EXHIBIT 13
<TABLE>
<CAPTION>

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

                                                          YEAR ENDED JANUARY 31,
                                       ------------------------------------------------------------
                                         1996        1995(1)      1994(2)      1993         1992
                                       --------     --------     --------     --------     --------

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

Financial Results
  Revenues                              $358,976    $336,943     $305,453     $300,067     $302,506
  Income (loss) from operations           39,737      23,146       (2,301)      27,258       28,704
  Income (loss) before income tax
    provision (benefit)                   37,009      19,148       (2,859)      26,608       24,174
  Income tax provision (benefit)          14,750       5,750         (350)      10,100        8,700
  Net income (loss)                       22,259      13,398       (2,509)      16,508       15,474
  Net income (loss) per share           $   1.42    $    .88     $   (.16)    $   1.03     $    .96
  Average number of shares outstanding    15,685      15,225       15,535       16,066       16,138
  Dividends paid per share              $    .36    $    .36     $    .36     $    .33     $    .29

Financial Position
  Current ratio                              1.6         1.5          1.5          1.6          1.7
  Working capital                       $ 40,763    $ 35,614     $ 36,217     $ 38,792     $ 39,836
  Total assets                           235,260     240,757      220,173      214,739      217,578
  Long-term debt, including
    current maturities                    28,540      50,525       47,351       25,350       39,751
  Stockholders' equity                   128,198     113,123      100,147      121,317      112,316


</TABLE>

(1) Includes a  special charge of $11,339  pre-tax, $5,189 after-tax or $.34 per
    share.
(2) Includes a special charge of $25,000 pre-tax, $15,500 after-tax or $1.00 per
    share.

<PAGE>

QUARTERLY MARKET DATA (Unaudited)


The Company's Common Stock is traded on the Nasdaq National Market System under
the symbol  "NLCS." As of  January  31,  1996,  there were  approximately  1,900
stockholders  of record.  Set forth below is certain  information  regarding the
sales prices of, and dividends paid with respect to, the Company's  Common Stock
during the year ended January 31, 1996 and 1995:

                                 YEAR ENDED JANUARY 31, 1996
                            -------------------------------------
Quarter                       1st       2nd       3rd       4th
---------------------       -------   -------   -------   -------
Sales prices per share
  High                      $17.75    $21.50   $22.00    $22.00
  Low                        14.86     16.25    17.75     17.50
Dividends paid per share    $  .09    $  .09   $  .09    $  .09


                                YEAR ENDED JANUARY 31, 1995
                            -------------------------------------
Quarter                       1st       2nd       3rd       4th
------------------------    -------   -------   -------   -------
Sales prices per share
  High                      $ 13.50   $ 13.25   $ 14.75   $ 17.25
  Low                         10.88     10.50     11.50     12.13
Dividends paid per share    $   .09   $   .09   $   .09   $   .09

<TABLE>
<CAPTION>

QUARTERLY RESULTS OF OPERATIONS

(In thousands, except per share amounts)


                                               THREE MONTHS ENDED
                                 -----------------------------------------------
                                 April 30    July 31    October 31    January 31
                                 --------    -------    ----------    ----------

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

Year Ended January 31, 1996
  Revenues                       $74,297     $88,442     $97,321       $98,916
  Gross profit                    29,114      33,957      35,037        38,608
  Net income                       2,365       5,644       6,172         8,078
  Net income per share           $  0.15     $  0.36     $  0.39       $  0.52


Year Ended January 31, 1995
  Revenues                       $68,750     $80,131     $94,608       $93,454
  Gross profit                    27,081      31,165      31,239        38,452
  Net income                       1,950       4,715       4,578         2,155(1)
  Net income per share           $  0.13     $  0.31     $  0.30       $  0.14

</TABLE>

(1) Includes a $5,189 after-tax special charge ($ .34 per share).


<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
             1995      -    January 31, 1996
             1994      -    January 31, 1995
             1993      -    January 31, 1994

Income and Expense Items as a Percentage of Revenues

Fiscal Year                           1995    1994    1993
------------------------------------------------------------
Revenues
  Net sales                           82.5%   80.8%   77.5%
  Maintenance and support             17.5    19.2    22.5
------------------------------------------------------------
    Total revenues                   100.0   100.0   100.0
Costs Of Revenues
  Cost of sales(1)                    60.9    60.1    57.4
  Cost of maintenance and support(2)  66.6    70.0    73.6
------------------------------------------------------------
    Total gross profit                38.1    38.0    38.9
Operating Expenses
  Sales and marketing                 12.5    13.1    15.7
  Research and development             3.9     4.0     3.1
  General and administrative          10.7    10.6    12.7
  Special charges                       --     3.4     8.2
-------------------------------------------------------------
Income (loss) from operations         11.1     6.9    (0.8)
Income (loss) before taxes            10.3     5.7    (0.9)
Net income (loss)                      6.2%    4.0%   (0.8)%
=============================================================
(1) As a percentage of sales revenue.
(2) As a percentage of maintenance and support revenue.

National  Computer  Systems,  Inc.  (the  Company or NCS)  operates two business
segments. The Company's largest business segment is Data Collection Services and
Systems.  This segment markets those products and related  application  software
and services  predominantly in education,  but also to business,  government and
health care markets through its various  operating units. The Financial  Systems
segment  designs,  develops and markets asset  management  software and service,
primarily for bank trust  departments.  This includes systems for personal trust
asset management for individuals and corporate trust  applications such as stock
and bond transfer systems.

