|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 June 30, 2002 | Commission file number 0-6355
|----------------------------------- | -----------------------------

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

|Incorporated in Delaware | IRS EI No. 52-0852578
|------------------------ | ---------------------

|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 |_|
|------- | ------

|ClassCommon Stock, $.50 par value | Shares Outstanding EffectiveAugust 7, 20026,953,755
|--------------------------------- | ---------------------------------------------------

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

|                                                                                                                                                                                                  | June 30,
      2002 |  | March
      31,
      2002 |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- |  | -------------------------- | -------
|
|ASSETS                                                                                                                                                                                            |                     |  |                            |        
|Current
      assets:                                                                                                                                                                             |                     | 
|Cash
      and cash equivalents                                                                                                                                                                   |                     |  | $                          | 28,521 
|Short-term
      investments, available-for-sale                                                                                                                                                  |                     |  |                            | 23,095 
|Trade
      and installment accounts receivable, less                                                                                                                                             |                     | 
|allowance
      of $1,967 and $2,058                                                                                                                                                              |                     |  |                            | 13,113 
|Deferred
      income taxes                                                                                                                                                                       |                     |  |                            | 1,629  
|Prepaid
      expenses and other current assets                                                                                                                                                   |                     |  |                            | 3,417  
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      current assets                                                                                                                                                                        |                     |  |                            | 69,775 
|                                                                                                                                                                                                 
|Installment
      accounts receivable, long-term                                                                                                                                                  |                     |  |                            | 211    
|Property
      and equipment, net                                                                                                                                                                 |                     |  |                            | 5,331  
|Computer
      software, net                                                                                                                                                                      |                     |  |                            | 23,069 
|Goodwill                                                                                                                                                                                          |                     |  |                            | 12,707 
|Other
      assets                                                                                                                                                                                |                     |  |                            | 173    
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      assets                                                                                                                                                                                |                     |  | $                          | 111,266
|                                                                                                                                                                                                  |                     |  |                            |        
|                                                                                                                                                                                                 
|LIABILITIES
      AND STOCKHOLDERS EQUITY                                                                                                                                                        |                     | 
|Current
      liabilities:                                                                                                                                                                        |                     | 
|Accounts
      payable                                                                                                                                                                            |                     |  | $                          | 1,534  
|Current
      portion of notes payable and capital lease                                                                                                                                          |                     | 
|obligation                                                                                                                                                                                        |                     |  |                            | 3,302  
|Accrued
      expenses                                                                                                                                                                            |                     |  |                            | 5,998  
|Accrued
      compensation                                                                                                                                                                        |                     |  |                            | 4,655  
|Current
      deferred revenues                                                                                                                                                                   |                     |  |                            | 27,596 
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      current liabilities                                                                                                                                                                   |                     |  |                            | 43,085 
|                                                                                                                                                                                                  |                     |  |                            |        
|Notes
      payable, net of current portion                                                                                                                                                       |                     |  |                            | 722    
|Deferred
      revenues, long-term                                                                                                                                                                |                     |  |                            | 225    
|Deferred
      income taxes                                                                                                                                                                       |                     |  |                            | 4,528  
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      liabilities                                                                                                                                                                           |                     |  |                            | 48,560 
|                                                                                                                                                                                                  |                     |  |                            |        
|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;                                                                                                                                     |                     | 
|6,946
      and 6,918 shares issued and outstanding                                                                                                                                               |                     |  |                            | 3,473  
|Additional
      paid in capital                                                                                                                                                                  |                     |  |                            | 33,329 
|Retained
      earnings                                                                                                                                                                           |                     |  |                            | 29,862 
|Accumulated
      other comprehensive income                                                                                                                                                      |                     |  |                            | (261   
|Treasury
      stock, 622 and 620 shares, at cost                                                                                                                                                 |                     |  |                            | (4,613 
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      stockholders equity                                                                                                                                                                  |                     |  |                            | 62,706 
|                                                                                                                                                                                                  |                     |  |                            |        
|Total
      liabilities and stockholders equity                                                                                                                                                  |                     |  | $                          | 111,266
|                                                                                                                                                                                                  |                     |  |                            |        

