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


FORM 10-Q



Quarterly Report Under
Section 13 or 15(d) of theSecurities Exchange Act of 1934
|---------------------------------------------------------------------------------------------------------------------------------------------------------

|For the
Quarter Ended December 31, 2000 | 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 ___________
|--------------- | --------------

|Class
Common Stock, $.50 par value | Shares Outstanding EffectiveFebruary 7, 2001
6,646,753
|-------------------------------------------- | ----------------------------------------------------------------

|1
|-

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

|                                                              | December 31,2000 | March 31,2000
|------------------------------------------------------------- | ---------------- | -------------
|
|ASSETS                                                        |                  |              
|Current assets:                                               |                 
|Cash and cash equivalents                                     |                  | $ 31,600     
|Short-term investments                                        |                  | 7,637        
|Trade and installment accounts receivable, less               |                 
|allowance of $2,438 and $3,317                                |                  | 18,321       
|Deferred income taxes                                         |                  | 2,406        
|Prepaid expenses and other current assets                     |                  | 3,666        
|                                                             
|Total current assets                                          |                  | 63,630       
|Installment accounts receivable, long-term                    |                  | 1,095        
|Property and equipment, net                                   |                  | 4,462        
|Computer software, net                                        |                  | 20,099       
|Other assets                                                  |                  | 4,380        
|                                                             
|Total assets                                                  |                  | $ 93,666     
|                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                 
|Current liabilities:                                          |                 
|Accounts payable                                              |                  | $   2,149    
|Current portion of capital lease obligation                   |                  | 88           
|Accrued expenses                                              |                  | 6,433        
|Accrued compensation                                          |                  | 7,062        
|Current deferred revenues                                     |                  | 23,272       
|                                                             
|Total current liabilities                                     |                  | 39,004       
|Capital lease obligation, net of current portion              |                  | 29           
|Deferred revenues, long-term                                  |                  | 635          
|Deferred income taxes                                         |                  | 3,235        
|                                                             
|Total liabilities                                             |                  | 42,903       
|                                                             
|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; 6,635 |                 
|and 6,468 shares issued and outstanding                       |                  | 3,317        
|Additional paid in capital                                    |                  | 28,639       
|Retained earnings                                             |                  | 20,858       
|Accumulated other comprehensive income                        |                  | (632         
|Less treasury stock, 497 shares, at cost                      |                  | (2,335       
|                                                             
|Total stockholders equity                                    |                  | 50,763       
|                                                             
|Total liabilities and stockholders equity                    |                  | $ 93,666     
|                                                             

|See notes to
consolidated financial statements.


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

|GROUP 1 SOFTWARE,
INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Adjusted to reflect the 3 for 2 stock split
approved by the Board of Directors on February 4, 2000)(In thousands, except per share data)(Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                     | For the Three Month PeriodEnded December 31, | For the Nine Month PeriodEnded December 31,
|-------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------
|
|Revenues:                                                            |                                              |                                            
|Software license and related revenues                                |                                              | $ 11,188                                   
|Maintenance and services                                             |                                              | 12,948                                     
|                                                                    
|Total revenue                                                        |                                              | 24,136                                     
|                                                                    
|Cost of revenue:                                                     |                                             
|Software license expense                                             |                                              | 2,536                                      
|Maintenance and service expense                                      |                                              | 4,631                                      
|                                                                    
|Total cost of revenue                                                |                                              | 7,167                                      
|                                                                    
|Gross profit                                                         |                                              | 16,969                                     
|Operating expenses:                                                  |                                             
|Research and development                                             |                                              | 1,685                                      
|Sales and marketing                                                  |                                              | 8,299                                      
|General and administrative                                           |                                              | 3,359                                      
|                                                                    
|Total operating expenses                                             |                                              | 13,343                                     
|                                                                    
|Income from operations                                               |                                              | 3,626                                      
|Non-operating income                                                 |                                             
|Interest income                                                      |                                              | 688                                        
|Interest expense                                                     |                                              | (90                                        
|Other non-operating income (expense)                                 |                                              | (104                                       
|                                                                    
|Total non-operating income                                           |                                              | 494                                        
|                                                                    
|Income from operations before
        provision     for income taxes |                                              | 4,120                                      
|                                                                    
|Provision for income taxes                                           |                                              | 1,739                                      
|                                                                    
|Net income                                                           |                                              | 2,381                                      
|Preferred stock dividend requirements                                |                                              | (14                                        
|                                                                    
|Net income available to common stockholders                          |                                              | $   2,367                                  
|                                                                    
|Basic earnings per share                                             |                                              | $     0.39                                 
|                                                                    
|Diluted earnings per share                                           |                                              | $     0.34                                 
|                                                                    
|Basic weighted average shares outstanding                            |                                              | 6,091                                      
|                                                                    
|Diluted weighted average shares outstanding                          |                                              | 6,965                                      
|                                                                    

