MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



The fiscal years referenced herein are as follows:

         Fiscal Year           Year Ended
         -----------           ----------
             1996      -    January 31, 1997
             1995      -    January 31, 1996
             1994      -    January 31, 1995

Income and Expense Items as a Percentage of Revenues
<TABLE>
<CAPTION>

Fiscal Year                            1996    1995    1994
------------------------------------------------------------
<S>                                   <C>     <C>     <C>

Revenues
  Information services                 47.6%   43.4%   40.6%
  Product sales                        40.5    43.4    44.1
  Maintenance and support              11.9    13.2    15.3
------------------------------------------------------------
    Total revenues                    100.0   100.0   100.0
Costs of Revenues (1)
  Cost of information services         78.5    77.0    77.0
  Cost of product sales                46.3    46.9    46.2
  Cost of maintenance and support      67.4    69.0    72.0
------------------------------------------------------------
    Total gross profit                 35.9    37.1    37.3
Operating Expenses
  Sales and marketing                  12.5    12.8    13.5
  Research and development              3.0     2.8     2.6
  General and administrative           10.0    11.3    11.2
  Acquisition and special charges       2.4      --     2.9
-------------------------------------------------------------
Income from operations                  8.0    10.2     7.1
Income from continuing operations
  before income taxes                   8.0     9.2     5.7
Income from continuing operations       4.1%    5.5%    4.0%
============================================================
</TABLE>

(1)       As a percentage of the respective revenue caption.

National Computer Systems,  Inc. (the Company or NCS) is an information services
company,  providing  services  and systems for the  collection,  management  and
interpretation  of  data.  The  Company  markets  these  products  and  services
predominantly  in education,  but also to business,  government  and health care
markets through its various operating units.

<PAGE>

RECAP OF 1996 RESULTS

Total revenues from  continuing  operations in fiscal 1996 increased  10.1% over
the prior year to $331.2 million.  The Company's overall gross profit dollars on
those  revenues  increased  by $7.0  million or 6.3%.  Total  gross  margin as a
percentage of revenues declined,  principally due to the  product/service mix of
those revenues.  Operating expenses declined as a percent of revenue, except for
research and development, which reflects additional investments in both hardware
and software  products.  NCS recorded a pre-tax operating charge of $7.9 million
($.45 per share after tax)  principally  for  acquired  in-process  research and
development from the purchase of Macro Educational Systems, Inc. (Macro). Before
this  charge,  income from  operations  increased  12.5% to $34.5  million,  and
improved slightly as a percentage of revenues. Year-to-year favorable changes in
non-operating  income and expense  primarily  reflect the impact of the proceeds
from the sale of the  Company's  Financial  Systems  business in July 1996.  Net
income for fiscal 1996 from continuing  operations was $13.7 million or $.88 per
share.  However,  excluding the  acquisition  related  charges,  net income from
continuing operations would have been $20.7 million compared to $16.6 million in
fiscal 1995, a 24.6% increase.  A reconciliation  of earnings per share for 1996
and 1995 is as follows:

                                              1996       1995
                                              ----       ----
Earnings per share, as reported              $3.18      $1.42

Less gain on disposition
  and discontinued operations                (2.30)      (.36)
                                              ----       ----
Continuing operations                          .88       1.06

Plus acquisition related charges               .45          -
                                             -----      -----
Pro forma earnings per share                 $1.33      $1.06
                                             =====      =====

During fiscal 1996, the Company sold its Financial Systems business.
See Note 3 of Notes to Consolidated  Financial Statements for further discussion
on the sale, the gain on disposition and discontinued operations.  The following
discussion relates to continuing operations only.

REVENUES

Fiscal 1996 versus Fiscal 1995.  Total revenues for fiscal 1996 were up 10.1% to
$331.2 million from $300.9 million in fiscal 1995. By revenue  category,  fiscal
1996 compares to fiscal 1995 as follows:

     Information services           + 20.8%
     Product sales                  +  2.7%
     Maintenance and support        -  0.8%


<PAGE>


The growth in  information  services  revenues  is  predominantly  the result of
significantly   higher   volumes  of   educational   assessment   services   and
international service business.  During fiscal 1996, the Company invested in two
small  international  businesses,  principally  service in  nature,  and NCS was
awarded a new long-term service contract in Mexico.  These  transactions  fueled
the  Company's  growth  in  the   international   service   business.   Overall,
international  revenues were up 42.1% from fiscal 1995.  Product sales increases
were essentially due to higher education  administrative  software and scannable
forms  revenues.  These  improvements,  however  were  somewhat  offset by lower
proprietary  hardware revenues.  Maintenance and support revenues were down 0.8%
due to lower  third-party  hardware  maintenance  revenues,  partially offset by
higher software support revenues.

Fiscal 1995 versus Fiscal 1994.  Total  revenues for fiscal 1995 were up 5.6% to
$300.9 million from $284.9 million in fiscal 1994. By revenue  category,  fiscal
1995 compares to fiscal 1994 as follows:

     Information services           + 12.7%
     Product sales                  +  4.1%
     Maintenance and support        -  8.7%

Information services revenue grew in fiscal 1995 primarily as a result of higher
volumes of educational  assessments and student  financial aid services.  Higher
education software revenue was the principal factor in the year-to-year increase
in product  sales.  Maintenance  and support  revenues  were down as a result of
lower  third-party  hardware  maintenance  revenues,  somewhat  offset by higher
software support revenues.

