,791.

        Total rent expense, under operating leases for fiscal years ended March
31, 1998, 1997, and 1996 was $3,479,128, $3,080,774, and $2,462,000,
respectively.

        Legal

        COMNET, Group 1 and certain of Group 1's directors have been named as
defendants in a purported shareholder class action filed on April 28, 1998 in
the Court of Chancery of the State of Delaware (CA. No. 16349), Brickell
Partners, Individually and on Behalf of All Others Similarly Situated v. Robert
S. Bowen, et al. The suit alleges breaches of fiduciary duties in that COMNET,
as majority stockholder of Group 1, "has greater knowledge of Group 1 than the
public shareholders and has timed the merger transaction to take advantage of
Group 1's increased efficiency and prospects of profitability", to the unfair
disadvantage of Group 1's public shareholders. Both COMNET and Group 1 believe
that the complaint is meritless and are actively pursuing dismissal of all the
claims made by Plaintiff in the lawsuit.



                                       37
<PAGE>   39




(15)  GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
                                                                                Year Ended March 31,
                                                      -------------------------------------------------------------------------
                                                             1998                      1997                       1996
                                                      --------------------      --------------------       --------------------
        <S>                                          <C>                       <C>                        <C>
        Net Revenue
           U.S. operations                           $        53,778,625                50,110,423        $        43,142,750
           European operations                                 9,677,885                 6,676,498                  4,429,531
           Eliminations                                       (2,452,613)               (2,239,972)                (1,699,459)
                                                      --------------------      --------------------       --------------------

                Total net revenue                    $        61,003,897                54,546,949        $        45,872,822
                                                      ====================      ====================       ====================

        Operating Income
           U.S. operations                           $          (215,329)      $        (4,431,019)       $         3,403,932
           European operations                                 3,014,685                 2,146,828                  1,829,312
           Eliminations                                      ---                       ---                        ---
                                                      --------------------      --------------------       --------------------

                Total operating income (loss)        $         2,799,356       $        (2,284,191)       $         5,233,244
                                                      ====================      ====================       ====================

        Identifiable Assets
           U.S. operations                           $        62,541,644       $        70,027,026        $        63,601,807
           European operations                                 9,986,268                 8,433,004                  6,528,514
           Eliminations                                       (1,898,400)               (2,603,730)                (2,938,500)
                                                      --------------------      --------------------       --------------------

                Total identifiable assets            $        70,629,512       $        75,856,300        $        67,191,821
                                                      ====================      ====================       ====================
</TABLE>

It is management's belief that the Company's intercompany sales between
geographic areas are accounted for at prices consistent with market conditions
with unaffiliated transactions. "U.S. operations" include shipments to customers
in the United States, licensing to OEMs, and exports of finished goods directly
to international customers, primarily in Canada. International revenue which
includes European operations, U.S. operations and exports, were 15.4%, 15.7%,
and 13% of total revenue in 1998, 1997, and 1996.


(16)  SUBSEQUENT  EVENT 


                                       38
<PAGE>   40


        In December 1997, COMNET and Group 1 announced their intent to merge the
two companies through the issuance of COMNET common stock to Group 1's minority
shareholders in exchange for their Group 1 common stock. In April 1998, the
companies announced that the exchange ratio of 1.15 shares of COMNET for each
share of Group 1 stock had been agreed to by the independent committees of the
respective boards of directors. The merger is subject to approval by the boards
of both COMNET and Group 1 as well as the shareholders of each company. The
merger will be accounted for under purchase accounting and approximately $4.0
million of identifiable intangible assets will be recorded.


                                       39
<PAGE>   41


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The Directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name                                        Age             Position
----                                        ---             --------
<S>                                         <C>             <C>
James V. Manning                             51             Chairman of the Board of Directors
Robert S. Bowen                              60             President, Chief Executive
                                                               Officer and Director
Ronald F. Friedman                           54             President, Group 1 Software, Inc.
                                                               and Director
Mark D. Funston                              38             Vice President, Chief Financial Officer and Director
Edward Weiss                                 47             Secretary and General Counsel
Richard H. Eisenberg                         60             Director
James P. Marden                              44             Director
Charles A. Mele                              41             Director
Charles J. Sindelar                          61             Director
</TABLE>

        The Company knows of no family relationships between any of the above.

