|SECURITIES
AND EXCHANGE COMMISSIONWashington,
DC 20549Form 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, 2001


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


Group 1
Software, Inc.(Exact name
of registrant as specified in its charter)
|------------------------------------------------------------------------------------------------------------

|                                  | 
|--------------------------------- | 
|DELAWARE                          | 
|(State or other jurisdiction      | 
|of incorporation or organization) | 

|                                             | 
|-------------------------------------------- | 
|4200 Parliament Place, Suite 600, Lanham, MD | 
|(Address of principal executive offices)     | 

|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 19,
2001 was $108,042,098


The number of shares of the
Registrants Common Stock outstanding on June 19, 2001 was 6,688,478


DOCUMENTS
INCORPORATED BY REFERENCE:


Definitive proxy statement
to be filed with the Securities and Exchange Commission relating to
Companys 2001 Annual Meeting of Shareholders (Part III of Form 10-K).
1
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Part I


Item 1.
Business


The Company


Group 1 Software,
Inc., including its wholly owned subsidiaries (Group 1 or the
Company), is a leading provider of software solutions for data
quality, marketing automation, customer relationship communications and direct
marketing applications. Group 1 supports IBM mainframe, Unix (including Linux),
MVS, VSE, Windows NT, Windows 2000 and other operating systems and various
computers. Group 1 has offices throughout the United States and in Canada, the
United Kingdom, continental Europe, and Latin America. The Company is also
represented in Asia and Australia. Group 1 provides software solutions that
enable approximately 2,500 businesses to market smarter by helping them find,
reach, and keep their customers. Increasingly, Group 1s products are used
to help companies realize the benefits from, or increase the return from their
investments in Customer Relationship Management (CRM) systems.


The Companys data
quality products enable businesses to ensure the integrity of customer and
prospect data. Businesses can verify as well as enhance that data with valuable
geographic and demographic information. Through the Companys
DataQuality.net Web service, this functionality can be delivered in real-time.
With the May 2001 acquisition of assets of HotData, Inc., the Company is also
able to offer hosted, automated batch processing over the Internet. Our
enterprise data quality solutions can deliver this essential functionality to
all of the touch points within a company.


Group 1s marketing
automation solutions help businesses better utilize customer data to increase
marketing effectiveness. These solutions enable companies to predict responses
to marketing campaigns, identify and understand their best customers and take
advantage of cross-selling opportunities.


The Companys direct
marketing applications help businesses to ensure accurate, on-time delivery of
mailings, goods and services, thereby increasing response rates and customer
satisfaction. These solutions enable businesses to reduce costs by standardizing
addresses, eliminating duplicate addresses, validating postal codes and coding
and presorting mailings to maximize postal discounts.


Group 1s customer
relationship communications solutions allow businesses to create high-impact
customer-focused communications for delivery via a customers preferred
channel  paper documentation, email, the web, fax and wireless. This
product suite permits companies to personalize communications such as bills and
statements using a rules-based engine for highly targeted messaging. Integration
with the PaySense Electronic Bill Presentment and Payment (EBPP) system obtained
through the April 2001 acquisition of assets of TriSense Software, Ltd. will
create the first integrated solution providing digital and paper generation and
delivery of customer-focused business documents.


The Company provides
software solutions to leading organizations in the financial services, banking,
retail, e-business, telecommunications, hospitality, publishing, utilities, and
insurance industries.


Group 1 markets all of its
products in North America and certain of its products throughout the world.
Group 1 is a leading worldwide vendor of Customer Relationship Communications
software and a leading vendor in North America of Data Quality, Direct Marketing
and Marketing Automation software products.


Many of Group 1s
customers utilize its software in a real-time environment. The Company offers a
number of its industry leading software solutions via ASP-based hosted services
for the e-commerce arena.


Group 1 markets its
Data Quality, Marketing Automation and Direct Marketing applications through a
direct sales force in the United States and Canada. Customer Relationship
Communications solutions are marketed directly to clients in the Americas and
throughout Europe. Where appropriate worldwide, distributors are used to
supplement direct sales channels.


The Company believes that
the increasing need for personalized customer communications, coupled with the
mission-critical requirement for enterprise-wide data quality solutions can
expand the market potential for Group 1s existing and future products.
2
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|Markets Served


Group 1 markets its
products within a broad span of industries to meet the needs of organizations in
the areas of Customer Relationship Communications, Direct Marketing, Data
Quality and Marketing Automation. Group 1 addresses the Marketing Automation,
Data Quality and Direct Marketing markets through a single operating segment,
its Enterprise Solutions Division. Group 1 addresses the Customer Relationship
Communications market through a separate operating segment, its Customer
Relationship Communications Division.


Customer
Relationship Communications


Group 1s
Customer Relationship Communications solutions enable businesses to create
high-impact, customer-focused documents including statements and invoices for
delivery via print, Web, e-mail, fax and wireless devices. These innovative
software applications help companies differentiate themselves to their customers
by creating attractive, easy-to-read personalized customer communications. Aside
from building brand awareness and increasing customer satisfaction and loyalty,
these solutions help companies facilitate the cross selling of additional
products and services.


The Company believes that
there is substantial demand for automated solutions that combine customer data
with todays advanced printing and Web-based delivery technologies to
quickly and easily produce content-rich, highly personalized business documents.
Among the 450 businesses worldwide using Group 1 to develop and deliver millions
of customer relationship communications each month are telecommunications
companies, insurance companies, brokerages, credit card processors, public
utilities, health care providers and banks.


DOC1, Group 1s core
Customer Relationship Communications solution, produces personalized business
documents for print and on-line delivery. Designed for seamless, one-to-one
customer communication, DOC1 also facilitates deployment of Electronic Bill
Presentment and Payment (EBPP) and Electronic Statement Presentation (ESP)
solutions by generating XML, HTML, and enhanced PDF files. When integrated with
the PaySense EBPP offering obtained through the April 2001 acquisition of the
assets of TriSense Software, Ltd., Group 1 will offer the first-ever complete
solution for both digital and print communication. The integrated offering will
feature electronic payment of invoices and design and delivery of Web-based
documents.


DOC1 for Workgroups
streamlines time-to-market by allowing multiple developers to create and share
resources while managing dynamic document applications as they move from
development to production. Using DOC1 for Workgroups, multiple developers access
an integrated development environment, through which they can create and share
content across the enterprise, providing increased productivity and reduced
application development time.


Message1, one of the suite
of DOC1 products, enables marketers to create highly targeted messages that
drive response and generate revenue. With Message1, marketers have unprecedented
flexibility to develop, manage, and deliver personalized, highly targeted
messaging campaigns for both print and digital delivery. By inserting
cross-selling messages on bills, statements, and invoices, routine customer
communications can become strategic selling tools.


The software supports all
major printing architectures and can operate in centralized, distributed or
desktop environments under NT, OS/400, MVS, Open VMS, and UNIX operating
systems. When integrated with Group 1s MailStream Plus and CODE-1
Plus, DOC1 produces documents in a sequence that qualifies for United States
Postal Service (USPS) presorting discounts.


Direct
Marketing


Group 1s direct
marketing solutions increase direct marketing effectiveness and customer
satisfaction by helping provide on-time delivery of mailings, goods and
services. This is accomplished by assuring the integrity of name and address
information and by coding the mail for speediest and most certain handling.
Duplicate mailings are also identified and eliminated. By using these Group 1
applications, businesses can also take advantage of substantial discounts on
postage available from the USPS and Canada Post Corporation (CPC) by
standardizing addresses, validating postal codes and presorting mailings. Group
1s Direct Marketing applications are among the most accurate and
comprehensive software solutions currently available for international direct
marketing. Using data obtained from postal administrations worldwide, these
solutions validate, correct, and/or format customer and prospect addresses for
over 220 countries and dependencies worldwide.


Group 1s Direct
Marketing applications include CODE-1 Plus, CODE-1 Plus International, Canadian
CODE-1 Plus, MailStream Plus, Mail Canada, and MOVEforward, along with many
additional solutions that provide significant operational benefits.
Group 1s CODE-1 Plus and MailStream Plus products are, respectively,
Coding Accuracy Support System (CASS)-certified and Presort Accuracy Validation
and Evaluation (PAVE)-certified by the USPS. To ensure accuracy, CODE-1 cleans,
codes, and standardizes every address element. MailStream Plus gives mailers the
most powerful software solution available to presort mail for the highest postal
discounts offered by the USPS in all classes of mail.
3
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|US mailers currently save
nearly 28% of the cost of first-class mail and up to 32% of the cost of standard
mail by using MailStream Plus and CODE-1 Plus. 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%.


CODE-1 International uses
postal address files obtained directly from postal administrations worldwide to
validate and correct addresses for 70 countries. The system also formats
addresses for over 220 countries and dependencies. Many U.S. businesses have
been reluctant to conduct international direct marketing campaigns due to the
historically poor quality of international address data and the complexity of
dealing with such data. With CODE-1 Plus International, multinational direct
marketing is much easier to implement.


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


Data Quality


Group 1s Data Quality
solutions enable businesses to ensure the integrity of customer and prospect
data and are the cornerstone of successful CRM initiatives. Businesses can also
enhance this data with geographic and demographic intelligence. Group 1 provides
both hosted services and real-time customer data quality and data enrichment
solutions for enterprise-wide applications. These industry-leading solutions
provide substantial operational savings as well as increased sales and customer
retention by facilitating the most accurate target marketing. Group 1s
data quality software solutions, which encompass many of the companys
Direct Marketing Applications, are the most widely used applications for
verifying customer information.


In October 2000, Group 1
launched DataQuality.net, a real-time, transactional Web service that offers
e-businesses significant operational savings by verifying address information
and providing geographic and demographic information. DataQuality.net uses an
XML-based interface to provide a broad variety of real-time, customer data
quality and enrichment solutions for e-commerce and enterprise-wide
applications. With the May 2001 acquisition of assets of HotData, Inc., Group 1
now offers this same functionality via hosted services providing automated batch
processing over the Internet.


Group 1 also offers the
DataVerse product suite for companies that want software solutions within the
enterprise that offer the same real-time functionality provided by
DataQuality.net. The DataVerse solutions allow e-businesses to integrate Group
1s industry leading data quality solutions directly into their Web
environments using readily available technologies.


Group 1s GeoTAX
system provides businesses with the most accurate tax jurisdiction assignment
solution available. GeoTAX permits organizations to deal with the thousands of
U.S. tax jurisdictions assessing a broad variety of telecommunications, utility,
property, sales, income and payroll taxes. The large number of taxing
jurisdictions, the variety of taxes and the frequent changes in each and the
potential liability from inaccurate tax assignment all combine to pose a
tremendous problem for many business operating over broad geographic areas.
Alone among tax application providers, only GeoTAX users have access to
GDTs innovative Dynamap/Municipal Boundary database, which provides the
most current and precise nationwide municipal boundary information available.


Geographic Coding Plus
helps companies turn simple customer address data into practical and powerful
information. By adding highly accurate census geography data, demographic data
and lifestyle data to customer addresses, Geographic Coding Plus offers
businesses a gateway to increased customer and prospect understanding.


Companies have great
difficulty measuring customer value, particularly when they are unaware of the
full range of products and services customers are utilizing across the
enterprise. Through Group 1s Enterprise Data Quality (EDQ) solution, even
the largest enterprises can identify individual customers across operating
divisions and lines of business. This intelligence enables companies to leverage
their sizable CRM investments by making intelligent marketing and cross-selling
decisions.
4
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|An organizations most
valuable asset is its customer data. DQ Plus helps businesses ensure the quality
of this data across the enterprise, consolidating data and improving its
accuracy to ensure the best customers information possible.


Marketing
Automation


Group 1s
Marketing Automation solutions enable businesses to utilize customer data to
increase marketing effectiveness by achieving greater return on investment from
marketing initiatives. Companies use Group 1s marketing automation
offerings to predict responses to marketing campaigns, identify and understand
best customers, and create cross-selling and up-selling opportunities. DM1 is an
enterprise marketing automation solution that offers marketers essential data
hygiene and enhancement capabilities through Group 1s leading data quality
solutions. DM1 also offers data analysis, data visualization, modeling,
reporting and campaign management by incorporating third party technologies from
industry leaders such as Oracle, Cognos, Dimensional Insight and MapInfo.
Designed for marketers, DM1 can be implemented in an organizations
enterprise or accessed via ASP.


A powerful and reliable
marketing tool, Model 1 is a series of award-winning modeling solutions that
help companies to maximize their marketing dollars by getting the most out of
their customer data. The Model 1 predictive modeling system utilizes all
traditional predictive techniques to deliver the best models. Speed,
ease-of-use, breadth of predictive techniques, and reliability are
characteristics enabling users, from marketers to statisticians, to make
accurate, actionable market predictions.


Products,
Services and Support


Products


As of March 31, 2001,
Group 1 offered over 50 software products which run on more than 20
different operating systems and hardware platforms. Group 1s products
can each operate on a stand-alone basis or in conjunction with other
Group 1 products to create an integrated system that can be tailored to a
clients requirements.


The DOC1 production engine
can run under MVS, Windows NT, Windows 2000, UNIX (Sun Solaris, HP/UX, IBM AIX,
and TRU64), Open VMS, OS/400 or PC DOS. DOC1 is printer-independent and produces
AFP, Metacode, HP/PCL, PostScript, HTML, XML, PDF and line data output.


Most products of the
Enterprise Solutions Division are offered in an open systems format that enables
the specific application to operate on all major platforms. This approach
provides consistent performance across the enterprise, regardless of computer
platform and allows users to migrate from one platform to another without lost
productivity or added training.