|See notes to
consolidated financial statements.

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

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

|                                                          | For the Nine Month PeriodEnded December 31,
|--------------------------------------------------------- | -------------------------------------------
|
|Cash flows from operating activities:                     |                                            
|Net income                                                |                                            
|Adjustments to reconcile net income from                  |                                            
|Operations to net cash provided by operating activities:  |                                            
|Amortization expense                                      |                                            
|Depreciation expense                                      |                                            
|Provision for doubtful accounts                           |                                            
|Net loss on disposal of assets                            |                                            
|Deferred income taxes                                     |                                            
|Tax benefit from disqualifying disposition of             |                                            
|incentive stock options                                   |                                            
|Foreign currency transaction gain                         |                                            
|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:                     |                                            
|Purchase and development of computer software             |                                            
|Purchase of property and equipment                        |                                            
|Purchase of marketable securities                         |                                            
|Sale of marketable securities                             |                                            
|                                                         
|Net cash used in investing activities                     |                                            
|                                                         
|Cash flows from financing activities:                     |                                            
|Proceeds from exercise of stock options                   |                                            
|Repayment of
      principal on capital lease obligations |                                            
|Dividends paid                                            |                                            
|                                                         
|Net cash provided by financing activities                 |                                            
|                                                         
|Net increase in cash and cash equivalents                 |                                            
|Effect of exchange rate on cash and                       |                                            
|cash equivalents                                          |                                            
|Cash and cash equivalents at beginning of period          |                                            
|                                                         
|Cash and cash equivalents at end of period                |  
;                                    
|                                                         
|Supplemental disclosure of non-cash financing activity:   |                                            
|Warrants issued in exchange for services                  |                                            

|See notes to
consolidated financial statements.



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

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

|                                         | For the Three Month Period EndedDecember 31, | For the Nine Month Period EndedDecember 31,
|---------------------------------------- | -------------------------------------------- | -------------------------------------------
|
|Net income                               |                                              | $2,381                                     
|Foreign currency translation adjustments |                                              | 254                                        
|                                        
|Comprehensive income                     |                                              | $2,635                                     
|                                        

|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 nine months ended December 31, 2000 and
1999 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 and nine months ended December 31, 2000 are not
necessarily indicative of the results for the year ending March 31, 2001. The
information contained in the annual report on the Form 10-K for the year ended
March 31, 2000, 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.


3.  On February 4, 2000, the
Board of Directors approved a 3 for 2 common stock split for stockholders of
record as of February 17, 2000. There was no change in the par value of the
stock as a result of the split. The effect of the stock split has been
retroactively reflected in the consolidated financial statements for all periods
presented.


4.  Research and development
expense, before the capitalization of computer software development costs,
amounted to approximately $3.4 million and $2.8 million for the three months
ended December 31, 2000 and 1999, respectively. Capitalization of computer
software development costs for the three month periods was $1.7 million and $1.8
million, respectively. Research and development expense, before the
capitalization of computer software development costs, amounted to approximately
$9.8 million and $8.1 million for the nine months ended December 31, 2000 and
1999, respectively. Capitalization of computer software development costs for
the nine month periods was $5.1 million and $5.3 million, respectively.