        The Board of Directors is divided into three classes. One class of the
Directors will be elected annually, and Directors serve until the annual meeting
of stockholders three years following their election and until their successors
are elected and qualified. The terms of Messrs. Sindelar, Marden and Mele will
expire at the next shareholder's meeting. The terms of Messrs. Eisenberg and
Manning will expire in 1998 and the terms of Messrs. Bowen, Friedman and Funston
will expire in 1999. Each of the officers shall continue in his capacity until
his successor is appointed and qualified.

        Mr. James V. Manning has been Chairman of the Board of the Company since
February, 1994 and a Director since 1992. He is Chief Executive Officer of
Synetic, Inc. and has been a director of Synetic since May, 1989.

        Mr. Robert S. Bowen has been a Director, President and Chief Executive
Officer of the Company for more than five years and a Director, Chairman of the
Board and Chief Executive Officer of Group 1 since January, 1984.

        Mr. Ronald F. Friedman has been a Director of the Company and President
and Chief Operating Officer and a Director of Group 1 and its predecessor, Group
1 Software Division of Group 1, for more than five years.

        Mr. Mark D. Funston has been Vice President, Chief Financial Officer of
the Company since September 1996 and a Director since December 1996. Mr. Funston
also serves as Director and Chief Financial Officer of Group 1.

        Mr. Edward Weiss has been Secretary and General Counsel of the Company
since 1990. He has been Secretary and General Counsel of Group 1 for more than
five years.

        Mr. Richard H. Eisenberg has been a Director of the Company since
February, 1994. Mr. Eisenberg is currently Vice President, Great Northern
Brokerage Corporation, and prior to that Senior Vice President of Kaye Insurance
Association, L.P. since September 1992. He has also been President of APCO
Corporation, an insurance brokerage firm, Vice President of Amalgamated Programs
Corporation and President of Great Northern Brokerage Corporation for more than
five years.


                                       40
<PAGE>   42


        Mr. James Marden has been a Director of the Company since 1992. Mr.
Marden is currently serving as Chairman of The Entertainment Connection, Inc., a
privately held electronic retailer of audio and video products. He was Vice
President - Acquisitions for Medco Containment Services, Inc. from 1991 to 1994
and held a similar position for Synetic, Inc. from 1993 to 1994. Prior to that
time, Mr. Marden was a private investor for more than five years.

        Mr. Charles A. Mele has been a Director of the Company since 1992. Mr.
Mele is Vice President/General Counsel and a director of Synetic, Inc. Prior to
April 1994, he was Executive Vice President and General Counsel of Medco
Containment Services, Inc., for more than five years. He is also a Director of
Group 1 Software, Inc.

        Mr. Charles J. Sindelar has been a Director of the Company since 1992.
Mr. Sindelar has been Staff Vice President - Business Development of Zenith
Electronics Corporation since September 1994. From April, 1994 to September 1994
he was also President of the Display Division, Zenith Electronics Corporation.
From November 1990 to April 1994, Mr. Sindelar was President of the Display
Division, Zenith Electronics Corporation. Mr. Sindelar was Executive Director of
Color Display Operations of Zenith from April 1990 through November 1990.


ITEM 11.  EXECUTIVE COMPENSATION

        The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under the caption, "Executive Compensation" and such information is incorporated
herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under introductory paragraphs and under the captions "Principal Stockholders"
and "Election of Directors" and such information is incorporated herein by
reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required in response to this item is contained in the
registrant's definitive proxy statement, to be filed pursuant to Regulation 14A,
under the caption, "Executive Compensation - Certain Transactions," and such
information is incorporated herein by reference.


