<PAGE>   1
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 [No Fee Required]

     For fiscal year ended December 31, 1997.

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required]

Commission file number 1-12175

                         THE SABRE GROUP HOLDINGS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


<TABLE>
<S>                                                                     <C>
                        Delaware                                                           75-2662240
---------------------------------------------------------               --------------------------------------------------
     (State or other jurisdiction of incorporation                                 (I.R.S. Employer Identification No.)
                  or organization)

                 4255 Amon Carter Blvd.
                   Fort Worth, Texas                                                          76155
---------------------------------------------------------               ---------------------------------------------------
        (Address of principal executive offices)                                            (Zip Code)
</TABLE>

Registrant's telephone number, including area code  (817) 931-7300
                                                   ----------------

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                                                    <C>
                  Title of Each Class                                          Name of exchange on which registered
---------------------------------------------------------               ---------------------------------------------------
   Class A Common Stock, par value $.01 per share                                      New York Stock Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

                                      NONE
--------------------------------------------------------------------------------
                                (Title of Class)

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 (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 1998 was approximately $803,561,045. As of March 24,
1998, 22,958,887 shares of the registrant's Class A Common Stock and 107,374,000
shares of the registrant's Class B Common Stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain information from
the Proxy Statement for the Annual Meeting of Stockholders to be held May 20,
1998.

================================================================================

<PAGE>   2


                                     PART I
--------------------------------------------------------------------------------

ITEM 1.  BUSINESS

         The SABRE Group Holdings, Inc. is a holding company incorporated in
Delaware on June 25, 1996. Pursuant to a reorganization consummated on July 2,
1996 (the "Reorganization"), the Company became the successor to the businesses
of The SABRE Group which were formerly operated as divisions or subsidiaries of
American Airlines, Inc. ("American") or AMR Corporation ("AMR"). Unless
otherwise indicated, references herein to the "Company" include The SABRE Group
Holdings, Inc. and its consolidated subsidiaries and, for any period prior to
the Reorganization, the business of AMR and American constituting The SABRE
Group. On October 17, 1996, the Company completed an initial public offering
(the "Offering") of 23,230,000 shares of its Class A Common Stock, par value
$.01 per share, constituting approximately 17.8% of the economic interest of the
Company's outstanding common equity. As of March 24, 1998, AMR owned all
107,374,000 shares of the Company's Class B Common Stock, representing
approximately 82.4% of the economic interest and 97.9% of the combined voting
power of all classes of voting stock of the Company.

         The Company is a world leader in the electronic distribution of travel
through its proprietary travel reservation and information system, SABRE(R), and
is the largest electronic distributor of travel in North America. In addition,
the Company is a leading provider of information technology solutions to the
travel and transportation industry and fulfills substantially all of the data
processing, network and distributed systems needs of American and AMR's other
subsidiaries, Canadian Airlines International, Ltd., and other customers.

ELECTRONIC TRAVEL DISTRIBUTION

         SABRE and other global distribution systems are the principal means of
air travel distribution in the United States and a growing means of air travel
distribution internationally. Through the SABRE system, travel agencies,
corporate travel departments and individual consumers ("subscribers") can access
information on and book reservations with airlines and other providers of travel
and travel-related products and services ("associates"). As of December 31,
1997, travel agencies with more than 30,000 locations in over 70 countries on
six continents subscribed to SABRE. SABRE subscribers are able to make
reservations with more than 400 airlines and more than 50 car rental companies
and more than 200 hotel companies covering approximately 39,000 hotel properties
worldwide.

         During 1997, more airline bookings in North America were made through
SABRE than through any other global distribution system. In 1997, approximately
67.3% of the Company's revenue was generated by the electronic distribution of
travel, primarily through booking fees paid by associates.

THE SABRE GLOBAL DISTRIBUTION SYSTEM

         SABRE, like other global distribution systems, creates an electronic
marketplace where travel providers display information about their products and
warehouse and manage inventory. Subscribers -- principally travel agencies but
also corporate travel departments and individual consumers -- access information
and purchase travel products and services. In 1997, more than 700 vendors,
called "Associates", displayed information about their products and services
through SABRE, and the Company estimates that more than $66 billion of
travel-related products and services were sold through SABRE.

         In addition to providing information to subscribers about airlines and
other travel-related vendors, SABRE reports to the travel providers transaction
data about subscriber-generated reservations, allowing vendors to better manage
inventory and revenues. The SABRE system also allows travel agency subscribers
to print airline tickets, boarding passes and itineraries. Additionally, SABRE
provides subscribers with travel information on matters such as currency,
medical and visa requirements, weather and sightseeing. By accessing the SABRE
system, a subscriber can, from a single source, obtain schedule, availability
and pricing information from multiple travel providers for complex travel
itineraries.




                                       2
<PAGE>   3




ASSOCIATE PARTICIPATION

         The Company derives its electronic travel distribution revenues
primarily from booking fees paid by associates for reservations made through
SABRE for their products and services. In addition to airlines, associates
include car rental companies, hotel companies, railroads, tour operators, ferry
companies and cruise lines.

         Airlines and other associates can display, warehouse, manage and sell
their inventory in SABRE. The booking fee paid by an associate depends upon
several factors, including the associate's level of participation in SABRE and
the type of products or services provided by the associate. Airlines are offered
a wide range of participation levels. The lowest level of functionality for
airlines, Basic Booking Request(SM), provides schedules and electronic booking
only. Higher levels of functionality for airlines, such as Direct Connect
Availability(SM) , provide greater levels of communication with SABRE, giving
subscribers more detailed information and associates improved inventory
management. For an associate selecting one of the higher levels of
participation, SABRE provides subscribers with a direct connection to the
associate's internal reservation system, allowing SABRE to provide real-time
information and allowing the associate to optimize revenue for each flight. Car
rental companies and hotel operators are provided with similar levels of
participation from which to select. The Company also provides associates, upon
request, marketing data derived from SABRE bookings for fees that vary depending
on the amount and type of information provided.

SUBSCRIBER ACCESS

         Access to SABRE enables subscribers to electronically locate, price,
compare and purchase travel products and services provided by associates. The
Company tailors the interface and functionality of SABRE to the needs of its
different types of subscribers. Marketing is targeted to travel agencies,
corporations and individual consumers.

         TRAVEL AGENTS. The Company provides travel agents with the hardware,
software, technical support and other services needed to use SABRE, in return
for fees that typically vary inversely with the travel agency's productivity, as
measured by the number of bookings generated. Such fees are payable over the
term of the travel agent's agreement with the Company, generally five years in
the United States and Latin America, three years in Canada, and one year in
Europe.

         Because travel agencies have differing needs, the Company has modified
the SABRE interface to meet the specific needs of different categories of travel
agents. Travel agents can choose interfaces that range from simple, text-based
systems to feature-laden graphical systems. For example, the Company developed
Turbo SABRE(TM), an advanced point-of-sale interface and application development
tool that enables advanced functionality such as customized screens, automated
quality control, database integration, and eliminates complex commands, reducing
keystrokes and training requirements.

         Planet SABRE(TM), which the Company introduced in February 1997,
includes a graphical launch pad, which enables the user to move to any function
with one or two clicks of a mouse; a customizer feature, which allows travel
agencies to tailor Planet SABRE to meet their own specific needs; a tutorial;
online help; a place to store notes about clients, destinations or procedures;
and a suggestion system. Planet SABRE transforms SABRE from a complex
command-oriented system to an all-graphic interface with continued access to the
SABRE host system and its capabilities.

         SABRE interfaces are available in English, Spanish, Portuguese, French,
German, Italian and Japanese. In addition, the Company offers travel agencies
back-office accounting systems and further supports travel agencies by offering
a simplified method to develop and place their own marketing presence on the
World Wide Web.

         CORPORATIONS. The Company sells Commercial SABRE(TM) to corporations
and home-based travel agents who are sponsored by travel agencies. Using
Commercial SABRE, a traveler or agent can connect to the SABRE system and make
bookings which are automatically delivered to the sponsoring agency where travel
documents are issued.



                                       3
<PAGE>   4


         The Company also markets SABRE to corporations through SABRE Business
Travel Solutions(TM) ("SABRE BTS(TM)") released in October 1996. SABRE BTS is
designed for corporate travelers, travel arrangers and travel managers. It is a
fully-integrated product suite for travel planning and booking, expense
reporting and decision-support. SABRE BTS provides corporations with tools to
better manage travel costs, ensure compliance with corporate travel policies,
automate expense reporting and obtain real-time information on all aspects of
travel.

         INDIVIDUAL CONSUMERS. Through the Company's Travelocity(SM) and
easySABRE(R) products, individual consumers can compare prices, make travel
reservations and obtain destination information. These products are available to
individual consumers free of charge.

         Travelocity is accessible through the Internet and computer on-line
services. It features booking and purchase capability for all airline, car
rental and hotel companies for which booking and purchase capability is
available in SABRE. Vacation and cruise packages are available as well.
Travelocity also offers access to a database of destination and interest
information, articles from travel correspondents and interactive maps.
Travelocity averages approximately 22.6 million page views per month. The
Internet address for Travelocity is http://www.travelocity.com/.

         The Company has entered into numerous co-branding agreements to provide
access to Travelocity on complementary Internet Web sites. These agreements
include a deal with Netscape Communications Corporation to launch Netcenter
Travel by Travelocity, accessible through the Netscape Netcenter free online
service. The Company also signed an agreement with Yahoo! Inc. for Travelocity
to become the exclusive co-branded travel booking service for Yahoo! and Yahoo!
Travel.

         The Company introduced easySABRE in 1985 as one of the world's first
consumer booking systems for travel. easySABRE is available through a number of
computer on-line information systems and on the Internet. With easySABRE,
consumers can view travel reservation information and make bookings directly in
SABRE for no fee. The Internet address for easySABRE is
http://www.easySABRE.com/.

         The Company receives booking fees from travel providers for purchases
of their travel products and services pursuant to reservations made through
Travelocity and easySABRE.

INTERNATIONAL MARKETING

         The Company is actively involved in marketing SABRE internationally
either directly or through joint venture or distributorship arrangements. The
Company's global marketing partners principally include foreign airlines that
have strong relationships with travel agents in such airlines' primary markets
and entities that operate smaller global distribution systems or other
travel-related network services.

         In February 1998, the Company signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint venture
company to manage travel distribution in the Asia-Pacific region. The Company
owns 35 percent of the joint venture company, called ABACUS International Ltd.,
and provides it with transaction processing on the SABRE computer reservations
system.

COMPETITION

         The Company competes in electronic travel distribution primarily
against other large and well-established global distribution systems. SABRE's
principal competitors in marketing to travel agents include Amadeus/System One,
Galileo/Apollo and Worldspan. Each of these competitors offers many products and
services substantially similar to those of the Company.

         Although certain barriers exist for any new provider of electronic
commerce -- barriers such as the need for significant capital investment to
acquire or develop the hardware, software and network facilities necessary to
operate a global distribution system -- the Company is faced with the potential
of new competitors, particularly as new channels for travel distribution
develop.



                                       4
<PAGE>   5


         The global market to attract and retain agency subscribers is intensely
competitive. Factors affecting competitive success of global distribution
systems include depth and breadth of information, ease of use, reliability,
service and incentives to travel agents and range of products available to
travel providers, travel agents and consumers.

         Although distribution through travel agents continues to be the primary
method of travel distribution, new channels of direct distribution to businesses
and consumers, through computer on-line services, the Internet and private
networks, are developing rapidly. The deployment and adoption of these tools is
currently quite low, however the pace of adoption is expected to accelerate. The
Company believes that it has positioned its SABRE BTS, Travelocity and easySABRE
products to effectively compete in these emerging distribution channels.

CRS INDUSTRY REGULATION

         The Company's electronic travel distribution business is subject to
regulation in the United States, the European Union, Canada, Australia and New
Zealand. These regulations address the relationships among computer reservation
systems ("CRSs"), airline associates, and travel agency subscribers. These
regulations do not currently address relationships with non-airline associates,
but future regulations in the European Union may include rail associates. In
general, these regulations are directed at ensuring fair competition among
travel providers. Among the principles addressed in the current regulations are:
unbiased CRS displays of airline information, fair treatment of airline
associates by CRSs, equal participation by airlines in non-owned CRSs, and fair
competition for subscribers. The CRS regulations in the United States and the
European Union are currently being revised, but the Company does not expect the
revisions to materially adversely affect its operations.

OTHER REGULATION

         The Company is subject to regulations affecting issues such as: exports
of technology, telecommunications, data privacy, and electronic commerce. Some
portions of the Company's business, such as its Internet-based electronic travel
distribution, may be affected by newly-developed regulations. Regulations
affecting other areas of the Company's business may be revised from time to
time. Regulations also vary among jurisdictions. The Company believes that it is
capable of addressing these regulatory issues as they arise.

INFORMATION TECHNOLOGY SOLUTIONS

         The Company is a leading provider of information technology services to
the travel and transportation industry. The Company employs its airline
technology expertise to offer information technology solutions to other
industries that face similar complex operations issues, including the airport,
railroad, logistics and hospitality industries. The solutions offered by the
Company include software development and product sales, transactions processing,
consulting, as well as comprehensive information technology outsourcing. The
Company provides data processing, network and distributed systems services to
American and AMR's other subsidiaries, Canadian Airlines International, Ltd.,
and other customers fulfilling substantially all of their information technology
requirements. In 1997, approximately 32.7% of the Company's revenue was
generated by the provision of information technology solutions.

         The Company is aggressively pursuing strategic information technology
relationships that add a new dimension to traditional outsourcing agreements by
integrating our airline applications and business processes into customer
operations. Clients entering into a strategic agreement with the Company benefit
from our extensive airline industry expertise, experience with complex operating
and transaction environments and our extensive suite of software products and
applications.

SOLUTIONS

         The Company offers a comprehensive set of information technology
solution services to the airline industry. These solutions include: (i)
information technology outsourcing; (ii) software development, sales and
licensing; and (iii) consulting, which includes capabilities ranging from
reengineering to functional consulting. Recruiting and retaining capable
personnel, particularly those with expertise in operations research, information
technology and industrial engineering, is vital to the provision of solutions by
the Company.



                                       5
<PAGE>   6

         The Company's solutions have helped American become one of the most
technologically advanced airlines in the world. The Company has provided
solutions to over 170 airlines or airline associations. These solutions have
many applications for airlines. For example, (i) with Fare Action Evaluator(SM),
airlines can seek to enhance revenue using statistical and database sources that
estimate the economic implications of fare actions before they are implemented,
(ii) with AIRPRICE(SM) , airlines can analyze and manage fares and react to
competitors' changes, (iii) with AIRFLITE(SM), airlines can determine superior
flight schedules and (iv) with AIRCREWS(SM), airlines can improve crew member
scheduling thus reducing staffing costs.

         The Company also provides real-time transaction processing services,
whereby the Company provides access to its hardware and software to airlines for
reservations, flight operations, departure control and other related services.
Local computer terminals at a customer's location are linked to the Company's
mainframes, and the Company maintains and operates the entire system on a secure
and confidential basis.

         The Company distributes its solutions and consulting services through a
sales and marketing organization with offices in eleven cities on four
continents (Boston, Chicago, Dallas, Tulsa, Vancouver, London, Paris, Kuwait
City, Hong Kong, Sydney and Auckland). The Company also maintains agency
relationships to support sales efforts in key markets, including India, China
and the Middle East. To date, the Company has provided business solutions to
nearly 500 clients located in more than 50 countries.

TECHNOLOGY SERVICES

         In 1996, the Company executed an information technology services
agreement with American for a term of ten years for most services (three and
five years for others). Under this agreement, the Company provides data
processing, network, distributed systems, and applications development services
to American and AMR's other subsidiaries. The Company fulfills substantially all
of American's data processing requirements and manages all voice and data
communication services for American and AMR's other subsidiaries, including data
networks, voice networks and radio services. The Company also provides American
with the services required to design, install, operate and maintain its range of
local area networks, desktop, mobile computing and peripheral devices. The
Company completes nearly all of the applications development for American, as
well as manages the AMR Year 2000 project office and completes most of AMR
system's Year 2000 testing and compliance enhancements.

         In January 1998, the Company completed the execution of a 25-year,
multibillion dollar technology agreement with US Airways, Inc. to provide
substantially all of US Airways' information technology services. As a part of
the agreement, the Company purchased approximately $47 million of US Airways'
information technology assets, and hired more than 600 former employees of US
Airways. The agreement covers the management and operation of US Airways'
systems and information technology services, including the migration or
conversion of US Airways' legacy systems to the Company's systems by mid-1999.
Additionally, the Company agreed to assist US Airways in making its information
systems Year 2000 compliant.

         In February 1998, the Company executed a 10-year information technology
services agreement with Gulf Air. Under the agreement, the Company will be
responsible for all of Gulf Air's information technology infrastructure,
including application development and maintenance, as well as data center and
network management.

COMPETITION

         In information technology solutions, the Company competes both against
solutions companies and full-service providers of technology outsourcing, some
of which have considerably greater financial resources than the Company, and
against smaller companies that offer a limited range of products. Among the
Company's full-service competitors are Electronic Data Systems, IBM Global
Services, Unisys, Andersen Consulting and Lufthansa Systems. Some of these
competitors have formed strategic alliances with large companies in the travel
industry, and the Company's access to these potential customers is thus limited.
The Company believes that its competitive position in the travel and
transportation industry is enhanced by its experience in developing systems for
American and other airlines and by its ability to offer not only software
applications but also systems development, integration and maintenance and
transaction processing services.



                                       6
<PAGE>   7


INTELLECTUAL PROPERTY

         In connection with the Reorganization, American transferred to the
Company the software used in the operation of the business of The SABRE Group.
This software, along with other software, proprietary information, patents,
copyrights, trade secrets, trademarks and intellectual property rights, are
significant assets of the Company. The Company relies on a combination of
patent, copyright, trade secret and trademark laws, confidentiality procedures
and contractual provisions to protect these assets. The Company's software and
related documentation are protected principally under trade secret and copyright
laws, which afford only limited protection. In addition, the laws of some
foreign jurisdictions may provide less protection than the laws of the United
States for the Company's proprietary rights. Unauthorized use of the Company's
intellectual property could have a material adverse effect on the Company, and
there can be no assurance that the Company's legal remedies would adequately
compensate it for the damages to its business caused by such use.

EMPLOYEES

         As of December 31, 1997 the Company had approximately 8,500 full-time
employees. A central part of the Company's philosophy is to attract and maintain
a highly capable staff. The Company considers its current employee relations to
be good. None of the Company's employees based in the United States are
represented by a labor union.


ITEM 2.  PROPERTIES

         The Company's principal executive offices are located in Fort Worth,
Texas, primarily in three buildings, two of which are owned by the Company and
one of which is leased from the Dallas/Fort Worth International Airport Board
under a lease that expires in 2019, subject to four renewal options of five
years each, exercisable at the option of the Company. The Company leases a
fourth office building in Southlake, Texas, under a lease that expires in 2003,
subject to two renewal options of five years each, exerciseable at the option of
the Company. Additionally, the Company leases office facilities in approximately
70 other locations worldwide.

