|SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549




FORM 10-Q



Quarterly Report Under
Section 13 or 15(d) of the



Securities Exchange Act
of 1934
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         
| | ----------------------------------------
| | For the Quarter Ended September 30, 2002

|Group 1 Software, Inc.
|----------------------

| |                         
| | ------------------------
| | Incorporated in Delaware

|4200 Parliament Place,
Suite 600, Lanham, MD 20706-1860



Telephone Number: (301) 918-0400


Indicate by check mark whether the
registrant (1) has filed 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 |_|
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Class                        | Shares Outstanding Effective
November 7, 2002
|---------------------------- | ---------------------------------------------
|Common Stock, $.50 par value |                                              

|1
|-

---

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

|                                                              | September 30,2002 | March 31,2002
|------------------------------------------------------------- | ----------------- | -------------
|
|ASSETS                                                        |                   |              
|Current assets:                                               |                  
|Cash and cash equivalents                                     |                   | $   28,263   
|Short-term investments, available-for-sale                    |                   | 24,634       
|Trade and installment accounts receivable, less               |                  
|allowance of $2,222 and $2,058                                |                   | 18,991       
|Deferred income taxes                                         |                   | 1,744        
|Prepaid expenses and other current assets                     |                   | 3,230        
|                                                              |                   |              
|Total current assets                                          |                   | 76,862       
|Installment accounts receivable, long-term                    |                   | 168          
|Property and equipment, net                                   |                   | 5,048        
|Computer software, net                                        |                   | 22,957       
|Goodwill                                                      |                   | 12,713       
|Other assets                                                  |                   | 174          
|                                                              |                   |              
|Total assets                                                  |                   | $ 117,922    
|                                                              |                   |              
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                  
|Current liabilities:                                          |                  
|Accounts payable                                              |                   | $     1,579  
|Current portion of notes payable and capital lease            |                  
|obligation                                                    |                   | 3,302        
|Accrued expenses                                              |                   | 6,262        
|Accrued compensation                                          |                   | 5,735        
|Current deferred revenues                                     |                   | 29,035       
|                                                              |                   |              
|Total current liabilities                                     |                   | 45,913       
|Notes payable, net of current portion                         |                   | 722          
|Deferred revenues, long-term                                  |                   | 256          
|Deferred income taxes                                         |                   | 4,503        
|                                                              |                   |              
|Total liabilities                                             |                   | 51,394       
|                                                              |                   |              
|Commitments and contingencies                                 |                   |             
|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)           |                   | 916          
|Common stock $0.50 par value; 50,000 shares authorized; 7,150 |                   |              
|and 6,918 shares issued and outstanding                       |                   | 3,575        
|Additional paid in capital                                    |                   | 34,781       
|Retained earnings                                             |                   | 31,819       
|Accumulated other comprehensive income                        |                   | 50           
|Treasury stock, 622 and 620 shares, at cost                   |                   | (4,613       
|                                                              |                   |              
|Total stockholders equity                                    |                   | 66,528       
|                                                              |                   |              
|Total liabilities and stockholders equity                    |                   | $ 117,922    
|                                                              |                   |              

|See notes to consolidated financial
statements.



2
|----------------------------------------------------

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

|                                            | For the Three Month Period Ended September 30, | For the Six Month PeriodEnded September 30,
|------------------------------------------- | ---------------------------------------------- | -------------------------------------------
|
|Revenue:                                    |                                                |                                            
|Software license and related revenue        |                                                | $ 11,329                                   
|Maintenance and services                    |                                                | 13,691                                     
|                                            |                                                |                                            
|Total revenue                               |                                                | 25,020                                     
|                                            |                                                |                                            
|Cost of revenue:                            |                                               
|Software license expense                    |                                                | 3,763                                      
|Maintenance and service expense             |                                                | 4,105                                      
|                                            |                                                |                                            
|Total cost of revenue                       |                                                | 7,868                                      
|                                            |                                                |                                            
|Gross profit                                |                                                | 17,152                                     
|                                            |                                                |                                            
|Operating expenses:                         |                                               
|Research and development, net (see note 4)  |                                                | 2,812                                      
|Sales and marketing                         |                                                | 7,738                                      
|General and administrative                  |                                                | 3,539                                      
|                                            |                                                |                                            
|Total operating expenses                    |                                                | 14,089                                     
|                                            |                                                |                                            
|                                            |                                                | 3,063                                      
|Income from operations                      |                                               
|Non-operating income:                       |                                               
|Interest income                             |                                                | 322                                        
|Interest expense                            |                                                | (61                                        
|Other non-operating income (expense)        |                                                | (146                                       
|                                            |                                                |                                            
|Total non-operating income                  |                                                | 115                                        
|                                            |                                                |                                            
|Income before provision for income taxes    |                                                | 3,178                                      
|Provision for income taxes                  |                                                | 1,207                                      
|                                            |                                                |                                            
|                                            |                                                | 1,971                                      
|Net income                                  |                                               
|Preferred stock dividend requirements       |                                                | (14                                        
|                                            |                                                |                                            
|Net income available to common stockholders |                                                | $   1,957                                  
|                                            |                                                |                                            
|Basic earnings per share                    |                                                | $     0.31                                 
|                                            |                                                |                                            
|Diluted earnings per share                  |                                                | $     0.28                                 
|                                            |                                                |                                            
|Basic weighted average shares outstanding   |                                                | 6,387                                      
|                                            |                                                |                                            
|Diluted weighted average shares outstanding |                                                | 7,039                                      
|                                            |                                                |                                            

|See notes to consolidated financial
statements.


