SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K

For the fiscal year ended March 31, 2002

OR

Commission file number 0-6355

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

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

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.50 par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]       NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 18, 2002 was $85,386,788

The number of shares of the Registrant’s Common Stock outstanding on June 18, 2002 was 6,946,001

DOCUMENTS INCORPORATED BY REFERENCE:

Definitive proxy statement to be filed with the Securities and Exchange Commission relating to Company’s 2002 Annual Meeting of Shareholders (Part III of Form 10-K).

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Part I

Item 1. Business

The Company

Group 1 Software, Inc., including its wholly owned subsidiaries (“Group 1” or the “Company”), is a leading provider of software solutions for data quality, customer communications management and direct marketing applications. Group 1 has offices throughout the United States and in Canada, the United Kingdom, continental Europe, and Latin America. The Company is also represented in Asia and Australia. Group 1 provides customer relationship management (CRM)-enabling software solutions that enable more than 2,000 businesses to market smarter by helping them find, reach, and keep their customers. Group 1’s products are used to help companies realize the benefits from or increase the return from their CRM and other relationship-management investments.

The Company’s data quality solutions are the cornerstone of successful CRM initiatives. These solutions enable businesses to ensure the integrity of customer and prospect data through validation, standardization, parsing, matching, consolidation and enhancement.

The Company’s direct marketing applications help businesses dramatically reduce mailing costs and ensure accurate, on-time delivery of mailings, goods and services, thereby increasing response rates and customer satisfaction. These solutions enable businesses to reduce costs by standardizing addresses, identifying duplicate customers, validating postal codes and maximizing postal discounts.

Group 1’s customer communications management solutions provide integrated, end-to-end document generation technology for delivery via multiple channels, including print, e-mail and Web. These solutions give businesses complete control of the document lifecycle and enable them to design, generate, deliver, and archive targeted communications, the sought-after end results of CRM programs.

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

Group 1 markets all of its products in North America and certain of its products throughout the world. Group 1 is a leading worldwide vendor of customer communications management software and a leading vendor in North America of data quality and direct marketing software products.

Group 1 markets its data quality and direct marketing applications through a direct sales force in the United States and Canada. Customer communications management solutions are marketed directly to clients in the Americas and throughout Europe. The Company also uses distributors to supplement direct sales efforts.

The Company believes that the growing global adoption of CRM technologies, the increasing demand for personalized customer communications and the operational requirement for enterprise-wide data quality solutions can expand the market potential for Group 1’s existing and future products.

Markets Served

Group 1 markets its products within a broad span of industries to meet the needs of organizations in the areas of customer communications management, data quality and direct marketing. Group 1 addresses the direct marketing and data quality markets through its Enterprise Solutions Division, a single operating segment. Group 1 addresses the customer communications management market through a separate operating segment, its DOC1 Division.

Data Quality

Group 1’s data quality solutions are the cornerstone of successful CRM initiatives. These applications enable businesses to ensure the integrity of customer and prospect data and enhance that information with valuable geographic and demographic intelligence. These solutions consolidate disparate data to help develop an accurate single customer view, enabling businesses to increase operational efficiency, make more informed business decisions, and maximize customer lifetime value. Available as software applications or via hosted services, these solutions encompass many of the Company’s direct marketing applications and can be utilized in both real-time and batch modes.

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In March 2002, Group 1 launched DataSight, its flagship data quality solution. DataSight provides enterprise-wide correction, validation, and enhancement of customer, prospect and supplier data. The solution’s sophisticated technology can be applied to name and address as well as non-name and address data. Its functionality includes data validation, standardization, parsing, householding, and user-defined consolidation of duplicate customer records. This technology, available in both real-time and batch modes, offers businesses an integrated, enterprise-wide view of all customer-focused data. The product features a unique set of intuitive user interfaces, designed for both technical experts and business users, to manage all data quality processes.

The Group 1 Data Quality Connector for Siebel can be easily integrated into Siebel Systems’ leading CRM solution to provide accurate, consolidated customer and prospect data in both batch and interactive modes. The Data Quality Connector identifies and merges duplicate records and validates, corrects and formats address data for over 220 countries and dependencies worldwide. This solution helps give users a single, integrated view of their customers and the products and services they are utilizing across the enterprise, thereby improving target marketing effectiveness, enhancing customer relationships through improved service and strengthening the bottom line.

Group 1’s GeoTAX system provides businesses with the most accurate tax jurisdiction assignment solution available. GeoTAX is a comprehensive suite of tools that standardizes addresses and appends accurate state, county, municipal place, and special tax jurisdiction information to customer address records. With tax jurisdictions constantly changing and new tax jurisdiction assignment requirements mandated by federal and state laws, the potential liability resulting from inaccurate tax assignment poses a significant problem. To ensure businesses utilize accurate address information for tax jurisdiction assignment, GeoTAX provides exclusive access to the most current taxation boundary files through a database that tracks and updates on a monthly basis taxation boundary files nationwide.

Group 1’s HotData is a one-stop-shop for an organization’s online data quality and augmentation needs, offering real-time hosted services for Web sites, call centers, customer databases and highly distributed applications. HotData provides the flexibility to verify, standardize and append customer, prospect and business data for real-time environments as well as databases and CRM applications. The hosted service incorporates global address verification, the ability to update the addresses of customers who have recently moved, Dun & Bradstreet business information, geographic intelligence, area code updating and tax jurisdiction assignment.

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

The DM1 solution enables companies to build one-to-one relationships by identifying and better understanding customers and prospects, permitting the generation of more efficient targeted offers and responses. Also available as a hosted solution, DM1 offers essential data hygiene and enhancement capabilities through Group 1’s leading data quality solutions and adds best-of-class technologies for querying, OLAP (on-line analytical processing), data visualization, modeling and reporting, mapping and campaign management.

