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                       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, 1997

                                       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)



            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)

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

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

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, 1997, was $22,650,626.

The number of shares of the Registrant's Common Stock outstanding on June 23,
1997, was 3,186,006.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to Company's 1997 Annual Meeting of Shareholders (Part III
of Form 10-K).



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                                     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, 1997, Group 1's common stock price ranged from a high of $16.50 to a
low of $7.50. Based on the closing price of Group 1's common stock on June 23,
1997, of $7.00, COMNET's holdings in Group 1 represented a market value of
approximately $22.6 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. ("Group 1") develops, manufactures, licenses,
sells and supports software products for specialized marketing and mail
management applications. On December 31, 1994, Group 1 acquired all of the
outstanding shares of capital stock of Archetype Systems, Ltd. of the United
Kingdom. After the acquisition, Archetype Systems, Ltd. changed its name to
Group 1 Software Europe, Ltd. ("Group 1 Europe") and continues its operations
based in London, England. Group 1 markets a broad range of software solutions
in each of four major categories: Customer Information Management, Database
Marketing, Electronic Document Systems and Mailing Efficiency. The operating
systems utilized for Group 1's products vary as to category. Products in the
first two categories - Customer Information Management and Database Marketing -
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 currently run under MVS and OS/400, as well as under UNIX and IBM OS/2
with NT scheduled for release in fiscal 1998. Mailing Efficiency products run
on IBM and IBM compatible mainframe computers, IBM AS/400, Digital, UNIX, NT
and IBM OS/2 platforms as well as on IBM and IBM-compatible microcomputers
(PCs). 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 its
Electronic Document Systems throughout the world as well; plans are underway to
distribute additional Group 1 products internationally. 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.
Group 1's software systems also provide solutions where a need exists for
highly accurate name and address data or where address information must be
correlated with demographic or geographic data. Other Group 1 systems provide
highly effective document preparation for 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


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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.

         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 efficiency
and effectiveness of their business operations.

         Group 1 markets its Electronic Document Systems Products directly to
its clients in North America, the United Kingdom, and Scandinavia and through
distributors in the remainder of Europe. Mailing Efficiency and Database
Marketing products are marketed directly for mainframe and midrange system
configurations and through a dealer and distributor network for PC
applications. Customer Information Management products are marketed primarily
through business partners and to a lesser extent the Group 1 direct sales
force.

MARKETS SERVED

         Group 1 markets its products within a broad span of industries to
fulfill customer information management, 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, hotels, 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 fund raisers are also extensive
users of Group 1's list management and personalization products. The Smart
Marketing Suite integrates mailing efficiency, file merge and duplicate, and
mail preparation functions in an integrated PC based marketing tool for small
businesses.

         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 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.

         Enterprises with large sales organizations are increasingly in need of
closed-loop sale and marketing automation systems that can track every
communication with a prospect or existing customer. Group 1's multi-module
sales and marketing automation system supports complex global territories, plus
direct and indirect sales channels, allowing businesses to manage sales
opportunities more effectively. Businesses may now fully integrate account,
contact, activity and resource management functions with Oracle Office,
Microsoft Office, Lotus Smart Suite and knowledge based support products to
maximize sales results.

         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 



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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 can be 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 plus, 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 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, 1997, Group 1 offered a total of 97 software products.

         The multi-platform electronic document composition system (DOC 1) 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 the DOC 1
production engines can run under MVS, OS/2, MS-DOS, OS/400, and UNIX operating
systems with NT due to be released during FY 1998. The system is printer
independent and supports AFP, Metacode and PCL output.

         Most of the mailing efficiency products are offered in an Open System
format which 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 is the SQLBase
RDMS which runs under Windows 3.x, 95, or NT, OS/2 and Novell NetWare; the
client utilizes Windows 3.x or 95. 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 the user's data. Model 1 runs under Windows 95 or NT. Demographic and
geographic coding products operate in most open system operating environments.

         The customer information management products include NADIS and
WorldTrak. WorldTrak operates in a client/server mode. Data synchronization
facilitates information exchange with remote users. Client support includes
Windows 3.x, 95, and NT. Server operating systems may be UNIX, NT or Novell.
WorldTrak supports Oracle, SYBASE, SQLServer, SQLBASE databases. The data
repository structure features dynamic configuration. Data sources may be
accessed and drilled on RDBMS through a single interface to all
customer-related data. NADIS products are offered in open systems format
compatible with most mainframe and mid size operating systems.

         The newest releases of the PC products are developed in a 32-bit
Windows environment. All Group 1 PC products support ".dbf" files, the industry
standard PC database software format.

         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.



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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 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. DOC 1 can be integrated with Group1's MailStream Plus system
to produce output documents in a sequence that provides presorting discounts
from the U.S. Postal Service.

         Group 1's Automated System for Advanced Printing (ASAP) is a complete
system comprising batch and on-line components to create, print and manage
individualized business documents. The system uses conditional statement logic
and variable processing to generate customized documents such as statements,
invoices, and policies, all based on customer-unique information. The system is
a tailored solution for IBM and IBM-compatible mainframes, implemented to
client specifications. ASAP 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.

         ASAP is 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 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 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 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 formatted address data to
comply with the formats of all 195 countries recognized by the United Nations.




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         Group 1's PC-based products include a specialized database management
system designed specifically to handle mailing lists, and postal discount
systems which allow mailers to qualify for various discounts depending on
various postal rate categories. A stand-alone product is also available that is
designed to remove duplicates from address lists on the most popular database
management systems. The system can print virtually any type of label.

DATABASE MARKETING

         Group 1's DataDesigns database marketing system allows the user to
develop a composite profile of an organization's 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 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 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 modeling technique for each set of data. Other
Group 1 products provide data analysis and decision support tools to identify
motivational behavioral characteristics and changes across products or over
time.

CUSTOMER INFORMATION MANAGEMENT

         Group 1's WorldTrak sales and marketing automation system provides
closed-loop tracking of all prospect and customer inquiries. WorldTrak's
user-definable workflow allows clients to tailor the system to match their
sales and marketing processes. Enhanced reporting, campaign management, sales
pipeline management and sales forecasting are streamlined to provide improved
market analysis. A client-server based system, it maintains closed-loop sales,
marketing and service information to allow for improved management of the
prospect, customer and supplier relationship. WorldTrak records the
characteristics of all types of marketing, sales and support efforts, including
media advertising and telemarketing. This relationship-driven system
consolidates all activity to enable measurement of the quality of leads, return
on marketing investment and total cost of marketing and selling. WorldTrak
supports international business disciplines, helping to ensure that language,
cultural and geographic issues affecting global business operations are
properly addressed.

         To process name and address data for Customer Information Files
(CIF's) reliably, 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
which provides telephone support and continuing updates and enhancements, as
available, to its products, USPS name and address databases and



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product 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 Customer Information Management and 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. For PCs, products are offered at
suggested retail prices from $295 to $2,995.

         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 five 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. A service and enhancement agreement is
available for an annual fee of $495 each for certain of Group 1's PC products.

         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 $6,600 annually for 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
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. Client/server
implementations are available for DataDesign and WorldTrak; LAN network
versions for PC products are also available. 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 other than PC 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. PC software is warranted for ninety days from
date of purchase against defects in material and workmanship and against
operational failures.



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CUSTOMERS

         Group 1's customer base includes approximately 2,400 clients who have
licensed one or more of its large software systems. In addition, there are
currently over 8,100 registered users of Group 1's PC software systems. Group 1
believes that it is a leading vendor of list and mail management software in
North America.

         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 and PEPCO, telecommunication companies such as AT&T,
Iridium and MCI; major banks such as Citibank, National Westminster Bank, Bank
One, Chase Manhattan Bank and Banque Nationale du Canada; insurance companies
such as The Hartford Insurance Group, Metropolitan Life, and Standard Life of
Scotland; 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 and Wal-Mart;
manufacturers such as GTE, Caterpillar, Eastman Kodak, 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, Trans World Airlines, 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,
1997, seven customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% 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. International revenues
account for 15.7% of Group 1's total revenue, although that percentage is
expected to increase with the continued growth of European revenue and
increased sales of the new Code-1 International product.

SALES AND MARKETING

         Group 1 markets all of its software products with the exception of its
WorldTrak product in North America and Europe through a direct sales and sales
support force of 100 representatives 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. WorldTrak is marketed through business
partnership arrangements.

         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 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's PC software products are marketed to end-users through Group
1's developing U.S. and Canadian dealer and distributor network.



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         Group 1 has entered into joint marketing agreements with a number of
busine12`ss partners including IBM, Xerox, Data General Corp., R.L. Polk,
Campaign Mail & Data, the Harris Group, MapInfo, Software Pursuits, Mastersoft
International Pty., Geographic Data Technology, Claritas/NPDC, Versatility,
AMS, UNICA Technologies and OBIMD International. 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 Group 1's 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. A telephone support help line is also provided
for PC products. 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, 1997, 1996 and
1995, maintenance and enhancement fees represented approximately 33%, 37% and
41%, 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 USPS and CPC.
Group 1 may also have to adapt its products to accommodate future changes in
hardware. 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.

