EXHIBIT 13
<TABLE>
<CAPTION>

FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)

                                                          YEAR ENDED JANUARY 31,
                                        -----------------------------------------------------------
                                           1999        1998       1997(2)       1996        1995(3)
                                        --------    --------     --------     --------     --------
<S>                                     <C>          <C>         <C>          <C>          <C>    

Financial Results
  Revenues                              $505,372     $406,015    $331,159     $300,883     $284,874
  Income from operations                  55,271       43,044      26,646       30,704       20,323
  Income from continuing operations
    before income taxes                   54,111       41,975      26,533       27,760       16,119
  Income from continuing operations       32,511       25,175      13,666       16,580       11,281
  Discontinued operations, net of taxes        -            -      (2,229)       5,679        2,117
  Gain on disposition, net of taxes            -            -      38,143            -            -
  Net income (loss)                       32,511       25,175      49,580       22,259       13,398
  Net income per share from continuing
    operations(1)
      Basic earnings per share          $   1.05     $   0.83    $   0.45     $   0.54     $   0.38
      Diluted earnings per share        $   1.00     $   0.80    $   0.44     $   0.53     $   0.37
  Dividends paid per share              $   0.20     $   0.18    $   0.18     $   0.18     $   0.18

Financial Position
  Total assets                           362,471      315,414     273,920      219,724      209,375
  Long-term debt, including
    current maturities                     9,355       18,844      20,148       27,008       49,864
  Stockholders' equity                   226,866      193,994     170,034      128,198      113,123

<FN>

     (1)  All  references to share and per share data have been adjusted to give
          retroactive effect to the 2-for-1 stock split declared in March 1998.

     (2)  Includes an acquisition related charge of $7,895 pre-tax, $6,992 after
          tax or $.23 per diluted share. (3) Includes a special charge of $8,164
          pre-tax, $3,252 after-tax or $.11 per diluted share.
</FN>
</TABLE>


<PAGE>


QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)


                                               Three Months Ended
                               ----------------------------------------------
                               April 30    July 31    October 31   January 31
                               --------    -------    ----------   ----------
Year Ended January 31, 1999
  Revenues                     $97,915    $128,128     $135,408     $143,921
  Gross profit                  37,522      51,276       47,375       54,241
  Net income                     5,095       9,742        7,758        9,916
  Basic earnings per share     $  0.17    $   0.31     $   0.25     $   0.32
  Diluted earnings per share   $  0.16    $   0.30     $   0.24     $   0.30

Year Ended January 31, 1998
  Revenues                     $78,971    $ 96,029     $115,387     $115,628
  Gross profit                  30,811      38,067       40,743       44,817
  Net income                     4,048       7,011        6,026        8,090
  Basic earnings per share     $  0.13    $   0.23     $   0.20     $   0.27
  Diluted earnings per share   $  0.13    $   0.22     $   0.19     $   0.26


<PAGE>

STOCK EXCHANGE LISTING

Common  Stock of National  Computer  Systems,  Inc.  trades on The Nasdaq  Stock
Market(R) under the symbol "NLCS".

QUARTERLY MARKET DATA

NCS had 2,128 and 1,957 Common Stockholders of record as of January 31, 1999 and
1998, respectively.


                                            Fiscal 1998
                              -----------------------------------------
                                         Three Months Ended
                              -----------------------------------------
Year Ended January 31, 1999   April 30  July 31  October 31  January 31
---------------------------   --------  -------  ----------  ----------
  High                        $25.25     $27.00    $31.38      $38.25
  Low                          16.88      20.00     20.50       28.13
  Close                        25.00      22.25     28.00       38.25
  Dividends per share         $ 0.05     $ 0.05    $ 0.05      $ 0.05



                                            Fiscal 1997
                              -----------------------------------------
                                         Three Months Ended
                              -----------------------------------------
Year Ended January 31, 1998   April 30  July 31  October 31  January 31
---------------------------   --------  -------  ----------  ----------
  High                        $13.37     $14.75    $19.75      $19.50
  Low                          11.37      12.50     13.75       15.50
  Close                        12.56      13.75     19.00       17.12
  Dividends per share         $0.045     $0.045    $0.045      $0.045

<PAGE>

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

The fiscal years referenced herein are as follows:

         Fiscal Year           Year Ended
         -----------           ----------
             1998           January 31, 1999
             1997           January 31, 1998
             1996           January 31, 1997

Income and Expense Items as a Percentage of Revenues

Fiscal Year                            1998    1997    1996
------------------------------------------------------------
Revenues
  Information services                 53.9%   48.2%   47.6%
  Product sales                        35.7    39.9    40.5
  Maintenance and support              10.4    11.9    11.9
------------------------------------------------------------
    Total revenues                    100.0   100.0   100.0
Costs of Revenues (1)
  Cost of information services         76.1    76.7    78.5
  Cost of product sales                40.8    42.0    46.3
  Cost of maintenance and support      65.0    69.5    67.4
------------------------------------------------------------
    Total gross profit                 37.7    38.0    35.9
Operating Expenses
  Sales and marketing                  12.8    14.0    12.5
  Research and development              2.5     2.1     3.0
  General and administrative           11.5    11.3    10.0
  Acquisition related charges             -       -     2.4
------------------------------------------------------------
Income from operations                 10.9    10.6     8.0
Income from continuing operations
  before income taxes                  10.7    10.3     8.0
Income from continuing operations       6.4%    6.2%    4.1%
============================================================
(1)      As a percentage of the respective revenue caption.


National Computer Systems,  Inc. (the Company or NCS) is an information services
company, providing software, services and systems for the collection, management
and  interpretation  of data.  The Company  markets these  products and services
predominantly  to the  education  market,  but also  provides  large  scale data
collection  and  management  services and products to business,  government  and
other markets.

RECAP OF 1998 RESULTS

Total revenues increased 24.5% in fiscal 1998 to $505.4 million compared to last
year's $406.0 million.  The Company's overall gross margin on revenues increased
$36.0 million.  Total gross margin as a percentage of revenues declined to 37.7%
in fiscal  1998 from 38.0% in fiscal  1997,  due to the  product mix of revenues
although  gross  margins in each of the three primary  revenue  lines  improved.
Operating  expenses  decreased to 26.7% of revenues in fiscal 1998,  compared to
27.4% of revenues in fiscal 1997.  Overall  operating margins increased to 10.9%
of revenue  in fiscal  1998 from 10.6% in fiscal  1997 and  operating  income in
dollars increased 28.4% to $55.3 million.  Income tax rates were consistent with
the prior year.  Net income in fiscal 1998  totaled  $32.5  million or $1.00 per
diluted share outstanding.  This compares to the fiscal 1997 net income of $25.2
million and $0.80 per diluted share.  In fiscal 1996, the reported net income of
$1.59 per share included a significant  one-time net gain on the  disposition of
the Company's  Financial  Systems  business and special  charges  related to the
acquisition of Macro  Educational  Systems,  Inc.  (Macro).  A reconciliation of
diluted earnings per share follows:

                                         1998       1997       1996
                                        -----      -----      -----
Earnings per share, as reported         $1.00      $ .80     $ 1.59

Less gain on disposition
  and discontinued operations               -          -      (1.15)
                                        -----      -----      -----
Continuing operations                    1.00        .80        .44

Plus acquisition related charges            -          -        .23
                                        -----      -----      -----
Pro forma earnings per share            $1.00      $ .80      $ .67
                                        =====      =====      =====

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 1998 versus Fiscal 1997.  Total revenues for fiscal 1998 were up 24.5% to
$505.4 million from $406.0 million in fiscal 1997.