RECAP OF 1995 RESULTS

Total  revenues  in fiscal  1995  were up 6.5%  from the prior  year to a record
$359.0 million.  The Company's  overall gross profit  percentage on revenues was
relatively  constant  with the prior  year,  while total  gross  profit  dollars
increased over fiscal 1994 by $8.8 million or 6.9%. Sales and marketing expenses
increased slightly, by $.6 million, however, those expenses declined to 12.5% of
revenues from 13.1% in fiscal 1994. Research and development  expenses increased
by $.5 million,  remaining  relatively constant,  year-to-year,  as a percent of
revenues.  General and administrative  expenses increased by $2.4 million,  also
relatively  constant,  year-to-year,  as a percent of  revenues.  The  Company's
income from  operations  increased  15.2% to $39.7  million  over the prior year
income  from  operations  of $34.4  million,  before  the 1994  special  charges
discussed below.  Interest expense declined  slightly as lower average borrowing
levels  were  somewhat  offset by higher  interest  rates.  Net  income of $22.3
million or $1.42 per share  compares to fiscal 1994 net income of $18.6  million
or $1.22 per share before the 1994 special charges.

SPECIAL CHARGES

In fiscal 1994, the Company recorded an $11.3 million special charge  consisting
of three  components:  The  restructuring  and statutory  reorganization  of the
Company's  German  operations,  the  discontinuation  of  an  employee  benefits
software  development  project,  and the  write-down of certain  investments  in
anticipation  of  disposition.  See Note 2 of Notes  to  Consolidated  Financial
Statements for further discussion.

In fiscal 1993, the Company recorded a $25 million special charge, $22.8 million
of which  was to  terminate  the  Ultrust  product  and the  related  Cambridge,
Massachusetts operations dedicated to the product. The charge also included $2.2
million for the  restructuring of the  Administrative  Software  division of the
Education  business,  principally  the closing of the  Company's  Salt Lake City
software  development  facility  and the  consolidation  of product  development
activities into facilities in Mesa, Arizona. See Note 2 of Notes to Consolidated
Financial Statements for further discussion.

REVENUES

Fiscal 1995 versus Fiscal 1994.  Total  revenues for fiscal 1995 were up 6.5% to
$359.0 million from $336.9 million in fiscal 1994. Revenue growth in fiscal 1995
as compared to fiscal 1994, by NCS business segment, was as follows:

     Data Collection Services and Systems -
        Education                                     + 6.3% 
        Business, Government, Health Care and other   + 4.8% 
        Overall                                       + 5.6%

     Financial Systems                                +11.6%

Data  Collection   Services  and  Systems   benefited  from  higher  volumes  of
educational assessments and student financial aid services at the Company's Iowa
City  service   center.   Higher   software   licensing   revenues  from  school
administrative  software  were also a  significant  factor  in the  year-to-year
increase.  Higher services revenues,  notwithstanding lower hardware maintenance
revenues,  as well as improved  hardware and forms sales  generated  the revenue
growth for  Business,  Government  and  Health  Care.  Substantially  all of the
revenue  growth  in  Financial  Systems  was  due  to  the  acquisition  of  its
International  Private Banking subsidiary in the latter part of fiscal 1994. See
Note 3 of Notes to Consolidated Financial Statements for further discussion.  By
revenue category,  net sales were up 8.8% in fiscal 1995 over fiscal 1994 due to
the higher assessment, software licensing and services revenues mentioned above,
as well  as  increased  proprietary  hardware  sales.  Maintenance  and  support
revenues were down 2.8% due to lower third-party hardware maintenance  revenues,
partially offset by higher software support revenues.

Fiscal 1994 versus Fiscal 1993.  Total revenues for fiscal 1994 were up 10.3% to
$336.9 million from $305.5 million in fiscal 1993. Revenue growth in fiscal 1994
as compared to fiscal 1993, by NCS business segment, was as follows:

     Data Collection Services and Systems -
        Education                                     +19.5%
        Business, Government, Health Care and other   + 1.4%
        Overall                                       +10.5%

     Financial Systems                                + 9.3%

Significantly higher volumes of educational assessment and student financial aid
services at the Company's Iowa City service center were the principal factors in
the growth in Data Collection  revenues in education.  Approximately half of the
revenue  growth in  Financial  Systems was due to the  acquisition  in the third
quarter of fiscal 1994. See Note 3 of Notes to Consolidated Financial Statements
for further discussion.

By revenue category, net sales were up 15.0% in fiscal 1994 over fiscal 1993 due
to the higher Data  Collection  revenues in education and student  financial aid
services  mentioned  above,  among  other  increases.  Maintenance  and  support
revenues were down 5.9% due to lower third-party hardware maintenance  revenues,
offset  somewhat by increases in proprietary  maintenance  services and software
support.

COST OF REVENUES AND GROSS PROFITS

Fiscal 1995 versus Fiscal 1994. The Company's overall gross profit percentage of
38.1% for fiscal 1995 was slightly  improved  over the prior year  percentage of
38.0%.  The  gross  profit  on  net  sales  declined  by 0.8  percentage  points
year-to-year principally due to lower relative margins on assessment revenues at
the Company's  Iowa City service  center.  This decline was partially  offset by
higher margins on domestic  non-educational Data Collection Services and Systems
revenues.  Maintenance and support margins improved by 3.4 percentage  points in
fiscal 1995 over the prior year, totally  offsetting the aforementioned  decline
in margins on net sales. The year-to-year improvement came from software support
margins.

Fiscal 1994 versus  Fiscal 1993.  In fiscal 1994,  the  Company's  overall gross
profit declined to 38.0% of total revenues from 38.9% in fiscal 1993. By revenue
category,  the gross profit on net sales  declined by 2.7  percentage  points in
fiscal 1994 from the prior year, due in large measure to lower relative  margins
on certain of the incremental student financial aid project revenues at the Iowa
City service center. This was offset by improved gross profit on maintenance and
support  revenues,  which increased by 3.6 percentage points in fiscal 1994, due
principally  to higher  margins on hardware  maintenance  services  and improved
software support margins, owing largely to the discontinuance of Ultrust.