         During fiscal 1997, Group 1 enhanced its MailStream, Arclist, and
Prosort products to meet the new postal reclassification regulations that
became effective July 1, 1996. Additional enhancements and new product releases
were made to help mailing efficiency customers meet the expanding requirements
of the U.S. Postal Service in order to qualify for postal discounts.

         Substantial investment was made during 1997 in a new Windows NT
version of the DOC 1 product scheduled for release in FY 1998. Other major
product enhancements begun in FY 1997 include a new release of Code-1 Plus as
well as substantial enhancements to Canadian postal products and PC products.



                                       8
<PAGE>   11

         Group 1 also released Code-1 International under a joint venture
agreement. Group 1 began development of an enhanced Code-1 International during
FY 1997.

COMPETITION

         The computer software and service industry is highly competitive, and
no published data is 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 that six companies offer customer information management systems and
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. Group 1 believes that at
least ten companies offer PC products competitive with one or more of Group 1's
products. 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 Company. 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.

TRADEMARKS

         Group 1 Software (name and logo), MailStream Plus, CODE-1 Plus and
WorldTrak are registered trademarks of Group 1 Software, Inc. ASAP,
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 Model 1, DOC 1, DataDesigns, MOVEforward
and CODE-1 International are pending. All other trademarks referenced herein
are the property of their respective owners.

EMPLOYEES

         As of March 31, 1997, the Company employed 375 persons on a full-time
basis. Of those employees, 161 were in management, professional and technical
positions, 167 in marketing, sales and support and 47 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.





                                       9
<PAGE>   12

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.

         Reserves in the amount of $75,526 have been established to cover
disposition cost and contingencies associated with the sale of the assets. Any
gain on the sale will be recognized as payments are received.  The Company's
Consolidated Statements of Earnings have been restated to reflect COM-MED
Systems as a discontinued operation.


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.


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

         The following matters were submitted to, and approved by, the required
vote of security holders of the Company at the Company's most recent annual
shareholders' meeting held on September 12, 1996.

                  To elect three (3) directors to hold office until the third
                  annual meeting of stockholders of COMNET following their
                  election and until the election and qualification of their
                  successors.

<TABLE>
<CAPTION>
                                                                 WITHHELD
                             NOMINEES          FOR               AUTHORITY
<S>                                         <C>                    <C>  
                  Robert S. Bowen           3,243,073              2,227
                  Ronald F. Friedman        3,243,073              2,227
                  Charles A. Crew*          3,243,073              2,227
                  *Resigned
                  -------------------------------------------------------------
</TABLE>

                                      10
<PAGE>   13




                                    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
NASDAQ 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
                                               ---------------------------
1997                           HIGH      LOW     1996                            HIGH      LOW
----                          ----------------   ----                           ----------------
<S>                           <C>      <C>        <C>                           <C>       <C>  
First - June 30, 1996         $15.00   $10.00     First - June 30, 1995         $10.50     $9.00
Second - September 30, 1996   $16.50   $ 8.00     Second - September 30, 1995   $20.50     $9.13
Third - December 31, 1996     $15.50   $ 8.00     Third - December 31, 1995     $17.00    $10.00
Fourth - March 31, 1997       $11.00   $ 8.50     Fourth - March 31, 1996       $14.00    $10.00
</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 8. 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 23, 1997, 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,
                                                   ------------------------------------------------------------------
                                                       1997          1996         1995          1994          1993
                                                   -----------   -----------  -----------   -----------   -----------
<S>                                               <C>           <C>          <C>           <C>           <C>
Statement of Earnings Data: (1)
Revenue                                           $   54,547    $  45,873    $  37,883     $  31,370     $  32,099
Earnings (loss) from continuing operations        $   (2,710)   $   5,472    $   5,241     $   3,303     $   5,548
Net earnings (loss) from continuing operations    $   (1,600)   $   2,832    $   2,658     $   1,776     $   3,075
Net loss from discontinued operations             $   - - -          - - -   $    (282)    $   (1,571)   $    (921)
Net earnings (loss)                               $   (1,600)   $   2,832    $   2,376     $     204     $   2,154
Earnings (loss) per share (primary): (2)
  Earnings (loss) from continuing operations per 
    share of common stock                         $    (0.54)   $    0.82    $    0.76     $    0.54     $    0.83
  Loss from discontinued operations       
    per share of common stock                     $   - - -         - - -    $   (0.08)    $   (0.53)    $   (0.24)
  Net earnings (loss) per share                   $    (0.54)   $    0.82    $    0.68     $    0.01     $    0.59
Weighted average number of shares                      3,263        3,864        3,764         2,941         3,884

Balance Sheet Data:
Working capital                                   $   4,491     $   6,829    $   6,787     $   8,958     $   9,499
Total assets                                      $  75,856     $  67,192    $  57,148     $  49,047     $  45,541
Long-term debt                                    $     304     $     320    $     561     $     719     $   1,206
Stockholders' equity                              $  26,212     $  27,433    $  24,881     $  20,337     $  17,251

---------------------------------------------------------------------------------------------------------------------
</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.



                                      11
<PAGE>   14

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

RESULTS OF OPERATIONS

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 $0.82 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.

         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,
1997, seven customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% 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. 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 $31.3 million represented
an increase of 21% over the prior year attributable primarily to new product
licenses. As a percent of total revenue, software license and related revenue
was 57% and 56% for fiscal years 1997 and 1996, respectively.

         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 59% 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. 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 $0.6 million for fiscal year 1997 compared with the prior year.
Sales of both the WorldTrak product acquired in November 1995 and the NADIS
product declined over the prior year. As a result the Company has revised its
distribution strategy for both of these product lines. During most of fiscal
1997 each of these products were sold through a direct sales force dedicated to
each product. The NADIS product continues to be sold through direct sales;
however, it is now sold by the Mailing Efficiency sales force, rather than a
dedicated sales force. 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.

                                      12
<PAGE>   15

        Maintenance and other revenue of $23.3 million for the year increased
16% over the prior year. Maintenance and other revenue accounted for 43% of
total revenue in 1997 and 44% of total revenue in 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
which 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.

         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 year. $4.2
million was attributed to the adjustments to net realizable value of
capitalized software. Excluding the capitalized software write downs, total
operating costs were 96% of revenue in fiscal 1997.

         Software license expense increased to $12 million in 1997 (including
the write downs of capitalized software) representing 38% of software license
and related revenues compared with $7.5 million or 29% in 1996. Excluding the
write downs to capitalized software, software license expense increased to $9.5
million in 1997 representing 30% of software license and related revenues.

         Maintenance and service expense increased to $13.5 million in 1997
from $7.7 million in 1996, 58% and 38% of maintenance and service revenue,
respectively. Excluding the write downs to capitalized software, maintenance
and service expense increased to $11.9 million in 1997 representing 51% of
maintenance and service revenue. The increase in expense as a percent of
maintenance and service revenue (excluding the capitalized software write
downs) 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 $4.4 million which were 74% of
professional services revenue during 1997 and $2.3 million or 77% of
professional services revenue for the prior year.

         Costs of maintenance were $9.1 million for 1997 representing 51% of
maintenance revenue compared with costs of $5.4 million or 32% of maintenance
revenue in 1996. Excluding the write downs to capitalized software, costs of
maintenance increased to $7.5 million in 1997 representing 43% of maintenance
revenue. The increased cost as a percentage of maintenance revenue (excluding
the capitalized software adjustments) were 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 $3.6 million in 1997 and
$2.5 million in 1996, representing 7% and 6% 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 which were $0.9 million in 1997 and $0.2 million in
1996. The Company anticipates that these costs as a percentage of revenue will
increase due to expanded product offerings.

                                      13
<PAGE>   16

         Selling and marketing expenses totaled $20.7 million or 38% of revenue
in 1997 and $15.9 million or 35% of revenue in the prior year. 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 $5 million or 9% of total
revenue in 1997 compared with $5.4 million or 12% for 1996. The decrease in the
current year 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.

         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.

1996 as Compared with 1995

         The Company sold its COM-MED Systems subsidiary as of March 31, 1995.
The Company's consolidated financial statements have been restated to report
separately, as a discontinued operation, the results of operations of COM-MED
Systems. The Company's remaining business unit is Group 1 Software, Inc., an
81% owned subsidiary, which develops, acquires, markets and supports
specialized marketing and mail management software. For the year ended March
31, 1996, the Company's revenue was $45.9 million compared with $37.9 million
the prior year. The Company's net earnings from continuing operations were $2.8
million or $0.82 per share compared with $2.6 million or $0.76 per share the
prior year.

         For the year ended March 31, 1996, Group 1's revenue was $45.9 million
compared with $37.9 million for the prior year. Net earnings for the year were
$3.7 million compared with $3.3 million for fiscal 1995. On December 31, 1994,
Group 1 acquired Archetype Systems, Ltd. (renamed Group 1 Software Europe,
Ltd.). The results of operations from that subsidiary subsequent to the
acquisition did not have a material effect on the consolidated financial
statements for fiscal 1995.