By revenue category, fiscal 1998 compares to fiscal 1997 as follows:

     Information services           + 39.1%
     Product sales                  + 11.5%
     Maintenance and support        +  8.8%

Three-fourths  of the $99.4 million of overall revenue  increases in fiscal 1998
was attributed to growth in information services, which grew 39.1% year on year.
The information  services growth came from several  sources,  but  approximately
half was  attributable to assessment and testing  services,  which achieved over
$16 million of growth through one new state assessment  program.  Government and
commercial  outsourcing and professional  services related to education software
also contributed to information services growth.

Fiscal 1998 increases in product sales came principally from education  software
licensing  and  related  network  hardware.  Increased  maintenance  and support
revenue  were the result of  increased  support  revenues  related to  education
software.  By major  market,  for  fiscal  1998,  revenues  grew  28.8% from the
education market and 12.2% from the large scale data management  (non-education)
market.  For fiscal 1998 the  education  market  accounted  for 75% of total NCS
revenues.  Less than 2% of the Company's  overall  revenue growth in fiscal 1998
came from acquisitions.

Fiscal 1997 versus Fiscal 1996.  Total revenues for fiscal 1997 were up 22.6% to
$406.0 million from $331.2 million in fiscal 1996,  with  approximately  half of
the year-on-year revenue growth due to acquisitions.  The exact annual growth in
revenues  attributable to acquisitions is  impracticable to determine due to the
total integration of many of these operations into existing Company  operations,
the elimination of duplicate or overlapping  product lines, and the packaging of
existing and acquired offerings into new offerings not previously possible.

By revenue category, fiscal 1997 compares to fiscal 1996 as follows:

     Information services           + 24.3%
     Product sales                  + 20.7%
     Maintenance and support        + 22.1%

The growth in information services came from several sources,  both internal and
acquired,  but most  significantly  from the Company's  international  business,
where  acquisitions  in Australia and Canada,  as well as  significant  internal
growth in  Mexico,  contributed  approximately  one-third  of the total  growth.
Testing and assessment  services and services related to the Company's education
software also contributed significant year-on-year revenue growth. The growth in
product sales, as well as the related maintenance and support revenues, were due
primarily  to growth in  licensing  of the  Company's  enterprise  software  for
schools,  which realized 150%  year-on-year  growth.  Products and  technologies
acquired  during  the past two years made large  contributions  to this  growth.
Sales of assessment instruments also contributed to the growth in product sales,
as a result of the acquisition of the London House product line.

By market,  the Company's  revenues from the Education market grew approximately
29% in fiscal 1997, and account for over 70% of total revenue.  Large Scale Data
Management (non-education) grew just under 10% year-on-year.

COST OF REVENUES AND GROSS PROFITS

Fiscal 1998 versus  Fiscal 1997.  The  Company's  overall  gross profit  dollars
increased  $36.0  million,  or 23.3%.  As a percentage of revenue,  gross margin
declined .3 percentage  points to 37.7% from 38.0%.  This modest  decline is due
entirely to revenue  mix, as gross  margins on each  revenue  line  (information
services, product sales, and maintenance and support) improved. The rapid growth
of information  services influenced the overall gross margin percentage decline.
Maintenance and support  margins  improved most  significantly,  owing to better
margins on education software support revenues.

Fiscal  1997  versus  Fiscal  1996.  The  Company's  overall  gross  margin as a
percentage  of revenue  improved  to 38.0% in fiscal  1997  compared to 35.9% in
fiscal 1996.  The most impactive  factor in this fiscal 1997  improvement is the
greater  volumes and higher margins of education  software  products,  and, to a
lesser extent, the increase in sales and margins of assessment  instruments.  In
both instances, the gross margin on incremental sales is quite favorable.  Gross
margins on information  services also improved  slightly in fiscal 1997 due to a
number of  contributing  factors.  Gross  margins  on  maintenance  and  support
declined  slightly  in fiscal  1997,  due to a greater  complement  of  software
support, carrying a lower margin compared to hardware maintenance.

OPERATING EXPENSES

Fiscal 1998 versus  Fiscal 1997.  Sales and  marketing  expense  increased  $8.1
million or 14.3% in fiscal 1998 over the prior fiscal year.  As a percentage  of
revenues,  sales  and  marketing  declined  by  1.2  percentage  points,  due to
relatively lower selling costs on information  services  revenues.  Research and
development costs increased $3.8 million,  increasing only slightly as a percent
revenue,  in fiscal 1998. The increase in research and development  reflects the
Company's investment in software products and test processing technology.

General and administrative  expenses for fiscal 1998 increased by $11.9 million,
and were up slightly as a percentage of revenue over fiscal 1997. These expenses
increased  due  to  several   factors,   including   amortization  of  goodwill,
information  technology  costs  (including  Y2K), and accruals  established  for
variable compensation plans due to favorable operating results.

Fiscal 1997 versus  Fiscal 1996.  The overall  growth in  operating  expenses in
fiscal  1997  over  fiscal  1996  is  heavily  impacted  by the  Company's  1997
acquisitions.  Beyond the  increase in  operating  expenses  due simply to added
volume,  these businesses by their nature  (intellectual  property licensing and
sales,  mainly software and assessment  instruments)  carry higher gross margins
and higher operating  expense  percentages  compared to the rest of the Company.
Therefore, sales and marketing and general and administrative expenses increased
not only in dollars, but as a percentage of revenues in fiscal 1997.

Research and development  expenses declined  nominally in 1997 as certain of the
acquisitions offset the need for internal research and development  spending and
allowed faster time to market.

IMPACT OF YEAR 2000

Many currently  installed computer systems and software are coded to accept only
two-digit  entries in the date code fields.  These date code fields will need to
accept  four-digit  entries to distinguish  21st century dates from 20th century
dates. This problem could result in system failures or  miscalculations  causing
disruptions of business operations  (including,  among other things, a temporary
inability  to process  transactions,  send  invoices or engage in other  similar
business activities). As a result, many companies' computer systems and software
will  need to be  upgraded  or  replaced  in  order to  comply  with  Year  2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner,  could affect the Company and the U.S.
and world economy generally.

The Company's product  development  processes currently contain steps to include
Year 2000 compliance  verification for all current and future products.  Most of
the Company's  products are currently  Year 2000  compliant,  and all continuing
products will be compliant before December 31, 1999.