         The Company's principal data center is located in an underground
facility in Tulsa, Oklahoma (the "Data Center"). The land on which the Data
Center is located is leased from the Tulsa Airport Improvements Trust, a public
trust organized under the laws of the State of Oklahoma, pursuant to a lease
that expires in 2038. SABRE and the Company's data processing services are
dependent on the Company's central computer operations and information
processing facility located in the Data Center. The Company also utilizes a
computer center located in one of its office buildings in Fort Worth (the "Fort
Worth Center"). At the Fort Worth Center, the Company operates and manages a
wide variety of server based and client/server distributed systems.

         The Company's travel agency and corporate subscribers connect to SABRE
through leased access circuits. These leased access circuits, in turn, connect
to the domestic and international data networks leased by the Company, such as
those leased from Societe Internationale de Telecommunications Aeronautiques
("SITA"), which is owned by a consortium of Airlines, including American.

         The Company believes that its office facilities will be adequate for
its immediate needs and that additional or substitute space is available if
needed to accommodate expansion. The Company also believes that its Data Center,
Fort Worth Center and network access will be adequate for its immediate and
foreseeable needs. The Company, however, continuously invests in research and
development to upgrade these facilities to meet changing technological needs.



                                       7
<PAGE>   8



ITEM 3.  LEGAL PROCEEDINGS

         In connection with the Reorganization, the Company is the successor in
interest to American in the following two civil proceedings concerning disputed
booking fees.

         In 1995, America West Airlines, Inc. ("America West") began withholding
SABRE booking fees that it claims were assessed in contravention of America
West's SABRE participation agreement. American and SABRE Associates, Inc., filed
a lawsuit against America West in the District Court of Tarrant County, Texas,
153rd Judicial District, to recover the unpaid booking fees from America West.
On April 10, 1997, the District Court of Tarrant County, Texas granted the
Company's motion of summary judgment as to the proper interpretation of the
contract, upholding the Company's position. On April 21, 1997, America West paid
the Company $2.9 million in past due booking fees, with a stipulation that
preserves its rights in the lawsuit. America West has pending counter-claims
against the Company claiming breach of contract.

         In June 1996, American Trans Air, Inc. ("ATA") filed a lawsuit against
American in the U.S. District Court for the Southern District of Indiana,
Indianapolis Division seeking a refund of over $400,000 in SABRE booking fees on
similar grounds to America West's claims. In addition, since June 1996, ATA has
withheld payment of more than $300,000 in SABRE booking fees. The Company filed
a motion for summary judgment in the ATA lawsuit which is similar to the one
granted in the America West lawsuit. ATA has filed a cross-motion for summary
judgment similar to the one filed by America West claiming its interpretation of
the contract is the correct one.

         If either ATA or America West were to prevail on their claims, other
associates might make similar claims. Nevertheless, the Company believes that
the booking fees are properly charged pursuant to its contracts and that the
claims of ATA and America West can be successfully defended or resolved without
a material adverse effect on the Company's financial position or results of
operations.

         In 1994, Alaska Airlines filed a Petition for Rulemaking with the DOT
seeking a rule that would bar a global distribution system from requiring
airlines that are not GDS-Affiliated Airlines to participate in such system at
the same level of functionality as the airline participates in other global
distribution systems. On November 5, 1997, the DOT issued a final rule
prohibiting a GDS from enforcing so-called "parity" clauses unless the carrier
involved owns, is affiliated with, or markets a competing GDS. The Company does
not believe that this rule will have a material adverse effect on the Company's
financial condition or results of operations.

         On November 18, 1997, the Canadian Court of Appeals affirmed a 1993
lower court judgment awarding the Company damages from Air Canada for actions
taken by Air Canada relating to the Company's purchase of Ticketnet Corporation.
The Court of Appeals reduced the damages awarded to CAD $10,160,000. With
interest and costs, the judgment is now approximately CAD $26,000,000. Air
Canada recently filed an appeal to the Supreme Court of Canada.

         On January 9, 1998, Worldspan LP, the former provider of computer
reservation system services to ABACUS International Holdings, filed a lawsuit
against the Company in the United States District Court for the Northern
District of Georgia, Atlanta Division, seeking damages and an injunction, and
alleging, among other things, that the Company interfered with Worldspan's
relationship with ABACUS and misappropriated Worldspan's confidential
information. The same day, Worldspan filed a parallel lawsuit in the same court
against ABACUS. On February 26, 1998, the court denied Worldspan's motion for a
preliminary injunction against ABACUS. The Company believes that both lawsuits
are without merit and is vigorously defending itself.



                                       8
<PAGE>   9


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.


                                     PART II
--------------------------------------------------------------------------------

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The Company's Class A Common Stock is traded on the New York Stock
Exchange (symbol TSG). The approximate number of record holders of the Company's
Class A Common Stock at March 24, 1998 was 394. All of the 107,374,000 shares
of the Company's Class B Common Stock are owned by AMR and there is no public
trading market for such shares.

         The range of closing market prices for the Company's Class A Common
Stock on the New York Stock Exchange since the Company's initial public offering
of Class A Common Stock on October 11, 1996 was:


<TABLE>
<CAPTION>
                                                         High             Low
                                                         ----             ---
<S>                                                    <C>             <C>
October 11, 1996 through December 31, 1996              $ 33.00         $ 26.00

 Quarter Ended:
           March 31, 1997                                 29.625          25.25
           June 30, 1997                                  28.75           23.625
           September 30, 1997                             36.625          26.6875
           December 31, 1997                              35.50           24.50
</TABLE>

         No cash dividends on Class A Common Stock or Class B Common Stock were
declared or paid during 1997.




                                       9
<PAGE>   10


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                   --------------------------------------------------------------
                                      1997         1996         1995         1994          1993
                                   -----------    ---------   ---------   ----------   ----------
                                         (IN MILLIONS, EXCEPT PER SHARE DATA AND OTHER DATA WHERE INDICATED)
<S>                                <C>           <C>          <C>         <C>          <C>
INCOME STATEMENT DATA (1):
Revenues                           $   1,783.5   $  1,622.0   $ 1,529.6   $  1,406.7   $  1,258.2
Operating expenses                     1,475.8      1,295.2     1,149.2      1,056.5      1,004.5
                                   -----------    ---------   ---------   ----------   ----------
Operating income                         307.7        326.8       380.4        350.2        253.7
Other income (expense), net (2)           15.9        (20.9)      (10.3)       (26.1)       (84.7)
                                   -----------    ---------   ---------   ----------   ----------
Income before income taxes               323.6        305.9       370.1        324.1        169.0
Income taxes                             123.7        119.3       144.2        126.9         69.0
                                   -----------    ---------   ---------   ----------   ----------
Net earnings                       $     199.9    $   186.6   $   225.9   $    197.2   $    100.0
                                   ===========    =========   =========   ==========   ==========
Earnings per common share, basic
     and diluted (3)               $      1.53    $    1.43          --           --           --
                                   ===========    =========   =========   ==========   ==========

BALANCE SHEET DATA
       (AT END OF PERIOD) (1):
Current assets                     $     874.2    $   694.5   $   271.2   $    404.3   $    107.1
Total assets                           1,524.0      1,287.1       729.4        873.5        584.3
Current liabilities (2)                  316.5        289.8       218.6        503.2        346.4
Debenture payable to AMR                 317.9        317.9          --           --           --
Stockholder's net investment               --            --       432.1        289.5        158.0
Stockholders' equity                     757.3        569.6          --           --           --

OTHER DATA (1):
Operating income as a percentage
     of revenue                           17.3%        20.1%       24.9%        24.9%        20.2%
Percentage of revenue from
     non-affiliated customers             70.5%        69.2%       64.2%        58.1%        56.6%
Reservations booked using SABRE          359.2        347.9       325.4        311.1        275.2
Cash flows from operating
     activities                    $     377.8    $   415.8   $   395.9   $    265.3   $    332.4
Capital expenditures               $     218.1    $   184.3   $   166.8   $    168.9   $    176.6
</TABLE>


--------------------------------------------------------------------------------
(1)  The Company has significant transactions with AMR and American. The terms
     of many of the agreements with AMR and its affiliates were revised
     effective January 1, 1996 as a result of the plans for the Reorganization.
     See Note 5 to the Consolidated Financial Statements.

(2)  The operating results for the year ended December 31, 1993 includes a
     provision for losses of $71 million associated with a reservation system
     project and resolution of related litigation. The balance sheet as of
     December 31, 1993 includes current liabilities for the losses of $133
     million.

(3)  Earnings per share for 1996 has been restated to comply with Statement of
     Financial Accounting Standards No. 128, Earnings Per Share. For further
     discussion of earnings per share and the impact of Statement No. 128, see
     Notes 2 and 11 to the Consolidated Financial Statements.


                                       10
<PAGE>   11


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Summary

         During 1997 the Company generated approximately 67.3% of its revenue
from electronic travel distribution services and approximately 32.7% of its
revenue from information technology solutions services. The following table sets
forth revenues by affiliation and geographic location as a percentage of total
revenues:

<TABLE>
<CAPTION>
                               Year Ended December 31,
                             --------------------------
                              1997      1996      1995
                             ------    ------    ------
<S>                            <C>       <C>       <C>
Affiliation
  Unaffiliated Customers       70.5%     69.2%     64.2%
  Affiliated Customers         29.5      30.8      35.8
                             ------    ------    ------
      Total                   100.0%    100.0%    100.0%
                             ======    ======    ======

Geographical
  United States                81.0%     82.5%     83.6%
  International                19.0      17.5      16.4
                             ------    ------    ------
     Total                    100.0%    100.0%    100.0%
                             ======    ======    ======
</TABLE>


         Total revenues have grown at a compound annual growth rate of 8.2% for
the three years ended December 31, 1997. Revenues from affiliated customers have
declined as a percentage of total revenues because of growth in the Company's
external business. Revenues from unaffiliated customers grew at a compound
annual growth rate of 15.5% during the three years ended December 31, 1997, to
$1,258 million in 1997. Revenues from affiliated customers decreased for the
same time period due to the impact of the Affiliate Agreements (described below)
on revenues in 1996 and 1997. The Company expects that the amount and proportion
of revenues from unaffiliated customers will continue to increase. International
revenues also increased as a percentage of total revenues. International
revenues grew at a compound annual growth rate of 17.2% for the three years
ended December 31, 1997, to $339 million in 1997. Revenues from the United
States grew at a compound annual rate of 6.5% over the same period, to $1,445
million in 1997.

         The Company's primary expenses from providing electronic travel
distribution and information technology solution services consist of salaries,
benefits and other employee related costs, depreciation and amortization,
communication costs, and subscriber incentives. Salaries, benefits and other
employee related costs, depreciation and amortization and communication costs
represented over 69% of 1997 total operating expenses. From 1995 through 1997,
salaries and benefits grew at a rate higher than that of revenues in order to
support the Company's growth. Expenses in 1996 and 1997 were impacted by the
Affiliate Agreements (as described below) entered into with American, including
increased employee travel costs and other expenses, and marketing support
payments to American. As a result, operating income as a percentage of revenue
decreased from 24.9% in 1995 to 17.3% in 1997.



                                       11
<PAGE>   12




Seasonality

The following table sets forth quarterly financial data for the Company (in
millions except per share data):


<TABLE>
<CAPTION>
                                                      First          Second              Third            Fourth
                                                     Quarter         Quarter             Quarter          Quarter
                                                    ----------     ------------        ------------     -----------
<S>                                                   <C>              <C>               <C>              <C>
1997
Revenues                                              $439.6           $447.4            $456.0           $440.5
Operating income                                       107.8             93.1              88.1             18.7
Net earnings                                            66.7             58.5              56.2             18.4
Operating income as a percent of revenue               24.5%            20.8%             19.3%             4.2%
Reservations booked using SABRE                         94.9             93.5              91.4             79.4
Earnings per common share, basic and diluted          $  .51           $  .45            $  .43           $  .14

1996
Revenues                                              $427.8           $410.4            $407.4           $376.3
Operating income                                       115.6             82.0              87.9             41.3
Net earnings                                            70.0             49.1              45.1             22.4
Operating income as a percent of revenue               27.0%            20.0%             21.6%            11.0%
Reservations booked using SABRE                         91.9             89.3              89.3             77.4
Pro forma earnings per common share, basic
     and diluted                                      $  .54           $  .38            $  .35               --
Earnings per common share, basic
     and diluted                                          --               --                --             $.17

</TABLE>

         The travel industry is seasonal in nature. Bookings, and thus booking
fees charged for the use of SABRE, decrease significantly each year in the
fourth quarter, primarily in December, due to early bookings by customers for
travel during the holiday season and a decline in business travel during the
holiday season.

AFFILIATE AGREEMENTS WITH AMR AND AMERICAN

         The Company, AMR and American have entered into various agreements,
including an agreement for the provision of information technology services to
American by the Company (the "Technology Services Agreement"), an agreement for
the provision of marketing support by American for the Company's travel agency
products and SABRE BTS, Travelocity and easySABRE (the "Marketing Cooperation
Agreement"), an agreement for the provision of management services by American
to the Company (the "Management Services Agreement") and agreements for the
provision of travel services by American to the Company and its employees (the
"Corporate Travel Agreement" and the "Travel Privileges Agreement"). These
agreements are collectively referred to as the "Affiliate Agreements". See Note
5 to the Consolidated Financial Statements for a description of each agreement.
The rates under the agreements are adjusted or renegotiated from time to time,
and current rates may represent an increase or decrease over previous rates. The
financial terms of the Affiliate Agreements were applied to the Company's
operations commencing January 1, 1996, and the application thereof resulted in a
reduction in revenues and an increase in expenses for 1996 and 1997 as compared
to 1995.

         The base term of the Technology Services Agreement expires June 30,
2006. The terms of the services to be provided by the Company to American,
however, vary. For 1997, revenues from services provided under the Technology
Services Agreement with a remaining service term of (i) two years represented
approximately 4.9% of total revenues, (ii) four years represented approximately
0.4% of total revenues and (iii) nine years represented approximately 14.7% of
total revenues.

         The Affiliate Agreements generally establish pricing and service terms,
and certain agreements, including the Technology Services Agreement, provide for
periodic price adjustments that may take into account the market for similar
services. Commencing in 1998, the formulas for annually adjusting certain rates
under the Technology Services Agreement will be adjusted every two years through
negotiations of the parties which are to be guided by benchmarking procedures
set forth in the agreement.




                                       12
<PAGE>   13

         The Company entered into a Tax-Sharing Agreement with AMR dated July 1,
1996 (the "Tax-Sharing Agreement"), which in most respects formalizes the
Company's previous arrangements with AMR. See Note 2 to the Consolidated
Financial Statements for a description of the agreement.

         The Company entered into a Non-Competition Agreement dated July 1, 1996
(the "Non-Competition Agreement"), pursuant to which AMR and American, on behalf
of themselves and certain of their subsidiaries, have agreed to limit their
competition with the Company's businesses under the circumstances described in
Note 5 to the Consolidated Financial Statements.

RESULTS OF OPERATIONS

1997 COMPARED TO 1996

ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1997 increased approximately $98 million, 8.9%, compared
to the year ended December 31, 1996, from $1,102 million to $1,200 million. This
increase was primarily due to growth in booking fees from $1,007 million to
$1,081 million. The growth in booking fees was due to an increase in booking
volumes primarily attributable to international expansion in Europe and Latin
America and an overall increase in the price per booking charged to associates.

         Cost of revenues for electronic travel distribution increased
approximately $90 million, 11.8%, from $763 million to $853 million. This
increase was primarily attributable to increases in salaries, benefits and
employee related costs, depreciation and amortization, subscriber incentive and
other operating expenses. Salaries, benefits and employee related costs
increased due to an increase in the average number of employees necessary to
support the Company's revenue growth and annual salary increases. Employee
related costs also increased due to increased travel expenses. Depreciation and
amortization expense increased primarily due to growth in the subscriber
equipment base, shorter depreciable lives on purchased subscriber equipment
reflecting increased technological changes and an increase in capitalized
software. Subscriber incentive expenses increased in order to maintain and
expand the Company's travel agency subscriber base. Other operating expenses
increased due to the write-off of a capitalized software development project
that was intended to create a new order entry and billing system, costs
associated with SABREWorld 97 (a global travel technology conference and trade
show), increased software license expenses, increased reserves for bad debt and
an increase in fees paid to American under the Marketing Cooperation Agreement.

INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology solutions
for the year ended December 31, 1997 increased approximately $63 million, 12.1%,
compared to the year ended December 31, 1996, from $520 million to $583 million.
Revenues from unaffiliated customers increased approximately $39 million due to
an increase in software development, consulting and software license fee
revenues. Revenues from AMR increased $24 million due to an increase in software
development revenue and data processing volumes offset by a decrease in data
network revenues from the sale, in July 1996, of data network equipment to a
third party which began direct billing certain items to American.

         Cost of revenues for information technology solutions increased
approximately $61 million, 15.7%, from $389 million to $450 million. This
increase was primarily attributable to an increase in salaries, benefits and
employee related costs, offset by a decrease in depreciation and amortization
expense. Salaries, benefits and employee related costs increased due to an
increase in the average number of employees necessary to support the Company's
business growth and annual salary increases. The decrease in depreciation and
amortization expense is primarily due to the benefits of lower price and higher
productivity of certain data center equipment and the sale, in July 1996, of
data network equipment with a net book value of approximately $25 million to a
third party.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $29 million, 20.3%, from $143 million to $172
million primarily due to an increase in salaries, benefits and employee related
costs. Salaries, benefits and employee related costs increased as a result of
sales growth initiatives for both the electronic travel distribution and the
information technology solutions lines of business. Employee related costs also
increased due to increased travel expenses.

OPERATING INCOME. Operating income decreased $19 million, 5.8%, from $327
million to $308 million. Operating margins decreased from 20.1% in 1996 to 17.3%
in 1997 due to an increase in revenues of 10.0% while operating expenses
increased 14.0%.



                                       13
<PAGE>   14

INTEREST INCOME. Interest income increased $17 million due to higher balances
maintained in the Company's short-term investment accounts.

INTEREST EXPENSE. Interest expense decreased $6 million primarily due to a lower
outstanding principal balance on the Debenture (as defined below) issued to
American in July 1996 and lower interest rates.

OTHER INCOME. Other income increased $14 million primarily due to growth in
income from joint ventures in which the Company owns an interest accounted for
under the equity method.

INCOME TAXES. The provision for income taxes was $124 million and $119 million
in 1997 and 1996, respectively. The increase in the provision for income taxes
corresponds with the increase in income before the provision for income taxes.
See Note 7 to the Consolidated Financial Statements for additional information
regarding income taxes.

NET EARNINGS. Net earnings increased $13 million, 7.0%, from $187 million to
$200 million, primarily due to the increase in interest and other income offset
by the decrease in operating income.

1996 COMPARED TO 1995

ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution revenues for the
year ended December 31, 1996 increased approximately $95 million, 9.4%, compared
to the year ended December 31, 1995, from $1,007 million to $1,102 million. The
increase was primarily due to growth in booking fees from associates from $904
million to $1,007 million. This growth was driven by an increase in booking
volumes partially attributable to international expansion in Europe and Latin
America, an overall increase in the price per booking charged to associates and
a migration of associates to higher participation levels within SABRE.