COST OF REVENUES AND GROSS PROFITS

Fiscal 1996 versus  Fiscal 1995.  The  Company's  overall  gross profit  dollars
increased $7.0 million or 6.3% with the largest dollar  increases being in state
educational  assessments,  international  services and education  administrative
software.  As a percent of revenue,  overall  gross profit  declined to 35.9% of
total revenues from 37.1% in fiscal 1995,  principally  reflecting the Company's
revenue growth in information services revenues. Gross profit changes by revenue
category  were largely  offsetting,  however,  the gross  profit on  information
services  revenues  did decline due to lower  first-year  margins on  multi-year
federal student financial aid contracts.

Fiscal 1995 versus  Fiscal 1994.  The  Company's  overall  gross profit  dollars
increased  $5.4 million or 5.1% in fiscal 1995 over the prior year. As a percent
of revenue,  the overall  gross  profit of 37.1% in fiscal 1995 was  essentially
unchanged  from fiscal 1994.  The gross profit on net product sales  declined by
0.7 percentage points  year-to-year  primarily due to lower margins on education
software and  international  forms  revenues.  Maintenance  and support  margins
improved by 3.0 percentage  points in fiscal 1995 over the prior year,  with the
year-to-year improvement coming from software support margins.


<PAGE>


OPERATING EXPENSES

Fiscal 1996 versus Fiscal 1995. Sales and marketing  expenses  increased by $2.7
million or 7.0% in fiscal 1996 from the prior year. The year-to-year increase is
primarily the result of additional  expenditures  in introducing and selling new
image processing systems to the marketplace.

Research and  development  expenses  increased  $1.4 million in fiscal 1996 over
fiscal 1995. This increase relates  principally to enhancements to the Company's
scanning and imaging technology and school administrative software.

General and  administrative  expenses decreased by $.9 million or 2.7% in fiscal
1996 from the prior year. As a percent of revenues,  these expenses  declined by
1.3  percentage  points,  to 10.0 % of total  revenues.  The  decrease  reflects
specific emphasis on reducing general and administrative expenses, and is net of
a  $1.0  million  increase  in  expenses  to  upgrade  the  Company's   internal
information systems.

Fiscal 1995 versus  Fiscal 1994. In fiscal 1995,  sales and  marketing  expenses
were  essentially  unchanged  from fiscal  1995 to fiscal  1994.  However,  as a
percentage of revenues these expenses declined by 0.7 percentage points to 12.8%
of total  revenues.  This  decline  was the result of a  Company-wide  effort to
manage these expenses.

Research and development expenses increased $1.1 million or 15.7% in fiscal 1995
over fiscal 1994, relating principally to enhancements to the Company's scanning
and imaging technology and related software.

General and administrative  expenses increased by $1.9 million or 6.0% in fiscal
1995 from the prior year.  The  increase  reflects  additional  spending of $1.0
million to introduce and install enhanced product and project management methods
and  tools.  As  a  percent  of  revenues,   these  expenses  remained  constant
year-to-year.

OTHER SIGNIFICANT TRANSACTIONS

During fiscal 1996, in conjunction  with the acquisition of Macro,  NCS recorded
one-time  charges  totaling  $7.9 million,  including  $5.6 million of purchased
research and  development  plus $2.3 million of  acquisition  related costs (See
Note 2 of Financial Statements).

In  1994,   the  Company   recorded  an  $8.2  million  pretax  charge  for  the
restructuring  of the  Company's  German  operations  and  write-down of certain
non-operating assets (See Note 3 of Financial Statements).


<PAGE>


INTEREST EXPENSE

Interest expense  decreased by $1.6 million in fiscal 1996 from fiscal 1995. The
year-to-year  decrease is the result of lower borrowing  levels for fiscal 1996.
See Capital  Resources and Liquidity  below for further  discussion of cash flow
and debt.

Interest  expense  decreased by $0.2 million in fiscal 1995 from the prior year.
The  year-to-year  decrease is primarily the result of lower  average  borrowing
levels for the  latter  half of the year,  somewhat  offset by  slightly  higher
interest rates.

OTHER INCOME AND EXPENSE

Other income in fiscal 1996 includes interest income of $2.8 million principally
from investment of the proceeds from the sale of the Company's Financial Systems
business, but also from internally generated cash flows.

Other income and expense for 1995 and 1994 included no large or unusual items.

INCOME TAXES

The effective  income tax rate for fiscal 1996 was 48.5%,  which was higher than
the  statutory  rate  primarily  as a  result  of  the  one  time  write-off  of
non-deductible  purchased  research  and  development  and losses  from  foreign
subsidiaries  for which the Company is unable to recognize a benefit in its 1996
tax provision.

The effective  income tax rate for fiscal 1995 was 40.3%,  which was higher than
the statutory rate as a result of losses from foreign subsidiaries for which the
Company is unable to recognize a benefit in its 1995 tax provision.

The effective income tax rate for fiscal 1994 was 30.0% which was  significantly
reduced by the net tax benefits related to the  reorganization  of the Company's
German operations.

CAPITAL RESOURCES AND LIQUIDITY

With the net proceeds from the sale of the Financial  Systems  business and cash
generated  from  ongoing  operations,  the Company  ended fiscal 1996 with $58.1
million of cash and cash  equivalents.  During fiscal 1996, NCS generated  $38.5
million of cash from operating activities. The Company invested $14.9 million in
property,  plant and equipment and $11.2 million in  acquisitions  consisting of
Macro and three  additional  smaller  entities.  The  Company  also  repurchased
362,000  shares of Common Stock during fiscal 1996,  using $8.1 million of cash.
Other  financing  activities  included the early repayment of the $15.0 million,
9.88% Secured Notes.