Hosted Services


For those customers that do
not wish to acquire, implement and maintain the software themselves, Group 1
offers many of its Data Quality products and its DM1 product as a complete
hosted solution. DataQuality.net is a transactional Web service that offers
real-time address standardization and verification for the U.S., Canada, and
more than 220 countries and dependencies worldwide. DataQuality.net also
provides geographic information, taxing jurisdiction, and summary-level
demographic information for United States addresses. With the May 2001
acquisition of assets of HotData, Inc., Group 1 also offers automated batch
processing over the Internet. In the area of customer relationship
communications, the April 2001 acquisition of assets of TriSense Software, Ltd.
permits Group 1 to offer bill presentment and payment solutions via hosted
services for the EBPP industry.


Professional
Services


Group 1s broad
range of professional services include data analysis, data migration,
integration with other systems, document analysis, consultation and design,
installation and training, file conversion and operational review. These
services are designed to assist clients in obtaining maximum utilization from
their Group 1 products and in improving other operational areas.
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. and in Canada and the United Kingdom.


Group 1s Enterprise
Data Quality (EDQ) initiatives provide turnkey solutions for complex data
quality engagements. These services include comprehensive analysis and
enterprise-wide integration.
5
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|Support


Effective support of our
customers and products has been a substantial factor in Group 1s success
to date and will continue to be in the foreseeable future. Customer support for
software products is provided by telephone for assistance in product
installation and problem resolution. Automated call tracking, client-specific
call routing, electronic newscast, e-mail messages and on-line discussion
bulletin board services via the technical support Web site are also provided for
customers utilizing Group 1s maintenance and enhancement program. On-site
visits by qualified company personnel are also available, if necessary. Other
offerings include e-mail support, integration support, and premium support
plans.


Group 1 customers are
afforded educational opportunities through our Annual Users Conference and
the over 20 local User Groups. In addition, two National User Groups advise
Group 1 on a variety of issues, including those related to customer support. The
thirty-member Enterprise Solutions Division National User Group represents a
cross-section of customers selected based on platforms, products, and
industries. The Customer Relationship Communications Division also has an active
Users Group that meets twice a year.


For DM1 customers, Group 1
maintains systems in our Las Vegas, Nevada facility that duplicate the
customers environment. Group 1 Software Europe also has modem links
with many of its customers to provide high levels of mission-critical support.


Group 1 offers with
its product licenses an annual service agreement that provides telephone support
and continuing updates and enhancements, if and when available, to its products
and documentation. The education department offers educational and training
seminars specific to Group 1 products.


In the fiscal years ended
March 31, 2001, 2000, 1999, maintenance and enhancement fees represented
approximately 42%, 40%, and 38% respectively, of Group 1s revenue.


Customers


Group 1s
customer base includes approximately 2,500 clients who have licensed one or more
of its products. Group 1 provides software solutions to corporate leaders in a
variety of industry segments, as indicated by the following brief list of
customers:


Insurance and Financial Services
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | American Express
|- |  | ----------------

| |  | Citicorp
|- |  | --------

| |  | Lehman Brothers
|- |  | ---------------

| |  | Prudential Securities
|- |  | ---------------------

| |  | Charles Schwab
|- |  | --------------

| |  | ABN Amro
|- |  | --------

| |  | Bank of America
|- |  | ---------------

| |  | CIGNA
|- |  | -----

| |  | MetLife
|- |  | -------

|Retailers
|---------

| |  | J.C. Penney
|- |  | -----------

| |  | L.L. Bean
|- |  | ---------

| |  | Neiman Marcus
|- |  | -------------

| |  | Sears
|- |  | -----

| |  | U.S. Postal Service
|- |  | -------------------

|Telecommunications
|------------------

| |  | Ameritech
|- |  | ---------

| |  | AT&T
|- |  | ----

| |  | GTE
|- |  | ---

| |  | MCI
|- |  | ---

| |  | Qwest
|- |  | -----

|Utilities
|---------

| |  | Entergy
|- |  | -------

| |  | Pacific Gas and Electric
|- |  | ------------------------

| |  | Scottish Power
|- |  | --------------

|Direct Marketers
|----------------

| |  | Publishers Clearinghouse
|- |  | ------------------------

| |  | Lands End
|- |  | ---------

|Government and Non-profit
|-------------------------

| |  | Internal Revenue Service
|- |  | ------------------------

| |  | U.S. Senate
|- |  | -----------

| |  | National Geographic Society
|- |  | ---------------------------

| |  | AARP
|- |  | ----

| |  | Veterans Administration
|- |  | -----------------------

|E-Business
|----------

| |  | CyberSource
|- |  | -----------

| |  | Internet Pictures Corporation
|- |  | -----------------------------

| |  | NetFlix
|- |  | -------

| |  | EarthLink
|- |  | ---------

|6
|-

|Group 1s
operations are in two business segments defined as Enterprise Solutions Software
and Customer Relationship Communications software (see Note 14 to the
Consolidated Financial Statements). No customer accounts for more than 10% of
the Companys revenue.


Licensing


Most of Group 1s
products are licensed on a perpetual right to use basis pursuant to
non-exclusive license agreements. Those products that incorporate third-party
databases are 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. Multi-site, multi-computer, and remote access corporate license
agreements are available as well. Certain postal products are required under
USPS and CPC regulations (Coding Accuracy Support System (CASS) and Software
Evaluation and Recognition Program (SERP) respectively) to have defined
expiration dates (quarterly or monthly) and must be under subscription or
re-licensing arrangements with Group 1 to qualify for postal discounts.


Group 1 generally
warrants that its products will perform substantially in accordance with their
standard documentation for the defined warranty period. The software is
generally licensed in conjunction with a first year maintenance agreement to
provide service and support for twelve months from the date of the license
agreement. The hosted on-line services are offered under annual, renewable
service agreements.


Sales and
Marketing


Group 1 markets all of
its software products in North America and Europe through a direct sales and
sales support organization of over 125 employees located in the U.S., Canada,
Latin America, Scandinavia, Italy, Germany, the Netherlands, Austria and the
United Kingdom. To serve existing clients and to attract new customers,
Group 1 has two sales and support offices in the Washington, DC area and
ten other regional offices in the New York City, Chicago, Los Angeles, Las
Vegas, Atlanta, Dallas, Minneapolis, Miami and Austin, Texas. Group 1s
international offices are located in the Toronto, Sao Paulo, London, Frankfurt,
Milan, Copenhagen, Amsterdam and Vienna metropolitan areas.


The Group 1 sales
organization is supported by a comprehensive marketing program administered from
Group 1s Lanham, Maryland headquarters. Marketing is conducted
through direct mail, print advertising, an active Web site, trade show
exhibitions, speaking engagements, product training seminars, telemarketing and
a broad variety of public relations activities including media relations,
industry analyst briefings, the Group 1 Report and the annual
Group 1 Software Users Conference.


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


Group 1 has entered
into agreements with a number of leading software and hardware vendors. Group 1
distributes products manufactured by Dun & Bradstreet, Claritas, GDT, R. L.
Polk, Equifax, UNICA Technologies, Business Document, Data General, COMPAQ,
Window Book and others. Group 1s domestic distributors and partners
include PeopleSoft, Siebel, Lucent, Accenture, SPL Worldgroup, Ernst and Young,
IBM, Xerox, Portal, CSC, Daleen, USHA, SCT, Cayenta, McKesson HBOC, Convergys,
and ProQuest. International distributors of Group 1s products include
Xerox, IBM, SAP, OBIMD, Mastersoft International, Business Document, Accenture
and L&K.


Product
Development


The industry is
characterized by rapid change in hardware and software technology and in user
needs, requiring a continual expenditure for product development. Group 1 and
other software developers are currently responding to the market demand for
products and services that can operate in real-time. Businesses are also placing
emphasis on products and services that can operate across the enterprise. It is
likely that these operational requirements will continue in the foreseeable
future.


Group 1 must be able
to provide new products and to modify and 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 further
adapt its products to accommodate future changes in hardware and operating
systems. To date, Group 1 has been able to adapt its products to such
changes and believes that it will be able to do so in the future. Most of the
Companys products are developed internally. The Company also purchases
technology, licenses intellectual property rights and oversees third party
development of certain products.
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|Quality assurance testing
of Group 1s new or enhanced products is conducted by teams of
experienced individuals from all segments of Group 1s organization
under the direction of testing specialists. Whether the product or technology is
developed internally or acquired from another company, Group 1 considers it
important to control the marketing, distribution, enhancement and future
direction of each of its products and technologies.


Significant investment was
made during the year in new software development, which focused on improving the
integration, export, and output technologies to take advantage of e-commerce
opportunities that Group 1 believes existing for its functionality. In this
arena, Group 1 successfully developed and released its DataQuality.net Web
service and DataVerse product suite. The HotData and Trisense asset acquisitions
in April and May of 2001 significantly expanded our e-business capabilities in
the areas of hosted solutions, digital delivery and electronic payment. Other
areas of product enhancement were improved user interfaces and enterprise data
quality.


During FY 2001, substantial
investments were made in all Customer Relationship Communications products, most
notably a major release of DOC1 that supports Web-based documents. In the
Enterprise Solutions Division, Group 1 updated all of its core Direct Marketing
and Data Quality solutions. In the Marketing Automation area, Group 1 released
both a Web-accessible version of DM1 as well as DM1 Corporate Hospitality, the
first of its vertically focused solution modules.


During FY 2001, Group 1
released product updates for all its regulatory products that enabled the
Companys direct marketing customers in the U.S. and Canada to meet the
requirements of the USPS and CPC to qualify for postal discounts.


Competition


The software and service
industry is highly competitive, and little 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 are available from a number of
different vendors offering features similar to those of Group 1s products.
Group 1s existing and potential competitors include companies having
greater financial, marketing and technical resources than Group 1. 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 Group 1s products
have in-house capabilities to develop computer software programs that can
provide some or all of the functionality of Group 1s products.


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, ease of integration of the product line and the
Companys financial strength. Group 1 believes that it competes
favorably with regard to these factors, including pricing. A major competitive
asset is that Group 1 offers a comprehensive array of complementary
products which work together to facilitate more effective and efficient target
marketing and customer relationship management. 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. In addition, Group 1 owns U.S. Patent No.
6,078,907 covering security technology and has a patent application pending in
Australia regarding the same technology and a patent pending in the U.S.
covering other unrelated technology. 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, 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 technology industry and 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 has U.S. federal
registrations on over 20 trademarks, including CODE-1 Plus, DM1, DOC1, GROUP 1
SOFTWARE, GEOTAX, HotData, Model1 and TriSense. The Company also has
registrations in Australia, Canada, the European Union, Japan and South Korea
for several key trademarks. In addition, Group 1 maintains over 35 U.S. common
law trademarks.
8
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Employees


As of March 31, 2001, the
Company employed 485 persons on a full-time basis, of whom 394 were based in the
United States and 91 were based internationally. Of the total, 128 were engaged
in sales and marketing, 183 in product development and support, 65 in
professional services and 109 in finance, administration and corporate
operations. None of the Companys employees is represented by a labor
union. The Company has not experienced any work stoppages and believes its
employee relations to be good.


Item 2.  
Properties


The Companys
executive and administrative offices are located in Lanham, Maryland, a
Washington, DC suburb, where the Company leases 54,600 square feet under a lease
that expires in 2015. These facilities also include Group 1s
headquarters and principal operations base. Group 1 has options to lease
additional space at specified periods during the term and to extend its lease.
In North America, Group 1 leases additional sales and support offices in
the Chicago, Dallas, Austin, Los Angeles, Las Vegas, Atlanta, New York City,
Minneapolis, Miami, Toronto, and the Herndon, Virginia metropolitan areas.
Outside North America, the company leases a sales and support office in the
London metropolitan area.


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,
cash flows or results of operations of the Company.


Item 4.  Submission of
Matters to a Vote of Security Holders


None
9
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 GSOF. The table below sets forth the highest and lowest closing prices
between dealers for the quarters indicated and reflects the 3 for 2 stock split
effected by the Company in February, 2000. These prices, as reported by NASDAQ,
do not include retail markup, markdown or commissions and may not necessarily
represent actual transactions.




Closing Common Stock
Prices
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2001                        |  | High   | Low | 2000   |  | High                        | Low
|--------------------------- |  | ------ | --- | ------ |  | --------------------------- | ---
|First - June 30, 2000       |  | $19.38 |     | $13.13 |  | First - June 30, 1999       |    
|                            | 
|Second - September 30, 2000 |  | $21.00 |     | $15.88 |  | Second - September 30, 1999 |    
|                            | 
|Third - December 31, 2000   |  | $23.00 |     | $11.00 |  | Third - December 31, 1999   |    
|                            | 
|Fourth - March 31, 2001     |  | $17.31 |     | $11.44 |  | Fourth - March 31, 2000     |    

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


At June 15, 2001, there
were approximately 2,430 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
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(In thousands except per share amounts)             | Year Ended March 31,
|--------------------------------------------------- | --------------------
|
|Statement of Earnings Data:                         |                     
|Revenue                                             |                     
|Income (loss) before provision for income taxes     |                     
|and minority interest                               |                     
|Net income (loss)                                   |                     
|Basic net earnings (loss) per share                 |                     
|Basic weighted average number of shares             |                     
|Diluted net earnings (loss) per share               |                     
|Diluted weighted average number of shares           |                     
|Balance Sheet Data:                                 |                     
|Working capital                                     |                     
|Total assets                                        |                     
|Capital lease obligation, excluding current portion |                     
|Stockholders equity                                |                     
|                                                   

|Item 7.   Managements
Discussion and Analysis of Financial Condition and Results of Operations


Results of
Operations


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

|Fiscal 2001 as
Compared with Fiscal 2000


For
the year ended March 31, 2001, Group 1s revenue was $93.3 million compared with
$81.8 million for the prior year. Group 1 had net income available to common stockholders
for the year of $8.8 million compared with $6.2 million for fiscal 2000. The increase in
profitability is attributed to increased revenues and operating income in both the
Enterprise Solutions and Customer Relationship Communications segments as well as
increased interest income resulting from the companys higher cash and equivalents
balance.