         Cost of revenues for electronic travel distribution increased
approximately $107 million, 16.3%, from $656 million to $763 million. This
increase was primarily attributable to an increase in salaries and benefits, the
Affiliate Agreements and subscriber incentive expenses. Salaries and benefits
increased due to an increase in the average number of employees necessary to
support the Company's revenue growth and annual salary increases. The Affiliate
Agreements, entered into with American, resulted in an increase in expenses
estimated to be approximately $24 million for 1996. Subscriber incentive
expenses increased in order to maintain and expand the Company's travel agency
subscriber base.

INFORMATION TECHNOLOGY SOLUTIONS. Revenues from information technology solutions
for the year ended December 31, 1996 decreased approximately $2 million, 0.4%,
compared to the year ended December 31, 1995, from $522 million to $520 million.
Revenues from unaffiliated customers increased approximately $27 million, offset
by a decrease in revenues from such services provided to AMR of $29 million
primarily due to application of the financial terms of the Technology Services
Agreement.

         Cost of revenues for information technology solutions increased
approximately $12 million, 3.2%, from $377 million to $389 million. This
increase was primarily attributable to an increase in salaries and benefits and
the Affiliate Agreements, offset by a decrease in depreciation and amortization
expense. Salaries and benefits increased due to an increase in the average
number of employees necessary to support the Company's business growth and
annual salary increases. The Affiliate Agreements resulted in an increase in
expenses estimated to be approximately $8 million for 1996. The decrease in
depreciation and amortization expense is primarily due to the benefits of price
and performance improvements for Data Center equipment and the sale to a third
party of certain computer network equipment during the year with a net book
value of approximately $25 million.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $26 million, 22.2%, from $117 million to $143
million primarily due to an increase in salaries and benefits, legal and
professional fees and the Affiliate Agreements. The Affiliate Agreements
resulted in an increase in selling, general and administrative expenses
estimated to be approximately $4 million for 1996.

Operating Income. Operating income decreased $54 million, 14.2%, from $381
million to $327 million. Operating margins decreased from 24.9% in 1995 to 20.1%
in 1996 due to an increase in revenues of 6.0% while operating expenses
increased 12.7%.



                                       14
<PAGE>   15

INTEREST INCOME. Interest income increased $6 million due to higher balances
maintained in the Company's short-term investment accounts.

INTEREST EXPENSE. Interest expense increased $21 million primarily due to
interest expense incurred on the Debenture (as defined below) issued to American
in 1996.

OTHER EXPENSES. Other expenses decreased $5 million due to a reduction in the
losses from joint ventures in which the Company owns an interest accounted for
under the equity method.

INCOME TAXES. The provision for income taxes was $119 million and $144 million
in 1996 and 1995, respectively. See Note 7 to the Consolidated Financial
Statements for additional information regarding taxes.

NET EARNINGS. Net earnings decreased $39 million, 17.3%, from $226 million to
$187 million, primarily due to the decrease in operating income.

LIQUIDITY AND CAPITAL RESOURCES

         The Company had substantial liquidity at December 31, 1997, with
approximately $585 million in cash and short-term investments and $558 million
in working capital. At December 31, 1996, cash and short-term investments and
working capital were $443 million and $405 million, respectively.

         American performs cash management services for the Company under the
Management Services Agreement. The Company invests cash in short-term marketable
securities, consisting primarily of certificates of deposit, bankers'
acceptances, commercial paper, corporate notes and government notes.

         The Company has funded its operations through cash generated from
operations. The Company's cash provided by operating activities of $378 million
in 1997 and $416 million in 1996 was primarily attributable to net earnings
before noncash charges.

         Capital investment principally has been related to purchases of
computer equipment to be provided to subscribers of SABRE and to be used in data
processing services. Other investments were related to cash purchases of
short-term marketable securities. Capital expenditures for 1997 were $218
million and in 1996 were $184 million.

         The Company expects that the principal use of funds in the foreseeable
future will be for capital expenditures, software product development,
acquisitions and working capital. Capital expenditures will primarily consist of
purchases of equipment for the Data Center, as well as computer equipment,
printers, fileservers and workstations to support (i) updating subscriber
equipment primarily for travel agencies, (ii) expansion of the subscriber base
and (iii) new product capital requirements. The Company has estimated capital
expenditures of approximately $360 million to $410 million for 1998. The Company
believes available balances of cash and short-term investments combined with
cash flows from operations will be sufficient to meet the Company's capital
requirements.

         The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
common stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other factors as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends.

         In 1997, the Company's Board of Directors authorized, subject to
certain business and market conditions, the repurchase of up to 1.5 million
shares of the Company's Class A Common Stock. The number of treasury shares
purchased in 1997 was 71,800.



                                       15
<PAGE>   16


         In January 1998, the Company completed the execution of a 25-year
information technology services agreement with US Airways, Inc. The Company will
provide substantially all of US Airways' information technology services.
Additionally, the Company agreed to assist US Airways in making its information
systems Year 2000 compliant. In connection with the agreement, in January 1998,
the Company purchased substantially all of US Airways' information technology
assets for approximately $47 million, hired more than 600 former employees of US
Airways, and granted to US Airways options to acquire 6 million shares of the
Company's Class A Common Stock.

         In February 1998, the Company entered into a 10-year information
technology services agreement with Gulf Air. Under the terms of the agreement,
the Company will be responsible for all of Gulf Air's information technology
infrastructure, including application development and maintenance, as well as
data center and network management.

         In February 1998, the Company signed long-term agreements with ABACUS
International Holdings Ltd. which created a Singapore-based joint venture
company to manage travel distribution in the Asia-Pacific region. The Company
received 35 percent of the joint venture company, called ABACUS International
Ltd. The Company paid $139 million in cash and contributed its assets related to
the Company's ongoing travel distribution activities in Asia-Pacific and other
considerations. The Company provides ABACUS International with transaction
processing on the SABRE computer reservations system.

YEAR 2000 COMPLIANCE

         The Company has implemented a Year 2000 compliance program designed to
ensure that hardware and software systems operated or licensed in the Company's
business, including those of its travel agency subscribers, will properly
function beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 compliance program to be
completed on a timely basis. However, there is no assurance that systems
operated by third parties (e.g., data providers, associates, credit card
transaction processors) with which the Company's systems interface will continue
to properly interface with the Company's systems and will otherwise timely
achieve Year 2000 compliance. The Company's business, financial condition, or
results of operations could be materially adversely affected by the failure of
its systems and applications, those licensed to or operated for third parties,
or those operated by other parties to properly manage dates beyond 1999.

         The Company expects to incur significant internal labor costs, as well
as consulting and other expenses to prepare its systems for the Year 2000. The
Company's total estimated cost of the Year 2000 compliance program is
approximately $80 to $95 million, of which approximately $21 million was
incurred as of December 31, 1997. The remaining expenses are expected to be
incurred primarily in 1998. A portion of these costs will not be incremental
costs to the Company, but rather will represent the redeployment of existing
information technology resources. Costs associated with achieving Year 2000
compliance will be expensed as incurred.

         The costs of the projects and the date on which the Company plans to
complete the Year 2000 compliance program are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.

INFLATION

         The Company believes that inflation has not had a material effect on
its results of operations.

OUTLOOK FOR 1998

         The Company expects continued profitability and revenue growth in 1998.
Revenues from the Company's information technology solutions business should
grow dramatically in 1998 as a result of the multi-billion dollar technology
services agreement signed with US Airways, Inc. Additionally, the Company
expects overall revenue growth from the electronic travel distribution business
to be consistent with prior years. While the Company anticipates a decline in
domestic airline bookings growth in 1998, the Company expects to compensate for
the decline with growth in international bookings, non-air bookings and price
increases.



                                       16
<PAGE>   17


PRO FORMA STATEMENT OF INCOME DATA

         The pro forma statement of income data in the table below is based upon
the historical financial statements of the Company and assumes the
Reorganization and the Offering were consummated on January 1, 1995. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have occurred if such
transactions had been consummated on January 1, 1995, nor is it necessarily
indicative of future results of operations.

         The pro forma statement of income data should be read in conjunction
with the Consolidated Financial Statements and related notes thereto of the
Company included elsewhere herein. Pro forma adjustments include the impact of
the Affiliate Agreements and the Debenture as well as other adjustments
associated with the Reorganization and the Offering. See Note 5 to the
Consolidated Financial Statements. Amounts shown below are in thousands, with
the exception of per share amounts.


<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                   ---------------------------------------------
                                                       1997             1996            1995
                                                      Actual         Pro Forma        Pro Forma
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
Revenues
  Electronic travel distribution                   $ 1,200,276      $ 1,101,791      $   986,057
  Information technology solutions                     583,271          514,098          477,290
                                                   -----------      -----------      -----------
     Total revenues                                  1,783,547        1,615,889        1,463,347
Operating expenses
  Cost of revenues
    Electronic travel distribution                     853,221          764,536          688,250
    Information technology solutions                   450,296          382,387          369,984
  Selling, general and administrative                  172,321          142,618          120,515
                                                   -----------      -----------      -----------
      Total operating expenses                       1,475,838        1,289,541        1,178,749
                                                   -----------      -----------      -----------
Operating income                                       307,709          326,348          284,598
Other income (expense)
   Interest income                                      29,980           13,282            7,325
   Interest expense                                    (21,692)         (25,107)         (23,580)
   Other, net                                            7,652           (6,826)         (11,614)
                                                   -----------      -----------      -----------
Income before provision for income taxes               323,649          307,697          256,729
Provision for income taxes                             123,796          120,000          100,019
                                                   -----------      -----------      -----------
Net earnings                                       $   199,853      $   187,697      $   156,710
                                                   ===========      ===========      ===========
Earnings per common share, basic and diluted       $      1.53
                                                   ===========
Pro forma earnings per common share, basic and
     diluted                                                        $      1.44      $      1.20
                                                                    ===========      ===========
</TABLE>

ACTUAL 1997 COMPARED TO PRO FORMA 1996

Electronic Travel Distribution. Electronic travel distribution actual revenues
for the year ended December 31, 1997 increased approximately $98 million, 8.9%,
compared to pro forma revenues for the year ended December 31, 1996, from $1,102
million to $1,200 million. The increase was primarily due to growth in booking
fees from $1,007 million to $1,081 million. The growth in booking fees was due
to an increase in booking volumes primarily attributable to international
expansion in Europe and Latin America and an overall increase in the price per
booking charged to associates.



                                       17
<PAGE>   18


         Actual cost of revenues for electronic travel distribution for the year
ended December 31, 1997 increased approximately $88 million, 11.5%, compared to
pro forma for the year ended December 31, 1996 from $765 million to $853
million. This increase was primarily attributable to an increase in salaries,
benefits and employee related costs, depreciation and amortization, subscriber
incentive and other operating expenses. Salaries, benefits and employee related
costs increased due to an increase in the average number of employees necessary
to support the Company's revenue growth and annual salary increases.
Depreciation and amortization expense increased primarily due to growth in the
subscriber equipment base, shorter depreciable lives on purchased subscriber
equipment reflecting increased technological changes and an increase in
capitalized software. Subscriber incentive expenses increased in order to
maintain and expand the Company's travel agency subscriber base. Other operating
expenses increased due to the write-off of a capitalized software development
project that was intended to create a new order entry and billing system, costs
associated with SABREWorld 97 (a global travel technology conference and trade
show), increased reserves for bad debt and an increase in fees paid to American
under the Marketing Cooperation Agreement.

INFORMATION TECHNOLOGY SOLUTIONS. Actual revenues from information technology
solutions for the year ended December 31, 1997 increased approximately $69
million, 13.4%, compared to pro forma revenues for the year ended December 31,
1996, from $514 million to $583 million. Revenues from unaffiliated customers
increased approximately $39 million due to an increase in software development,
consulting and software license fee revenues. Revenues from AMR increased $30
million due to an increase in software development revenue and data processing
volumes.

         Actual cost of revenues for information technology solutions for the
year ended December 31, 1997 increased approximately $68 million, 17.8%,
compared to pro forma cost of revenues for the year ended December 31, 1996,
from $382 million to $450 million. This increase was primarily attributable to
an increase in salaries, benefits and employee related costs and communication
expenses, offset by a decrease in depreciation and amortization expense.
Salaries, benefits and employee related costs increased due to an increase in
the average number of employees necessary to support the Company's business
growth and annual salary increases. The increase in communication expense is
primarily due to the lease of the domestic data network from a third party. This
data network was owned by the Company until July 1996. The decrease in
depreciation and amortization expense is primarily due to the benefits of lower
price and higher productivity of certain data center equipment and the sale, in
July 1996, of data network equipment with a net book value of approximately $25
million to a third party.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Actual selling, general and
administrative expenses increased $29 million, 20.3%, compared to pro forma
selling, general and administrative expenses, from $143 million to $172 million
primarily due to an increase in salaries, benefits and employee related costs.
Salaries, benefits and employee related costs increased as a result of sales
growth initiatives for both the electronic travel distribution and the
information technology solutions lines of business. Employee related costs also
increased due to increased travel expenses.

OPERATING INCOME. Actual operating income decreased $18 million, 5.5%, compared
to pro forma operating income, from $326 million to $308 million. Operating
margins decreased from 20.2% to 17.3% due to an increase in actual revenues of
10.4% compared to pro forma revenues, while actual operating expenses increased
14.4% compared to pro forma operating expenses.

INTEREST INCOME. Actual interest income increased $17 million, compared to pro
forma interest income, due to higher balances maintained in the Company's
short-term investment accounts.

INTEREST EXPENSE. Actual interest expense decreased $3 million, compared to pro
forma interest expense, due to a decrease in interest rates on the Debenture (as
defined below) issued to American.

OTHER INCOME. Actual other income increased $14 million, compared to pro forma
other income, primarily due to growth in income from joint ventures in which the
Company owns an interest accounted for under the equity method.

INCOME TAXES. The actual provision for income taxes was $124 million and the pro
forma provision for income taxes was $120 million for the years ended December
31, 1997 and 1996, respectively. The increase in the provision for income taxes
corresponds with the increase in income before the provision for income taxes.
See Note 7 to the Consolidated Financial Statements for additional information
regarding income taxes.

                                       18
<PAGE>   19

NET EARNINGS. Actual net earnings increased $12 million, 6.4%, compared to pro
forma net earnings, from $188 million to $200 million, primarily due to the
increase in interest and other income offset by the decrease in operating
income.

PRO FORMA 1996 COMPARED TO 1995

ELECTRONIC TRAVEL DISTRIBUTION. Electronic travel distribution pro forma
revenues for the year ended December 31, 1996 increased approximately $116
million, 11.8%, compared to the year ended December 31, 1995, from $986 million
to $1,102 million. The increase was primarily due to growth in booking fees from
associates from $904 million to $1,007 million. This growth was driven by an
increase in booking volumes partially attributable to international expansion in
Europe and Latin America, an overall increase in the price per booking charged
to associates, and a migration of associates to higher participation levels
within SABRE.

         Pro forma cost of revenues for electronic travel distribution increased
approximately $77 million, 11.2%, from $688 million to $765 million. This
increase was primarily attributable to an increase in salaries and benefits and
subscriber incentive expenses. Salaries and benefits increased due to an
increase in the average number of employees necessary to support the Company's
revenue growth and new product development. Subscriber incentive expenses
increased in order to maintain and expand the Company's travel agency subscriber
base.

INFORMATION TECHNOLOGY SOLUTIONS. Pro forma revenue from information technology
solutions for the year ended December 31, 1996 increased approximately $37
million, 7.8%, compared to the year ended December 31, 1995, from $477 million
to $514 million due to an increase in revenues from unaffiliated customers of
approximately $27 million and from AMR of approximately $10 million.

         Pro forma cost of revenues for information technology solutions
increased approximately $12 million, 3.2%, from $370 million to $382 million.
This increase was primarily attributable to an increase in salaries and
benefits, offset by a decrease in depreciation and amortization expense.
Salaries and benefits increased due to an increase in the average number of
employees necessary to support the Company's revenue growth and new product
development. The decrease in depreciation expense is primarily due to the
benefits of price and performance improvements for Data Center equipment and the
sale to a third party of certain computer network equipment during the year with
a net book value of approximately $25 million.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and
administrative expenses increased $22 million, 18.2%, from $121 million to $143
million primarily due to an increase in salaries and benefits and legal and
professional fees.

OPERATING INCOME. Pro forma operating income increased $42 million, 14.8%, from
$284 million to $326 million. Operating margins increased from 19.4% to 20.2%
due to the increase in pro forma revenues of 10.4%, while pro forma operating
expenses increased 9.4%.

INTEREST INCOME. Pro forma interest income increased $6 million due to higher
balances maintained in the Company's short-term investment accounts.

OTHER EXPENSES. Pro forma other expenses decreased $5 million due to a reduction
in the losses from joint ventures in which the Company owns an interest
accounted for under the equity method.

INCOME TAXES. The pro forma provision for income taxes was $120 million and $100
million for 1996 and 1995, respectively. The increase in the provision for
income taxes corresponds with the increase in net income before the provision
for income taxes.

NET EARNINGS. Pro forma net earnings increased $31 million, 19.7%, from $157
million to $188 million due to the increase in operating income.




                                       19
<PAGE>   20


NEW ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 130, Reporting Comprehensive Income, effective for fiscal
years beginning after December 15, 1997. Statement No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The adoption of Statement No.
130 will require additional disclosures in the Company's financial statements,
but it will have no impact on the Company's results of operations.

         Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, effective for fiscal years
beginning after December 15, 1997. Statement No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The adoption
of Statement No. 131 will require additional disclosures in the Company's
financial statements, but it will have no impact on the Company's financial
position or results of operations.

         In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
effective for transactions entered into in fiscal years beginning after December
15, 1997. SOP 97-2 provides revised and expanded guidance on software revenue
recognition and applies to all entities that earn revenue from licensing,
selling or otherwise marketing computer software. The Company's accounting
policy for software revenue recognition is substantially in compliance with SOP
97-2, and its adoption is not expected to have a material impact on the
Company's financial position or results of operations.


CAUTIONARY STATEMENT

         Statements in this report which are not purely historical facts,
including statements regarding the Company's anticipations, beliefs,
expectations, hopes, intentions or strategies for the future, may be forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. All forward looking statements in this report are based
upon information available to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise. Any forward looking statements involve risks and uncertainties that
could cause actual events or results to differ materially from the events or
results described in the forward looking statements. Readers are cautioned not
to place undue reliance on these forward looking statements.

         Risks associated with the Company's forward looking statements include,
but are not limited to: risks related to the Company's relationships with
American and its affiliates, including risks that American may terminate any of
the agreements with the Company, or fail or otherwise become unable to fulfill
its principal obligations thereunder, or determine not to renew certain of the
agreements; risks associated with competition, and technological innovation by
competitors, which could require the Company to reduce prices, to change billing
practices, to increase spending or marketing or product development or otherwise
to take actions that might adversely affect its operations or earnings; risks
related to the Company's technology, such as a failure to timely achieve Year
2000 compliance; risks related to seasonality of the travel industry and booking
revenues; risks of the Company's sensitivity to general economic conditions and
events that affect airline travel and the airlines that participate in the SABRE
system; risks of a natural disaster or other calamity that may cause significant
damage to the Company's data center facility; risks associated with the
Company's international operations, such as currency fluctuations, governmental
approvals, tariffs and trade barriers, risks of new or different legal and
regulatory requirements; and risks associated with the Company's growth
strategy, including investments in emerging markets and the ability to
successfully conclude alliances.