         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,
1996, four customers individually accounted for more than 1% of Group 1's
revenue. No customer accounted for 3% 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. International revenues
account for less than 13% of Group 1's total revenue, although that percentage
is expected to increase with the continued growth of European revenue.

         Software license fees and related revenue of $25.8 million represented
an increase of 24% over the prior year attributable primarily to new product
sales. As a percent of total revenue, software license and related revenue was
56% and 55% for fiscal years 1996 and 1995, respectively.

         License fees from Customer Information Management Systems software
increased by $808,000 over the prior year due mostly to NADIS revenues;
Database Marketing Systems license fees decreased by $127,000 due to lower
geographic and demographic licenses fees offset in part by revenue from the
newly acquired DataDesigns System. Licensing of the Electronic Document Systems
contributed increased revenue of $1.8 million, due primarily to a full year of
European operations versus only four months the prior year. Mailing Efficiency
software 


                                      14
<PAGE>   17



revenues increased $2.6 million over the prior year due to the continued growth
of the Open Systems product suite; the increase also reflects a growth of
$850,000 in PC software revenue.

         Maintenance and other revenue in fiscal 1996 of $20.1 million increased
by 17% over the prior year. Maintenance and other services accounted for 44% of
total revenue in 1996 versus 45% of total revenue in 1995. Recognized
maintenance contract revenue increased over the prior year by $1.8 million, due
primarily to the continuing growth in the number of customers under maintenance
contracts. The maintenance renewal rate was 85% for the fiscal year 1996
compared with 83% in fiscal 1995.

         Total operating costs and expenses for fiscal year 1996 were $40.6
million or 89% of total revenue compared with $32.8 million or 87% of total
revenue during the prior year. The increase in operating costs and expenses as
a percent of revenue is primarily due to increased selling and marketing
expenses.

         Software license expense increased to $7.6 million in fiscal 1996 from
$6.5 million the prior year, representing 29% and 31% of software license and
related revenue, respectively. The increase in software license expense was
related to increased amortization of product development and acquisition costs
as well as the direct sales support activity related to the DOC 1 and NADIS
products. PC cost of sales also increased for the year due to the cost of
production and shipping.

         Maintenance and other service expense increased to $7.6 million in the
current year from $6.2 million in 1995, representing 38% and 36% of maintenance
and other revenue, respectively. The incremental cost was due primarily to an
increase of $1.3 million in amortization expenses for the current year
reflecting the new and enhanced products released during fiscal 1996 and fiscal
1995 for all computer platforms. Amortization was 11% of total revenue in both
years. Group 1 expects the amortization of software costs to continue to
increase due to development expenditures capitalized and to recent software
acquisitions. Other direct costs to fulfill new customer orders and provide
updates for existing customers increased to 6% of total revenue from 5% the
prior year due to an increase in internal product distribution support
personnel. Group 1 expects the cost of maintenance and other service to
increase as Group 1's customer base expands.

         Research, development and indirect support expenses totaled $2.6
million in fiscal 1996 and $1.9 million in the prior year, representing 6% and
5% of revenue, respectively. Expenses during fiscal 1996 increased due to
additional internal management and technical support requirements for the
growing number of computer platforms and specialized product applications.
Group 1 expects these expenses to continue to increase as Group 1's product
applications increase.

         Selling and marketing expenses totaled $15.9 million or 35% of revenue
in fiscal year 1995, compared with $12.2 million or 32% of revenue the prior
year. The increase in expenses reflects higher sales compensation, travel and
direct marketing expenses to support increased sales activity for new products
and markets.

         General and administrative expenses increased $0.8 million to $5.4
million or 12% of revenue, primarily as a result of increased costs associated
with a full year of Group 1's operations in Europe and establishing operations
in Puerto Rico to address the South American market. Additionally, compensation
and professional services increased over the prior year.

         The provision for doubtful accounts of $1.6 million represented an
increase of $0.1 million from the prior year. This increase over the prior year
reflects a reduction in that year of reversal of reserves associated with a
note receivable for which payment was received.

         Net non-operating income for the Company totaled $239,000 in fiscal
year 1996, which represents an increase of $55,000 as compared with fiscal
1995. Interest income and gains on investments increased $199,000, as compared
with fiscal 1995 as a result of the improved invested cash position of the
Company throughout the year. Interest expense increased $12,000 due to
increased capital lease obligations. Other expense increased by $27,000 for
foreign exchange losses and $105,000 for other items.

                                      15
<PAGE>   18

         The Company's effective tax rate for the 1996 fiscal year was 36% as
compared with 38% for fiscal 1995 reflecting the lower state tax rates in
addition to lower foreign tax rates on a larger proportion of foreign income
versus the prior year.

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 $4.5 million at March 31, 1997 as
compared with $6.8 million in the prior year. The current ratio was 1.1 to 1 at
March 31, 1997, compared with 1.3 to 1 at March 31, 1996. 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 subsidiary maintains a
line of credit facility. On October 8, 1996 Group 1 entered into a new two year
uncollateralized $10,000,000 line of credit arrangement with Crestar Bank. The
line of credit bears interest at the bank's prime rate minus 50 basis points or
Libor plus 150 basis points at Group 1's option. The line of credit requires
Group 1 to maintain an EBIT to interest expense ratio of at least 4.5 to 1
through December 31, 1997 and at least 6.5 to 1 thereafter. Borrowings under
the facility are limited to 85% of eligible receivables. At March 31, 1997
borrowings outstanding under the line of credit were $7.1 million; at March 31,
1996, there were no short-term borrowings.

         During fiscal 1997 a net loss of $1.6 million plus non-cash expenses
of $12.7 million provided a total of $11.1 million cash from operating
activities. This amount was offset by increases in accounts receivable of $10.1
million which is the combined result of higher year-end sales over the prior
year-end and the increased mix of large dollar contracts with extended
collection cycles versus the prior year. Deferred revenues increased cash by
$2.3 million, and other working capital items decreased cash by $0.6 million.
Cash flows from investing activities are primarily expenditures for investments
in software development and capital equipment of $12 million. Cash of $2
million was generated from the sale of marketable securities. Proceeds from the
exercise of the Company's stock options generated cash of $0.3 million.
Long-term debt was reduced by $0.4 million, and dividends of $0.2 million were
paid while short-term borrowings increased by $7.1 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 five 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, 1997, 1996, and
1995, the principal amount of installment agreements entered into during the
year represented 10%, 15%, and 17% of Group 1's revenue, respectively.
Installment receivables included in accounts receivable are $11.9 million and
$11.8 million at March 31, 1997 and 1996, respectively. Group 1 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 Group 1's policy of 

                                      16
<PAGE>   19

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.

        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. Certain of these clients may have limited
capital and insufficient assets to secure their liability with 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 Group 1. The service bureau industry is also highly competitive and
subject to general economic cycles, as they impact advertising and direct
marketing expenditures. Group 1 is aware of no current market risk associated
with the installment receivables. Service bureaus represent approximately $9.3
million, or 78%, of the installment receivables at March 31, 1997.

         As of March 31, 1997, 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. 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 38.


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

         None.


                                      17
<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 and Subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of Group 1'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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.


                                                     COOPERS & LYBRAND, L.L.P.

McLean, Virginia
June 27, 1997

                                      18

<PAGE>   21


                               COMNET CORPORATION
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                       MARCH 31,
                                                                         --------------------------------------
                                                                              1997                    1996
                                                                         -------------          ---------------
<S>                                                                      <C>                     <C>
 ASSETS
 Current assets:
   Cash and cash equivalents                                             $  1,628,552              $  1,844,521
   Marketable securities                                                        - - -                 1,979,166
   Trade and installment accounts receivable,
     less allowance of $3,208,000 and $2,409,000                           32,460,267                24,488,730
   Deferred income taxes                                                    2,385,099                 1,923,000
   Prepaid expenses and other current assets                                4,532,748                 2,793,129
                                                                          -------------             -------------

 Total current assets                                                      41,006,666                33,028,546

 Installment accounts receivable, long-term                                 6,169,987                 5,985,291
 Property and equipment, net                                                3,666,782                 3,269,206
 Computer software, net                                                    22,306,255                22,425,814
 Other assets                                                               2,706,610                 2,482,964
                                                                          ===========               ===========  

   Total assets                                                          $ 75,856,300              $ 67,191,821
                                                                          =============             ===========  

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Short-term borrowings                                                 $  7,096,854              $      - - -
   Accounts payable                                                         3,168,485                 2,483,356
   Current portion of long-term debt                                          163,748                   564,934
   Accrued expenses                                                         5,932,607                 5,277,990
   Accrued compensation                                                     3,984,139                 3,743,954
   Current deferred revenues                                               16,169,758                14,129,359
                                                                         ------------               -----------

 Total current liabilities                                                 36,515,591                26,199,593

 Long-term debt, net of current portion                                       303,504                   320,115
 Deferred revenues, long-term                                               4,605,606                 4,363,429
 Deferred income taxes                                                      2,801,078                 3,147,000
 Minority interest in net earnings of consolidated subsidiary               5,418,731                 5,728,613
                                                                          -----------               -----------
                                                                                       
  Total liabilities                                                        49,644,510                39,758,750
                                                                          -----------               -----------

 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;
    3,587,990 and 3,562,690 issued and outstanding                          1,793,995                 1,781,345
 Capital contributed in excess of par value                                17,728,151                17,471,861
 Retained earnings                                                          5,507,940                 7,285,246
 Unrealized loss on investments, net                                            - - -                    (2,175)
 Cumulative foreign currency translation                                      351,197                    66,287
                                                                          -------------             -----------
                                                                           28,227,140                29,448,421
 Less treasury stock at cost, 316,267 shares                               (2,015,350)               (2,015,350)
                                                                          -------------             -----------

 Total stockholders' equity                                                26,211,790                27,433,071
                                                                                                    -----------

</TABLE>



                                       19




<PAGE>   22

<TABLE>
<S>                                                                     <C>                      <C>
                                                                          -----------

 Total liabilities and stockholders' equity                              $ 75,856,300              $ 67,191,821
                                                                          ===========               ===========

</TABLE>

See notes to consolidated financial statements.



