EXHIBIT 13

FIVE YEAR FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                       January 29,                    January 31,
                                       -----------   -----------------------------------------------
Year ended                                2000         1999         1998       1997(2)        1996
                                       -----------   --------     --------     --------     --------

<S>                                     <C>          <C>         <C>          <C>          <C>
Financial Results
  Revenues                              $629,545     $505,372    $406,015     $331,159     $300,883
  Income from operations                  69,588       55,271      43,044       26,646       30,704
  Income from continuing operations
    before income taxes                   68,430       54,111      41,975       26,533       27,760
  Income from continuing operations       42,930       32,511      25,175       13,666       16,580
  Discontinued operations, net of taxes        -            -           -       (2,229)       5,679
  Gain on disposition, net of taxes            -            -           -       38,143            -
  Net income                              42,930       32,511      25,175       49,580       22,259
  Net income per share from continuing
    operations(1)
      Basic earnings per share              1.35         1.05        0.83         0.45         0.54
      Diluted earnings per share            1.30         1.00        0.80         0.44         0.53
  Dividends paid per share                  0.20         0.20        0.18         0.18         0.18

Financial Position
  Total assets                           449,880      362,471     315,414      273,920      219,724
  Long-term debt, including
    current maturities                     1,786        9,355      18,844       20,148       27,008
  Stockholders' equity                  $276,388     $226,866    $193,994     $170,034     $128,198

<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) Continuing  operations  include  an  acquisition  related  charge  of $7,895
    pre-tax, $6,992 after tax or $.23 per diluted share.
</FN>
</TABLE>


<PAGE>


QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>



Thirteen weeks ended             May 1     July 31    October 30   January 29
                               --------   --------    ----------   ----------
Year Ended January 29, 2000

  <S>                          <C>        <C>          <C>          <C>
  Revenues                     $125,817   $167,664     $162,920     $173,144
  Gross profit                   48,131     70,164       61,023       61,748
  Net income                      6,653     13,160        9,568       13,549
  Basic earnings per share     $   0.21   $   0.42     $   0.30     $   0.42
  Diluted earnings per share   $   0.20   $   0.40     $   0.29     $   0.41

</TABLE>


<TABLE>
<CAPTION>

Three months ended             April 30    July 31    October 31   January 31
                               --------   --------    ----------   ----------
Year Ended January 31, 1999

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

</TABLE>

<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 2,438 and 2,128 Common Shareholders of record as of January 29, 2000 and
January 31, 1999, respectively.


                                            Fiscal 1999
                              -----------------------------------------
                                       Thirteen Weeks Ended
                              -----------------------------------------
                               May 1    July 31  October 30  January 29
                              -------   -------  ----------  ----------
  High                        $39.13     $35.88    $40.38      $41.75
  Low                          23.00      27.13     31.63       32.50
  Close                        28.00      34.25     37.81       36.06
  Dividends per share         $ 0.05     $ 0.05    $ 0.05      $ 0.05


                                            Fiscal 1998
                              -----------------------------------------
                                         Three Months Ended
                              -----------------------------------------
                              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


<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
         -----------           ----------
             1999           January 29, 2000
             1998           January 31, 1999
             1997           January 31, 1998

Income and Expense Items as a Percentage of Revenues

Fiscal Year                            1999    1998    1997
------------------------------------------------------------
Revenues
  Services                             69.7%   64.3%   60.1%
  Product sales                        30.3    35.7    39.9
------------------------------------------------------------
    Total revenues                    100.0   100.0   100.0
Costs of Revenues (1)
  Cost of services                     71.7    74.3    75.2
  Cost of product sales                38.7    40.8    42.0
------------------------------------------------------------
    Total gross profit                 38.3    37.7    38.0
Operating Expenses
  Sales and marketing                  11.0    12.8    14.0
  Research and development              3.2     2.5     2.1
  General and administrative           13.0    11.5    11.3
------------------------------------------------------------
Income from operations                 11.1    10.9    10.6
Income before income taxes             10.9    10.7    10.3
Net income                              6.8%    6.4%    6.2%
============================================================
(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 1999 RESULTS.  Total revenues increased  24.6% in fiscal 1999 to $629.5
million compared to the prior year's $505.4 million. The Company's overall gross
margin on revenues  increased  26.6% to $50.7  million,  and as a percentage  of
revenues, gross margin increased to 38.3% in fiscal 1999 from 37.7% in the prior
year. Operating expenses increased to 27.2% of revenues in fiscal 1999, compared
to 26.7% of revenues in fiscal  1998.  Operating  margins  increased to 11.1% of
revenue in fiscal 1999 from 10.9% in fiscal 1998 and operating income in dollars
increased  25.9% to $69.6  million.  Income tax rates were  consistent  with the
prior year,  except for a one-time $2.0 million tax benefit described below. Net
income  in  fiscal  1999  totaled  $42.9  million  or $1.30  per  diluted  share
outstanding ($1.24 before the one-time tax benefit). This compares to the fiscal
1998 net income of $32.5 million and $1.00 per diluted share.