All of
Group 1s operations are in the two business segments defined as the Enterprise
Solutions Division and Customer Relationship Communications Division. Enterprise
Solutions revenue accounted for 64% and 65% of Group 1s total revenue in fiscal
2001 and fiscal 2000, respectively. Customer Relationship Communications revenue was 36%
and 35% of total revenue for fiscal 2001 and fiscal 2000. International revenues
accounted for 16% of Group 1s total revenue in fiscal 2001 and 13% in fiscal 2000.
The increase in international revenue as a percent of total revenue is due to increased
sales of the DOC1 product in Europe and Latin America.


Software
license fees and related revenue of $40.0 million represented an increase of 3% over the
prior year. As a percentage of total revenue, software license and related revenues were
43% and 48% for fiscal years 2001 and 2000, respectively.


The
Enterprise Solutions segments data quality/direct marketing software license fees
were flat for fiscal year 2001 compared with fiscal year 2000. Included in data
quality/direct marketing license fees were an increase in GeoTax licenses along with an
increase in Code 1 Plus licenses. These increases were offset by lower license sales of
the Companys international coding products.


License
fees from the Enterprise Solutions segments Database Marketing systems decreased
$0.8 million for fiscal year 2001. The decrease resulted from lower sales of the Model 1
product.


Licensing
of Customer Relationship Communications software increased by 1% in fiscal 2001 over the
prior fiscal year. The increase is due primarily to increased European and Latin American
sales offset by slightly lower U.S. sales in fiscal 2001 as compared with fiscal 2000.


Maintenance
and services revenue of $53.3 million for the year increased 24% over the prior year.
Maintenance and service revenue accounted for 57% and 52% of total revenue in fiscal 2001
and fiscal 2000, respectively. Recognized maintenance fees were $39.0 million in fiscal
2001 and $32.6 million in fiscal 2000, an increase of 20%. Professional service and
educational training revenues were $14.3 million in fiscal 2001 and $10.3 million in
fiscal 2000, an increase of 38%.


Enterprise
Solutions recognized maintenance increased 16% over the prior year to $31.0 million.
Customer Relationship Communications recognized maintenance increased 35% to $8.0 million
in fiscal 2001 from fiscal 2000. The increase in maintenance revenue is due to the
recognition of a higher level of maintenance deferrals based on higher aggregate sales
from prior periods and increased maintenance renewals based on an increase in the
installed customer base in both business segments. The Company expects continued growth
in recognized maintenance in both of its business segments.


Professional
services revenue from the Enterprise Solutions segment increased to $4.2 million in
fiscal 2001 from $2.8 million in fiscal 2000, an increase of 50%. Customer Relationship
Communications services revenue increased 35% in fiscal 2001 to $10.1 million. As the
Company foresees a growing need for integrating complex solutions, it anticipates
increased revenue from these services.


Total
costs of revenue for fiscal 2001 were $30.4 million versus $27.3 million for fiscal 2001,
representing 33% of total revenue in both years. Costs of revenue include software
license expense and maintenance and service expense. Software license expense consists of
the amortization of software development costs, royalty payments to third party vendors,
and the costs of documentation and quality assurance. Maintenance and service expense
consist primarily of consulting, education and support personnel salaries and related
costs as well as the costs to distribute the product, including the costs of the media on
which it is delivered, shipping and handling costs. Research and development costs are
excluded from the cost of revenue.


Software
license expense decreased to $11.2 million in fiscal 2001 representing 28% of software
license and related revenue compared with $12.3 million in fiscal 2000 representing 32%
of software license and related revenue. The decrease as a percent of revenue is
primarily due to higher license revenue, lower software amortization expense and lower
royalty expense on sales of third party products.
11
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Maintenance
and service expense increased to $19.2 million in fiscal 2001 from $15.0 million in
fiscal 2000, 36% and 35% of maintenance and service revenue, respectively. The increase
in expense as a percent of revenue is due to the higher percentage of service revenue
relative to maintenance revenue.


Included
in maintenance and service expense above are professional service and educational
training costs of $11.6 million which were 82% of professional services revenue during
2001 and $8.0 million and 78% of professional services revenue for the prior year. The
increase in expense as a percentage of services revenue is due to increased staffing and
contracting costs.


Costs
of maintenance were $7.5 million for fiscal 2001 representing 19% of maintenance revenue
compared with costs of $7.0 million and 21% of maintenance revenue in fiscal 2000. The
decreased costs as a percentage of maintenance revenue were primarily due to increased
maintenance revenue partially offset by higher information technology costs associated
with supporting internal systems. The Company anticipates these costs to remain
relatively close to their current levels.


Total
operating costs of $50.9 million amounted to 55% of revenue in fiscal 2001 compared with
$44.7 million or 55% of revenue during fiscal 2000. The various components of operating
costs are discussed below.


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. Software development costs include
direct labor cost and overhead. 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. Amortization of capitalized software is
included in the cost of license fees.


Research
and development expenses (after capitalization of certain software development costs)
totaled $6.4 million in fiscal 2001 and $4.2 million in 2000, representing 7% and 5% of
total revenue, respectively. Costs for research and development, before capitalization,
incurred in fiscal 2001and 2000, were $13.1 million, $11.1 million, respectively. The
increase in costs is due to increased investment in new product initiatives in all of the
Companys major product groups. The Company expects these costs, as a percentage of
revenue, to increase as a result of the acquisitions made subsequent to year end (see
Note 1).


Sales
and marketing expenses totaled $31.0 million or 33% of revenue in fiscal 2001 and $26.1
million or 32% of revenue in fiscal 2000. The increase in costs as a percentage of
revenue is primarily due to higher sales incentive costs for both Enterprise Solutions
and Customer Relationship Communications products. The Company expects these costs to
remain relatively close to current levels as a percentage of revenue. Sales and marketing
costs for the Enterprise Solutions products were 33% of total Enterprise Solutions
revenue for fiscal 2001 and 32% for fiscal 2000. Customer Relationship Communications
selling and marketing costs were 34% of total Customer Relationship Communications
revenue for fiscal 2001 and 32% for fiscal 2000.


General
and administrative expenses were $13.5 million or 14% of total revenue in fiscal 2001
compared with $14.4 million or 18% for fiscal 2000. The decrease is attributable to lower
bonus compensation and lower bad debt expense due to cash collections. The Company
expects these costs to remain relatively close to current levels as a percentage of
revenue.


Net
non-operating income was $2.9 million in fiscal 2001 compared with net non-operating
income of $1.1 million in fiscal 2000. This increase represents higher interest income
generated from higher cash and short-term investment balances as well as gains arising
from foreign currency translation. The Company expects non-operating income to decrease
as interest income on cash and investments decreases. This is due to a decrease in
interest rates and a decrease in cash reserves to fund acquisitions subsequent to March
31, 2001. The Company does not expect to continue to benefit from gains on foreign
currency transactions. No short-term borrowing requirements are expected; this
expectation could be affected substantially by newly-identified investment opportunities
including acquisitions.


The
Companys effective tax rate was 40.6% in fiscal 2001 and 42.5% in fiscal 2000. The
current years rate is the net effect of a 45% domestic tax rate combined with a 33%
foreign tax rate on taxable net income. The decreased effective rate is primarily due to
higher foreign taxable income in fiscal 2001.
12
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fiscal 2000 as Compared
with Fiscal 1999


For
the year ended March 31, 2000, Group 1s revenue was $81.8 million compared with
$65.3 million for the prior year. Group 1 had net income available to common stockholders
for the year of $6.2 million compared with $3.0 million for fiscal 1999. The increase in
profitability is attributed to increased revenues and operating income in both the
Enterprise Solutions and Customer Relationship Communications segments as well as
increased interest income.


All of
Group 1s operations are in the two business segments defined as Enterprise
Solutions software and Customer Relationship Communications software. Enterprise
Solutions revenue accounted for 65% and 68% of Group 1s total revenue in fiscal
2000 and fiscal 1999, respectively. Customer Relationship Communications revenue was 35%
and 32% of total revenue for fiscal 2000 and fiscal 1999. The change in mix is due to
more rapid growth in sales in the Customer Relationship Communications segment.
International revenues accounted for 13% of Group 1s total revenue in fiscal 2000
and 17% in fiscal 1999. The decrease in international revenue as a percent of total
revenue is due to lower European revenues along with higher sales in the U.S.


Software
license fees and related revenue of $38.9 million represented an increase of 23% over the
prior year which was attributable to increased sales across all of Group 1s product
lines. As a percent of total revenue, software license and related revenues were 48% for
fiscal years 2000 and 1999.


The
Companys data quality/mailing efficiency software license fees increased 10% for
fiscal 2000 over the prior year. The increase is primarily due to higher sales of the
Companys international coding products, list products and the DQ Plus product suite.


License
fees from Database Marketing systems increased 10% for fiscal year 2000. The increase
resulted from higher recognizable revenue on DM1 solutions which are recognized on a
percentage of completion basis.


Licensing
of Customer Relationship Communications systems increased by 50% in fiscal 2000 over the
prior fiscal year. The increase is due to higher sales in North America, South America
and the Caribbean, offset slightly by lower sales in Europe.


Maintenance
and services revenue of $42.9 million for the year increased 27% over the prior year.
Maintenance and service revenue accounted for 52% of total revenue in both fiscal 2000
and fiscal 1999. Recognized maintenance fees were $32.6 million in fiscal 2000 and $24.7
million in fiscal 1999, an increase of 32%. Professional service and educational training
revenues of $10.3 million in fiscal 2000 and $9.0 million in fiscal 1999 represented an
increase of 14%.


Enterprise
Solutions recognized maintenance increased 27% over the prior year to $26.7 million.
Customer Relationship Communications recognized maintenance increased 59% to $5.9 million
in fiscal 2000 from fiscal 1999. The Company expects continued growth in recognized
maintenance in both of its business segments.


Professional
services revenue from the Enterprise Solutions segment increased to $2.8 million in
fiscal 2000 from $2.0 million in fiscal 1999, an increase of 40%. Customer Relationship
Communications services revenue increased 7% in fiscal 2000 to $7.5 million. As the
Company foresees a growing need for integrating complex solutions, it anticipates
increased revenue from these services.


Total
costs of revenue for fiscal 2000 were $27.3 million versus $23.7 million for fiscal 1999,
representing 33% and 36% of total revenue, respectively. The separate components of cost
of revenue are discussed below.


Software
license expense increased to $12.3 million in fiscal 2000 representing 32% of software
license and related revenue compared to $10.7 million in fiscal 1999 representing 34% of
software license and related revenue. The decrease as a percentage of revenue is
primarily due to higher license revenue partially offset by higher software amortization
expense.


Maintenance
and service expense increased to $15.0 million in fiscal 2000 from $13.0 million in
fiscal 1999, 35% and 39% of maintenance and service revenue, respectively. The decrease
in expense as a percentage of revenue is due to higher revenues partially offset by
higher costs of outside consultants used to help deliver these services.


Included
in maintenance and service expense above are professional service and educational
training costs of $8.0 million which were 78% of professional services revenue during
2000 and $6.6 million and 73% of professional services revenue for the prior year. The
increase in cost as a percentage of services revenue is due to lower margins in the
Companys Enterprise Solutions services attributable to a specific contract in which
the duration extended original estimates and substantial outside resources were needed
for completion. The Company does not expect any significant costs for this contract going
forward.
13
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Costs
of maintenance were $7.0 million for fiscal 2000 representing 21% of maintenance revenue
compared with costs of $6.4 million and 26% of revenue in fiscal 1999. The decreased
costs as a percentage of maintenance revenue were primarily due to increased maintenance
revenue partially offset by higher Information Technology costs associated with
supporting internal systems. The Company anticipates these costs to remain relatively
close to their current levels. Total operating costs of $44.7 million amounted to 55% of
revenue in fiscal 2000 compared with $36.6 million or 56% of revenue during fiscal 1999.
The various components of operating costs are discussed below.


Research
and development expenses (after capitalization of certain development costs) totaled $4.2
million in fiscal 2000 and $2.7 million in 1999, representing 5% and 4% of total revenue.
The increase in costs is due to increased investment in new product initiatives in all of
the Companys major product groups. The Company expects these costs, as a percentage
of revenue, to remain relatively close to their current levels.


Sales
and marketing expenses totaled $26.1 million or 32% of revenue in fiscal 2000 and $21.7
million or 33% of revenue in fiscal 1999. The decrease in costs as a percentage of
revenue is primarily due to higher revenue partially offset by higher costs for sales and
marketing of Enterprise Solutions and Customer Relationship Communications products. The
Company expects these costs to remain relatively close to current levels as a percentage
of revenue. Sales and marketing costs for the Enterprise Solutions products were 32% of
total Enterprise Solutions revenue for fiscal 2000 and 36% for fiscal 1999. Customer
Relationship Communications selling and marketing costs were 32% of total Customer
Relationship Communications revenue for fiscal 2000 and 28% for fiscal 1999.