                                       41
<PAGE>   43


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

          REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
                                                                                                                 Page Number
                                                                                                                 -----------
          <S>  <C>                                                                                               <C>
          1.   Financial Statements:

               The following financial statements are submitted in Item 8:

                     Report of Independent Accountants on Financial Statements                                        19

                     Consolidated Balance Sheets as of March 31, 1998 and 1997                                        20

                     Consolidated Statements of Earnings for the years
                     ended March 31, 1998, 1997 and 1996                                                              21

                     Consolidated Statements of Stockholders' Equity for the years
                     ended March 31, 1998, 1997 and 1996                                                              22

                     Consolidated Statements of Cash Flows for the years
                     ended March 31, 1998, 1997 and 1996                                                              23

                     Notes to Consolidated Financial Statements for the years
                     ended March 31, 1998, 1997 and 1996                                                           24 - 39

          2.   Financial Statement Schedules

               The following financial statement schedule is filed as part of this report:

                     Report of Independent Accountants on Financial Statement Schedule                                48

                     Schedule II: Valuation and Qualifying Accounts for the Years
                     Ended March 31, 1998, 1997 and 1996                                                              49
</TABLE>

        Schedules other than those listed above have been omitted since they are
either not required or the information is included elsewhere in the financial
statements or notes thereto.


                                       42
<PAGE>   44


           3.   List of Exhibits.
<TABLE>
<S>             <C>

        3.01    Articles of Incorporation and Bylaws, as amended - 1985,
                (incorporated by reference to Exhibit 3.7 to Group 1's Annual
                Report on Form 10-K for the year ended March 31, 1991).

        3.02    Bylaws - Amended as of January 22, 1992, (incorporated by
                reference to Exhibit 3.8 to Group 1's Quarterly Report on Form
                10-Q for the quarter ended December 31, 1991).

        3.03    Amendments to Certificate of Incorporation filed January 22,
                1993.

        4.01    Purchase Agreement between the Company and Medco Containment
                Services, Inc., dated as of January 28, 1992 (incorporated by
                reference to Exhibit 4.47 to the Company's Quarterly Report on
                Form 10-Q for the quarter ended December 31, 1991).

        4.02    Agreement Regarding Satisfaction of Debt, Release of Pledge and
                Issuance of Stock between Group 1 and Robert S. Bowen, dated as
                of January 28, 1992, (incorporated by reference to Exhibit 4.48
                to the Company's Quarterly Report on Form 10-Q for the quarter
                ended December 31, 1991).

        4.03    Agreement Regarding Satisfaction of Debt, Release of Pledge and
                Issuance of Stock between Group 1 and Dr. Milton Kaplan, dated
                as of January 28, 1992, (incorporated by reference to Exhibit
                4.49 to the Company's Quarterly Report on Form 10-Q for the
                quarter ended December 31, 991).

        4.04    Agreement Regarding Satisfaction of Debt, Release of Pledge and
                Issuance of Stock between Group 1 and John Spohler, dated as of
                January 28, 1992, (incorporated by reference to Exhibit 4.50 to
                the Company's Quarterly Report on Form 10-Q for the quarter
                ended December 31, 1991).

        4.05    Agreement Regarding Satisfaction of Debt, Release of Pledge and
                Issuance of Stock between the Company and Leonard J. Smith,
                dated as of January 28, 1992, (incorporated by reference to
                Exhibit 4.51 to Group 1's Quarterly Report on Form 10-Q for the
                quarter ended December 31, 1991).

        4.06    Stock Option Agreement between the Company and James V. Manning,
                dated as of August 16, 1991, (incorporated by reference to
                Exhibit 4.53 to the Company's Quarterly Report on Form 10-Q for
                the quarter ended December 31, 1991).

        4.07    Stock Option Agreement between the Company and James Marden,
                dated as of August 16, 1991, (incorporated by reference to
                Exhibit 4.55 to the Company's Quarterly Report on Form 10-Q for
                the quarter ended December 31, 1991).

        4.08    Stock Option Agreement between the Company and Robert S. Bowen,
                dated as of August 16, 1991, (incorporated by reference to
                Exhibit 4.56 to the Company's Quarterly Report on Form 10-Q for
                the quarter ended December 31, 1991).

        4.09    Stock Option Agreement between the Company and Ronald F.
                Friedman, dated as of August 16, 1991, (incorporated by
                reference to Exhibit 4.57 to the Company's Quarterly Report on
                Form 10-Q for the quarter ended December 31, 1991).

        4.10    Stock Option Agreement between the Company and Charles A. Crew,
                dated as of August 16, 1991, (incorporated by reference to
                Exhibit 4.58 to the Company's Quarterly Report on Form 10-Q for
                the quarter ended December 31, 1991).
</TABLE>


                                       43
<PAGE>   45


<TABLE>
<S>             <C>
        4.11    Stock Option Agreement between the Company and Charles J.
                Sindelar, dated as of August 16, 1991, (incorporated by
                reference to Exhibit 4.59 to the Company's Quarterly Report on
                From 10-Q for the quarter ended December 31, 1991).