                                      20
<PAGE>   23






                               COMNET CORPORATION
                      CONSOLIDATED STATEMENTS OF EARNINGS


<TABLE>
<CAPTION>
                                                                                  Year Ended March 31,
                                                                -------------------------------------------------------
                                                                      1997                1996               1995
                                                                ------------------   ----------------   ---------------
<S>                                                             <C>                  <C>                 <C>    
Revenue:                                                        
  Software license and related revenues                               $ 31,253,434       $25,785,598       $20,754,197
  Maintenance and other revenue                                         23,293,515        20,087,224        17,128,462
                                                                 ------------------  ----------------    --------------
                                                                
    Total revenue                                                       54,546,949        45,872,822        37,882,659
                                                                 ------------------  ----------------    --------------
                                                                
Costs and expenses:                                             
  Software license expense                                              12,014,110         7,582,297         6,453,283
  Maintenance and service expense                                       13,516,133         7,569,039         6,170,855
  Research, development and indirect support                             3,597,915         2,627,627         1,895,315
  Selling and marketing                                                 20,725,677        15,897,343        12,208,007
  General and administrative                                             5,020,902         5,345,635         4,609,469
  Provision for doubtful accounts                                        1,956,403         1,617,637         1,487,878
                                                                 ------------------  ----------------    --------------
    Total costs and expenses                                            56,831,140        40,639,578        32,824,807
                                                                 ------------------  ----------------    --------------
                                                                
Operating earnings (loss)                                               (2,284,191)        5,233,244         5,057,852
                                                                
Non-operating income (expense), net                                       (425,627)          238,871           183,552
                                                                 ------------------  ----------------     -------------
                                                                
Earnings (loss) from continuing operations before               
  provision for income taxes                                            (2,709,818)        5,472,115         5,241,404
                                                                
Provisions (benefit) for income taxes                                     (799,630)        1,985,000         1,968,539
                                                                
Minority interest in net earnings (loss) of consolidated               
 subsidiary                                                               (309,882)          655,578           615,158
                                                                 ------------------   ---------------     -------------
                                                                
Net earnings (loss) from continuing operations                          (1,600,306)        2,831,537         2,657,707
                                                                
Discontinued operations:                                        
  Loss from discontinued operations (net of tax                 
   benefits of $83,000 for 1995)                                             - - -             - - -          (161,504)
  Loss on disposal of discontinued operations (net of           
   tax benefit of $61,000)                                                   - - -             - - -          (120,282)
                                                                 ------------------   ---------------     -------------
                                                                
Net earnings (loss)                                                     (1,600,306)        2,831,537         2,375,921
                                                                
Preferred stock dividend requirements                                     (177,000)         (177,000)         (177,000)
                                                                 ------------------   ---------------     -------------
                                                                
Net earnings (loss) available to common stockholders                  $ (1,777,306)      $ 2,654,537       $ 2,198,921
                                                                 ==================   ===============     =============
                                                                
Earnings (loss) per share of common stock                       
     Continuing operations                                            $      (0.54)      $      0.82       $      0.76
     Discontinued operations                                                 - - -             - - -             (0.08)
                                                                 ------------------   ---------------     -------------
     Net earnings (loss) per common share                             $      (0.54)      $      0.82       $      0.68
                                                                 ==================   ===============     =============
                                                                
Weighted average shares outstanding                                      3,262,813         3,864,294         3,764,078
                                                                 ==================   ===============     =============
</TABLE>

See notes to consolidated financial statements.



                                      21
<PAGE>   24




                               COMNET CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                   Years Ended March 31, 1997, 1996 and 1995


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, 1994                            $2,845,857      $1,609,237       $14,602,536       $2,431,788  
                                                                                                                  
                                                                                                                  
Dividends to preferred stockholders                     - - -           - - -             - - -         (177,000) 
Repurchase of common stock                              - - -           - - -             - - -            - - -  
Issuance of stock upon exercise of options              - - -          82,637         1,136,108            - - -  
Gain on foreign currency translation                    - - -           - - -             - - -            - - -  
Unrealized loss on investments                          - - -           - - -             - - -            - - -  
Net earnings for the year                               - - -           - - -             - - -        2,375,921  
                                              ----------------- ---------------  ---------------- ----------------
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  
                                              ================= ===============  ================ ================


<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, 1994                       $(1,151,990)    $      - - -    $      - - -    $   20,337,428
                                                                         
                                           
Dividends to preferred stockholders                 - - -            - - -           - - -          (177,000)
Repurchase of common stock                       (863,360)           - - -           - - -          (863,360)
Issuance of stock upon exercise of options          - - -            - - -           - - -         1,218,745
Gain on foreign currency translation                - - -            - - -          18,486            18,486
Unrealized loss on investments                      - - -          (44,720)          - - -           (44,720)
Net earnings for the year                           - - -            - - -           - - -         2,375,921
                                            ---------------  --------------- ---------------  ----------------
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
                                            ===============  =============== ===============  ================

</TABLE>

See notes to consolidated financial statements.



                                      22
<PAGE>   25



                               COMNET CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                     Year Ended March 31,
                                                                -----------------------------------------------------------
                                                                      1997                 1996                 1995
                                                                -----------------    -----------------    -----------------
<S>                                                             <C>                   <C>                    <C>
Cash flows from operating activities:
   Net earnings (loss)                                             $ (1,600,306)        $  2,831,537           $  2,375,921
  Adjustments to reconcile earnings (loss) from
  operations to net cash provided by operating activities:
     Amortization expense                                            10,849,115            5,095,487              3,796,982
     Depreciation expense                                               986,284              861,499                749,036
     Provision for doubtful accounts receivable                       1,956,403            1,617,637              1,906,184
     Net gain on disposal of asset                                        - - -                - - -                  7,999
     Deferred income taxes                                             (808,021)           1,548,022              1,112,000
     Minority interest in earnings of
      consolidated subsidiary                                          (309,882)             655,578                615,158
  Changes in assets and liabilities:
     Increase in accounts receivable                                (10,112,636)          (9,977,778)            (6,068,215)

     (Increase) decrease in other current assets                     (1,739,619)            (201,546)              (166,758)
     (Increase) decrease in other assets                               (355,146)             401,975                 72,024
     Increase in deferred revenues                                    2,282,576            2,396,459              2,097,704
     Increase (decrease) in accounts payable                            685,129             (317,810)               665,744
     Increase in accrued expenses                                       894,802            1,839,794              2,133,737
                                                                   ------------         ------------           ------------
   Net cash provided by operating activities                          2,728,699            6,750,854              9,297,516
                                                                   ------------         ------------           ------------

Cash flows from investing activities:
     Purchase and development of computer software                  (10,557,263)          (8,758,547)            (5,902,737)
     Purchase of equipment and improvements                          (1,424,653)          (1,299,991)              (726,166)
     Purchase of marketable securities                                    - - -          (18,066,997)            (3,824,344)
                                                                               
     Sale of marketable securities                                    1,981,341           19,910,000                  - - -
     Advances to and payment for acquisition
      of subsidiary, net of cash acquired                                 - - -                - - -             (2,514,945)
     Sale of assets                                                       - - -                - - -                354,689
                                                                   ------------         ------------           ------------
   Net cash used in investing activities                            (10,000,575)          (8,215,535)           (12,613,503)
                                                                   ------------         ------------           ------------

Cash flows from financing activities:
     Proceeds from short-term borrowings                             20,961,666            8,384,995              3,307,458
     Reduction of short-term borrowings                             (13,864,812)          (8,384,995)            (3,307,458)
     Proceeds from exercise of stock options                            268,940            1,822,688                355,395
     Proceeds from exercise of subsidiary stock options                   - - -                4,967                  - - -
     Reduction of long-term debt                                       (417,797)            (328,050)              (788,339)
     Dividend paid on preferred stock                                  (177,000)            (177,000)              (177,000)
                                                                   ------------         ------------           ------------
    Net cash provided by (used in) financing activities               6,770,997            1,322,605               (609,944)
                                                                   ------------         ------------           ------------

    Net increase (decrease) in cash and cash
    equivalents                                                        (500,879)            (142,076)            (3,925,931)
    Effect of currency translation on cash                              284,910               47,801                 30,659
    Cash and cash equivalents at beginning of period                  1,844,521            1,938,796              5,834,068
                                                                   ------------         ------------           ------------
    Cash and cash equivalents at end of period                     $  1,628,552         $  1,844,521           $  1,938,796       
                                                                   ============         ============           ============
</TABLE>


See notes to consolidated financial statements.