3
|---------------------------------------------------

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

|                                                                           | For the Six Month PeriodEnded September 30,
|-------------------------------------------------------------------------- | -------------------------------------------
|
|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                                            |                                            
|Deferred income taxes                                                      |                                            
|Net loss on disposal of assets                                             |                                            
|Tax benefit from exercises of stock options                                |                                            
|Foreign currency transaction loss                                          |                                            
|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                                         |                                            
|Sales of marketable securities                                             |                                            
|Payment for acquisitions, net of cash acquired                             |                                            
|                                                                           |                                            
|Net cash used in investing activities                                      |                                            
|                                                                           |                                            
|Cash flows from financing activities:                                      |                                            
|Proceeds from exercise of stock options                                    |                                            
|Repayment of principal on long-term debt                                   |                                            
|Dividends paid                                                             |                                            
|Repurchase of common stock                                                 |                                            
|                                                                           |                                            
|Net cash provided by (used in) financing activities                        |                                            
|                                                                           |                                            
|Net increase (decrease) 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                                 |                                            
|                                                                           |                                            
|Supplemental disclosure of non-cash investing and    financing activities: |                                            
|Mature shares tendered in payment for stock option    exercises            |                                            
|Note payable issued for acquisition                                        |                                            
|Liabilities assumed in acquisitions                                        |                                            
|Warrants issued in lieu of cash payments for    acquisition costs          |                                            
|                                                                           |                                            

|See notes to consolidated financial
statements.



4
|----------------------------------------------------

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

|                                         | For the Three Month Period EndedSeptember 30, | For the Six Month Period EndedSeptember 30,
|---------------------------------------- | --------------------------------------------- | -------------------------------------------
|
|Net income                               |                                               | $   1,971                                  
|                                        
|Foreign currency translation adjustments |                                               | 311                                        
|                                         |                                               |                                            
|Comprehensive income                     |                                               | $   2,282                                  
|                                         |                                               |                                            

|See notes to consolidated financial
statements.



5
|----------------------------------------------------

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


     1.    
          The consolidated financial statements for the three and six months ended
          September 30, 2002 and 2001 are unaudited. In the opinion of management, all
          adjustments considered necessary for a fair presentation have been included and
          are of a recurring nature in the normal course of business. Limited footnote
          information is presented in accordance with quarterly reporting requirements.
          The results of operations for the three months ended September 30, 2002 are not
          necessarily indicative of the results for the year ending March 31, 2003. The
          information contained in the annual report on the Form 10-K for the year ended
          March 31, 2002, should be referred to in connection with the unaudited interim
          financial information.


     2.    
          On November 5, 2002, the Board of Directors declared a two-for-one common stock
          split for stockholders of record as of November 15, 2002. There was no change in
          the par value of the stock as a result of the split. The additional shares will
          be issued on or about December 2, 2002. Common stock shares outstanding, giving
          retroactive effect to the stock split, at September 30, 2002 and March 31, 2002
          are 14,300,000 and 13,836,000, respectively (unaudited). Pro forma earnings per
          common share, giving retroactive effect to the stock split, are as follows
          (shares in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | For the ThreeMonth PeriodEndedSeptember 30, |        | For the SixMonthPeriodEndedSeptember 30, |       
|------------------------------------------- | ------------------------------------------- | ------ | ---------------------------------------- | ------
|
|Net income available to common stockholders |                                             | $1,957 |                                          | $941  
|                                            |                                             |        |                                          |       
|Basic earnings per share                    |                                             | $0.15  |                                          | $0.08 
|                                            |                                             |        |                                          |       
|Diluted earnings per share                  |                                             | $0.14  |                                          | $0.07 
|                                            |                                             |        |                                          |       
|Basic weighted average shares outstanding   |                                             | 12,774 |                                          | 12,483
|                                            |                                             |        |                                          |       
|Diluted weighted average shares outstanding |                                             | 14,079 |                                          | 13,868
|                                            |                                             |        |                                          |       

|3.    
          Certain prior period amounts have been reclassified to conform to current period
          presentation. In accordance with Emerging Issues Task Force Issue No. 01-14,
          service revenue and service cost of revenue were each increased $126,000 and
          $249,000 in the three and six months ended September 30, 2001, respectively.