The Company named a full-time Year 2000 program leader and a team (consisting
of  representatives  from each of its  business  units) to address  internal and
external  Year 2000 issues.  The  Company's  internal  financial  and other "IT"
computer  systems have been reviewed to assess and remediate Year 2000 problems,
as have other "non-IT" systems such as security, HVAC, and telephone systems. In
addition,  executive  management  regularly monitors the status of the Company's
Year 2000 remediation plans. The Company's Year 2000 compliance program includes
the following phases:  identifying  systems with date sensitive points that will
need to be addressed;  carrying out remediation  work to modify those systems or
convert  to  new  systems;   conducting   validation   testing  of  systems  and
applications to ensure compliance; and transition preparedness activities. As of
January 31, 1999, the Company believes it was  approximately  75% completed with
its total Year 2000 effort. The Company expects to be substantially  complete by
July, 1999, with the exception of transition activities described later.

Through  January 31,  1999,  the Company has spent  approximately  $4.8  million
addressing  Year 2000 issues  ($1.5  million in fiscal 1997 and $3.3  million in
fiscal 1998.) The Company  expects to incur  approximately  $2.0 million of Year
2000  expenses  in fiscal  1999.  These  costs  are  below  the costs  that were
originally  estimated  and consist of primarily  the use of internal  resources,
with relatively minor external costs.  All amounts are being expensed  currently
and are included in the Company's  future operating plans and  expectations.  In
addition,  the Company  has also made,  and will  continue to make,  significant
capital  investments  to enhance its  internal  business  and  service  delivery
systems.  However,  these  investments  are not driven  principally by Year 2000
considerations.

In addition,  the Company is requesting assurances from its major suppliers that
they are  addressing  the Year 2000  issue and that  products  purchased  by the
Company  from such  suppliers  will  function  properly in the Year 2000.  Also,
contacts are being made with the Company's  major  customers.  These actions are
intended to help mitigate the possible external impact of the Year 2000 problem.
However,  it is  impossible to fully assess the  potential  consequences  to the
Company  of the Year  2000  problem  in the  event  service  interruptions  from
suppliers   occur  or  in  the  event  that  there  are   disruptions   in  such
infrastructure areas as utilities, communications,  transportation,  banking and
government.

Based on its  assessments to date,  the Company  believes it will not experience
any material disruption as a result of Year 2000 problems in internal processes,
information  processing or interfaces with major  customers,  or with processing
orders and billing.  However, if certain critical third-party providers, such as
those providers supplying  electricity,  water or telephone service,  experience
difficulties  resulting in disruption  of service to the Company,  a shutdown of
the Company's  operations at individual  facilities could occur for the duration
of the  disruption.  While the Company  currently  believes such  disruptions of
basic  services and facility  shutdowns are  unlikely,  there can be no absolute
assurance that they will not occur.

It is the  Company's  current  belief that the more likely  worst case Year 2000
scenario  will be that NCS products do not operate  properly for  customers  who
have not  installed  Year 2000  compliant  versions of NCS  products or have not
updated their own computing platform or network infrastructure to be operational
in the Year 2000. The Company has developed, and continues to refine, transition
preparedness  plans to respond to a significantly  increased  number of customer
calls at all its support  locations to address  these  problems.  The Company is
also  developing  contingency  plans to provide for  continuity of processing in
Year  2000  based on the  outcome  of its  validation  phase  of its  Year  2000
compliance  program  and the  results  of  surveying  its  major  suppliers  and
customers.  Assuming no major  disruption  in service from utility  companies or
other critical third-party providers,  the Company believes that it will be able
to manage its total Year 2000  transition  without  any  material  effect on the
Company's consolidated results of operations or financial condition.

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.

INTEREST EXPENSE

Interest  expense  decreased  slightly in fiscal 1998 from fiscal  1997,  and in
fiscal 1997 from fiscal 1996.  These decreases are due to slightly lower average
borrowing  levels.  See  Capital  Resources  and  Liquidity  below  for  further
discussion of cash flow and debt.

OTHER INCOME AND EXPENSE

Other income and expense, net, was insignificant for fiscal 1998.

Other income in fiscal 1997 decreased  $1.3 million,  due to lower invested cash
balances as $48.8 million was used to fund acquisitions.

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, and also from internally generated cash flows.

INCOME TAXES

The effective income tax rate was 39.90%, 40.0%, and 48.5% for fiscal 1998, 1997
and 1996, respectively. See Note 6 of Notes to Consolidated Financial Statements
for a  reconciliation  to the statutory rate. The effective  income tax rate for
fiscal 1996 was higher than the statutory  rate primarily as a result of the one
time write-off of non-deductible purchased research and development.

CAPITAL RESOURCES AND LIQUIDITY

The Company began fiscal 1998 with $23.3  million of cash and cash  equivalents.
During  fiscal  1998,  NCS  generated  $58.7  million  of  cash  from  operating
activities.  Cash was  used  for  acquisitions  of  $17.2  million,  principally
American Cybercasting Corporation (Education Structures),  and $27.1 million was
used for investments in property, plant, and equipment,  including a significant
expansion of facilities in Mesa,  Arizona,  and  consolidation of three southern
California  facilities into one. Financing  activities included the repayment of
the  $5.3  million   unsecured  note  and  $2.3  million  (net)  of  convertible
debentures. The Company paid dividends of $6.2 million during fiscal 1998.

During fiscal 1997, the Company  generated  $49.5 million of cash from operating
activities.  Cash was used for  acquisitions  of $48.8 million,  including $13.6
million  to  repurchase  shares in the open  market to offset  shares  issued to
effect the acquisition of Virtual University Enterprises. $25.2 million was used
for property,  plant and equipment  acquisitions  including a new  Company-owned
facility in Melbourne,  Australia and the outfitting of new leased facilities in
Cedar Rapids, Iowa and Lawrence,  Kansas. Investments totaling $7.1 million were
made in internal administrative and service delivery systems during fiscal 1997,
and the Company paid dividends of $5.5 million.

The Company had long-term debt balances,  including current maturities,  of $9.4
million,  $18.8 million and $20.1 million at January 31, 1999,  1998,  and 1997,
respectively.  The items  causing the  changes in debt  balances  are  described
above.  At January 31, 1999,  the Company's debt to total capital ratio was 4.0%
compared  to 8.9% a year  earlier  and  10.6%  two years  earlier.  The  Company
believes  that the current debt to total  capital ratio is at a level which will
allow the Company significant flexibility to fund future growth initiatives.

Accounts receivable,  goodwill,  accounts payable, accrued expenses and deferred
income were impacted by acquisitions  made in 1997 and by the increased level of
operations during fiscal 1998 and 1997.

The market risk inherent in the Company's  market risk sensitive  instruments is
the potential  loss arising from adverse  changes in foreign  currency  exchange
rates due to amounts permanently  invested in foreign  subsidiaries.  The amount
permanently  invested  in foreign  subsidiaries  and  affiliates  translated  to
dollars  using the year end  exchange  rates is $16 million at January 31, 1999.
The  potential  loss in fair value  resulting  from a  hypothetical  10% adverse
change in quoted foreign currency exchange rates is $1.6 million. Actual results
may differ.  The Company's exposure to interest rate changes upon the fair value
of long term debt is immaterial.

Looking  toward fiscal 1999,  the Company  maintains a $50.0  million  revolving
credit  facility,  all of which was  available at January 31, 1999.  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.

NEW ACCOUNTING STANDARDS

Certain  accounting  standards  have been  issued  which the  Company is not yet
required  to  adopt.  See  Notes  to  Consolidated  Financial  Statements  for a
discussion of the applicable standards.