Direct Marketing

Group 1’s direct marketing applications increase target marketing effectiveness and customer satisfaction by facilitating on-time, accurate delivery of mailings, goods and services. This is accomplished by cleaning, coding and standardizing address data, validating postal codes, presorting mailings and identifying and eliminating duplicate records. By using these solutions, businesses can take advantage of substantial discounts by complying with the United States Postal Service (USPS) and Canada Post Corporation (CPC) standards governing mail preparation and sortation. Group 1 also offers the industry’s most comprehensive international direct marketing solutions — validating, correcting and/or formatting address data for over 220 countries and dependencies worldwide.

Group 1’s direct marketing applications include CODE-1 Plus, CODE-1 Plus International, Canadian CODE-1 Plus, MailStream Plus, SortStream Canada, MOVEforward, and MOVEforward Canada along with many additional products that provide significant operational benefits. Group 1’s CODE-1 Plus and MailStream Plus products are, respectively, Coding Accuracy Support System (CASS)-certified and Presort Accuracy Validation and Evaluation (PAVE)-certified by the USPS. Group 1’s Canadian CODE-1 Plus and SortStream Canada are recognized under the CPC’s Software Evaluation Recognition Program (SERP) for address validation and postal presortation. To ensure accuracy and data quality, CODE-1 Plus and Canadian CODE-1 Plus validate, correct, and format each address element. MailStream Plus gives mailers the most powerful software solution available to presort mail for the highest postal discounts offered by the USPS for nearly every class of mail. MOVEforward and MOVEforward Canada access business and residential address changes, ensuring that communications reach the intended recipients.

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US mailers currently can save nearly 25% of the cost of first-class postage and up to 31% of the cost of standard mail by using MailStream Plus and CODE-1 Plus. Significant savings can also be achieved with other classes of mail. Similar benefits are provided to Canadian mailers using Group 1’s products accepted under the CPC’s SERP program. Canadian clients can avoid the $0.05 per piece surcharge by demonstrating an address accuracy level of at least 95%.

CODE-1 Plus International uses postal address files obtained directly from postal administrations worldwide to validate and correct addresses for over 120 countries. For an additional 100 countries and dependencies, CODE-1 Plus International can format address data. Additionally, Group 1 is the only North American vendor partnered with the Universal Postal Union (UPU), a specialized agency of the United Nations, to incorporate the UPU’s Universal POST*CODE® DataBase. The database contains locality and street-level data for all United Nations countries. Many U.S. businesses have been reluctant to conduct international direct marketing campaigns due to the historically poor quality of international address data and the complexity of dealing with such data. Available for batch or real-time address validation, CODE-1 Plus International makes multinational direct marketing much easier to implement.

Group 1’s data management applications, Merge/Purge Plus, Business Merge/Purge, Generalized Selection, and List Conversion Plus, provide substantial cost savings by enhancing the effectiveness of direct marketing initiatives. This is accomplished by validating, parsing, matching and de-duplicating customer and prospect information for more efficient list processing. These applications enable businesses to focus marketing efforts on specific groups based on geographic and demographic criteria and analyze response rates from specific segments of their target market.

Customer Communications Management

Group 1’s Customer Communications Management solutions give businesses complete control of the document lifecycle, from content design, generation, and presentment to archive, retrieval and payment. Through its core DOC1 suite, Group 1 offers an integrated customer communications management solution for e-mail, print and Web delivery of targeted correspondence. Personalized, high impact communications with customers and prospects are the sought-after end results of all CRM initiatives.

The Company believes that there is substantial demand for a single-source solution combining customer data with advanced document design, generation and mutichannel delivery. Using Group 1 to develop and deliver millions of customer communications each month are over 500 businesses worldwide, including telecommunications companies, insurance companies, brokerages, credit card processors, public utilities, health care providers and banks.

DOC1 is the industry’s leading enterprise-wide document generation suite and the only single-source solution for generation of print and Web-based documents. Using DOC1, companies can market more intelligently and communicate more effectively with customers and prospects.

DOC1 Designer enables users to create and maintain dynamic business communications. With an intuitive Windows-based user interface, documents can be formatted in multiple languages with full color, dynamic graphics, and variable data. DOC1 Generate uses the rules and content from DOC1 Designer to compose documents for batch or real-time outputs. DOC1 Print offers the industry’s most comprehensive output solution, producing AFP, Metacode, PostScript, PCL, as well as PDF, HTML and XML for e-billing.

DOC1 Present provides businesses with a variety of ways to electronically deliver business documents to their customers. Delivery methods include Web, standard e-mail and secure e-mail. Organizations can utilize DOC1 Present for electronic statement presentment or develop internal applications using its robust development tools. DOC1 Pay, offered in conjunction with DOC1 Present, adds electronic payment functionality. This enables online electronic payment of delivered e-bills.

DOC1 Interactive enables business users to create personalized, professional correspondence such as contracts, letters and policies quickly and easily. Front-office employees can author one-to-one business correspondence through a managed Microsoft Word environment for delivery via print, e-mail, or Web browser.

DOC1 Archive offers real-time storage, compression and high-speed retrieval of business documents and enables users to archive and view millions of documents and maintain years of historical billing and statement data online. DOC1 Archive employs next-generation compression and indexing techniques and utilizes industry-standard hardware, thereby minimizing the investment traditionally required in storage of archived documents.

DOC1 Marketer combines campaign management, data mining, and powerful one-to-one messaging. DOC1 Marketer provides browser-based access to enriched customer data with advanced, easy-to-use predictive modeling via Group 1’s award-winning Model 1 solution.

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DOC1 supports all major printing architectures and can operate in centralized, distributed or desktop environments. When integrated with Group 1’s MailStream Plus and CODE-1 Plus, DOC1 produces documents in a sequence that qualifies for significant United States Postal Service (USPS) presorting discounts.