     4.    
          Research and development expense, before the capitalization of computer software
          development costs, was $4,675,000 and $4,505,000 for the three months ended
          September 30, 2002 and 2001, respectively. Capitalization of computer software
          development costs for the three months ended September 30, 2002 and 2001 were
          $1,863,000 and $1,814,000, respectively. Research and development expense,
          before the capitalization of computer software development costs, was $9,260,000
          and $8,752,000 for the six months ended September 30, 2002 and 2001,
          respectively. Capitalization of computer software development costs for the six
          months ended September 30, 2002 and 2001 were $3,706,000 and $3,660,000,
          respectively.


     5.    
          Earnings per share


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.


6
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                                 | For the Three Month PeriodEnded September 30, |       | For the Six Month PeriodEnded September 30, |      
|------------------------------------------------ | --------------------------------------------- | ----- | ------------------------------------------- | -----
|
|Weighted average common shares outstanding-basic |                                               | 6,387 |                                             | 6,242
|Effect of dilutive securities:                   |                                              
|Stock options and warrants                       |                                               | 581   |                                             | 692  
|Convertible securities                           |                                               | 71    |                                             |     
|                                                 |                                               |       |                                             |      
|Weighted average shares outstanding-diluted      |                                              
|                                                 |                                               | 7,039 |                                             | 6,934
|                                                 |                                               |       |                                             |      

|There were 757,000 and 886,000
additional potentially dilutive common stock options and warrants in the three months
ended September 30, 2002 and 2001, respectively and 763,000 and 976,000 additional
potentially dilutive common stock options and warrants in the six months ended September
30, 2002 and 2001, respectively. There were additional potentially dilutive convertible
securities of 71,000 in the three and six months ended September 30, 2001. These
potentially dilutive common stock options and warrants and convertible securities were not
included in the earnings per share calculation due to their anti-dilutive effect.


     6.    
          In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
          Disposal of Long-Lived Assets. This Statement addresses financial
          accounting and reporting for the impairment or disposal of long-lived assets and
          supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
          Assets and for Long-Lived Assets to Be Disposed Of, and the
          accounting and reporting provisions of APB Opinion No. 30, Reporting the
          Results of Operations  Reporting the Effects of Disposal of a Segment of a
          Business, and Extraordinary, Unusual and Infrequently Occurring Events and
          Transactions, for the disposal of a segment of a business. The
          provisions of this Statement will be effective for the Companys fiscal
          year 2003. The adoption of this Statement has not had a significant impact on
          the Companys financial position and results of operations.


In April 2002, the FASB issued SFAS
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. This Statement rescinds FAS 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FAS 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FAS 44,
Accounting for Intangible Assets of Motor Carriers. SFAS 145 also amends FAS
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback transactions.
This Statement additionally amends other existing authoritative pronouncements to make
various technical corrections, clarify earnings, or describe their applicability under
changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002
for FASB Statements No. 4, 44 and 64 and effective for transactions that occurred after
May 15, 2002 for FASB Statement No. 13. Early application is encouraged. The adoption of
this Statement is not expected to have a significant impact on the Companys
financial position and results of operations.


In August 2002, the FASB issued SFAS
146 Accounting for Costs Associated with Exit or Disposal Activities. It
addresses financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective for initial
measurement of the liability. Under Issue 94-3, a liability for an exit cost, as defined
in Issue 94-3, was recognized at the date of an entitys commitment to an exit plan.
The new standard is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not believe that
SFAS 146 will have a material effect on the Companys financial position or results
of operations.


7
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. Legal Contingencies


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



8. Segment Information


The following table presents certain
financial information relating to each reportable segment:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | Three Months EndedSeptember 30, |         | Six Months EndedSeptember 30, |         
|-------------------- | ------------------------------- | ------- | ----------------------------- | --------
|
|                    
|Revenue:             |                                 |         |                               |         
|Enterprise Solutions |                                 | $16,915 |                               | $14,001 
|DOC1                 |                                 | 8,105   |                               | 8,293   
|                     |                                 |         |                               |         
|Total revenue        |                                 | $25,020 |                               | $22,294 
|                     |                                 |         |                               |         
|                     |                                 |         |                               |         
|Gross Profit:        |                                
|Enterprise Solutions |                                 | $12,099 |                               | $  8,612
|DOC1                 |                                 | 5,053   |                               | 5,373   
|                     |                                 |         |                               |         
|Total gross profit   |                                 | $17,152 |                               | $13,985 
|                     |                                 |         |                               |         
|                     |                                 |         |                               |         

|Amortization of capitalized developed
and acquired software associated with the Enterprise Solutions Software segment was
$1,347,000 and $1,364,000 for the three months ended September 30, 2002 and 2001 and
$2,723,000 and $2,495,000 in the six months ended September 30, 2002 and 2001,
respectively. Amortization of capitalized developed and acquired software associated with
the DOC1 Software segment was $753,000 and $510,000 in the three months ended September
30, 2002 and 2001 and $1,473,000 and $1,054,000 in the six months ended September 30, 2002
and 2001, respectively.