        4.12    Agreement among the Company and Robert S. Bowen, Milton Kaplan,
                Leonard J. Smith and John Spohler regarding certain registration
                rights, dated as of January 28, 1992, (incorporated by reference
                to Exhibit 4.60 to the Company's Quarterly Report on Form 10-Q
                for the quarter ended December 31, 1991).

        4.13    Certificate of Designation of 6% Convertible Preferred Stock,
                filed January 22 1993.

        4.14    1995 Incentive Stock Option, Non-Qualified Stock Option and
                Stock Appreciation Unit Plan

        4.15    1995 Non-Employee Directors' Stock Option Plan

       10.01    Technology Purchase Agreement between COMNET Corporation and
                Andy Bellinghieri - 1985, as amended and restated in May, 1994,
                (incorporated by reference to Exhibit 10.52 to the Company's
                Annual Report on Form 10-K for the year ended March 31, 1991).

       10.02    Intentionally deleted.

       10.03    Employment Agreement between Ronald F. Friedman and Group 1
                Software, Inc. dated October 31, 1990, (incorporated by
                reference to Exhibit 10.94 to the Company's Annual Report on
                Form 10-K for the year ended March 31, 1991).

       10.04    Management and Services Agreement between Group 1 Software, Inc.
                and COMNET Corporation dated April 1, 1994.

       10.05    Tax Sharing Agreement among Group 1 Software, Inc., COM-MED
                Systems, Inc., ADMS, Inc. and COMNET Corporation, dated April 1,
                1991, (incorporated by reference to Exhibit 10.97 to the
                Company's Annual Report on Form 10-K for the year March 31,
                1991).

       10.06    First Amendment to Employment Agreement by and between Group 1
                Software, Inc. and Ronald F. Friedman dated June 24, 1991,
                (incorporated by reference to Exhibit 10.96 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended June 3,
                1991).

       10.07    Amendment to the Management and Services Agreement as of August
                1, 1991 by and between Group 1 Software, Inc. and COMNET
                Corporation (incorporated by reference to Exhibit 10.98 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                September 31, 1991).

       10.08    Amended and Restated Employment Agreement dated January 28, 1992
                by and between Group 1 Software, Inc. and Robert S. Bowen
                (incorporated by reference to Exhibit 10.25 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended December 31,
                1991).

       10.08    Fee Agreement between the Company and James V. Manning, dated as
                of January 28, 1992, (incorporated by reference to Exhibit
                10.100 to the Company's Quarterly Report on Form 10-Q for the
                quarter ended December 31, 1991).

       10.09    Fee Agreement between the Company and Robert S. Bowen, dated as
                of January 28, 1992, (incorporated by reference to Exhibit
                10.102 to the Company's Quarterly Report on Form 10-Q for the
                quarter ended December 31, 1991).

       10.10    Fee Agreement between the Company and Ronald F. Friedman, dated
                as of January 28, 1992,
</TABLE>


                                       44
<PAGE>   46


<TABLE>
<S>             <C>
                (incorporated by reference to Exhibit 10.103 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended December 31,
                1991).

       10.11    Indemnification Agreement between the Company and James V.
                Manning, (incorporated by reference to Exhibit 10.105 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 1991).

       10.12    Indemnification Agreement between the Company and James P.
                Marden, (incorporated by reference to Exhibit 10.107 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 1991).

       10.13    Indemnification Agreement between the Company and Ronald F.
                Friedman , (incorporated by reference to Exhibit 10.108 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 1991).

       10.14    Indemnification Agreement between the Company and Charles A.
                Crew, (incorporated by reference to Exhibit 10.109 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 1991).

       10.15    Indemnification Agreement between the Company and Robert S.
                Bowen, (incorporated by reference to Exhibit 10.110 to the
                Company's Quarterly Report on Form 10-Q for the quarter ended
                December 31, 1991).