5.  Earnings
per share


Earnings per share (EPS) is
computed in accordance with SFAS No. 128, Earnings Per Share. Basic
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
potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of convertible preferred stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Potentially dilutive securities are excluded from the computation if
the effect is anti-dilutive.


Reconciliation of basic EPS
calculations to the shares used in the diluted EPS calculation (in thousands,
adjusted to reflect the 3 for 2 stock split approved by the Board of Directors
on February 4, 2000):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | For the Three Month Period EndedDecember 31, | For the Nine Month Period EndedDecember 31,
|------------------------------------------------ | -------------------------------------------- | -------------------------------------------
|
|                                                 |                                              |                                            
|Weighted average common shares outstanding-basic |                                              | 6,091                                      
|Effect of dilutive securities:                   |                                             
|Stock options and warrants                       |                                              | 874                                        
|                                                
|Weighted average shares outstanding-diluted      |                                              | 6,965                                      
|                                                

|6
|-

|There were additional
potentially dilutive convertible securities of 47,500 in the three and nine
months ended December 31, 2000, and 1999 respectively, which were not included
in the earnings per share calculation due to their anti-dilutive effect.



6.  Recent
Accounting Pronouncements


In
December 1999, the SEC released Staff Accounting Bulletin (SAB) No.
101,Revenue Recognition in Financial Statements, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB 101A, which
delayed the implementation date of SAB 101 for registrants with fiscal years
that begin between December 16, 1999 and March 15, 2000. In June 2000 the SEC
issued SAB 101B, further delaying the required implementation of SAB 101 by the
Company until the fourth quarter of fiscal year 2001. The Company has not fully
assessed the effect on our financial statements as a result of SAB 101.



7.  Legal
 Contingencies


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



8.  
Segment Information


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

|                                              | Three Months EndedDecember 31, | Nine Months EndedDecember 31,
|--------------------------------------------- | ------------------------------ | -----------------------------
|
|Revenue:                                      |                                |                              
|Enterprise Solutions Software                 |                                | $15,615                      
|Customer Relationship Communications Software |                                | 8,521                        
|                                             
|Total revenue                                 |                                | $24,136                      
|                                             
|Gross Profit:                                 |                               
|Enterprise Solutions Software                 |                                | $10,969                      
|Customer Relationship Communications Software |                                | 6,000                        
|Other                                         |                                |                             
|                                             
|Total gross profit                            |                                | $16,969                      
|                                             

|All of the Companys
assets are retained and analyzed at the corporate level and are not allocated to
the individual segments. Amortization of capitalized software associated with
the Enterprise Solutions Software segment was $1.3 million and $1.9 million for
the three months ended December 31, 2000 and 1999, respectively. For the nine
month period ended December 31, 2000 and 1999, amortization of capitalized
software for the Enterprise Solutions Software segment was $4.6 million and $4.9
million, respectively. Amortization of capitalized software associated with the
Customer Relationship Communications Software segment was $0.5 million for both
three month periods ended December 31, 2000 and 1999. Amortization of
capitalized software associated with the Customer Relationship Communications
Software segment was $1.7 million and $1.6 million for the nine months ended
December 31, 2000 and 1999, respectively.


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

|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 are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, changes in currency exchange rates,
changes and delays in new product introduction, customer acceptance of new
products, changes in government regulations, changes in pricing or other actions
by competitors and general economic conditions, as well as other risks detailed
in the Companys filings with the Securities and Exchange Commission.


For the three months ended
December 31, 2000 and 1999, the Company had revenues of $24.1 million and $20.2
million, respectively. Net income available to common stockholders for the three
months ended December 31, 2000 was $2.4 million or $0.34 per share compared with
net income available to common stockholders of $1.7 million or $0.29 per share
in the same period in the prior year. For the nine months ended December 31,
2000 and 1999, the Company had revenues of $66.3 million and $56.3 million,
respectively. Net income available to common stockholders for the nine months
ended December 31, 2000 was $5.2 million or $0.75 per share compared with net
income available to common stockholders of $3.2 million or $0.55 per share in
the same period in the prior year. The increase in profitability for both the
three and nine months ended December 31, 2000 is primarily due to higher revenue
in both of the Companys operating segments along with higher interest
income.