General
and administrative expenses were $14.4 million or 18% of total revenue in fiscal 2000
compared with $12.2 million or 19% for fiscal 1999. The increase is attributable to
higher performance bonus compensation offset partially by lower bad debt expense. The
Company expects these costs to remain relatively close to current levels as a percentage
of revenue.


Net
non-operating income was $1.1 million in fiscal 2000 compared with net non-operating
income of $0.2 million in fiscal 1999. This increase represents higher interest income
generated from higher cash and short-term investment balances compared to fiscal 1999.
The Company expects non-operating income to increase as interest income on cash and
investments increases and short-term borrowing requirements remain minimal; these
expectations could be affected substantially by newly-identified investment opportunities
including acquisitions.


The
Companys effective tax rate was 42.5% in fiscal 2000 and 39.3% in fiscal 1999. The
current years rate is the net effect of a 46% domestic tax rate combined with a 32%
foreign tax rate on taxable net income. The increased effective rate is primarily due to
proportionately higher domestic income in fiscal 2000.


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; there can be no assurance, however, that this will
occur in the future. This seasonal factor is believed to be attributable to buying
patterns of major accounts and also to fiscal year incentives for Group 1s sales
representatives. Group 1s revenue and resultant earnings have shown substantial
variation on a quarter-to-quarter basis. The Companys 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 $29.7 million at March 31, 2001 as compared with $17.1
million a year earlier. The current ratio was 1.7 to 1 at March 31, 2001 and 1.4 to 1 at
March 31, 2000. Note that the current portion of deferred revenue related to maintenance
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 funding requirements through cash generated from operations.
Additionally, the Company maintains a $10 million line of credit arrangement with a
commercial bank, expiring October 31, 2001. The line of credit bears interest at the banks
prime rate or Libor plus 150 basis points, at Group 1s option. The line of credit
is not collateralized but requires Group 1 to maintain certain operating ratios. At March
31, 2001 and at March 31, 2000, there were no borrowings outstanding under the line of
credit.
14
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|During
fiscal 2001, net income before preferred stock dividends of $8.9 million along with
non-cash expenses of $14.1 million provided a total of $23.0 million cash from operating
activities. An increase in accounts receivable decreased cash by $1.6 million during the
year. This increase was due to an increase in revenue, offset by improved collections
during the year. Deferred revenues increased cash by $1.7 million; other working capital
items decreased cash by $1.8 million. Cash flows used in investing activities consist of
expenditures for investments in software development and capital equipment of $10.0
million, offset by $3.3 million from the sale and maturity of marketable securities.
Proceeds from the exercise of stock options of $1.3 million were partially offset by
principal payments on capital leases and preferred dividends of $0.2 million for a total
of $1.1 million cash provided by financing activities.


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.


As of
March 31, 2001, 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 minimum lease obligations and other short-term and long-term
liquidity needs can be met from its existing cash and short-term investment balances and
cash flows from operations. The Company believes that its long-term liquidity needs are
minimal and no large capital expenditures are currently planned, except for the
continuing investment in software development costs, which the Company believes can be
funded from operations during the next twelve months.


Recent
Accounting Pronouncements


In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137, which delays the
effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which will be effective for our fiscal year 2002. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, further amending FAS
No. 133. Currently the Company does not utilize derivative financial instruments and has
no plans to do so in the future. Therefore, the adoption of SFAS Nos. 133, 137 and 138
will not have a material effect on the Companys consolidated financial statements.


Item 7A.
Quantitative and Qualitative Disclosures about Market Risk


The
company has a subsidiary in the United Kingdom with offices throughout continental
Europe. Additionally, the Company uses third party distributors to market and distribute
its products in other international regions. Transactions conducted by the subsidiary are
typically denominated in the local country currency, while transactions conducted by the
distributors are typically denominated in pounds sterling. As a result, the Company is
primarily exposed to foreign exchange rate fluctuations as the financial results of its
subsidiary and third party distributors are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary from
expectations and impact overall expected profitability. However, through and as of March
31, 2001, the Companys exposure was not material to the financial statements taken
as a whole. The Company has not entered into any foreign currency hedging transactions
with respect to its foreign currency market risk. The Company does not have any financial
instruments subject to material market risk.


Risk Factors


Our total
revenue and operating results may fluctuate.


We
may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially and adversely affect our
business and the market price of our common stock. Our total revenue and
operating results may fluctuate significantly because of a number of factors,
many of which are outside of our control. These factors include, but are not
necessarily limited to:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level of product, services and price competition;
|- |  | -------------------------------------------------

| |  | Length of our sales cycle and customer licensing patterns;
|- |  | ----------------------------------------------------------

| |  | The size and timing of individual license transactions;
|- |  | -------------------------------------------------------

| |  | Delay or deferral of customer purchase and implementations of our products;
|- |  | ---------------------------------------------------------------------------

|15
|--

---

| |  | Success in expanding or maintaining our direct sales force and indirect distribution
channels;
|- |  | ----------------------------------------------------------------------------------------------

| |  | Timing of new product introductions and product enhancements;
|- |  | -------------------------------------------------------------

| |  | Appropriate mix of products licensed and services sold;
|- |  | -------------------------------------------------------

| |  | Levels of international transactions;
|- |  | -------------------------------------

| |  | Activities of and acquisitions by competitors;
|- |  | ----------------------------------------------

| |  | Labor turnover and timing of new hires and the allocation of our resources;
|- |  | ---------------------------------------------------------------------------

| |  | Changes in the economy and foreign currency exchange rates; and
|- |  | ---------------------------------------------------------------

| |  | Our ability to develop and market new products and control costs
|- |  | ----------------------------------------------------------------

| |  | Satisfactory completion of services we provide
|- |  | ----------------------------------------------

| |  | Performance of key third party service providers
|- |  | ------------------------------------------------

|One
or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly.


Our quarterly
operating results may fluctuate.


Our total revenue and
operating results may vary drastically from quarter to quarter. The main factors
that may affect these fluctuations are:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The discretionary nature of our customerspurchase and budget cycles;
|- |  | ---------------------------------------------------------------------

| |  | The potential delays in recognizing revenue from license transacions;
|- |  | ---------------------------------------------------------------------

| |  | The timing of new product releases;
|- |  | -----------------------------------

| |  | Seasonal variations in operating results; and
|- |  | ---------------------------------------------

| |  | Variations in the fiscal or quarterly cycles of our customers.
|- |  | --------------------------------------------------------------

|Each
customers decision to purchase our products and services is discretionary
and is subject to its budget cycles. In addition, the timing of license revenue
is difficult to predict because of the length of our sales cycle, which has
ranged to date from one to eighteen months. We base our operating expenses on
anticipated revenue trends. Because a high percentage of these expenses are
relatively fixed, a delay in recognizing revenue from license transactions could
cause significant variations in operating results from quarter to quarter and
could result in operating losses. If these expenses precede, or are not
subsequently followed by, increased revenues, our operating results could be
materially and adversely affected.


As
a result of these and other factors, revenues for any quarter are subject to
significant variation and we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful. The reader should not rely
on these comparisons as indications of future performance.


We need to
successfully integrate acquisitions and manage growth.


Our
business strategy includes pursuing opportunities to grow our business, both internally
and through selective acquisitions and strategic alliances. Our ability to implement this
strategy depends, in part, on our success in making such acquisitions and strategic
alliances on satisfactory terms and successfully integrating them into our operations.
Implementation of our growth strategy may impose significant strains on our management,
operating systems and financial resources. Failure to manage this growth, or unexpected
difficulties encountered during expansion, could have an adverse effect on our business,
operating results and financial condition.


We may not be able to
compete effectively in the Internet-related products and services market.


Group 1s
Web service applications communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to continue
developing products that are compatible with the Internet. We cannot predict with any
assurance whether the demand for Internet-related products and services will increase or
decrease in the future. The increased commercial use of the Internet could require
substantial modification and customization of our products and the introduction of new
products.


Critical
issues concerning the commercial use of the Internet, including security, privacy,
demand, reliability, rate of adoption, cost, ease of use, accessibility, quality of
service and potential tax or other government regulation, remain unresolved and may
affect the use of the Internet as a medium to support the functionality of our products
and distribution of our software. If these critical issues are not favorably resolved,
our business, operating results and financial condition could be materially and adversely
affected.
16
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our continued success will
require us to keep pace with technological developments, evolving industry
standards and changing customer needs.


The
software market in which we compete is characterized by (i) rapid technological change,
(ii) frequent introductions of new products, (iii) changing customer needs and (iv)
evolving industry standards. To keep pace with technological developments, evolving
industry standards and changing customer needs, we must support existing products and
develop new products. We may not be successful in developing, marketing and releasing new
products or new versions of our products that respond to technological developments,
evolving industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development, introduction and
sale of these enhancements. In addition, these enhancements may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of market
acceptance. If release dates of any future products or enhancements to Group 1s
products are delayed, or if these products or enhancements fail to achieve market
acceptance when released, our business, operating results and financial condition could
be materially and adversely affected. In addition, new products or enhancements by our
competitors may cause customers to defer or forego purchases of our products, which could
have a material adverse effect on our business, financial condition and results of
operations.


Software
errors or defects in our products could reduce revenues.


Software
products frequently contain errors or failures, especially when first introduced or when
new versions are released, and could be affected by viruses. We have, in the past, been
forced to delay the commercial release of products until software problems have been
corrected. We could lose revenues as a result of software viruses, errors or defects,
including defects in third party products with which our products work. Testing errors
may also be found in new products or releases after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, damage to our reputation, or
increased service and warranty costs, any of which could have a material adverse effect
upon our business, operating results and financial condition.


If we do not
successfully manage our growth, our business may be negatively impacted.


If we
fail to manage our growth effectively, our business, financial condition and results of
operations could be materially and adversely affected. Our business has grown rapidly in
recent years. This growth has placed a significant strain on our management systems and
resources. In addition, this growth may require us to implement new systems or upgrade
current systems, and the failure to successfully implement such new or improved systems
could materially and adversely affect our business. To manage future growth, we must
continue to (i) implement and improve our financial, operational and management controls,
reporting systems and procedures on a timely basis and (ii) expand, train and manage our
employee work force.


Integration of
personnel and operations relating to our previous or future acquisitions may
disrupt our business and management.


We
acquired two companies subsequent to year end, and we may not be able to successfully
assimilate the additional personnel, operations, acquired technology and products into
our business. In particular, we will need to assimilate and retain key professional
services, sales, development and marketing personnel. Key personnel from the acquired
companies may in the future decide to pursue other opportunities. In addition, it may be
necessary to integrate products of these companies with our technology, and it is
uncertain whether we may accomplish this easily or at all. These integration difficulties
could disrupt our ongoing business, distract management and employees or increase
expenses. Acquisitions are inherently risky, and we may also face unexpected costs, which
may adversely affect operating results in any quarter.


Due to
these and other factors, we may not meet expectations of securities analysts or investors
with respect to revenues or other operating results of the combined company, which could
adversely affect our stock price.


If we acquire
additional companies, products or technologies, we may face risks similar to
those faced in our other acquisitions.


We may
continue to make other investments in complementary companies, products or technologies.
We may not realize the anticipated benefits of any other acquisition or investment. If we
acquire another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our other acquisitions. In addition, our
profitability may suffer because of acquisition-related costs or amortization costs for
acquired goodwill and other intangible assets.


17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We may not be
able to protect our proprietary information.



We
rely primarily on a combination of patent, copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect our proprietary rights.
We also believe that the technological and creative skills of our personnel, new product
developments, frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a technology leadership
position. Notwithstanding these, 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 technology industry and 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. Policing unauthorized
use of our products is difficult. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the United States. Our means of
protecting our proprietary rights in the United States or abroad may not be adequate.


Although
we do not believe that we are infringing on any proprietary rights of others, third
parties may claim that we have infringed on their intellectual property rights.
Furthermore, former employers of our former, current or future employees may assert
claims that such employees have improperly disclosed to us the confidential or
proprietary information of such former employers. Any such claims, with or without merit,
could (i) be time consuming to defend, (ii) result in costly litigation, (iii) divert
managements attention and resources, (iv) cause product delays in product and
services deliveries and (v) require us to pay monetary damages or enter into royalty or
licensing agreements. A successful claim of product infringement against us and our
failure or inability to license or create a workaround for such infringed or similar
technology may materially and adversely affect our business, operating results and
financial condition.


We
license certain software from third parties. These third-party software licenses may not
continue to be available to us on acceptable terms. The loss of, or inability to
maintain, any of these software licenses could result in shipment delays or reductions.
This could materially and adversely affect our business, operating results and financial
condition.


Our
international operations involve unique risks.


Our
international operations are subject to a variety of risks, including (i) foreign
currency fluctuations, (ii) economic or political instability, (iii) shipping delays and
(iv) various trade restrictions. Any of these risks could have a significant impact on
our ability to deliver products on a competitive and timely basis. Significant increases
in the level of customs duties, export quotas or other trade restrictions could also have
an adverse effect on our business, financial condition and results of operations. In
situations where direct sales are denominated in foreign currency, any fluctuation in
foreign currency or the exchange rate may adversely affect our business, financial
condition and results of operations.


Our stock
price may continue to be volatile.


The
trading price of our common stock is subject to significant fluctuations in response to
variations in quarterly operating results, the gain or loss of significant contracts,
changes in earning estimates by analysts, announcements of technological innovations or
new products by us or our competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in general has
experienced extreme price and volume fluctuations that have affected the market price for
many companies in industries similar or related to ours and that have been unrelated to
the operating performance of these companies. These market fluctuations have adversely
affected and may continue to adversely affect the market price of our common stock.



