SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

Securities Exchange Act of 1934

Group 1 Software, Inc.

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

Telephone Number: (301) 918-0400

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

YES    |X|     NO |_|

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

See notes to consolidated financial statements.

2

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

See notes to consolidated financial statements.

3

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

See notes to consolidated financial statements.

4

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

See notes to consolidated financial statements.

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

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

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

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

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

5.     Earnings per share

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

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

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

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

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

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

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7. Legal Contingencies

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

8. Segment Information

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

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

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

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

9. Business Combinations

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

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

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

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

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

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

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

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

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

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

Results of Operations

Any statements in this Quarterly Report on Form 10-Q concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items, together with other statements that are not historical facts, are “forward-looking statements” as that term is defined under the Federal Securities Laws. Forward looking statements may include words such as “believes”, “is developing”, “will continue to be in the future”, “anticipates” and “expects”. Actual results may differ materially from the expectations expressed or implied in the forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, changes in currency exchange rates, changes and delays in new product introduction, customer acceptance of new products, changes in government regulations, changes in pricing or other actions by competitors and general economic conditions, as well as other risks detailed in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Software development costs incurred subsequent to establishment of the software’s technological feasibility are capitalized. Capitalization ceases when the software is available for general release to customers. All costs not meeting the requirements for capitalization are expensed in the period incurred. Software development costs include direct labor cost and overhead. Capitalized software development costs are amortized by the greater of (a) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. At the balance sheet date, the Company evaluates the net realizable value of the capitalized costs and adjusts the current period amortization for any impairment of the capitalized asset value. Amortization of capitalized software is included in the cost of license fees.

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

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

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

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

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

Critical Accounting Policies

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

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

Contracts for professional services are negotiated individually. The Company generally recognizes revenues from professional service contracts on a time and materials basis as the work is performed. Revenues from fixed price professional service contracts are recognized using the percentage-of-completion method as work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information is known. As of September 30, 2002, the Company has not incurred any losses on contracts in progress.

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

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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.

Capitalized Software: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Software development costs capitalized include direct labor costs and fringe labor overhead costs attributed to programmers, software engineers, quality control and field certifiers working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized costs are amortized over the estimated product life of three to five years, using the greater of the straight-line method or the ratio of current product revenues to total projected future revenues. At the balance sheet date, the Company evaluates the net realizable value of the capitalized costs and adjusts the current period amortization for any impairment of the capitalized asset value.

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

Goodwill represents the excess of the aggregate purchase price over the fair market value of the tangible and intangible assets acquired in various acquisitions and, prior to fiscal year 2002, was amortized on a straight-line basis over the estimated economic useful life ranging from nine to fifteen years. There was no goodwill amortization expense during fiscal year 2003 and 2002 in accordance with SFAS Nos. 141 and 142, as discussed above.

Liquidity and Capital Resources

The Company’s working capital was $30.9 million at September 30, 2002, as compared with $27.0 million at March 31, 2002. The current ratio was 1.7 to 1 at September 30, 2002 and 1.6 to 1 at March 31, 2002. Note that the current portion of deferred revenue related to maintenance contracts is included in current liabilities. Accordingly, working capital and current ratios may not be directly comparable to such data for companies in other industries where similar revenue deferrals are not typical.

The Company provides for its funding requirements through cash funds generated from operations. Additionally, the Company maintains a $10 million line of credit arrangement with a commercial bank, expiring November 30, 2002. The line of credit bears interest at the bank’s prime rate or Libor plus 150 basis points, at Group 1’s option. The line of credit is not collateralized but requires Group 1 to maintain certain operating ratios. At September 30, 2002 and at March 31, 2002, there were no borrowings outstanding under the line of credit.

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

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

As of September 30, 2002, the Company’s capital resource commitments consisted primarily of non-cancelable operating lease commitments for office space and equipment. The Company believes that its current minimum lease obligations and other short-term and long-term liquidity needs can be met from its existing cash and short-term investment balances and cash flows from operations. The Company believes that its long-term liquidity needs are minimal and no large capital expenditures are currently planned, except for the continuing investment in software development costs, which the Company believes can be funded from operations during the next twelve months.

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

Recent Accounting Pronouncements

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

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

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

Legal Contingencies

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

Quantitative and Qualitative Disclosures about Market Risk

The Company has a subsidiary in the United Kingdom with offices throughout continental Europe. Additionally, the Company uses third party distributors to market and distribute its products in other international regions. Transactions conducted by the subsidiary are typically denominated in the local country currency, while transactions conducted by the distributors are typically denominated in pounds sterling. As a result, the Company is primarily exposed to foreign exchange rate fluctuations as the financial results of its subsidiary and third party distributors are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and impact overall expected profitability. Through and as of September 30, 2002, however, the Company’s exposure was not material to the financial statements taken as a whole. The Company has not entered into any foreign currency hedging transactions with respect to its foreign currency market risk. The Company does not have any financial instruments subject to material market risk.

Controls and Procedures

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

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

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Part II Other Information

Item 1. Legal Proceedings

         NONE

Item 2. Changes in Securities

         NONE

Item 3. Defaults Upon Senior Securities

         NONE

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

Item 5. Other Information

         NONE

Item 6. Exhibits and Reports on Form 8-K

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Signatures

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

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