All of Group 1s
operations are based in the two business segments defined as Enterprise
Solutions Software and Customer Relationship Communications Software. Enterprise
Solutions revenue accounted for 65% and 64% of Group 1s total revenue for
the third fiscal quarter of 2001 and 2000, respectively. Enterprise Solutions
revenue accounted for 64% and 67% of Group 1s total revenue for the first
nine months of 2001 and 2000, respectively. Customer Relationship Communications
revenue was 35% and 36% of total revenue for the third quarter of fiscal 2001
and fiscal 2000, respectively. Customer Relationship Communications revenue was
35% and 33% of total revenue for the nine months ended December 31, 2000 and
1999, respectively. International revenues accounted for 16% of
Group 1s total revenue in the third quarter of both fiscal 2001 and
2000. International revenues accounted for 16% and 14% of Group 1s
total revenue in the nine months ended December 31, 2000 and 1999, respectively.
The increase in international revenue as a percent of total revenue is primarily
due to higher sales of the DOC 1 product in Europe.


Software license and
related revenues of $11.2 million for the third fiscal quarter of 2001 increased
20% from $9.3 million the same period the prior year. As a percent of total
revenue, third quarter software license and related revenues were 46% in fiscal
2001 compared with 46% in fiscal 2000. For the nine month period, software
license and related revenues of $27.9 million were 10% above the same period the
prior year. As a percent of total revenue, software license and related revenues
were 42% for the nine months ended December 31, 2000 compared with 45% for the
same period the prior year.


License fees from
Enterprise Solutions Software increased 27% in the three month period ended
December 31, 2000 as compared to the same period in the prior year. License fees
from Enterprise Solutions Software were up 13% for the nine month period ended
December 31, 2000 as compared to the same period in the prior year. The
specifics of Enterprise Solutions license fees are discussed below.


8
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For the three and nine
months ended December 31, 2000, license fees from database marketing products
decreased by $0.3 million and $0.5 million respectively compared to the same
periods in the prior year. The decrease for the quarter and nine month periods
was primarily due to lower sales of the Model 1 product.


The Companys mailing
efficiency/data quality software license fees for the three months ended
December 31, 2000 increased 22% as compared to the same period in the prior
year. License fees of these products were relatively flat for the nine month
period ended December 31, 2000. The increase for the three month period is
primarily due to higher sales of Group 1s Code 1 Plus product.


License fees from Customer
Relationship Communications Software were relatively flat for the three months
ended December 31, 2000 over the same period in the prior year. For the nine
months ended December 31, 2000 license fees for Customer Relationship
Communications increased 7% over the same period the prior year. The increase
in sales for the nine month period was primarily due to higher European sales.


Maintenance and service
revenue of $12.9 million for the third quarter of fiscal 2001 increased 18% over
the prior years comparable period. For the nine month period ended
December 31, 2000 maintenance and service revenue of $38.4 million was 24% above
the same period in the prior year. Maintenance and service revenue accounted for
54% and 58% of total revenue for the quarter and nine months ended December 31,
2000, compared with 54% and 55% of total revenue in the same periods in the
prior year. Recognized maintenance fees included in maintenance and service
revenue were $9.7 million for the quarter ended December 31, 2000 and $8.6
million for the same period the prior year, an increase of 13%. The increase in
maintenance revenue is due to the recognition of a higher level of maintenance
deferrals based on higher aggregate sales from prior periods and from increased
maintenance renewals based on an increase in the installed customer base in both
business segments.