                                       20
<PAGE>   21


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company's exposure to interest rates relates primarily to its investment
portfolio and to its debenture payable to AMR. The Company does not currently
use financial derivative instruments to manage interest rate risk; however, it
does closely monitor the relationship between interest rate-sensitive assets and
liabilities.

The objectives of the Company's short-term investments are safety of principal;
liquidity maintenance; yield maximization; and full investment of all available
funds. As such, the Company's investment portfolio consists primarily of high
credit quality certificates of deposit, bankers' acceptances, commercial paper
and corporate and government notes. If short-term interest rates average 10%
lower in 1998 than they were during 1997, the Company's interest income from
short-term investments would change by approximately $3 million. This amount was
determined by applying the hypothetical interest rate change to the Company's
short-term investments balance as of December 31, 1997.

In addition, the Company has a floating rate debenture payable to AMR (the
"Debenture") due September 30, 2004 with a principal balance of approximately
$318 million at December 31, 1997. Interest expense on the Debenture is accrued
based on the six month London Interbank Offered Rate (LIBOR rate) plus a margin
derived from the Company's senior unsecured long-term debt rating, or if such
debt rating is not available, upon the Company's ratio of net debt-to-total
capital. The average interest rate on the Debenture for 1997 was 6.2%.
Consequently, if short-term interest rates average 10% higher in 1998 than they
were during 1997, the Company's interest expenses would increase by
approximately $2.0 million. This amount was determined by applying the
hypothetical interest rate change to the Company's Debenture balance as of
December 31, 1997. If the Company's mix of interest rate-sensitive assets and
liabilities changes significantly, the Company may enter into derivative
transactions to manage its net interest exposure.

FOREIGN CURRENCY RISK

The Company has various foreign operations, primarily in North America, South
America, Europe, and Asia. As a result of these business activities, the Company
is exposed to foreign currency risk. However, with the exception of Europe,
these exposures have historically related to a small portion of the Company's
overall operations. In 1997, the Company established a hedging program to manage
its European currency exposures through December 31, 1997. In the future, the
Company intends to manage its European currency exposure by adjusting the mix of
European based revenues and expenses. The Company had no open derivative
transactions as of December 31, 1997, however, it may enter into derivative
transactions from time-to-time as foreign currency exposures arise.




                                       21
<PAGE>   22


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                        Page
                                                                       -------
<S>                                                                      <C>
Report of Ernst & Young LLP, Independent Auditors                        23

Consolidated Balance Sheets                                              24

Consolidated Statements of Income                                        25

Consolidated Statements of Cash Flows                                    26

Consolidated Statements of Stockholders' Equity                          27

Notes to Consolidated Financial Statements                               28

</TABLE>







                                       22
<PAGE>   23


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
The SABRE Group Holdings, Inc.

         We have audited the accompanying consolidated balance sheets of The
SABRE Group Holdings, Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income and stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The SABRE Group Holdings, Inc. and subsidiary at December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.



                                                  ERNST & YOUNG LLP


Dallas, Texas
January 19, 1998,
except for Note 14, as to which
the date is February 27, 1998





                                       23
<PAGE>   24


THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    December 31,     December 31,
                                                                                       1997              1996
                                                                                    -----------      -----------
<S>                                                                                 <C>              <C>
ASSETS
CURRENT ASSETS
  Cash                                                                              $    11,286      $    15,992
  Short-term investments                                                                573,620          426,945
  Accounts receivable, net                                                              239,626          197,015
  Receivable from affiliates                                                             10,829               --
  Prepaid expenses                                                                       17,708           13,630
  Deferred income taxes                                                                  21,093           40,946
                                                                                    -----------      -----------
    Total current assets                                                                874,162          694,528

PROPERTY AND EQUIPMENT
  Buildings and leasehold improvements                                                  321,987          298,740
  Furniture, fixtures and equipment                                                      36,904           24,403
  Service contract equipment                                                            548,706          545,302
  Computer equipment                                                                    395,887          356,506
                                                                                    -----------      -----------
                                                                                      1,303,484        1,224,951
  Less accumulated depreciation and amortization                                       (721,917)        (665,884)
                                                                                    -----------      -----------
    Total property and equipment                                                        581,567          559,067

Other assets, net                                                                        68,229           33,488
                                                                                    -----------      -----------
    TOTAL ASSETS                                                                    $ 1,523,958      $ 1,287,083
                                                                                    ===========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                                                  $    96,041      $    96,622
  Accrued compensation and related benefits                                              69,694           55,547
  Other accrued liabilities                                                             150,785          110,391
  Payable to affiliates                                                                      --           27,267
                                                                                    -----------      -----------
    Total current liabilities                                                           316,520          289,827

Deferred income taxes                                                                    12,354           43,077
Pensions and other postretirement benefits                                               89,573           50,070
Other liabilities                                                                        30,350           16,595
Debenture payable to AMR                                                                317,873          317,873
Commitments and contingencies

STOCKHOLDERS' EQUITY
  Preferred Stock:  $0.01 par value; 20,000 shares authorized; no shares issued              --               --
  Common stock
      Class A:  $0.01 par value; 250,000 shares authorized; 23,480 issued at
         December 31, 1997; 23,396 issued and outstanding at December
         31, 1996                                                                           235              234
      Class B:  $0.01 par value; 107,374 shares authorized; 107,374
         issued and outstanding at December 31, 1997 and 1996                             1,074            1,074

  Additional paid-in capital                                                            593,939          591,885

  Retained earnings (deficit)                                                           164,004          (23,552)

  Less treasury stock at cost; 72 shares at December 31, 1997                            (1,964)              --
                                                                                    -----------      -----------
    Total stockholders' equity                                                          757,288          569,641
                                                                                    -----------      -----------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $ 1,523,958      $ 1,287,083
                                                                                    ===========      ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.



                                       24
<PAGE>   25




THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                   ---------------------------------------------
                                                      1997             1996              1995
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
REVENUES
  Electronic Travel Distribution                   $ 1,200,276      $ 1,101,791      $ 1,006,926
  Information Technology Solutions                     583,271          520,196          522,690
                                                   -----------      -----------      -----------
    Total revenues                                   1,783,547        1,621,987        1,529,616

OPERATING EXPENSES
  Cost of revenues
    Electronic Travel Distribution                     853,221          763,261          655,973
    Information Technology Solutions                   450,296          389,352          376,453
  Selling, general and administrative                  172,321          142,573          116,766
                                                   -----------      -----------      -----------
    Total operating expenses                         1,475,838        1,295,186        1,149,192
                                                   -----------      -----------      -----------
OPERATING INCOME                                       307,709          326,801          380,424

OTHER INCOME (EXPENSE)
  Interest income                                       29,980           13,282            7,325
  Interest expense                                     (21,692)         (27,401)          (6,060)
  Other - net                                            7,652           (6,826)         (11,614)
                                                   -----------      -----------      -----------
                                                        15,940          (20,945)         (10,349)
                                                   -----------      -----------      -----------
INCOME BEFORE PROVISION FOR INCOME
   TAXES                                               323,649          305,856          370,075
   Provision for income taxes                          123,796          119,282          144,224
                                                   -----------      -----------      -----------
NET EARNINGS                                       $   199,853      $   186,574      $   225,851
                                                   ===========      ===========      ===========

EARNINGS PER COMMON SHARE DATA
  Pro forma earnings per common share                                                $      1.73
                                                                                     ===========
  Earnings per common share, basic and diluted     $      1.53      $      1.43
                                                   ===========      ===========
  Common shares used in per share calculations
     Basic                                             130,649          130,606
                                                   ===========      ===========
     Diluted                                           130,988          130,686
                                                   ===========      ===========
     Pro forma                                                                           130,604
                                                                                     ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.



                                       25
<PAGE>   26



THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                       ---------------------------------------------
                                                          1997              1996             1995
                                                       -----------      -----------      -----------
<S>                                                    <C>              <C>              <C>
OPERATING ACTIVITIES
Net earnings                                           $   199,853      $   186,574      $   225,851
Adjustments to reconcile net earnings to cash
   provided by operating activities
  Depreciation and amortization                            185,175          165,064          171,471
  Deferred income taxes                                     (2,945)         (28,346)         (12,385)
  Other                                                      6,378            6,475            7,865
  Changes in operating assets and liabilities
    Accounts receivable                                    (42,611)         (58,043)         (24,946)
    Prepaid expenses                                        (1,781)          (7,779)          (3,247)
    Other assets                                              (514)          15,428           (1,915)
    Accrued compensation and related benefits               14,147           21,851              182
    Accounts payable and other accrued liabilities          40,259           76,226           29,662
    Receivable from and payable to affiliates              (38,096)          27,267               --
    Pensions and other postretirement benefits              19,183            4,310            4,780
    Other liabilities                                       (1,245)           6,814           (1,389)
                                                       -----------      -----------      -----------
      Cash provided by operating activities                377,803          415,841          395,929

INVESTING ACTIVITIES
  Additions to property and equipment                     (218,124)        (184,261)        (166,816)
  Purchases of short-term investments                   (2,783,655)      (2,806,856)              --
  Maturities of  short-term investments                  2,638,939        2,381,398               --
  Other investing activities, net                          (23,688)          24,229          (18,169)
  Proceeds from sale of equipment                            4,551           33,582            6,169
                                                       -----------      -----------      -----------
        Cash used for investing activities                (381,977)        (551,908)        (178,816)

FINANCING ACTIVITIES
  Cash advances to affiliates                                   --               --         (236,367)
  Contributions from affiliates                                 --               --          244,666
  Distributions to affiliates                                   --               --         (393,507)
  Proceeds from issuance of common stock                       771          589,089               --
  Proceeds from exercise of stock options                      661              236               --
  Payments to acquire treasury stock                        (1,964)              --               --
  Payments on Debenture payable to AMR                          --         (532,127)              --
                                                       -----------      -----------      -----------
        Cash provided by (used for) financing
            activities                                        (532)          57,198         (385,208)
                                                       -----------      -----------      -----------

Decrease in cash and cash equivalents                       (4,706)         (78,869)        (168,095)
Cash and cash equivalents at beginning of the
   period                                                   15,992           94,861          262,956
                                                       -----------      -----------      -----------

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD         $    11,286      $    15,992      $    94,861
                                                       ===========      ===========      ===========

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash payments to affiliates for income taxes         $   121,456      $   128,932      $   148,332
                                                       ===========      ===========      ===========
  Cash payments to affiliates for interest             $    24,628      $    15,524      $        --
                                                       ===========      ===========      ===========
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       26
<PAGE>   27



THE SABRE GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                  Class A    Class B    Additional    Retained    Stockholder's
                                  Common     Common       Paid-in     Earnings        Net         Treasury
                                   Stock      Stock      Capital     (Deficit)     Investment       Stock        Total
                                -----------------------------------------------------------------------------------------
<S>                             <C>        <C>          <C>         <C>             <C>            <C>       <C>
Balance at January 1, 1995      $     ---  $     ---    $     ---   $      ---      $  289,464     $    ---  $    289,464
Contributions from affiliates         ---        ---          ---          ---         310,329          ---       310,329
Distributions to affiliates           ---        ---          ---          ---        (393,507)         ---      (393,507)
Net earnings                          ---        ---          ---          ---         225,851          ---       225,851
                                -----------------------------------------------------------------------------------------
Balance at December 31, 1995          ---        ---          ---          ---         432,137          ---       432,137

Net earnings prior to the
  Reorganization                      ---        ---          ---          ---         119,050          ---       119,050
Capitalization of the Company
  in connection with the
  Reorganization
Reclassification of
   stockholder's net
   investment                         ---        ---          ---      551,187        (551,187)         ---           ---
Issuance of Debenture
   payable to AMR                     ---        ---          ---     (850,000)            ---          ---      (850,000)
Transfer of fixed assets              ---        ---          ---      159,451             ---          ---       159,451
Other                                 ---        ---          ---       48,254             ---          ---        48,254
Issuance of 23,230 shares of
  Class A Common Stock in
  initial public offering             232        ---      588,857          ---             ---          ---       589,089
Reclassification of shares of
  common stock held by AMR
  into 107,374 shares of
  Class B Common Stock                ---      1,074       (1,074)         ---             ---           --           ---
Issuance of 166 shares of
  Class A Common Stock
  pursuant to stock option
  and restricted stock
  incentive plans                       2        ---        4,102          ---             ---          ---         4,104
Net earnings subsequent to
   Reorganization                     ---        ---          ---       67,524             ---          ---        67,524
Unrealized gain on investments        ---        ---          ---           32             ---          ---            32
                                -----------------------------------------------------------------------------------------
Balance at December 31, 1996          234      1,074      591,885      (23,552)            ---          ---       569,641
Net earnings                          ---        ---          ---      199,853             ---          ---       199,853
Assumption of net pension
  liability  from AMR                 ---        ---          ---      (12,395)            ---          ---       (12,395)
Issuance of  83 shares of
  Class A Common Stock
  pursuant to stock option,
  stock purchase and restricted
  stock incentive plans                 1        ---        2,054          ---             ---          ---         2,055
Repurchase of  Company stock          ---        ---          ---          ---             ---       (1,964)       (1,964)
Unrealized gain on investments        ---        ---          ---           98             ---          ---            98
                                ==========================================================================================
Balance at December 31, 1997    $     235  $   1,074  $   593,939   $ 164,004   $          ---  $    (1,964) $    757,288
                                ==========================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       27
<PAGE>   28

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.   GENERAL INFORMATION

     The SABRE Group Holdings, Inc. is a holding company. Its sole direct
     subsidiary is The SABRE Group, Inc., which, pursuant to the Reorganization
     (as defined below), is the successor to the businesses of The SABRE Group
     which were previously operated as subsidiaries or divisions of American
     Airlines, Inc. ("American") or AMR Corporation ("AMR"). The SABRE Group was
     formed by AMR to capitalize on synergies of combining AMR's information
     technology businesses under common management. Unless otherwise indicated,
     references herein to the "Company" include The SABRE Group Holdings, Inc.
     and its consolidated subsidiaries and, for the period prior to the
     Reorganization, the businesses of American and AMR constituting The SABRE
     Group, an operating unit of AMR.

     On July 2, 1996, AMR reorganized the businesses of The SABRE Group (the
     "Reorganization"). As part of the Reorganization, the Company was
     incorporated as a Delaware Corporation and a direct wholly-owned subsidiary
     of American, the businesses of The SABRE Group formerly operated as
     divisions and subsidiaries of American or AMR were combined under the
     Company and the Company and its subsidiaries were dividended by American to
     AMR.

     In connection with the Reorganization on July 2, 1996, the Company issued
     1,000 shares of common stock, par value $.01 per share, to American. These
     shares were subsequently dividended to AMR. The Company completed its
     initial public offering (the "Offering") of 23,230,000 shares of Class A
     Common Stock, par value $.01 per share, on October 17, 1996. The offering
     price of $27.00 per share resulted in net proceeds to the Company of
     approximately $589 million, after deducting underwriting discounts and
     commissions and other expenses payable by the Company. The Company used
     approximately $532 million of the net proceeds to repay a portion of a
     debenture payable to AMR. See Note 5.

     Concurrently with the Offering, the 1,000 shares of Common Stock held by
     AMR were reclassified into 107,374,000 shares of Class B Common Stock of
     the Company. See Note 9.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION - The consolidated financial statements have been
     prepared using AMR's historical basis in the assets and liabilities of the
     Company. The consolidated financial statements reflect the results of
     operations, financial condition and cash flows of the Company as a
     component and, subsequent to the Offering, a majority owned subsidiary of
     AMR and may not be indicative of actual results of operations and financial
     position of the Company under other ownership. Management believes the
     consolidated income statements include a reasonable allocation of
     administrative costs, which are described in Note 5, incurred by AMR on
     behalf of the Company. Certain reclassifications have been made to the 1996
     and 1995 financial statements to conform to the 1997 presentation.

     CONSOLIDATION - All significant accounts and transactions among the
     consolidated entities have been eliminated. For financial reporting
     purposes for periods prior to the Reorganization, the equity accounts of
     the previous divisions of American and subsidiaries of AMR have been
     accumulated into a single disclosure caption entitled Stockholder's Net
     Investment.

     CASH AND CASH EQUIVALENTS - Prior to the Reorganization, the Company's cash
     and cash equivalents were held for the Company by American. Cash and cash
     equivalents were immediately charged or credited to the Company upon
     recording certain transactions, including transactions with American for
     airline booking fees and purchases of goods and services. Cash equivalents
     are carried at cost plus accrued interest, which approximates fair value.
     Effective with the Reorganization, the Company began maintaining its own
     cash management system with separate cash and investment accounts from
     American. Subsequent to the Reorganization, the Company does not maintain
     cash equivalents.


                                       28
<PAGE>   29



THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     DEPRECIATION AND AMORTIZATION - The Company's depreciation and amortization
policies are as follows:

<TABLE>
<S>                                        <C>
     Property and Equipment:
        Buildings                          30 years
        Service contract equipment         3 to 5 years
        Computer equipment                 3 to 5 years
        Furniture and fixtures             5 to 15 years
        Leasehold improvements             Lesser of lease term or useful life
        Capitalized software               3 to 5 years
     Other Assets:
        Internally developed software      3 to 5 years
</TABLE>

     Property and equipment are stated at cost less accumulated depreciation and
     amortization, which is calculated on the straight-line basis. Service
     contract equipment consists of hardware provided primarily to subscribers
     of SABRE. Depreciation of property and equipment totaled approximately $178
     million, $159 million and $166 million in 1997, 1996 and 1995,
     respectively. Other assets are amortized on the straight-line basis over
     the periods indicated.

     REVENUE RECOGNITION - The Company provides electronic travel distribution
     services using the SABRE computer reservations system, one of the largest
     privately owned real-time computer systems in the world. As compensation
     for electronic travel distribution services provided, fees are collected
     from airline, car rental and hotel vendors and other providers of
     travel-related products and services ("associates") for reservations booked
     through SABRE. The fee per booking charged to associates is dependent upon
     the level of functionality within SABRE at which the associate
     participates. Revenue for airline travel reservations is recognized at the
     time of the booking of the reservation, net of estimated future
     cancellations. At December 31, 1997 and 1996, the Company had recorded
     booking fee cancellation reserves of approximately $15 million and $14
     million, respectively. Revenue for car rental and hotel bookings and other
     travel providers is recognized at the time the reservation is used by the
     customer. The Company also enters into service contracts with subscribers
     (primarily travel agencies) to provide access to SABRE, hardware, software,
     hardware maintenance and other support services. Fees billed on service
     contracts are recognized as revenue in the month earned.

     The Company also provides information technology solutions to AMR and
     companies in the travel industry and other industries worldwide. Revenue
     from data processing services is recognized in the period earned. Revenue
     from software license fees for standard software products is recognized
     when the software is delivered, provided no significant future vendor
     obligations exist and collection is probable. The Company recognizes
     revenue on long-term software development and consulting contracts under
     the percentage of completion method of accounting. Losses, if any, on
     long-term contracts are recognized when the current estimate of total
     contract costs indicates a loss on a contract is probable. Fixed fees for
     software maintenance are recognized ratably over the life of the contract.
     As a result of contractual billing terms, at December 31, 1997 and 1996 the
     Company had recorded accounts receivable of approximately $52 million and
     $40 million, respectively, that had not been billed to customers.