REVENUES

Fiscal 1999 versus Fiscal 1998.  Total revenues for fiscal 1999 were up 24.6% to
$629.5  million from $505.4  million in fiscal 1998.  Revenues  increased in all
five business segments.

By revenue category, fiscal 1999 compares to fiscal 1998 as follows:

                       Services        + 35.1%
                       Product sales   +  5.7%

The  Services  revenue  growth  came  from  several  sources,   especially  K-12
assessment testing, which grew by approximately $35 million over the prior year.
Student  loan  processing  and  other  government   outsourcing   services  grew
approximately  $29 million.  Electronic  testing,  commercial  outsourcing,  and
professional  services related to education software also contributed to year on
year growth in services  revenues.  Fiscal 1999  increases in product sales came
principally from education software licensing and image scanning systems.

By major market, for fiscal 1999,  revenues grew 25.2% from the education market
and 22.7%  from the large  scale data  management  (non-education)  market.  For
fiscal 1999 the education  market accounted for  approximately  three-fourths of
total NCS revenues.  Approximately 2% of the Company's overall revenue growth in
fiscal 1999 came from current year acquisitions.

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:

                       Services        + 33.1%
                       Product sales   + 11.5%

The  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 services  growth.  Fiscal 1998  increases in product  sales came
principally from education software licensing and related network hardware.

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 1998
acquisitions.

COST OF REVENUES AND GROSS PROFITS

Fiscal 1999 versus  Fiscal 1998.  The  Company's  overall  gross profit  dollars
increased  $50.7  million,  or 26.6%.  As a percentage of revenue,  gross margin
increased 0.6  percentage  points to 38.3% from 37.7%.  This  increase  reflects
increases in both revenue categories.  Gross margins on services improved in all
the Company's  business  segments in 1999,  but most notably in the NCS Services
segment which does government and commercial outsourcing services.

Product  margins  improved  principally  due to the mix of product moving toward
higher margin software offerings of the Education Software segment.

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 0.3 percentage  points to 37.7% from 38.0%.  This modest decline is due
entirely to revenue mix, as gross  margins on both revenue lines  improved.  The
rapid growth of services influenced the overall gross margin percentage decline.

OPERATING EXPENSES

Fiscal 1999 versus  Fiscal 1998.  Sales and  marketing  expense  increased  $4.7
million or 7.2% in fiscal 1999 over the prior  fiscal year.  As a percentage  of
revenues,  sales  and  marketing  declined  by  1.8  percentage  points,  due to
relatively lower selling costs on services revenues.

Research and development  costs  increased $8.0 million or 64%,  increasing as a
percent  revenue from 2.5% to 3.2% from 1998 to 1999. This reflects an increased
level of investment in Internet  delivered  products and services,  particularly
for the  Education  Software  segment,  as well as  other  product  and  service
offerings.

General and administrative  expenses for fiscal 1999 increased by $23.7 million,
and as a percentage  of revenue were up 1.7% over fiscal  1998.  These  expenses
increased  due  to  several   factors,   including   amortization  of  goodwill,
information  technology costs (including Year 2000),  expanded vacation benefits
and  accruals  established  for  variable  compensation  plans due to  favorable
operating results.

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 Year 2000), and accruals established for
variable compensation plans due to favorable operating results.

IMPACT OF YEAR 2000

In prior years,  the Company  discussed  the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company  completed its remediation and
testing of systems.  As a result of those planning and  implementation  efforts,
the  Company   experienced  no  significant   disruptions  in  mission  critical
information technology and non-information technology systems and believes those
systems  successfully  responded  to the Year  2000  date  change.  The  Company
incurred approximately $2.0 million of costs during 1999 and about $7 million in
total in connection with  remediating  its systems.  The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its  suppliers  and vendors  throughout  the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.

INTEREST EXPENSE

Interest  expense  decreased  slightly in fiscal 1999 from fiscal  1998,  and in
fiscal 1998 from fiscal 1997. These decreases are due to lower average borrowing
levels as debt has become  insignificant  in total.  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 the three fiscal years
presented.