For the quarter ended
December 31, 2000, Enterprise Solutions recognized maintenance increased 10% to
$7.7 million over the same period in the prior year. For the nine months ended
December 31, 2000, Enterprise Solutions recognized maintenance increased 19% to
$23.3 million over the same period in the prior year. Customer Relationship
Communications recognized maintenance increased 22% to $2.0 million in the
quarter ended December 31, 2000 compared to the comparable period in the prior
year. Customer Relationship Communications recognized maintenance increased 41%
to $5.9 million in the nine months ended December 31, 2000 compared to the same
period in the prior year.


Professional and
educational service revenue from the Enterprise Solutions segment increased 25%
to $0.8 million in the quarter ended December 31, 2000 from the same period in
the prior year. Professional and educational service revenue from the Enterprise
Solutions segment increased to $2.3 million in the nine months ended December
31, 2000, an increase of 19% from the same period in the prior year. Customer
Relationship Communications service revenue increased 46% to $2.4 million in the
quarter ended December 31, 2000 from the same period the prior fiscal year.
Customer Relationship Communications service revenue increased 35% to $7.0
million in the nine months ended December 31, 2000 compared to the same prior
year period. The increase in Customer Relationship Communications service
revenue is due to new service contracts in the U.S. and internationally.


Total cost of revenue for
the third quarter of fiscal 2001 was $7.1 million versus $6.7 million in the
same period of fiscal 2000. The total cost of revenue for the nine month period
was $21.8 million compared to $20.6 million in the same period in the prior
year. The separate components of cost of revenue are discussed below.


Software license expense
decreased for the three month period ended December 31, 2000 to $2.5 million
from $3.4 million for the same period in the prior year representing 23% and 36%
of software license and related revenues, respectively. Software license expense
decreased for the nine month period ended December 31, 2000 to $8.4 million from
$9.9 million for the same period in the prior year representing 30% and 39% of
software license and related revenues, respectively. The decrease in expense as
a percent of software license revenue was due to higher license fees in both
operating segments, as well as lower royalty and amortization expenses.



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

|Maintenance and service
expense increased to $4.6 million in the current quarter from $3.3 million in
the comparable period in fiscal 2000, representing 36% and 31% of maintenance
and service revenue, respectively. Maintenance and service expense increased to
$13.4 million in the nine month period ended December 31, 2000 from $10.7
million in the comparable period in fiscal 2000, representing 35% of maintenance
and service revenue, in both periods. The increase in expense as a percentage of
revenue for the quarter can be attributed to proportionately higher service
revenue which has lower gross margins than maintenance revenue as discussed
below.


Included in maintenance and
service expense discussed above are professional and educational service costs
of $2.6 million which were 81% of professional service and education revenue for
the third quarter compared with $1.8 million which represented 76% of
professional service and educational revenue for the comparable period in the
prior year. For the nine month period ended December 31, 2000, professional and
educational service costs of $7.4 million were 80% of professional service and
educational revenue compared with $5.7 million or 79% in the prior year
period.The increase in expense as a percent of revenue for the three
month period is due to higher expense associated with Enterprise Solutions
services due to increased staffing and contracting costs. The decrease in
expense as a percent of revenue for the nine month period can be attributed to
higher revenue in Customer Relationship Communications services as discussed
above.


Costs of maintenance were
$2.0 million for the third fiscal quarter of 2001 representing 21% of
maintenance revenue. Costs of maintenance for the same quarter in the prior year
were $1.6 million, representing 18% of maintenance revenue. For the nine months
ended December 31, 2000, costs of maintenance were $6.0 million, representing
21% of maintenance revenue versus $5.1 million or 22% of revenue in the prior
year. The increase in expense for the third fiscal quarter is due to increased
customer and internal support costs.


Total operating costs of
$13.4 million amounted to 55% of revenue for the quarter ended December 31, 2000
compared with $10.9 million or 54% of revenue for the prior year period. Total
operating costs of $37.5 million amounted to 57% of revenue for the nine months
ended December 31, 2000 compared $31.0 million or 55% 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.