     INCOME TAXES - The entities comprising the Company are included in the
     consolidated federal income tax return of AMR. Prior to July 1, 1996, under
     the terms of a tax sharing agreement, the Company paid AMR an amount equal
     to the income tax payments calculated as if the Company had filed separate
     income tax returns.

     The Company and AMR entered into a tax sharing agreement effective July 1,
     1996 (the "Tax Sharing Agreement"), which provides for the allocation of
     tax liabilities during the tax periods the Company is included in the
     consolidated federal, state and local income tax returns filed by AMR. The
     Tax Sharing Agreement generally requires the Company to pay to AMR the
     amount of federal, state and local income taxes that the Company would have
     paid had it ceased to be a member of the AMR consolidated tax group for
     periods after the Reorganization. The Company is jointly and severally
     liable for the federal income tax of AMR and the other companies included
     in the consolidated return for all periods in which the Company is included
     in the AMR consolidated group. AMR has agreed, however, to indemnify the
     Company for any liability for taxes reported or required to be reported on
     a consolidated return.


                                       29
<PAGE>   30

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     Except for certain items specified in the Tax Sharing Agreement, AMR
     generally retains any potential tax benefit carryforwards, and remains
     obligated to pay all taxes attributable to periods before the
     Reorganization. The Tax Sharing Agreement also grants the Company certain
     limited participation rights in any disputes with tax authorities.

     The Company computes its provision for deferred income taxes using the
     liability method as if it were a separate taxpayer. Under the liability
     method, deferred income tax assets and liabilities are determined based on
     differences between financial reporting and income tax bases of assets and
     liabilities and are measured using the enacted tax rates and laws. The
     measurement of deferred tax assets is adjusted by a valuation allowance, if
     necessary, to recognize the extent to which, based on available evidence,
     the future tax benefits more likely than not will be realized.

     RESEARCH AND DEVELOPMENT COSTS - All costs in the software development
     process which are classified as research and development costs are expensed
     as incurred until technological feasibility has been established. Once
     technological feasibility has been established, such costs are capitalized
     until the product is ready for service. Research and development costs
     approximated $24 million for 1997. Prior to 1997, research and development
     costs were not material.

     CONCENTRATION OF CREDIT RISK - The Company's customers are primarily
     located in the United States, Europe, Canada and Latin America, and are
     concentrated in the travel industry. Approximately 30%, 31% and 36% of
     revenues in 1997, 1996 and 1995, respectively, were related to American and
     other subsidiaries of AMR. The Company generally does not require security
     or collateral from its customers as a condition of sale. The Company
     maintained an allowance for losses of approximately $9 million and $4
     million at December 31, 1997 and 1996, respectively, based upon the
     expected collectibility of all accounts receivable.

     USE OF ESTIMATES - The preparation of these financial statements in
     conformity with generally accepted accounting principles requires that
     certain amounts be recorded based on estimates and assumptions made by
     management. Actual results could differ from these estimates and
     assumptions.

     STOCK AWARDS AND OPTIONS - The Company accounts for stock awards and
     options (including awards of AMR stock and stock options granted to
     employees prior to the Reorganization) in accordance with Accounting
     Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
     No compensation expense is recognized for stock option grants if the
     exercise price is at or above the fair market value of the underlying stock
     on the date of grant. Compensation expense relating to other stock awards
     is recognized over the period during which the employee renders service to
     the Company necessary to earn the award.

     EARNINGS PER COMMON SHARE - The pro forma earnings per share data is
     calculated as though the 23,230,000 shares of Class A Common Stock issued
     in connection with the Offering and the reclassification of 107,374,000
     shares of Class B Common Stock held by AMR were outstanding for the year
     ended December 31, 1995. The earnings per common share data for 1996 is
     calculated as though the 130,604,000 shares were outstanding the entire
     year, adjusted for the weighted average additional shares of Class A Common
     Stock issued subsequent to the Offering.

     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
     Earnings Per Share. Statement 128 replaced the calculation of primary and
     fully diluted earnings per share with basic and diluted earnings per share.
     Unlike previously reported primary earnings per share, basic earnings per
     share excludes any dilutive effects of options, warrants and convertible
     securities. Diluted earnings per share is very similar to the previously
     reported fully diluted earnings per share. All earnings per share amounts
     for all periods have been presented, and where appropriate, restated to
     conform to the Statement 128 requirements.


                                       30
<PAGE>   31

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
     Standards Board (the "FASB") issued Statement No. 130, Reporting
     Comprehensive Income, effective for fiscal years beginning after December
     15, 1997. Statement No. 130 establishes standards for the reporting and
     display of comprehensive income and its components in a full set of
     general-purpose financial statements. The adoption of Statement No. 130
     will require additional disclosures in the Company's financial statements,
     but it will have no impact on the Company's results of operations.

     Also in June 1997, the FASB issued Statement No. 131, Disclosures about
     Segments of an Enterprise and Related Information, effective for fiscal
     years beginning after December 15, 1997. Statement No. 131 establishes
     standards for the way that public business enterprises report information
     about operating segments in annual financial statements and requires those
     enterprises to report selected information about operating segments in
     interim financial reports issued to stockholders. It also establishes
     standards for related disclosures about products and services, geographic
     areas and major customers. The adoption of Statement No. 131 will require
     additional disclosures in the Company's financial statements, but it will
     have no impact on the Company's financial position or results of
     operations.

     In October 1997, the American Institute of Certified Public Accountants
     issued Statement of Position ("SOP") No. 97-2, Software Revenue
     Recognition, effective for transactions entered into in fiscal years
     beginning after December 15, 1997. SOP 97-2 provides revised and expanded
     guidance on software revenue recognition and applies to all entities that
     earn revenue from licensing, selling or otherwise marketing computer
     software. The Company's accounting policy for software revenue recognition
     is substantially in compliance with SOP 97-2, and its adoption is not
     expected to have a material impact on the Company's financial position or
     results of operations.

3.   SHORT-TERM INVESTMENTS

     Short-term investments consist of (in thousands):
<TABLE>
<CAPTION>
                                                                             December 31,
                                                                       --------------------------
                                                                           1997           1996
                                                                       -----------    -----------
<S>                                                                       <C>           <C>
     Overnight investment and time deposits                               $119,303      $  66,848
     Corporate notes                                                       242,847        266,036
     Mortgages                                                             181,353         58,927
     U.S. Treasuries                                                        30,117         35,134
                                                                       ===========    ===========
                                                                          $573,620       $426,945
                                                                       ===========    ===========
</TABLE>


     The following table summarizes short-term investments by contractual
     maturity at December 31, 1997 and 1996, (in thousands):
<TABLE>
<CAPTION>
                                                                           1997           1996
                                                                        -----------    -----------
<S>                                                                        <C>            <C>
     Due in one year or less                                               $346,540       $281,799
     Due after one year through three years                                 187,316         86,219
     Due after three years                                                   39,764         58,927
                                                                        -----------    -----------
                                                                           $573,620       $426,945
                                                                        ===========    ===========
</TABLE>

     Short-term investments, all of which are classified as available-for-sale
     in accordance with Statement of Financial Accounting Standards No. 115,
     Accounting for Certain Debt and Equity Securities, are stated at fair value
     based on market quotes. There were no significant differences between
     amortized cost and estimated fair value at December 31, 1997. Net
     unrealized gains and losses, net of deferred taxes, are reflected as an
     adjustment to stockholders' equity. Short-term investments, without regard
     to remaining maturity at acquisition, are not considered cash equivalents
     for purposes of the statement of cash flows.


                                       31

<PAGE>   32


THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

4.   FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     To reduce its exposure to future exchange rate fluctuations, the Company
     may enter into foreign currency derivative agreements. At December 31,
     1997, no such agreements were outstanding.

     During 1997, the Company entered into currency put option agreements that
     resulted in the recognition of gains of approximately $1.8 million as of
     December 31, 1997. Gains on the options are recognized as a component of
     electronic travel distribution revenue in the same period as the
     transactions. The Company does not hold or issue derivative financial
     instruments for trading purposes.

5.   CERTAIN RELATED PARTY TRANSACTIONS

     DISTRIBUTIONS TO AND CONTRIBUTIONS FROM AFFILIATES - Certain of The SABRE
     Group entities from which the Company was formed distributed, in their
     capacity as divisions of American, $394 million in 1995 to American. Also
     during 1995, AMR contributed $245 million to the Company and a note payable
     to AMR of $66 million was capitalized in order to adequately capitalize
     certain of The SABRE Group entities from which the Company was formed.
     Proceeds from the contribution were used to reduce cash advances from AMR.

     In conjunction with the capital infusion discussed above, amounts payable
     to AMR of approximately $54 million were converted to intercompany notes
     payable in 1995, upon which the Company was charged interest expense at an
     average rate of 9.9%. On July 1, 1996 the note payable to AMR of
     approximately $54 million was capitalized.

     INTEREST ON CASH EQUIVALENTS - Prior to the Reorganization, American
     allocated interest income or expense monthly based on the net balance of
     cash equivalents and the payable to AMR at the average rate earned by
     American's portfolio of short-term marketable securities. The allocation
     may not be representative of what the Company would have earned or paid if
     its cash were held externally. Cash payments for interest are equivalent to
     net interest expense for periods prior to the Reorganization.

     DEBENTURE PAYABLE TO AMR - On July 2, 1996, in connection with the
     Reorganization, American transferred to the Company certain divisions and
     subsidiaries of American through which AMR previously conducted its
     information technology businesses, and in return the Company issued to
     American a floating rate subordinated debenture due September 30, 2004 with
     a principal amount of $850 million (the "Debenture") and common stock
     representing 100% of the equity ownership interest in the Company. American
     subsequently prepaid a portion of its note payable to AMR with the
     Debenture. Because the assets and liabilities of the divisions and
     subsidiaries of American transferred to the Company are included in the
     historical financial statements of the Company, issuing the Debenture
     resulted in a reduction of stockholders' equity.

     The Company used approximately $532 million of the net proceeds from the
     Offering to repay a portion of the Debenture held by AMR.

     The interest rate on the Debenture is based on the sum of the London
     Interbank Offered Rate (LIBOR rate) plus a margin determined based upon the
     Company's senior unsecured long-term debt rating or, if such debt rating is
     not available, upon the Company's ratio of net debt to total capital. The
     interest rate is determined monthly and accrued interest is payable each
     September 30 and March 31. The average interest rate on the Debenture was
     6.2% and 7.1% for 1997 and 1996, respectively. The Company may prepay the
     principal balance, approximately $318 million at December 31, 1997, in
     whole or in part at any interest payment date.

     PROPERTY AND EQUIPMENT - On July 1, 1996 American contributed buildings,
     furniture and fixtures in addition to those discussed above to the Company
     with an original cost of approximately $298 million and a net book value of
     $193 million. During 1997, the Company acquired a building from American
     for approximately $6 million.

     AFFILIATE AGREEMENTS - In connection with the Reorganization, the Company
     has entered into certain agreements with AMR and its affiliates (the
     "Affiliate Agreements"), which are discussed below.


                                       32
<PAGE>   33

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     INFORMATION TECHNOLOGY SERVICES AGREEMENT - The Company is party to the
     Information Technology Services Agreement with American dated July 1, 1996
     (the "Technology Services Agreement"), to provide American with certain
     information technology services. The parties agreed to apply the financial
     terms of the Technology Services Agreement as of January 1, 1996. The base
     term of the Technology Services Agreement expires June 30, 2006. The terms
     of the services to be provided by the Company to American, however, vary.
     For example, the Company will provide: (i) Data Center services, data
     network services, application development and existing application
     maintenance enhancement services until June 30, 2006; (ii) services
     relating to existing client server operations until June 30, 2001; and
     (iii) distributed systems services until June 30, 2000; and voice network
     services until June 30, 2001.

     The Technology Services Agreement provides for annual price adjustments.
     For certain prices, adjustments are made according to formulas which,
     commencing in 1998, are reset every two years and which may take into
     account the market for similar services provided by other companies. The
     resulting rates may reflect an increase or decrease over the previous
     rates.

     With limited exceptions, under the Technology Services Agreement the
     Company will continue to be the exclusive provider of all information
     technology services provided by the Company to American immediately prior
     to the execution of the Technology Services Agreement. Any new information
     technology services, including most new application development services,
     requested by American can be outsourced pursuant to competitive bidding by
     American or performed by American on its own behalf. With limited
     exceptions, the Company has the right to bid on all new services for which
     American solicits bids. Additionally, American may continue to perform
     development and enhancement work that it is currently performing on its own
     behalf.

     After July 1, 2000, American may terminate the Technology Services
     Agreement for convenience. If it does so, American will be required to pay
     a termination fee equal to the sum of all amounts then due under the
     Technology Services Agreement, including wind-down costs, net book value of
     dedicated assets and a significant percentage of estimated lost profits.
     American may also terminate the Technology Services Agreement without
     penalty, in whole or in part depending upon circumstances, for egregious
     breach by the Company of its obligations or for serious failure to perform
     critical or significant services. If the Company is acquired by another
     Company (other than AMR or American) with more than $1 billion in annual
     airline transportation revenue, then American may terminate the Technology
     Services Agreement without paying any termination fee. Additionally, if
     American were to dispose of any portion of its businesses or any affiliate
     accounting for more than 10% of the Company's fees from American, then
     American shall either cause such divested business or affiliate to be
     obligated to use the Company's services in accordance with the Technology
     Services Agreement or pay a proportionate termination fee.

     In addition, Airline Management Services, Incorporated (AMS), a subsidiary
     of AMR, and Canadian have entered into an agreement pursuant to which AMR
     and American supply to Canadian various services, including technology
     services. The Company is a principal provider of data processing and
     network distributed systems services to Canadian under the terms of the
     Canadian Technical Services Subcontract (the "Canadian Subcontract") with
     American which expires in 2006. Under the terms of the Canadian
     Subcontract, American guaranteed full payment for services actually
     performed by the Company and deferred costs associated with the
     installation and implementation of certain systems. As permitted by the
     terms of the Canadian Subcontract, in December 1996, American paid the
     Company approximately $40 million, representing the unrecovered contract
     costs. Approximately $5 million of these deferred costs were charged to
     operations in both 1996 and 1995.

     MANAGEMENT SERVICES AGREEMENT - The Company and American are parties to a
     Management Services Agreement dated July 1, 1996 (the "Management Services
     Agreement"), pursuant to which American performs various management
     services for the Company, including treasury, risk management, and other
     administrative services, that American has historically provided to the
     Company. American also manages the Company's cash balances under the terms
     of the Management Services Agreement. Transactions with American are
     settled through monthly billings, with payment due in 30 days. The
     Management Services Agreement will expire on June 30, 1999, unless
     terminated earlier if American and the Company are no longer under common
     control or if the Technology Services Agreement is terminated early.
     Amounts charged to the Company under this agreement approximate American's
     cost of providing the services plus a margin. The parties agreed to apply
     the financial terms of the Management Services Agreement as of January 1,
     1996.


                                       33
<PAGE>   34

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     MARKETING COOPERATION AGREEMENT - The Company and American are parties to
     the Marketing Cooperation Agreement dated July 1, 1996 (the "Marketing
     Cooperation Agreement"), pursuant to which American will provide marketing
     support for 10 years for the Company's professional SABRE products targeted
     to travel agencies and for five years for SABRE Business Travel Solutions
     ("SABRE BTS"), Travelocity and easySABRE. The parties agreed to apply the
     financial terms of the Marketing Cooperation Agreement as of January 1,
     1996. The Marketing Cooperation Agreement may be terminated by either party
     prior to June 30, 2006 only if the other party fails to perform its
     obligations thereunder.

     Under the Marketing Cooperation Agreement, American's marketing efforts
     include ongoing promotional programs to assist in the sale of those SABRE
     products, development with the Company of an annual sales plan, sponsorship
     of sales/promotional events and the targeting of potential customers. Under
     the terms of the Marketing Cooperation Agreement, the Company pays American
     a fee for its marketing support for professional SABRE, the amount of which
     may increase or decrease, depending on total SABRE booking volumes
     generated by certain professional SABRE subscribers in the U.S., the
     Caribbean and elsewhere and on SABRE's market share of travel agency
     bookings in those areas. That fee was approximately $22 million and $20
     million in 1997 and 1996, respectively. As payment for American's support
     of the Company's promotion of SABRE BTS, Travelocity and easySABRE, the
     Company pays American a marketing fee based upon booking volume.
     Additionally, the Company has guaranteed to American certain cost savings
     in the fifth year of the Marketing Cooperation Agreement. If American does
     not achieve those savings, the Company will pay American any shortfall, up
     to a maximum of $50 million.

     NON-COMPETITION AGREEMENT - The Company, AMR and American have entered into
     a Non-Competition Agreement dated July 1, 1996 (the "Non-Competition
     Agreement"), pursuant to which AMR and American, on behalf of themselves
     and certain of their subsidiaries, have agreed to limit their competition
     with the Company's businesses of (i) electronic travel distribution; (ii)
     development, maintenance, marketing and licensing of software for travel
     agency, travel, transportation and logistics management; (iii) computer
     system integration; (iv) development, maintenance and operation of a data
     processing center providing data processing services to third parties; and
     (v) travel industry, transportation and logistics consulting services
     relating primarily to computer technology and automation. The
     Non-Competition Agreement expires on December 31, 2001. American may
     terminate the Non-Competition Agreement, however, as to the activities
     described in clauses (ii) though (v) of this paragraph upon 90 days notice
     to the Company if the Technology Services Agreement is terminated as a
     result of an egregious breach thereof by the Company.

     TRAVEL AGREEMENTS - The Company and American are parties to a Travel
     Privileges Agreement dated July 1, 1996 (the "Travel Privileges
     Agreement"), pursuant to which the Company is entitled to purchase personal
     travel for its employees and retirees at reduced fares. The Travel
     Privileges Agreement will expire on June 30, 2008. To pay for the provision
     of flight privileges to certain of its future retired employees, the
     Company makes a lump sum payment to American each year, beginning in 1997,
     for each employee retiring in that year. The payment per retiree is based
     on the number of years of service with the Company and AMR over the prior
     ten years of service. Service years accrue for the Company beginning on
     January 1, 1993. AMR will retain the obligation for the portion of benefits
     attributable to service years prior to January 1, 1993. The accumulated
     benefit obligation for postretirement travel privileges assumed by the
     Company at July 1, 1996 of approximately $8 million, net of deferred taxes
     of approximately $3 million, was recorded as a reduction to stockholders'
     equity. The remaining cost of providing this privilege is being accrued
     over the estimated service lives of the employees eligible for the
     privilege. See Note 6.

     The Company and American are also parties to a Corporate Travel Agreement
     dated July 1, 1996 and ending June 30, 1998 (the "Corporate Travel
     Agreement"), pursuant to which the Company receives discounts for certain
     flights purchased on American. In exchange, the Company must fly a certain
     percentage of its travel on American as compared to all other air carriers
     combined. If the Company fails to meet the applicable percentage on an
     average basis over any calendar quarter, American may terminate the
     agreement upon 60 days' notice.