OPERATING EXPENSES

Fiscal 1995 versus Fiscal 1994.  Sales and marketing  expenses  increased by $.6
million in fiscal 1995 over fiscal 1994. As a percentage of revenues,  sales and
marketing  expenses  declined  by 0.6  percentage  points,  to  12.5%  of  total
revenues.  This decline is a result of the  continuing  Company-wide  efforts to
manage these costs and expenses.

Research  and  development  expenses  increased  $.5 million in fiscal 1995 over
fiscal 1994. This increase relates  principally to enhancements to the Company's
scanning and imaging technology and related software.

General and administrative  expenses increased by $2.4 million or 6.6% in fiscal
1995 from the prior year.  As a percent of  revenues,  these  expenses  remained
constant  year-to-year.  The increase reflects  additional spending of over $1.0
million to introduce and install enhanced product and project management methods
and tools.

Fiscal 1994 versus  Fiscal 1993. In fiscal 1994,  sales and  marketing  expenses
decreased $4.0 million from the prior fiscal year. This,  coupled with increased
revenues,  decreased  these  expenses as a percentage  of total  revenues by 2.6
percentage points.  This improvement was due to a concerted  Company-wide effort
to reduce these  expenses and make sales and marketing  efforts more  productive
than in fiscal 1993.

Research and development expenses increased $4.1 million or 43.3% in fiscal 1994
over fiscal 1993 due directly to new  software  product  initiatives  across the
Company,  particularly  in  Financial  Systems and Data  Collection  relating to
education.

General and  administrative  expenses declined by $2.9 million or 7.4% in fiscal
1994 from the prior fiscal year.  This  decrease  year-to-year  is due to direct
efforts to reduce these expenses.

INTEREST EXPENSE

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.

Interest  expense  increased $1.3 million in fiscal 1994 over fiscal 1993.  This
was due to  higher  average  borrowing  levels in fiscal  1994,  as debt  levels
increased significantly in the latter part of fiscal 1993 and modestly in fiscal
1994.  Interest  rates also  increased  in fiscal 1994 from the prior year.  See
Capital  Resources and Liquidity  below for further  discussion of cash flow and
debt.

OTHER INCOME AND EXPENSE

Other income and expense for 1995 and 1994 included no large or unusual items.
Other income in fiscal 1993 includes a $1.6 million gain from the sale of assets
of the Company's  Catalog Card Division.  This division's net assets and results
of operations were not material to NCS.

INCOME TAXES

The effective  income tax rate for fiscal 1995 was 39.9%,  which was higher than
the  statutory  rate as a result of losses from foreign  subsidiaries  which the
Company is unable to recognize as 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. See Note 6 of the Notes to Consolidated Financial Statements.

The  effective  income tax  benefit  rate for fiscal  1993 was 12.2%,  which was
significantly lower than the statutory rate and Company's  historical  effective
rate. The rate impact of permanent book/tax differences was magnified due to the
low absolute dollar amount of the pre-tax loss.

CAPITAL RESOURCES AND LIQUIDITY

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.

During fiscal 1994, the Company generated $42.2 million of cash from operations.
The special charges incurred in fiscal 1994 had, after considering tax benefits,
a slightly  positive impact on cash from operations.  The Company invested $28.3
million in property,  plant and  equipment in fiscal 1994,  which was  unusually
high due to the addition of new buildings in Mesa,  Arizona and Iowa City, Iowa.
Other  investing  activities  consisted  of $6.9  million  of  software  capital
additions,  and $3.2  million  of  investments  in two minor  acquisitions.  The
activities  above,  and all  other  cash  needs,  were  financed  with cash from
operations and $4.1 million of additional borrowings.

The Company had long-term debt balances,  including current  maturities of $28.5
million,  $50.5 million,  and $47.4 million at January 31, 1996,  1995, and 1994
respectively.  The items  causing the  changes in debt  balances  are  described
above.  At January 31, 1996, the Company's debt to total capital ratio was 18.2%
compared  to 30.9% a year  earlier  and  32.1% 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.

Looking toward fiscal 1996, the Company maintains a $40 million revolving credit
facility,  all of which was unused at January 31, 1996. The Company expects,  in
fiscal 1996, to use its cash flows to fund current operating  activities as well
as internal growth in its businesses and possible acquisitions. In 1996, capital
expenditures  and  software   development  are  expected  to  remain  relatively
constant.  The Company  considers the $40 million credit facility,  cash on hand
and funds from operations to be adequate to meet foreseeable cash requirements.

<PAGE>

<TABLE>
<CAPTION>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
                                                               JANUARY 31,
                                                         --------------------
                                                           1996        1995
                                                         --------    --------

<S>                                                      <C>         <C>

ASSETS
Current Assets
  Cash and cash equivalents                              $  5,174    $  1,195
  Receivables                                              81,241      79,149
  Inventories                                              18,740      20,455
  Prepaid expenses and other                                9,666       9,925
                                                         --------    --------
    Total Current Assets                                  114,821     110,724
                                                         --------    --------
Property, Plant and Equipment
  Land, buildings and improvements                         50,044      48,202
  Machinery and equipment                                 103,111     101,336
  Rotable service parts                                     6,793       9,256
  Equipment held for lease                                  7,086       7,583
  Accumulated depreciation                                (87,836)    (83,648)
                                                         --------    --------
                                                           79,198      82,729
                                                         --------    --------
Other Assets, net
  Acquired and internally developed software products      23,222      27,234
  Non-current receivables and other assets                 15,593      17,027
  Goodwill                                                  2,426       3,043
                                                         --------    --------
                                                           41,241      47,304
                                                         --------    --------
     Total Assets                                        $235,260    $240,757
                                                         ========    ========