Total research and
development expense before capitalization of certain development costs was $3.4
million or 14% of revenue for the three month period ended December 31, 2000
compared with $2.8 million or 14% in the prior year. For the nine months ended
December 31, 2000 total research and development expense before capitalization
of certain development costs was $9.8 million or 15% of revenue compared with
$8.1 million or 14% of revenue in the prior year.


Research and development
expenses (after capitalization of certain software development costs) totaled
$1.7 million for the third fiscal quarter of 2001 and $1.0 million for the same
period of fiscal 2000, representing 7% and 5% of revenue, respectively. Research
and development expenses (after capitalization of certain software development
costs) totaled $4.7 million for the nine months ended December 31, 2000 and $2.8
million for the same period of the prior year, representing 7% and 5% of
revenue, respectively. The increase in expense is due to increased spending on
new product initiatives in both the Enterprise Solutions and Customer
Relationship Communications segments.

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

|Sales and marketing
expenses totaled $8.3 million or 34% of revenue in the third quarter of fiscal
2001 and $6.2 million or 31% in the prior year same period. Sales and marketing
expenses totaled $21.9 million or 33% of revenue in the nine months ended
December 31, 2000 and $18.4 million or 33% in the nine months ended December 31,
1999. The increase in cost as a percent of revenue for the current quarter
versus the prior year quarter was primarily due to higher sales incentive costs
for both Enterprise Solutions and Customer Relationship Communications products.
Sales and marketing costs for the Enterprise Solutions products were 33% of
Enterprise Solutions revenue in the third fiscal quarter of 2001 and 30% for the
same period the prior year. Customer Relationship Communications selling and
marketing costs were 37% for the three month period ended December 31, 2000 and
33% for the same period the prior year. Sales and marketing costs for the
Enterprise Solutions products were 32% of Enterprise Solutions revenue in the
first nine months of fiscal year 2001 and 33% for the same period in the prior
year. Customer Relationship Communications sales and marketing costs were 35%
and 32% for the nine months ended December 31, 2000 and 1999, respectively.


General and administrative
expenses were $3.4 million or 14% of total revenue compared with $3.7 million or
18% of revenue for the three months ended December 31, 2000 and 1999,
respectively. General and administrative expenses were $10.9 million or 16% of
total revenue compared with $9.7 million or 17% of revenue for the nine months
ended December 31, 2000 and 1999, respectively. The decrease in general and
administrative expenses is primarily related to a decrease in the provision for
bad debt expense due to increased cash collections.


Net non-operating income
was $0.5 million for the quarter ended December 31, 2000 as compared with $0.3
million for the same period in the prior year. For the nine months ended
December 31, 2000 and 1999, net non-operating income was $1.9 million and $0.6
million, respectively. This increase represents higher interest income generated
from higher cash and short-term investment balances in the current periods
compared to the same periods of fiscal 2000.


The Companys
effective tax rates were 41% and 40% for the nine month period ended December
31, 2000, and 1999, respectively. The current years rate is the net effect
of a 46% effective tax rate on foreign taxable income and a 33% rate on domestic
taxable income.



Liquidity and
Capital Resources


The Companys working
capital was $24.6 million at December 31, 2000, as compared to $17.1 million at
March 31, 2000. The current ratio was 1.6 to 1 at December 31, 2000 and 1.4 to 1
at March 31, 2000.


The Company provides for
its cash 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, 2001. The line of credit bears
interest at the banks prime rate or Libor plus 150 basis points, at Group
1s option. The line of credit is not collateralized but requires Group 1
to maintain certain operating ratios. At December 31, 2000 and at March 31,
2000, there were no borrowings outstanding under the line of credit.


For the nine months ended
December 31, 2000, net cash provided by operating activities was $13.7 million.
This amount included net income of $5.2 million plus non-cash expenses of $9.7
million. Also included in cash provided by operating activities was a $3.5
million decrease in accounts receivable, offset by a $4.0 million decrease in
deferred revenues and a $0.7 million decrease in accrued expenses and accrued
compensation. The decrease in accounts receivable is due to increased cash
collections. Investment in purchased and developed software of $5.5 million, and
capital equipment of $1.8 million, in addition to a decrease of $3.6 million in
short-term investments resulted in $3.7 million provided by investing
activities. For the nine months ended December 31, 2000, $1.0 million was
provided by financing activities.

