SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

Securities Exchange Act of 1934

For the Quarter Ended June 30, 2003

Commission file number 0-6355

Group 1 Software, Inc.

Incorporated in Delaware

IRS EI No. 52-0852578

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

Telephone Number: (301) 918-0400

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

YES |X|

NO |_|

Class
Common Stock, $.50 par value

Shares Outstanding Effective
August 7, 2003
14,984,301

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

	June 30, 2003			March 31, 2003
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	49,420		$	56,475
Short-term investments, available-for-sale		8,422			7,712
Trade and installment accounts receivable, less
allowance of $1,484 and $1,755		13,929			18,834
Note Receivable		7,000			—
Deferred income taxes		1,715			2,130
Prepaid expenses and other current assets		3,603			4,067

Total current assets		84,089			89,218

Installment accounts receivable, long-term		30			39
Property and equipment, net		4,864			4,707
Computer software, net		23,600			23,490
Goodwill		12,722			12,716
Other assets		220			206

Total assets	$	125,525		$	130,376


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,345		$	1,358
Current portion of note payable		347			371
Accrued expenses		5,836			7,033
Accrued compensation		4,837			9,454
Current deferred revenues		28,203			31,241

Total current liabilities		40,568			49,457
Note payable, net of current portion		350			350
Deferred revenues, long-term		386			315
Deferred income taxes		4,402			4,694

Total liabilities		45,706			54,816

Commitments and contingencies
Stockholders’ equity:
6% cumulative convertible preferred stock $0.25 par value;
1,200 shares authorized; 48 shares issued		—			—
Common stock $0.50 par value; 50,000 shares authorized;
15,041 and 14,902 shares issued		7,521			7,451
Additional paid in capital		36,333			34,951
Retained earnings		39,672			37,619
Accumulated other comprehensive income		938			184
Treasury stock, 1,246 shares, at cost		(4,645	)		(4,645	)

Total stockholders’ equity		79,819			75,560

Total liabilities and stockholders’ equity	$	125,525		$	130,376

See notes to consolidated financial statements.

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

	For the Three Month Period Ended June 30,
	2003			2002
Revenue:
Software license and related revenue	$	10,468		$	9,877
Maintenance and services		13,788			13,502

Total revenue		23,379			24,256


Cost of revenue:
Software license expense		3,799			4,071
Maintenance and service expense		4,450			4,274

Total cost of revenue		8,249			8,345


Gross profit		16,007			15,034


Operating expenses:
Research and development, net (see note 6)		2,769			2,742
Sales and marketing		7,580			7,510
General and administrative		3,200			3,330

Total operating expenses		13,549			13,582


Income from operations		2,458			1,452

Other income:
Interest income		243			281
Interest expense		(12	)		(130	)
Other income (expense)		546			(46	)

Total other income		777			105

Income before provision for income taxes		3,235			1,557

Provision for income taxes		1,182			584

Net income		2,053			973

Preferred stock dividend requirements		—			(14	)

Net income available to common stockholders	$	2,053		$	959


Basic earnings per share	$	0.15		$	0.08


Diluted earnings per share	$	0.13		$	0.07


Basic weighted average shares outstanding		13,724			12,616


Diluted weighted average shares outstanding		15,862			13,886

See notes to consolidated financial statements.

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

	For the Three Month Period Ended June 30,
	2003			2002
Cash flows from operating activities:
Net income	$	2,053		$	973
Adjustments to reconcile net income from
operations to net cash provided by operating activities:
Amortization expense		2,748			2,356
Depreciation expense		414			594
Provision for doubtful accounts		(310	)		150
Deferred income taxes		125			80
Net gain on sale of intellectual property and other property
and equipment		(345	)		—
Tax benefit from exercises of stock options		647			85
Foreign currency transaction loss		18			64
Changes in assets and liabilities:
Accounts receivable		5,352			4,478
Prepaid expenses and other current assets		486			(177	)
Other assets		(7	)		(6	)
Deferred revenues		(3,092	)		(1,357	)
Accounts payable		(33	)		307
Accrued expenses and accrued compensation		(5,893	)		972

Net cash provided by operating activities		2,163			8,519


Cash flows from investing activities:
Purchases and development of computer software		(2,301	)		(1,842	)
Purchases of property and equipment		(809	)		(359	)
Purchases of marketable securities		(6,708	)		(4,915	)
Sales of marketable securities		5,998			6,489
Proceeds from sale of intellectual property		375			—
Issuance of notes receivable		(7,000	)		—