|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 PeriodEnded June 30, | 
|------------------------------------------- | ---------------------------------------- | 
|
|Revenue:                                    |                                          | 
|Software license and related revenue        |                                          | 
|Maintenance and services                    |                                          | 
|                                            |                                          | 
|                                           
|Total revenue                               |                                          | 
|                                            |                                          | 
|                                           
|Cost of revenue:                            |                                          | 
|Software license expense                    |                                          | 
|Maintenance and service expense             |                                          | 
|                                            |                                          | 
|Total cost of revenue                       |                                          | 
|                                            |                                          | 
|                                           
|Gross profit                                |                                          | 
|                                            |                                          | 
|Operating expenses:                         |                                          | 
|Research and development, net (see note 3)  |                                          | 
|Sales and marketing                         |                                          | 
|General and administrative                  |                                          | 
|                                            |                                          | 
|Total operating expenses                    |                                          | 
|                                            |                                          | 
|Income (loss) from operations               |                                          | 
|                                           
|Non-operating income:                       |                                          | 
|Interest income                             |                                          | 
|Interest expense                            |                                          | 
|Other non-operating income (expense)        |                                          | 
|                                            |                                          | 
|Total non-operating income                  |                                          | 
|                                            |                                          | 
|Income before provision for income taxes    |                                          | 
|                                           
|Provision for income taxes                  |                                          | 
|                                            |                                          | 
|                                           
|Net income                                  |                                          | 
|                                           
|Preferred stock dividend requirements       |                                          | 
|                                            |                                          | 
|                                           
|Net income available to common stockholders |                                          | 
|                                            |                                          | 
|                                           
|Basic earnings per share                    |                                          | 
|                                            |                                          | 
|                                           
|Diluted earnings per share                  |                                          | 
|                                            |                                          | 
|                                           
|Basic weighted average shares outstanding   |                                          | 
|                                            |                                          | 
|                                           
|Diluted weighted average shares outstanding |                                          | 
|                                            |                                          | 

|See notes to consolidated financial statements.


3
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------------

|                                                             | For the Three Month PeriodEnded June 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                                        |                                          | 
|Tax benefit from exercises of stock options                  |                                          | 
|Foreign currency transaction (gain) 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                     |                                          | 
|                                                             |                                          | 
|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 issues for acquisition                          |                                          | 
|                                                             |                                          | 

|See notes to consolidated financial statements.


4
GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | For the Three Month Period EndedJune 30, | 
|---------------------------------------- | ---------------------------------------- | 
|
|Net income                               |                                          | 
|                                        
|Foreign currency translation adjustments |                                          | 
|                                         |                                          | 
|                                        
|Comprehensive income (loss)              |                                          | 
|                                         |                                          | 

|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 months ended June 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 June 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. Certain prior period
amounts have been reclassified to conform to current period presentation.
Service revenue and service cost of revenue were each increased $123,000 in the
quarter ended June 30, 2001.


3. Research and development
expense, before the capitalization of computer software development costs, was
$4,585,000 and $4,247,000 for the three months ended June 30, 2002 and 2001,
respectively. Capitalization of computer software development costs for the
three months ended June 30, 2002 and 2001 were $1,843,000 and $1,846,000,
respectively.


4. 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.


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 June 30, | 
|------------------------------------------------ | ---------------------------------------- | 
|
|Weighted average common shares outstanding-basic |                                          | 
|Effect of dilutive securities:                   |                                          | 
|Stock options and warrants                       |                                          | 
|                                                 |                                          | 
|Weighted average shares outstanding-diluted      |                                          | 
|                                                 |                                          | 

|There were 750,000 and
811,000 additional potentially dilutive common stock option and warrants in the
three months ended June 30, 2002 and 2001, respectively. There were additional
potentially dilutive convertible securities of 71,000 in the three months ended
June 30, 2002 and 2001 which were not included in the earnings per share
calculation due to their anti-dilutive effect.


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 is not expected to have a significant
impact on the Companys financial position and results of operations.


6
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 FAS44, Accounting or
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.


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.


5. 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.


6. Segment Information


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

|                     | Three Months EndedJune 30, | 
|-------------------- | -------------------------- | 
|
|Revenue:             |                            | 
|Enterprise Solutions |                            | 
|DOC1                 |                            | 
|                     |                            | 
|Total revenue        |                            | 
|                     |                            | 
|                    
|Gross Profit:        |                            | 
|Enterprise Solutions |                            | 
|DOC1                 |                            | 
|                     |                            | 
|Total gross profit   |                            | 
|                     |                            | 

|7
Amortization of capitalized
developed and acquired software associated with the Enterprise Solutions
Software segment was $1,376,000 and $1,131,000 for the three months ended June
30, 2002 and 2001, respectively. Amortization of capitalized developed and
acquired software associated with the DOC1 Software segment was $720,000 and
$544,000 for the three month periods ended June 30, 2002 and 2001, respectively.