Products, Services and Support

Products

As of March 31, 2002, Group 1 offered over 50 software products that run on more than 20 different operating systems and hardware platforms. Group 1’s products each can operate on a stand-alone basis or in conjunction with other Group 1 products to create an integrated system that can be tailored to a client’s requirements.

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

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

Professional Services

Group 1’s broad range of professional services include data analysis, data migration, integration with other systems, document analysis, consultation and design, installation and training, and file conversion. These services are designed to assist clients in obtaining maximum utilization from their Group 1 products and in improving other operational areas. Professional services, including operations support, business analysis, programming services, technical education and training, and operational reviews, are provided at the client’s location and at Group 1 training facilities throughout the U.S. and in Canada and the United Kingdom.

Support

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

Group 1 customers are afforded educational opportunities through our Annual User’s Conference and the over 20 local User Groups. In addition, two National User Groups advise Group 1 on a variety of issues. The thirty-member National User Group for the Enterprise Solutions Division includes a cross-section of customers representing various platforms, products, and industries. The Customer Communications Management Division also has an active User’s Group that meets twice a year.

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

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

In the fiscal years ended March 31, 2002, 2001 and 2000, maintenance and enhancement fees represented approximately 49%, 42%, and 40%, respectively, of Group 1’s revenue.

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Customers

Group 1’s customer base includes more than 2,000 clients who have licensed one or more of its products. Group 1 provides software solutions to corporate leaders in a variety of industry segments, as indicated by the following brief list of customers:

Insurance and Financial Services

Retailers

Telecommunications

Utilities

Direct Marketers

Government and Non-profit

E-Business

No customer accounts for more than 10% of the Company’s revenue.

Licensing

Most Group 1 products are licensed on a perpetual “right to use” basis pursuant to non-exclusive license agreements. Those products that incorporate third-party databases are licensed on an annual basis. Group 1 does not sell or transfer title to its software products to clients. A client is generally entitled to use a product only for internal purposes on a single computer at a single location. Group 1 offers its customers a wide variety of license agreements, from single user to enterprise-wide. Certain postal products are required under USPS and CPC regulations (CASS and SERP, respectively) to have defined expiration dates (quarterly or monthly) and must be under subscription or re-licensing arrangements with Group 1 to continue to qualify for postal discounts.

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

Sales and Marketing

Group 1 markets all of its software products in North America and Europe through a direct sales and sales support organization of over 100 Associates located in the Americas and Europe. To serve existing clients and to attract new customers, Group 1 has two sales and support offices in the Washington, DC area and nine other regional offices in the New York City, Chicago, Los Angeles, Las Vegas, Atlanta, Dallas, Minneapolis, Miami and Toronto, Canada areas. Group 1’s European headquarters is located in the London metropolitan area.

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

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Group 1’s domestic distributors and partners include PeopleSoft, Siebel Systems, Pitney Bowes, SPL Worldgroup, Ernst and Young, IBM, Xerox, Portal, CSC, Daleen, USHA, CommercialWare, CSG, SCT, Convergys, Systems Research and Development (SRD) ProQuest and others. Through its Group 1 Software Europe subsidiary, Group 1 has entered into software distribution and support agreements for the DOC 1 product suite with partner distribution companies throughout Europe. International distributors of Group 1’s products include Pitney Bowes, Xerox, IBM, SAP, OBIMD, Business Document, Accenture and L&K. Group 1 has entered into agreements with a number of leading software and hardware vendors. Group 1 distributes products manufactured by Informatica, iWay, Dun & Bradstreet, Claritas, GDT, UNICA Technologies, Business Document, Sigaba and others.

Product Development

The software and service industry is characterized by rapid change in hardware and software technology and in user needs, requiring a continual expenditure for product development. Businesses are also placing emphasis on products and services that can be deployed across the enterprise and in real-time. Technology trends such as the increasing adoption of XML and the promise of Web services require constant evaluation. These operational requirements and technology trends in conjunction with input received from existing customers will continue to guide Group 1’s product direction for the foreseeable future.

Group 1 must be able to provide new products and to modify and enhance existing products on a continuing basis to meet the requirements of its customers and of regulatory agencies, particularly the USPS and CPC. Group 1 may also have to adapt its products to accommodate future changes in hardware and operating systems. To date, Group 1 has been able to adapt its products to such changes and believes that it will be able to do so in the future. Most of the Company’s products are developed internally. The Company also purchases technology, licenses intellectual property rights and oversees third party development of certain products.

Quality assurance testing of Group 1’s new or enhanced products is conducted by teams of experienced individuals from all segments of Group 1’s organization under the direction of testing specialists. Whether the product or technology is developed internally or acquired from another company, Group 1 considers it important to control the marketing, distribution, enhancement and future direction of each of its products and technologies.

Significant investment was made during the year in new software development, which in the Enterprise Solutions division focused on improving the core data quality technology to take advantage of the opportunities that Group 1 believes exist. The Company released DataSight, its flagship data quality solution during the year. It also developed its Data Quality Connector for Siebel to provide robust data quality technology to users of the leading CRM solution. The Company’s HotData hosted services offering was also launched, wedding the technology acquired from HotData with Group 1’s DataQuality.net transactional Web service. Furthermore, the Company introduced MOVEforward Canada, which tracks business and residential address changes and updated its entire suite of data management applications.

Substantial investments were also made in all DOC1 products, most notably the launch of an integrated DOC1 suite offering complete control over the document lifecycle. With the acquisition of Vision-R Technologies, DOC1 Archive was introduced, adding archive and retrieval functionality to the DOC1 suite. DOC1 Present and DOC1 Pay were also introduced, incorporating the technology from the acquisition of TriSense Software and adding electronic delivery and payment to the DOC1 suite.

During fiscal 2002, Group 1 released product updates for all its regulatory products that enabled the Company’s direct marketing customers in the U.S. and Canada to meet the requirements of the USPS and CPC and continue to benefit from substantial postal discounts.