                                      23
<PAGE>   26





                               COMNET CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   YEARS ENDED MARCH 31, 1997, 1996 AND 1995


(1)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

         COMNET Corporation ("COMNET" through its 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
(the "Company"). 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, 1997, to be recognized
during the subsequent years is:

    1998                               $16,169,758
    1999                                 2,641,033
    2000                                 1,333,862
    2001                                   428,020
    2002                                   197,023
    2003 & beyond                            5,668
                                    ---------------
                                       $20,775,364
                                    ===============

         Contracts for professional services are negotiated individually and
are non-cancelable. The Company recognizes revenues from professional service
contracts 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 each specific 



                                      24
<PAGE>   27

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.

         Contract professional services revenue in the years ended March 31,
1997 and 1996 was recognized primarily using the percentage-of-completion
method as the work was performed. For the period ended March 31, 1995 the
completed contract method was used; any difference in revenue resulting from
this change in accounting method was immaterial to the consolidated financial
statements for 1995.

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 five years.
Interest income from such contracts, which is included in software licenses and
related revenue, was $468,000, $440,000, and $406,000 in 1997, 1996, and 1995,
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 1997, 1996, and 1995
were approximately $12,604,000, $9,068,000, and $6,948,000, respectively. Under
FASB Statement No. 86, software development costs amounting to $9,331,000,
$7,675,000, and $5,089,000, respectively, were capitalized. During the years
ended March 31, 1997, 1996, and 1995, amortization of capitalized internally
developed computer software costs, based on an estimated economic life of no
more than five years, was $8,540,000, $4,010,000, and $3,430,000, respectively.

Marketable Securities

         Concurrent with its purchase of investments during fiscal 1995, Group
1 adopted Statement of Financial Accounting Standards ("SFAS") Statement No.
115, "Accounting for Certain Investments and Debt and Equity Securities." Group
1 has classified its investments as "available for sale" securities which
require that all unrealized gains and losses be reported, net of tax, as a
separate component of stockholders' equity.

                                      25
<PAGE>   28

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 $132,000, $70,000, and
$44,000, for 1997, 1996, and 1995, 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, 1997.

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.

Sale of Stock of and by a Subsidiary

         Gains arising from both the public sale by the Company of stock in a 
subsidiary and the issuance to the public by a subsidiary of the Company of 
its own stock have been recognized as non-operating income.

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, 1997, 1996, and 1995, is reflected in consolidation and 
is the portion of Group 1 Software, Inc. ("Group 1") that is not owned by the 
Company.

Earnings per Share of Common Stock

         Earnings per share of common stock have been computed for the years
ended March 31, 1997, 1996, and 1995 on net earnings, after deducting dividends
using the weighted average number of common and dilutive common equivalent
shares outstanding during the respective years. Common equivalent shares result
from the dilutive effect of stock options, calculated under the treasury stock
method. The weighted average number of common shares and equivalents used for
primary earnings per share was 3,262,813 in 1997; 3,716,794 in 1996, and
3,616,578 in 1995

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 from clients (service bureaus) who provide computer services to
the direct marketing industry. Certain of these service 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 $9.2 million or 78% of the
installment receivables at March 31, 1997 versus $9.0 million or 76% the prior
year.

                                      26
<PAGE>   29

Impairment of Long-Lived Assets

         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. Adoption of this
standard on April 1, 1996 did not have a material effect on the financial
position or results of operation of the Company.

Fair Value of Financial Instruments

         The carrying amount of the Company's cash and cash equivalents,
receivables, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments. The Company derives the
fair value of its short-term investments based on quoted market prices which
are generally readily available. 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.

New Accounting Standards

         The Financial Accounting Standards Board issued SFAS No. 128 regarding
earnings per share. This statement which must be adopted by the Company for
fiscal years beginning April 1, 1997, requires earnings per share to be
calculated under newly prescribed methods. Adoption of SFAS No. 128 is not
expected to have a material impact on the Company's financial statements

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:

<TABLE>
<CAPTION>
                                                                               March 31,
                                                                -----------------------------------------
                                                                      1997                    1996
                                                                -----------------       -----------------
<S>                                                             <C>                     <C>
         Trade                                                      $29,974,239             $21,114,071
         Installment accounts receivable,
          interest typically at 8.5% to 13%                          11,864,015              11,768,950
         Allowance for doubtful accounts                             (3,208,000)             (2,409,000)
                                                                -----------------       -----------------
                                                                     38,630,254              30,474,021
         Less non-current portion of
          installment accounts receivable                             6,169,987               5,985,291
                                                                -----------------       -----------------
         Current portion                                            $32,460,267             $24,488,730
                                                                =================       =================

</TABLE>



                                      27
<PAGE>   30

(3)     PREPAID EXPENSE AND OTHER ASSETS

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

<TABLE>
<CAPTION>
                                                            March 31,
                                             -----------------------------------------
                                                   1997                    1996
                                             -----------------       -----------------
<S>                                               <C>                    <C>     
         Prepaid expense                          $1,095,771             $563,418
         Prepaid commission                        1,046,266              801,911
         Prepaid royalty                             545,495              695,003
         Other assets                              1,845,216              732,797
                                                  ----------           ---------- 
                                                  $4,532,748           $2,793,129
                                                  ==========           ========== 
         
</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,
                                                       -----------------------------------------
                                                             1997                    1996
                                                       -----------------       -----------------
<S>                                                         <C>                    <C>       
        Data processing equipment                           $5,880,074             $4,663,216
        Furniture and fixtures                               2,554,087              2,513,106
        Leasehold improvements                                 833,847                667,033
                                                          ------------            -----------  
                                                             9,268,008              7,843,355
        Less accumulated depreciation and                   (5,601,226)            (4,574,149)
          amortization                                    ------------            -----------
                                                            $3,666,782             $3,269,206
                                                          ============            ===========
        
</TABLE>




(5)     COMPUTER SOFTWARE

         Computer software is comprised of the following:

<TABLE>
<CAPTION>
                                                             March 31,
                                              -----------------------------------------
                                                    1997                    1996
                                              -----------------       -----------------
        
<S>                                                 <C>                      <C>        
        Developed software                          $41,837,398             $30,247,944
        Acquired software                             5,931,877               6,317,931
        Software purchased for                                  
         internal use                                 3,397,373               3,382,908
                                                    -----------             -----------
                                                     51,166,648              39,948,783
                                                                
                                                    (28,860,393)            (17,522,969)
        Less accumulated amortization               -----------             -----------
                                                    $22,306,255             $22,425,814
                                                    ===========             ===========
        
</TABLE>




                                      28
<PAGE>   31

(6)     ACCRUED EXPENSES

         Accrued expenses are as follows:
<TABLE>
<CAPTION>
                                                                     March 31,
                                                      -----------------------------------------
                                                            1997                    1996
                                                      -----------------       -----------------
<S>                                                          <C>                      <C>      
        Accrued sales and other taxes                        $1,456,178                $734,798
        Accrued royalties                                     1,228,770                 953,636
        Accrued sales incentives                                326,418                 301,556
        Accrued rent abatements                                 106,424                  39,402
        Accrued dividends                                        44,250                  44,250
        Other accrued expenses                                2,666,758               3,032,157
        Accrued expense for disposition                                                        
          of AIM operations                                      28,283                  63,750
        Accrued expense for disposition of                                                     
        COM-MED operations                                       75,526                 108,441
                                                             ----------              ----------
                                                             $5,932,607              $5,277,990
                                                             ==========              ==========
</TABLE>



(7)     SHORT-TERM BORROWINGS

         At March 31, 1997, the Company's Group 1 Software, Inc. subsidiary,
maintained an uncollateralized $10,000,000 bank line of credit arrangement with
interest at the bank's prime rate minus 50 basis points or Libor plus 150 basis
points. The line of credit arrangement requires Group 1, among other things, to
maintain an EBIT to interest expense ratio of at least 4.5 to 1 through
December 31, 1997 and at least 6.5 to 1 thereafter. Borrowings under the
facility are limited to 85% of eligible receivables. At March 31, 1997
borrowings under the line of credit were $7,096,854; at March 31, 1996 there
were no short-term borrowings.

(8)     LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                   March 31,
                                                -----------------------------------------
                                                      1997                    1996
                                                -----------------      -----------------
<S>                                                    <C>                    <C>
        Installment notes payable                      $363,505                $702,035
        Capitalized lease obligations                   103,747                 183,014
                                                ---------------         ---------------  
        Sub-total                                       467,252                 885,049  
        Less current portion                            163,748                 564,934  
                                                ===============         ===============  
        Long-term portion                              $303,504                $320,115  
                                                ===============         ===============  
</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.