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

| | June 30,2002 |  | March 31,2002        | 
| | ------------ |  | -------------------- | 
| |              |  | Enterprise Solutions | 
| |              |  | DOC1                 | 
| |              |  | Corporate            | 
| |              |  |                      | 
| |              |  | Total assets         | 
| |              |  |                      | 

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

| |  | Enterprise Solutions | DOC1                                       | 
| |  | -------------------- | ------------------------------------------ | 
| |  |                      | Balance as of March 31, 2002               | 
| |  |                      | Goodwill acquired                          | 
| |  |                      | Effect of currency translation on goodwill | 
| |  |                      |                                           
| |  |                      | Balance as of June 30, 2002                | 
| |  |                      |                                           

|7. 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 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.


8
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 June 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:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (thousands, except per share data) | Three Months EndedJune 30, |                                                   
| | ---------------------------------- | -------------------------- | --------------------------------------------------
|
| |                                    |                            | Revenue                                           
| |                                    |                            | Net income (loss) available to common shareholders
| |                                    |                            | Diluted earnings (loss) per share                 
| |                                    |                            | Weighted average shares outstanding               

|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.


8. Acquired Intangible Assets
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (in thousands) | Gross CarryingAmount | AccumulatedAmortization asof June 30, 2002 | 
| | -------------- | -------------------- | ------------------------------------------ | 
| |                |                      | Amortized intangible assets:               | 
| |                |                      | Computer software                          | 
| |                |                      |                                            | 
| |                |                      | Unamortized intangible assets:             | 
| |                |                      | Goodwill                                   | 

|The aggregate amortization expense for the three months ended June 30, 2002 was $192,000.  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):


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

| | 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.


For the three months ended
June 30, 2002 and 2001, the Company had revenues of $23.4 million and $20.8
million, respectively. Net income available to common stockholders for the three
months ended June 30, 2002 was $1.0 million or $0.14 diluted earnings per share
compared with $0.1 million or $0.01 diluted earnings per share in the same
period in the prior year. The increase in profitability for the three months
ended June 30, 2002 is primarily due to increases in license revenue 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 69% and 70% of
Group 1s total revenue for the first fiscal quarter of 2003 and 2002,
respectively. DOC1 revenue was 31% and 30% of total revenue for the first
quarter of fiscal 2003 and fiscal 2002, respectively. International revenues
accounted for 14% and 13% of Group 1s total revenue in the first
quarters of fiscal 2003 and 2002, respectively.


Software license and
related revenue of $9.9 million for the first fiscal quarter of 2003 increased
38% from $7.2 million the same period the prior year. As a percent of total
revenue, first quarter software license and related revenues were 42% in fiscal
2003 compared with 34% in fiscal 2002.


License fees from
Enterprise Solutions increased 35% to $7.1 million in the three month period
ended June 30, 2002 as compared with the same period in the prior year. 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
June 30, 2002 increased 35% as compared with the same period in the prior year.
The increase for the three month period is primarily due to higher sales of our
GeoTAX tax jurisdiction software.


License fees from DOC1 for
the three months ended June 30, 2002 increased 47% to $2.8 million, from the
same period in the prior year. The increase in license fees for the three month
period was due to higher sales both domestically and internationally. 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 current year quarter.


10
Maintenance and service
revenue was $13.5 million for the first quarter of fiscal year 2003 and $13.7
million in the prior years first fiscal quarter. Maintenance and service
revenue accounted for 58% of total revenue for the quarter ended June 30, 2002
compared with 66% of total revenue in the same period in the prior year.
Recognized maintenance fees included in maintenance and service revenue were
$11.1 million for the quarter ended June 30, 2002 and $10.4 million for the same
period the prior year, an increase of 6%. The increase in maintenance revenue is
due to the recognition of higher level of maintenance deferrals based on higher
aggregate sales from prior periods and from increased maintenance renewals based
on an increase in the installed customer base in both business segments.


For the quarter ended June
30, 2002, Enterprise Solutions recognized maintenance was $8.4 million, a 2%
increase over the same period in the prior year. DOC1 recognized maintenance
increased 23% to $2.7 million in the quarter ended June 30, 2002 compared with
the comparable period in the prior year.


Professional and
educational service revenue from the Enterprise Solutions segment decreased to
$0.6 million in the quarter ended June 30, 2002 from $1.1 million in the same
period in the prior year. DOC1 service revenue decreased to $1.8 million in the
quarter ended June 30, 2002 from $2.2 million in the same period of the prior
fiscal year. The decrease in professional and educational service revenue in
both segments is due to lower services revenue in the U.S. predominantly caused
by companies delaying purchasing decisions in the prior fiscal year.


Total cost of revenue for
the first quarter of fiscal 2003 was $8.3 million versus $8.6 million in the
same period of fiscal 2002. The separate components of cost of revenue are
discussed below.


Software license expense
increased for the three month period ended June 30, 2002 to $4.1 million from
$2.5 million for the same period in the prior year representing 41% and 35% of
software license and related revenues, respectively. The increase in expense as
a percent of software license revenue was due primarily to higher royalty
expense associated with higher sales of GeoTAX and accruals of minimum royalty
payments in the current quarter.