INCOME TAXES

The effective income tax rate was 37.3%,  39.9%, and 40.0% for fiscal 1999, 1998
and 1997, respectively. See Note 5 of Notes to Consolidated Financial Statements
for a  reconciliation  to the statutory rate. The effective  income tax rate for
fiscal 1999 was lower than the statutory rate and prior years'  effective  rates
primarily due to the one-time tax benefit from the sale of a foreign subsidiary.
Without  this  one-time  benefit,  the 1999  effective  tax rate would have been
40.3%.

CAPITAL RESOURCES AND LIQUIDITY

The Company began fiscal 1999 with $16.3  million of cash and cash  equivalents.
During  fiscal  1999,  NCS  generated  $87.9  million  of  cash  from  operating
activities,  which was an unusually high level - even  considering the increased
volume  - due to  the  buildup  of a  number  of  large  accruals,  particularly
long-term compensation and other employee benefits,  which will actually be paid
in future years.  Cash was used for the  acquisition of NovaNET  Learning,  Inc.
($19.0  million),  and for investments in property,  plant, and equipment ($42.6
million),  including a significant  expansion of facilities in Austin, Texas and
several smaller testing centers around the U.S.  Financing  activities  included
the repayment of $2.3 million of borrowings.  The Company paid dividends of $6.4
million during fiscal 1999.

During fiscal 1998, the Company  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 for investments in
property,  plant,  and  equipment  ($27.1  million),   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.

The Company had long-term debt balances,  including current maturities,  of $1.8
million, $9.4 million and $18.8 million at January 29, 2000 and January 31, 1999
and 1998, respectively. At January 29, 2000, the Company's debt to total capital
ratio was 0.7% compared to 4.0% a year earlier and 8.9% 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 1998 and by the increased level of
operations during fiscal 1999 and 1998.

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 29, 2000.
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 2000,  the Company  maintains a $50.0  million  revolving
credit  facility,  all of which was  available at January 29, 2000.  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.

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 29,  2000,  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 29,  January 31,
(in thousands)                                             2000         1999
                                                       -----------  -----------
Assets

Current Assets
  Cash and cash equivalents                              $ 26,592     $ 16,310
  Receivables                                             151,870      128,751
  Inventories                                              33,619       21,791
  Prepaid expenses and other                                9,932        7,225
                                                         --------     --------
    Total Current Assets                                  222,013      174,077
                                                         --------     --------
Property, Plant and Equipment
  Land, buildings and improvements                         67,928       63,018
  Machinery and equipment                                 189,835      152,414
  Accumulated depreciation                               (125,654)    (109,416)
                                                         --------     --------
                                                          132,109      106,016
                                                         --------     --------
Intellectual Properties, net
  Software products                                         9,371       12,170
  Educational content and assessment instruments           23,306        8,835
                                                         --------     --------
                                                           32,677       21,005
                                                         --------     --------
Other Assets, net
  Goodwill                                                 50,263       52,840
  Other assets                                             12,818        8,533
                                                         --------     --------
                                                           63,081       61,373
                                                         --------     --------
     Total Assets                                        $449,880     $362,471
                                                         ========     ========

See Notes to Consolidated Financial Statements.


<PAGE>


NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



                                                      January 29,  January 31,
(in thousands)                                            2000         1999
                                                      -----------  -----------
Liabilities and Stockholders' Equity

Current Liabilities
  Current maturities of long-term debt                  $  1,270     $  3,758
  Accounts payable                                        38,546       35,809
  Accrued expenses                                        73,163       51,779
  Deferred income                                         51,785       32,209
  Income taxes                                             6,570        3,883
                                                        --------     --------
    Total Current Liabilities                            171,334      127,438
                                                        --------     --------

Long-Term Debt - less current maturities                     516        5,597

Deferred Income Taxes                                      1,642        2,570

Commitments and Contingencies                                  -            -

Stockholders' Equity
  Preferred stock                                              -            -
  Common stock - issued and outstanding -
    32,348 and 31,467 shares, respectively                   970          944
  Paid-in capital                                         22,596       10,760
  Retained earnings                                      257,195      220,625
  Accumulated other comprehensive income -
    Foreign currency translation adjustment               (2,969)      (3,880)
  Deferred compensation                                   (1,404)      (1,583)
                                                        --------     --------
    Total Stockholders' Equity                           276,388      226,866
                                                        --------     --------
    Total Liabilities and Stockholders' Equity          $449,880     $362,471
                                                        ========     ========