</TABLE>

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLERS' EQUITY

<S>                                                      <C>         <C>

Current Liabilities
  Current maturities of long-term debt                   $  4,005    $  5,212
  Accounts payable                                         19,077      20,655
  Accrued expenses                                         27,997      29,495
  Deferred income                                          18,521      18,645
  Income taxes                                              4,458       1,103
                                                         --------    --------
    Total Current Liabilities                              74,058      75,110
                                                         --------    --------
Deferred Income Taxes                                       8,469       7,211

Long-Term Debt - less current maturities                   24,535      45,313

Commitments and Contingencies                                   -           -

Stockholders' Equity
  Preferred stock                                               -           -
  Common stock - issued and outstanding -
    15,365 and 15,310 shares, respectively                    461         459
  Paid-in capital                                           3,427       3,795
  Retained earnings                                       130,007     114,546
  Deferred compensation                                    (5,697)     (5,677)
                                                         --------    --------
    Total Stockholders' Equity                            128,198     113,123
                                                         --------    --------
    Total Liabilities and Stockholders' Equity           $235,260    $240,757
                                                         ========    ========

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                            YEAR ENDED JANUARY 31,
                                                       ------------------------------
                                                         1996       1995       1994
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>

Revenues
  Net sales                                            $296,136   $272,305   $236,737
  Maintenance and support                                62,840     64,638     68,716
                                                       --------   --------   --------
    Total revenues                                      358,976    336,943    305,453

Cost of Revenues
  Cost of sales                                         180,392    163,744    135,943
  Cost of maintenance and support                        41,868     45,262     50,589
                                                       --------   --------   --------
    Gross profit                                        136,716    127,937    118,921

Operating Expenses
  Sales and marketing                                    44,773     44,138     48,104
  Research and development                               13,938     13,422      9,364
  General and administrative                             38,268     35,892     38,754
  Special charges                                             -     11,339     25,000
                                                       --------   --------   --------
Income (Loss) From Operations                            39,737     23,146     (2,301)
  Interest expense                                        3,311      3,465      2,200
  Other (income) expense                                   (583)       533     (1,642)
                                                       --------   --------   --------
Income (Loss) Before Income Tax Provision (Benefit)      37,009     19,148     (2,859)
  Income tax provision (benefit)                         14,750      5,750       (350)
                                                       --------   --------   --------
Net Income (Loss)                                      $ 22,259   $ 13,398   $ (2,509)
                                                       ========   ========   ========
Net Income (Loss) Per Share                            $   1.42   $   0.88   $  (0.16)

Average Shares Outstanding                               15,685     15,225     15,535

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

Balance January 31, 1993                   15,899    $477   $13,390   $115,716     $ (8,266)    $121,317
  Shares issued for employee stock
    purchase and option plans                 135       4     1,741          -            -        1,745
  Repurchase of common stock               (1,053)    (32)  (15,317)      (566)           -      (15,915)
  Restricted stock awards                       2       -       186          -          (33)         153
  ESOP debt payment                             -       -         -          -        1,000        1,000
  Restricted stock compensation accrual         -       -         -          -          226          226
  Net loss                                      -       -         -     (2,509)           -       (2,509)
  Cash dividends paid - $.36 per share          -       -         -     (5,581)           -       (5,581)
  Foreign currency translation adjustment       -       -         -       (289)           -         (289)
                                           ------  ------  --------   ---------    ---------    ---------
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                     (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
                                           ======   =====    ======   =========    =========    =========
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>
<TABLE>
<CAPTION>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
                                                            YEAR ENDED JANUARY 31,
                                                        ------------------------------
                                                          1996       1995       1994
                                                        --------   --------   --------
<S>                                                     <C>        <C>        <C>

Operating Activities
  Net income (loss)                                     $ 22,259   $ 13,398   $ (2,509)
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation                                        15,643     15,559     16,289
      Amortization                                        11,791      8,412      8,388
      Deferred income taxes and other                      3,747       (400)    (2,434)
      Non-cash special charges                                 -     10,375     17,805
      Changes in operating assets and liabilities
        (net of acquired amounts):
           Accounts receivable                            (2,133)    (3,392)   (12,346)
           Inventory and other current assets                542     (4,285)    (3,765)
           Accounts payable and accrued expenses             272      3,183      3,879
           Deferred income                                  (190)      (613)       652
                                                         -------    -------    -------
       Net Cash Provided By Operating Activities          51,931     42,237     25,959
                                                         -------    -------    -------
Investing Activities
  Divestitures (acquisitions), net                             -     (3,216)    (1,198)
  Purchases of property, plant and equipment             (14,091)   (29,185)   (23,852)
  Capitalized software products                           (4,826)    (6,928)   (11,474)
  Other - net                                               (535)    (3,245)    (1,728)
                                                         -------    -------    -------
       Net Cash Used In Investing Activities             (19,452)   (42,574)   (38,252)

Financing Activities
  Net increase (decrease) in revolving credit borrowing  (13,065)     1,100     18,500
  Net increase (decrease) in other borrowings             (7,920)     3,024      4,501
  Issuance (repurchase) of common stock, net              (1,945)     1,137    (14,170)
  Dividends paid                                          (5,570)    (5,453)    (5,581)
                                                         -------    -------    -------
       Net Cash Provided By
         (Used In) Financing Activities                  (28,500)      (192)     3,250
                                                         -------    -------    -------

Increase (Decrease) In Cash and Cash Equivalents           3,979       (529)    (9,043)

Cash and Cash Equivalents  - Beginning of Year             1,195      1,724     10,767
                                                         -------    -------    -------
Cash and Cash Equivalents - End of Year                  $ 5,174    $ 1,195    $ 1,724
                                                         =======    =======    =======
</TABLE>
See Notes to Consolidated Financial Statements.