The  statements  which are not  historical  or current  facts or are  "goals" or
"expectations"  contained in this annual  report  constitute  `forward  looking'
statements,  as defined in the Private Securities  Litigation Reform Act of 1995
and are  subject to certain  risks and  uncertainties  that could  cause  actual
results to differ materially.  The cautionary statements filed by the Company as
Exhibit 99 to a filing  made with the SEC on Form 10-K for the fiscal year ended
January 31,  1998,  are  incorporated  herein by  reference  and  investors  are
specifically  referred to such cautionary statements for a discussion of factors
which could  affect the  Company's  operations  and  forward-looking  statements
contained herein.

<PAGE>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



January 31 (in thousands)                                   1999        1998
                                                         --------    --------
Assets

Current Assets
  Cash and cash equivalents                              $ 16,310    $ 23,267
  Receivables                                             128,751     101,334
  Inventories                                              21,791      16,239
  Prepaid expenses and other                                7,225       6,562
                                                         --------    --------
    Total Current Assets                                  174,077     147,402
                                                         --------    --------
Property, Plant and Equipment
  Land, buildings and improvements                         63,018      57,281
  Machinery and equipment                                 152,414     141,949
  Accumulated depreciation                               (109,416)   (105,206)
                                                         --------    --------
                                                          106,016      94,024
                                                         --------    --------
Intellectual Properties, net
  Acquired and internally developed software products      12,170      14,967
  Assessment instruments                                    8,835      10,317
                                                         --------    --------
                                                           21,005      25,284
                                                         --------    --------
Other Assets, net
  Goodwill                                                 52,840      45,634
  Other assets                                              8,533       3,070
                                                         --------    --------
                                                           61,373      48,704
                                                         --------    --------
     Total Assets                                        $362,471    $315,414
                                                         ========    ========

See Notes to Consolidated Financial Statements.


<PAGE>


NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



January 31 (in thousands)                                  1999        1998
                                                         --------    --------
Liabilities and Stockholders' Equity

Current Liabilities
  Current maturities of long-term debt                   $  3,758    $  6,448
  Accounts payable                                         35,809      26,767
  Accrued expenses                                         51,779      36,237
  Deferred income                                          32,209      29,026
  Income taxes                                              3,883       4,156
                                                         --------    --------
    Total Current Liabilities                             127,438     102,634
                                                         --------    --------

Long-Term Debt - less current maturities                    5,597      12,396

Deferred Income Taxes                                       2,570       6,390

Commitments and Contingencies                                   -           -

Stockholders' Equity
  Preferred stock                                               -           -
  Common stock - issued and outstanding -
    31,467 and 30,846 shares, respectively                    944         925
  Paid-in capital                                          10,760       4,518
  Retained earnings                                       220,625     194,348
  Accumulated other comprehensive income -
    Foreign currency translation adjustment                (3,880)     (2,343)
  Deferred compensation                                    (1,583)     (3,454)
                                                         --------    --------
    Total Stockholders' Equity                            226,866     193,994
                                                         --------    --------
    Total Liabilities and Stockholders' Equity           $362,471    $315,414
                                                         ========    ========

See Notes to Consolidated Financial Statements.


<PAGE>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>



Fiscal Year (in thousands, except per share amounts)     1998       1997       1996

<S>                                                    <C>        <C>        <C> 
                                                       --------   --------   --------
Revenues
  Information services                                 $272,252   $195,793   $157,511
  Product sales                                         180,634    161,977    134,144
  Maintenance and support                                52,486     48,245     39,504
                                                       --------   --------   --------
    Total revenues                                      505,372    406,015    331,159

Costs of Revenues
  Cost of information services                          207,151    150,106    123,718
  Cost of product sales                                  73,696     67,950     62,075
  Cost of maintenance and support                        34,110     33,521     26,608
                                                       --------   --------   --------
    Gross profit                                        190,415    154,438    118,758

Operating Expenses
  Sales and marketing                                    64,797     56,675     41,258
  Research and development                               12,388      8,628      9,883
  General and administrative                             57,959     46,091     33,076
  Acquisition related charges:
    Purchased research and development                        -          -      5,637
    Other                                                     -          -      2,258
                                                       --------   --------   --------
Income from Operations                                   55,271     43,044     26,646
  Interest expense                                          936      1,353      1,677
  Other (income) expense, net                               224       (284)    (1,564)
                                                       --------   --------   --------
Income from Continuing Operations Before Income Taxes    54,111     41,975     26,533
  Income taxes                                           21,600     16,800     12,867
                                                       --------   --------   --------
Income from Continuing Operations                        32,511     25,175     13,666
  Income (loss) from discontinued operations,
    net of taxes of $(1,360) in 1996                          -          -     (2,229)
  Gain on disposition, net of taxes of $29,031 in 1996        -          -     38,143
                                                       --------   --------   --------
Net Income                                             $ 32,511   $ 25,175   $ 49,580
                                                       ========   ========   ========
Basic Earnings per share
  Continuing operations                                $   1.05   $    .83   $    .45
  Discontinued operations                                     -          -      (0.07)
  Gain on disposition                                         -          -       1.26
                                                       --------   --------   --------
Net Income per share                                   $   1.05   $    .83   $   1.64
                                                       ========   ========   ========

Weighted Average Shares Outstanding                      31,022     30,391     30,257

Diluted Earnings per share
  Continuing operations                                $   1.00   $    .80   $    .44
  Discontinued operations                                     -          -      (0.07)
  Gain on disposition                                         -          -       1.22
                                                       --------   --------   --------
Net Income per share                                   $   1.00   $    .80   $   1.59
                                                       ========   ========   ========

Weighted Average Shares Outstanding and
  Dilutive Potential Common Shares                       32,589     31,864     31,069

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>



                                              Common Stock                         Accumulated
                                             ---------------  Paid-In   Retained  Comprehensive    Deferred
(in thousands, except per share amounts)     Shares   Amount  Capital   Earnings      Income     Compensation    Total
                                             ------   ------  -------   --------  -------------  -------------  --------

<S>                                          <C>      <C>     <C>       <C>          <C>            <C>        <C> 

Balance, January 31, 1996                    30,729   $ 922   $ 2,966   $131,820     $(1,813)       $(5,697)   $128,198
  Shares issued for employee stock
    purchase and option plans                   490      15     3,475          -           -              -       3,490
  Repurchase of common stock                   (724)    (22)   (6,860)    (1,194)          -              -      (8,076)
  Restricted stock awards (forfeitures), net    (26)     (1)       25          -           -            (24)          -
  ESOP debt payment                               -       -         -          -           -          1,000       1,000
  Restricted stock compensation accrual           -       -       394          -           -            734       1,128
  Cash dividends paid - $.18 per share            -       -         -     (5,521)          -              -      (5,521)
  Net income                                      -       -         -     49,580           -              -      49,580
  Foreign currency translation adjustment         -       -         -          -         235              -         235
                                                                                                                -------
  Subtotal - Comprehensive Income                 -       -         -          -           -              -      49,815