Competition

The software and service industry is highly competitive, and little published data is available regarding Group 1’s relative position in the markets in which it operates. Although no major competitor currently competes against Group 1 across its entire product line, competitive products are available from a number of different vendors offering features similar to those of Group 1’s products. Group 1’s existing and potential competitors include companies having greater financial, marketing and technical resources than Group 1. There can be no assurance that one or more of these competitors will not develop products that are equal or superior to the products Group 1 expects to market. In addition, many potential clients for Group 1’s products have in-house capabilities to develop computer software programs that can provide some or all of the functionality of Group 1’s products.

Group 1 believes that the principal, distinguishing competitive factors in the selection of its software products are price/performance characteristics, marketing and sales expertise, ease of use, product features and functions, reliability and quality of technical support, ease of integration of the product line and the Company’s financial strength. Group 1 believes that it competes favorably with regard to these factors. A major competitive asset is that Group 1 offers a comprehensive array of complementary products that work together to facilitate more effective and efficient target marketing and customer relationship management. Group 1’s primary strengths are the technical capabilities of its personnel and products, marketing and sales expertise, service and support, and industry product leadership.

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Intangible Asset Protection

Group 1 regards its software, in source and object code, related manuals and documentation as proprietary. Group 1 relies upon a combination of contract, trade secret, patents and copyright laws to protect its products. The license agreements under which clients use Group 1’s products often restrict the client’s use to its own operations and always prohibit unauthorized disclosure to third persons. Notwithstanding these, it may be possible for other persons to obtain copies of Group 1’s products. Furthermore, with the increasing number of patents issued for computer programming, notwithstanding Group 1’s efforts to assure to the contrary, Group 1 may in the future find that it has inadvertently infringed on a newly issued patent. Group 1 believes that because of the rapid pace of technological change in the technology industry and changes in postal regulations that affect several core products, copyright, patent, and trade secret protection are less significant than factors such as the knowledge and experience of Group 1’s management and other personnel and their ability to develop, enhance, market and acquire new products.

Group 1 has U.S. federal registrations on over 30 trademarks, including CODE-1 Plus, DM1, DOC1, GROUP 1 SOFTWARE, GEOTAX, HotData and Model1. The Company also has registrations in Australia, Canada, Chile the European Union, Japan and South Korea for selected trademarks. In addition, Group 1 maintains over 35 U.S. common law trademarks.

Employees

As of March 31, 2002, the Company employed 457 persons on a full-time basis, of whom 365 were based in the United States and 92 were based internationally. Of the total, 122 were engaged in sales and marketing, 197 in product development and support, 52 in professional services and 86 in finance, administration and corporate operations. None of the Company’s Associates is represented by a labor union. The Company has not experienced any work stoppages and believes its employee relations to be good.

Item 2. Properties

The Company’s executive and administrative offices are located in Lanham, Maryland, a Washington, DC suburb, where the Company leases 68,598 square feet under a lease that expires in 2015. These facilities also include Group 1’s headquarters and principal operations base. Group 1 has options to lease additional space at specified periods during the term and to extend its lease. In North America, Group 1 leases additional offices in the Chicago, Dallas, Austin, Los Angeles, Las Vegas, Atlanta, New York City, Minneapolis, Miami, Toronto, and the Herndon, Virginia metropolitan areas. Outside North America, the Company leases an office in the London metropolitan area.

Item 3. Legal Proceedings

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

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

None

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PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

The trading of the common stock of the Company is reported on the NASDAQ National Market System under the symbol GSOF. The table below sets forth the highest and lowest closing prices between dealers for the quarters indicated. These prices, as reported by NASDAQ, do not include retail markup, markdown or commissions and may not necessarily represent actual transactions.

Closing Common Stock Prices

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

At June 15, 2002, there were approximately 2,195 holders of record of the Company’s common stock, including persons who wish to be identified as having an interest in shares held or recorded in “street name” with broker-dealers.

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

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Item 6. Selected Financial Data
(In thousands except per share amounts)

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

Results of Operations

Forward-looking Statements

     Any statements in this Annual Report on Form 10-K concerning the Company’s business outlook or future economic performance; anticipated profitability, revenues, expenses or other financial items; together with other statements that are not historical facts, are “forward-looking statements” as that term is defined under the Federal Securities Laws. Forward looking statements may include words such as “believes”, “is developing”, “will continue to be in the future”, “anticipates” and “expects”. 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.

Fiscal 2002 as Compared with Fiscal 2001

     For the year ended March 31, 2002, Group 1’s revenue was $89.4 million compared with $94.2 million for the prior year. Group 1 had net income available to common stockholders for the year of $4.4 million compared with $8.8 million for fiscal 2001. The decrease in profitability is attributed to decreased revenues and operating income in both the Enterprise Solutions and DOC1 segments. These decreases are due primarily to unfavorable economic and market conditions and acquired businesses in fiscal 2002 and are discussed in further detail below.

     All of Group 1’s operations are in the two business segments defined as the Enterprise Solutions Division and DOC1 Division. Enterprise Solutions revenue accounted for 67% and 63% of Group 1’s total revenue in fiscal 2002 and fiscal 2001, respectively. DOC1 revenue was 33% and 37% of total revenue for fiscal 2002 and fiscal 2001. International revenues accounted for 15% and 16% of Group 1’s total revenue in fiscal 2002 and fiscal 2001, respectively.

     Software license fees and related revenue of $33.0 million decreased 18% from the prior year. As a percentage of total revenue, software license and related revenue was 37% and 43% for fiscal years 2002 and 2001, respectively. The decrease was due to lower license fee revenue in both business segments further described below.

     The Enterprise Solutions segment’s data quality/direct marketing software license fees decreased 9% for fiscal year 2002 compared with fiscal year 2001. Included in data quality/direct marketing license fees were a decrease in GeoTax and Code 1 Plus licenses offset partially by an increase in Canadian Data Quality and Mailing Efficiency products.