Item 8.  
Financial Statements and Supplementary Data


See
pages 20 through 37.


Item 9.   Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure


None.

18
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Report of
Independent Accountants


To the Board of Directors and
Stockholders of Group 1 Software, Inc.


In our opinion, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of comprehensive income, of stockholders equity and of cash
flows present fairly, in all material respects, the financial position of Group
1 Software, Inc. and its subsidiaries at March 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 
| | 
| | 

|McLean, VirginiaJune 12, 2001
19
|--------------------------------

|GROUP 1 SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
|-----------------------------------------------------------------------------------

|                                                                | MARCH 31,
|--------------------------------------------------------------- | ---------
|
|ASSETS                                                          |          
|Current assets:                                                 |          
|Cash and cash equivalents                                       |          
|Short-term investments, available for sale                      |          
|Trade and installment accounts receivable,                      |          
|less allowance for doubtful accounts of                         |          
|$2,197 and $3,317                                               |          
|Deferred income taxes                                           |          
|Prepaid expenses and other current assets                       |          
|                                                               
|Total current assets                                            |          
|Installment accounts receivable, long-term                      |          
|Property and equipment, net                                     |          
|Computer software, net                                          |          
|Other assets                                                    |          
|                                                               
|Total assets                                                    |          
|                                                               
|                                                                |          
|LIABILITIES AND STOCKHOLDERS EQUITY                            |          
|Current liabilities:                                            |          
|Accounts payable                                                |          
|Current portion of capital lease obligation                     |          
|Accrued expenses                                                |          
|Accrued compensation                                            |          
|Current deferred revenues                                       |          
|                                                               
|Total current liabilities                                       |          
|Capital lease obligation, net of current portion                |          
|Deferred revenues, long-term                                    |          
|Deferred income taxes                                           |          
|                                                               
|Total liabilities                                               |          
|                                                               
|Commitments and contingencies (Note 13)                         |          
|Stockholders equity:                                           |          
|6% cumulative convertible preferred stock $0.25 par             |          
|value; 1,200 shares authorized; 48 shares issued and            |          
|outstanding (aggregate involuntary liquidation preference $950) |          
|Common stock $0.50 par value; 50,000 and 14,000 shares          |          
|authorized; 6,654 and 6,468 issued and outstanding              |          
|Additional paid in capital                                      |          
|Retained earnings                                               |          
|Accumulated other comprehensive loss                            |          
|Less treasury stock, 497 shares, at cost                        |          
|                                                               
|Total stockholders equity                                      |          
|                                                               
|Total liabilities and stockholders equity                      |          
|                                                               

|See notes to consolidated
financial statements.
20
|--------------------------------------------------

|GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
|--------------------------------------------------------------------------------------------------

|                                                      | Year Ended March 31,
|----------------------------------------------------- | --------------------
|
|Revenue:                                              |                     
|Software license and related revenue                  |                     
|Maintenance and services                              |                     
|                                                     
|Total revenue                                         |                     
|                                                     
|                                                      |                     
|Cost of revenue:                                      |                     
|Software license expense                              |                     
|Maintenance and service expense                       |                     
|                                                     
|Total cost of revenue                                 |                     
|                                                     
|Gross profit                                          |                     
|                                                      |                     
|Operating expenses:                                   |                     
|Research and development                              |                     
|Sales and marketing                                   |                     
|General and administrative                            |                     
|                                                     
|Total operating expenses                              |                     
|                                                     
|Income from operations                                |                     
|                                                      |                     
|Non-operating income:                                 |                     
|Interest income                                       |                     
|Interest expense                                      |                     
|Other non-operating income (expense)                  |                     
|                                                     
|Total non-operating income                            |                     
|                                                     
|Income before provision for income taxes and minority |                     
|interest                                              |                     
|                                                      |                     
|Provision for income taxes                            |                     
|                                                      |                     
|Minority interest in net income of consolidated       |                     
|subsidiary                                            |                     
|                                                     
|Net income                                            |                     
|Preferred stock dividend requirements                 |                     
|                                                     
|Net income available to common stockholders           |                     
|                                                     
|Basic earnings per share                              |                     
|                                                     
|Diluted earnings per share                            |                     
|                                                     
|Basic weighted average shares outstanding             |                     
|                                                     
|Diluted weighted average shares outstanding           |                     
|                                                     

|See notes to consolidated
financial statements.
21
|--------------------------------------------------

|GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
|-------------------------------------------------------------------------------------

|                                         | Year Ended March 31,
|---------------------------------------- | --------------------
|
|Net income                               |                     
|                                         |                     
|Foreign currency translation adjustments |                     
|                                         |                     
|                                        
|Comprehensive income                     |                     
|                                        

|See notes to consolidated financial
statements.

22
|---------------------------------------------------

|GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERSEQUITY (In thousands)
|------------------------------------------------------------------------------------

|                                     | Preferred Stock | Common Stock |   | Treasury Stock
|------------------------------------ | --------------- | ------------ | - | --------------
|
|Balance, March 31, 1998              |                 | 148          |   | $2,846        
|Dividends to preferred stockholders  |                 |             |   |              
|Redemption of preferred stock below  |                 |             
|carrying value                       |                 | (100         | ) | (1,930        
|Issuance of stock upon exercise of   |                
|options                              |                 |             |   |              
|Repurchase of treasury stock         |                 |             |   |              
|Minority interest acquisition        |                 |             |   |              
|Loss on foreign currency translation |                 |             |   |              
|Net income                           |                 |             |   |              
|                                    
|Balance, March 31, 1999              |                 | 48           |   | 916           
|Dividends to preferred stockholders  |                 |             |   |              
|Issuance of stock upon exercise of   |                
|options                              |                 |             |   |              
|Loss on foreign currency translation |                 |             |   |              
|Tax benefit related to stock options |                 |             |   |              
|Net income                           |                 |             |   |              
|                                    
|Balance, March 31, 2000              |                 | 48           |   | 916           
|Dividends to preferred stockholders  |                 |             |   |              
|Issuance of stock upon exercise of   |                
|options                              |                 |             |   |              
|Loss on foreign currency translation |                 |             |   |              
|Tax benefit related to stock options |                 |             |   |              
|Issuance of warrants to acquire      |                
|common stock in exchange for         |                
|services                             |                 |             |   |              
|Net income                           |                 |             |   |              
|                                    
|Balance, March 31, 2001              |                 | 48           |   | $916          

|See notes to consolidated
financial statements.
23
|--------------------------------------------------

|GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
|---------------------------------------------------------------------------

|                                                     | Year Ended March 31,
|---------------------------------------------------- | --------------------
|
|Cash flows from operating activities:                |                     
|Net income                                           |                     
|Adjustments to reconcile net income from             |                     
|operations to net cash provided by operating         |                     
|activities:                                          |                     
|Amortization expense                                 |                     
|Depreciation expense                                 |                     
|Provision for doubtful accounts                      |                     
|Net loss on disposal of assets                       |                     
|Deferred income taxes                                |                     
|Minority interest in income of consolidated          |                     
|subsidiary                                           |                     
|Tax benefit from exercises of  stock options         |                     
|Foreign currency transaction gain                    |                     
|Issuance of common stock warrants in exchange for    |                     
|services                                             |                     
|Changes in assets and liabilities:                   |                     
|Accounts receivable                                  |                     
|Prepaid expenses and other current assets            |                     
|Other assets                                         |                     
|Deferred revenues                                    |                     
|Accounts payable                                     |                     
|Accrued expenses and accrued compensation            |                     
|                                                    
|Net cash provided by operating activities            |                     
|                                                    
|                                                     |                     
|Cash flows from investing activities:                |                     
|Purchases and development of computer software       |                     
|Purchases of property and equipment                  |                     
|Purchases of marketable securities                   |                     
|Proceeds from sale and maturities of marketable      |                     
|securities                                           |                     
|Purchase of minority interest                        |                     
|                                                    
|Net cash used in investing activities                |                     
|                                                    
|                                                     |                     
|Cash flows from financing activities:                |                     
|Proceeds from exercise of stock options              |                     
|Repayment of principal on capital lease              |                     
|obligations                                          |                     
|Dividends paid on preferred stock                    |                     
|Repurchase of common stock                           |                     
|Repurchase of preferred stock                        |                     
|                                                    
|Net cash (used in) provided by financing activities  |                     
|                                                    
|                                                     |                     
|Net increase in cash and cash equivalents            |                     
|                                                     |                     
|Effect of exchange rate on cash and cash equivalents |                     
|                                                     |                     
|Cash and cash equivalents at beginning of period     |                     
|                                                    
|Cash and cash equivalents at end of period           |                     
|                                                    

|See
notes to consolidated financial statements.
24
|--------------------------------------------------

|Group 1
Software, Inc.Notes to
Consolidated Financial Statements


(1)  Summary of
Significant Accounting Policies


Organization


The
accompanying consolidated financial statements are for Group 1 Software, Inc. (Group
1), formerly doing business as COMNET Corporation, which was incorporated June
1967. Unless otherwise indicated in the Notes to the consolidated financials statements,
the term Companywill refer to the operations of Group 1 and its subsidiaries.
On September 25, 1998, the shareholders of Group 1 Software, Inc. and COMNET Corporation (COMNET)
both approved the proposed merger of Group 1 Software, Inc. into COMNET. The surviving
company was renamed Group 1 Software, Inc. (Group 1) (see Note 2). Group 1
Software, Inc. develops, acquires, markets and supports software solutions for customer
relationship communications, data quality, marketing automation and direct marketing. The
Company distributes all of its products in North America and its customer relationship
communication solutions throughout the world.


Principles of
Consolidation


The
consolidated financial statements of the Company include the accounts of Group 1
Software, Inc. and its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.


Estimates


The
preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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


Revenues
are primarily derived from the sale of software licenses and from the sale of related
services, which include maintenance and support, consulting and training services.
Revenues from license arrangements are recognized upon delivery of the product when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. If the agreement includes acceptance
criteria, revenue is not recognized until the Company can demonstrate that the software
or service can meet the acceptance criteria. If an ongoing vendor obligation exists under
the license arrangement, revenue is deferred based on vendor-specific objective evidence
of the undelivered element. If vendor-specific objective evidence does not exist for all
undelivered elements, all revenue is deferred until sufficient evidence exists or all
elements have been delivered. Revenues from annual maintenance and support are deferred
and recognized ratably over the term of the contract. Revenues from consulting and
training services are deferred and recognized when the services are performed and
collectibility is deemed probable.


The amount of deferred
revenue at March 31, 2001 to be recognized during the subsequent years is (in
thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |     
|--------------- | ----
|                | 2002
|2003            |     
|2004            |     
|2005 and beyond |     
|               
|                |     
|               

|Contracts
for professional services are negotiated individually. The Company generally recognizes
revenues from professional service contracts on a time and materials basis as the work is
performed. Revenues from fixed price professional service contracts are recognized using
the percentage-of-completion method as work is performed, measured primarily by the ratio
of labor hours incurred to total estimated labor hours for each specific contract. When
the total estimated cost of a contract is expected to exceed the contract price, the
total estimated loss is charged to expense in the period when the information is known.
As of March 31, 2001, the Company has not incurred any losses on contracts in progress.


Revenue
from arrangements where the Company provides Web based services is recognized over the
contract period. Any fees paid or costs incurred prior to the customer relationship
period, such as license fees, consulting, customization or development services, are
deferred and recognized ratably over the subsequent contract period, which is typically
one to two years.
25
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Revenue
from products licensed to original equipment manufacturers is recorded when products have
been shipped and the appropriate documentation has been received Group 1. Revenue from
sales through value added resellers or distributors is recorded when a license agreement
is signed with an end user.


Cash and Cash
Equivalents


The
Company considers all highly liquid investments with maturities of three months or less
at the time the investments are acquired to be cash equivalents. Cash equivalents for the
Company are solely investments in commercial paper.


Short-term
Investments


The
Company classifies its short-term investments as available-for-sale. Short-term
investments are comprised of debt securities with original maturities of more than three
months when purchased. All securities held mature within one year of the balance sheet
date. As of March 31, 2001 the Company had available-for-sale investments of $8.0
million. The Company had available-for-sale investments of $11.3 million as of March 31,
2000. The investments are adjusted to market value at the end of each accounting period.
Unrealized gains and losses, net of applicable taxes, are charged or credited to
accumulated other comprehensive income, a separate component of stockholdersequity.
Realized gains and losses on the sale of investments, as determined on a specific
identification basis, are included in the consolidated statements of operations. To date,
unrealized gains and losses have not been material. Interest income is recognized when
earned.


Property and
Equipment


Property
and equipment are stated at cost and are depreciated using the straight-line method over
their estimated useful lives: two years for laptop computers, three years for other
computers, five years for office equipment and ten years for furniture. Leasehold
improvements are amortized on a straight-line basis over the shorter of their useful
lives or the term of the respective leases. Expenditures for maintenance and repairs are
charged to expense as incurred. When assets are retired or sold, the cost and the
accumulated depreciation are removed from the accounts and any resulting gain or loss is
recognized in the results of operations.