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

NOTE 1 - ACCOUNTING POLICIES

The fiscal years referenced herein are as follows:

         Fiscal Year           Year Ended
             1995      -    January 31, 1996
             1994      -    January 31, 1995
             1993      -    January 31, 1994

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

USE OF ESTIMATES:  The consolidated  financial  statements have been prepared in
accordance  with the generally  accepted  accounting  principles  which requires
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
carried at cost which approximates fair market value.

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:

                                             1996       1995
----------------------------------------------------------------
Finished Goods                             $ 6,416    $ 6,408
Scoring services and work in process         8,694      8,974
Raw materials and purchased parts            3,630      5,073
----------------------------------------------------------------
                                           $18,740    $20,455
================================================================

PROPERTY,  PLANT AND EQUIPMENT:  Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the assets 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. Depreciation is
computed using the  straight-line  method based on the assets'  estimated useful
lives ranging from two to forty years.

ROTABLE SERVICE PARTS: Parts continually repaired and reused are carried at cost
and  depreciated  over their  estimated  useful lives ranging from three to five
years. Such amounts are reflected as a separate category of property,  plant and
equipment.   

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 years.  Internally  developed  software  products  represent costs
capitalized in accordance with Statement of Financial  Accounting  Standards 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 two to five years.  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.  An employee benefits software product and the
Ultrust  software  product  were  discontinued  in fiscal 1994 and fiscal  1993,
respectively. Refer to Note 2 for further discussion.
<PAGE>

A summary of software activity is as follows:

<TABLE>
<CAPTION>
                                        Internally   Accumulated
                             Acquired    Developed   Amortization   Total
---------------------------------------------------------------------------

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

Balance, January 31, 1993     $16,684     $29,065     $(15,583)    $30,166
Additions                       1,165      11,474            -      12,639
Product discontinuation        (4,522)    (18,495)       5,212     (17,805)
Dispositions                        -      (1,558)       1,057        (501)
Amortization                        -           -       (4,407)     (4,407)
----------------------------------------------------------------------------
Balance, January 31, 1994      13,327      20,486      (13,721)     20,092
Additions                       7,868       6,928            -      14,796
Product discontinuation             -      (2,983)          25      (2,958)
Amortization                        -           -       (4,696)     (4,696)
----------------------------------------------------------------------------
Balance, January 31, 1995      21,195      24,431      (18,392)     27,234
Additions                           -       4,826            -       4,826
Dispositions                     (532)       (213)         459        (286)
Amortization                        -           -       (8,552)     (8,552)
----------------------------------------------------------------------------
Balance, January 31, 1996     $20,663     $29,044     $(26,485)    $23,222
============================================================================
</TABLE>

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 $624 in fiscal 1995, $1,179 in fiscal 1994
and $1,146 in fiscal 1993. Accumulated  amortization was $3,109 and $2,493 as of
January 31, 1996 and 1995, respectively.


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

                               1996      1995
------------------------------------------------
Employee compensation        $13,811   $12,960
Taxes other than income        3,587     3,410
Royalties                      2,176     2,241
Scoring                        1,477     2,169
Special charges                    -       679
Other                          6,946     8,036
------------------------------------------------
                             $27,997   $29,495
================================================

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.  Hardware  maintenance and software
support  revenues are recognized  ratably over the contractual  period.  Revenue
from other services is recognized when such service is performed.

OTHER (INCOME)  EXPENSE:  Other (income)  expense for the year ended January 31,
1994 includes a $1,556 gain on the sale of the assets of the  Company's  Catalog
Card  Division to an entity  controlled  by the  Company's  then Chairman of the
Board. The sale was for cash and notes totaling $2,350,  including interest. The
disinterested  directors  of the Company  determined  that the terms of the sale
were fair and reasonable to the Company.  Notes receivable of $1,199 and $1,454,
net, from the acquiring  entity are carried in  non-current  receivables  on the
accompanying   consolidated  balance  sheets  at  January  31,  1996  and  1995,
respectively.

PER SHARE DATA:  Net income  (loss) 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 Statement of Financial Accounting Standards (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  will be subject to SFAS No. 121 in the first  quarter of 1996 and,
based on current estimates and assumptions, believes the effect of adoption will
not be material.  

STOCK-BASED  COMPENSATION:  In  October,  1995,  the FASB  issued  SFAS No. 123,
Accounting for  Stock-Based  Compensation.  The Company  currently  accounts for
stock  options  and  awards to  employees  under the  provisions  of  Accounting
Principles  Board  Opinion  No. 25. The Company  has not  determined  whether to
continue  to account  for stock  option  under the  current  method or adopt the
provisions of SFAS No. 123. The impact of adopting  this new  standard,  at this
point, has not been determined.  All transactions entered into during the fiscal
years ended January 31, 1996 and 1997 will require  footnote  disclosure in 1997
as if the new method had been adopted.

NOTE 2 - SPECIAL CHARGES

In the fourth  quarter of fiscal  1994,  the Company  recorded an $11.3  million
pre-tax special charge  consisting of three  components:  the  restructuring and
statutory reorganization of the Company's German operations, the discontinuation
of an employee  benefits  software  development  project,  and the write-down of
certain unconsolidated investments in anticipation of disposition.

The German  restructuring and reorganization  amounted to a $3.7 million pre-tax
charge to liquidate two of the Company's three operating subsidiaries in Germany
and  consolidate  all  remaining   operations,   principally   distribution  and
maintenance,  into one remaining subsidiary.  The pre-tax charge was principally
to write down goodwill and other assets ($2.9 million) to liquidation values and
the balance of this charge was to accrue  exit costs for leased  facilities  and
other obligations.  There were,  however,  significant tax benefits triggered by
these actions,  so that the net after-tax effect of this  restructuring was only
$.5 million. These actions are complete and the liquidation will become official
upon the expiration of the German statutory notice periods.