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|The Companys exposure
to market risk for changes in interest rates relates primarily to its cash
equivalents and short-term investments. The Company does not invest in
derivative financial instruments. Excess cash is invested in short-term, fixed
income financial instruments. These fixed rate investments are subject to
interest rate risk and may fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from the
levels at December 31, 2000, the fair market value of the portfolio would
decline by an immaterial amount. The Company has the ability to hold its fixed
income investments until maturity and, therefore, does not expect operating
results or cash flows to be materially affected by a sudden change in market
interest rates on its investment portfolio.


Group 1 continually
evaluates the credit and market risks associated with outstanding receivables.
In the course of this review, Group 1 considers many factors specific to
the individual client as well as to the concentration of receivables within
industry groups. Group 1s installment receivables are predominately
with clients (service bureaus) who provide computer services to the direct
marketing industry. Many of these clients have limited capital and insufficient
assets to secure their liability with Group 1. The service bureaus are
highly dependent on Group 1s software and services to offer their
customers the economic benefit of postal discounts and mailing efficiency. To
qualify for the U.S. Postal Service and Canada Post Corporation postal
discounts, service bureaus require continuous regulatory product updates from
the Company. The service bureau industry is also highly competitive and subject
to general economic cycles, as they impact advertising and direct marketing
expenditures. The Company is aware of no current market risk associated with the
installment receivables. Service bureaus represent approximately $1.9 million or
66% of the installment receivables at December 31, 2000.


As of December 31, 2000,
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
anticipated, except for the continuing investment in capitalized software
development costs, which the Company believes can be funded from operations
during the next twelve months.



Recent
Accounting Pronouncements


In
December 1999, the SEC released Staff Accounting Bulletin (SAB) No.
101,Revenue Recognition in Financial Statements, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB 101A, which
delayed the implementation date of SAB 101 for registrants with fiscal years
that begin between December 16, 1999 and March 15, 2000. In June 2000 the SEC
issued SAB 101B, further delaying the required implementation of SAB 101 by the
Company until the fourth quarter of fiscal year 2001. The Company has not fully
assessed the effect on our financial statements as a result of SAB 101.


In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137, which
delays the effective date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective for our fiscal
year 2002. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivatives fair value be recognized in
earnings unless specific hedge accounting criteria are met. In June 2000, the
Financial Accounting Standards Board issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, further
amending FAS No. 133. Currently the Company does not utilize derivative
financial instruments, therefore, the adoption of SFAS Nos. 133, 137 and 138 is
not expected to have a material effect on the Companys financial
statements.
12
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|Legal
Contingencies


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



Quantitative
and Qualitative Disclosures about Market Risk


The
Company has a subsidiary in the United Kingdom with offices in Germany, Italy
and Denmark. 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. Based on the
Companys overall currency rate exposure at December 31, 2000 a 10% change
in foreign exchange rates would have had an immaterial effect on the
Companys financial position, results of operations and cash flows. 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.



Euro Currency


The
European Unions adoption of the Euro currency raises a variety of issues
associated with the Companys European operations. Although the transition
from national currencies to the Euro will be phased in over several years, the
Euro became the single currency for most European countries on January 1, 1999.
The Company is assessing Euro issues related to its treasury operations, product
pricing, contracts and accounting systems. Although the evaluation of these
issues is still in process, management currently believes that the
Companys existing or planned hardware and software systems will
accommodate the transition to the Euro and any required operating changes will
not have a material effect on future results of operations or financial
condition.

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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


NONE


Item 5. Other Information


NONE


Item 6. Exhibits and Reports on Form
8-K


NONE



14
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|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.By: /s/ Mark Funston
Mark FunstonChief Financial OfficerFebruary 13, 2001
| |  | -------------------------------------------------------------------------------------------------------------

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