     The parties agreed to apply the financial terms of the Travel Privileges
     Agreement and the Corporate Travel Agreement as of January 1, 1996.


                                       34
<PAGE>   35

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     CREDIT AGREEMENT - On July 1, 1996, the Company and American entered into a
     Credit Agreement pursuant to which the Company is required to borrow from
     American, and American is required to lend to the Company, amounts required
     by the Company to fund its daily cash requirements. In addition, American
     may, but is not required to, borrow from the Company to fund its daily cash
     requirements. The maximum amount the Company may borrow at any time from
     American under the Credit Agreement is $300 million. The maximum amount
     that American may borrow at any time from the Company under the Credit
     Agreement is $100 million. Loans under the Credit Agreement are not
     intended as long-term financing. If the Company's credit rating is better
     than "B" on the Standard & Poor's Rating Service Scale (or an equivalent
     thereof) or American has excess cash, as defined, to lend the Company, the
     interest rate to be charged to the Company is the sum of (a) the higher of
     (i) American's average rate of return on short-term investments for the
     month in which the borrowing occurred or (ii) the actual rate of interest
     paid by American to borrow funds to make the loan to the Company under the
     Credit Agreement, plus (b) an additional spread based upon the Company's
     credit risk. If the Company's credit rating is "B" or below on the Standard
     & Poor's Rating Service Scale (or an equivalent thereof) and American does
     not have excess cash to lend to the Company, the interest rate to be
     charged to the Company is the lower of (a) the sum of (i) the borrowing
     cost incurred by American to draw on its revolving credit facility to make
     the advance, plus (ii) an additional spread based on the Company's credit
     risk, or (b) the sum of (i) the cost at which the Company could borrow
     funds from an independent party plus (ii) one-half of the margin American
     pays to borrow under its revolving credit facility. The Company believes
     that the interest rate it will be charged by American could, at times, be
     slightly above the rate at which the Company could borrow externally;
     however, no standby fees for the line of credit will be required to be paid
     by either party. The interest rate to be charged to American is the
     Company's average portfolio rate for the months in which borrowing occurred
     plus an additional spread based upon American's credit risk. At the end of
     each quarter, American must pay all amounts owing under the Credit
     Agreement to the Company. No borrowings have occurred by either the Company
     or American as of December 31, 1997.

     INDEMNIFICATION AGREEMENT - In connection with the Reorganization, the
     Company and American entered into an intercompany agreement (the
     "Indemnification Agreement") pursuant to which each party indemnified the
     other for certain obligations relating to the Reorganization. Pursuant to
     the Indemnification Agreement, the Company indemnified American for
     liabilities assumed in the Reorganization, against third party claims
     asserted against American as a result of American's prior ownership of
     assets or operation of businesses contributed to the Company and for losses
     arising from or in connection with the Company's lease of property from
     American. In exchange, American indemnified the Company for specified
     liabilities retained by it in the Reorganization, against third party
     claims against the Company relating to American's businesses and asserted
     against the Company as a result of the ownership or possession by American
     prior to the Reorganization of any asset contributed to the Company in the
     Reorganization and for losses arising from or in connection with American's
     lease of property from the Company.

     REVENUES FROM AFFILIATES - Revenues from American and other subsidiaries of
     AMR were $526 million, $500 million and $548 million in 1997, 1996 and
     1995, respectively.

     OPERATING EXPENSES - Operating expenses are charged to the Company by
     American and other subsidiaries of AMR to cover certain employee benefits,
     facilities rental, marketing services, management services, legal fees and
     certain other administrative costs based on employee headcount or actual
     usage of facilities and services. The Company believes amounts charged to
     the Company for these expenses approximate the cost of such services
     provided by third parties. Travel service costs for travel by the Company's
     employees for personal and business travel are charged to the Company based
     on rates negotiated with American. If the Company were not affiliated with
     American, the personal travel flight privilege would most likely not be
     available to employees. It is estimated that business travel costs, had the
     Company not been affiliated with American, for 1995 would have been
     approximately $34 million, based on corporate travel rates offered by
     American to similar companies. The rates negotiated with American for 1996
     and 1997 under the Corporate Travel Agreement approximates corporate travel
     rates offered by American to similar companies. Expenses charged to the
     Company by affiliates are as follows (in thousands):


                                       35
<PAGE>   36




THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                           ----------------------------------------------
                                               1997             1996              1995
                                           ------------     ------------     -------------
<S>                                         <C>              <C>               <C>
       Employee benefits                    $   55,872       $   85,538        $   68,743
       Facilities rental                         3,526           19,120            29,385
       Marketing cooperation                    21,779           20,436               ---
       Management services                      11,276           17,143            16,508
       Other administrative costs                6,799           14,767            11,377
       Travel services                          47,638           42,855            28,761
                                           ------------     ------------     -------------
                                             $ 146,890        $ 199,859         $ 154,774
                                           ============     ============     =============
</TABLE>

6.   EMPLOYEE BENEFIT PLANS

     Prior to 1997, substantially all employees of the Company were eligible to
     participate in American's tax-qualified defined benefit pension plan (the
     "American Plan"). The American Plan provides benefits for participating
     employees based on years of service and average compensation for a
     specified period of time before retirement. Costs associated with employee
     participation in this plan were determined based upon employee headcount
     and were allocated to the Company by American. American's annual allocation
     of costs to the Company for such benefits, which are included in employee
     benefits in the table in Note 5, was approximately $20 million and $9
     million in 1996 and 1995, respectively. The Company is jointly and
     severally liable with AMR and other members of AMR's consolidated group for
     applicable funding and termination liabilities of the plan. The historical
     financial statements of the Company do not reflect the portion of the net
     obligation of the defined benefit plan sponsored by American attributable
     to employees of the Company.

     Effective January 1, 1997, the Company established The SABRE Group
     Retirement Plan (the "SGRP"), a defined contribution plan qualified under
     Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). Upon
     establishment, substantially all Company employees under the age of 40 at
     December 31, 1996 began participating in the SGRP.

     The Company contributes 2.75% of each participating employee's base pay to
     the SGRP. Employees vest in the Company's contributions after three years
     of service, including any prior service with AMR affiliates. In addition,
     the Company matches 50 cents of each dollar contributed by participating
     employees, limited to the first 6% of the employee's base pay contribution,
     subject to IRS limitations. Employees are immediately vested in their own
     contributions and the Company's matching contributions. In 1997, costs for
     the SGRP were $11 million.

     The obligation for benefits previously earned by employees under the age of
     40 under the American Plan are now the responsibility of the Legacy Pension
     Plan (the "LPP"), a defined benefit plan sponsored by the Company which
     offers benefits substantially similar to those offered by the American
     Plan. These benefits are based on the credited years of service earned as
     of December 31, 1996. However, these employees will continue to earn years
     of service for purposes of determining vesting and early retirement
     eligibility under the LPP based on future service to the Company.
     Additionally, future increases in compensation levels will be considered in
     the calculation of retirement benefits to be paid from the LPP to these
     employees upon their retirement.

     Employees age 40 or over as of December 31, 1996, who were participants in
     the American Plan at that date, were given the option of participating in
     the SGRP or the LPP. Benefits provided by the LPP to retirees of the
     Company are based on years of credited service and the employee's base pay
     for the highest consecutive five years of the ten years preceding
     retirement. With the exception noted below, the obligation for benefits
     previously earned by these employees under the American Plan is now the
     responsibility of the LPP.


                                       36

<PAGE>   37

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     Certain employees of the Company meeting specified criteria have elected to
     remain in the American Plan for service through December 31, 1996, and are
     in the LPP for service and increases in compensation levels subsequent to
     that date. The obligation for benefits earned by these employees as of
     December 31, 1996 under the American Plan remained with the American Plan.

     In October 1997, the portion of the American Plan applicable to employees
     of the Company was spun-off to the LPP. At the date of spin-off, the net
     obligation attributable to the Company's employees participating in the
     American Plan, a liability of approximately $20 million, was charged to
     stockholders' equity, net of deferred taxes of approximately $8 million.

     Total costs for the year ended December 31, 1997 for the LPP were (in
     thousands):


<TABLE>
<S>                                                               <C>
       Service cost - benefits earned during the period           $ 9,845
       Interest cost on projected benefit obligation               10,056
       Return on assets                                           (13,877)
       Net amortization and deferral                                7,046
                                                            --------------

       Net periodic pension cost                                  $13,070
                                                            ==============
</TABLE>

     The funded status and actuarial present value of benefit obligations of the
     LPP reconciled to the accrued pension cost recognized in the accompanying
     balance sheet at December 31, 1997 were (in thousands):


<TABLE>
<S>                                                             <C>
       Vested benefit obligation                                $  (55,776)
                                                             ==============
       Accumulated benefit obligation                           $  (69,574)
       Effect of future salary increases                           (89,806)
                                                             --------------
       Projected benefit obligation                               (159,380)
       Plan assets at fair value                                    92,318
                                                             --------------
       Projected benefit obligation in excess of plan
       assets                                                      (67,062)
       Unrecognized net loss                                        32,866
       Unrecognized prior service costs                                242
       Unrecognized transition asset                                  (363)
                                                             ==============
       Accrued pension cost                                     $  (34,317)
                                                             ==============
</TABLE>

     The Company's funding policy is to make contributions equal to, or in
     excess of, the minimum funding requirements of the Employee Retirement
     Income Security Act of 1974.

     Plan assets consist primarily of mutual fund shares managed by a subsidiary
     of AMR invested in debt and equity securities.

     The projected benefit obligation was calculated using a discount rate of
     7.25%, a rate of annual compensation increase of 4.0%, and an expected
     long-term rate of return on assets of 9.50% at December 31, 1997.

     In addition to providing pension benefits, American provides certain health
     care and life insurance benefits to retired employees. The amount of health
     care benefits is limited to lifetime maximums as outlined in the plan.
     Substantially all employees of the Company may become eligible for these
     benefits if they satisfy eligibility requirements during their working
     lives. Certain employee groups make contributions towards funding a portion
     of their retiree health care benefits during their working lives. The
     Company funds benefits as incurred and also matches employee prefunding.
     The Company's cost for such benefits was approximately $5 million, $10
     million and $5 million in 1997, 1996 and 1995, respectively. The Company is
     jointly and severally liable with AMR and other members of AMR's
     consolidated group for funding postretirement health care and life
     insurance benefit liabilities.


                                       37

<PAGE>   38

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     Pursuant to the Travel Privileges Agreement, the Company is entitled to
     purchase personal travel for certain retirees. To pay for the provision of
     flight privileges to certain of its future retired employees, the Company
     makes a lump sum payment, beginning in 1997, for each employee retiring in
     that year. The payment per retiree is based on the number of years of
     service with the Company and AMR over the prior ten years of service.
     Service years accrue for the Company beginning on January 1, 1993. AMR
     retains the obligation for the portion of benefits attributable to service
     years prior to January 1, 1993. In connection with the Reorganization, the
     accumulated benefit obligation for postretirement travel privileges at July
     1, 1996 of approximately $8 million, net of deferred taxes of approximately
     $3 million, was recorded as a reduction to stockholders' equity. The
     remaining cost of providing this privilege is being accrued over the
     estimated service lives of the employees eligible for the privilege. Prior
     to the Reorganization, the flight privileges provided to retired employees
     did not result in significant incremental costs for the Company and,
     therefore, the cost of providing this to the Company's employees was not
     included in the postretirement costs for periods prior to the
     Reorganization.

     Included in employee benefits in the table in Note 5 are the following net
     other postretirement benefit costs for the years ended December 31, 1997,
     1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                              ----------------------------------------
                                                                                 1997           1996           1995
                                                                              -----------     ---------     ----------
<S>                                                                               <C>           <C>            <C>
       Service cost -- benefits earned during the period                          $3,891        $4,170         $2,620
       Interest cost on accumulated other postretirement benefit obligation        3,592         6,043          2,420
       Return on assets                                                             (460)         (358)          (160)
       Net amortization and deferral                                                (463)          (70)          (100)
                                                                              ===========     =========     ==========
       Net other postretirement benefit cost                                      $6,560        $9,785         $4,780
                                                                              ===========     =========     ==========
</TABLE>

     The following table summarizes the funded status of the plans reconciled to
     the accrued postretirement benefit liabilities recognized in the
     accompanying balance sheets (in thousands):

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                              ------------------------------
                                                                                   1997             1996
                                                                              ------------     -------------
<S>                                                                              <C>            <C>
       Retirees                                                                  $  (599)              ---
       Fully eligible active participants                                         (9,614)        $  (4,980)
       Other active participants                                                 (40,770)          (37,601)
                                                                              ------------     -------------
       Accumulated other postretirement benefit obligation                       (50,983)          (42,581)
       Plan assets at fair value                                                   6,637             4,440
                                                                              ------------     -------------
       Accumulated other postretirement benefit obligation in excess of
         plan assets                                                             (44,346)          (38,141)
       Unrecognized net gain                                                      (9,330)          (10,199)
       Unrecognized prior service benefit                                         (1,580)           (1,730)
                                                                              ============     =============
       Accrued other postretirement benefit cost                                $(55,256)         $(50,070)
                                                                              ============     =============
</TABLE>

     Plan assets consist primarily of mutual fund shares managed by a subsidiary
     of AMR invested in debt and equity securities for the postretirement health
     care and life insurance benefits.

     As of December 31, 1997 and 1996, future postretirement health care benefit
     costs were estimated assuming per capita cost of covered medical benefits
     would increase at a five and six percent annual rate, respectively,
     decreasing gradually to a four percent annual growth rate in 1999 and
     thereafter. A one percent increase in this annual trend rate would have
     increased the accumulated benefit obligation at December 31, 1997 by
     approximately $7 million and 1997 postretirement benefit cost by
     approximately $1 million. The weighted average discount rate used in
     estimating the accumulated postretirement benefit obligation was 7.25% in
     1997 and 7.75% in 1996.


                                       38
<PAGE>   39


THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     7.  INCOME TAXES

     The provision (benefit) for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                -------------------------------------------
                                   1997             1996            1995
                                ---------        ---------        ---------
<S>                             <C>              <C>              <C>
Current portion:
Federal                         $ 126,805        $ 121,774        $ 133,575
State                               3,661           17,888           21,936
Foreign                             5,052            2,644            1,098
                                ---------        ---------        ---------
                                  135,518          142,306          156,609

Deferred portion:
Federal                           (23,141)         (23,438)         (11,792)
State                              11,419              414             (593)
                                ---------        ---------        ---------
                                  (11,722)         (23,024)         (12,385)
                                =========        =========        =========
Total provision for taxes       $ 123,796        $ 119,282        $ 144,224
                                =========        =========        =========
</TABLE>

     The provision for income taxes differs from amounts computed at the
     statutory federal income tax rate as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                         --------------------------------------
                                           1997           1996           1995
                                         --------       --------       --------
<S>                                      <C>            <C>            <C>
Statutory income tax provision           $113,278       $107,050       $129,526
State income taxes, net of federal          9,802         11,896         13,581
benefit
Foreign tax credit                           --              241           --
Valuation allowance                          --             --              449
Other, net                                    716             95            668
                                         ========       ========       ========
                                         $123,796       $119,282       $144,224
                                         ========       ========       ========
</TABLE>

     The components of the Company's deferred tax assets and liabilities as of
     December 31, 1997 and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                      1997            1996
                                                    --------        --------
<S>                                                 <C>             <C>
Deferred tax assets:
       Accrued expenses                             $ 31,626        $ 32,013
       Employee benefits other than pensions          21,201          27,717
       Deferred revenue                               14,778           4,977
       Pension obligations                            13,127            --
       State net operating loss carryforwards            922           1,754
       Other                                           4,424             847
                                                    --------        --------
            Total deferred tax assets                 86,078          67,308
  Deferred tax liabilities:
       Depreciation and amortization                 (58,836)        (59,588)
       Other                                         (18,503)         (9,851)
                                                    --------        --------
            Total deferred tax liabilities           (77,339)        (69,439)
                                                    --------        --------

  Net deferred tax asset (liability)                $  8,739        $ (2,131)
                                                    ========        ========

  Current deferred income tax asset                 $ 21,093        $ 40,946
  Noncurrent deferred income tax liability           (12,354)        (43,077)
                                                    --------        --------
  Net deferred tax asset (liability)                $  8,739        $ (2,131)
                                                    ========        ========
</TABLE>


                                       39
<PAGE>   40

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

8.  COMMITMENTS AND CONTINGENCIES

     Certain service contracts with significant subscribers contain booking fee
     productivity clauses and other provisions which allow subscribers to
     receive various amounts of additional equipment and other services from the
     Company at no cost to the subscribers. The Company establishes liabilities
     for these commitments as the subscribers satisfy the applicable contractual
     terms. The service contracts are priced so that the additional airline and
     other booking fees generated over the life of the contract will exceed the
     cost of the equipment and other services. Accrued subscriber incentives at
     December 31, 1997 and 1996 were approximately $36 million and $31 million,
     respectively.

     On July 1, 1996 the Company entered into an operating lease agreement with
     AMR for certain facilities and AMR assigned its rights and obligations
     under certain leases to the Company. Also on July 1, 1996 the Company
     entered into an operating lease agreement with a third party for the lease
     of other facilities. At December 31, 1997, the future minimum lease
     payments required under these operating lease agreements, along with
     various other operating lease agreements with terms in excess of one year
     for facilities and equipment, were as follows (in thousands):

<TABLE>
<CAPTION>
                                    Affiliates           Third Parties
                                  --------------       ----------------
   Year ending December 31,
<S>                                      <C>                  <C>
   1998                                  $2,996               $17,211
   1999                                   2,924                10,936
   2000                                   2,383                 6,637
   2001                                   1,748                 5,943
   2002                                   1,740                 5,889
   Thereafter                            20,316                23,085
</TABLE>


     Rental expense, excluding facilities rented from affiliates, was
     approximately $35 million, $40 million and $33 million for the years ended
     December 31, 1997, 1996 and 1995, respectively.

     The Company is involved in certain disputes arising in the normal course of
     business. Although the ultimate resolution of these matters cannot be
     reasonably estimated at this time, management does not believe that they
     will have a material adverse effect on the financial condition or results
     of operations of the Company.

9.  CAPITAL STOCK

     The authorized capital stock of the Company consists of 250,000,000 shares
     of Class A Common Stock, par value $.01 per share, 107,374,000 shares of
     Class B Common Stock, par value $.01 per share, and 20,000,000 shares of
     preferred stock, par value $.01 per share. As of December 31, 1997, no
     shares of preferred stock have been issued.