The  discontinuation of the employee benefit software product resulted in a $3.2
million  pre-tax  charge.  The  charge  was  principally  to write off  internal
software  development  costs and acquired  third-party  software  licenses.  The
after-tax effect of this action was approximately $2.0 million.

The balance of the  pre-tax  special  charge  ($4.4  million)  was to write down
investments in four companies in  anticipation  of values which will be realized
as the Company proceeds with an orderly  disposition of these  investments.  The
after-tax effect of the write-down of these investments was $2.7 million. One of
these  investments  was disposed of during  fiscal  1995,  and a second is under
contract for disposition. The Company continues to hold, for sale, the remaining
two investments whose net carrying value is insignificant.

The special  charges  totaled $11.3 million pre-tax and $5.2 million or 34 cents
per  share  on  an  after-tax  basis.  These  actions  represent  largely  asset
write-downs with related tax benefits and therefore, actually generated cash for
the Company,  before considering  disposition proceeds. 

In the fourth quarter of fiscal 1993, the Company recorded a $25 million pre-tax
special charge. This amount consisted of a $22.8 million charge to terminate the
Ultrust product and related operations,  including a non-cash write-off of $17.8
million of  software  investment,  $2.7  million of  severance  costs,  and $2.3
million of facility exit costs, customer accommodations and other items.

The balance of the charge was for the closing of a software development facility
in Salt Lake City and  consolidation of those functions into the Company's Mesa,
Arizona  facility.  Substantially  all of this $2.2  million  charge  related to
severance and other employee-related costs.

This charge reduced fiscal 1993 after-tax earnings by $15.5 million or $1.00 per
share.  The cash outlay  required by this charge was  essentially  completed  in
1994.

NOTE 3 - SIGNIFICANT TRANSACTIONS

During fiscal 1994, the Company completed two minor acquisitions. In July, 1994,
the Company completed the acquisition of Abacus Data Group, Inc., a developer of
Windows-based  instructional  management  software for the education market. The
purchase  price was  approximately  $3.8  million in a  combination  of cash and
common  stock  of the  Company,  plus  contingent  earn-out  payments,  and  was
allocated principally to software products and goodwill.  In October,  1994, the
Company  completed the acquisition of an international  private banking product,
DECBank  APSYS,  along with certain  related  business  assets and operations in
Geneva,  Switzerland.  The purchase price was approximately $2.9 million in cash
plus  assumption  of certain  liabilities,  which was allocated  principally  to
software  products.  The operating  results of these acquired  entities were not
material to NCS.

The Company  holds an  investment in  Dimensional  Medicine Inc.  (DMI) which is
comprised of 27.5 million  shares of DMI common stock  (representing  85% of the
outstanding common shares) and a long-term note receivable.  The Company has not
consolidated the financial results of DMI as it has been the Company's intention
to divest of the DMI shares. The Company  anticipates closing on the sale of DMI
in the first half of 1996.  DMI's  financial  position and results of operations
are not material to the Company.

Fees charged to DMI for  installation  and servicing of DMI systems were $206 in
fiscal  1995,  $518 in fiscal 1994,  and $999 in fiscal  1993.  Rates and prices
charged  for these  services  approximate  those  which  would  prevail  between
unrelated  parties.  The balance of the long-term  note,  $602 as of January 31,
1996 and $865 as of January 31, 1995, is reflected in non-current receivables in
the accompanying consolidated balance sheets.
<PAGE>
NOTE 4 - LEASES

The Company leases office facilities under noncancelable  operating leases which
expire in various years through 2001.  Rental  expense for all operating  leases
was $10,138 in fiscal 1995, $11,026 in fiscal 1994, and $11,242 in fiscal 1993 .
Future  minimum  rental  expense  as of  January  31,  1996,  for  noncancelable
operating  leases  with  initial  or  remaining  terms in  excess of one year is
$25,150 and is payable as follows:  fiscal 1996 - $6,785;  fiscal 1997 - $5,799;
fiscal  1998 - $4,804;  fiscal  1999 - $3,180;  fiscal  2000 - $2,368 and $2,214
beyond.

NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

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

                                1996       1995
--------------------------------------------------
Revolving credit borrowing    $     -    $19,600
Secured notes                  15,000     15,000
Unsecured note                  6,535      6,173
ESOP borrowings                 4,000      5,000
Other borrowings,               3,005      4,212
  principally foreign
--------------------------------------------------
                               28,540     50,525
Less current maturities        (4,005)    (5,212)
--------------------------------------------------
Long-term debt                $24,535    $45,313
==================================================

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, 1996, 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:  In July,  1990 the Company issued $15,000 of 9.88% Secured Notes
due in July,  1997.  Interest  is paid  monthly  during the term.  The notes are
secured by certain  Company-owned  real  estate.  The credit  facility  contains
covenants with which the Company is in compliance.

Unsecured  Note:  This unsecured term note is due in five 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 1996.  The balance of the loan will be
refinanced,  prior to May 1, 1996,  for an  additional  three year period,  with
annual payments of $1,000.  Interest is payable at rates which  approximate 3.5%
under the prime rate.

Scheduled  Maturities:   The  aggregate  principal  amounts  of  long-term  debt
scheduled  for  repayment in each of the five fiscal years 1996 through 2000 are
$4,005, $17,307, $2,307, $2,307, and $1,307, respectively.  In each fiscal year,
interest paid approximates interest expense plus capitalized interest of $175 in
1994 and $338 in 1993.