                                             --------------------------------------------------------------------------
Balance, January 31, 1997                    30,469     914         -    174,685      (1,578)        (3,987)    170,034
  Shares issued for employee stock
    purchase and option plans                   283       8     2,693          -           -              -       2,701
  Repurchase of common stock                 (1,082)    (32)  (13,467)         -           -              -     (13,499)
  Restricted stock awards                        91       3     1,758          -           -         (1,761)          -
  Shares issued for business acquisition      1,085      32    13,534          -           -              -      13,566
  ESOP debt payment                               -       -         -          -           -          1,000       1,000
  Restricted stock compensation accrual           -       -         -          -           -          1,294       1,294
  Cash dividends paid - $.18 per share            -       -         -     (5,512)          -              -      (5,512)
  Net income                                      -       -         -     25,175           -              -      25,175
  Foreign currency translation adjustment         -       -         -          -        (765)             -        (765)
                                                                                                                -------
  Subtotal - Comprehensive Income                 -       -         -          -           -              -      24,410
                                             --------------------------------------------------------------------------
Balance, January 31, 1998                    30,846     925     4,518    194,348      (2,343)        (3,454)    193,994
  Shares issued for employee stock
    purchase and option plans                   512      15     3,656          -           -              -       3,671
  Restricted stock awards (forfeitures), net    (66)     (1)     (209)         -           -         (1,410)     (1,620)
  Shares issued for convertible debenture       175       5     2,795          -           -              -       2,800
  ESOP debt payment                               -       -         -          -           -          1,000       1,000
  Restricted stock compensation accrual           -       -         -          -           -          2,281       2,281
  Cash dividends paid - $.20 per share            -       -         -     (6,234)          -              -      (6,234)
  Net income                                      -       -         -     32,511           -              -       32,511
  Foreign currency translation adjustment         -       -         -          -      (1,537)             -       (1,537)
                                                                                                                 -------
  Subtotal - Comprehensive Income                 -       -         -          -           -              -       30,974
                                             ---------------------------------------------------------------------------
Balance, January 31, 1999                    31,467   $ 944   $10,760   $220,625     $(3,880)       $(1,583)    $226,866
                                             ======   =====   =======   ========     =======        =======     ========

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>



Fiscal Year (in thousands)                                 1998       1997       1996
                                                         -------    -------    -------
<S>                                                      <C>        <C>        <C>    

Operating Activities
  Net income                                             $32,511    $25,175    $49,580
  Less - gain on disposition                                   -          -    (38,143)
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation                                        20,755     16,825     15,620
      Amortization                                        12,049     13,291      9,647
      Deferred income taxes and other                     (2,237)      (661)    (2,053)
      Non-cash charges                                         -          -      6,637
      Changes in operating assets and liabilities
         (net of acquired amounts):
         Accounts receivable                             (26,967)   (15,361)    (4,318)
         Inventory and other current assets               (6,249)     1,712      2,495
         Accounts payable and accrued expenses            26,341      8,087     (3,856)
         Deferred income                                   2,461        424      2,912
                                                         -------    -------    -------
       Net Cash Provided By Operating Activities          58,664     49,492     38,521
                                                         -------    -------    -------
Investing Activities
  Acquisitions, net                                      (17,246)   (35,216)   (11,192)
  Purchases of property, plant and equipment             (27,145)   (25,174)   (14,909)
  Purchases of business systems                           (8,928)    (7,108)    (1,048)
  Capitalized software products                                -          -     (1,553)
  Net proceeds from disposition                                -          -     64,071
  Other - net                                                719      1,148      3,296
                                                         -------    -------    -------
       Net Cash Provided By (Used In)
         Investing Activities                            (52,600)   (66,350)    38,665
                                                         -------    -------    -------
Financing Activities
  Repayment of secured notes                                   -          -    (15,000)
  Net increase (decrease) in other borrowings             (6,413)      (676)       846
  Repurchase of common stock, net                           (374)   (11,766)    (4,586)
  Dividends paid                                          (6,234)    (5,512)    (5,521)
                                                         -------    -------    -------

       Net Cash Used In Financing Activities             (13,021)   (17,954)   (24,261)
                                                         -------    -------    -------
Increase (Decrease) In Cash and Cash Equivalents          (6,957)   (34,812)    52,925
Cash and Cash Equivalents  - Beginning of Year            23,267     58,079      5,154
                                                         -------    -------    -------
Cash and Cash Equivalents - End of Year                  $16,310    $23,267    $58,079
                                                         =======    =======    =======
</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
         -----------           ----------
             1998      -    January 31, 1999
             1997      -    January 31, 1998
             1996      -    January 31, 1997

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.   Certain
reclassifications  have been made to prior  year  presentations  to  conform  to
current year presentation.

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:

                                             1999        1998
----------------------------------------------------------------
Finished goods                             $ 5,096     $ 5,166
Scoring services and work in process        14,442       8,218
Raw materials and purchased parts            2,253       2,855
----------------------------------------------------------------
                                           $21,791     $16,239
================================================================

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.

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    Net
-------------------------------------------------------------------------------
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
Additions                          1,010           -           -        1,010
Amortization                           -           -       (3,621)     (3,621)
-------------------------------------------------------------------------------
Balance, January 31, 1998         24,334      11,993      (21,360)     14,967
Additions                            900           -            -         900
Write-downs and dispositions        (225)       (555)         566        (214)
Amortization                           -           -       (3,483)     (3,483)
-------------------------------------------------------------------------------
Balance, January 31, 1999         25,009      11,438
Accumulated Amortization         (12,839)    (11,438)     (24,277)
-------------------------------------------------------------------------------
Net Balance, January 31, 1999    $12,170     $     -                  $12,170
===============================================================================

ASSESSMENT INSTRUMENTS:  These amounts originate from the allocation of purchase
prices of acquired companies and direct  acquisition of assessment  instruments.
These  products gain  prominence  over time and generally have  relatively  long
market  lives  once   established.   Products  in  this  category  are  assigned
amortizeable  lives of ten years or less.  Expected  revenues  and  amortizeable
lives are  subject to revision  and  balances  are  periodically  evaluated  for
possible impairment.  Accumulated  amortization at January 31, 1999 and 1998 was
$5,331 and $3,849, respectively.

GOODWILL:  Goodwill  arising  from  business  acquisitions  is  amortized  on  a
straight-line basis over periods ranging from five to twenty years. Amortization
expense  was  $4,489,   $3,047,   and  $703  in  fiscal  1998,  1997  and  1996,
respectively.  Accumulated amortization was $11,480 and $7,130 as of January 31,
1999 and 1998, 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:

                               1999      1998
------------------------------------------------
Employee compensation        $27,899    $17,604
Taxes other than income        4,473      3,558
Other                         19,407     15,075
------------------------------------------------
                             $51,779    $36,237
================================================

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.

In October 1997, the American  Institute of Certified Public  Accountants issued
Statement of Position (SOP) 97-2, Software Revenue  Recognition,  which requires
that each element of a software licensing  arrangement be separately  identified
and  accounted  for  based on the  relative  fair  values of each  element.  The
Company's software revenue  recognition  policies and related procedures were in
compliance  with the SOP,  therefore,  the effect of  adoption as of February 1,
1998 on transactions occurring in fiscal 1998 was not material.