Internal Use Software


Internal
use software and web site development costs are capitalized in accordance with Statement
of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use,and Emerging Issues Task Force (EITF) Issue No. 00-02,
Accounting for Web Site Development Costs.Qualifying costs incurred during
the application development stage, which consist primarily of outside services and
purchased software license costs, are capitalized and amortized over the estimated useful
life of the asset. All other costs are expensed as incurred. As of March 31, 2001 and
2000, costs qualifying for capitalization totaled $2,171,000 and $2,063,000, net of
accumulated amortization of $2,438,000 and $2,065,000, respectively. These costs are
included as part of computer software, net in the accompanying consolidated balance
sheets. Amortization is computed using the straight-line method over the estimated useful
lives of the assets, generally three years, and is included in general and administrative
expenses.


Research and Product
Development


In
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed,software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until the
product is available for general release to customers. Software development costs
capitalized include direct labor costs and fringe labor overhead costs attributed to
programmers, software engineers, quality control and field certifiers working on products
after they reach technological feasibility but before they are generally available to
customers for sale. Capitalized costs are amortized over the estimated product life of
three to five years, using the greater of the straight-line method or the ratio of
current product revenues to total projected future revenues. 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.
Capitalized software developments costs, net of accumulated amortization, are $18,063,000
and $19,760,000 at March 31, 2001 and 2000, respectively, and are included in computer
software, net in the accompanying consolidated balance sheets. Amortization expense
related to software development costs was $7,851,000, $9,047,000 and $7,626,000 for the
years ended March 31, 2001, 2000 and 1999, respectively and is included in cost of
software license revenues. During the years ended March 31, 2001, 2000 and 1999,
respectively, the Company capitalized software development costs of $6,736,000,
$6,834,000 and $7,153,000. Research and product development costs not subject to SFAS No.
86 are expensed as incurred and relate mainly to the development of new products and
on-going maintenance of existing products. Total costs for research and development,
before capitalization, incurred in fiscal 2001, 2000, and 1999 were $13,112,000,
$11,055,000 and $9,896,000, respectively.


26
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Goodwill


Goodwill
represents the excess of the aggregate purchase price over the fair market value of the
tangible and intangible assets acquired in various acquisitions and is being amortized on
a straight-line basis over the estimated economic useful life ranging from nine to
fifteen years. Goodwill, net of accumulated amortization, was $4.1 million and $4.6
million at March 31, 2001 and 2000, respectively, and is included in other assets.
Amortization charged to operations amounted to $527,000, $749,000 and $353,000, for
fiscal 2001, 2000, and 1999, 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, 2001.


Foreign
Currency Translation


The
functional currency for the Companys international subsidiary is the applicable
local currency. The financial statements of the international subsidiary are translated
into U.S. dollars using exchange rates in effect at period end for assets and liabilities
and average exchange rates during each reporting period for results of operations.
Adjustments resulting from translation of financial statements are included in
stockholders equity as accumulated other comprehensive income. The Company does not
attempt to hedge its foreign currency exposures. Foreign currency losses of $1,284,000 in
2001, $16,000 in 2000, and $273,000 in 1999 are included in accumulated other
comprehensive income.


Gains
and losses arising from transactions denominated in a currency other than the Companys
functional currency are included in the consolidated statements of operations.


Stock-based
Compensation Plans


The
Company accounts for stock-based employee compensation arrangements in accordance with
the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees,(APB 25) and complies with the disclosure
provisions of SFAS 123, Accounting for Stock Based Compensation. Under APB 25,
compensation cost is recognized over the vesting period based on the difference, if any,
on the date of grant between the fair market value of the Companys stock and the
amount an employee must pay to acquire the stock. The Companys policy is to grant
options with an exercise price equal to the quoted market price of the Companys
stock on the grant date. Accordingly, no compensation expense has been recognized for the
Companys stock option plans. The Companys stock-based awards issued to
non-employees are accounted for under the fair value method. The Company did not issue
stock options to non-employees in 2001, 2000 or 1999.


Income Taxes


The
Company uses the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred income taxes are recognized for the asset and
liability 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.


Earnings per
Share of Common Stock


Basic
earnings per share (EPS) is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the
period. Diluted EPS is computed using the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding during the period. Potentially
dilutive common stock equivalents consist of convertible preferred stock (computed using
the if converted method) and stock options and warrants (computed using the treasury
stock method). Potentially dilutive common stock equivalents are excluded from the
computation if the effect is anti-dilutive. Share and per share data presented reflect
the three-for-two stock split effective February 2000.


Reconciliation of shares
used in basic EPS calculations to the shares used in the diluted EPS calculation
is as follows (in thousands):
27
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|                                              | Year Ended March 31,
|--------------------------------------------- | --------------------
|
|Weighted average shares outstanding-basic     |                     
|Effect of dilutive securities:                |                     
|Stock options and warrants                    |                     
|Preferred shares                              |                     
|                                             
|Weighted average shares outstanding - diluted |                     
|                                             

|There
were 387,000, 957,000 and 1,685,000 potentially dilutive common stock options
and warrants in 2001, 2000 and 1999, respectively. There were additional
potentially dilutive convertible preferred shares of 47,500 in 2000 and 96,000
in 1999. These were not included in the earnings per share calculation due to
their anti-dilutive effect.


Concentration
of Credit Risk


Financial
instruments that potentially subject the Company to concentrations of credit risk consist
primarily of cash, cash equivalents, short-term investments and accounts receivable. The
Company places its cash and cash equivalents and short-term investments in highly rated
commercial paper with maturities of less than one year. The Company has established
guidelines relative to credit ratings and maturities that seek to maintain safety and
liquidity.


The
Company designs, develops, manufactures, markets and supports computer software systems
to customers in diversified industries throughout the world. The Company performs ongoing
credit evaluations of its customersfinancial condition and generally requires no
collateral. The Companys installment receivables are predominately with clients
(service bureaus) who provide computer services to the direct marketing industry. Certain
of these service 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 customers represent approximately $1.8 million or 68% of
the installment receivables balance at March 31, 2001 versus $2.8 million or 73% at March
31, 2000. The Company maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of revenue or all accounts receivable. For the years
ended March 31, 2001 and 2000, no one customer accounted for 10% or more of revenue or
net accounts receivable.


Impairment of Long-Lived
Assets


SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,specifies circumstances in which certain long-lived assets
must be reviewed for impairment. If such review indicates that the carrying amount of an
asset exceeds the sum of its expected future cash flows, the assets carrying value
must be written down to fair value. Based on managements assessment as of March 31,
2001, the Company has determined that no impairment of long-lived assets exists.


Fair Value of
Financial Instruments


The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, short-term investments, accounts receivable and accounts payable approximate
their fair value due to the short maturity of these instruments.


Other
Comprehensive Income (Loss)


Other
comprehensive income (loss) is comprised of foreign currency translation adjustments and
unrealized gains and losses on available-for-sale marketable securities, net of related
tax effects. To date, unrealized gains and losses on available-for-sale marketable
securities have not been significant.


Segment
Reporting


The
Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 replaces the industry segment approach
with the management approach to reporting financial information about an
enterprises segments. The management approach designates the internal organization
that is used by management for allocating resources and assessing performance as the
source of the Companys reportable segments. SFAS No. 131 also requires disclosures
about products and services, geographic areas and major customers.
28
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Recent
Accounting Pronouncements


In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137, which delays the
effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which will now be effective for our fiscal year 2002. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, further amending FAS
No. 133. The Company does not utilize derivative financial instruments and has no plans
to do so. Therefore, the adoption of SFAS Nos. 133, 137 and 138 will not have a material
effect on the Companys financial statements.


Reclassification


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


(2)  
Acquisition of Minority Interest


On
September 25, 1998, the Company formerly known as COMNET Corporation acquired the
minority interest held by Group 1 Software, Inc.s minority shareholders for a total
purchase price of $9,899,000. The purchase price included the issuance of 1,395,713
shares of COMNETs common stock plus direct acquisition costs of $454,000. COMNET
issued the 1,395,713 shares to Group 1 Software Inc.s minority shareholders at an
exchange ratio of 1.15 shares of COMNET common stock for each share of Group 1 Software,
Inc.s common stock. The surviving company was renamed Group 1 Software, Inc.


The
acquisition was accounted for using the purchase method of accounting. The purchase price
has been allocated to minority interest acquired based on its estimated fair value as
shown below:


Allocation of purchase price (in
thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | 
|----------------------------------------- | 
|Total purchase price                      | 
|Allocated fair value of minority interest | 
|                                         
|Goodwill                                  | 
|                                         

|Goodwill is being amortized
over its estimated useful life of 15 years.


The operating results
related to the acquired minority interest have been included in the consolidated
statements of operations for the year ended March 31, 1999 from September 25,
1998 (the date of acquisition.)


(3) Accounts
Receivable


Accounts
receivable are comprised of the following (in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | March 31,
|--------------------------------- | ---------
|
|Trade                             |          
|Installment accounts receivable,  |          
|interest typically at 8.5% to 13% |          
|Allowance for doubtful accounts   |          
|                                 
|                                  |          
|Less non-current portion of       |          
|installment accounts receivable   |          
|                                 
|Current portion                   |          
|                                 

|29
|--

|(4)  Prepaid
Expenses and Other Current Assets


Prepaid
expenses and other current assets are comprised of the following (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------

|                     | March 31,
|-------------------- | ---------
|
|Prepaid expenses     |          
|Prepaid commissions  |          
|Prepaid royalties    |          
|Other current assets |          
|                    
|                     |          
|                    

|Prepaid commissions
and royalties primarily relate to amounts paid, as of the balance sheet date, on
initial maintenance and enhancement contracts and contracts being recognized
under the percentage-of-completion method which have been deferred into future
periods.


(5)  Property
and Equipment


Property
and equipment is comprised of the following (in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | March 31,
|---------------------------------------------- | ---------
|
|Computer equipment                             |          
|Furniture and fixtures                         |          
|Leasehold improvements                         |          
|                                              
|                                               |          
|Less accumulated depreciation and amortization |          
|                                              
|                                               |          
|                                              

|(6)   Computer
Software


Computer
software is comprised of the following (in thousands):
|-----------------------------------------------------------------------------------------

|                                     | March 31,
|------------------------------------ | ---------
|
|Developed software                   |          
|Acquired software                    |          
|Software purchased and developed for |          
|internal use                         |          
|                                    
|                                     |          
|Less accumulated amortization        |          
|                                    
|                                     |          
|                                    

|The Company wrote off $0.5 million
and $10.0 million of fully amortized software balances during fiscal 2001 and 2000,
respectively.
|------------------------------------------------------------------------------------------------------------------------------------

|(7)  Accrued
Expenses



Accrued
expenses are as follows (in thousands):
|------------------------------------------------------------------------

|                              | March 31,
|----------------------------- | ---------
|
|Accrued sales and other taxes |          
|Accrued royalties             |          
|Accrued sales incentives      |          
|Income taxes payable          |          
|Other accrued expenses        |          
|                             
|                              |          
|                             

|30
|--

|(8)  Line of
Credit


The
Company has a $10 million unsecured line of credit facility with a financial
institution which expires October 31, 2001. The line of credit bears interest at
the banks prime rate (8.0% at March 31, 2001), or Libor (4.67% at March
31, 2001) plus 150 basis points at the Companys option. The line of credit
is not collateralized but requires Group 1 to maintain certain operating ratios.
At March 31, 2001 and March 31, 2000 there were no borrowings outstanding under
the line of credit.


(9)  
Stockholders Equity


Stock
Repurchase


By
agreement dated September 24, 1998, the Company redeemed 100,000 shares of 6% cumulative
convertible preferred stock for $675,000 and repurchased 770,018 shares of common stock
for $3,465,000 from an investor. The common shares were repurchased for the express
purpose of issuance in connection with the minority interest acquisition. The excess of
the carrying value of the 100,000 preferred shares above the redemption value was
accounted for as permanently reinvested capital. This investor was the Companys
largest shareholder with 14% of the common stock and 68% of the preferred stock.


Preferred Stock


On
January 22, 1993, the Company issued Preferred Stock, par value $0.25 per share, to be
designated 6% Cumulative Convertible Preferred Stockconsisting of 147,500
shares. On September 24, 1998 the Company repurchased 100,000 preferred shares and
currently has 47,500 shares issued and outstanding. Dividends have been paid
semi-annually in January and July since July, 1993. The 6% Preferred Stock is convertible
at any time at the sole option of the holder into fully paid and non-assessable Common
Stock, at the rate of 1.5 shares of Common Stock for each share of preferred stock,
subject to a specified adjustment rate.


The
Company has the right to redeem the outstanding 6% Preferred Stock, in whole or in part,
at any time by paying to the holders thereof in cash the redemption price of $20 per
share, together with all accrued and unpaid dividends thereon.


Stock Split


In
February 2000 the Company effected a three-for-two split of the outstanding shares of
common stock. Accordingly, all data shown in the accompanying consolidated financial
statements and notes has been retroactively adjusted to reflect the stock split.


Stock Option
Plans


The
Company has three stock option programs currently in effect, and three predecessor plans
for which option grants are still outstanding. Options granted under all plans were
granted at 100% of the fair market value of the common stock at the date of grant.


The
Companys Stock Option Plan of 1998 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 686,500 shares of common stock for issuance on exercise of options
under the Plan. The option and rights vest over five years; all options and rights expire
ten years after the date of the grant. No stock appreciation rights have been granted
under this plan.


The
Companys 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 1,500,000 shares of common stock for issuance on exercise of options
under the Plan. The option and rights vest over five years; all options and rights expire
ten years after the date of the grant. No stock appreciation rights have been granted
under this plan.


The
Companys 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 are fully vested; all options and
rights expire ten years after the grant date. No Stock Appreciation Rights have been
granted under this plan. A total of 110,500 shares of common stock have been reserved for
issuance on exercise of options under the plan.
31
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys 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. A total of 514,000 shares of common
stock have been reserved for issuance on exercise of options under the plan.


