<TABLE>
<CAPTION>



                                                                      EXHIBIT 13

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

                                                          YEAR ENDED JANUARY 31,
                                        -----------------------------------------------------------
                                          1998       1997(2)       1996        1995(3)      1994(4)

                                        --------    --------     --------     --------     --------
<S>                                     <C>         <C>          <C>          <C>          <C>
Financial Results

  Revenues                              $406,015    $331,159     $300,883     $284,874     $257,813
  Income from operations                  43,044      26,646       30,704       20,323       17,318
  Income from continuing operations
    before income taxes                   41,975      26,533       27,760       16,119       16,733
  Income from continuing operations       25,175      13,666       16,580       11,281        9,744
  Discontinued operations, net of taxes        -      (2,229)       5,679        2,117      (12,253)
  Gain on disposition, net of taxes            -      38,143            -            -            -
  Net income (loss)                       25,175      49,580       22,259       13,398       (2,509)
  Income per share from continuing
    operations(1)
      Basic earnings per share          $   0.83    $   0.45     $   0.54     $   0.38     $   0.32
      Diluted earnings per share        $   0.80    $   0.44     $   0.53     $   0.37     $   0.31
  Dividends paid per share              $   0.18    $   0.18     $   0.18     $   0.18     $   0.18

Financial Position
  Total assets                           315,414     273,920      219,724      209,375      194,833
  Long-term debt, including
    current maturities                    18,844      20,148       27,008       49,864       47,351
  Stockholders' equity                   193,994     170,034      128,198      113,123      100,147

<FN>

(1)  All  references  to share and per share  data  have been  adjusted  to give
     retroactive effect to the 2-for-1 stock split declared in March 1998.
(2)  Includes an acquisition related charge of $7,895 pre-tax,  $6,992 after tax
     or $.23 per diluted share.
(3)  Includes a special charge of $8,164 pre-tax,  $3,252  after-tax or $.11 per
     diluted share.
(4)  Includes a special charge of $2,200 pre-tax,  $1,364  after-tax or $.04 per
     diluted share.
</FN>

</TABLE>

<PAGE>


 STOCK EXCHANGE LISTING

Common  Stock of National  Computer  Systems,  Inc.  trades on the Nasdaq  Stock
Market(TM) under the symbol "NLCS"and is listed in the newspaper stock tables as
NtCptr or NtlCptrSys.

QUARTERLY MARKET DATA

NCS had  approximately  2,000  and  1,900  Common  Stockholders  of record as of
January 31, 1998 and 1997, respectively.

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



                                          Fiscal Year 1996
                              -----------------------------------------
                                         Three Months Ended
                              -----------------------------------------
Year Ended January 31, 1997   April 30  July 31  October 31  January 31
---------------------------   --------  -------  ----------  ----------
  High                        $11.81     $12.62    $11.62      $13.25
  Low                           9.00       9.62      9.69       10.00
  Close                        10.87      10.12     10.75       12.22
  Dividends per share          0.045      0.045     0.045       0.045


<PAGE>


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


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

Year Ended January 31, 1997
  Revenues                     $70,507     $80,864     $ 88,783     $ 90,905
  Gross profit                  26,738      31,288       28,645       32,087
  Income from continuing
    operations                   3,201       5,893        4,950         (378)(2)
  Net income                     2,831      42,177(1)     4,950         (378)(2)
  Basic earnings per share:
    Continuing operations       $ 0.11     $  0.19     $   0.16     $  (0.01)
    Discontinued operations      (0.01)      (0.06)           -            -
    Gain on disposition              -        1.26            -            -
                               -------     -------      -------      -------
  Net income                   $  0.10     $  1.39      $  0.16      $ (0.01)
                               =======     =======      =======      =======

  Diluted earnings per share:
    Continuing operations       $ 0.10     $  0.19     $   0.16     $  (0.01)
    Discontinued operations      (0.01)      (0.06)           -            -
    Gain on disposition              -        1.22            -            -
                               -------     -------      -------      -------
  Net income                   $  0.09     $  1.35      $  0.16      $ (0.01)
                               =======     =======      =======      =======