     The holders of Class A Common Stock and Class B Common Stock generally have
     identical rights, except that the holders of Class A Common Stock are
     entitled to one vote per share while holders of Class B Common Stock are
     entitled to 10 votes per share on all matters to be voted on by
     stockholders. Holders of shares of Class A Common Stock and Class B Common
     Stock are not entitled to cumulate their votes in the election of
     directors. Generally, all matters to be voted on by stockholders must be
     approved by a majority (or in the case of election of directors, by a
     plurality) of the votes entitled to be cast by all shares of Class A Common
     Stock and Class B Common Stock present in person or represented by proxy,
     voting together as a single class, subject to any voting rights granted to
     holders of any preferred stock. Except as otherwise provided by law, and
     subject to any voting rights granted to holders of any outstanding
     preferred stock, amendments to the Company's Certificate of Incorporation
     generally must be approved by a majority of the combined voting power of
     all Class A Common Stock and Class B Common Stock voting together as a
     single class. However, amendments to the Company's Certificate of
     Incorporation that would alter or change the powers, preferences or special
     rights of the Class A Common Stock or the Class B Common Stock so as to
     affect them adversely also must be approved by a majority of the votes
     entitled to be cast by the holders of the shares affected by the amendment
     voting as a separate class. Notwithstanding the foregoing, any amendment to
     the Company's Certificate of Incorporation


                                       40
<PAGE>   41

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     to increase the authorized shares of any class or authorize the creation,
     authorization or issuance of any securities convertible into, or warrants
     or options to acquire, shares of any such class or classes of stock must be
     approved by the affirmative vote of the holders of a majority of the common
     stock, voting together as a single class.

     Effective as of the first time at which AMR ceases to be the beneficial
     owner of an aggregate of at least a majority of the voting power of the
     Voting Stock (as defined) of the Company then outstanding, amendments to
     certain provisions of the Certificate of Incorporation will require the
     approval of 80% of the combined voting power of all Class A Common Stock
     and Class B Common Stock, voting together as a single class.

     Holders of Class A Common Stock and Class B Common Stock will share in an
     equal amount per share in any dividend declared by the Board of Directors,
     subject to any preferential rights of any outstanding preferred stock.

     Except as provided below, any shares of Class B Common Stock transferred to
     a person other than AMR or any of its subsidiaries or the Class B
     Transferee (as defined below) shall automatically convert to Class A Common
     Stock upon such disposition. Shares of Class B Common Stock representing
     more than 50% economic interest in the Company transferred by AMR or any of
     its subsidiaries in a single transaction to one unrelated person (the
     "Class B Transferee") or any subsidiary of the Class B Transferee shall not
     automatically convert to shares of Class A Common Stock upon such
     disposition. Any shares of Class B Common Stock retained by AMR or its
     subsidiaries following any such transfer of shares of Class B Common Stock
     to the Class B Transferee shall automatically convert into shares of Class
     A Common Stock upon such transfer. Shares of Class B Common Stock
     transferred to stockholders of AMR or stockholders of the Class B
     Transferee in a transaction intended to be on a tax-free basis (a "Tax-Free
     Spin-Off") under the Internal Revenue Code shall not convert to shares of
     Class A Common Stock upon the occurrence of such Tax-Free Spin-Off.

     Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be
     transferred as Class B Common Stock, subject to applicable laws; provided,
     however that shares of Class B Common Stock shall automatically convert
     into shares of Class A Common Stock on the fifth anniversary of the
     Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, AMR, or the
     Class B Transferee, as the case may be, delivers to the Company an opinion
     of counsel reasonably satisfactory to the Company to the effect that such
     conversion could adversely affect the ability of AMR, or the Class B
     Transferee, as the case may be, to obtain a favorable ruling from the
     Internal Revenue Service that such transfer would be a Tax-Free Spin-Off.
     If such an opinion is received, approval of such conversion shall be
     submitted to a vote of holders of the common stock as soon as practicable
     after the fifth anniversary of the Tax-Free Spin-Off, unless AMR or the
     Class B Transferee, as the case may be, delivers to the Company an opinion
     of counsel reasonably satisfactory to the Company prior to such anniversary
     that such vote could adversely affect the status of the Tax-Free Spin-Off,
     including the ability to obtain a favorable ruling from the Internal
     Revenue Service; if such opinion is so delivered, such vote shall not be
     held. Approval of such conversion will require the affirmative vote of the
     holders of a majority of the shares of both Class A Common Stock and Class
     B Common Stock present and voting, voting together as a single class, with
     each share entitled to one vote for such purposes.

     On liquidation, dissolution or winding up of the Company, after payment in
     full of the amounts required to be paid to holders of preferred stock, if
     any, all holders of common stock, regardless of class, are entitled to
     share ratably in any assets available for distribution to holders of shares
     of common stock.

     No shares of either class of common stock are subject to redemption or have
     preemptive rights to purchase additional shares of common stock.

     In 1997, the Board of Directors authorized, subject to certain business and
     market conditions, the purchase of up to 1.5 million shares of the
     Company's Class A Common Stock. The number of treasury shares purchased in
     1997 was 71,800.


                                       41
<PAGE>   42



THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

10.   STOCK AWARDS AND OPTIONS

     Prior to the Offering, officers and key employees of the Company were
     eligible, under AMR's 1988 Long-Term Incentive Plan (the "AMR LTIP"), to be
     granted deferred stock, restricted stock, stock options, stock appreciation
     rights, stock purchase rights and/or other stock based awards in common
     stock, par value $1 per share, of AMR ("AMR Common Stock").

     In conjunction with the AMR LTIP, certain officers and key employees of the
     Company were awarded 217,000 shares of deferred AMR Common Stock ("AMR
     Career Equity Shares") at no cost, to be issued upon the individuals'
     retirement from AMR. In connection with the Offering, the AMR Career Equity
     Shares awarded to certain officers and key employees of the Company were
     exchanged for 142,690 restricted shares of Class A Common Stock, options to
     purchase 847,550 shares of Class A Common Stock and 75,600 deferred shares
     of Class A Common Shares ("Company Career Equity Shares"). The number of
     restricted shares, stock options and deferred shares issued was dependent
     on, among other things, election by the individuals as to the mix of
     restricted shares, stock options and deferred shares to be received, the
     previous day's closing price of AMR Common Stock at the date of the
     Offering and the initial public offering price of Class A Common Stock. The
     restricted shares vest three years following the date of grant. The stock
     options, which have an exercise price equal to the initial public offering
     price of the Class A Common Stock, vest over a five-year period following
     the date of grant and will expire ten years from the date of grant. The
     Company Career Equity Shares will be issued upon the individual's
     retirement from the Company. All of the Company Career Equity Shares issued
     in connection with the Offering were outstanding at December 31, 1997 and
     1996.

     Effective with the Offering, the Company established the 1996 Long-Term
     Incentive Plan (the "LTIP"), whereby officers and other key employees of
     the Company may be granted restricted stock, deferred stock, stock options,
     stock appreciation rights, stock purchase rights and/or other stock based
     awards. 13,000,000 shares of Class A Common Stock are authorized to be
     issued under the LTIP. The LTIP will terminate no later than ten years from
     the date of its establishment. At December 31, 1997, approximately
     9,222,000 shares were available for future grants of stock-based awards
     under the LTIP.

     Restricted stock activity was:

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                         ---------------------------
                                                                            1997           1996
                                                                         ----------     -----------
<S>                                                                         <C>             <C>
            Outstanding at January 1                                        151,550             ---
            Issued upon conversion of AMR Career Equity and
              Restricted Shares                                                 ---         149,330
            Granted                                                          24,910           2,220
            Canceled                                                         (9,520)            ---
                                                                         ----------     -----------
            Outstanding at December 31                                      166,940         151,550
                                                                         ==========     ===========
</TABLE>

     The weighted-average grant date fair value of restricted stock granted
     during 1997 and 1996 were $26.03 and $27.00, respectively.

     In conjunction with the AMR LTIP, certain officers and key employees of the
     Company were also awarded, at no cost, deferred AMR Common Stock
     performance shares ("AMR Performance Shares"). The AMR Performance Shares
     vest over a three-year performance period based on performance metrics of
     AMR and the Company, as defined in the plan. In connection with the
     Offering, certain AMR Performance Shares awarded to officers and key
     employees of the Company were converted into 272,160 deferred Class A
     Common Stock performance shares ("Company Performance Shares") based on the
     initial public offering price of shares of Class A Common Stock and the
     previous day's closing price of the AMR Common Stock on the date of the
     Offering.

     Under the Company's performance share plan, shares of deferred stock are
     awarded at no cost to officers and key employees under the LTIP. The
     Company Performance Shares vest over a three-year performance period


                                       42
<PAGE>   43

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     based on performance metrics of the Company, as defined in the LTIP. The
     Company's Performance Share activity was:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                         ---------------------------
                                                                            1997           1996
                                                                         -----------    ------------
<S>                                                                         <C>             <C>
            Outstanding at January 1                                        433,860             ---
            Issued upon conversion of AMR Performance Shares                    ---         272,160
            Granted                                                         205,370         162,450
            Canceled                                                        (27,130)           (750)
                                                                         -----------    ------------
            Outstanding at December 31                                      612,100         433,860
                                                                         ===========    ============
</TABLE>

     The weighted-average grant date fair value of Company Performance Shares
     granted during 1997 and 1996 were $26.02 and $27.00, respectively.

     In conjunction with the AMR LTIP, options to purchase shares of AMR Common
     Stock ("AMR Options") were granted to officers and key employees of the
     Company. Options granted were exercisable at the market value upon grant,
     generally becoming exercisable over one to five years following the date of
     grant, and expiring ten years from the date of grant.

     In connection with the Offering, the AMR Options granted to officers and
     key employees of the Company were exchanged for options to purchase 728,740
     shares of Class A Common Stock of the Company. The exercise prices of the
     options to purchase Class A Common Stock were computed by multiplying the
     initial public offering price of Class A Common Stock by the ratio of the
     exercise prices of the AMR Options to the previous day's closing price of
     AMR Common Stock at the date of the Offering. The number of options was
     increased to maintain the aggregate intrinsic value of each holder's
     options. These options will continue to vest in equal annual installments
     over the original vesting period.

     Options granted under the LTIP will be exercisable at a price which is not
     less than the market value of Class A Common Stock on the date of grant,
     except as otherwise determined by a committee appointed by the Board of
     Directors, and no such options are exercisable more than ten years after
     the date of grant. Stock option activity was:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                 ------------------------------------------------------------------
                                                               1997                              1996
                                                 --------------------------------- --------------------------------

                                                                 Weighted-Average                   Weighted-Average
                                                                  Exercise                             Exercise
                                                    Options         Price             Options            Price
                                                 ------------- --------------     --------------- -----------------

<S>                                                <C>               <C>              <C>                 <C>
       Outstanding at January 1                    2,384,670         $ 24.89                ---               ---
       Issued upon exchange of AMR Options               ---            ---             728,740           $ 19.87
       Issued upon exchange of AMR Career
         Equity Shares                                   ---            ---             847,550             27.00
       Granted                                       711,010           27.11            822,900             27.00
       Exercised                                     (34,540)          19.14            (14,520)            16.27
       Canceled                                     (187,070)          26.10                ---               ---
                                                 -------------                     --------------
       Outstanding at December 31                  2,874,070           25.43          2,384,670             24.89
                                                 =============                     ==============
       Exercisable options outstanding at
         December 31                                 808,110           22.64            422,920             19.80
                                                 =============                     ==============
</TABLE>

     The weighted-average grant date fair value of stock options granted during
     1997 and 1996 were $9.71 and $9.24, respectively.


                                       43
<PAGE>   44


THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     The following table summarizes information about the stock options
     outstanding at December 31, 1997:

<TABLE>
<CAPTION>

                            Number of      Weighted-Average                         Number of
     Range of Exercise       Options       Remaining Life    Weighted-Average        Options        Weighted-Average
           Prices          Outstanding         (years)        Exercise Price        Exercisable      Exercise Price
    -------------------- ---------------- ---------------- ------------------  ------------------ ------------------

<S>                            <C>               <C>            <C>                      <C>           <C>
      $12.95 - $19.49            193,150         6.00           $ 16.88                  123,190       $ 16.80
      $19.50 - $24.49            445,890         5.50             20.79                  349,790         21.64
      $24.50 - $35.81          2,235,030         8.90             27.09                  335,130         26.87
                         ----------------                                      ------------------

                               2,874,070         8.20           $ 25.43                 808,110        $ 22.64
                         ================                                      ==================
</TABLE>

     For other stock-based awards, a committee established by the Board of
     Directors determines the eligible persons to whom awards will be made, the
     times at which the awards will be made, the number of shares to be awarded,
     the price, if any, to be paid by the recipient and all other terms and
     conditions of the award under the terms of the LTIP at the time of grant.

     Stock appreciation rights may be granted in conjunction with all or part of
     any stock option granted under the LTIP. All appreciation rights will
     terminate upon termination or exercise of the related option and will be
     exercisable only during the time that the related option is exercisable. If
     an appreciation right is exercised, the related stock option will be deemed
     to have been exercised.

     The Company has a Directors' Stock Incentive Plan which provides for an
     annual award of options to purchase 3,000 shares of the Company's Class A
     Common Stock to each non-employee director. The plan also provides for a
     one time award of options to purchase 10,000 shares of the Company's Class
     A Common Stock to a new non-employee director upon his or her initial
     election to the Board of Directors. The options, which will have an
     exercise price equal to the market price of the Class A Common Stock on the
     date of grant, will vest pro rata over a five-year period. Each option will
     expire on the earlier of (i) the date the non-employee director ceases to
     be a director of the Company, if for any reason other than due to death,
     disability or retirement or (ii) three years from the date the non-employee
     director ceases to be a director of the Company due to death, disability or
     retirement. 350,000 shares of Class A Common Stock are reserved for
     issuance under the Directors' Stock Incentive Plan. 78,000 options were
     granted to directors during 1997. At December 31, 1997, 272,000 shares were
     available for future grants under the Directors' Stock Incentive Plan.

     Effective January 1, 1997, the Company established The SABRE Group
     Holdings, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP allows
     eligible employees the right to purchase Class A Common Stock on a monthly
     basis at the lower of 85% of the market price at the beginning or the end
     of each monthly offering period. The ESPP allows each employee to acquire
     Class A Common Stock with an aggregate maximum purchase price equal to
     either 1% or 2% of that employee's annual base pay, subject to limitations
     under the Internal Revenue Code of 1986. Upon establishment of the ESPP,
     1,000,000 shares of Class A Common Stock were reserved for issuance under
     the plan. Approximately 34,000 shares were issued to the plan during 1997,
     and approximately 966,000 shares remain available for future purchases
     under the ESPP at December 31, 1997.

     As required by Statement of Financial Accounting Standards No. 123,
     Accounting for Stock-Based Compensation, pro forma information regarding
     net income and earnings per share have been determined as if the Company
     had accounted for its employee stock options and stock-based awards under
     the fair value method set forth in Statement No. 123. The fair value for
     the stock options granted by AMR or the Company to officers and key
     employees of the Company after January 1, 1995 was estimated at the date of
     grant using the Black-Scholes option pricing model with the following
     weighted-average assumptions: risk-free interest rate of 6.46% for 1995,
     6.07% for 1996 and 6.20% to 6.70% for 1997; a dividend yield of 0%;
     volatility factors of the expected market price of AMR Common Stock of .25
     for 1995; a volatility factor of the expected market price of the Company's
     Class A Common Stock of .28 for 1996 and .29 for 1997; and a
     weighted-average expected life of the options granted of 4.5 years.


                                       44

<PAGE>   45

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     The Black-Scholes option valuation model was developed for use in
     estimating the fair value of traded options which have no vesting
     restrictions and are fully transferable. In addition, option valuation
     models require the input of highly subjective assumptions including the
     expected stock price volatility. Because the Company's employee stock
     options have characteristics significantly different from those of traded
     options, and because changes in the subjective input assumptions can
     materially affect the fair value estimate, in management's opinion, the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options. In addition, because Statement
     No. 123 is applicable only to options and stock-based awards granted
     subsequent to December 31, 1994, the pro forma impact does not reflect the
     pro forma effect of all previous stock based awards to the Company's
     employees.

     For purposes of the pro forma disclosures, the estimated fair value of the
     options and stock-based awards is amortized to expense over the vesting
     period. The Company's pro forma information is as follows (in thousands,
     except for earnings per common share information):

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                 -----------------------------------------------
                                                     1997             1996              1995
                                                 -------------    -------------     -------------
<S>                                                  <C>              <C>               <C>
     Net earnings
         As reported                                 $199,853         $186,574          $225,851
                                                 =============    =============     =============
         Pro forma                                   $198,404         $184,981          $225,764
                                                 =============    =============     =============

     Earnings per common share, as reported
         Basic and diluted                              $1.53            $1.43
                                                 =============    =============
         Pro forma                                                                         $1.73
                                                                                    =============
     Earnings per common share, pro forma
         Basic                                          $1.52            $1.42
                                                 =============    =============
         Diluted                                        $1.51            $1.42
                                                 =============    =============
         Pro forma                                                                         $1.73
                                                                                    =============
</TABLE>

11.   EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
     earnings per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                     -----------------------------------------
                                                        1997           1996           1995
                                                     -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
     Numerator:
       Net income                                      $199,853       $186,574       $225,851
                                                     ===========    ===========    ===========
     Denominator:
       Denominator for basic earnings per share -
        weighted-average shares                         130,649        130,606        130,604
       Effect of dilutive securities:
        Employee stock options                              188             48            ---
        Restricted shares                                    88             17            ---
        Career equity shares                                 63             15            ---
                                                     -----------    -----------    -----------
       Dilutive potential common shares                     339             80            ---
       Denominator for diluted earnings per share
        - adjusted weighted-average shares              130,988        130,686        130,604
                                                     ===========    ===========    ===========
     Pro forma earnings per share                                                       $1.73
                                                                                   ===========
     Basic and diluted earnings per share                 $1.53          $1.43
                                                     ===========    ===========
</TABLE>

     For additional information regarding the employee stock options, restricted
     and career equity shares, see Note 10.


                                       45

<PAGE>   46

THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

     Options to purchase 544,000 weighted average shares of common stock were
     outstanding during 1997 but were excluded from the computation of diluted
     earnings per share because the options' exercise prices were greater than
     the average market price of the common shares for the period and,
     therefore, the effect would be antidilutive.

12.  GEOGRAPHICAL ANALYSIS

     The Company derives revenues from worldwide operations. Data relating to
     the Company's operations by geographic area is set forth below (in
     thousands):

<TABLE>
<CAPTION>
                                                  United States              Foreign                 Total
                                             -------------------       ----------------       ----------------
<S>                                                  <C>                      <C>                  <C>
     1997
     Revenues                                        $1,444,795               $338,752             $1,783,547
     Operating income                                   270,324                 37,385                307,709
     Identifiable assets                              1,429,378                 73,487              1,502,865

     1996
     Revenues                                        $1,338,021               $283,966             $1,621,987
     Operating income                                   308,529                 18,272                326,801
     Identifiable assets                              1,184,770                 61,367              1,246,137

     1995
     Revenues                                        $1,279,471               $250,145             $1,529,616
     Operating income                                   345,262                 35,162                380,424
     Identifiable assets                                534,626                 61,080                595,706
</TABLE>

     Operating income from operations consists of revenues less operating
     expenses, including an allocation of corporate expenses. Operating income
     excludes interest income, interest expense and other income (expense) net.
     Cash equivalents and deferred tax assets are excluded from identifiable
     assets.