The
Companys 1986 Stock Option Plan for Non-Employee Directors provided for
annual automatic grants of non-qualified stock options to non-employee directors
of the Company who served from 1986 to 1992, under conditions defined by the
plan. The options vest over five years and expire ten years after the grant
date. On January 22, 1993, the shareholders approved an amendment to eliminate
restrictions on vesting of stock options granted to the plan so that options
will become fully exercisable in whole or in part, upon resignation as a
director. A total of 32,800 shares of common stock are reserved for issuance on
exercise of options under the plan.


In
1991, the Company granted options to purchase an aggregate of 697,500 shares of
common stock at an exercise price of $14.50 per share to the individuals then
serving on the reconstituted Board of Directors, as an inducement to such
individuals to serve on the board. The options are exercisable for ten years
from the date of grant and are fully vested. A total of 277,500 shares of common
stock are reserved for issuance on exercise of options under the plan.


In
1992, the Company granted options to purchase an aggregate of 22,500 shares of
common stock at an exercise price of $20.17 per share to the individuals serving
on the Advisory Committee. The options are exercisable for ten years from the
date of grant and are fully vested. 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 127,000 shares of common stock for issuance on
exercise of options under the plan. The options are fully vested and expire
fifteen years after the grant date.


The
following table summarizes information about the fixed stock options outstanding
at March 31, 2001:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Ranges of exerciseprices | Numbers ofoptionsoutstanding | Weightedaverageexerciseprice | Weightedaverageremainingcontractuallife in years | Numbers ofoptionsexercisable | Weightedaverageexercise price
|------------------------ | ---------------------------- | ---------------------------- | ------------------------------------------------ | ---------------------------- | -----------------------------
|$3.51-$7.00              |                              | 1,275,864                    |                                                  | $  5.98                      |                              
|$7.01-$10.50             |                              | 209,111                      |                                                  | $  8.58                      |                              
|$10.51-$14.00            |                              | 2,000                        |                                                  | $13.00                       |                              
|$14.01-$17.50            |                              | 588,500                      |                                                  | $15.20                       |                              
|$17.51-$21.00            |                              | 496,738                      |                                                  | $19.72                       |                              
|$21.01-$24.50            |                              | 6,500                        |                                                  | $22.63                       |                              
|                        
|Total                    |                              | 2,578,713                    |                                                  | $10.99                       |                              
|                        

|Activity
under the Companys stock option plans discussed above is summarized as
follows:
|-----------------------------------------------------------------------------------------

|                                        | Year Ended March 31,
|--------------------------------------- | --------------------
|
|
|Options outstanding beginning of period |                     
|Options exercised                       |                     
|Options canceled                        |                     
|Options granted                         |                     
|                                       
|Options outstanding end of period       |                     
|Options exercisable at end of period    |                     
|Weighted-average fair value of options  |                     
|granted during the period               |                     

|32
|--

|The
Company accounts for the activity under the Plans in accordance with APB 25. Accordingly,
no compensation expense has been recognized for the Plans. Had compensation expense been
determined based on the fair value of the stock options for awards under the Plans in
accordance with SFAS 123, the Companys net income available to common stockholders
and earnings per common share would have been decreased to the pro forma amounts
indicated below (in thousands, except per share data):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2001 | 2000   | 1999
|------------------------------------------- | ---- | ------ | ----
|Net income available to common stockholders |      |        |     
|As reported                                 |      | $8,849 |     
|Pro forma                                   |      | $5,377 |     
|Basic earnings per share                    |     
|As reported                                 |      | $1.46  |     
|Pro forma                                   |      | $0.89  |     
|Diluted earnings per share                  |     
|As reported                                 |      | $1.28  |     
|Pro forma                                   |      | $0.78  |     

|The
fair value of each option is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for grants
during the years ended March 31, 2001, 2000 and 1999 respectively: dividend yield of 0%,
expected volatility of 110%, 116% and 113% respectively, a risk-free interest rate of
6.03%, 5.84% and 4.61% respectively, and an expected term of 4.09, 3.89 and 7 years
respectively.


(10)   Income
Taxes


The
provision for income taxes consists of the following components (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|         | Years Ended March 31,
|-------- | ---------------------
|
|Federal: |                      
|Current  |                      
|Deferred |                      
|        
|         |                      
|        
|State:   |                      
|Current  |                      
|Deferred |                      
|        
|         |                      
|        
|Foreign: |                      
|Current  |                      
|Deferred |                      
|        
|         |                      
|        
|         |                      
|        

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

|                                                      | Year Ended March 31,
|----------------------------------------------------- | --------------------
|
|Statutory tax rate                                    |                     
|State income taxes, net of federal income tax benefit |                     
|Foreign taxes                                         |                     
|Other, net                                            |                     
|                                                     
|Effective tax rate                                    |                     
|                                                     

|33
|--

|Deferred
tax assets and liabilities which result from temporary differences in the recognition of
certain revenues and expenses for financial and income tax reporting purposes consist of
the following (in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | March 31,
|---------------------------------------- | ---------
|
|Current:                                 |          
|Stock options                            |          
|Allowance for doubtful accounts          |          
|Accrued compensation                     |          
|Other, net                               |          
|                                        
|Total current deferred tax assets        |          
|                                        
|Long-term:                               |          
|Deferred maintenance revenue - long-term |          
|Capitalized software                     |          
|Depreciation                             |          
|Research and development tax credit      |          
|Other, net                               |          
|                                        
|Total long-term deferred tax liabilities |          
|                                        

|The
Company has consolidated research and development tax credit carry-forwards of
approximately $98,000 which will expire in 2020 through 2021.


U.S.
and international withholding taxes have not been provided on undistributed
earnings of foreign subsidiaries. The Company remits only those earnings which
are considered to be in excess of the reasonably anticipated working capital
needs of the foreign subsidiaries with the balance considered to be permanently
reinvested in the operations of such subsidiaries.


(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. The Companys
contributions for the years ended March 31, 2001, 2000 and 1999 were, $548,000,
$325,000, and $257,000, respectively.


(12)  
Supplemental Cash Flow Information


The
following supplemental information summarizes the disclosures pertaining to the
Statements of Cash Flows (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Year Ended March 31,
|-------------------------------------------------- | --------------------
|
|Cash paid during the year for:                     |                     
|Interest                                           |                     
|Income taxes                                       |                     
|Non-cash investing and financing activities:       |                     
|Issuance of common and treasury stock for          |                     
|minority interest acquisition                      |                     
|Redemption of preferred stock below carrying value |                     
|Issuance of common stock warrants for services     |                     
|provided                                           |                     

|34
|--

|(13)  
Commitments and Contingencies


Legal




From
time to time, the Company may become involved in litigation relating to claims
arising from the ordinary course of business. The Company believes that there
are no claims or actions pending or threatened against it, either individually
or in the aggregate, the ultimate disposition of which would have a material
adverse effect on the Company.


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. Deferred rent at March
31, 2001 was insignificant. 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 (in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Operating | Capital  
|---------------------------------------------- | --------- | ---------
|2002                                           |           | $   2,749
|2003                                           |           | 2,337    
|2004                                           |           | 2,254    
|2005                                           |           | 2,095    
|2006                                           |           | 1,702    
|2007 and thereafter                            |           | 13,907   
|                                              
|Total minimum lease payments                   |           | $ 25,044 
|                                              
|Amount representing interest                   |           |          
|                                              
|Net minimum lease payments                     |           |          
|Current portion of capital lease obligations   |           |          
|                                              
|Long-term portion of capital lease obligations |           |          
|                                              

|Total
rent expense under operating leases for fiscal years ended March 31, 2001, 2000,
and 1999 was $3,127,000, $3,095,000, and $3,537,000, respectively.


(14)  Segment
Information


The
Company has two reportable segments, Enterprise Solutions and Customer
Relationship Communications. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. The
following table presents certain financial information relating to each
reportable segment:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Year Ended March 31,
|------------------------------------ | --------------------
|
|Revenue                              |                     
|Enterprise Solutions                 |                     
|Customer Relationship Communications |                     
|                                    
|Total revenue                        |                     
|                                    
|                                     |                     
|Gross Profit                         |                     
|Entrprise Solutions                  |                     
|Customer Relationship Communications |                     
|Other                                |                     
|                                    
|Total gross profit                   |                     
|                                    

|All
of the Companys assets, tax provisions and tax benefits are retained and
analyzed at the corporate level and are not allocated to the individual
segments. Amortization of capitalized software associated with the Enterprise
Solutions Software segment is $5.7 million, $6.9 million, and $4.8 million for
2001, 2000 and 1999, respectively. Amortization of capitalized software
associated with the Customer Relationship Communications Software segment is
$2.2 million, $2.1 million, and $1.9 million for 2001, 2000 and 1999,
respectively.
35
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|                                      | Year Ended March 31,
|------------------------------------- | --------------------
|
|Revenue                               |                     
|U.S. operations                       |                     
|European operations                   |                     
|Eliminations                          |                     
|                                     
|Total revenue                         |                     
|                                     
|Operating income                      |                     
|U.S. operations                       |                     
|European operations                   |                     
|                                     
|Total operating income                |                     
|                                     
|Identifiable non-current assets       |                     
|U.S. operations                       |                     
|European operations                   |                     
|Eliminations                          |                     
|                                     
|Total identifiable non-current assets |                     
|                                     

|It is
managements belief that intercompany sales between geographic areas are accounted
for at prices consistent with market conditions as evidenced by 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
and exports, were 16% 13% and 17% of total revenue in 2001, 2000 and 1999.


(15)  
Subsequent Events


On
April 30, 2001, the Company acquired TriSense Software, Ltd.
(TriSense) in a business combination accounted for using the
purchase method. TriSense develops and markets electronic bill presentment and
payment (EBPP) software. Integration of TriSenses PaySense EBPP offering
will enable the Company to create an integrated solution providing digital and
paper generation and delivery of customer-focused business documents. In
consideration for the purchase, the Company paid $1,545,000 at closing and
issued a promissory note for an additional $6,560,000 payable in two annual
installments of principal plus accrued interest at the annual rate of 4.63%.


On
May 11, 2001, the Company acquired HotData, Inc. (HotData) in a
business combination accounted for using the purchase method. Integration of
HotData technology will enable the Company to enhance its web-based data quality
services by offering hosted automated batch processing over the Internet. In
consideration for the purchase, the Company paid $2,000,000 at closing and
agreed to pay an additional 10% of the revenue generated from the HotData
service over the next three years.
36
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16)   Quarterly
Financial Data (Unaudited)


Quarterly
unaudited financial information for the years ended March 31, 2001 and 2000 was
as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|------------------------------------- | ------------ | ------------- | ------------ | -------------
|                                     
|(In thousands, except per share data) |              |               |              |              
|                                     
|Fiscal Year 2001:                     |             
|Revenue                               |              | $20,062       |              | $22,134      
|Gross profit                          |              | 12,790        |              | 14,707       
|Income before taxes                   |              | 1,896         |              | 2,900        
|Net income available to common        |             
|stockholders                          |              | 1,117         |              | 1,690        
|Basic earnings per share              |              | $0.19         |              | $0.28        
|Diluted earnings per share            |              | $0.16         |              | $0.24        
|Fiscal Year 2000:                     |             
|Revenue                               |              | $16,757       |              | $19,270      
|Gross profit                          |              | 9,849         |              | 12,270       
|Income before taxes                   |              | 618           |              | 1,835        
|Net income available to common        |             
|stockholders                          |              | 365           |              | 1,096        
|Basic earnings per share              |              | $0.07         |              | $0.20        
|Diluted earnings per share            |              | $0.06         |              | $0.19        

|37
|--

|PART III


Item 10.  
Directors and Executive Officers of the Registrant


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

|Name                 | Age | Position
|-------------------- | --- | --------
|James V. Manning     |     | 54      
|Robert S. Bowen      |     | 63      
|Mark D. Funston      |     | 41      
|Alan P. Slater       |     | 45      
|Stephen R. Bebee     |     | 47      
|Andrew W. Naden      |     | 43      
|Kenneth T. Chow      |     | 41      
|Ronald F. Friedman   |     | 56      
|Edward Weiss         |     | 50      
|Bernard S. Miller    |     | 59      
|Victor O. Forman     |     | 55      
|Elizabeth Walter     |     | 36      
|Jeffrey Deming       |     | 37      
|John C. Renehan      |     | 38      
|John G. Walsh        |     | 54      
|Thomas S. Buchsbaum  |     | 50      
|Richard H. Eisenberg |     | 63      
|James P. Marden      |     | 47      
|Charles A. Mele      |     | 44      
|Charles J. Sindelar  |     | 64      
|Bruce J. Spohler     |     | 40      

|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 is
elected annually, and their terms extend until the annual meeting of
stockholders three years following their election and until their successors are
elected and qualified. The terms of Messrs. Manning, Eisenberg and Spohler will
expire at the next shareholders meeting. The terms of Messrs. Sindelar,
Marden and Mele will expire in 2001. The terms of Messrs. Bowen, Slater and
Buchsbaum will expire in 2002. 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 was Chief Executive Officer of Medical Manager, Inc., and its
predecessor, from 1995 to 1998. Prior to that, he was Senior Executive Vice President -
Finance of Medco Containment Services, Inc. for more than five years. Since May 1989, he
has been a director of WebMD Corporation and its predecessors, Medical Manager, Inc. and
Synetic Inc.