As of September 30, 2002 and March
31, 2002, the Company determined that the identifiable assets for its reportable segments
were as follows (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | September 30,2002 |           | March 31,2002 |          
| | -------------------- | ----------------- | --------- | ------------- | ---------
| | Enterprise Solutions |                   | $  33,381 |               | $  34,267
| | DOC1                 |                   | 33,479    |               | 32,379   
| | Corporate            |                   | 51,062    |               | 45,233   
| |                      |                   |           |               |          
| | Total assets         |                   | $117,922  |               | $111,879 
| |                      |                   |           |               |          

|8
|-

|The changes in the carrying amount of
goodwill for the three months ended September 30, 2002 for each reportable segment were as
follows (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Enterprise Solutions |        | DOC1
|------------------------------------------ | -------------------- | ------ | ----
|Balance as of March 31, 2002               |                      | $4,497 |     
|Effect of currency translation on goodwill |                      |       |     
|                                           |                      |        |     
|Balance as of September 30, 2002           |                      | $4,497 |     
|                                           |                      |        |     

|9. Business Combinations


On April 30, 2001, the Company
acquired various assets of TriSense Software, Ltd. (TriSense) for $1,545,000
in cash, a promissory note with the present value of $5,997,000, and $423,000 in
acquisition costs. The promissory note is payable in two installments of $3,280,000,
including interest, due on each of the first and second anniversary dates of closing. The
first installment was paid on April 30, 2002. The results of operations of TriSense have
been included with those of the Company since the date of acquisition. The cash
consideration for the acquisition was paid from the Companys working capital.


TriSense developed and marketed
electronic bill presentment and payment (EBPP) software. Integration of
TriSenses PaySense EBPP offering enables the Company to create an integrated
solution providing digital and paper generation and delivery of customer-focused business
documents as well as electronic payments.


On May 11, 2001, the Company acquired
various assets of HotData, Inc., Ltd. (HotData) for $2,000,000 in cash, future
payments in the amount of 10% of net revenue, as defined, generated from the HotData
license and service fees over the thirty-six months following the date of closing, and
$225,000 in acquisition costs. The results of operations of HotData have been included
with those of the Company since the date of acquisition. The cash consideration for the
acquisition was paid from the Companys working capital. Additional consideration to
be paid based on future net revenue will be recorded at its fair value as an additional
cost of the acquisition when such additional consideration is earned.


HotData provides automated batch
processing for address validation, move update, and appending of various demographic and
geographic data over the Internet. The combination of the HotData technology and the
Companys DataQuality.net offering created a comprehensive hosted services
environment that is capable of providing the functionality of all of the Companys
core Data Quality products over the web.


On December 4, 2001, the Company
acquired various assets of Vision-R eTechnologies (Vision-R) for $1,000,000 in
cash, a $1,250,000 note payable with the present value of $1,115,000, earn-out payments
over the next 36 months not to exceed $1,000,000, and $220,000 in acquisition costs. The
results of operations of Vision-R have been included with those of the Company since the
date of acquisition. The cash consideration was paid from the Companys working
capital. Additional earn-out consideration will be recorded at its fair value as
additional cost of the acquisition when such additional consideration is earned.


The Vision-R product, enhanced and
renamed DOC1 Archive, provides highly scalable electronic archive and retrieval software
solutions. The acquisition adds next-generation, real-time storage, compression and
high-speed retrieval of business documents to Group 1s DOC1 customer communications
management suite.


The following unaudited pro forma
consolidated results of operations for the three months ended September 30, 2001 have been
prepared as if the acquisitions of TriSense, HotData and Vision-R had occurred as of the
beginning of fiscal 2002, after giving effect to purchase accounting adjustments relating
to amortization of intangible assets, interest expense on the notes payable issued to
finance the TriSense and Vision-R purchases, and reduction of income tax provision and
interest income:


9
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(thousands, except per share data)          | Three Months EndedSeptember 30, |           | Six Months EndedSeptember 30, |          
|------------------------------------------- | ------------------------------- | --------- | ----------------------------- | ---------
|
|Revenue                                     |                                 | $25,020   |                               | $22,402  
|Net income available to common shareholders |                                 | $  1,957  |                               | $     765
|Diluted earnings per share                  |                                 | $    0.28 |                               | $    0.11
|Weighted average shares outstanding         |                                 | 7,039     |                               | 6,934    

|The pro forma results are not
necessarily indicative of what actually would have occurred if the acquisitions had been
completed as of the beginning of each of the periods presented, nor are they necessarily
indicative of future consolidated results.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | Acquired Intangible Assets (in thousands)
|--- | -----------------------------------------

|                               | Gross CarryingAmount | Accumulated Amortizationas of September 30, 2002
|------------------------------ | -------------------- | ------------------------------------------------
|Amortized intangible assets:   |                      |                                                 
|Computer software              |                      | $  3,832                                        
|Unamortized intangible assets: |                     
|Goodwill                       |                      | $14,953                                         