Maintenance and service
expense decreased to $4.3 million in the current quarter from $6.1 million in
the comparable period in fiscal 2002, representing 32% and 45% of maintenance
and service revenue, respectively. The decrease in expense as a percentage of
revenue for the quarter 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 $2.4 million compared with $3.9 million for the comparable period in the
prior year. The decrease in professional and educational service expense is due
to cost reductions to size the services organization with current revenue
levels.


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. The decrease in
expense as a percent of revenue for the first fiscal quarter is primarily due to
increased maintenance revenue.


Total operating costs of
$13.6 million amounted to 58% of revenue for the quarter ended June 30, 2002
compared with $12.6 million or 60% of revenue for the prior year 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.


11
Total research and
development expense before capitalization of certain development costs was $4.6
million or 20% of revenue for the three month period ended June 30, 2002
compared with $4.2 million or 20% in the prior year. Research and development
expenses (after capitalization of certain software development costs) totaled
$2.7 million for the first fiscal quarter of 2003 and $2.4 million for the same
period of fiscal 2002, representing 12% of revenue in both periods. The increase
in expense is due to increased spending on new product initiatives in both the
Enterprise Solutions and DOC1 segments, along with additional expenses related
to the TriSense, HotData and Vision-R acquisitions (see footnote 8 in notes to
consolidated financial statements).


Sales and marketing
expenses totaled $7.5 million or 32% of revenue in the first quarter of fiscal
2003 and $7.4 million or 35% in the prior year first quarter. Sales and
marketing costs for Enterprise Solutions were 28% of Enterprise Solutions
revenue in the first fiscal quarter of 2003 and 30% for the same period the
prior year. DOC1 selling and marketing costs were 41% of DOC1 revenue for the
three month period ended June 30, 2002 and 48% for the same period the prior
year. The decrease in cost as a percent of revenue for the current quarter
versus the prior year quarter in DOC1 was due to higher revenue in the current
period.


General and administrative
expenses were $3.3 million or 14% of total revenue compared with $2.8 million or
13% of revenue for the three months ended June 30, 2002 and 2001, respectively.
The increase in general and administrative expenses is primarily related to an
increase in incentive compensation accruals and bad debt expense, partially
offset by a reduction of legal expense accruals in the current period.


Net non-operating income
was $0.1 million for the quarter ended June 30, 2002 as compared with $0.5
million for the same period in the prior year. This decrease represents lower
interest income due to declining interest rates, interest expense on notes
related to prior year acquisitions and foreign currency translation losses in
the current quarter.


The Companys
effective tax rates were 37.5% and 40.1% for the three month periods ended June
30, 2002 and 2001, respectively. The current years rate is the net effect
of a 41.5% effective tax rate on domestic taxable income and a 29.0% rate on
foreign taxable income.


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.


12
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 June 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.


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 June
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.


13
Liquidity and Capital Resources


The Companys working
capital was $26.7 million at June 30, 2002, as compared with $27.0 million at
March 31, 2002. The current ratio was 1.6 to 1 at June 30, 2002 and 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 October 31, 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 June 30, 2002 and at March 31, 2002,
there were no borrowings outstanding under the line of credit.


For the three months ended
June 30, 2002, net cash provided by operating activities was $8.5 million. This
amount included net income of $1.0 million plus non-cash expenses of $3.2
million. Also included in cash provided by operating activities was a $4.5
million decrease in accounts receivable, offset by a $1.4 million decrease in
deferred revenues, a $1.0 million increase in accrued expenses and accrued
compensation and a $0.2 million decrease in prepaid expenses and other current
and non-current assets. The decrease in accounts receivable is due to increased
cash collections. Investment in purchased and developed software of $1.8
million, and capital equipment of $0.4 million and a decrease of $1.6 million in
short-term investments resulted in $0.6 million used in investing activities.
For the three months ended June 30, 2002, a $3.1 million principal payment
related to the TriSense acquisition offset by $0.2 million in proceeds from
stock option exercises resulted in $2.9 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 June 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):
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|                                  
|Operating leases                  
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|Notes payable                     
|                                  
|Total contractual cash obligations
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|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 is not expected to have a significant
impact on the Companys financial position and results of operations.


14
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 FAS44, Accounting or
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.


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 June 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.


15
Part II
Other Information


Item 1. Legal Proceedings
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| | 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
|-----------------------------------------------------------

| | NONE
| | ----

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

|16
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/ Mark Funston
Mark Funston
Chief Financial Officer
August 14, 2002
| |  | --------------------------------------------------------------------------------------------

|17
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