During fiscal 1995, the Company  generated  $51.9 million of cash from operating
activities.   Cash  was  used  for  capital  expenditures  and  other  investing
activities totaling $19.5 million, debt reduction of $21.0 million, dividends of
$5.6 million and stock  repurchases,  net of  issuances,  of $1.9  million.  The
Company had paid off its revolving  debt  balances by January 31, 1996,  and had
accumulated  cash and cash  equivalents  of $5.2  million,  an  increase of $4.0
million from a year earlier.

The Company had long-term debt balances,  including current maturities, of $20.1
million,  $27.0 million and $49.9 million at January 31, 1997,  1996,  and 1995,
respectively.  The items  causing the  changes in debt  balances  are  described
above.  At January 31, 1997, the Company's debt to total capital ratio was 10.6%
compared  to 17.4% a year  earlier  and  30.6% two years  earlier.  The  Company
believes that the current debt to total capital ratio is at an acceptable  level
which will allow the Company flexibility to fund future growth initiatives.

Accounts  receivable,  accrued expenses and deferred income were impacted by the
acquisitions  made in 1996 and by the increased  level of operations  during the
year.

Looking  toward fiscal 1997,  the Company  maintains a $40.0  million  revolving
credit  facility,  all of which was  available at January 31, 1997.  The Company
expects its cash flows from  operations,  the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.


<PAGE>


NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>

                                                               JANUARY 31,
                                                         --------------------
                                                           1997        1996
                                                         --------    --------
<S>                                                      <C>         <C>
ASSETS
Current Assets
  Cash and cash equivalents                              $ 58,079    $  5,154
  Receivables                                              79,056      68,713
  Inventories                                              18,176      18,336
  Prepaid expenses and other                                5,526       8,460
  Investment in discontinued operations                         -      17,557
                                                         --------    --------
    Total Current Assets                                  160,837     118,220
                                                         --------    --------
Property, Plant and Equipment
  Land, buildings and improvements                         51,741      49,350
  Machinery and equipment                                 111,921     105,075
  Accumulated depreciation                                (87,353)    (79,596)
                                                         --------    --------
                                                           76,309      74,829
                                                         --------    --------
Other Assets, net
  Acquired and internally developed software products      17,578      11,667
  Non-current receivables and other assets                 11,640      12,582
  Goodwill                                                  7,556       2,426
                                                         --------    --------
                                                           36,774      26,675
                                                         --------    --------
     Total Assets                                        $273,920    $219,724
                                                         ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>

                                                               JANUARY 31,
                                                         --------------------
                                                           1997        1996
                                                         --------    -------- 
<S>                                                      <C>         <C>

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
  Current maturities of long-term debt                   $  3,819    $  2,473
  Accounts payable                                         20,886      16,416
  Accrued expenses                                         28,832      23,137
  Deferred income                                          23,079      16,148
  Income taxes                                              5,556       4,458
                                                         --------    --------
    Total Current Liabilities                              82,172      62,632
                                                         --------    --------

Deferred Income Taxes                                       5,385       4,359

Long-Term Debt - less current maturities                   16,329      24,535

Commitments and Contingencies                                   -           -

Stockholders' Equity
  Preferred stock                                               -           -
  Common stock - issued and outstanding -
    15,235 and 15,365 shares, respectively                    457         461
  Paid-in capital                                               -       3,427
  Retained earnings                                       173,564     130,007
  Deferred compensation                                    (3,987)     (5,697)
                                                         --------    --------
    Total Stockholders' Equity                            170,034     128,198
                                                         --------    --------
    Total Liabilities and Stockholders' Equity           $273,920    $219,724
                                                         ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>



NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                                FISCAL YEAR
                                                       ------------------------------
                                                         1996       1995       1994
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>

Revenues
  Information services                                 $157,511   $130,432   $115,723
  Product sales                                         134,144    130,648    125,557
  Maintenance and support                                39,504     39,803     43,594
                                                       --------   --------   --------
    Total revenues                                      331,159    300,883    284,874

Cost of Revenues
  Cost of information services                          123,718    100,459     89,133
  Cost of product sales                                  62,075     61,233     58,034
  Cost of maintenance and support                        26,608     27,453     31,405
                                                       --------   --------   --------
    Gross profit                                        118,758    111,738    106,302

Operating Expenses
  Sales and marketing                                    41,258     38,544     38,397
  Research and development                                9,883      8,490      7,341
  General and administrative                             33,076     34,000     32,077
  Acquisition related charges:
    Purchased research and development                    5,637          -          -
    Other                                                 2,258          -          -
  Special charges                                             -          -      8,164
                                                       --------   --------   --------
Income From Operations                                   26,646     30,704     20,323
  Interest expense                                        1,677      3,276      3,465
  Other (income) expense, net                            (1,564)      (332)       739
                                                       --------   --------   --------
Income from Continuing Operations Before Income Taxes    26,533     27,760     16,119
  Income taxes                                           12,867     11,180      4,838
                                                       --------   --------   --------
Income from Continuing Operations                        13,666     16,580     11,281
  Income (loss) from discontinued operations,
    net of taxes of $(1,360), $3,570 and $912            (2,229)     5,679      2,117
  Gain on disposition, net of taxes of $29,031           38,143          -          -
                                                       --------   --------   --------
Net Income                                             $ 49,580   $ 22,259   $ 13,398
                                                       ========   ========   ========
Earnings Per Share
  Continuing operations                                $   0.88   $   1.06   $   0.74
  Discontinued operations                                 (0.14)      0.36       0.14
  Gain on disposition                                      2.44          -          -
                                                       --------   --------   --------
Net Income Per Share                                   $   3.18   $   1.42   $   0.88
                                                       ========   ========   ========

Average Shares Outstanding                               15,555     15,685     15,225