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)


                                                         1999       1998       1997
                                                       --------   --------   --------

Revenues
  <S>                                                  <C>        <C>        <C>
  Services                                             $438,655   $324,738   $244,038
  Product sales                                         190,890    180,634    161,977
                                                       --------   --------   --------
    Total Revenues                                      629,545    505,372    406,015

Costs of Revenues
  Cost of services                                      314,546    241,261    183,627
  Cost of product sales                                  73,933     73,696     67,950
                                                       --------   --------   --------
    Gross Profit                                        241,066    190,415    154,438

Operating Expenses
  Sales and marketing                                    69,456     64,797     56,675
  Research and development                               20,358     12,388      8,628
  General and administrative                             81,664     57,959     46,091
                                                       --------   --------   --------
Income from Operations                                   69,588     55,271     43,044
  Interest expense                                          725        936      1,353
  Other (income) expense, net                               433        224       (284)
                                                       --------   --------   --------
Income Before Income Taxes                               68,430     54,111     41,975
  Income taxes                                           25,500     21,600     16,800
                                                       --------   --------   --------
Net Income                                             $ 42,930   $ 32,511   $ 25,175
                                                       ========   ========   ========

Basic Earnings per share                               $   1.35   $   1.05   $    .83
                                                       ========   ========   ========

Diluted Earnings per share                             $   1.30   $   1.00   $    .80
                                                       ========   ========   ========



See Notes to Consolidated Financial Statements.
</TABLE>


<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, 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
  Shares issued for employee stock
    purchase and option plans                   463      13     5,760          -           -              -      5,773
  Restricted stock awards                        60       2     1,787          -           -         (1,789)         -
  Shares issued for convertible debenture       358      11     4,289          -           -              -      4,300
  ESOP debt payment                               -       -         -          -           -          1,000      1,000
  Restricted stock compensation accrual           -       -         -          -           -            968        968
  Cash dividends paid - $.20 per share            -       -         -     (6,360)          -              -     (6,360)

  Net income                                      -       -         -     42,930           -              -     42,930
  Foreign currency translation adjustment         -       -         -          -         911              -        911
                                                                                                              --------
  Subtotal - Comprehensive Income                 -       -         -          -           -              -     43,841
                                             -------------------------------------------------------------------------
Balance, January 29, 2000                    32,348   $ 970   $22,596   $257,195     $(2,969)       $(1,404)  $276,388
                                             ======   =====   =======   ========     =======        =======   ========
See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


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



Fiscal Year (in thousands)                                 1999       1998       1997
                                                         -------    -------    -------
Operating Activities
  <S>                                                    <C>        <C>        <C>
  Net income                                             $42,930    $32,511    $25,175
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation                                        24,996     20,755     16,825
      Amortization                                        10,172     12,049     13,291
      Deferred income taxes and other                       (349)    (2,237)      (661)
      Changes in operating assets and liabilities
         (net of acquired amounts):
         Accounts receivable                             (21,903)   (26,967)   (15,361)
         Inventory and other current assets              (14,289)    (6,249)     1,712
         Accounts payable and accrued expenses            30,540     26,341      8,087
         Deferred income                                  15,850      2,461        424
                                                         -------    -------    -------
       Net Cash Provided By Operating Activities          87,947     58,664     49,492
                                                         -------    -------    -------
Investing Activities
  Acquisitions, net of cash acquired                     (19,034)   (17,246)   (35,216)
  Purchases of property, plant and equipment             (42,618)   (27,145)   (25,174)
  Purchases of business systems                           (8,679)    (8,928)    (7,108)
  Other - net                                             (1,678)       719      1,148
                                                         -------    -------    -------
       Net Cash Used In Investing Activities             (72,009)   (52,600)   (66,350)
                                                         -------    -------    -------
Financing Activities
 (Decrease) Increase in other borrowings                  (2,269)    (6,413)      (676)
  Issuance (Repurchase) of common stock, net               2,973       (374)   (11,766)
  Dividends paid                                          (6,360)    (6,234)    (5,512)
                                                         -------    -------    -------

       Net Cash Used In Financing Activities              (5,656)   (13,021)   (17,954)
                                                         -------    -------    -------
Increase (Decrease) In Cash and Cash Equivalents          10,282     (6,957)   (34,812)
Cash and Cash Equivalents  - Beginning of Year            16,310     23,267     58,079
                                                         -------    -------    -------
Cash and Cash Equivalents - End of Year                  $26,592    $16,310    $23,267
                                                         =======    =======    =======

See Notes to Consolidated Financial Statements.
</TABLE>


<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
         -----------        ----------------
             1999      -    January 29, 2000
             1998      -    January 31, 1999
             1997      -    January 31, 1998

Effective  February 1, 1999 the Company adopted a 52/53 week  accounting  cycle,
with the fiscal year ending on the Saturday nearest to January 31. The impact of
this change on the Company's  quarterly and annual financial results in 1999 was
insignificant.