Net cash used in investing activities		(10,445	)		(627	)


Cash flows from financing activities:
Proceeds from exercise of stock options		804			153
Repayment of principal on long-term debt		(24	)		(3,102	)

Net cash provided by (used in) financing activities		780			(2,949	)


Net (decrease) increase in cash and cash equivalents		(7,502	)		4,943

Effect of exchange rate on cash and cash equivalents		447			642

Cash and cash equivalents at beginning of period		56,475			22,936

Cash and cash equivalents at end of period	$	49,420			28,521


Supplemental disclosure of non-cash investing and financing activities:
Mature shares tendered in payment for stock option exercises	$	—			26

See notes to consolidated financial statements.

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

	For the Three Month Period Ended June 30,
	2003		2002
Net income	$	2,053	$	973

Foreign currency translation adjustments		754		1,107


Comprehensive income	$	2,807	$	2,080

See notes to consolidated financial statements.

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

1. The consolidated financial statements for the three months ended June 30, 2003 and 2002 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a recurring nature in the normal course of business. Limited footnote information is presented in accordance with quarterly reporting requirements. The results of operations for the three months ended June 30, 2003 are not necessarily indicative of the results for the year ending March 31, 2004. The information contained in the annual report on the Form 10-K for the year ended March 31, 2003, should be referred to in connection with the unaudited interim financial information.

2. On April 15, 2003, the Company entered into an agreement to acquire key assets of Sagent Technology, Inc. (“Sagent”) for up to $17 million, payable in cash and debt forgiveness. Group 1 has provided Sagent with $7 million in bridge financing, secured by all of Sagent’s assets. The purchase agreement has been approved by Group 1‘s and Sagent’s board of directors. The transaction is subject to approval by Sagent’s shareholders and certain other closing conditions. On July 31, 2003, Group 1 entered into an amendment to extend the maturity date under the $7 million existing secured loans to September 30, 2003 and to increase the borrowing limit of the loan from $7 million to $9 million. Sagent and Group 1 have also agreed to extend the outside date for closing under the asset purchase agreement until October 30, 2003. Otherwise, terms of the existing loan and the asset purchase agreement remain the same.

3. On December 10, 2002, under authorization of the Board of Directors the Company moved to redeem all of the outstanding 6% cumulative convertible preferred stock. On January 15, 2003, the holders of all 47,500 shares outstanding elected to exchange their preferred shares for 142,500 common shares in accordance with the conversion provision of the preferred stock.

4. 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 were issued on December 2, 2002. The effect of the stock split has been retroactively reflected in the consolidated financial statements for all periods presented.

5. Certain prior period amounts have been reclassified to conform to current period presentation.

6. Research and development costs, before the capitalization of computer software development costs, was $4,818,000 and $4,585,000 for the three months ended June 30, 2003 and 2002, respectively. Capitalization of computer software development costs for the three months ended June 30, 2003 and 2002 were $2,049,000 and $1,843,000, respectively.

7. Earnings per share

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

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

	For the Three Month Period Ended June 30,
	2003		2002
Weighted average common shares outstanding-basic		13,724		12,616
Effect of dilutive securities:
Stock options and warrants		2,138		1,270

Weighted average shares outstanding-diluted		15,862		13,886

There were no additional potentially dilutive common stock options, warrants or convertible securities in the three months ended June 30, 2003. There were 1,500,000 additional potentially dilutive common stock options and warrants in the three months ended June 30, 2002. There were 142,500 additional potentially dilutive convertible securities in the three months ended June 30, 2002.

The Company accounts for its stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25,” (FIN 44) and present the pro forma disclosures required by Statement of Financial Accounting Standard No. 123, “Accounting for Stock Based Compensation” (SFAS 123) as amended by Statement of Financial Accounting Standard No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” (SFAS 148).