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>



NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>


                                              COMMON STOCK
                                             ---------------  PAID-IN   RETAINED    DEFERRED
                                             SHARES   AMOUNT  CAPITAL   EARNINGS  COMPENSATION     TOTAL
                                             ------   ------  -------   --------  ------------  -----------
<S>                                          <C>     <C>       <C>      <C>           <C>         <C>

Balance, January 31, 1994                    14,983  $  449    $    -   $106,771      $(7,073)    $100,147
  Shares issued for employee stock
    purchase and option plans                   152       5     1,492          -            -        1,497
  Repurchase of common stock                    (32)     (1)     (359)         -            -         (360)
  Restricted stock awards (forfeitures), net    (59)     (2)     (430)         -          432            -
  Shares issued for business acquisition        266       8     3,092          -            -        3,100
  ESOP debt payment                               -       -         -          -        1,000        1,000
  Restricted stock compensation accrual           -       -         -          -          (36)         (36)
  Net income                                      -       -         -     13,398            -       13,398
  Cash dividends paid - $.36 per share            -       -         -     (5,453)           -       (5,453)
  Foreign currency translation adjustment         -       -         -       (170)           -         (170)
                                             ------  ------    ------   --------      --------    --------
Balance, January 31, 1995                    15,310     459     3,795    114,546       (5,677)     113,123
  Shares issued for employee stock
    purchase and option plans                   208       6     2,446          -            -        2,452
  Repurchase of common stock                   (233)     (7)   (4,445)         -            -       (4,452)
  Restricted stock awards                        80       3     1,576          -       (1,579)           -
  Shares issued for business acquisition          -       -        55          -            -           55
  ESOP debt payment                               -       -         -          -        1,000        1,000
  Restricted stock compensation accrual           -       -         -          -          559          559
  Net income                                      -       -         -     22,259            -       22,259
  Cash dividends paid - $.36 per share            -       -         -     (5,570)           -       (5,570)
  Foreign currency translation adjustment         -       -         -     (1,228)           -       (1,228)
                                             ------  ------    ------   --------      -------     --------
Balance, January 31, 1996                    15,365     461     3,427    130,007       (5,697)     128,198
  Shares issued for employee stock
    purchase and option plans                   245       7     3,483          -            -        3,490
  Repurchase of common stock                   (362)    (11)   (7,328)      (737)           -       (8,076)
  Restricted stock awards (forfeitures), net    (13)      -        24          -          (24)           -
  ESOP debt payment                               -       -         -          -        1,000        1,000
  Restricted stock compensation accrual           -       -       394          -          734        1,128
  Net income                                      -       -         -     49,580            -       49,580
  Cash dividends paid - $.36 per share            -       -         -     (5,521)           -       (5,521)
  Foreign currency translation adjustment         -       -         -        235            -          235
                                             ------  ------    ------   --------      --------    --------
Balance, January 31, 1997                    15,235    $457    $    -   $173,564      $(3,987)    $170,034
                                             ======  ======    ======   ========      ========    ========

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>



NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                 FISCAL YEAR
                                                        ------------------------------
                                                          1996       1995       1994
                                                        --------   --------   --------
<S>                                                      <C>        <C>        <C>

Operating Activities
  Net income                                             $49,580    $22,259    $13,398
  Less gain on disposition                               (38,143)         -          -
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation                                        15,620     15,643     15,559
      Amortization                                         9,647     11,791      8,412
      Deferred income taxes and other                     (2,053)     3,747       (400)
      Acquisition related charges                          6,637          -          -
      Non-cash special charges                                 -          -     10,375
      Changes in operating assets and liabilities
        (net of acquired amounts):
           Accounts receivable                            (4,318)    (2,133)    (3,392)
           Inventory and other current assets              2,495        542     (4,285)
           Accounts payable and accrued expenses          (3,856)       272      3,183
           Deferred income                                 2,912       (190)      (613)
                                                         -------    -------    -------
       Net Cash Provided By Operating Activities          38,521     51,931     42,237
                                                         -------    -------    -------
Investing Activities
  Acquisitions, net                                      (11,192)         -     (3,216)
  Purchases of property, plant and equipment             (14,909)   (14,091)   (29,185)
  Capitalized software products                           (1,553)    (4,826)    (6,928)
  Net proceeds from disposition                           64,071          -          -
  Other - net                                              2,248       (555)    (3,245)
                                                         -------    -------    -------
       Net Cash Provided By (Used In)
         Investing Activities                             38,665    (19,472)   (42,574)

Financing Activities
  Net increase (decrease) in revolving credit borrowing        -    (13,065)     1,100
  Repayment of secured notes                             (15,000)         -          -
  Net increase (decrease) in other borrowings                846     (7,920)     3,024
  Issuance (repurchase) of common stock, net              (4,586)    (1,945)     1,137
  Dividends paid                                          (5,521)    (5,570)    (5,453)
                                                         -------    -------    -------
       Net Cash Used In Financing Activities             (24,261)   (28,500)      (192)
                                                         -------    -------    -------

Increase (Decrease) In Cash and Cash Equivalents          52,925      3,959       (529)

Cash and Cash Equivalents  - Beginning of Year             5,154      1,195      1,724
                                                         -------    -------    -------
Cash and Cash Equivalents - End of Year                  $58,079    $ 5,154    $ 1,195
                                                         =======    =======    =======

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>



NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE 1 - ACCOUNTING POLICIES

The fiscal years referenced herein are as follows:

         Fiscal Year           Year Ended
         -----------           ----------
             1996      -    January 31, 1997
             1995      -    January 31, 1996
             1994      -    January 31, 1995

PRINCIPLES OF CONSOLIDATION:  The consolidated  financial statements include the
accounts of the Company and its  subsidiaries.  All  intercompany  accounts  and
transactions between consolidated entities have been eliminated.