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     License fees from the Enterprise Solutions segment’s Database Marketing systems decreased $0.4 million for fiscal year 2002. The decrease resulted from lower sales of the Model 1 and DM1 products.

     Licensing of DOC1 software decreased by 28% in fiscal 2002 over the prior fiscal year. The decrease is due to lower license fees sold both domestically and internationally.

     Maintenance and services revenue of $56.4 million for the year increased 4% over the prior year. Maintenance and service revenue accounted for 63% and 57% of total revenue in fiscal 2002 and fiscal 2001, respectively. Recognized maintenance fees were $43.6 million in fiscal 2002 and $39.0 million in fiscal 2001, an increase of 12%. Professional service and educational training revenues were $12.8 million in fiscal 2002 and $15.2 million in fiscal 2001, a decrease of 15%.

     Enterprise Solutions recognized maintenance increased 9% over the prior year to $33.7 million. DOC1 recognized maintenance increased 23% to $9.9 million in fiscal 2002. The increase in maintenance revenue is due to the recognition of a higher level of maintenance deferrals based on higher aggregate sales from prior periods and increased maintenance renewals based on an increase in the installed customer base in both business segments. The Company expects moderate growth in recognized maintenance in the upcoming year in both of its business segments.

     Professional services revenue from the Enterprise Solutions segment decreased to $4.1 million in fiscal 2002 from $4.6 million in fiscal 2001, a decrease of 9%. DOC1 services revenue decreased 18% in fiscal 2002 to $8.7 million. These decreases are associated with the decreased license revenue in both segments, which were affected by unfavorable economic and market conditions. As the Company foresees a growing need for integrating complex solutions, it anticipates increased revenue from these services.

     Total costs of revenue for fiscal 2002 were $32.9 million versus $31.3 million for fiscal 2001, representing 37% and 33% of total revenue, respectively. Costs of revenue include software license expense and maintenance and service expense. Software license expense consists of the amortization of software development costs, royalty payments to third party vendors, and the costs of documentation and quality assurance. Maintenance and service expense consist primarily of consulting, education and support personnel salaries and related costs as well as the costs to distribute the product, including the costs of the media on which it is delivered and shipping and handling costs.

     Software license expense increased to $12.0 million in fiscal 2002 representing 37% of software license and related revenue compared with $11.3 million in fiscal 2001 representing 28% of software license and related revenue. The increase as a percent of revenue is primarily due to lower license fees in fiscal 2002 along with higher royalty expense associated with the sale of third party products.

     Maintenance and service expense increased to $20.8 million in fiscal 2002 from $20.1 million in fiscal 2001, 37% of maintenance and service revenue in both years. The expense as a percent of revenue is expected to decrease as services revenue increases and higher utilization of services personnel is achieved.

     Included in maintenance and service expense are professional service and educational training costs of $12.5 million which were 98% of professional services revenue during 2002 and $12.6 million and 83% of professional services revenue for the prior year. The increase in expense as a percentage of services revenue is due to increased staffing and contracting costs. Services expense as a percent of revenue is expected to decrease as services revenue increases and higher utilization of service personnel is achieved.

     Costs of maintenance were $8.3 million for fiscal 2002 representing 19% of maintenance revenue compared with costs of $7.5 million and 19% of maintenance revenue in fiscal 2001. The Company anticipates that these costs will remain relatively close to their current levels.

     Total operating costs of $50.4 million were 56% of revenue in fiscal 2002 compared with $50.8 million or 54% of revenue during fiscal 2001. 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.

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     Costs for research and development, before capitalization, incurred in fiscal 2002 and 2001, were $17.4 million, $13.3 million, respectively. Research and development expenses (after capitalization of certain software development costs) totaled $10.3 million in fiscal 2002 and $6.5 million in 2001, representing 12% and 7% of total revenue, respectively. The increase in costs is due to the three acquisitions made by the Company during the year along with new product initiatives in both of the Company’s operating segments.

     Sales and marketing expenses totaled $28.9 million or 32% of revenue in fiscal 2002 and $30.8 million or 33% of revenue in fiscal 2001. The decrease in costs as a percentage of revenue is due to lower incentive compensation for sales personnel during fiscal 2002 because of lower revenue. The Company expects these costs to remain relatively close to current levels as a percentage of revenue. Sales and marketing costs for the Enterprise Solutions products were 29% of total Enterprise Solutions revenue for fiscal 2002 and 32% for fiscal 2001. DOC1 selling and marketing costs were 39% of total DOC1 revenue for fiscal 2002 and 33% for fiscal 2001.

     General and administrative expenses were $11.3 million or 13% of total revenue in fiscal 2002 compared with $13.4 million or 14% for fiscal 2001. The decrease is attributable to lower bonus compensation and lower bad debt expense. The Company expects general and administrative expenses to remain relatively close to current levels as a percentage of revenue.

     Net non-operating income was $1.1 million in fiscal 2002 compared with net non-operating income of $2.9 million in fiscal 2001. This decrease represents lower interest income due to lower interest rates, lower translation gains on foreign currency and higher interest expense associated with the outstanding notes from the TriSense and Vision-R acquisitions. The Company expects non-operating income to remain relatively flat. The Company does not expect to benefit from gains on foreign currency transactions. No short-term borrowing requirements are expected; this expectation could be affected substantially by newly-identified investment opportunities including acquisitions.

     The Company’s effective tax rate was 39.2% in fiscal 2002 and 40.6% in fiscal 2001. The current year’s rate is the net effect of a 44.5% domestic tax rate combined with a 30.7% foreign tax rate on taxable net income. The decreased effective rate is primarily due to a higher proportion of foreign taxable income in fiscal 2002.

Fiscal 2001 as Compared with Fiscal 2000

     For the year ended March 31, 2001, Group 1’s revenue was $94.2 million compared with $82.5 million for the prior year. Group 1 had net income available to common stockholders for the year of $8.8 million compared with $6.2 million for fiscal 2000. The increase in profitability was attributed to increased revenues and operating income in both the Enterprise Solutions and DOC1 segments as well as increased interest income resulting from the Company’s higher cash and equivalents balance.