The Company accounts for the activity under the Plans in accordance with APB 25. Accordingly, no compensation expense has been recognized for the Plans. If compensation expense had been determined based on the fair value of the options at the grant dates consistent with the method of accounting under SFAS No. 123, the Company’s net income and earnings per share would have decreased or increased to the pro forma amounts indicated below (in thousands, except per share amounts):


Net income available to common stockholders as
reported	$2,053		$ 959
Add: stock-based employee compensation
expense included in reported net income	—		—
Deduct: total stock-based employee
compensation expense determined under fair
value based method for all awards	(1,046	)	(840	)

Pro forma net income available to common
stockholders	$1,007		$ 119

Earnings per share
Basic, as reported	$ 0.15		$ 0.08

Basic, pro forma	$ 0.07		$ 0.01

Diluted, as reported	$ 0.13		$ 0.07

Diluted, pro forma	$ 0.06		$ 0.01

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended June 30, 2003 and 2002, respectively: dividend yield of 0%, expected volatility of 95% and 104%, respectively, a risk-free interest rate of 2.60% and 4.63%, respectively, and an expected term of 4.04 and 4.08 years, respectively.

8. Recent Accounting Pronouncements

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 June 30, 2003, with early application encouraged. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after June 30, 2003. The adoption of this Statement did not have a material impact on the Company’s financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The Company does not expect that the adoption of this standard will have a material effect on its financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company does not expect that the adoption of this standard will have a material effect on its financial position or results of operations.

9. 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.

10. Segment Information

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

	Three Months Ended June 30,
Segment Information (in thousands)	2003		2002
Revenue:
Enterprise Solutions	$	17,422	$	16,127
DOC1		6,834		7,252

Total revenue	$	24,256	$	23,379


Gross Profit:
Enterprise Solutions	$	12,595	$	10,909
DOC1		3,412		4,125

Total gross profit	$	16,007	$	15,034

Amortization of capitalized developed and acquired software associated with the Enterprise Solutions segment was $1,606,000 and $1,376,000 for the three months ended June 30, 2003 and 2002. Amortization of capitalized developed and acquired software associated with the DOC1 segment was $938,000 and $720,000 in the three months ended June 30, 2003 and 2002.

As of June 30, 2003 and March 31, 2003, the Company determined that the identifiable assets for its reportable segments were as follows (in thousands):

	June 30, 2003		March 31, 2003
Enterprise Solutions	$	32,416	$	39,075
DOC1		31,458		32,039
Corporate		61,651		59,262

Total assets	$	125,525	$	130,376

The changes in the carrying amount of goodwill for the three months ended June 30, 2003 for each reportable segment were as follows (in thousands):


Balance as of March 31, 2003	$ 4,497		$ 8,219
Effect of sale of intellectual property	(8	)	—
Effect of currency translation on goodwill	—		14

Balance as of June 30, 2003	$ 4,489		$ 8,233

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

Results of Operations

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

For the three months ended June 30, 2003 and 2002, the Company had revenues of $24.3 million and $23.4 million, respectively. Net income available to common stockholders for the three months ended June 30, 2003 was $2.1 million or $0.13 diluted earnings per share compared with $1.0 million or $0.07 diluted earnings per share in the same period in the prior year. The increase in profitability is primarily due to increased revenue, lower cost of revenue and an increase in other income.

All of Group 1’s operations are based in the two business segments defined as Enterprise Solutions and DOC1. Enterprise Solutions revenue accounted for 72% and 69% of Group 1’s total revenue for the first fiscal quarters ended June 30, 2003 and 2002, respectively. DOC1 revenue was 28% and 31% of total revenue for the first quarters of fiscal 2004 and fiscal 2003, respectively.

International revenues accounted for 11% and 14% of Group 1’s total revenue in the first quarters of fiscal 2004 and 2003, respectively. The lower international revenue can primarily be attributed to lower sales of the DOC 1 product in Europe.

Software license and related revenue of $10.5 million for the first fiscal quarter of 2004 increased 6% from $9.9 million the same period the prior year. As a percent of total revenue, first quarter software license and related revenues were 43% in the first fiscal quarter of 2004 compared with 42% in fiscal 2003.

Enterprise Solutions license revenue increased 16% to $8.2 million in the three month period ended June 30, 2003. The increase in the quarter is due to higher sales of Group 1’s Code 1 Plus, MailStream Plus and MoveForward products partially offset by lower sales of the Company’s GeoTax tax jurisdiction software.

License fees from DOC1 for the three months ended June 30, 2003 decreased 20% to $2.2 million from the same period in the prior year. The decrease in DOC1 license revenue was due to lower sales of the DOC 1 document generation product offset in part by higher sales of the Company’s DOC 1 Archive product both domestically and in Europe.