|The aggregate amortization expense
for the three and six months ended September 30, 2002 was $192,000 and $384,000,
respectively. The aggregate amortization expense for the year ended March 31, 2003 is
estimated at $768,000. The following table summarizes aggregate amortization expense for
each of the four succeeding fiscal years (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For year ending March 31, 2004 |  | $768 | 
| | ------------------------------ |  | ---- | 
| | For year ending March 31, 2005 |  | $768 | 
| | For year ending March 31, 2006 |  | $768 | 
| | For year ending March 31, 2007 |  | $333 | 

|Item 2.    Managements
Discussion and Analysis of Results of Operations and Financial Condition




Results of Operations


Any statements in this Quarterly
Report on Form 10-Q 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. Actual results may differ materially from the expectations
expressed or implied in the forward-looking statements. 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 other filings
with the Securities and Exchange Commission. The Company undertakes no obligation to
update any forward-looking statement.


10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For the three months ended September
30, 2002 and 2001, the Company had revenues of $25.0 million and $22.3 million,
respectively. Net income available to common stockholders for the three months ended
September 30, 2002 was $2.0 million or $0.28 diluted earnings per share compared with $0.9
million or $0.14 diluted earnings per share in the same period in the prior year. For the
six months ended September 30, 2002 and 2001, the Company had revenues of $48.4 million
and $43.1 million, respectively. Net income available to common stockholders for the six
months ended September 30, 2002 was $2.9 million or $0.42 diluted earnings per share
compared with $1.0 million or $0.15 diluted earnings per share in the same period in the
prior year. The increase in profitability is primarily due to increased revenue and lower
maintenance and service expense in both of the Companys operating segments.


All of Group 1s operations
are based in the two business segments defined as Enterprise Solutions and DOC1.
Enterprise Solutions revenue accounted for 68% and 63% of Group 1s total revenue for
the second fiscal quarters of 2003 and 2002, respectively. DOC1 revenue was 32% and 37% of
total revenue for the second quarters of fiscal 2003 and fiscal 2002, respectively.
Enterprise Solutions revenue accounted for 68% and 66% of Group 1s total revenue for
the six months ended September 30, 2002 and 2001, respectively. DOC1 revenue was 32% and
34% of total revenue for the six months ended September 30, 2002 and 2001, respectively.


International revenues accounted for
16% and 17% of Group 1s total revenue in the second quarters of fiscal 2003 and
2002, respectively. International revenues were 15% of Group 1s total revenue
in the first six months of both fiscal 2003 and 2002.


Software license and related revenue
of $11.3 million for the second fiscal quarter of 2003 increased 38% from $8.2 million the
same period the prior year. As a percent of total revenue, second quarter software license
and related revenues were 45% in the second fiscal quarter of 2003 compared with 37% in
fiscal 2002. Software license and related revenue was $21.2 million in the six months
ended September 30, 2002, an increase of 38% over the $15.4 million in the same period of
the prior fiscal year. As a percent of total revenue, software license and related
revenues in the six months ended September 30, 2002 and 2001 were 44% and 36%,
respectively.


License fees from Enterprise
Solutions increased 75% to $7.8 million in the three month period ended September 30, 2002
as compared with the same period in the prior year. Enterprise Solutions license fees were
$15.0 million in the six month period ended September 30, 2002, an increase of 53% over
the prior year period. The specifics of Enterprise Solutions license fees are discussed
below.


The Companys data quality and
database marketing software license fees for the three months ended September 30, 2002
increased 75% as compared with the same period in the prior year. For the six months ended
September 30, 2002, data quality and database marketing software license fees increased
51% over the prior year six month period. The increase in the quarter is primarily due to
higher sales of our data quality software. The increase for the six month period ended
September 30, 2002 is due to higher sales of Data Quality software which includes the
GeoTax product which had increased license fees of $1.7 million or 49% over the same
period in the prior year.


License fees from DOC1 for the three
months ended September 30, 2002 decreased 7% to $3.5 million, from the same period in the
prior year, which was a second quarter record for the DOC1 division. DOC1 license fees
were $6.2 million and $5.6 million in the six months ended September 30, 2002 and 2001,
respectively, an increase of 11%. The decrease in license fees in the second quarter was
due to lower sales of the traditional DOC1 composition product, partially offset by
increased sales of DOC1 Archive and DOC1 Interactive. The Companys DOC1 Archive and
DOC1 Pay products, which were not available in the first quarter of fiscal year 2002, as
well as the Companys new distribution agreement with Pitney Bowes all contributed to
the increased license fees in the first six months of the current year.