       10.16    Stockholder Voting Agreement among Medco Containment Services,
                Inc. and Robert S. Bowen, Charles A. Crew, Ronald F. Friedman,
                Milton Kaplan, Perry E. Morrison, Leonard J. Smith and John
                Spohler, dated as of January 28, 1992, (incorporated by
                reference to Exhibit 10.111 to the Company's Quarterly Report on
                Form 10-Q for the quarter ended December 31, 1991).

       10.17    Advisory Committee Agreement between the Company and Leonard J.
                Smith, dated as of January 28, 1992, (incorporated by reference
                to Exhibit 10.112 to the Company's Quarterly Report on Form 10-Q
                for the quarter ended December 31, 1991).

       10.18    Advisory Committee Agreement between the Company and Milton
                Kaplan, dated as of January 28, 1992, (incorporated by reference
                to Exhibit 10.113 to the Company's Quarterly Report on Form 10-Q
                for the quarter ended December 31, 1991).

       10.19    Advisory Committee Agreement between the Company and Perry E.
                Morrison, dated as of January 28, 1992, (incorporated by
                reference to Exhibit 10.114 to the Company's Quarterly Report on
                Form 10-Q for the quarter ended December 31, 1991).

       10.20    Agreement between the Company and Robert S. Bowen, dated as of
                January 23, 1992, (incorporated by reference to Exhibit 10.115
                to the Company's Quarterly Report on Form 10-Q for the quarter
                ended December 31, 1991).

       10.21    Loan Agreement and three notes in the amount of $78,334 each
                between the Company as Holder and Robert S. Bowen as Maker,
                dated as of January 23, 1992, (incorporated by reference to
                Exhibit 10.117 to the Company's Quarterly Report on Form 10-Q
                for the quarter ended December 31, 1991).

       10.22    Amended and Restated Employment Agreement between Robert S.
                Bowen and the Company, dated as of January 28, 1992,
                (incorporated by reference to Exhibit 10.118 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended December 31,
                1991).

       10.23    Amended and Restated Employment Agreement between Robert S.
                Bowen and Group 1 Software,
</TABLE>


                                       45
<PAGE>   47


<TABLE>
<S>             <C>
                Inc., dated as of January 28, 1992, (incorporated by reference
                to Exhibit 10.119 to the Company's Quarterly Report on Form 10-Q
                for the quarter ended December 31, 1991).

       10.24    Indemnification Agreement, dated January 22, 1993, between
                COMNET Corporation and Carl I. Kanter.

       10.25    Loan Agreement, dated March 1, 1993, between COMNET Corporation
                and Ronald F. Friedman.

       10.26    Indemnification Agreement, dated February 24, 1992, between
                COMNET Corporation and Charles A. Mele.

       10.27    Indemnification Agreement between COMNET Corporation and Charles
                J. Sindelar.

       10.28    Lease covering Company office facilities in Lanham, MD - 1993.

       10.29    Intentionally deleted.

       10.30    Agreement between Group 1 Software, Inc. and Archetype Systems,
                Ltd. for acquisition of the entire share capital of Archetype
                Systems, Ltd., dated as of December 30, 1994.

       10.31    Fourth Amendment to Employment Agreement, dated as of March 1,
                1994, by and between Group 1 Software, Inc., and Ronald F.
                Friedman.

       10.32    Sublease, dated March 1, 1994, by and between COMNET Corporation
                and Group 1 Software, Inc.

       10.33    Agreement to Extend Management and Services Agreement, dated
                April 1, 1994, by and between COMNET Corporation and Group 1
                Software, Inc.

       10.34    Sales agreement for COM-MED Systems, Inc.

       10.35    Letter of Agreement between Group 1 and MEDCOM Acquisition
                Corporation, dated May 8, 1995.

       10.36    Amended Letter of Agreement between Group 1 and MEDCOM
                Acquisition Corporation, dated June 9, 1995.

       10.37    Bill of Sale between Group 1 and MEDCOM Acquisition Corporation,
                dated March 31, 1995, for the sale of substantially all of the
                assets of COM-MED Systems, Inc. and CMEDS, Inc.

       10.38    Line of Credit Agreement between Group 1 and MEDCOM Acquisition
                Corporation, dated March 31, 1995.

       10.39    Fifth Amendment to Employment Agreement, dated as of April 1,
                1995, by and between Group 1 Software, Inc. and Ronald F.
                Friedman.