         As of March 31, 1996, installment notes include two notes with no
interest. These notes were discounted to reflect the present value of the debt.
The note for the acquisition of certain assets of Arc Tangent, Inc. was
discounted at 6% to $291,220 at March 31, 1996. The note payable for the
acquisition of certain assets of PostSaver, Inc. has been discounted at 7.25%
to $167,360 at March 31, 1996. (See Note 14). These notes were paid in full as
of March 31, 1997.

                                      29
<PAGE>   32

         The aggregate maturities of the long-term debt during the years
subsequent to March 31, 1997 are:

                      1998                        $163,748
                      1999                          72,713
                      2000                          52,709
                      2001                          58,229
                      2002 and beyond              119,853
                                                  --------
                                                  $467,252
                                                  ========


 
         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 Company 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.

         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. The plan activity was as follows:

 

<TABLE>
<CAPTION>

                                                                                                              
                                                                                                  Option
                                                                                                  Shares
<S>                                                                                             <C>
           Shares under option - March 31, 1995                                                    - - -
           Options granted - 1995 - exercise price $10.00                                        316,950
                                                                                                 -------
           Shares under option March 31, 1996 - exercise price of $10.00                         316,950
   
           Options granted - 1997 - exercise prices of $9.00 - 10.25                              71,500
           Options canceled - 1997                                                               (38,390)
                                                                                                 -------
           Shares under option, March 31, 1997 - exercise prices of $9.00 - $10.25               350,060
                                                                                                 =======

</TABLE>



                                      30
<PAGE>   33

         At March 31, 1997 options for 55,712 shares were exercisable at
$10.00.  Options outstanding at March 31, 1997, expire in years ending March
31, 2006 through 2008.  Options for 70,012 shares become exercisable in the
year ending March 31, 1998, 210,550 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, 1994 - exercise prices of $6.625 - $3.25              974,328
         Options granted - 1995 - exercise price of $7.50                                      17,500
         Options exercised - 1995 - exercise prices $6.625  - $8.25                          (165,274)
         Options canceled - 1995                                                             (178,450)
                                                                                            ----------
         Shares under option, March 31, 1995 - exercise  prices of $6.625 - $30.25            648,104

         Options granted - 1996 - exercise prices of  $10.00                                   67,383
         Options exercised - 1996 - exercise prices $5.375  - $14.00                          (78,983)
         Options canceled - 1996                                                              (29,100)
                                                                                            ----------
         Shares under option, March 31, 1996 - exercise prices of $6.625 - $30.25             607,404

         Options granted - 1997 - exercise prices of  $6.625 - $8.25                          (25,300)
         Options canceled - 1997                                                              (21,240)
                                                                                            ----------
         Shares under option, March 31, 1997 - exercise prices of $6.625 - $30.25             560,864
                                                                                            ==========
</TABLE>

         As of March 31, 1997, options for 449,111 shares were exercisable at
prices ranging from $6.625 to $30.25.  Options outstanding at March 31, 1997
expire in years ending March 31, 1998 through 2006.  Options for 44,923 shares
become exercisable in the year ending March 31, 1998.  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                                    30,000
                                                                                             --------
         Shares under option, March 31, 1997 - exercise price of $10.00                       30,000
                                                                                             ========
</TABLE>

         At March 31, 1997, none of these options were exercisable.  Options
for 6,000 shares became exercisable in the year ending March 31, 1998.  At
March 31, 1997, 120,000 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




                                       31
<PAGE>   34

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, 1994 - exercise prices of $5.375 - $30.00              184,334
         Options exercised - 1995 - exercise prices of $5.375 - $7.125                        (37,500)
                                                                                             ---------
         Shares under option, March 31, 1995 - exercise prices of $5.375 - $30.00              146,834

         Options exercised - 1996 - exercise prices of  $5.375 - $11.00                       (99,959)
                                                                                             ---------
         Shares under option, March 31, 1996 and 1997, exercise price of $16.50 - $30.00        46,875
                                                                                             =========
</TABLE>

         As of March 31, 1997, 46,875 shares under option were vested and
exercisable.  Options outstanding at March 31, 1997 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, 1997,
210,000 shares were vested and exercisable.

         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, 1997,
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, 1994 - exercise prices $24.25 - $30.50                  35,000
         Options granted - 1995 - exercise price of $8.75                                       25,000
                                                                                             ---------
         Shares under option, March 31, 1995 - exercise prices 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 and 1997 - exercise prices of $8.75 - $24.25       70,000
                                                                                             =========
</TABLE>


         As of March 31, 1997, 28,000 options were exercisable.  Options
outstanding at March 31, 1997, expire in the years ending March 31, 2003
through 2004.  Options for 14,000 shares become exercisable in the year ending
March 31, 1998.  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.

         At March 31, 1997, approximately 1,852,779 shares of common stock were
specifically reserved for issuance under the employee stock option plan and the
director stock option plans.





                                       32
<PAGE>   35
         A summary of the status of the Plans is presented below:
<TABLE>
<CAPTION>
                                                                             Year Ended March 31,
                                                           ------------------------------------------------------
                                                                     1997                          1996
                                                           ------------------------      ------------------------
                                                                         Weighted                       Weighted
                                                                         Average                        Average
                                                                         Exercise                       Exercise
                                                              Shares      Price            Shares        Price
                                                           ------------------------      ------------------------
         <S>                                                  <C>          <C>             <C>            <C>
         Options outstanding beginning of period              1,266,229    $13.06          1,079,938      $13.61
         Options exercised                                     (25,300)    $10.34          (178,942)       $8.48
         Options canceled                                      (59,630)    $11.91           (49,100)      $14.16
         Options granted                                         96,500     $9.32            414,333      $10.01
         Options outstanding end of period                    1,277,799    $12.95          1,266,229      $13.06
         Options exercisable at end of period                   731,293    $14.89            731,531      $12.71
         Weighted-average fair value of options granted
         during the Period.                                       $6.61                        $7.08
</TABLE>

         As of March 31, 1997, the weighted average remaining contractual life
of the options that range from $9.00 to $10.25 is 8.79 years.

         As of March 31, 1997, and 1996, the pro forma tax effects under SFAS
109 would include an increase to the deferred tax liability of $47,844 and
increase to the deferred tax asset of $21,266.

         The Company accounts for the fair value of its grants 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 grant dates for awards under the Plans consistent with
the method of SFAS 123, the Company's net loss and loss per common share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                      1997                     1996
                                                                 -------------              ----------
         <S>                                                      <C>                       <C>
         Net earnings (loss)
            As reported                                           $(1,777,306)              $2,654,537
            Pro forma                                             $(1,939,489)              $2,595,953
         Earnings (loss) per common share
            As reported                                                $(0.54)                   $0.82
            Pro forma                                                  $(0.59)                   $0.80
</TABLE>

         The fair value of each option is estimated on the date of grant using
a type of Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended March 31,
1997 and 1996, respectively; dividend yield of 0%, expected volatility of 65%,
risk-free interest rate of 6.59% and 5.79%, respectively, and an expected term
of 7 years.





                                       33
<PAGE>   36
(10)  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                             Year Ended March 31,
                                                           -------------------------------------------------------
                                                                1997                 1996                1995
                                                           --------------       -------------       --------------
         <S>                                              <C>                  <C>                 <C>
         Federal:
           Current                                        $     (764,302)      $      244,000      $        46,000
           Deferred                                             (751,613)             945,000            1,396,000
                                                           --------------       -------------       --------------
                                                              (1,515,915)           1,189,000            1,442,000
                                                           --------------       -------------       --------------

         State:
           Current                                                 68,000              76,000               80,000
           Deferred                                                 3,088              73,000              157,000
                                                           --------------       -------------       --------------
                                                                   71,088             149,000              237,000
                                                           --------------       -------------       --------------

         Foreign:
           Current                                                694,926             362,000              157,000
           Deferred                                              (49,729)             285,000              132,000
                                                           --------------       -------------       --------------
                                                                  645,197             647,000              289,000
                                                           --------------       -------------       --------------

                                                          $     (799,630)      $    1,985,000      $     1,968,000
                                                           ==============       =============       ==============
</TABLE>



         The benefit for income taxes for discontinued operations consists of
the following components:

<TABLE>
<CAPTION>
                                                                             Year Ended March 31,
                                                           -------------------------------------------------------
                                                                1997                 1996                1995
                                                           -------------        -------------       --------------
         <S>                                              <C>                 <C>                  <C>
         Federal:
           Current                                        $        - - -      $         - - -      $       275,000
           Deferred                                                - - -                - - -            (414,000)
                                                           -------------        -------------       --------------
                                                                                                         (139,000)
         State:
           Current                                                 - - -                - - -                3,000
           Deferred                                                - - -                - - -              (8,000)
                                                           -------------        -------------       --------------
                                                                   - - -                - - -              (5,000)
                                                           -------------        -------------       --------------
                                                          $        - - -      $         - - -      $     (144,000)
                                                           =============        =============       ==============
</TABLE>