13.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The following is a summary of the unaudited quarterly financial information
     for the years ended December 31, 1997 and 1996 (in thousands except per
     share data):
<TABLE>
<CAPTION>

                                           First           Second              Third             Fourth
                                          Quarter          Quarter            Quarter             Quarter
                                      ---------------    ---------------    ---------------    ---------------
<S>                                        <C>                 <C>              <C>                <C>
     1997
     Revenues                              $439,630            $447,378         $456,046           $440,493
     Operating income                       107,787              93,101           88,086             18,735
     Net earnings                            66,685              58,536           56,199             18,433
     Earnings per common share,
         basic and diluted                     $.51                $.45             $.43               $.14

     1996
     Revenues                              $427,844            $410,445         $407,420           $376,278
     Operating income                       115,591              81,998           87,914             41,298
     Net earnings                            69,987              49,063           45,151             22,373
     Pro forma earnings per common
         share, basic
         and diluted                           $.54                $.38             $.35                ---
     Earnings per common share,
         basic and diluted                      ---                 ---              ---               $.17
</TABLE>


                                       46

<PAGE>   47
THE SABRE GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------


     The travel industry is seasonal in nature. Bookings, and thus booking fees
     charged for the use of SABRE, decrease significantly each year in the
     fourth quarter, primarily in December. During the fourth quarter of 1997,
     the Company recorded a loss of approximately $11 million related to the
     write-off of a capitalized software development project that was intended
     to create a new order entry and billing system.

     Earnings per share amounts for 1996 and the first three quarters of 1997
     have been restated to comply with Statement of Financial Accounting
     Standards No. 128, Earnings Per Share. For further discussion of earnings
     per share and the impact of Statement No. 128, see Note 2.

14.  SUBSEQUENT EVENTS

     In January 1998, the Company completed the execution of a 25-year
     information technology services agreement with US Airways, Inc. Under the
     terms of the agreement, the Company will provide substantially all of US
     Airways' information technology services. Additionally, the Company agreed
     to assist US Airways in making its information systems Year 2000 compliant.
     In connection with the agreement, the Company purchased substantially all
     of US Airways' information technology assets for approximately $47 million,
     hired more than 600 former employees of US Airways, and granted to US
     Airways two tranches of stock options, each to acquire 3 million shares of
     the Company's Class A Common Stock. At its election, US Airways may select
     an alternative vehicle of substantially equivalent value in place of
     receiving stock. The first tranche of options is exercisable during the six
     month period ending two years after the transfer of US Airways' information
     technology assets, has an exercise price of $27 per share and is subject to
     a cap on share price of $90. The second tranche of options is exercisable
     during the ten year period beginning on the fifth anniversary of the asset
     transfer date, has an exercise price of $27 per share, and is subject to a
     cap on share price of $127.

     In February 1998, the Company entered into a 10-year information technology
     services agreement with Gulf Air. Under the terms of the agreement, the
     Company will be responsible for all of Gulf Air's information technology
     infrastructure, including application development and maintenance, as well
     as data center and network management.

     In February 1998, the Company signed long-term agreements with ABACUS
     International Holdings Ltd. which created a Singapore-based joint venture
     company to manage travel distribution in the Asia-Pacific region. The
     Company received 35 percent of the shares of the joint venture company,
     called ABACUS International Ltd. The Company paid $139 million in cash and
     contributed its assets related to the Company's ongoing travel distribution
     activities in Asia-Pacific and other considerations. The Company provides
     ABACUS International with transaction processing on the SABRE computer
     reservations system.



                                       47
<PAGE>   48




ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         None.

                                    PART III
--------------------------------------------------------------------------------
ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Incorporated herein by reference is the information set forth under the
headings "Nominees for Election as Directors" and "Continuing Directors" in the
Company's definitive proxy statement for the annual meeting of stockholders to
be held on May 20, 1998.

         EXECUTIVE OFFICERS

         The executive officers of the Company, their positions and ages as of
December 31, 1997, are as follows:

<TABLE>
<S>                                        <C>
Michael J. Durham......................     Director, President and Chief Executive Officer since July 1996. President and Chief
                                            Executive Officer of The SABRE Group division of AMR from 1995 to 1996; Senior Vice
                                            President and Treasurer of AMR and Senior Vice President -- Finance and Chief Financial
                                            Officer of American from 1989 to 1995. Age 46.

Bradford J. Boston.....................     Senior Vice President--SABRE Technology Solutions since July 1996. President--SABRE
                                            Computer Services from June 1996 to July 1996; Senior Vice President for American
                                            Express Travel Related Services from 1994 to 1996; Senior Vice President of Visa
                                            International's Visanet operations from 1993 to 1994; and Vice President of Systems
                                            Development for United Airlines/Covia Partnership from 1991 to 1993. Age 43.

Thomas M. Cook.........................     Senior Vice President--SABRE Technology Solutions since July 1996. President--SABRE
                                            Decision Technologies, a division of The SABRE Group, from 1994 to 1996;
                                            President--American Airlines Decision Technologies from 1988 to 1994. Age 57.

Terrell B. Jones.......................     Senior Vice President--SABRE Interactive and Chief Information Officer since July 1996.
                                            President--SABRE Computer Services from 1993 to 1996; Division Vice President--SCS
                                            Systems Planning & Development for American from 1991 to 1993; Managing Director & Vice
                                            President--STIN Product Development for American from 1987 to 1991. Age 49.

Eric J. Speck..........................     Senior Vice President--SABRE Travel Information Network since April 1997. Vice
                                            President--SABRE Europe from August 1995 to April 1997; Vice President--Marketing of
                                            SABRE Travel Information Network from October 1994 to August 1995. Age 41.

T. Patrick Kelly.......................     Senior Vice President, Chief Financial Officer and Treasurer since July 1996. Senior
                                            Vice President--SABRE Group Planning from 1995 to July 1996; Vice President--Financial
                                            Planning & Analysis for American from 1993 to 1995; Managing Director--SABRE Development
                                            Services for American from 1992 to 1993; and Managing Director--Financial Planning for
                                            American from 1990 to 1992. Age 40.

Andrew B. Steinberg....................     Senior Vice President, General Counsel and Corporate Secretary since October 1996.
                                            Associate General Counsel for American from 1994 to 1996; Senior Attorney for American
                                            from 1991 to 1994. Age 39.

</TABLE>

         All officers serve at the discretion of the Board of Directors.



                                       48
<PAGE>   49




ITEM 11.          EXECUTIVE COMPENSATION

         Incorporated herein by reference is the information set forth under the
heading "Executive Compensation" in the Company's definitive proxy statement for
the annual meeting of stockholders to be held on May 20, 1998.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated herein by reference is the information set forth under the
heading "Ownership of Securities" from the Company's definitive proxy statement
for the annual meeting of stockholders to be held on May 20, 1998.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated herein by reference is the information set forth under the
headings "Other Matters" and "Relationship with AMR Corporation and Affiliates"
in the Company's definitive proxy statement for the annual meeting of
stockholders to be held on May 20, 1998 and under Note 5 to the Consolidated
Financial Statements in Item 8 of this report.


                                     PART IV
--------------------------------------------------------------------------------
ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                  8-K

(a)      (1)      The financial statements listed in the accompanying index to
                  financial statements and the schedules are filed as part of
                  this report.

         (2)      The schedules listed in the accompanying index to financial
                  statements and schedules are filed as part of this report.

         (3)      Exhibits required to be filed by Item 601 of Regulation S-K.

<TABLE>
     EXHIBIT

<S>            <C>
       3.1      Restated Certificate of Incorporation of Registrant. (1)
       3.2      Restated Bylaws of Registrant. (1)
       4.1      Registration Rights Agreement between Registrant and AMR Corporation. (1)
       4.2      Specimen Certificate representing Class A Common Stock. (1)
       10.1     Registration Rights Agreement between Registrant and AMR Corporation (See Exhibit 4.1).
       10.2     Intercompany Agreement, dated as of July 2, 1996, among Registrant, The SABRE Group, Inc., TSGL Holding, Inc.,
                TSGL-SCS, Inc., TSGL, Inc., SABRE International, Inc., SABRE Servicios Colombia, LTDA and American Airlines, Inc.
                (1)
       10.3     Management Services Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.
                (1) (4)
       10.4     Credit Agreement, dated as of July 1, 1996, between Registrant, The SABRE Group, Inc., AMR Corporation and American
                Airlines, Inc. (1)
       10.5     $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by Registrant and payable to AMR Corporation. (1)
       10.6     Information Technology Services Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines,
                Inc. (1) (4)
       10.7     Non-competition Agreement, dated July 1, 1996, among Registrant, The SABRE Group, Inc., AMR Corporation and American
                Airlines, Inc. (1)
       10.8     Marketing Cooperation Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.
                (1) (4)
       10.9     Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.10    Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
                (4)
       10.11    Corporate Travel Agreement, dated July 25, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1) (4)
</TABLE>

                                       49
<PAGE>   50

<TABLE>
<S>            <C>
       10.12    Software Marketing Agreement, dated September 10, 1996, among Registrant, The SABRE Group, Inc. and AMR Corporation.
                (1) (4)
       10.13    Canadian Technical Services Subcontract, dated as of July 1, 1996, between The SABRE Group Inc. and American
                Airlines, Inc. (1) (4)
       10.14    Form of Participating Carrier Agreement between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.15    Investment Agreement, dated September 11, 1996, between The SABRE Group, Inc. and AMR Investment Services, Inc. (1)
                (4)
       10.16    Assignment and Amendment Agreement, dated as of July 1, 1996, among The SABRE Group, Inc., American Airlines, Inc.
                and the Dallas-Fort Worth International Airport Board. (1)
       10.17    American Airlines Special Facilities Lease Agreement, dated October 1, 1972, between American Airlines, Inc. and the
                Dallas-Fort Worth Regional Airport Board, as amended by Supplemental Agreements Nos. 1-5. (1)
       10.18    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.19    Sublease, dated June 1, 1958, between American Airlines, Inc. and the Trustees of the Tulsa Municipal Airport Trust,
                as amended by Amendments Nos. 1-12. (1)
       10.20    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.21    Amended and Restated Sublease Agreement, dated May, 1996, between American Airlines, Inc. and the Tulsa Airports
                Improvement Trust. (1)
       10.22    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.23    Office Lease Agreement, dated January 19, 1996, between American Airlines, Inc. and Maguire/Thomas Partners --
                Westlake/Southlake Partnership. (1)
       10.24    American Airlines, Inc. Supplemental Executive Retirement Plan dated November 16, 1994. (2)
       10.25    The SABRE Group Holdings, Inc. Long-Term Incentive Plan. (1)
       10.26    The SABRE Group Holdings, Inc. Directors' Stock Incentive Plan. (1)
       10.27    Form of Executive Termination Benefits Agreement. (1)
       10.28    Employment Agreement, dated August 30, 1996, between The SABRE Group, Inc. and Michael J. Durham. (1)
       10.29    Employment Agreement, dated September 7, 1995, between American Airlines, Inc. and Thomas M. Cook. (1)
       10.30    Employment Agreement, dated May 7, 1996, between American Airlines, Inc. and Terrell B. Jones. (1)
       10.31    Letter Agreement, dated July 15, 1996, between Registrant and Thomas M. Cook. (1)
       10.32    Letter Agreement, dated July 15, 1996, between Registrant and Terrell B. Jones. (1)
       10.33    The SABRE Group Holdings, Inc. Employees Stock Purchase Plan. (3)
       10.34    Option Issuance Agreement, dated January 1, 1998 between Registrant and US Airways, Inc.
       21.1     Subsidiaries of Registrant.
       23.1     Consent of Ernst & Young LLP.
       27.1     Financial Data Schedule.
       27.2     Restated Financial Data Schedule as of December 31, 1996
</TABLE>
----------------

       (1)      Incorporated by reference to exhibits 3.1 through 10.32 to the
                Company's Registration Statement on Form S-1 (Registration No.
                333-09747).
       (2)      Incorporated by reference to Exhibit 10(mmm) to AMR's report on
                Form 10-K for the year ended December 31, 1994 (File No.
                1-8400).
       (3)      Incorporated by reference to Exhibit 4.1 to the Company's
                Registration Statement on Form S-8 (Registration No. 333-18851).
       (4)      Confidential treatment was granted as to a portion of this
                document.

(b)      Reports on Form 8-K:

          None.



                                       50
<PAGE>   51




                         THE SABRE GROUP HOLDINGS, INC.
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                    COVERED BY REPORT OF INDEPENDENT AUDITORS
                                  [ITEM 14(A)]


<TABLE>
<CAPTION>

FINANCIAL STATEMENTS                                                                     Page


<S>                                                                                       <C>
Report of Independent Auditors                                                            23

Consolidated Balance Sheets at December 31, 1997 and 1996                                 24

Consolidated Statements of Income for the Years Ended                                     25
December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows for the Years Ended                                 26
December 31, 1997, 1996 and 1995

Consolidated Statements of Stockholders' Equity for the Years                             27
Ended December 31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements                                                28
</TABLE>




                                       51
<PAGE>   52



CONSOLIDATED SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995

         None.

All schedules are omitted because the required information is included in the
financial statements or notes thereto, or because the required information is
either not present or not present in sufficient amounts.


                                       52
<PAGE>   53


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   THE SABRE GROUP HOLDINGS, INC.



                                             /s/ Michael J. Durham
                                             -----------------------------------
                                             Michael J. Durham
                                             President, Chief Executive Officer
                                             and Director
                                             (Principal Executive Officer)



                                             /s/ T. Patrick Kelly
                                             -----------------------------------
                                             T. Patrick Kelly
                                             Senior Vice President, Chief
                                             Financial Officer and Treasurer
                                             (Principal Financial and
                                             Accounting Officer)

                                             Date: March 30, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates noted:

Directors:


/s/ Robert L. Crandall                       /s/ Dee J. Kelly
-----------------------------------          -----------------------------------
Robert L. Crandall                           Dee J. Kelly


/s/ Gerard J. Arpey                          /s/ Glenn W. Marschel, Jr.
-----------------------------------          -----------------------------------
Gerard J. Arpey                              Glenn W. Marschel, Jr.


/s/ Anne H. McNamara                         /s/ Bob L. Martin
-----------------------------------          -----------------------------------
Anne H. McNamara                             Bob L. Martin


/s/ Edward A. Brennan                        /s/ Richard L. Thomas
-----------------------------------          -----------------------------------
Edward A. Brennan                            Richard L. Thomas


/s/ Paul C. Ely, Jr.
-----------------------------------
Paul C. Ely, Jr.




Date:  March 30, 1998




                                      53
<PAGE>   54
                               INDEX TO EXHIBITS

<TABLE>
   EXHIBIT NO.                     DESCRIPTION
  ------------                    ------------
<S>            <C>
       3.1      Restated Certificate of Incorporation of Registrant. (1)
       3.2      Restated Bylaws of Registrant. (1)
       4.1      Registration Rights Agreement between Registrant and AMR Corporation. (1)
       4.2      Specimen Certificate representing Class A Common Stock. (1)
       10.1     Registration Rights Agreement between Registrant and AMR Corporation (See Exhibit 4.1).
       10.2     Intercompany Agreement, dated as of July 2, 1996, among Registrant, The SABRE Group, Inc., TSGL Holding, Inc.,
                TSGL-SCS, Inc., TSGL, Inc., SABRE International, Inc., SABRE Servicios Colombia, LTDA and American Airlines, Inc.
                (1)
       10.3     Management Services Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.
                (1) (4)
       10.4     Credit Agreement, dated as of July 1, 1996, between Registrant, The SABRE Group, Inc., AMR Corporation and American
                Airlines, Inc. (1)
       10.5     $850,000,000 Subordinated Debenture, dated July 2, 1996, executed by Registrant and payable to AMR Corporation. (1)
       10.6     Information Technology Services Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines,
                Inc. (1) (4)
       10.7     Non-competition Agreement, dated July 1, 1996, among Registrant, The SABRE Group, Inc., AMR Corporation and American
                Airlines, Inc. (1)
       10.8     Marketing Cooperation Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc.
                (1) (4)
       10.9     Tax Sharing Agreement, dated July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.10    Travel Privileges Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
                (4)
       10.11    Corporate Travel Agreement, dated July 25, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1) (4)
       10.12    Software Marketing Agreement, dated September 10, 1996, among Registrant, The SABRE Group, Inc. and AMR Corporation.
                (1) (4)
       10.13    Canadian Technical Services Subcontract, dated as of July 1, 1996, between The SABRE Group Inc. and American
                Airlines, Inc. (1) (4)
       10.14    Form of Participating Carrier Agreement between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.15    Investment Agreement, dated September 11, 1996, between The SABRE Group, Inc. and AMR Investment Services, Inc. (1)
                (4)
       10.16    Assignment and Amendment Agreement, dated as of July 1, 1996, among The SABRE Group, Inc., American Airlines, Inc.
                and the Dallas-Fort Worth International Airport Board. (1)
       10.17    American Airlines Special Facilities Lease Agreement, dated October 1, 1972, between American Airlines, Inc. and the
                Dallas-Fort Worth Regional Airport Board, as amended by Supplemental Agreements Nos. 1-5. (1)
       10.18    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.19    Sublease, dated June 1, 1958, between American Airlines, Inc. and the Trustees of the Tulsa Municipal Airport Trust,
                as amended by Amendments Nos. 1-12. (1)
       10.20    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.21    Amended and Restated Sublease Agreement, dated May, 1996, between American Airlines, Inc. and the Tulsa Airports
                Improvement Trust. (1)
       10.22    Assignment Agreement, dated as of July 1, 1996, between The SABRE Group, Inc. and American Airlines, Inc. (1)
       10.23    Office Lease Agreement, dated January 19, 1996, between American Airlines, Inc. and Maguire/Thomas Partners --
                Westlake/Southlake Partnership. (1)
       10.24    American Airlines, Inc. Supplemental Executive Retirement Plan dated November 16, 1994. (2)
       10.25    The SABRE Group Holdings, Inc. Long-Term Incentive Plan. (1)
       10.26    The SABRE Group Holdings, Inc. Directors' Stock Incentive Plan. (1)
       10.27    Form of Executive Termination Benefits Agreement. (1)
       10.28    Employment Agreement, dated August 30, 1996, between The SABRE Group, Inc. and Michael J. Durham. (1)
       10.29    Employment Agreement, dated September 7, 1995, between American Airlines, Inc. and Thomas M. Cook. (1)
       10.30    Employment Agreement, dated May 7, 1996, between American Airlines, Inc. and Terrell B. Jones. (1)
       10.31    Letter Agreement, dated July 15, 1996, between Registrant and Thomas M. Cook. (1)
       10.32    Letter Agreement, dated July 15, 1996, between Registrant and Terrell B. Jones. (1)
       10.33    The SABRE Group Holdings, Inc. Employees Stock Purchase Plan. (3)
       10.34    Option Issuance Agreement, dated January 1, 1998 between Registrant and US Airways, Inc.
       21.1     Subsidiaries of Registrant.
       23.1     Consent of Ernst & Young LLP.
       27.1     Financial Data Schedule.
       27.2     Restated Financial Data Schedule as of December 31, 1996.
</TABLE>
----------------

       (1)      Incorporated by reference to exhibits 3.1 through 10.32 to the
                Company's Registration Statement on Form S-1 (Registration No.
                333-09747).
       (2)      Incorporated by reference to Exhibit 10(mmm) to AMR's report on
                Form 10-K for the year ended December 31, 1994 (File No.
                1-8400).
       (3)      Incorporated by reference to Exhibit 4.1 to the Company's
                Registration Statement on Form S-8 (Registration No. 333-18851).
       (4)      Confidential treatment was granted as to a portion of this
                document.