(1)  Includes  a gain on  disposition,  net of taxes,  of  $38,143  or $1.22 per
     diluted share.
(2)  Includes  an  acquisition  related  charge of $6,992  after tax or $.23 per
     diluted 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
         -----------           ----------
             1997           January 31, 1998
             1996           January 31, 1997
             1995           January 31, 1996

Income and Expense Items as a Percentage of Revenues

Fiscal Year                            1997    1996    1995
------------------------------------------------------------
Revenues
  Information services                 48.2%   47.6%   43.4%
  Product sales                        39.9    40.5    43.4
  Maintenance and support              11.9    11.9    13.2
------------------------------------------------------------
    Total revenues                    100.0   100.0   100.0
Costs of Revenues (1)
  Cost of information services         76.7    78.5    77.0
  Cost of product sales                42.0    46.3    46.9
  Cost of maintenance and support      69.5    67.4    69.0
------------------------------------------------------------
    Total gross profit                 38.0    35.9    37.1
Operating Expenses
  Sales and marketing                  14.0    12.5    12.8
  Research and development              2.1     3.0     2.8
  General and administrative           11.3    10.0    11.3
  Acquisition related charges             -     2.4       -
------------------------------------------------------------
Income from operations                 10.6     8.0    10.2
Income from continuing operations
  before income taxes                  10.3     8.0     9.2
Income from continuing operations       6.2%    4.1%    5.5%
============================================================
(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 in education,  but also to business,  government and other markets
through its various operating units.

RECAP OF 1997 RESULTS

Total revenues increased 22.6% in fiscal 1997 to $406.0 million compared to last
year's $331.2 million,  with approximately half of the increase  attributable to
acquisitions. Refer also to Note 2 of Notes to Consolidated Financial Statements
for further  discussion of acquisitions.  The Company's  overall gross margin on
revenues  increased  $35.7 million to 38.0% as a percentage  of total  revenues,
versus  last  year's  gross  margin  percentage  of 35.9%.  Operating  expenses,
however,  increased  to 27.4% of revenues in fiscal  1997,  compared to 25.5% of
revenues in fiscal 1996, before acquisition related charges.  These year-to-year
margin and expense  increases were partially caused by the acquired  businesses,
as  they  are  predominantly  intellectual  property  businesses  (software  and
assessment  products) with higher gross margins and higher  operating  expenses,
relative to the remainder of the Company. Nonetheless, overall operating margins
increased  to 10.6% of  revenue  in fiscal  1997 from  10.4% in fiscal  1996 and
operating income in dollars  increased 24.6% to $43.0 million.  Income tax rates
were  consistent  with the prior year before the  effects of the  special  items
described below. Income from continuing  operations in fiscal 1997 totaled $25.2
million or $0.80 per diluted share  outstanding.  This compares to a fiscal 1996
pro forma  income  from  continuing  operations  of $20.7  million and $0.67 per
diluted  share.  In fiscal 1996,  the  reported  net income of $1.59  included a
significant  one-time net gain on the  disposition  of the  Company's  Financial
Systems  business  and a special  charge  related  to the  acquisition  of Macro
Educational  Systems,  Inc.  (Macro).  A reconciliation  of diluted earnings per
share follows:

                                         1997       1996       1995
                                        -----      -----      -----
Earnings per share, as reported         $ .80     $ 1.59      $ .71

Less gain on disposition
  and discontinued operations               -      (1.15)      (.18)
                                        -----      -----      -----
Continuing operations                     .80        .44        .53

Plus acquisition related charges            -        .23          -
                                        -----      -----      -----
Pro forma earnings per share            $ .80      $ .67      $ .53
                                        =====      =====      =====

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

REVENUES

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

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

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

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

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

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

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

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

COST OF REVENUES AND GROSS PROFITS

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

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


OPERATING EXPENSES

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

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

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

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

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

IMPACT OF YEAR 2000

Some of the older software in use today was written using two digits rather than
four to define the applicable  year. As a result,  those computer  programs have
date-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations,  including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.