         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,
                                                                        -----------------------------------------
                                                                            1997           1996           1995
                                                                        -----------     ----------     ----------
         <S>                                                              <C>             <C>             <C>
         Statutory tax rate                                               (34.0)%         34.0%           34.0%
         State income taxes, net of federal income tax benefit              1.7            1.9             3.1
         Research and development tax credits                             - - -           (0.9)           (4.0)
         Foreign taxes                                                     (0.7)           1.5             2.1
         Other, net                                                         3.5           (0.2)            2.4
                                                                        -----------     ----------     ----------
           Effective tax rate                                             (29.5)%         36.3%           37.6%
                                                                        ===========     ==========     ==========
</TABLE>





                                       34
<PAGE>   37
         The significant components of the current deferred tax asset and the
long-term deferred tax liabilities are:

<TABLE>
<CAPTION>
                                                                                        March 31,
                                                                          ----------------------------------------
                                                                                1997                      1996
                                                                          --------------            --------------
         <S>                                                              <C>                       <C>
         Current:
         -------
           Deferred maintenance revenue                                     $  530,974                $  531,000
           Allowance for doubtful accounts                                   1,329,597                   928,000
           Reserve for the disposition of AIM                                    9,616                    22,000
           Other, net                                                          514,912                   442,000
                                                                          --------------            --------------
             Total current deferred tax assets                              $2,385,099                $1,923,000
                                                                          ==============            ==============

         Long-term:
         ---------
           Deferred maintenance revenue - long-term                         $1,134,164               $ 1,439,000
           Allowance for doubtful accounts                                     500,963                   501,000
           Capitalized software                                             (5,854,463)               (5,930,000)
           Depreciation                                                        426,313                  (81,000)
           Other, net                                                          991,945                   924,000
                                                                          --------------            --------------
             Total long-term deferred tax liabilities                      $(2,801,078)              $(3,147,000)
                                                                          ==============            ==============
</TABLE>


         The Company has consolidated investment and research and development
tax credit carry forwards of $1,244,000, which will expire in 2005 through
2012.

(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, 1997, 1996 and 1995 were
$254,000, $226,000, and $184,000, respectively.

(12)  INCOME DATA (UNAUDITED)

         Quarterly financial information for the years ended March 31, 1997 and
1996 was as follows:

<TABLE>
<CAPTION>
                                                  First      Second        Third        Fourth
                                                 Quarter     Quarter      Quarter       Quarter        Year
                                                 -------     -------      -------       -------       -------
         (Dollars in thousands except earnings per share)
         <S>                                       <C>         <C>         <C>           <C>          <C>
         Fiscal Year 1997:
         Revenue                                   $10,720     $13,059     $14,631       $16,137      $54,547
         Earnings (loss) from
           operations before taxes                   (234)         246         640       (3,362)      (2,710)
         Net Earnings (loss)                         (165)         154         316       (1,905)      (1,600)
         Earnings (loss) per share (1)             $(0.06)       $0.03       $0.08       $(0.59)      $(0.54)

         Fiscal Year 1996:
         Revenue                                    $9,384     $10,081     $10,853       $15,555      $45,873
         Earnings from       
           operations before taxes                     824       1,193         905         2,550        5,472
         Net Earnings                                  415         604         444         1,369        2,832
         Earnings per share (1)                      $0.12       $0.18       $0.13         $0.36        $0.82
</TABLE>
-
------------------------------------------------------------------------------
(1)   See Note 1 of notes to consolidated financial statements





                                       35
<PAGE>   38
(13)  NON-OPERATING INCOME (EXPENSE) AND SUPPLEMENTAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                        Year Ended March 31,
                                                          ------------------------------------------------
                                                               1997             1996             1995
                                                          -------------    -------------    --------------
<S>                                                       <C>              <C>              <C>
Interest income                                           $     130,435    $     209,422    $     321,100
Interest expense                                              (554,237)        (125,809)         (113,881)
Gain (loss) on sales of investment                               14,332          109,595         (133,788)
Gain (loss) on sale of assets                                     - - -            - - -            5,883
Other income (expense), net                                    (16,157)           45,663          104,238
                                                          -------------    -------------    --------------
Total non-operating income (expense), net                 $   (425,627)    $     238,871    $     183,552
                                                          =============    =============    ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                 Year Ended March 31,
                                                                      -----------------------------------------
                                                                          1997           1996           1995
                                                                      ----------      ---------      ----------
           <S>                                                        <C>             <C>            <C>
           Cash paid during the year for:
             Interest                                                 $  553,673      $ 145,176      $  105,793
             Income taxes                                                190,597        165,251         610,482
           Non-cash investing and financing activities:
             Note payable incurred in connection with the                  - - -          - - -         563,795
               purchase of the assets of PostSaver Systems, Inc.
             Notes payable incurred in connection with the                 - - -        180,000          - - -
               purchase of the assets of Data Designs, Inc.
             Notes payable incurred in connection with the                 - - -        100,000          - - -
               purchase of the assets of WorldTrak, Inc.
           Capital lease obligations incurred                            249,378         47,102         138,341
           Options exercised through stock surrender                       - - -          - - -         863,360
</TABLE>

(14)  COMMITMENTS

         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, 1997,
1996, and 1995 were $1,273,000, $1,056,000, and $1,017,000, 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:





                                       36
<PAGE>   39
<TABLE>
<CAPTION>
                                                                      Operating              Capital
                                                                    ---------------       -------------
         <S>                                                       <C>                   <C>
              1998                                                 $     3,131,481       $     133,111
              1999                                                       2,530.171              63,216
              2000                                                       2,235,844              63,216
              2001                                                       2,107,652              63,216
              2002 and beyond                                            1,697,962              18,169
                                                                    ---------------       -------------
         Total minimum lease payments                              $    11,703,110             340,928
                                                                    ===============
         Amount representing interest                                                          (59,271)
                                                                                          -------------
         Net minimum lease payments                                                            281,657
         Current portion of capital lease obligations                                          103,747
                                                                                          -------------
         Long-term portion of capital lease obligations                                  $     177,910
                                                                                          =============
</TABLE>


         The Company entered into capital lease transactions aggregating
$249,378, $47,102 and $138,341, for the years ended 1997, 1996 and 1995,
respectively.  No transactions occurred in 1994.  As of March 31, 1997, the
book value of assets recorded under capital leases was $268,308.

         Total rent expense, under operating leases for fiscal years ended
March 31, 1997, 1996, and 1995 was $2,851,074, $2,462,000, and $1,216,000,
respectively.

         Acquisition Agreements

         In December 1994, Group 1 acquired all of the outstanding shares of
capital stock of Archetype Systems, for $400,000 cash (net of cash acquired)
plus a percentage of Archetype Systems' sales of the Archetype products, if
sales exceed pound sterling 2,000,000 in a 12 month period after closing.  On
April 25, 1996, Group 1 paid an additional $372,019 cash under the latter
provision.  The acquisition was accounted for as a purchase and, accordingly,
the purchase price was allocated to the post closing assets and liabilities
based on their estimated fair values, resulting in $1,072,000 in goodwill,
which is included in other assets.  The goodwill will be amortized over a
period not to exceed nine years.  The assets acquired and the liabilities
assumed have been included in the accompanying consolidated balance sheet.
Archetype Systems has changed its name to Group 1 Software Europe, Ltd.
("Group 1 Europe") and will continue its operations based in London, England.

         In August, 1995, Group 1 entered into an agreement with DataDesigns,
Inc. of Las Vegas, Nevada to acquire certain assets including title to all of
its software products.  Group 1 paid $484,000 in cash at closing and will pay a
percentage of the Group 1's sales of these products during the subsequent five
years.  For the years ended March 31, 1997 and 1996 such payments were $259,000
and $99,000, respectively.  Such amounts are recorded as adjustments to
goodwill and amortized over a period not to exceed nine years.

         In November 1995, Group 1 entered into a definitive agreement with
Premier One Consultants, Inc. of Minneapolis, Minnesota to acquire certain
assets including title to all of its software products.  Group 1 paid $319,000
in cash at closing and will pay a percentage of the Group 1's sales of these
products during the subsequent three years.  No contingent payments were due
for the years ended March 31, 1997 or 1996.

(15)  DISCONTINUED OPERATIONS

         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 $4,500,000, 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 those assets and sold them, in turn, to another entity for up to
$4,500,000, to be paid as a percentage of that company's future earnings.





                                       37
<PAGE>   40
         Reserves in the amount of $75,526 have been established to cover
disposition cost and contingencies associated with the sale of the assets.  Any
gain on the sale will be recognized as payments are received.  During fiscal
year 1994, the Company wrote off approximately $1,100,000 in capitalized
software and other assets relating to COM-MED Systems.  The Company's
Consolidated Statements of Earnings have been restated to reflect COM-MED
Systems as a discontinued operation.