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 the
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 CASH 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 the fiscal year end are  summarized  as
follows:

                                         January 29,   January 31,
                                             2000         1999
-----------------------------------------------------------------
Finished goods                             $ 5,881      $ 5,096
Scoring services and work in process        23,157       14,442
Raw materials and purchased parts            4,581        2,253
-----------------------------------------------------------------
                                           $33,619      $21,791
=================================================================

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.

SOFTWARE  PRODUCTS:  Acquired software products held for sale 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, and are amortized on a straight line basis.

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 amortized internally
developed  products is  computed on a product by product  basis and ratably as a
percentage of estimated revenue,  subject to minimum straight-line  amortization
over the products' estimated useful lives, of five years or less. At January 29,
2000 all such capitalized amounts were fully amortized.

The Company  periodically  evaluates  its software  products for  impairment  by
comparison of the carrying value of the product against undiscounted cash flows.
Amortization  expense of software  products was $2,513 in 1999;  $3,483 in 1998;
and  $3,621 in 1997.  Accumulated  amortization  of all  software  products  was
$24,708 at January 29, 2000 and $24,277 at January 31, 1999.

EDUCATIONAL CONTENT AND 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  amortizable  lives of ten  years or less.  Amortizable  lives are
subject to  revision  and  balances  are  periodically  evaluated  for  possible
impairment,   based  upon  profitability  goals  and  undiscounted  cash  flows.
Amortization  expense of these products was $1,659 in 1999;  $1,482 in 1998; and
$960 in 1997. Accumulated amortization was $6,080 and $4,339 at January 29, 2000
and January 31, 1999, 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  $5,146,  $4,489,  and  $3,047  in  fiscal  1999,  1998,  and 1997,
respectively. Accumulated amortization was $16,687 and $11,480 as of January 29,
2000 and January 31, 1999, respectively.  The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against  anticipated
business performance based upon profitability goals and undiscounted cash flows.

ACCRUED  EXPENSES:  Major  components  of  accrued  expenses  consisted  of  the
following:
                             January 29,   January 31,
                                2000          1999
------------------------------------------------------
Employee compensation         $46,789        $32,766
Taxes other than income         4,275          4,473
Other                          22,099         14,540
------------------------------------------------------
                              $73,163        $51,779
======================================================

REVENUE RECOGNITION: Services revenues represent all types of services performed
by the  Company,  including  maintenance  and support  services.  Product  sales
include  the  sale  of all  tangible  products  and  the  licensing  of  various
intellectual properties, including software and test instruments.

The Company  adopted the  provisions  of  Statement of Position  (SOP) 97-2,  as
amended,  for software revenue recognition  effective February 1, 1998. Prior to
that  date,   the  Company's   software   revenue   recognition   policies  were
substantially  in compliance with that SOP, and therefore the effect of adoption
of the Statement was not material.  The Company  recognizes license revenue upon
shipment of a product to the customer if a signed contractual  agreement exists,
the fee is fixed and determinable and collection of the resulting receivables is
probable. For contracts with multiple elements, the Company allocates revenue to
each  component of the contract  based on objective  evidence of its fair value,
which is specific to the Company.

The Company  recognizes  revenue  related to hardware  maintenance  and software
support fees for ongoing  customer  support and product updates ratably over the
period of the maintenance  contract.  Payments for these fees are generally made
in advance and are non-refundable.  Revenues from professional  services such as
training,  implementation,  and  consulting  are  recognized as the services are
performed.  Up-front fees related to  subscription  type services are recognized
over the period of delivery.  Revenues  from test scoring and other  outsourcing
services are recognized upon completion of major contracted deliverables,  or as
units of service are delivered.