In order to provide improved financial reporting,  the revenue and related costs
of the information  services operations have been segregated on the accompanying
consolidated statements of income.

USE OF ESTIMATES:  The consolidated  financial  statements have been prepared in
accordance  with the  generally  accepted  accounting  principles  which require
management  to make certain  estimates and  assumptions  that affect the amounts
reported in the financial  statements and accompanying  notes. Those assumptions
and estimates are subject to constant revision,  and actual results could differ
from those estimates.

CASH AND  EQUIVALENTS:  All investments  purchased with an original  maturity of
three months or less are considered to be cash equivalents. Cash equivalents are
available for sale, are carried at cost which approximates fair market value and
consist principally of corporate commercial paper.

INVENTORIES:  Inventories are stated at the lower of first-in, first-out cost or
market. Components of inventory as of January 31, are summarized as follows:

                                             1997       1996
----------------------------------------------------------------
Finished goods                             $ 4,765    $ 6,012
Scoring services and work in process         9,221      8,694
Raw materials and purchased parts            4,190      3,630
----------------------------------------------------------------
                                           $18,176    $18,336
================================================================


<PAGE>


PROPERTY,  PLANT AND EQUIPMENT:  Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets,  ranging from two
to forty  years,  using  principally  the  straight-line  method  for  financial
reporting purposes and accelerated methods for income tax purposes.  Significant
improvements are capitalized to property,  plant and equipment  accounts,  while
maintenance  and repairs are expensed  currently.  Rental income from  equipment
held for lease is recognized as earned using the operating  method of accounting
for such leases.

ACQUIRED AND INTERNALLY  DEVELOPED SOFTWARE PRODUCTS:  Acquired software product
amounts  originate from the allocation of purchase prices of acquired  companies
and direct  acquisition of software,  or rights to software.  These products are
generally large,  complex,  mission-critical  application software packages with
established  market positions.  Products in this category are generally assigned
lives of five to ten years.  Internally  developed  software products  represent
costs capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86.  Accordingly,  software  production costs incurred  subsequent to
establishing   technological   feasibility,   as   defined,   are   capitalized.
Amortization of these products is computed on a product by product basis ratably
as  a  percentage  of  estimated  revenue,   subject  to  minimum  straight-line
amortization  over the products'  estimated  useful lives of five years or less.
Expected revenues and useful lives are estimates which are subject to changes in
technology and marketplace requirements and are, therefore, subject to revision.
The Company  periodically  evaluates  its software  products for  impairment  by
comparison  of the carrying  value of the product  against  anticipated  product
margins.  The carrying  value is adjusted,  if necessary.  A summary of software
activity is as follows:

                                        Internally   Accumulated
                             Acquired    Developed   Amortization   Total
---------------------------------------------------------------------------
Balance, January 31, 1994     $ 7,000     $14,240     $ (8,636)    $12,604
Additions                       3,475       4,280            -       7,755
Amortization                        -           -       (2,944)     (2,944)
----------------------------------------------------------------------------
Balance, January 31, 1995      10,475      18,520      (11,580)     17,415
Additions                           -         320            -         320
Product discontinuation          (151)       (308)         459           -
Amortization                        -           -       (6,068)     (6,068)
----------------------------------------------------------------------------
Balance, January 31, 1996      10,324      18,532      (17,189)     11,667
Additions                      13,000           -            -      13,000
Write-downs and dispositions        -      (6,539)       4,517      (2,022)
Amortization                        -           -       (5,067)     (5,067)
----------------------------------------------------------------------------
Balance, January 31, 1997     $23,324     $11,993     $(17,739)    $17,578
============================================================================


<PAGE>


GOODWILL:  Goodwill  arising  from  business  acquisitions  is  amortized  on  a
straight-line  basis over periods  ranging from five to twenty years,  generally
ten years.  Amortization  expense was $703, $624 and $1,179 in fiscal 1996, 1995
and 1994,  respectively.  Accumulated  amortization  was $3,843 and $3,109 as of
January 31, 1997 and 1996, respectively.  The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against  anticipated
business performance.

ACCRUED  EXPENSES:  Major  components  of  accrued  expenses  consisted  of  the
following as of January 31:

                               1997      1996
------------------------------------------------
Employee compensation        $13,376   $12,477
Taxes other than income        2,875     3,078
Royalties                      2,065     2,176
Other                         10,516     5,406
------------------------------------------------
                             $28,832   $23,137
================================================

REVENUE  RECOGNITION:  Revenue  from  product  sales and  software  licensing is
recognized  at  the  time  of  shipment,  except  in  instances  where  material
fulfillment  obligations  exist beyond shipment.  In such cases,  revenue is not
recognized until such obligations are  substantially  fulfilled or is recognized
in accordance with specific contract terms. Revenue from information services is
recognized  when such service is performed.  Hardware  maintenance  and software
support revenues are recognized ratably over the contractual period.

PER SHARE DATA: Net income per share is based on the weighted  average number of
shares of Common Stock and dilutive common stock equivalents  outstanding during
the year.

IMPAIRMENT  OF  LONG-LIVED  ASSETS:  In March  1995,  the  Financial  Accounting
Standards  Board (FASB) issued SFAS No. 121,  Accounting  for the  Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of, which requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present.  The Company adopted the Statement in 1996
and it had no impact on the consolidated financial statements.