NOTE 6 - INCOME TAXES
The components of the provision for income taxes are as follows:

                                Current
                        -----------------------
Year ended January 31,  Federal  State  Foreign  Deferred  Total
-----------------------------------------------------------------
1996                   $12,787  $1,789  $  70   $   104  $14,750
1995                     6,175     691    384    (1,500)   5,750
1994                     1,566     398     40    (2,354)    (350)
-----------------------------------------------------------------
<PAGE>
Deferred  income taxes reflect the net effect 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:

                                          1996      1995
---------------------------------------------------------
Deferred tax assets:
  Foreign operating loss carryforwards   $2,050   $  831
  Accrued vacation pay                    1,648    1,572
  Rotable service parts amortization      1,510    1,612
  Reserves for uncollectibles             1,284    3,223
  Intangible amortization                 1,219    1,047
  Capital loss carryforward                 783       71
  Special charges                           497    1,395
  Other                                     705      806
  Valuation allowance                    (1,910)    (831)
----------------------------------------------------------
  Total deferred tax assets               7,786    9,726
----------------------------------------------------------
Deferred tax liabilities:
  Net capitalized software                7,199    7,183
  Accelerated depreciation                5,823    5,847
  Product cost amortization               1,265      842
  Purchased software amortization         1,088    2,016
  Installment sales                         830      894
  Other                                      50      155
----------------------------------------------------------
  Total deferred tax liabilities         16,255   16,937
----------------------------------------------------------
  Net deferred tax liabilities          $ 8,469  $ 7,211
==========================================================

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

                                      YEAR ENDED JANUARY 31,
                                    --------------------------
                                     1996      1995      1994
                                    ------    ------    ------
Statutory rate                       35.0%     35.0%    (35.0)%
State income taxes net of
  federal benefit                     3.2       2.3       9.2
Intangible amortization               0.7       3.0      12.9
Foreign sales corporation            (0.1)     (0.6)     (4.7)
Research and development credits     (0.3)     (2.5)    (24.2)
Affordable housing credit            (0.7)     (1.4)        -
Foreign operating losses              2.3       0.8      27.1
Foreign investment loss                 -     (10.2)        -
Federal rate adjustment                 -         -       9.8
Other, net                           (0.2)      3.6      (7.3)
---------------------------------------------------------------
Effective rate                       39.9%     30.0%    (12.2)%
===============================================================

In the year ended  January  31,  1995,  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 2.

In the year ended January 31, 1994,  the Federal rate  adjustment  item above is
due to the SFAS No. 109  requirement  to increase  deferred tax  liabilities  to
reflect  current  statutory  income  tax  rates.  During  that  year,  after the
Company's  adoption of this standard,  the U.S. Federal statutory rate increased
from 34% to 35%. This adjustment reflects the resulting increase in the deferred
tax liability of $280.  The Company also incurred  foreign  operating  losses of
approximately  $2.7 million for the year ended January 31, 1994, which could not
currently be tax benefited,  and, therefore,  unfavorably impacted the effective
tax benefit rate. None of the remaining items in the year ended January 31, 1994
rate  reconciliation  above were  unusual in nature or amount in  comparison  to
prior years,  however,  the rate effects are  magnified  due to the low absolute
dollar amount of the pre-tax loss.

The Company made tax payments of $10,335, $5,549, and $7,312 in the fiscal years
ended January 31, 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.
<PAGE>
The Company has five Employee  Stock Option Plans (1982,  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.  Outstanding  options  under all plans  are  summarized  as
follows:
                                    SHARES    PRICE PER SHARE
---------------------------------------------------------------
Balance, January 31, 1994           909,350   $ 7.75 to $17.60
  Granted                           272,250    12.50 to  15.00
  Cancelled                        (300,200)    7.75 to  17.60
  Exercised                         (76,900)    7.75 to  15.00
---------------------------------------------------------------
Balance, January 31, 1995           804,500     7.75 to  16.75
---------------------------------------------------------------
  Granted                           222,750    16.75 to  21.25
  Cancelled                         (65,950)    8.25 to  20.13
  Exercised                        (159,350)    7.75 to  16.75
---------------------------------------------------------------
Balance, January 31, 1996           801,950   $12.00 to $21.25
===============================================================

Options for 163,650 and 188,050 shares became exercisable during fiscal 1995 and
1994, respectively,  and options for 228,250 and 235,750 shares were exercisable
at January 31, 1996 and 1995, respectively. Shares available for grant under the
Plans totaled 380,250 and 209,600 at January 31, 1996 and 1995, respectively.

At January 31, 1996,  non-qualified options not covered by the Plans to purchase
102,000  shares at $8.25 to $17.60 per share were  outstanding.  At January  31,
1995,  non-qualified options not covered by the Plans to purchase 107,000 shares
at $8.25 to $17.60 per share were outstanding.

At  January  31,  1996,  there  were  43,000   outstanding   options  under  the
Non-Employee  Director  Stock  Option  Plan with  exercise  prices from $8.25 to
$18.00 per share.  At January 31, 1995,  there were 36,000  outstanding  options
under the Plan with exercise prices from $8.25 to $16.00 per share.

The Company has an Employee  Stock  Purchase  Plan.  There were  135,510  shares
available for purchase under the Plan at January 31, 1996.

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 $1,900,  $1,700 and $1,674 in fiscal years 1995, 1994,
and 1993, 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  1995,  the  Company's
contribution  to the Plan  was  $1,000  plus  interest  of $63,  which is net of
dividends on unallocated shares of $171. The Company's  contribution to the Plan
was $1,000 in fiscal  1994 and fiscal  1993,  and  interest,  which was  totally
offset by dividends on unallocated  shares,  was $206 in fiscal 1994 and $168 in
fiscal 1993.  There were 316,800 and 396,000  unallocated  shares at January 31,
1996 and 1995, 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.  