Maintenance and service revenue was $13.8 million for the first quarter of fiscal year 2004 and $13.5 million in the prior year’s first fiscal quarter. Maintenance and service revenue was 57% of total revenue for the quarter ended June 30, 2003 and 58% of total revenue in the same period in the prior year. Recognized maintenance fees included in maintenance and service revenue were $11.8 million for the quarter ended June 30, 2003 and $11.1 million for the same period the prior year, an increase of 6%.

For the quarter ended June 30, 2003, Enterprise Solutions recognized maintenance was $8.3 million, a 1% increase from the same period in the prior year. DOC1 recognized maintenance increased 23% to $3.4 million in the quarter ended June 30, 2003 compared with the comparable period the prior year.

Professional and educational service revenue from the Enterprise Solutions segment remained at $0.6 million in both quarters ended June 30, 2003 and 2002. DOC1 service revenue decreased to $1.3 million in the quarter ended June 30, 2003 from $1.8 million in the same period of the prior fiscal year. The decrease in professional and educational service revenue in both segments is due to lower sales of new installations which require integration services.

Total cost of revenue for the first quarter of fiscal 2004 and 2003 was $8.2 million and $8.3 million, respectively. The separate components of cost of revenue are discussed below.

Software license expense decreased for the three month period ended June 30, 2003 to $3.8 million from $4.1 million for the same period in the prior year representing 36% and 41% of software license and related revenues, respectively. The decrease in software license expense in the first fiscal quarter was due primarily to a decrease in royalty expenses, partially offset by higher amortization of capitalized development expenses in the current year.

Maintenance and service expense increased to $4.5 million in the current quarter from $4.3 million in the comparable period in fiscal 2003, representing 32% of maintenance and service revenue in both quarters.

Included in maintenance and service expense discussed above are professional and educational service costs of $2.5 million for the three months ended June 30, 2003 compared with $2.4 million for the comparable period in the prior year. The increase in professional and educational service costs is due to more professional service work being performed by third party contractors.

Costs of maintenance were $2.0 million and $1.9 million for the first fiscal quarters of 2004 and 2003 respectively, representing 17% of maintenance revenue in both periods.

Total operating costs of $13.5 million amounted to 56% of revenue for the quarter ended June 30, 2003 compared with $13.6 million or 58% of revenue for the prior year period. The various components of operating costs are discussed below.

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

Costs of research and development, before capitalization, were $4.8 million and $4.6 million or 20% of revenue in the quarters ended June 30, 2003 and 2002, 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 June 30, 2003 compared with $2.7 million or 12% in the prior year. The increase in expense is due to increased spending on new product initiatives and related development resources (see footnote 6 of notes to consolidated financial statements).

Sales and marketing expenses totaled $7.6 million or 31% of revenue in the first quarter of fiscal 2004 and $7.5 million or 32% in the prior year first quarter. Sales and marketing expenses for Enterprise Solutions were 25% of Enterprise Solutions revenue in the first fiscal quarter of 2003 and 28% for the same period the prior year. DOC1 sales and marketing expenses were 47% of DOC1 revenue for the three month period ended June 30, 2003 and 41% for the same period the prior year. The decrease in Enterprise Solutions cost as a percent of revenue is primarily due to increased revenue. The increase in cost as a percent of revenue in the DOC1 division is due primarily to increases in sales and marketing costs and lower revenue.

General and administrative expenses were $3.2 million or 13% of total revenue compared with $3.3 million or 14% of revenue for the three months ended June 30, 2003 and 2002, respectively. The decrease in general and administrative expenses in the quarter is primarily related to a recovery of bad debt expense.

Net other income was $0.8 million for the quarter ended June 30, 2003 as compared with $0.1 million for the same period in the prior year. The increase in other income in the three month period ending June 30, 2003 is primarily the result of currency translation gains and a gain on the sale of intellectual property.

The Company’s effective tax rates were 36.5% and 37.5% for the three month periods ended June 30, 2003 and 2002, respectively. The current period’s rate is the net effect of a 36% effective tax rate on domestic taxable income and a 29% rate on foreign taxable income. The lower effective tax rate in the current quarter is primarily due to increased research and development credits in the United States.

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, 2003 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. During the three months ended June 30, 2003, the Company has not incurred any losses on contracts in progress.

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

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

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

Goodwill: In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, the Company ceased amortization of goodwill as of April 1, 2001 and 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 2003 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 2004 and 2003 in accordance with SFAS Nos. 141 and 142, as discussed above.