STOCK-BASED  COMPENSATION:  In  October,  1995,  the FASB  issued  SFAS No. 123,
Accounting for Stock-Based Compensation.  The statement requires adoption of the
new standard or footnote disclosure for all transactions entered into during the
fiscal years ended January 31, 1996 and 1997. As permitted by the statement, the
Company  has  elected to  continue  to account  for stock  options and awards to
employees under the provisions of Accounting  Principles Board (APB) Opinion No.
25 and disclose the impact of SFAS No. 123, as if adopted, in Note 7.


<PAGE>


NOTE 2 - ACQUISITIONS

On January 21,  1997,  the  Company  acquired  all of the common  stock of Macro
Educational   Systems,   Inc.   (Macro),   a   California-based   developer   of
administrative software for the K-12 educational market, for approximately $13.9
million,  through the issuance of $7.0  million of  convertible  debentures  and
cash.  Additional  payments up to $6.0  million may be earned  between  1997 and
2001, subject to achieving certain earnings levels.

The  acquisition  was accounted for as a purchase  and,  accordingly,  operating
results of this business  subsequent to the date of acquisition were included in
the Company's  consolidated  financial  statements.  In accordance with SFAS No.
109,  Accounting for Income Taxes,  the purchase price has been adjusted by $6.0
million to reflect deferred taxes on the intangible  assets,  whose amortization
will be  nondeductible.  The excess  purchase  price,  as adjusted  for deferred
taxes,  over book value of the net assets  acquired was $22.4 million,  of which
$13.0  million was  allocated  to acquired  software,  $5.6 million to purchased
in-process  research  and  development  and $3.8  million to goodwill  and other
intangible assets. The purchased in-process research and development was charged
to operations upon acquisition, and the goodwill and other intangible assets are
being amortized over 10 years.

In connection with the acquisition,  the Company recorded a $2.3 million pre-tax
charge  related  to  impairments  and  redundancies  in the  Company's  existing
administrative  software business.  This included a $1.0 million non-cash charge
to  write-down  software  assets and $1.3 million to cover other costs  directly
related to the merger of the two operations.

The Company made three additional acquisitions in fiscal 1996, whose acquisition
prices totaled $5.1 million, of which $1.9 million was allocated to goodwill.

The pro forma impact of all  acquisitions  on 1996 and  comparative  results for
1995 and 1994 are not  significant,  other  than  the  $7.0  million  after  tax
acquisition charges described above.

NOTE 3 - DISCONTINUED OPERATIONS AND SPECIAL CHARGES

The Company sold its Financial  Systems segment on July 10, 1996 to SunGard Data
Systems,  Inc. for $95.0 million in cash. The gain on the sale,  recorded in the
second  quarter  1996,  was $38.1  million net of tax,  or $2.44 per share.  The
results of the Financial  Systems segment up to disposition have been classified
as  discontinued  operations  in  the  accompanying  financial  statements.  The
segment's  1996 revenues  through the sale date were $17.1  million;  for fiscal
1995 and 1994, revenues were $58.1 and $52.1 million, respectively.

In 1994,  the Company  recorded an $8.2 million  pre-tax  special charge for the
restructuring  and statutory  reorganization  of the Company's German operations
and the  write-down of certain  unconsolidated  investments in  anticipation  of
disposition.  The after-tax charge was $3.3 million,  or 21 cents per share. The
German  restructuring  and  reorganization  was a $3.7 million  pre-tax  charge,
primarily to write down goodwill and other assets to liquidation values. Because
of  significant  tax  benefits  triggered  by these  actions,  however,  the net
after-tax effect of this  restructuring  was only $.5 million.  The Company also
recorded a pre-tax special charge of $4.5 million to write down four investments
to their net realizable value upon disposition.

NOTE 4 - LEASES

The Company leases office facilities under noncancelable  operating leases which
expire in various years through 2002.  Rental  expense for all operating  leases
was $8,544 in fiscal  1996,  $7,987 in fiscal  1995,  and $8,818 in fiscal 1994.
Future  minimum  rental  expense  as of  January  31,  1997,  for  noncancelable
operating  leases  with  initial  or  remaining  terms in  excess of one year is
$11,320 and is payable as follows:  fiscal 1997 - $4,274;  fiscal 1998 - $2,470;
fiscal  1999 - $1,821;  fiscal  2000 -  $1,362;  fiscal  2001 - $1,026  and $367
beyond.

NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Long-term debt at January 31, consisted of the following:

                                1997       1996
--------------------------------------------------
Revolving credit borrowing    $     -    $     -
Secured notes                       -     15,000
Convertible debentures          7,000          -
Unsecured note                  6,535      6,535
ESOP borrowing                  3,000      4,000
Other borrowings,               3,613      1,473
  principally foreign
--------------------------------------------------
                               20,148     27,008
Less current maturities        (3,819)    (2,473)
--------------------------------------------------
Long-term debt                $16,329    $24,535
==================================================

Revolving  Credit  Borrowings:  The  Company has a $40,000  unsecured  revolving
credit facility that  terminates  August 1, 1998.  Interest on debt  outstanding
under this facility is computed, at the Company's discretion, based on the prime
rate or the London Interbank Offered Rate (LIBOR). During the year ended January
31, 1997, the interest rate approximated 1.0 % below the prime rate. The Company
pays a fee at an annual rate of .25% on the unused facility  amount.  The credit
facility contains covenants with which the Company is in compliance.

Secured Notes: The Secured Notes,  which carried an interest rate of 9.88%, were
retired in July 1996.

<PAGE>


Convertible   Debentures:   In  January  1997,  the  Company  issued  $7,000  of
Convertible  Debentures as  consideration  for the stock purchase of Macro,  see
Note 2. These  debentures  are due in five equal annual  installments,  with the
first  installment due on February 21, 1998.  These debentures carry an interest
rate of 6.1%, and are convertible into common stock at $24.00 per share.