(16)  GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
                                                                    Year Ended March 31,
                                                     ----------------------------------------------------
                                                          1997               1996               1995
                                                     --------------    ---------------    ---------------
<S>                                                 <C>               <C>                <C>
Net Revenue
  U.S. operations                                   $   50,110,423         43,142,750    $    37,046,533
  European operations                                    6,676,498          4,429,531          1,370,778
  Eliminations                                          (2,239,972)        (1,699,459)          (534,652)
                                                     --------------    ---------------    ---------------
     Total net revenue                              $   54,546,949         45,872,822    $    37,882,659
                                                     ==============    ===============    ===============

Operating Income
  U.S. operations                                   $   (4,431,019)   $     3,403,932    $     4,469,316
  European operations                                    2,146,828          1,829,312            588,536
  Eliminations                                             ---                ---                ---
                                                     --------------    ---------------    ---------------
     Total operating income (loss)                  $   (2,284,191)         5,233,244          5,057,852
                                                     ==============    ===============    ===============

Identifiable Assets
  U.S. operations                                   $   70,027,026    $    63,601,807    $    55,574,510
  European operations                                    8,433,004          6,528,514          4,840,880
  Eliminations                                          (2,603,730)        (2,938,500)        (3,267,078)
                                                     --------------    ---------------    ---------------
     Total identifiable assets                      $   75,856,300    $    67,191,821    $    57,148,312
                                                     ==============    ===============    ===============
</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 15.7%, 13%
and 7% of total revenue in 1997, 1996, and 1995.





                                       38
<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                50         Chairman of the Board of Directors
                       Robert S. Bowen                 59         President, Chief Executive
                                                                    Officer and Director
                       Ronald F. Friedman              53         President, Group 1 Software, Inc.
                                                                    and Director
                       Mark D. Funston                 37         Vice President, Chief Financial Officer and
                                                                    Director
                       Edward Weiss                    46         Secretary and General Counsel
                       Richard H. Eisenberg            59         Director
                       James P. Marden                 43         Director
                       Charles A. Mele                 40         Director
                       Charles J. Sindelar             60         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
for more than five years.  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.





                                       39
<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.





                                       40
<PAGE>   43
                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

           REPORTS ON FORM 8-K

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

                  The following financial statements are  submitted in Item 8:

                           Report of Independent Accountants on  Financial Statements                              18

                           Consolidated Balance Sheets as of March 31, 1997 and 1996                               19

                           Consolidated Statements of Earnings for the  years
                           ended March 31, 1997, 1996 and 1995                                                     20

                           Consolidated Statements of Stockholders' Equity  for the years ended March
                           31, 1997, 1996 and 1995                                                                 21

                           Consolidated Statements of Cash Flows for the  years
                           ended March 31, 1997, 1996 and 1995                                                     22

                           Notes to Consolidated Financial Statements for  the years
                           ended March 31, 1997, 1996 and 1995                                                   23 - 24

           2.     Financial Statement Schedules

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

                           Report of Independent Accountants on Financial  Statement Schedule                      43

                           Schedule II:  Valuation and Qualifying Accounts for the Years Ended March
                           31, 1997, 1996 and 1995                                                                 44
</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.





                                       41
<PAGE>   44
3.       Listing of Exhibits


          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   Bylaws - Amended as of January 22, 1993.

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

          3.05   Amendment to By-Laws.

          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).





                                       42
<PAGE>   45
          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).

          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).




                                       43
<PAGE>   46

         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, (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).





                                       44
<PAGE>   47
         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, 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).





                                       45
<PAGE>   48
         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).

         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.

        *11.00   Computation of earnings per share.

         16.11   Change in Registrant's Independent Accountant on Form 8-K
                 dated January 26, 1990, (incorporated by reference to Exhibit
                 16.1 of Group 1's Quarterly Report on From 10-Q for the
                 quarter ended June 30, 1991).

        *22.0    Subsidiaries of COMNET Corporation.

        *23.0    Consent of Independent Accountants.



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





                                       46
<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 27, 1997





                                       47
<PAGE>   50
                                  SCHEDULE II
                               COMNET Corporation

             Valuation and Qualifying Accounts For the Years Ended
                         March 31, 1997, 1996, and 1995

<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 (1)     at end
          Description               of Year     Expenses(2)(3)     Accounts       Describe        of year
          -----------               -------     --------------     --------       --------        -------
<S>                                <C>            <C>              <C>          <C>             <C>
Year ended March 31, 1997
 Allowance for  doubtful           $2,409,000     $1,956,403        - - -       $(1,157,403)    $3,208,000
 accounts

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

Year ended March 31, 1995
 Allowance for  doubtful           $2,634,000     $1,906,184       $  - - -     $(2,837,184)    $1,703,000
 accounts
</TABLE>

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

(2   Fiscal year 1995 reflects receipt of payment for notes receivable for
     sale of business assets that were previously fully reserved.

(3)  Amounts charged to costs and expenses also includes amounts from COM-MED
     Systems which is included in discontinued operations in fiscal 1995.





                                       48
<PAGE>   51
                                                                      EXHIBIT 11

                               COMNET Corporation
                       Computation of Earnings Per Share
               For the Years Ended March 31, 1997, 1996, and 1995

<TABLE>
<CAPTION>
                                                          1997(1)            1996                 1995
                                                     ---------------     --------------     ---------------
<S>                                                    <C>                 <C>                <C>
Net earnings from continuing operations                 $(1,600,306)        $2,831,537          $2,657,707
  Plus: Excess funding, net of income taxes                    - - -           377,128             243,989
  Less: Preferred stock dividend                           (177,000)          (177,000)           (177,000)
                                                     ---------------     --------------     ---------------
Primary earnings from continuing operations   (A)       $(1,777,306)        $3,031,665          $2,724,696

Preferred Stock Dividend                                    177,000            177,000                - - -
                                                     ---------------     --------------     ---------------
Fully diluted earnings from continuing
  operations                                  (B)       $(1,600,306)        $3,208,665          $2,724,696
                                                     ===============     ==============     ===============

Primary loss on discontinued operations       (C)              - - -              - - -         $ (281,786)
                                                     ===============     ==============     ===============

Fully diluted loss on discontinued
  operations                                  (D)              - - -              - - -         $ (281,786)
                                                     ===============     ==============     ===============

Weighted average shares outstanding                       3,262,813          3,269,495           3,616,578

Weighted average shares and common
  equivalent shares outstanding for primary
  earnings per share                          (E)         3,262,813          3,716,794           3,616,578
                                                     ---------------     --------------     ---------------

Additional equivalent shares assuming full
  dilution                                                  147,500            147,500             147,500
                                                     ---------------     --------------     ---------------

Weighted average shares and common
  equivalent shares outstanding for fully
  diluted earnings per share                  (F)         3,410,313          3,864,294           3,764,078
                                                     ===============     ==============     ===============

Earnings per share

  Primary
    Continuing operations                  (A)/(E)           $(0.54)            $ 0.82              $ 0.76
    Discontinued operations                (C)/(E)             - - -              - - -              (0.08)
                                                     ---------------     --------------     ---------------

Net earnings per common share                                $(0.54)            $ 0.82              $ 0.68
                                                     ===============     ==============     ===============

  Fully Diluted
    Continuing operations                  (B)/(F)           $(0.54)            $ 0.82              $ 0.76
    Discontinued operations                (D)/(F)             - - -              - - -              (0.08)
                                                     ---------------     --------------     ---------------

 Net earnings per common share                               $(0.54)            $ 0.82              $ 0.68
                                                     ===============     ==============     ===============
</TABLE>

(1) Common stock equivalents are antidilutive in the period.





                                       49
<PAGE>   52
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>   53

                       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 27, 1997, on our audits of the consolidated financial statements and
financial statement schedule of COMNET Corporation and Subsidiaries as of March
31, 1997 and 1996 and for each of the three years in the period ended March 31,
1997, which reports are included in this Annual Report on Form 10-K.



                                                        COOPERS & LYBRAND L.L.P.

McLean, Virginia
June 30, 1997





                                       51
<PAGE>   54
                                   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 30, 1997                       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 30, 1997
                                                Officer and Director                          -------------
                                                (Principal Executive Officer)


--------------------------------------------
Mark D. Funston                                 Vice President                                June 30, 1997
                                                Chief Financial Officer                       -------------
                                                Treasurer and Director


--------------------------------------------
Ronald F. Friedman                              President, Chief Operating Officer Group 1    June 30, 1997
                                                Software, Inc., and Director                  -------------


--------------------------------------------
James V. Manning                                Chairman of the Board                         June 30, 1997
                                                                                              -------------

--------------------------------------------
Charles J. Sindelar                             Director                                      June 30, 1997
                                                                                              -------------

--------------------------------------------
James Marden                                    Director                                      June 30, 1997
                                                                                              -------------

--------------------------------------------
Charles A. Mele                                 Director


--------------------------------------------
Richard H. Eisenberg                            Director                                      June 30, 1997
                                                                                              -------------
</TABLE>





                                       52
<PAGE>   55
Index of Exhibits

<TABLE>
<CAPTION>

                                                                                        PAGE NUMBER
<S>      <C>                                                                            <C>
*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.

*11.00   Computation of earnings per share.

*22.0    Subsidiaries of COMNET Corporation.


*23.0    Consent of Independent Accountants.

</TABLE>



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





                                       53