     Enterprise Solutions revenue accounted for 63% and 65% of Group 1’s total revenue in fiscal 2001 and fiscal 2000, respectively. DOC1 revenue was 37% and 35% of total revenue for fiscal 2001 and fiscal 2000. International revenues accounted for 16% of Group 1’s total revenue in fiscal 2001 and 14% in fiscal 2000. The increase in international revenue as a percent of total revenue was due to increased sales of the DOC1 product in Europe and Latin America.

     Software license fees and related revenue of $40.0 million represented an increase of 3% over the prior year. As a percentage of total revenue, software license and related revenues were 43% and 47% for fiscal years 2001 and 2000, respectively.

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

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

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     Licensing of DOC1 software increased by 1% in fiscal 2001 over the prior fiscal year. The increase was due primarily to increased European and Latin American sales offset by slightly lower U.S. sales in fiscal 2001 as compared with fiscal 2000.

     Maintenance and services revenue of $54.2 million for the year increased 24% over the prior year. Maintenance and service revenue accounted for 57% and 53% of total revenue in fiscal 2001 and fiscal 2000, respectively. Recognized maintenance fees were $39.0 million in fiscal 2001 and $32.6 million in fiscal 2000, an increase of 20%. Professional service and educational training revenues were $15.2 million in fiscal 2001 and $11.1 million in fiscal 2000, an increase of 37%.

     Enterprise Solutions recognized maintenance increased 16% over the prior year to $31.0 million. DOC1 recognized maintenance increased 35% to $8.0 million in fiscal 2001 from fiscal 2000. The increase in maintenance revenue was due to the recognition of a higher level of maintenance deferrals based on higher aggregate sales from prior periods and increased maintenance renewals based on an increase in the installed customer base in both business segments.

     Professional services revenue from the Enterprise Solutions segment increased to $4.6 million in fiscal 2001 from $3.0 million in fiscal 2000, an increase of 47%. DOC1 services revenue increased 33% in fiscal 2001 to $10.6 million.

     Total costs of revenue for fiscal 2001 were $31.4 million versus $28.0 million for fiscal 2000, representing 33% and 34% of total revenue, respectively. Costs of revenue include software license expense and maintenance and service expense. Software license expense consists of the amortization of software development costs, royalty payments to third party vendors, and the costs of documentation and quality assurance. Maintenance and service expense consist primarily of consulting, education and support personnel salaries and related costs as well as the costs to distribute the product, including the costs of the media on which it is delivered, shipping and handling costs.

     Software license expense decreased to $11.3 million in fiscal 2001 representing 28% of software license and related revenue compared with $12.3 million in fiscal 2000 representing 32% of software license and related revenue. The decrease as a percent of revenue was primarily due to higher license revenue, lower software amortization expense and lower royalty expense on sales of third party products.

     Maintenance and service expense increased to $20.1 million in fiscal 2001 from $15.7 million in fiscal 2000, 37% and 36% of maintenance and service revenue, respectively. The increase in expense as a percent of revenue was due to the higher percentage of service revenue relative to maintenance revenue.

     Included in maintenance and service expense above are professional service and educational training costs of $12.6 million which were 83% of professional services revenue during 2001 and $8.8 million and 79% of professional services revenue for the prior year. The increase in expense as a percentage of services revenue was due to increased staffing and contracting costs.

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

     Total operating costs of $50.8 million amounted to 54% of revenue in fiscal 2001 compared with $44.7 million or 54% of revenue during fiscal 2000. The various components of operating costs are discussed below.

     Research and development expenses (after capitalization of certain software development costs) totaled $6.5 million in fiscal 2001 and $4.2 million in 2000, representing 7% and 5% of total revenue, respectively. Costs for research and development, before capitalization, incurred in fiscal 2001and 2000, were $13.3 million, $11.1 million, respectively. The increase in costs was due to increased investment in new product initiatives in all of the Company’s major product groups.

     Sales and marketing expenses totaled $30.8 million or 33% of revenue in fiscal 2001 and $26.1 million or 32% of revenue in fiscal 2000. The increase in costs as a percentage of revenue was primarily due to higher sales incentive costs for both Enterprise Solutions and DOC1 products. Sales and marketing costs for the Enterprise Solutions products were 32% of total Enterprise Solutions revenue for both fiscal 2001 and fiscal 2000. DOC1 selling and marketing costs were 33% and 31% of total DOC1 revenue for fiscal 2001 and fiscal 2000, respectively.

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     General and administrative expenses were $13.4 million or 14% of total revenue in fiscal 2001 compared with $14.3 million or 17% for fiscal 2000. The decrease was attributable to lower bonus compensation and lower bad debt expense due to cash collections.

     Net non-operating income was $2.9 million in fiscal 2001 compared with net non-operating income of $1.1 million in fiscal 2000. This increase represents higher interest income generated from higher cash and short-term investment balances as well as gains arising from foreign currency translation.

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

Seasonality and Inflation

     Group 1 in the past has experienced greater sales and earnings in the January-March quarter, the fourth quarter of its fiscal year; there can be no assurance, however, that this will occur in the future. This seasonal factor is believed to be attributable to buying patterns of major accounts and also to fiscal year incentives for Group 1’s sales representatives. Group 1’s revenue and resultant earnings have shown substantial variation on a quarter-to-quarter basis. The Company’s license agreements represent the culmination of sales cycles averaging three to six months. Any significant lengthening in the sales cycle can have the effect of moving revenue from one quarter into the next, contributing to quarter-to-quarter variations.

     Prices remain stable for Group 1’s products. Inflation directly affects Group 1’s cost structure principally in the areas of Associate compensation and benefits, occupancy and support services and supplies.