Unsecured  Note:  This  unsecured  term  note  is due in five  annual  principal
payments of $1,307 per year beginning in April,  1997 and bears interest at .95%
over LIBOR.

ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company,  is due in May 1999. The loan has annual  payments of
$1,000,  with interest  payable at rates which  approximate 2.0% under the prime
rate.

Scheduled  Maturities:   The  aggregate  principal  amounts  of  long-term  debt
scheduled  for  repayment in each of the five fiscal years 1997 through 2001 are
$3,819, $5,898, $4,466, $2,781, and $2,707,  respectively.  In each fiscal year,
interest paid approximates interest expense.

NOTE 6 - INCOME TAXES

The components of the provision for income taxes from continuing  operations are
as follows:


                               Current
                       -----------------------
                       Federal  State  Foreign  Deferred  Total
-----------------------------------------------------------------
1996                   $16,197  $1,320  $ 864   $(5,514) $12,867
1995                    10,079   1,465     70      (434)  11,180
1994                     4,905     600    384    (1,051)   4,838
-----------------------------------------------------------------

The provision for income taxes from discontinued  operations is $27,671,  $3,570
and $912 in fiscal years 1996, 1995 and 1994, respectively.

Deferred income taxes reflect the net effects of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts  used for income tax  purposes.  Significant  components  of the
Company's deferred tax assets and liabilities as of January 31, are as follows:


<PAGE>


                                          1997       1996
                                         ------     ------
Deferred tax assets:
  Reserves for uncollectibles            $2,801     $1,266
  Foreign operating loss carryforwards    2,778      2,050
  Accrued vacation pay                    1,511      1,648
  Rotable service parts amortization      1,260      1,510
  Intangible amortization                 1,198      1,578
  Deferred expenses                         689        301
  Capital loss carryforward                   -        783
  Special charges                            61        497
  Other                                   1,370        581
  Valuation allowance                    (2,778)    (1,910)
------------------------------------------------------------
  Total deferred tax assets               8,890      8,304
------------------------------------------------------------
Deferred tax liabilities:
  Purchased intangible amortization       6,592      1,088
  Accelerated depreciation                5,197      5,473
  Net capitalized software                1,929      4,787
  Production cost amortization              406      1,265
  Other                                     151         50
------------------------------------------------------------
  Total deferred tax liabilities         14,275     12,663
------------------------------------------------------------
  Net deferred tax liabilities          $ 5,385    $ 4,359
============================================================

A  reconciliation  of the  Company's  statutory  and  effective  tax  rate  from
continuing operations is presented below:


                                     1996      1995      1994
                                    ------    ------    ------
Statutory rate                       35.0%     35.0%     35.0%
State income taxes, net of
  federal benefit                     3.2       3.1       2.1
Intangible amortization               1.7       1.0       3.7
Foreign sales corporation            (0.5)     (0.1)     (0.7)
Research and development credits     (0.6)     (0.3)     (2.0)
Affordable housing credit            (1.0)     (1.0)     (1.7)
Foreign operating losses              3.2       3.2       1.0
Purchased research and development    7.4         -         -
Foreign investment loss                 -         -     (12.6)
Other, net                            0.1      (0.6)      5.2
---------------------------------------------------------------
Effective rate                       48.5%     40.3%     30.0%
===============================================================


<PAGE>


In fiscal year 1994,  the tax rate  benefit from the foreign  investment  losses
principally  reflects  U.S. tax  benefits  triggered  by the  restructuring  and
reorganization of the Company's German operations discussed in Note 3.

The Company  made income tax  payments of $47,693,  $10,335 and $5,549 in fiscal
years 1996, 1995, and 1994, respectively.

NOTE 7 - STOCKHOLDERS' EQUITY

The Company has 10,000,000  shares of $.01 par value Preferred Stock  authorized
and issuable in one or more series as the Board of Directors may determine; none
is outstanding. 50,000,000 shares of $.03 par value Common Stock are authorized.
There are no restrictions on retained earnings.

In accordance with SFAS No. 123,  Accounting for Stock-Based  Compensation,  the
Company   continues  to  elect  to  utilize  APB  Opinion  No.  25  and  related
interpretations in accounting for its stock option plans, restricted stock plans
and its employee  stock  purchase  plan. If the Company had elected to recognize
compensation  cost based on the fair value of the  options  granted,  restricted
shares  awarded and shares sold  pursuant to the purchase  plan as prescribed by
SFAS No. 123,  net income and  earnings per share would have been reduced to the
pro forma amounts indicated in the table below for fiscal years 1996 and 1995:

                                          1996                  1995
                                        -------                -------
      Net income - as reported          $49,580                $22,259
      Net income - pro forma             49,069                 21,925
      Earnings per share - as reported  $  3.18                $  1.42
      Earnings per share - pro forma       3.15                   1.40

SFAS No. 123 is applicable only to options granted after December 31, 1994; as a
result,  its pro forma  effect will not be fully  impacted  until these  options
become  fully  exercisable.  The fair value of each option grant is estimated on
the date of the grant  using the  Black-Scholes  option-pricing  model  with the
following assumptions:

      Expected dividend yield.              .78%
      Expected stock price volatility        45%
      Risk-free interest rate              6.18%
      Expected life of options           5 years

The  weighted-average  fair value of the options granted during the fiscal years
1996 and 1995 were $10.33 and $8.40, respectively.