Liquidity and Capital Resources

The Company’s working capital was $43.5 million at June 30, 2003, as compared with $39.8 million at March 31, 2003. The current ratio was 2.1 to 1 at June 30, 2002 and 1.8 to 1 at March 31, 2003. Note that the current portion of deferred revenue related to maintenance contracts is included in current liabilities. Accordingly, working capital and current ratios may not be directly comparable to such data for companies in other industries where similar revenue deferrals are not typical.

The Company provides for its funding requirements through cash funds generated from operations. Additionally, the Company maintains a $10 million line of credit arrangement with a commercial bank, expiring October 31, 2004. The line of credit bears interest at the bank’s prime rate or Libor plus 140 basis points, at Group 1’s option. The line of credit is not collateralized but requires Group 1 to maintain certain operating ratios. At June 30, 2003 and at March 31, 2003, there were no borrowings outstanding under the line of credit.

During fiscal 2004, net income of $2.1 million, non-cash expenses of $3.3 million and $3.2 million net change in assets and liabilities provided a total of $2.2 million cash from operating activities. The net changes in assets and liabilities include an decrease in accounts receivable that increased cash by $5.4 million during the quarter. The decrease in receivables was due to increased cash collections. Deferred revenues decreased by $3.1 million, and accrued expenses and compensation decreased by $5.9 million, decreasing cash by a total of $9.0 million. The decreased accrued compensation was due primarily to payments of prior year incentive compensation accruals. The decrease in deferred revenue is primarily related to the recognition of license fees on certain transactions that had been previously deferred. Other working capital items increased cash by $0.4 million.

Cash flows used in investing activities of $10.4 million consist of expenditures for investments in software development and capital equipment of $3.1 million, net purchases of marketable securities of $0.7 million, $7.0 million in notes receivable issued to Sagent and proceeds of $0.4 million from the sale of intellectual property.

Proceeds from the exercise of stock options of $0.8 million net of repayments of long-term debt provided a total of $0.8 million cash from financing activities.

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

As of June 30, 2003, 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):

Contractual Obligations	Total Amount Committed		Less than 1 Year		1-3 Years		4-5 Years		Over 5 Years
Operating leases	$	28,257	$	3,877	$	6,514	$	4,565	$	13,301
Notes payable		697		347		350		—		—
Total contractual cash obligations	$	28,954	$	4,224	$	6,864	$	4,565	$	13,301

Recent Accounting Pronouncements

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has a subsidiary in the United Kingdom with offices throughout continental Europe. Additionally, the Company uses third party distributors to market and distribute its products in other international regions. Transactions conducted by the subsidiary are typically denominated in the local country currency, while transactions conducted by the distributors are typically denominated in pounds sterling. As a result, the Company is primarily exposed to foreign exchange rate fluctuations as the financial results of its subsidiary and third party distributors are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and impact overall expected profitability. Through and as of June 30, 2003, 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.

ITEM 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to our company, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

NONE

Item 2. Changes in Securities

NONE

Item 3. Defaults Upon Senior Securities

NONE

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

NONE

Item 5. Other Information

NONE

Item 6. Exhibits and Reports on Form 8-K

Form 8-K filed August 5, 2003 regarding amendment to asset purchase agreement of Sagent Technology, Inc. and existing $7 million secured loans to Sagent, dated July 31, 2003.

Form 8-K filed July 30, 2003 for the press release regarding financial results for the period ended June 30, 2003.

Form 8-K filed July 15, 2003 for the press release regarding preliminary financial results for the period ended June 30, 2003.

Exhibit 31.1

Section 302 Certification of Robert S. Bowen, Chief Executive Officer, and Mark Funston, Chief Financial Officer, of Quarterly Report on Form 10-Q.

Exhibit 32.1

Section 906 Certification of Robert S. Bowen, Chief Executive Officer, and Mark Funston, Chief Financial Officer, of Quarterly Report on Form 10-Q.

Signatures

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

Group 1 Software, Inc.

/s/ Robert S. Bowen
Chief Executive Officer
August 14, 2003

/s/ Mark Funston
Chief Financial Officer
August 14, 2003

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Group 1 Software, Inc.

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

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

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

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

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

Results of Operations

Critical Accounting Policies

Liquidity and Capital Resources

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ITEM 4. Controls and Procedures

Part II Other Information

Signatures

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

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

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

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