The  Company  has  substantially  completed  an  assessment  of both its product
software  and  internal  business  systems  and will have to  modify or  replace
portions of that  software so that it will  function  properly  with  respect to
dates in the year 2000 and  thereafter.  The Company  spent  approximately  $1.5
million in fiscal 1997 on  assessment  and  modification  of this  software.  It
expects to spend  approximately  $11.5  million  toward this end in fiscal 1998,
which should allow the Company to complete the majority of the estimated effort.
Approximately  $4.0 million of this amount is  incremental  expenditure  and the
remainder represents the redirection of existing resources.  The Company expects
fiscal 1999  expenditures to be significantly  reduced from that of fiscal 1998.
All amounts are being  expensed  currently,  and are  included in the  Company's
future  operating  plans and  expectations.  The Company has also made, and will
continue to make, significant capital investments in its internal administrative
and service  delivery  systems and  infrastructure  (see Capital  Resources  and
Liquidity below),  though these  investments are not driven  principally by year
2000  considerations.  The  Company  has also  completed  an  assessment  of its
customers,  suppliers  and other  vendor  relationships  to  identify  year 2000
exposures and will be working with these entities to mitigate or eliminate them.

The costs and timing of the project are based on  management's  best  estimates,
which were derived utilizing numerous assumptions of future events; as a result,
there can be no  guarantee  that these  estimates  will be  achieved.  While the
Company  believes it can address the year 2000 issues  under its control in time
to prevent any material impact on its operations, there can be no guarantee that
the Company's customers and suppliers can do likewise,  which in turn could have
an adverse  impact on the Company.  Contingency  plans will be developed,  where
necessary,  so that the Company's  operations will not be materially affected by
the year 2000.

OTHER SIGNIFICANT TRANSACTIONS

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

INTEREST EXPENSE

Interest  expense  decreased  slightly  in fiscal  1997 from  fiscal 1996 due to
slightly lower average borrowing levels.

Interest expense decreased by $1.6 million in fiscal 1996 from fiscal 1995, also
the result of lower borrowing levels.  See Capital Resources and Liquidity below
for further discussion of cash flow and debt.

OTHER INCOME AND EXPENSE

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

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

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

INCOME TAXES

The effective  income tax rate was 40.0%,  48.5% and 40.3% for fiscal 1997, 1996
and 1995, respectively. See Note 6 of Notes to Consolidated Financial Statements
for a  reconciliation  to the statutory rate. The effective  income tax rate for
fiscal 1996 was higher than the statutory  rate primarily as a result of the one
time write-off of non-deductible purchased research and development.

CAPITAL RESOURCES AND LIQUIDITY

The Company began fiscal 1997 with $58.1  million of cash and cash  equivalents,
due largely to the 1996 divestiture of its Financial  Systems  business.  During
fiscal 1997, the Company further  generated $49.5 million of cash from operating
activities.  Cash was used for  acquisitions  of $48.8 million,  including $13.6
million  to  repurchase  shares in the open  market to offset  shares  issued to
effect the acquisition of Virtual University Enterprises. Further, $25.2 million
was  used  for  property,  plant  and  equipment  acquisitions  including  a new
Company-owned facility in Melbourne,  Australia and the outfitting of new leased
facilities in Cedar Rapids, Iowa and Lawrence, Kansas. Investments totaling $7.1
million were made in internal administrative and service delivery systems during
fiscal  1997.  Debt  repayments  were  nominal and the  Company  paid its normal
dividends of $5.5 million.  At January 31, 1998 the Company had $23.3 million in
cash and cash equivalents.