PER SHARE DATA:  Earnings per share are calculated in accordance  with Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share".

The  following  table is a  reconciliation  of the  earnings  numerator  and the
weighted-average  shares  denominator  used in the  calculations  of  basic  and
diluted earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                          1998      1997      1996
                                                        -------   --------  -------

<S>                                                     <C>       <C>       <C>    
Earnings:
  Income from continuing operations
    Basic earnings per share                            $32,511   $25,175   $13,666

  Adjustments for dilutive securities:
    Interest expense on convertible debentures,
      net of tax                                            222       256         7
                                                        -------   -------   ------- 
Adjusted income from continuing operations
  for diluted earnings per share                        $32,733   $25,431   $13,673
                                                        =======   =======   =======

Weighted Average Shares:
  Basic average shares                                   31,022    30,391    30,257

  Adjustments for dilutive securities:
    Employee stock options, net of tax proceeds             981       620       402
    Contingent stock awards, net of tax proceeds             81       270       394
    Convertible debentures                                  505       583        16
                                                        -------   -------   -------
Diluted average shares                                   32,589    31,864    31,069
                                                        -------   -------   -------

Basic earnings per share from continuing operations     $  1.05   $  0.83   $  0.45
                                                        =======   =======   =======

Diluted earnings per share from continuing operations   $  1.00   $  0.80   $  0.44
                                                        =======   =======   =======
</TABLE>


IMPAIRMENT OF LONG-LIVED ASSETS: The Company is in compliance with 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.

STOCK-BASED  COMPENSATION:  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.

INTERNAL USE SOFTWARE:  In March,  1998, the AICPA issued  Statement of Position
(SOP)  98-1  Accounting  for the Costs of  Computer  Software  Developed  for or
Obtained for Internal Use. The SOP requires the  capitalization of certain costs
incurred in connection with  developing or obtaining  software for internal use.
The Company already complies with the provisions of the SOP.

DERIVATIVES AND HEDGING:  In June, 1998, the FASB issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, which requires the Company to
recognize all derivatives on the balance sheet at fair value effective  February
1, 2000.  The Company does not  anticipate  that the adoption of this  Statement
will  have a  significant  effect  on its  result  of  operations  or  financial
position.

NOTE 2 - ACQUISITIONS

In September 1998, the Company acquired all of the common and preferred stock of
American Cybercasting Corporation (ACC), also known as Educational Structures, a
business  specializing  in  customized  K-12  teacher  support  tools for lesson
planning and  curriculum  support.  The purchase price was  approximately  $12.6
million.  The  excess of the  purchase  price  over book value of the net assets
acquired,  as adjusted for deferred taxes,  was $10.8 million,  all of which was
allocated to goodwill and is being amortized over 20 years.  The acquisition was
accounted for as a purchase and,  accordingly,  operating results of Educational
Structures  are  included in the  Company's  consolidated  financial  statements
subsequent to the date of acquisition.

In April 1997,  the Company  acquired all of the common and  preferred  stock of
Virtual  University  Enterprises  (VUE), an electronic  course  registration and
training  administration  company.  The purchase price was  approximately  $14.6
million and  consisted of stock of the Company  (1,085,264  shares at $12.50 per
share) and cash.  The excess of the  purchase  price,  as adjusted  for deferred
taxes,  over book value of the net assets acquired was $16.4 million,  of all of
which was allocated to goodwill and is being amortized over 20 years.

In July  1997,  the  Company  acquired  the  assets of two  businesses  from The
McGraw-Hill Companies for $29.5 million in cash. The acquisition included London
House, a pre-employment  assessment business,  and McGraw Hill School Systems, a
school  administrative  software  business.  The  purchase  price was  allocated
primarily to goodwill, $20.4 million, and assessment instruments,  $9.1 million,
which are being amortized over 10 years.

The Company made two additional  acquisitions  in fiscal 1997 whose  acquisition
prices totaled $5.0 million, of which $4.2 million was allocated to goodwill.

All of the  fiscal  1997  acquisitions  described  above were  accounted  for as
purchases and, accordingly,  operating results of these businesses subsequent to
the date of acquisition  were included in the Company's  consolidated  financial
statements.  The following is a summary of pro forma operating results as if the
fiscal 1997 acquisitions had taken place at the beginning of fiscal 1996:

Fiscal Year (unaudited)                    1997           1996
                                         --------       --------
Total revenues                           $420,843       $384,923
Income from continuing operations
  before income taxes                      39,497         18,158
Income from continuing operations          23,698          8,641
  Basic earnings per share               $   0.78       $   0.29
  Diluted earnings per share             $   0.75       $   0.28


The pro forma  information  is provided for  informational  purposes only. It is
based on  historical  information  and does not purport to be  indicative of the
results that would have occurred had the acquisitions been made at the beginning
of fiscal 1996,or of future results, as significant changes to their operations,
products and cost and expense structures have taken place since acquisition.

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  1998 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 fiscal 1996 consolidated  financial statements.  The excess of the
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.

NOTE 3 - DISCONTINUED OPERATIONS

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. 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 date of sale were $17.1 million.

NOTE 4 - LEASES

The Company leases office facilities under noncancelable  operating leases which
expire in various years through 2004.  Rental  expense for all operating  leases
was $12,921 in fiscal 1998,  $9,167 in fiscal  1997,  and $8,544 in fiscal 1996.
Future  minimum  rental  expense  as of  January  31,  1999,  for  noncancelable
operating  leases  with  initial  or  remaining  terms in  excess of one year is
$27,031 and is payable as follows:  fiscal 1999 - $6,920;  fiscal 2000 - $6,038;
fiscal  2001 - $5,726;  fiscal  2002 - $4,441;  fiscal  2003 - $2,125 and $1,781
beyond.

In August 1997, the Company  entered into a five-year  operating lease agreement
for a facility in Cedar Rapids,  Iowa.  The total cost of the assets  covered by
the  lease as of  January  31,  1999  was  $12,403.  The  lease  provides  for a
substantial  residual  value  guarantee by the Company at the end of the initial
term and  includes  purchase  and  renewal  options at fair market  values.  The
amounts of future minimum  operating  lease  payments  listed above excludes any
payment related to the residual value guarantee which is due upon termination of
the lease.  The Company has the right to exercise a purchase option with respect
to the leased building or the building can be sold to a third party. The Company
expects the fair market value of the building, subject to the purchase option or
sale to a third  party,  to  substantially  reduce or  eliminate  the  Company's
payment under the residual value guarantee.  The Company is obligated to pay the
difference  between the maximum amount of the residual  value  guarantee and the
fair market value of the building at the  termination  of the lease.  At January
31, 1999 the maximum  amount of the  residual  value  guarantee  relative to the
assets under lease is approximately $10,500.

NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

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

                                 1999       1998
--------------------------------------------------
Revolving credit borrowing     $     -    $     -
Convertible debentures           4,700      7,000
Unsecured note                       -      5,228
ESOP borrowing                   1,000      2,000
Other borrowings                 3,655      4,616
--------------------------------------------------
                                 9,355     18,844
Less current maturities         (3,758)    (6,448)
--------------------------------------------------
Long-term debt                 $ 5,597    $12,396
==================================================

Revolving  Credit  Borrowings:  The  Company has a $50,000  unsecured  revolving
credit facility that terminates  November 1, 2002.  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).  The Company pays a fee at an
annual  rate  of .15% on the  facility  amount.  The  credit  facility  contains
covenants with which the Company is in compliance.