PER  SHARE  DATA:  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):

                                                      1999      1998      1997
                                                    -------   --------  -------
Earnings:
  Net Income
    Basic earnings per share                        $42,930   $32,511   $25,175

  Adjustments for dilutive securities:
    Interest expense on convertible debentures,
      net of tax                                        162       222       256
                                                    -------   -------   -------
Adjusted net income for diluted earnings per share  $43,092   $32,733   $25,431
                                                    =======   =======   =======

Weighted Average Shares:
  Basic average shares                               31,721    31,022    30,391

  Adjustments for dilutive securities:
    Employee stock options, net of tax proceeds         932       981       620
    Contingent stock awards, net of tax proceeds         32        81       270
    Convertible debentures                              369       505       583
                                                    -------   -------   -------
Diluted average shares                               33,054    32,589    31,864
                                                    -------   -------   -------

Basic earnings per share                            $  1.35   $  1.05   $  0.83
                                                    =======   =======   =======

Diluted earnings per share                          $  1.30   $  1.00   $  0.80
                                                    =======   =======   =======

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 6.

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 for the
Company's 2001 fiscal year. The Company does not anticipate that the adoption of
this  Statement  will have a significant  effect on its results of operations or
financial position.

NOTE 2 - ACQUISITIONS

On May 28,  1999 the Company  acquired  NovaNET  Learning,  Inc.  (NovaNET),  an
interactive,  on-line  curriculum  content  company.  The  transaction  has been
accounted for as a purchase,  and, accordingly,  NovaNET's operations subsequent
to the closing date are consolidated with the Company's.  The purchase price was
$19.0 million in cash and has been primarily  allocated to  educational  content
($16.3 million),  goodwill ($5.3 million) and a net deferred tax liability ($2.8
million), in accordance with SFAS 109, Accounting for Income Taxes.

In September 1998, the Company acquired all of the common and preferred stock of
American  Cybercasting  Corporation,  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,  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 fiscal 1997 acquisitions  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 1997:


Fiscal Year (unaudited)                 1997
---------------------------------------------
Total revenues                        $420,843

Income before income taxes              39,497

Net Income                              23,698

  Basic earnings per share             $  0.78

  Diluted earnings per share           $  0.75


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  1997,  or  of  future  results,  as  significant  changes  to  their
operations,  products  and cost and  expense  structures  have taken place since
acquisition.

NOTE 3 - LEASES

The Company leases office facilities under noncancelable  operating leases which
expire in various years through 2006.  Rental  expense for all operating  leases
was $14,349 in fiscal 1999,  $12,921 in fiscal 1998,  and $9,167 in fiscal 1997.
Future  minimum  rental  expense  as of  January  29,  2000,  for  noncancelable
operating  leases  with  initial  or  remaining  terms in  excess of one year is
$59,831 and is payable as follows: fiscal 2000 - $13,438; fiscal 2001 - $12,896;
fiscal  2002 - $10,687;  fiscal  2003 - $8,689;  fiscal 2004 - $7,527 and $6,594
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  29,  2000  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
29, 2000 the maximum  amount of the  residual  value  guarantee  relative to the
assets under lease is approximately $10,500.


NOTE 4 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Long-term debt at year end consisted of the following:

                              January 29,    January 31,
                                 2000           1999
--------------------------------------------------------
Revolving credit borrowing     $     -        $     -
Convertible debentures             400          4,700
ESOP borrowing                       -          1,000
Other borrowings                 1,386          3,655
--------------------------------------------------------
                                 1,786          9,355
Less current maturities         (1,270)        (3,758)
--------------------------------------------------------
Long-term debt                 $   516        $ 5,597
========================================================

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 an  acquired
company. These debentures have been due in installments,  carry an interest rate
of  approximately  6.1%,  and are  convertible  into Common  Stock at $12.00 per
share.

ESOP Borrowing:  The ESOP loan was secured by unallocated shares of Common Stock
and guaranteed by the Company and was fully paid in May 1999.

Scheduled  Maturities:   The  aggregate  principal  amounts  of  long-term  debt
scheduled  for  repayment  is  $1,270  and $516 in fiscal  years  2000 and 2001,
respectively. In each fiscal year, interest paid approximates interest expense.