LONG-TERM  INCENTIVE PLAN: During fiscal 1995, pursuant to a Long-Term Incentive
Plan approved by the stockholders in fiscal 1990,  92,400 shares of Common Stock
were issued to participants on a restricted basis, all of which were outstanding
at January  31,  1996.  The  shares  will be earned  by,  and  released  to, the
participants  two-thirds on January 31, 1998, and one-third on January 31, 1999,
upon the  achievement  of  specified  revenue  growth  and  cumulative  earnings
objectives  for the three fiscal years ended January 31, 1998, as defined in the
Plan.  The cost of the Plan is being  accrued  over the three  year  measurement
period.  The Plan also  contains  a cash  award  element,  for each of the three
fiscal years,  which is earned only upon attainment of specified annual earnings
objectives as defined in the Plan.

During fiscal 1990,  pursuant to the Plan,  171,400  shares of Common Stock were
issued to participants on a restricted basis. At January 31, 1996, 81,650 shares
remain outstanding due to forfeitures by original participants.  The shares will
be earned by, and  released  to, the  participants  at the end of 10 years,  but
release can be  accelerated  by  attainment  of 20% return on equity in a fiscal
year,  as defined in the Plan.  The cost of the Plan is being  accrued  over the
10-year  earning  period and will be  accelerated  if so  earned.  The Plan also
contains a cash award  element  which is earned only upon  attainment of the 20%
return on equity.

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.

NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting Standards No. 107, requires disclosue of fair
value  information  about  financial  instruments for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those  techniques are  significantly  affected by the estimates and  assumptions
used, including the discount rate and estimates of future cash flows.

At January 31, 1996 and 1995, the Company had non-current  investments and notes
receivable  (non-trade) with carrying values of $4,104 and $3,514  respectively,
which approximate fair value at those respective dates.

At January 31, 1996 and 1995, the Company's  $15,000,  9.88% Secured Notes had a
fair value of  approximately  $15,900 and  $15,500,  respectively,  based on the
Company's  current  borrowing rate for comparable  borrowing  arrangements.  The
Company's ESOP and other  long-term debt values  approximates  market due to the
variable interest rate features of the obligations.

NOTE 11 - BUSINESS SEGMENT DATA

The Company  operates two business  segments.  The predominance of the Company's
business is in the Data Collection  Services and Systems  segment.  This segment
markets  those  products  and  services  and  related  application  software  to
education,   business,  government  and  health  care  markets  through  various
operating  units. The Financial  Systems segment  designs,  develops and markets
asset management software,  primarily for bank trust departments.  This includes
systems for personal trust asset  management for individuals and corporate trust
applications  such as stock and bond  transfer  systems.  Below is a summary  of
certain financial information related to the two segments for fiscal years ended
January 31.

<PAGE>
<TABLE>
<CAPTION>
                                       DATA COLLECTION                   FINANCIAL
                                     SERVICES AND SYSTEMS                 SYSTEMS                      TOTAL
                                 ----------------------------  --------------------------  -----------------------------
                                    1996     1995      1994      1996      1995    1994      1996       1995       1994
                                 --------  --------  --------  --------  -------  -------  --------   --------   --------

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

Revenues                         $300,883  $284,875  $257,813  $ 58,093  $52,068  $47,640  $358,976   $336,943   $305,453
                                 ========  ========  ========  ========  =======  =======  ========   ========   ========
Operating income (loss)            42,017    37,316    25,447     9,648    2,820  (19,621)   51,665     40,136      5,826
Special charges included above          -     3,718     2,200         -    3,175   22,800         -      6,893     25,000
Corporate expense                                                                            11,928     16,990(1)   8,127
Interest and other expense, net                                                               2,728      3,998        558
                                                                                           --------   --------   --------
  Total income (loss) before
    income taxes                                                                             37,009     19,148     (2,859)
                                                                                           ========   ========   ========
Identifiable assets               191,571   201,312   177,664    33,093   31,382   25,340   224,664    232,694    203,004
Corporate assets                                                                             10,596      8,063     17,169
                                                                                           --------   --------   --------
  Total assets                                                                              235,260    240,757    220,173
                                                                                           ========   ========   ========
Depreciation and amortization      22,378    19,579    20,263     4,445    3,553    3,507    26,823     23,132     23,770
Corporate depreciation
  and amortization                                                                              611        839        907
                                                                                           --------   --------   --------
    Total depreciation and
      amortization                                                                           27,434     23,971     24,677
                                                                                           ========   ========   ========
Capital expenditures               12,288    31,317    24,425     6,233    4,374    9,391    18,521     35,691     33,816
Corporate capital expenditures                                                                  396        422      1,510
                                                                                           --------   --------   --------
    Total capital expenditures                                                             $ 18,917   $ 36,113   $ 35,326
                                                                                           ========   ========   ========

</TABLE>
(1)  Includes special charge of $4,446.





Capital  expenditures  include  property,  plant  and  equipment  additions  and
capitalized software. 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,  1996,  1995 and 1994 were  $148,313,  $143,187,  and
$110,107 of which  $42,664,  $41,455,  and $23,001,  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,
including those in the Financial  Systems  segment,  credit  investigations  are
performed to minimize credit losses, which historically have been insignificant.



<PAGE>



REPORT OF INDEPENDENT AUDITORS



Stockholders and Board of Directors
National Computer Systems, Inc.



We have  audited  the  accompanying  consolidated  balance  sheets  of  National
Computer Systems, Inc. and subsidiaries as of January 31, 1996 and 1995, and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for each of the three years in the period  ended  January  31,  1996.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of National Computer
Systems,   Inc.  and  subsidiaries  at  January  31,  1996  and  1995,  and  the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity  with  generally
accepted accounting principles.


                                   /s/ ERNST & YOUNG LLP


Minneapolis, Minnesota
March 3, 1996