11
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Maintenance and service revenue was
$13.7 million for the second quarter of fiscal year 2003 and $14.1 million in the prior
years second fiscal quarter. Maintenance and service revenue was $27.2 million and
$27.7 million in the six months ended September 30, 2002 and 2001, respectively.
Maintenance and service revenue accounted for 55% of total revenue for the quarter ended
September 30, 2002 compared with 63% of total revenue in the same period in the prior
year. Maintenance and service revenue accounted for 56% of total revenue in the six months
ended September 30, 2002 compared with 64% of total revenue in the same period in the
prior year. Recognized maintenance fees included in maintenance and service revenue were
$11.2 million for the quarter ended September 30, 2002 and $11.0 million for the same
period the prior year, an increase of 2%. Recognized maintenance fees included in
maintenance and service revenue were $22.2 million in the six months ended September 30,
2002 and $21.4 million for the same period the prior year, an increase of 4%. The increase
in maintenance revenue for the quarter is due to increased maintenance revenue from DOC1
customers, partially offset by lower maintenance revenue from customers of the Enterprise
Solutions division.


For the quarter ended September 30,
2002, Enterprise Solutions recognized maintenance was $8.4 million, a 2% decrease from the
same period in the prior year. Enterprise Solutions recognized maintenance was $16.7
million and $16.8 million in the six months ended September 30, 2002 and 2001,
respectively. DOC1 recognized maintenance increased 17% to $2.8 million in the quarter
ended September 30, 2002 compared with the comparable period in the prior year. DOC1
recognized maintenance was $5.5 million and $4.6 million in the six months ended September
30, 2002 and 2001, respectively.


Professional and educational service
revenue from the Enterprise Solutions segment decreased to $0.7 million in the quarter
ended September 30, 2002 from $0.9 million in the same period in the prior year.
Enterprise Solutions professional and educational service revenue was $1.4 million and
$2.0 million in the six months ended September 30, 2002 and 2001, respectively. DOC1
service revenue decreased to $1.8 million in the quarter ended September 30, 2002 from
$2.2 million in the same period of the prior fiscal year. DOC1 service revenue was $3.6
million and $4.4 million in the six months ended September 30, 2002 and 2001,
respectively. The decrease in professional and educational service revenue in both
segments is due to lower sales of new installations which require integration services.


Total cost of revenue for the second
quarter of fiscal 2003 was $7.9 million versus $8.3 million in the same period of fiscal
2002. Total cost of revenue was $16.2 million in the first six months of fiscal year 2003,
compared with $16.9 million in the same period of the prior year. The separate components
of cost of revenue are discussed below.


Software license expense increased
for the three month period ended September 30, 2002 to $3.8 million from $3.0 million for
the same period in the prior year representing 33% and 36% of software license and related
revenues, respectively. Software license expense was $7.8 million and $5.5 million in the
six months ended September 30, 2002 and 2001, respectively, representing 37% and 36% of
software license and related revenue in both respective periods. The increase in software
license expense was due primarily to an increase in royalty expense related to sales of
GeoTAX and DOC1 Interactive and an increase in software amortization expense.


Maintenance and service expense
decreased to $4.1 million in the current quarter from $5.4 million in the comparable
period in fiscal 2002, representing 30% and 38% of maintenance and service revenue,
respectively. Maintenance and service expense was $8.4 million and $11.5 million in the
six months ended September 30, 2002 and 2001, representing 31% and 41% of maintenance and
service revenue, respectively. The decrease in expense as a percentage of revenue was due
to lower expenses associated with both customer support and professional services as
discussed below.


Included in maintenance and service
expense discussed above are professional and educational service costs of $2.2 million for
the three months ended September 30, 2002 compared with $3.1 million for the comparable
period in the prior year. Professional and educational service costs were $4.6 million and
$7.0 million in the six months ended September 30, 2002 and 2001, respectively. The
decrease in professional and educational service expense is due to cost reductions to size
the services organization with current revenue levels.


12
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Costs of maintenance were $1.9
million for the first fiscal quarter of 2003 representing 17% of maintenance revenue.
Costs of maintenance for the same quarter in the prior year were $2.2 million,
representing 21% of maintenance revenue. Costs of maintenance were $3.8 million and $4.4
million in the six months ended September 30, 2002 and 2001, representing 17% and 21% of
maintenance revenue, respectively. The decrease in expense as a percent of revenue is
primarily due to lower customer support costs resulting from staffing decreases.


Total operating costs of $14.1
million amounted to 56% of revenue for the quarter ended September 30, 2002 compared with
$12.8 million or 57% of revenue for the prior year period. Total operating costs of $27.7
million amounted to 57% of revenue for the six months ended September 30, 2002 compared
with $25.3 million or 59% of revenue for the prior year six month period. 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.