During  fiscal  1996,  NCS  generated  $38.5  million  of  cash  from  operating
activities  and  $64.1  million,  net,  from the sale of its  Financial  Systems
business.  The Company  invested $14.9 million in property,  plant and equipment
and $11.2  million  in  acquisitions  consisting  of Macro and three  additional
smaller  entities.  The Company also repurchased  724,000 shares of Common Stock
during  fiscal 1996,  using $8.1  million of cash.  Other  financing  activities
included the early repayment of the $15.0 million,  9.88% Secured Notes and $7.0
million  of  convertible   debentures   issued  in  connection  with  the  Macro
acquisition.

The Company had long-term debt balances,  including current maturities, of $18.8
million,  $20.1 million and $27.0 million at January 31, 1998,  1997,  and 1996,
respectively.  The items  causing the  changes in debt  balances  are  described
above.  At January 31, 1998,  the Company's debt to total capital ratio was 8.9%
compared  to 10.6% a year  earlier  and  17.4% 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 the acquisitions made in 1997 and by the increased level
of operations during the year.

Looking  toward fiscal 1998,  the Company  maintains a $50.0  million  revolving
credit  facility,  all of which was  available at January 31, 1998.  The Company
expects its cash flows from  operations,  the revolving credit facility and cash
on hand to be adequate to meet foreseeable cash requirements, including internal
growth and potential acquisitions.

NEW ACCOUNTING STANDARDS

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

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

<PAGE>
NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


January 31 (in thousands)                                   1998        1997
                                                         --------    --------
Assets

Current Assets
  Cash and cash equivalents                              $ 23,267    $ 58,079
  Receivables                                             101,334      79,056
  Inventories                                              16,239      18,176
  Prepaid expenses and other                                6,562       5,526
                                                         --------    --------
    Total Current Assets                                  147,402     160,837
                                                         --------    --------
Property, Plant and Equipment
  Land, buildings and improvements                         57,281      51,741
  Machinery and equipment                                 141,949     120,395
  Accumulated depreciation                               (105,206)    (92,722)
                                                         --------    --------
                                                           94,024      79,414
                                                         --------    --------
Intellectual Properties, net
  Acquired and internally developed software products      14,967      17,578
  Assessment instruments                                   10,317       2,340
                                                         --------    --------
                                                           25,284      19,918
                                                         --------    --------
Other Assets, net
  Goodwill                                                 45,634       7,556
  Other assets                                              3,070       6,195
                                                         --------    --------
                                                           48,704      13,751
                                                         --------    --------
     Total Assets                                        $315,414    $273,920
                                                         ========    ========

See Notes to Consolidated Financial Statements.


<PAGE>


NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

January 31 (in thousands)                                  1998        1997
                                                         --------    --------
Liabilities and Stockholders' Equity

Current Liabilities
  Current maturities of long-term debt                   $  6,448    $  3,819
  Accounts payable                                         26,767      20,886
  Accrued expenses                                         36,237      28,832
  Deferred income                                          29,026      23,079
  Income taxes                                              4,156       5,556
                                                         --------    --------
    Total Current Liabilities                             102,634      82,172
                                                         --------    --------

Long-Term Debt - less current maturities                   12,396      16,329

Deferred Income Taxes                                       6,390       5,385

Commitments and Contingencies                                   -           -

Stockholders' Equity
  Preferred stock                                               -           -
  Common stock - issued and outstanding -
    30,846 and 30,469 shares, respectively                    925         914
  Paid-in capital                                           4,518           -
  Retained earnings                                       192,005     173,107
  Deferred compensation                                    (3,454)     (3,987)
                                                         --------    --------
    Total Stockholders' Equity                            193,994     170,034
                                                         --------    --------
    Total Liabilities and Stockholders' Equity           $315,414    $273,920
                                                         ========    ========

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)     1997       1996       1995
                                                       --------   --------   --------

<S>                                                    <C>        <C>        <C>
Revenues
  Information services                                 $195,793   $157,511   $130,432
  Product sales                                         161,977    134,144    130,648
  Maintenance and support                                48,245     39,504     39,803
                                                       --------   --------   --------
    Total revenues                                      406,015    331,159    300,883