Liquidity and Capital Resources

     The Company’s working capital was $27.0 million at March 31, 2002 as compared with $29.7 million a year earlier. The current ratio was 1.6 to 1 at March 31, 2002 and 1.7 to 1 at March 31, 2001. Note that the current portion of deferred revenue related to maintenance contracts is included in current liabilities. Accordingly, working capital and current ratios may not be directly comparable to such data for companies in other industries where similar revenue deferrals are not typical.

     The Company provides for its funding requirements through cash generated from operations. Additionally, the Company maintains a $10 million line of credit arrangement with a commercial bank, expiring October 31, 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 March 31, 2002 and at March 31, 2001, there were no borrowings outstanding under the line of credit.

     During fiscal 2002, net income before preferred stock dividends of $4.4 million along with non-cash expenses of $11.9 million provided a total of $16.3 million cash from operating activities. A decrease in accounts receivable increased cash by $6.4 million during the year. This decrease in receivables was due to improved cash collections and lower revenue during the year. Deferred revenues decreased cash by $0.5 million. A decrease in accrued expenses and compensation decreased cash by $2.8 million. This was due to payments of fiscal 2001 accrued corporate bonuses and other incentive compensation, which were not accrued during fiscal 2002 due to lower earnings. Other working capital items decreased cash by $0.3 million. Cash flows used in investing activities consist of expenditures for investments in software development and capital equipment of $10.2 million, $16.7 million net cash used for purchases of marketable securities and $6.1 million paid for acquisitions. Proceeds from the exercise of stock options of $0.9 million were partially offset by principal payments on capital leases and preferred dividends and the repurchase of common stock of $0.2 million for a total of $0.7 million cash provided by financing activities.

     Group 1 continually evaluates the credit and market risks associated with outstanding receivables. In the course of this review, Group 1 considers many factors specific to the individual client as well as to the concentration of receivables within industry groups.

     As of March 31, 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.

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

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 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.

     The amount of deferred revenue at March 31, 2002 to be recognized during the subsequent years is (in thousands):

     Contracts for professional services are negotiated individually. The Company generally recognizes revenues from professional service contracts on a time and materials basis as the work is performed. Revenues from fixed price professional service contracts are recognized using the percentage-of-completion method as work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information is known. As of March 31, 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.

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     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 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. Goodwill, net of accumulated amortization, was $12.7 million and $4.0 million at March 31, 2002 and 2001, respectively. There was no goodwill amortization expense during fiscal year 2002 in accordance with SFAS Nos. 141 and 142, as discussed above. Amortization charged to operations amounted to $526,000 and $748,000 for fiscal 2001 and 2000, respectively.

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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     The Company has a subsidiary in the United Kingdom with offices throughout continental Europe. Additionally, the Company uses third party distributors to market and distribute its products in other international regions. Transactions conducted by the subsidiary are typically denominated in the local country currency, while transactions conducted by the distributors are typically denominated in pounds sterling. As a result, the Company is primarily exposed to foreign exchange rate fluctuations as the financial results of its subsidiary and third party distributors are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and impact overall expected profitability. Through and as of March 31, 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.

Risk Factors

Our total revenue and operating results may fluctuate.

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

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

Our quarterly operating results may fluctuate.

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

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

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

We need to integrate acquisitions and manage growth successfully.

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

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

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

Economic conditions could adversely affect our revenue growth and ability to forecast revenue

     The revenue growth and profitability of our business depends on the overall demand for our software products and services. Because our sales are primarily to major corporate customers our business is subject to fluctuations based on overall economic conditions. The general weakening of the global economy has caused a decrease in our software license revenues in 2002. A softening of demand for computer software caused by continued weakening of the economy, domestically or internationally, may result in a continued decrease in revenues and growth rates.

     Our revenue pipeline estimates may not consistently correlate to actual revenues in a particular quarter or over a long period of time. A slowdown in the economy, domestically or internationally, has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or canceled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion of the pipeline into contracts could cause us to plan or budget improperly and thereby could adversely affect our business, financial condition or results of operations. In addition, primarily due to a substantial portion of our license contracts closing in the latter part of the quarter, management may not be able to adjust our cost structure in response to a variation in the conversion of the pipeline into contracts in a timely manner, thereby adversely affecting our business, financial condition or results of operations.

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

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

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

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

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

Software errors or defects in our products could reduce revenues.

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

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

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

Failure to meet regulatory requirements set by the USPS and CPC could have a negative impact on revenues.

     We are required to maintain many of our products in accordance with regulatory standards set by the U.S. and Canadian Postal authorities. Failure to meet these requirements could adversely affect our business, financial condition and results of operations.

Our expanding distribution channels may create additional risks.

     Failure to minimize channel conflicts could materially and adversely affect our business, operating results and financial condition. We have a number of relationships with resellers, which assist us in obtaining broad market coverage. We have generally avoided exclusive relationships with resellers of our products. Discount policies and reseller licensing programs are intended to support each distribution channel with a minimum level of channel conflicts.

If we do not maintain our relationships with third party vendors, interruptions in the supply of our products may result.

     We may not be able to replace the functionality provided by the third-party software and data currently offered with our products if that software oe data becomes obsolete or incompatible with future versions of our products or is not adequately maintained or updated. Portions of our products incorporate software or data that was developed and is maintained by third-party software developers or data providers. Although we believe there are other sources for these products and data, any significant interruption in the suply could adversely impact our sales unless and until we can secure another source. We depend in part on these third parties’ ability to enhance their current products and data, to develop new products and update data on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. The absence of or any significant delay in the replacement of functionality provided by third-party software in our products could materially and adversely affect our sales.

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

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

We may not be able to protect our proprietary information.

     We rely primarily on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We also believe that the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. Notwithstanding these, it may be possible for other persons to obtain copies of Group 1’s products. Group 1 believes that because of the rapid pace of technological change in the technology industry and changes in postal regulations that affect several core products, copyright and trade secret protection are less significant than factors such as the knowledge and experience of Group 1’s management and other personnel and their ability to develop, enhance, market and acquire new products. Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate.