Convertible   Debentures:   In  January  1997  the  Company  issued  Convertible
Debentures as partial consideration for the stock purchase of Macro, see Note 2.
These  debentures  are due in annual  installments,  carry an  interest  rate of
approximately 6.1%, and are convertible into common stock at $12.00 per share.

Unsecured Note: This unsecured term note was repaid in full in May 1998.

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 an interest rate of .75% over LIBOR.

Scheduled  Maturities:   The  aggregate  principal  amounts  of  long-term  debt
scheduled  for  repayment in each of the five fiscal years 1999 through 2003 are
$3,758, $1,986, $1,708, $106 and $101, respectively, with $1,696 due thereafter.
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
                       -----------------------
Fiscal Year            Federal  State  Foreign  Deferred  Total
-----------------------------------------------------------------
1998                   $18,495  $3,003  $1,682  $(1,580) $21,600
1997                    14,540   2,806   1,300   (1,846)  16,800
1996                    16,197   1,320     864   (5,514)  12,867
-----------------------------------------------------------------

The provision for income taxes from discontinued  operations was $27,671 for the
fiscal year 1996.

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:

                                          1999       1998
                                         ------     ------
Deferred tax assets:
  Reserves for uncollectibles           $ 3,513     $2,561
  Foreign operating loss carryforwards    3,659      2,826
  Accrued vacation pay                    2,051      1,792
  Rotable service parts amortization        700        980
  Intangible amortization                 1,552      1,453
  Other                                   2,900        602
  Deferred expenses                         794        783
  Valuation allowance                    (3,659)    (2,826)
------------------------------------------------------------
  Total deferred tax assets              11,510      8,171
------------------------------------------------------------
Deferred tax liabilities:
  Acquired intangible amortization        5,132      7,688
  Accelerated depreciation                5,070      4,542
  Net capitalized software                3,706      1,921
  Other                                     172        410
------------------------------------------------------------
  Total deferred tax liabilities         14,080     14,561
------------------------------------------------------------
  Net deferred tax liabilities          $ 2,570    $ 6,390
============================================================

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

                                        1998      1997      1996
                                       ------    ------    ------
Statutory rate                          35.0%     35.0%     35.0%
State income taxes, net of
  federal benefit                        3.6       4.4       3.2
Intangible amortization                  0.5       1.0       1.7
Affordable housing and other credits    (0.8)     (0.9)     (2.1)
Foreign operating losses                 1.6       1.1       3.2
Purchased research and development         -         -       7.4
Other                                      -      (0.6)      0.1
----------------------------------------------------------------
Effective rate                          39.9%     40.0%     48.5%
================================================================

The  Company  made income tax  payments  of $19,623,  $18,991 and $47,693 in the
fiscal years 1998, 1997, and 1996, respectively.

<PAGE>

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.   100,000,000  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 the fiscal years 1998, 1997,
and 1996:

                                           1998      1997      1996
                                         -------   -------   -------
      Net income - as reported           $32,511   $25,175   $49,580
      Net income - pro forma              30,041    23,988    49,069
      Earnings per share - as reported:
         Basic                           $  1.05   $   .83   $  1.64
         Diluted                            1.00       .80      1.59
      Earnings per share - pro forma:
         Basic                           $   .97   $   .79   $  1.62
         Diluted                             .93       .76      1.58

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 for the fiscal years shown:

                                           1998       1997      1996
                                         -------    -------    -------
      Expected dividend yield               .26%       .58%      .78%
      Expected stock price volatility        35%        30%       45%
      Risk-free interest rate              5.16%      6.23%     6.18%
      Expected life of options           5 years    5 years   5 years

The weighted-average fair value of the options granted during fiscal years 1998,
1997, and 1996 were $8.53, $4.40, and $5.16, respectively.

<PAGE>

The Company has four Employee  Stock Option Plans (1986,  1990,  1995 and 1997).
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  278,780,
669,700, and 454,000 at January 31, 1999, 1998 and 1997, respectively.

Outstanding options under all plans,  including  non-qualified options discussed
below are summarized as follows:
                                                    Weighted
                                                 Average Price
                                      Shares       Per Share
                                     -------     -------------
    Balance, January 31, 1996       1,893,900       $ 7.60
    Granted                           451,700        11.37
    Cancelled                        (188,900)        8.27
    Exercised                        (462,580)        7.43
                                    ---------        -----
    Balance, January 31, 1997       1,694,120         8.57
    Granted                           862,148        13.13
    Cancelled                         (92,908)        9.51
    Exercised                        (309,246)        7.57
                                    ---------       ------
    Balance, January 31, 1998       2,154,114        10.50
    Granted                           600,900        23.23
    Cancelled                         (64,380)       14.44
    Exercised                        (417,320)        7.87
                                    ---------       ------
    Balance, January 31, 1999       2,273,314       $14.15
                                    =========       ======

Options for 633,537; 679,182; and 627,140 shares were exercisable at January 31,
1999, 1998 and 1997, with weighted average exercise prices of $9.76,  $8.07, and
$7.43,  respectively.  Exercise prices for options outstanding as of January 31,
1999 are summarized as follows:
<TABLE>
<CAPTION>

                            Options Outstanding               Options Exercisable
                  ----------------------------------------- ------------------------
                              Weighted         Weighted                    Weighted
                               Average    Average Remaining                 Average
   Range of          Number   Exercise       Contractual       Number      Exercise
Exercise Prices    of Shares    Price            Life         of Shares      Price
---------------    ---------  ---------   -----------------  ----------    ---------
<S>               <C>           <C>           <C>              <C>          <C>   

$ 4.02 -  8.00      308,434     $ 6.20        1.5 years        226,737      $ 6.17
  8.38 - 12.00      579,740      10.45        2.3 years        271,460       10.26
 12.25 - 18.75      797,740      13.48        4.0 years        117,340       13.78
 20.00 - 35.19      587,400      22.89        4.9 years         18,000       21.50
                  ---------     ------                         -------      ------
                  2,273,314     $14.15                         633,537      $ 9.76
                  =========     ======                         =======      ======

</TABLE>

<PAGE>


During  fiscal 1998 and 1997,  pursuant  to the 1997  Long-Term  Incentive  Plan
(L-TIP),  non-qualified options to purchase 129,000 and 336,000 shares of Common
Stock of the Company were granted to  participants  at 100% of fair market value
on date of grant.  These options are  exercisable  67 months after date of grant
and  expire 72 months  after date of grant.  Vesting  can be  accelerated  to 36
months from date of grant on  achievement of specified  cumulative  earnings per
share and stock price  targets  during the three  fiscal  years then  ended.  At
January 31, 1999,  there were 465,000  options shares  outstanding at a weighted
average exercise price per share of $14.61.

The  Company  also  has a long  term  cash  incentive  program,  which  pays for
performance  in excess  of the three  year  earnings  per share and stock  price
targets.