Costs of Revenues
  Cost of information services                          150,106    123,718    100,459
  Cost of product sales                                  67,950     62,075     61,233
  Cost of maintenance and support                        33,521     26,608     27,453
                                                       --------   --------   --------
    Gross profit                                        154,438    118,758    111,738

Operating Expenses
  Sales and marketing                                    56,675     41,258     38,544
  Research and development                                8,628      9,883      8,490
  General and administrative                             46,091     33,076     34,000
  Acquisition related charges:
    Purchased research and development                        -      5,637          -
    Other                                                     -      2,258          -
                                                       --------   --------   --------
Income from Operations                                   43,044     26,646     30,704
  Interest expense                                        1,353      1,677      3,276
  Other (income) expense, net                              (284)    (1,564)      (332)
                                                       --------   --------   --------
Income from Continuing Operations Before Income Taxes    41,975     26,533     27,760
  Income taxes                                           16,800     12,867     11,180
                                                       --------   --------   --------
Income from Continuing Operations                        25,175     13,666     16,580
  Income (loss) from discontinued operations,
    net of taxes of $(1,360) in 1996 and
    $3,570 in 1995                                            -     (2,229)     5,679
  Gain on disposition, net of taxes of $29,031 in 1996        -     38,143          -
                                                       --------   --------   --------
Net Income                                             $ 25,175   $ 49,580   $ 22,259
                                                       ========   ========   ========
Basic Earnings per share
  Continuing operations                                $    .83   $    .45   $    .54
  Discontinued operations                                     -      (0.07)       .19
  Gain on disposition                                         -       1.26          -
                                                       --------   --------   --------
Net Income per share                                   $    .83   $   1.64   $    .73
                                                       ========   ========   ========

Average Shares Outstanding                               30,391     30,257     30,565

Diluted Earnings per share
  Continuing operations                                $    .80   $    .44   $    .53
  Discontinued operations                                     -      (0.07)       .18
  Gain on disposition                                         -       1.22          -
                                                       --------   --------   --------
Net Income per share                                   $    .80   $   1.59   $    .71
                                                       ========   ========   ========

Average Shares Outstanding and
  Dilutive Potential Common Shares                       31,864     31,069     31,319

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


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



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

<S>                                          <C>      <C>     <C>       <C>           <C>         <C>
Balance, January 31, 1995                    30,621   $ 919   $ 3,335   $114,546      $(5,677)    $113,123
  Shares issued for employee stock
    purchase and option plans                   413      12     2,440          -            -        2,452
  Repurchase of common stock                   (466)    (14)   (4,438)         -            -       (4,452)
  Restricted stock awards                       161       5     1,574          -       (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 - $.18 per share            -       -         -     (5,570)           -       (5,570)
  Foreign currency translation adjustment         -       -         -     (1,228)           -       (1,228)
                                             ------   -----   -------   --------      -------     --------
Balance, January 31, 1996                    30,729     922     2,966    130,007       (5,697)     128,198
  Shares issued for employee stock
    purchase and option plans                   490      15     3,475          -            -        3,490
  Repurchase of common stock                   (724)    (22)   (6,860)    (1,194)           -       (8,076)
  Restricted stock awards (forfeitures), net    (26)     (1)       25          -          (24)           -
  ESOP debt payment                               -       -         -          -        1,000        1,000
  Restricted stock compensation accrual           -       -       394          -          734        1,128
  Net income                                      -       -         -     49,580            -       49,580
  Cash dividends paid - $.18 per share            -       -         -     (5,521)           -       (5,521)
  Foreign currency translation adjustment         -       -         -        235            -          235
                                             ------   -----   -------   --------      -------     --------
Balance, January 31, 1997                    30,469     914         -    173,107       (3,987)     170,034
 Shares issued for employee stock
    purchase and option plans                   283       8     1,725          -            -        1,733
  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
  Net income                                      -       -         -     25,175            -       25,175
  Cash dividends paid - $.18 per share            -       -         -     (5,512)           -       (5,512)
  Foreign currency translation adjustment
    and other                                    -       -       968       (765)           -          203
                                             ------   -----   -------   --------      -------     --------
Balance, January 31, 1998                    30,846   $ 925   $ 4,518   $192,005      $(3,454)    $193,994
                                             ======   =====   =======   ========      =======     ========
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