       10.40    COMNET Corporation, Deferred Compensation Plan

       10.41    Definitive Agreement for purchase of assets of DataDesigns,
                Inc., dated August 23, 1995 (incorporated by reference to
                Exhibit 10.42 to the Company's Annual Report on Form 10-K for
                the year ended March 31, 1997).

       10.42    Definitive Agreement for purchase of assets of Premier One
                Consultants, Inc., dated November 22, 1995 (incorporated by
                reference to Exhibit 10.43 to the Company's Annual Report on
                Form 10-K for the year ended March 31, 1997).
</TABLE>


                                       46
<PAGE>   48


<TABLE>
<S>             <C>
       10.43    Agreement between Sidco, Inc., and CMEDS, Inc., dated November
                14, 1995 (incorporated by reference to Exhibit 10.44 to the
                Company's Annual Report on Form 10-K for the year ended March
                31, 1997).

       10.44    Third Amendment to Lease, dated April 15, 1994, by and between
                COMNET Corporation and Quadrangle Development Corporation
                (incorporated by reference to Exhibit 10.45 to the Company's
                Annual Report on Form 10-K for the year ended March 31, 1997).

       10.45    First Amendment to Sublease, dated April 15, 1994, by and
                between COMNET Corporation and Group 1 Software, Inc.
                (incorporated by reference to Exhibit 10.46 to the Company's
                Annual Report on Form 10-K for the year ended March 31, 1997).

       10.46    First Amendment to Loan Agreement with Ronald F. Friedman, dated
                as of January 15, 1996.

       10.47    Line of Credit Loan Agreement with Crestar Bank, dated October
                10, 1996.

       10.48    Agreement to Extend Management and Services Agreement, dated
                April 1, 1997, by and between the Company and Group 1 Software,
                Inc.

      *10.49    First Amendment to Employment Agreement by and between Robert S.
                Bowen and COMNET Corporation, dated August 15, 1997.

      *10.50    Second Amendment to Employment Agreement by and between Robert
                S. Bowen and COMNET Corporation, dated January 12, 1998.

      *10.51    Third Amendment to Employment Agreement by and between Robert S.
                Bowen and Group 1 Software, Inc., dated August 15, 1997.

      *10.52    Fourth Amendment to Employment Agreement by and between Robert
                S. Bowen and Group 1 Software, Inc. dated January 12, 1998.

      *10.53    Fifth Amendment to Employment Agreement by and between Robert S.
                Bowen and Group 1 Software, Inc. dated May 11, 1998.

      *10.54    Agreement for Purchase and Sale of Assets by and between
                Intertrak Corporation and Group 1 Software, Inc. dared September
                4, 1997.

       *22.0    Subsidiaries of COMNET Corporation.

       *23.0    Consent of Independent Accountants.
</TABLE>

-------------------------------
         *  Filed herewith.


                                       47
<PAGE>   49


                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE
                                -----------------


To the Stockholders and
  Board of Directors
  COMNET Corporation

        Our report on the consolidated financial statements of COMNET
Corporation and Subsidiaries is included elsewhere in this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule, as listed in the index to the
financial statement schedule of this Form 10-K.

        In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.




                                                        COOPERS & LYBRAND L.L.P.

McLean, Virginia
June 12, 1998


                                       48
<PAGE>   50


                                   SCHEDULE II
                               COMNET Corporation
              Valuation and Qualifying Accounts For the Years Ended
                         March 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
         Column A                 Column B              Column C             Additions             Column D          Column E
-------------------------    ------------------     -----------------------------------------  ----------------     -----------
                                 Balance at            Charged to          Charged to                                 Balance
                                 Beginning             Costs and              Other              Deductions           at end
       Description                of Year              Expenses            Accounts(1)           Describe(2)          of year
       -----------                -------              --------            -----------           -----------          -------
<S>                             <C>                   <C>                  <C>                  <C>                 <C>       
Year ended March 31, 1998       $3,208,000            $3,505,000              - - -             $(3,109,600)        $3,603,400
  Allowance for doubtful
  accounts

Year ended March 31, 1997
  Allowance for doubtful
  accounts                      $2,409,000            $1,956,403              - - -             $(1,157,403)        $3,208,000

Year ended March 31, 1996
  Allowance for doubtful
  accounts                      $1,703,000            $1,617,637             $281,400           $(1,193,037)        $2,409,000
</TABLE>

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

(1) Items charged to other accounts were for the recoveries of prior year
    accounts receivable written off during the year.