NOTE 5 - INCOME TAXES

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

                               Current
                       -----------------------
Fiscal Year            Federal  State  Foreign  Deferred  Total
-----------------------------------------------------------------
1999                   $21,155  $3,700  $2,280  $(1,635) $25,500
1998                    18,495   3,003   1,682   (1,580)  21,600
1997                    14,540   2,806   1,300   (1,846)  16,800
-----------------------------------------------------------------

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 year end are as follows:


                                      January 29,   January 31,
                                          2000          1999
                                      -----------   -----------
Deferred tax assets:
  Reserves for uncollectibles           $ 4,905       $ 3,513
  Foreign operating loss carryforwards        -         3,659
  Acquired operating loss benefit         3,800             -
  Accrued vacation pay                    2,981         2,051
  Intangible amortization                 1,905         1,552
  Deferred expenses and other             2,855         4,394
  Valuation allowance                         -        (3,659)
---------------------------------------------------------------
  Total deferred tax assets              16,446        11,510
---------------------------------------------------------------
Deferred tax liabilities:
  Purchased intangible amortization       9,234         5,132
  Accelerated depreciation                4,788         5,070
  Net capitalized software                4,077         3,706
  Other                                     (11)          172
---------------------------------------------------------------
  Total deferred tax liabilities         18,088        14,080
---------------------------------------------------------------
  Net deferred tax liability             $1,642        $2,570
===============================================================

The deferred tax asset for the foreign  operating loss  carryforwards at January
31,  1999  and  the  related  valuation  allowance  were  eliminated  due to the
December,  1999 sale of the stock of the United Kingdom subsidiary that incurred
these  losses.  This stock sale  resulted in no  material  gain or loss for book
purposes;  however, since the Company's stock basis for federal and state income
tax purposes was  substantially  higher than for book  purposes,  the  Company's
income tax expense for 1999 was reduced approximately $2,000 as a result of this
transaction.

The acquired net operating loss benefits expire beginning January, 2004, through
January, 2019, with $2,632 expiring in 2017 or after.

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

                                             1999      1998      1997
                                            ------    ------    ------
Statutory rate                               35.0%     35.0%     35.0%
State income taxes, net of federal benefit    3.5       3.6       4.4
Intangible amortization                       0.8       0.5       1.0
Benefit from sale of foreign subsidiary      (3.0)        -         -
Other                                         1.0       0.8      (0.4)
----------------------------------------------------------------------
Effective rate                               37.3%     39.9%     40.0%
======================================================================

The  Company  made income tax  payments  of $23,822,  $19,623 and $18,991 in the
fiscal years 1999, 1998, and 1997, respectively.

The  earnings   associated   with  the  Company's   investment  in  its  foreign
subsidiaries 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.

NOTE 6 - 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 1999,  1998
and 1997:

                                           1999      1998      1997
                                         -------   -------   -------
      Net income - as reported           $42,930   $32,511   $25,175
      Net income - pro forma              39,010    30,041    23,988
      Earnings per share - as reported:
         Basic                           $  1.35   $  1.05   $   .83
         Diluted                            1.30      1.00       .80
      Earnings per share - pro forma:
         Basic                           $  1.23   $   .97   $   .79
         Diluted                            1.18       .93       .76

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:

                                           1999       1998      1997
                                         -------    -------    -------
      Expected dividend yield:
           5 year grants                    .28%       .26%      .58%
          10 year grants                    .16%         -         -
      Expected stock price volatility        35%        35%       30%
      Risk-free interest rate:
           5 year grants                   5.77%      5.16%     6.23%
          10 year grants                   5.86%         -         -
      Expected life of options         5-9 years    5 years   5 years

The weighted-average fair value of the options granted during fiscal years 1999,
1998 and 1997 were $18.00, $8.53 and $4.40, respectively.

The Company has five Employee  Stock Option Plans (1986,  1990,  1995,  1997 and
1999).  Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant. Options granted prior to May,
1999 are exercisable over a 63-month period.  Options granted from May, 1999 are
exercisable  over 10 years.  Shares  available for grant under the Plans totaled
1,249,640  and 278,780 and 669,700,  at the end of fiscal  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, 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
    Granted                           621,600        35.46
    Cancelled                         (77,773)       23.57
    Exercised                        (443,398)        8.56
                                    ---------
    Balance, January 29, 2000       2,373,743       $20.47
                                    =========

Options for 590,471 and 633,537 and 679,182  shares were  exercisable at January
29, 2000 and January 31, 1999 and 1998, with weighted average exercise prices of
$13.75, $9.76 and $8.07,  respectively.  Exercise prices for options outstanding
as of January 29, 2000 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>          <C>
$ 4.02 - 12.00      487,153     $10.06        1.8 years        310,761      $ 9.71
 12.25 - 18.75      739,300      13.36        3.1 years        168,480       13.82
 20.00 - 26.69      514,940      22.17        3.9 years         85,780       22.64
 32.56 - 38.75      632,350      35.40        8.6 years         25,450       33.02
                  ---------                                    -------
                  2,373,743     $20.47                         590,471      $13.75
                  =========                                    =======
</TABLE>

During  fiscal 1999,  1998 and 1997,  pursuant to the 1997  Long-Term  Incentive
Plan,  non-qualified  options to purchase 94,500 and 129,000 and 336,000 shares,
respectively,  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  29,  2000,  there were  559,500  options  shares
outstanding at a weighted average exercise price per share of $17.77.