Costs of research and development,
before capitalization, were $4.7 million and $4.5 million or 19% and 20% of revenue in the
quarters ended September 30, 2002 and 2001, respectively. Costs of research and
development, before capitalization, were $9.3 million and $8.8 million or 19% and 20% of
revenue in the six months ended September 30, 2002 and 2001, respectively. Total research
and development expense after capitalization of certain development costs was $2.8 million
or 11% of revenue for the three month period ended September 30, 2002 compared with $2.7
million or 12% in the prior year. Research and development expenses after capitalization
of certain software development cost totaled $5.6 million for the six months ended
September 30, 2002 and $5.1 million for the same period of fiscal 2002, representing 11%
and 12% of revenue in the six months ended September 30, 2002 and 2001, respectively. The
increase in expense is due to increased spending on new product initiatives in the DOC1
segment, including expenses associated with the acquisition of the DOC1 Archive product
and related development resources (see footnote 8 of notes to consolidated financial
statements).


Sales and marketing expenses totaled
$7.7 million or 31% of revenue in the second quarter of fiscal 2003 and $7.4 million or
33% in the prior year second quarter. Sales and marketing expenses were $15.2 million and
$14.8 million in the six months ended September 30, 2002 and 2001, representing 32% and
34% of revenue, respectively. Sales and marketing expenses for Enterprise Solutions were
27% of Enterprise Solutions revenue in the second fiscal quarter of 2003 and 31% for the
same period the prior year. Sales and marketing expenses for Enterprise Solutions were 27%
and 31% of Enterprise Solutions revenue in the first six months of fiscal 2003 and 2002,
respectively. DOC1 sales and marketing expenses were 39% of DOC1 revenue for the three
month period ended September 30, 2002 and 36% for the same period the prior year. DOC1
sales and marketing expenses were 40% and 41% of DOC1 revenue in the first six months of
fiscal 2003 and 2002, respectively. The decrease in cost as a percent of revenue in the
Enterprise Solutions division in both the three and six month periods and in the DOC1
division in the six months ended September 30, 2002 is due primarily to increases in
revenue in both divisions.


General and administrative expenses
were $3.5 million or 14% of total revenue compared with $2.7 million or 12% of revenue for
the three months ended September 30, 2002 and 2001, respectively. General and
administrative expenses were $6.9 million or 14% of total revenue compared with $5.5
million or 13% of revenue for the six months ended September 30, 2002 and 2001,
respectively. The increase in general and administrative expenses in the quarter is
primarily related to an increase in incentive compensation accruals, bad debt expense and
legal expenses.


13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net non-operating income was $0.1
million for the quarter ended September 30, 2002 as compared with $0.2 million for the
same period in the prior year. Net non-operating income was $0.2 million and $0.7 million
in the six months ended September 30, 2002 and 2001, respectively. The decrease in
non-operating income in both the three and six month periods ending September 30, 2002 is
primarily a result of lower interest income earned due to lower interest rates.


The Companys effective tax
rates were 38% and 32% for the three month periods ended September 30, 2002 and 2001,
respectively. The current years rate is the net effect of a 41% effective tax rate
on domestic taxable income and a 29% rate on foreign taxable income. The increase in
effective tax rate is due to the proportionately higher income earned in the United States
in the current fiscal year.



Critical Accounting Policies


The Securities and Exchange
Commission issued Financial Reporting Release No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies (FR 60), in December 2001.
FR 60 requires companies to disclose those accounting policies considered most critical.
Note 1 to the audited financial statements in the Companys annual report on Form
10-K for the year ended March 31, 2002 includes a summary of the Companys
significant accounting policies. Of those policies, the Company has identified the
following as the most critical because they require significant judgment and estimates on
the part of management in their application:


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.


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
September 30, 2002, 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.


14
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Capitalized Software: 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.


Goodwill: In September 2001,
the Financial Accounting Standards Board (FASB) approved Statements of Financial
Accounting Standards (SFAS) No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets. The Company elected to adopt SFAS No.
142 as of April 1, 2001. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. In accordance with this Statement, the
Company ceased amortization of goodwill as of April 1, 2001. Goodwill will be tested for
impairment at least annually at the reporting unit level. Goodwill will be tested for
impairment on an interim basis if an event occurs or circumstances change that would
more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
In accordance with FAS 142 provisions, the Company completed the transitional and the
annual goodwill impairment test as of April 1, 2001 and concluded that goodwill of its
reporting units was not impaired. The Company also completed its annual goodwill
impairment test for fiscal year 2002 and concluded that goodwill of its reporting units
was not impaired.


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, prior to fiscal year 2002, was amortized on a
straight-line basis over the estimated economic useful life ranging from nine to fifteen
years. There was no goodwill amortization expense during fiscal year 2003 and 2002 in
accordance with SFAS Nos. 141 and 142, as discussed above.



Liquidity and Capital
Resources


The Companys working capital
was $30.9 million at September 30, 2002, as compared with $27.0 million at March 31, 2002.
The current ratio was 1.7 to 1 at September 30, 2002 and 1.6 to 1 at March 31, 2002. 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 funds generated from operations. Additionally, the Company
maintains a $10 million line of credit arrangement with a commercial bank, expiring
November 30, 2002. 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 September 30,
2002 and at March 31, 2002, there were no borrowings outstanding under the line of credit.