(2) The decrease in allowance for doubtful accounts is the result of accounts
    receivable written off during the year.


                                       49
<PAGE>   51


Exhibit 22.  Subsidiaries of COMNET Corporation


          Group 1 Software, Inc., a Delaware corporation

          Group 1 Software Europe, Ltd., a United Kingdom corporation

          Group 1 FSC, Ltd., a Barbados corporation

          Group 1 Software Latin America, Inc., a Puerto Rico corporation

          Gruco, Inc., a Delaware corporation

          Seanet, Inc., a Delaware corporation

          CMEDS, Inc., a Delaware corporation

          ARCU, Inc., a Delaware corporation

          Promco, Inc., a Delaware corporation


                                       50
<PAGE>   52


                       CONSENT OF INDEPENDENT ACCOUNTANTS

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


        We consent to the incorporation by reference in the registration
statement of COMNET Corporation on Form S-8 (File No. 2-62254) of our reports,
dated June 12, 1998, on our audits of the consolidated financial statements and
financial statement schedule of COMNET Corporation and Subsidiaries as of March
31, 1998 and 1997 and for each of the three years in the period ended March 31,
1998, which reports are included in this Annual Report on Form 10-K.




                                                        COOPERS & LYBRAND L.L.P.

McLean, Virginia
June 26, 1998


                                       51
<PAGE>   53


                                   SIGNATURES


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



<TABLE>
<S>                                             <C>
COMNET CORPORATION
                                                (Registrant)

Date:  June 26, 1998                                        By:
                                                                 -----------------------------------------------
                                                                      President and Chief Executive Officer
</TABLE>

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                   Title                                                           Date
---------                                   -----                                                           ----
<S>                                         <C>                                                             <C>

----------------------------------------
Robert S. Bowen                             President, Chief Executive                                      June 26, 1998
                                            Officer and Director                                            -------------
                                            (Principal Executive Officer)

----------------------------------------
Mark D. Funston                             Vice President                                                  June 26, 1998
                                            Chief Financial Officer                                         -------------
                                            Treasurer and Director
                                            (Principal Accounting Officer)

----------------------------------------
Ronald F. Friedman                          President, Chief Operating Officer Group 1                      June 26, 1998
                                            Software, Inc., and Director                                    -------------



----------------------------------------
James V. Manning                            Chairman of the Board                                           June 26, 1998
                                                                                                            -------------

----------------------------------------
Charles J. Sindelar                         Director                                                        June 26, 1998
                                                                                                            -------------
----------------------------------------
James Marden                                Director                                                        June 26, 1998
                                                                                                            -------------
----------------------------------------
Charles A. Mele                             Director                                                        June 26, 1998
                                                                                                            -------------
----------------------------------------
Richard H. Eisenberg                        Director                                                        June 26, 1998
                                                                                                            -------------
</TABLE>


                                       52
<PAGE>   54


<TABLE>
<CAPTION>
Index of Exhibits
-----------------
                                                                        PAGE NUMBER
<S>             <C>
   *10.49       First Amendment to Employment Agreement by and between Robert S.
                Bowen and COMNET Corporation, dated August 15, 1997.

   *10.50       Second Amendment to Employment Agreement by and between Robert
                S. Bowen and COMNET Corporation, dated January 12, 1998.

   *10.51       Third Amendment to Employment Agreement by and between Robert S.
                Bowen and COMNET Corporation, dated August 14, 1997.

   *10.52       Fourth Amendment to Employment Agreement by and between Robert
                S. Bowen and Group 1 Software, Inc. dated January 12, 1998.

   *10.53       Fifth Amendment to Employment Agreement by and between Robert S.
                Bowen and Group 1 Software, Inc. dated May 11, 1998.

   *10.54       Agreement for Purchase and Sale of Assets by and between
                Intertrak Corporation and Group 1 Software, Inc. dared September
                4, 1997.

    *22.0       Subsidiaries of COMNET Corporation.

    *23.0       Consent of Independent Accountants.
</TABLE>

-------------------------------
         *  Filed herewith.


                                       53