The Company has an Employee  Stock  Purchase  Plan.  There were  422,267  shares
available for purchase under the Plan at January 31, 1999.

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 $3,011,  $2,195, and $1,638 in fiscal years 1998, 1997
and 1996, 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  1,584,000 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  1998,  the  Company's
contribution  to the Plan  was  $1,000  plus  interest  of $17,  which is net of
dividends on unallocated  shares of $63. The Company's  contribution to the Plan
was $1,000 in fiscal  1997 and fiscal  1996,  and  interest,  which was  totally
offset by dividends  on  unallocated  shares,  was $61 in fiscal 1997 and $77 in
fiscal 1996.  There were 158,400 and 316,800  unallocated  shares at January 31,
1999 and 1998, 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

On April 30,  1997,  the Company was served  with a summons and  complaint  in a
lawsuit  filed  against the Company by a former  customer.  The lawsuit  alleges
certain  claims against the Company in connection  with certain loan  processing
and  servicing  agreements  and seeks  out-of-pocket  damages,  lost profits and
compensation  for  extraordinary  defaults  and  lost  interest  that it  claims
resulted  from  breaches by the  Company.  The  customer  also seeks to have the
Company acquire certain student loans with unpaid  principal,  interest and late
charges,  which loans it claims are or have been in default and were incorrectly
processed  or serviced by the  Company.  The Company has tendered the defense of
the claims to its insurer,  and the insurer  accepted  the defense  subject to a
reservation of rights.  The Company has filed an answer to the complaint denying
the claims, and the Company intends to vigorously defend against the lawsuit. In
addition, the Company has filed a counterclaim against the former customer and a
corporate affiliate seeking compensatory damages and contribution and indemnity.
The Company does not believe that the outcome of this litigation would result in
a material adverse effect on the Company's  consolidated  financial  position or
results of operations.

NOTE 10 - BUSINESS SEGMENT INFORMATION

The Company has five reportable segments as follows:

o    Assessments  and Testing  Services - provides  comprehensive  K-12 academic
     testing  services to states,  and test scoring services in support of major
     test  publishers.  This  segment  also  provides  clinical  psychology  and
     workforce development assessment  instruments and electronic  certification
     and licensure examinations.

o    Education   Software   and   Services  -  provides   student,   curriculum,
     instructional  management,  and  financial  management  software,  software
     support, and professional  implementation  services, and network design and
     installation services.

o    NCS Services - delivers  principally  outsourcing  services for large-scale
     data management projects for government and business.

o    Data Collection Systems  -  manufactures and  sells optical  mark and image
     scanning systems and scannable forms.

o    International  - provides many of the same products and services  mentioned
     above,  but sells and serves  customers  outside the United States  through
     subsidiaries in Australia, Canada, Mexico, Hong Kong, and the U.K.
     and through distributors in other geographies.

The Company's  reportable segments are business units that offer different,  but
related,  products  and  services  to  customer  sets  which  can  overlap.  The
reportable  segments are managed  separately  by  corporate  officers who report
directly to the CEO. The Company evaluates  performance and allocates  resources
based on profit or loss from operations  before  interest and income taxes.  The
accounting  policies of the reportable  segments are the same as those described
in the summary of significant accounting policies.

The table below presents information by reportable segment.


<PAGE>
<TABLE>
<CAPTION>


                                   Assessments  Education                Data
                                    & Testing   Software &    NCS     Collection
                                     Services   Services    Services    Systems    International    Totals
                                   ----------  ----------- ---------- ----------- --------------  --------

<S>                                 <C>          <C>         <C>        <C>          <C>          <C>

For the Period Ended 1/31/99
  Revenues                          $160,958     $116,214    $99,371    $84,239      $44,590      $505,372
  Income from operations              25,365       11,917     11,594     23,250        3,182        75,308
  Depreciation and Amortization       10,022        8,563      2,572      4,794        2,649        28,600
  Segment assets                     106,996       88,857     47,934     41,950       28,924       314,661

For the Period Ended 1/31/98
  Revenues                          $118,661     $ 88,474    $76,212    $82,692      $39,976      $406,015
  Income from operations              20,289        9,266      7,375     21,767        1,912        60,609
  Depreciation and Amortization        8,546        7,475      2,876      5,289        1,833        26,019
  Segment assets                      94,731       75,337     40,559     41,087       28,497       280,211

For the Period Ended 1/31/97
  Revenues                          $ 98,959     $ 52,025    $70,679    $80,299      $29,197      $331,159
  Income from operations              18,601        5,290      7,489     19,311         (723)       49,968
  Acquisition Related Charges             -        (7,895)         -          -            -        (7,895)
  Depreciation and Amortization        5,855        6,077      2,361      5,057        1,583        20,933
  Segment assets                      48,134       55,295     39,619     38,162       24,980       206,190


</TABLE>

<PAGE>

The following table is a reconciliation of reportable segment information to the
Company's consolidated totals.

                                                 Fiscal
                                    --------------------------------
                                      1998        1997        1996
                                    --------    --------    --------

Total Consolidated Revenue:         $505,372    $406,015    $331,159
                                    ========    ========    ========
Income From Operations:
Total for reportable segments       $ 75,308    $ 60,609    $ 49,968
Acquisition Related Charges                -           -       7,895
Unallocated amounts:
    Central G & A Expenses            20,037      17,565      15,427
    Interest Expense                     936       1,353       1,677
    Other (Income) Expense               224        (284)     (1,564)
                                    --------    --------    --------
Income from continuing operations
  before income taxes               $ 54,111    $ 41,975    $ 26,533
                                    ========    ========    ========
Depreciation and Amortization:
Total for reportable segments       $ 28,600    $ 26,019    $ 20,933
Corporate                              4,204       4,097       4,334
                                    --------    --------    --------
Total Depreciation and Amortization $ 32,804    $ 30,116    $ 25,267
                                    ========    ========    ========
Assets:
Total for reportable segments       $314,661    $280,211    $206,190
Corporate Assets                      47,810      35,203      67,730
                                    --------    --------    --------
Total Consolidated Assets           $362,471    $315,414    $273,920
                                    ========    ========    ========

The Company's foreign operations and export sales are individually less than 10%
of total revenues.  Sales to all government  agencies for the fiscal years ended
January 31, 1999, 1998 and 1997 were $262,511;  $185,186; and $180,993, of which
$67,601; $63,005; and $62,278,  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.

Note 11 -  ACCUMULATED OTHER COMPREHENSIVE INCOME

As of February 1, 1998, the Company  adopted  Statement of Financial  Accounting
Standard (SFAS) 130, Reporting  Comprehensive  Income.  SFAS 130 establishes new
rules for the reporting and display of comprehensive  income and its components;
however,  the  adoption of this  Statement  had no impact on the  Company's  net
income or stockholders' equity. SFAS 130 requires the Company's foreign currency
translation  adjustments,  which  prior to  adoption  were  reported in retained
earnings to be separately  classified as other comprehensive  income. Prior year
financial   statements  have  been   reclassified  to  conform  to  the  current
requirements.

The earnings associated with the Company's investment in its' foreign subsidiary
are considered to be permanently  invested and no provision for U.S. federal and
state  income  taxes  on  those  earnings  or  translation  adjustment  has been
provided.