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

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

Our international operations involve unique risks.

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

Our stock price may continue to be volatile.

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

Item 8. Financial Statements and Supplementary Data

     See pages 22 through 41.

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

     None.

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Report of Independent Accountants

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Group 1 Software, Inc. and its subsidiaries at March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP     

McLean, Virginia
June 14, 2002

21

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

See notes to consolidated financial statements.

22

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

See notes to consolidated financial statements.

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

See notes to consolidated financial statements.

24

GROUP 1 SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

See notes to consolidated financial statements.

25

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

See notes to consolidated financial statements.

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Group 1 Software, Inc.
Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Organization

     The accompanying consolidated financial statements are for Group 1 Software, Inc. (“Group 1”), which was incorporated in June 1967. Unless otherwise indicated in the Notes to the consolidated financial statements, the term “Company” will refer to the operations of Group 1 and its subsidiaries. Group 1 Software, Inc. develops, acquires, markets and supports software solutions for customer communication management, data quality and direct marketing. The Company distributes all of its products in North America and its customer relationship communication solutions throughout the world.

Principles of Consolidation

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

Estimates

     The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

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

     The amount of deferred revenue at March 31, 2002 to be recognized during the subsequent years is (in thousands):

     Contracts for professional services are negotiated individually. The Company generally recognizes revenues from professional service contracts on a time and materials basis as the work is performed. Revenues from fixed price professional service contracts are recognized using the percentage-of-completion method as work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information is known. As of March 31, 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.

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     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.

Cash and Cash Equivalents

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

Short-term Investments

     The Company classifies its short-term investments as available-for-sale. Short-term investments are comprised of debt securities with original maturities of more than three months when purchased. All securities held mature within one year of the balance sheet date. As of March 31, 2002 the Company had available-for-sale investments of $24.7 million. The Company had available-for-sale investments of $8.0 million as of March 31, 2001. The investments are adjusted to market value at the end of each accounting period. Unrealized gains and losses, net of applicable taxes, are charged or credited to accumulated other comprehensive income, a separate component of stockholders’ equity. Realized gains and losses on the sale of investments, as determined on a specific identification basis, are included in the consolidated statements of operations. To date, unrealized gains and losses have not been material. Interest income is recognized when earned.

Property and Equipment

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

Internal Use Software

     Internal use software and web site development costs are capitalized in accordance with Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Emerging Issues Task Force (EITF) Issue No. 00-02, “Accounting for Web Site Development Costs.” Qualifying costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred. As of March 31, 2002 and 2001, costs qualifying for capitalization totaled $1,180,000 and $2,171,000 net of accumulated amortization of $3,078,000 and $2,438,000, respectively. These costs are included as part of property, plant and equipment, net in the accompanying consolidated balance sheets. Amortization is computed using the straight-line method over the estimated useful lives of the assets, generally three years, and is included in general and administrative expenses.

Research and Product Development

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Software development costs capitalized include direct labor costs and fringe labor overhead costs attributed to programmers, software engineers, quality control and field certifiers working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized costs are amortized over the estimated product life of three to five years, using the greater of the straight-line method or the ratio of current product revenues to total projected future revenues. At the balance sheet date, the Company evaluates the net realizable value of the capitalized costs and adjusts the current period amortization for any impairment of the capitalized asset value. Developed and acquired software costs, net of accumulated amortization, are $22,873,000 and $18,936,000 million at March 31, 2002 and 2001, respectively, and are included in computer software, net in the accompanying consolidated balance sheets. Amortization expense related to developed and acquired software costs was $7,084,000, $8,091,000 and $9,047,000 for the years ended March 31, 2002, 2001 and 2000, respectively and is included in cost of software license revenues. During the years ended March 31, 2002, 2001 and 2000, respectively, the Company capitalized software development costs of $7,097,000, $6,736,000 and $6,834,000 and purchased software of $82,000, $983,000 and $2,221,000. Research and product development costs not subject to SFAS No. 86 are expensed as incurred and relate mainly to the development of new products and on-going maintenance of existing products. Total costs for research and development, before capitalization, incurred in fiscal 2002, 2001, and 2000 were $17,442,000, $13,264,000 and $11,055,000, respectively.

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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 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. Goodwill, net of accumulated amortization, was $12.7 million and $4.0 million at March 31, 2002 and 2001, respectively. There was no goodwill amortization expense during fiscal year 2002 in accordance with SFAS No. 142, as discussed above. Amortization charged to operations amounted to $526,000 and $748,000 for fiscal 2001 and 2000, respectively.

Foreign Currency Translation

     The functional currency for the Company’s international subsidiary is the applicable local currency. The financial statements of the international subsidiary are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements are included in stockholders’ equity as accumulated other comprehensive income. The Company does not attempt to hedge its foreign currency exposures. Foreign currency losses of $82,000 in 2002, $1,284,000 in 2001, and $16,000 in 2000 are included in accumulated other comprehensive income. Gains and losses arising from transactions denominated in a currency other than the Company’s functional currency are included in the consolidated statements of operations.

Stock-based Compensation Plans

     The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and complies with the disclosure provisions of SFAS 123, “Accounting for Stock Based Compensation.” Under APB 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the fair market value of the Company’s stock and the amount an employee must pay to acquire the stock. The Company’s policy is to grant options with an exercise price equal to the quoted market price of the Company’s stock on the grant date. The Company’s stock-based awards issued to non-employees are accounted for under the fair value method.

Income Taxes

     The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the asset and liability tax consequences of temporary differences by applying currently enacted statutory tax rates applicable to future years to differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities. The Company does not provide for U.S. income tax liabilities on undistributed earnings of its foreign subsidiaries which are considered indefinitely reinvested.

Earnings per Share of Common Stock

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

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