The Company has four Employee  Stock Option Plans (1984,  1986,  1990 and 1995).
Options to purchase Common Stock of the Company are granted to employees at 100%
of fair market  value on the date of grant and are  exercisable  over a 60 or 63
month period.  Shares  available  for grant under the Plans totaled  227,000 and
380,250 at January 31, 1997 and 1996, respectively.


<PAGE>


Outstanding options under all plans are summarized as follows:

                                                   Weighted
                                                 Average Price
                                       Shares      Per Share
                                      -------    -------------
    Balance, January 31, 1994         952,350       $13.75
      Granted                         375,250        13.24
      Cancelled                       (76,900)       14.36
      Exercised                      (303,200)       14.30
                                     --------        -----
    Balance, January 31, 1995         947,500        13.70
      Granted                         229,750        18.52
      Cancelled                       (65,950)       15.15
      Exercised                      (164,350)       11.25
                                     --------        -----
    Balance, January 31, 1996         946,950        15.20
      Granted                         225,850        22.75
      Cancelled                       (94,450)       16.55
      Exercised                      (231,290)       14.86
                                     --------       ------
    Balance, January 31, 1997         847,060       $17.15
                                     ========       ======

Options for 313,570 shares,  373,250 shares and 378,750 shares were  exercisable
at January 31, 1997,  1996 and 1995,  with weighted  average  exercise prices of
$14.86, $14.48 and $13.54, respectively. Exercise prices for options outstanding
as of  January  31,  1997  ranged  from $8.25 to  $24.50.  The  weighted-average
remaining life of those options is 3.1 years.

The  Company has an  Employee  Stock  Purchase  Plan.  There were 80,848  shares
available for purchase under the Plan at January 31, 1997.

During  fiscal 1990,  pursuant to the Long-Term  Incentive  Plan approved by the
shareholders (L-TIP), 171,400 shares were issued to participants on a restricted
basis. At January 31, 1997, 65,650 shares remained  outstanding with the balance
having been forfeited.  The shares were earned by the participants during fiscal
1996 and will be vested at a rate of 40% following  January 31, 1997, and 30% on
each of January  31,  1998 and  January  31,  1999,  contingent  upon  continued
employment.

During  fiscal 1996 and 1995,  pursuant to the L-TIP,  a total of 99,900  shares
were issued to participants on a restricted  basis;  95,563 shares of which were
outstanding at January 31, 1997.  During 1996, the award was amended by reducing
the term  from  three to two  years  and  reducing  the  award by  approximately
one-third.  The remaining  shares were earned by and will be vested:  two-thirds
following  January 31, 1997, and one-third on January 31, 1998,  contingent upon
continued employment.


<PAGE>


NOTE 8 - EMPLOYEE BENEFIT PLANS

EMPLOYEE  SAVINGS PLAN: The Company has a qualified 401(k) Employee Savings Plan
covering  substantially all employees.  Company contributions are discretionary.
The  Company's   contributions  to  the  Plan,   representing   401(k)  matching
contributions  only,  were $1,638,  $1,900 and $1,700 in fiscal years 1996, 1995
and 1994, respectively.

EMPLOYEE STOCK  OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering  substantially  all employees.  Benefits,  to the extent vested,
become available upon retirement or termination of employment.  During 1989, the
ESOP Trust borrowed  $10,000 to purchase  792,000  shares of Common Stock.  Each
year,  the  Company  makes  contributions  to the  ESOP  which  are  charged  to
compensation  expense,  and used by the ESOP  Trust to make  loan  interest  and
principal  payments.  With each principal payment, a portion of the Common Stock
is  allocated  to  participating   employees.  In  fiscal  1996,  the  Company's
contribution  to the Plan  was  $1,000  plus  interest  of $77,  which is net of
dividends on unallocated shares of $114. The Company's  contribution to the Plan
was $1,000 in fiscal  1995 and fiscal  1994,  and  interest,  which was  totally
offset by dividends on  unallocated  shares,  was $63 in fiscal 1995 and $206 in
fiscal 1994.  There were 237,600 and 316,800  unallocated  shares at January 31,
1997 and 1996, respectively.

The ESOP Trust  borrowing,  which is guaranteed by the Company,  is reflected in
long-term debt, and the Company's obligation to make future contributions to the
ESOP for debt repayment is reflected as a reduction of  Stockholders'  Equity in
the consolidated financial statements.

NOTE 9 - CONTINGENCY

The Company has received a claim from a former  customer for  expenses,  alleged
loan defaults,  and other damages related to performance under a loan processing
and  servicing  contract.  The Company has tendered the defense of this claim to
its insurer,  and the insurer has accepted that defense subject to a reservation
of rights.  The Company and its insurer intend to vigorously contest this claim.
While the claim has not yet been fully  articulated,  the Company  believes that
any such claim would be substantially  covered by insurance and would not have a
material effect on the Company's financial position or results of operations.

NOTE 10 - BUSINESS SEGMENT INFORMATION

The  Company  operates  in a  single  business  segment,  providing  information
services and systems for the collection,  management and interpretation of data.
The Company  markets  these  products and services to the  education,  business,
government and health care markets through various operating units.

The  Company's  foreign  operations  and export sales are less than 10% of total
revenues.  Sales to all  government  agencies for the fiscal years ended January
31, 1997, 1996 and 1995 were $180,993,  $148,313, and $143,187 of which $62,278,
$42,664,   and  $41,455,   respectively,   were  to  U.S.  government  agencies,
principally  the U.S.  Department of Education,  with the remainder to state and
local government agencies,  predominantly school districts and state departments
of education.  The Company  considers its credit risk in trade receivables to be
minimal with regard to the governmental  customers  described above. With regard
to the Company's non-governmental customers, credit investigations are performed
to minimize credit losses, which historically have been insignificant.