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


Mr.
Andrew W. Naden has been Executive Vice President of the Company since June 2001. Prior
to that, he was Chief Executive Officer of Overturf Productivity Management. Prior to
that, he served as Co-Operations Officer and Director of Solutions for the Insight
Division of Software AG, and before that as an operating officer for Maryland Public
Television in the Public Broadcasting Service (PBS).


Mr.
Alan P. Slater has been a Director and President, DOC1 Division since June 2001,
and prior to that Executive Vice President starting in April 1992. From October
1987 to April 1992, he was Vice President of Sales.


Mr.
Mark D. Funston has been Vice President, Chief Financial Officer of the Company
since September 1996 and was a Director from December 1996 through September
1998. Prior to joining the Company, he was Divisional Chief Financial Officer
for COMSAT RSI, a division of COMSAT, Inc.


Mr.
Stephen R. Bebee has been Executive Vice President since January 1997. From January 1991
to December 1996 he was Vice President of Sales.

38
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Mr.
Kenneth T. Chow has been Vice President of Business Development and E-Commerce of the
Company since January 2001. Prior to that, Mr. Chow was Vice President, Business
Development and prior to that Executive Director of Marketing for the Company since
joining it in October 1999. Prior to joining the Company, Mr. Chow was Vice President of
Marketing for Network Alchemy, Inc. from 1998 to 1999. Prior to that, he had assumed
progressively more responsible positions in sales management, marketing and business
development for One Touch Systems, Inc. from 1995 to 1998.


Mr.
Edward Weiss has been Secretary and General Counsel of the Company since 1990.


Mr.
Bernard S. Miller has been Chief Information Officer since April 1997 and Vice President
since 1989.


Mr.
Victor O. Forman has been Vice President of the Company for more than five years.


Ms.
Elizabeth Walter has been Vice President of Sales, DOC1 Division, since June 1998. Prior
to that, she served in other sales management and sales representative positions since
joining the Company in 1990.


Mr.
John C. Renehan has been Vice President, Finance of the Company since January of
2001. Prior to that, he had been Controller of the Company since June 1996 and
prior to that he served as Financial Analyst for the Company starting in 1995.


Mr.
John G. Walsh has been a Vice President of either Product Management or Sales since 1997.
Prior to that and since he joined the Company in 1985, he has served in various sales,
management and operational management positions.



Mr.
Richard H. Eisenberg has been a Director of the Company since February 1994. Since April
1, 2001, Mr. Eisenberg has been President of GNBC, Inc. and for at least five years prior
to that, President of Great Northern Brokerage Corporation.


Mr.
James P. Marden has been a Director of the Company since 1992. From 1998 to 2001, Mr.
Marden served as Senior Executive Vice President, Corporate Development, for Medical
Logistics, Inc. From 1994 to May 1997, Mr. Marden was Chairman of The Entertainment
Connection, Inc. He was Vice President - Acquisitions for Medco Containment Services,
Inc. from 1991 to 1994 and held a similar position at Synetic, Inc. from 1993 to 1994.


Mr.
Charles A. Mele has been a Director of the Company since 1992. Mr. Mele has been
Executive Vice President/General Counsel of WebMD Corporation since September 2000. From
April 1994 until September 2000, he served as Vice President and a director of Synetic,
Inc. and then Medical Manager, Inc. Prior to April 1994, he was Executive Vice President
and General Counsel of Medco Containment Services, Inc. for more than five years.


Mr.
Charles J. Sindelar has been a Director of the Company since 1992. Mr. Sindelar has been
Vice President of Motorola, Inc. since August 2000. From August 1999 to August 2000, he
was Senior Vice President - Business Development and General Manager of the Digital Video
Group ZNS of Zenith Electronics Corporation. From January 1996 to August 1999, he was
Vice President and General Manager of the Digital Video Group Network Systems of Zenith
Electronics Corporation.


Mr.
Bruce J. Spohler has been a Director since 1997. He has been Managing Director, High
Yield, of CIBC Oppenheimer for more than five years.


Mr.
Thomas S. Buchsbaum has been a Director since September 1998. Since November 2000, he has
been Vice President, Defense & Intelligence, and prior to that, beginning in April 1997
Vice President, Dell Federal or Vice President of Education for Dell Computer
Corporation. Prior to that, for more than five years, he was Executive Vice President of
Zenith Data Systems. Mr. Buchsbaum is also a Director of Dick Blick Company.


Mr.
Ronald F. Friedman resigned as a Director in June 2001. He announced his retirement as an
employee of the Company, effective in 2002. Until then, he will serve as Special
Assistant to the Companys Chief Executive Officer. Prior to June, 2001, Mr.
Friedman had been a Director of the Company for more than five years and President of the
Company since September 1998. Prior to the merger of Group 1 into the Company, Mr.
Friedman was President and Chief Operating Officer and a Director of Group 1 Software,
Inc. for more than five years.



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.
39
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART IV


Item 14.   Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|------------------------------------------------------------------------------------

| | a)  The
following documents are filed as part of this report
| | ------------------------------------------------------------

|                                                                    | PageNumber
|------------------------------------------------------------------- | ----------
|1.   Consolidated Financial Statements:                             |           
|                                                                   
|The following documents are  submitted in Item 8:                   |           
|Report of Independent Accountants                                   |           
|                                                                   
|Consolidated Balance Sheets as of March 31, 2001 and 2000           |           
|                                                                   
|Consolidated Statements of Operations for the  years                |           
|ended March 31, 2001, 2000 and 1999                                 |           
|                                                                   
|Consolidated Statements of Comprehensive Income for the years       |           
|ended March 31, 2001, 2000 and 1999                                 |           
|                                                                   
|Consolidated Statements of Stockholders Equity  for the years      |           
|ended March 31, 2001, 2000 and 1999                                 |           
|                                                                   
|Consolidated Statements of Cash Flows for the  years                |           
|ended March 31, 2001, 2000 and 1999                                 |           
|                                                                   
|Notes to Consolidated Financial Statements for  the years           |           
|ended March 31, 2001, 2000 and 1999                                 |           
|                                                                   
|2.  Financial Statement Schedule                                    |           
|                                                                   
|The following financial statement schedule is filed as part of this |           
|report:                                                             |           
|                                                                   
|Report of Independent Accountants on Financial  Statement           |           
|Schedule                                                            |           
|                                                                   
|Schedule II:  Valuation and Qualifying Accounts for the Years       |           
|Ended March 31, 2001, 2000 and 1999                                 |           

|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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)  
Report on form 8-K
| | -----------------------

| | None
| | ----

|41
|--

---

|3. |  | List
of Exhibits.
|-- |  | -----------------

|2.01 |  | Agreement
and Plan of Merger, dated June 23, 1998 by and between COMNET Corporation and Group 1
Software, Inc. (incorporated by reference to the Companys Prospectus filed August
18, 1998.) 3.01 Articles of Incorporation and Bylaws, as amended - 1985, (incorporated by
reference to Exhibit 3.7 to Group 1s Annual Report on Form 10-K for the year ended
March 31, 1991).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|*3.04 |  | Amended
and Restated Certificate of Incorporation of Group 1 Software, Inc., dated November 28,
2000.
|----- |  | -----------------------------------------------------------------------------------------------------

|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, 1991).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

|4.10 |  | Intentionally
deleted
|---- |  | ---------------------

|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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42
|--

---

|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 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | Indemnification
Agreement, dated February 24, 1992, between COMNET Corporation and Charles A. Mele
(incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form
10-K for the year ended March 31, 2000).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Indemnification
Agreement between COMNET Corporation and Charles J. Sindelar (incorporated by reference
to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year ended
March 31, 2000).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Lease
covering Company office facilities in Lanham, MD - 1993.
|----- |  | --------------------------------------------------------------

|10.08 |  | Fourth
Amendment to Employment Agreement, dated as of March 1, 1994, by and between Group 1
Software, Inc., and Ronald F. Friedman (incorporated by reference to Exhibit 10.321 to
the Companys Annual Report on Form 10-K for the year ended March 31, 2000).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | COMNET
Corporation, Deferred Compensation Plan (incorporated by reference to Exhibit 10.41 to
the Companys Annual Report on Form 10-K for the year ened March 31, 2000).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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, 2000).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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, 2000).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Line
of Credit Loan Agreement with Crestar Bank, dated October 10, 1996 (incorporated by
reference to Exhibit 10.48 to the Companys Annual Report on Form 10-K for the year
ended March 31, 2000).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Agreement
for Purchase and Sale of Assets by and between Intertrak Corporation and Group 1
Software, Inc. dated September 4, 1997 (incorporated by reference to Exhibit 10.55 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2000).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Agreement
to repurchase preferred and common stock from Merck & Co Inc. dated September 25, 1998
(incorporated by reference to Exhibit 10.56 to the Companys Annual Report on Form
10-K for the year ended March 31, 2000).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Amended
and Restated Employment Agreement between Robert S. Bowen and Group 1 Software, Inc.,
dated as of July 17, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Agreement
for purchase and sale of assets by and between TriSense Software, Ltd. and Group 1
Software, Inc. dated April 30, 2001 (incorporated by reference to Exhibit 10.59 to the
Companys Report on Form 8-K dated May 14, 2001).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|43
|--

---

|10.17 |  | Agreement
for purchase and sale of assets by and between HotData Software, Inc. and Group 1
Software, Inc. dated May 11, 2001 (incorporated by reference to Exhibit 10.60 to the
Companys Report on Form 8-K dated May 25, 2001).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*10.18 |  | Sixth
Amendment to Lease to headquarters in Lanham, MD, dated March 27, 2001, by and between
Group 1 Software, Inc. and Mack-Cali Realty L.P.
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|*10.19 |  | Agreement
between the Company and Ronald F. Friedman, dated May 31, 2001.
|------ |  | -------------------------------------------------------------------------

|*22.0 |  | Subsidiaries
of Group 1 Software, Inc.
|----- |  | --------------------------------------

|*23.1 |  | Consent
of PricewaterhouseCoopers LLP.
|----- |  | --------------------------------------

---

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

|44
|--

|Report of
Independent Accountants onFinancial Statement
Schedule


To the Board of Directors ofGroup
1 Software, Inc.


Our audits of the consolidated
financial statements referred to in our report dated June 12, 2001 appearing in the 2001
Annual Report to Shareholders of Group 1 Software, Inc. (which report and consolidated
financial statements are included in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Annual Report
on Form 10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 
| | 

|McLean, VirginiaJune 12, 2001
45
|--------------------------------

|SCHEDULE II


Group 1 Software,
Inc.Valuation and Qualifying Accounts For the Years Ended March 31, 2001, 2000, and 1999(in
thousands)
|--------------------------------------------------------------------------------------------------------------------------------------

|Column A                  |  | Column B | Column C | Column D | Column E
|------------------------- |  | -------- | -------- | -------- | --------
|
|Year ended March 31, 2001 |  |          |          |          |         
|Allowance for doubtful    | 
|accounts                  |  | $  3,317 |          | $   475  |         
|                          | 
|Year ended March 31, 2000 | 
|Allowance for doubtful    | 
|accounts                  |  | $  3,383 |          | $  1,050 |         
|                          | 
|Year ended March 31, 1999 | 
|Allowance for doubtful    | 
|accounts                  |  | $  3,603 |          | $  2,955 |         

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

|46
|--

|Index of
Exhibits
|-----------------

|       |  | PAGENUMBER                                                                      
|------ |  | --------------------------------------------------------------------------------
|*3.04  |  | Amended and Restated Certificate of Incorporation of Group 1 Software, Inc.,    
|       |  | dated November 28, 2000.                                                        
|*10.18 |  | Sixth Amendment to Lease, dated March 27, 2001, by and between Group 1 Software,
|       |  | Inc. and Mack-Cali Realty L.P.                                                  
|*10.19 |  | Agreement regarding resignation and retirement between the Company and Ronald F.
|       |  | Friedman, dated as of May 31, 2001.                                             
|*22.0  |  | Subsidiaries of Group 1 Software, Inc.                                          
|*23.1  |  | Consent of PricewaterhouseCoopers, LLP                                          

---

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

|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.



GROUP 1 SOFTWARE, INC.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  | (Registrant) |  |                                                             | 
|-------------------- |  | ------------ |  | ----------------------------------------------------------- | 
|Date:  June 29, 2001 |  | By:          |  | ____________________________________Chief Executive Officer | 

|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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Signature | Title | Date
| | --------- | ----- | ----

| | Robert S. Bowen | Chief Executive Officer and Director (Principal Executive Officer) | June 29, 2001
| | ------------------------- | ------------------------------------------------------------------ | -------------

| | Mark D. Funston | Executive, Vice President Chief Financial Officer Treasurer (Principal Financial and Accounting Officer) | June 29, 2001
| | ------------------------- | -------------------------------------------------------------------------------------------------------- | -------------

| | James V. Manning | Chairman of the Board | June 29, 2001
| | -------------------------- | --------------------- | -------------

| | Charles J. Sindelar | Director | June 29, 2001
| | ----------------------------- | -------- | -------------

| |  James Marden | Director | June 29, 2001
| | ----------------------- | -------- | -------------

| | Charles A. Mele | Director | June 29, 2001
| | ------------------------- | -------- | -------------

| | Richard H. Eisenberg | Director | June 29, 2001
| | ------------------------------ | -------- | -------------

| | Bruce J. Spohler | Director | June 29, 2001
| | -------------------------- | -------- | -------------

| | Thomas S. Buchsbaum | Director | June 29, 2001
| | ----------------------------- | -------- | -------------

| | Alan P. Slater | President, DOC1  Division | June 29, 2001
| | ------------------------ | ------------------------- | -------------