15
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|For the six months ended September
30, 2002, net cash provided by operating activities was $10.7 million. This amount
included net income of $2.9 million plus non-cash expenses of $6.6 million. Also included
in cash provided by operating activities was a $2.3 million increase in accrued expenses
and accrued compensation, a $0.1 million increase in deferred revenues and a $0.3 million
decrease in prepaid expenses and other current and non-current assets, offset by a $1.5
million increase in accounts receivable. The increase in accounts receivable is due to
increased revenues. Investment in purchased and developed software of $3.7 million, and
capital equipment of $0.8 million resulted in $4.5 million used in investing activities.
For the six months ended September 30, 2002, a $3.1 million principal payment related to
the TriSense acquisition offset by $1.5 million in proceeds from stock option exercises
resulted in $1.6 million cash used in 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 September 30, 2002, 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.


The following table lists the
Companys contractual obligations and commercial commitments (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  
|----------------------------------
|
|                                  
|Operating leases                  
|                                  
|Notes payable                     
|                                  
|Total contractual cash obligations
|                                  

|Recent Accounting Pronouncements


In August 2001, FASB issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. The provisions of this Statement will be
effective for the Companys fiscal year 2003. The adoption of this Statement has not
had a significant impact on the Companys financial position and results of
operations.


In April 2002, the FASB issued SFAS
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. This Statement rescinds FAS 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FAS 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FAS 44,
Accounting for Intangible Assets of Motor Carriers. SFAS 145 also amends FAS
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback transactions.
This Statement additionally amends other existing authoritative pronouncements to make
various technical corrections, clarify earnings, or describe their applicability under
changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002
for FASB Statements No. 4, 44 and 64 and effective for transactions that occurred after
May 15, 2002 for FASB Statement No. 13. Early application is encouraged. The adoption of
this Statement is not expected to have a significant impact on the Companys
financial position and results of operations.



16
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In August 2002, the FASB issued SFAS
146 Accounting for Costs Associated with Exit or Disposal Activities. It
addresses financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective for initial
measurement of the liability. Under Issue 94-3, a liability for an exit cost, as defined
in Issue 94-3, was recognized at the date of an entitys commitment to an exit plan.
The new standard is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not believe that
SFAS 146 will have a material effect on the Companys financial position or results
of operations.



Legal Contingencies


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



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. Through and as of September 30, 2002, however, 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.



Controls and Procedures


     (a)    
          Evaluation of disclosure controls and procedures. Based on their evaluation as
          of a date within 90 days of the filing date of this report, the Companys
          principal executive officer and principal financial officer have concluded that
          the Companys disclosure controls and procedures (as defined in Rules
          13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange
          Act) are effective to ensure that information required to be disclosed by the
          Company in reports that it files or submits under the Exchange Act is recorded,
          processed, summarized and reported within the time periods specified in
          Securities and Exchange Commission rules and forms.


     (b)    
          Changes in internal controls. There were no significant changes in the
          Companys internal controls or in other factors that could significantly
          affect these controls subsequent to the date of their evaluation. There were no
          significant deficiencies or material weaknesses, and therefore there were no
          corrective actions taken.



17
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|Part II Other
Information



Item 1. Legal Proceedings



NONE



Item 2. Changes in
Securities



NONE



Item 3. Defaults Upon
Senior Securities



NONE


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

| | The following matter was submitted to, and approved by, the required vote of security holders
of the Company at the Companys annual shareholders meeting held on September
10, 2002:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To elect three directors to hold office until the third annual meeting of stockholders of the
Company following their election and until the election and qualification of their
successors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nominees            | For | Withheld 
| | ------------------- | --- | ---------
| |                    
|
| | Robert S. Bowen     |     | 5,844,638
| | Thomas S. Buchsbaum |     | 5,844,638
| | Alan P. Slater      |     | 5,844,638

| | All
nominees were duly elected.
| | -------------------------------

| | In
addition to the newly elected directors, the terms of office as directors of Messrs. James
P. Marden, Charles J. Sindelar, Charles A. Mele, James V. Manning, Richard Eisenberg and
Bruce J. Spohler continued after the meeting.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 5. Other Information



NONE


Item 6. Exhibits and Reports on Form 8-K
|----------------------------------------------------------------------------

| | Exhibit 99.1 |  | Certification of Robert S. Bowen, Chief Executive Officer, and Mark Funston, Chief
Financial Officer, of Quarterly Report on Form 10-Q.
| | ------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------

| | Form 8-K filed November 6, 2002 for
the declaration of a two for one stock split for shareholders of record on November 15,
2002.
| | ---------------------------------------------------------------------------------------------------------------------------------

|18
|--

|Signatures


Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Group 1 Software, Inc.
/s/ Robert S. Bowen
Chief Executive Officer
November 14, 2002
| |  | ------------------------------------------------------------------------------------
|
| |  | /s/ Mark Funston 
Chief Financial Officer
November 14, 2002                         

|19
|--