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 referred to above.

The Company has an Employee  Stock  Purchase  Plan.  There were  299,880  shares
available for purchase under the Plan at January 29, 2000.

NOTE 7 - 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 $3,548,  $3,011, and $2,195 in fiscal years 1999, 1998
and 1997, 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  made  contributions  to the  ESOP  which  were  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
was allocated to participating employees. The loan was repaid in 1999. In fiscal
1999,  the Company's  contribution  to the Plan was $1,000 plus interest of $15,
which was  fully  offset by  dividends  on  unallocated  shares.  The  Company's
contribution  to the Plan was  $1,000  in  fiscal  1998 and  fiscal  1997,  plus
interest  of $80 and  $148,  respectively,  which  was  substantially  offset by
dividends on unallocated shares. There were no unallocated shares at January 29,
2000 and 158,400 unallocated shares at January 31, 1999.

NOTE 8 - CONTINGENCY

In 1997,  the Company was served with a summons and complaint in a lawsuit filed
against the  Company by a former  customer.  In March 2000 the  parties  reached
settlement on all issues.  The settlement had no material  adverse effect on the
Company's consolidated financial position or results of operations.

NOTE 9 - 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.

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  described
     in the Assessment and Testing,  NCS Services,  and Data Collection  Systems
     segments above, but sells to and serves customers outside the United States
     through subsidiaries in Argentina,  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
highly  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.

<PAGE>


The table below presents information by reportable segment.
<TABLE>
<CAPTION>

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

<S>                                <C>          <C>        <C>         <C>          <C>          <C>
Fiscal 1999
 Revenues                          $202,461     $147,109   $136,372    $89,940      $53,663      $629,545
  Income from operations              31,418       17,597     22,082     26,396        5,819       103,312
  Depreciation and amortization        8,824       10,968      4,243      3,276        2,951        30,262
  Assets                             121,281      124,125     62,965     42,894       36,246       387,511

Fiscal 1998
  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      3,176      4,190        2,649        28,600
  Assets                             106,996       88,857     47,934     41,950       28,924       314,661

Fiscal 1997
  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
  Assets                              94,731       75,337     40,559     41,087       28,497       280,211

</TABLE>



<PAGE>


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

<TABLE>
<CAPTION>

Fiscal Year                           1999        1998        1997
                                    --------    --------    --------

<S>                                 <C>         <C>         <C>
Total Consolidated Revenue:         $629,545    $505,372    $406,015
                                    ========    ========    ========
Income From Operations:
Total for reportable segments       $103,312    $ 75,308    $ 60,609
Unallocated amounts:
    Central G & A expenses            33,724      20,037      17,565
    Interest expense                     725         936       1,353
    Other (Income) expense               433         224        (284)
                                    --------    --------    --------
Income Before Income Taxes          $ 68,430    $ 54,111    $ 41,975
                                    ========    ========    ========
Depreciation and Amortization:
Total for reportable segments       $ 30,262    $ 28,600    $ 26,019
Corporate                              4,906       4,204       4,097
                                    --------    --------    --------
Total Depreciation and Amortization $ 35,168    $ 32,804    $ 30,116
                                    ========    ========    ========
Assets:
Total for reportable segments       $387,511    $314,661    $280,211
Corporate assets                      62,369      47,810      35,203
                                    --------    --------    --------
Total Assets                        $449,880    $362,471    $315,414
                                    ========    ========    ========
</TABLE>


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 1999,
1998, and 1997 were $326,845; $262,511; and $185,186; of which $95,220; $67,601;
and $63,005,  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.



<PAGE>


REPORT OF INDEPENDENT AUDITORS




We have  audited  the  accompanying  consolidated  balance  sheets  of  National
Computer  Systems,  Inc. and subsidiaries as of January 29, 2000 and January 31,
1999,   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 29, 2000. 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 auditing standards generally accepted
in the United States. 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 29, 2000 and January 31, 1999, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended January 29, 2000, in conformity  with accounting
principles generally accepted in the United States.


/s/Ernst & Young LLP

Minneapolis, Minnesota

March 6, 2000