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



Fiscal Year (in thousands)                                 1997       1996       1995
                                                         -------    -------    -------
<S>                                                      <C>        <C>        <C>
Operating Activities
  Net income                                             $25,175    $49,580    $22,259
  Less - gain on disposition                                   -    (38,143)         -
  Adjustments to reconcile to net cash
    provided by operating activities:
      Depreciation                                        16,825     15,620     15,643
      Amortization                                        13,291      9,647     11,791
      Deferred income taxes and other                       (661)    (2,053)     3,747
      Non-cash charges                                         -      6,637          -
      Changes in operating assets and liabilities
         (net of acquired amounts):
         Accounts receivable                             (15,361)    (4,318)    (2,133)
         Inventory and other current assets                1,712      2,495        542
         Accounts payable and accrued expenses             8,087     (3,856)       272
         Deferred income                                     424      2,912       (190)
                                                         -------    -------    -------
       Net Cash Provided By Operating Activities          49,492     38,521     51,931
                                                         -------    -------    -------
Investing Activities
  Acquisitions, net of cash acquired                     (35,216)   (11,192)         -
  Purchases of property, plant and equipment             (25,174)   (14,909)   (14,091)
  Purchases of business systems                           (7,108)    (1,048)    (1,897)
  Capitalized software products                                -     (1,553)    (4,826)
  Net proceeds from disposition                                -     64,071          -
  Other - net                                              1,148      3,296      1,342
                                                         -------    -------    -------
       Net Cash Provided By (Used In)
         Investing Activities                            (66,350)    38,665    (19,472)
                                                         -------    -------    -------
Financing Activities
  Decrease in revolving credit borrowing                       -          -    (13,065)
  Repayment of secured notes                                   -    (15,000)         -
  Net increase (decrease) in other borrowings               (676)       846     (7,920)
  Repurchase of common stock, net                        (11,766)    (4,586)    (1,945)
  Dividends paid                                          (5,512)    (5,521)    (5,570)
                                                         -------    -------    -------
       Net Cash Used In Financing Activities             (17,954)   (24,261)   (28,500)
                                                         -------    -------    -------

Increase (Decrease) In Cash and Cash Equivalents         (34,812)    52,925      3,959
Cash and Cash Equivalents  - Beginning of Year            58,079      5,154      1,195
                                                         -------    -------    -------
Cash and Cash Equivalents - End of Year                  $23,267    $58,079    $ 5,154
                                                         =======    =======    =======
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

NATIONAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 1 - ACCOUNTING POLICIES

The fiscal years referenced herein are as follows:
         Fiscal Year           Year Ended
         -----------           ----------
             1997           January 31, 1998
             1996           January 31, 1997
             1995           January 31, 1996

PRINCIPLES OF CONSOLIDATION:  The consolidated  financial statements include the
accounts of the Company and its  subsidiaries.  All  intercompany  accounts  and
transactions  between  consolidated  entities  have  been  eliminated.   Certain
reclassifications  have been made to prior  year  presentations  to  conform  to
current year presentation.

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

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

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

                                             1998       1997
----------------------------------------------------------------
Finished goods                             $ 5,166    $ 4,765
Scoring services and work in process         8,218      9,221
Raw materials and purchased parts            2,855      4,190
----------------------------------------------------------------
                                           $16,239    $18,176
================================================================

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

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

                                        Internally   Accumulated
                             Acquired    Developed   Amortization   Total
----------------------------------------------------------------------------
Balance, January 31, 1995     $10,475     $18,520     $(11,580)    $17,415
Additions                           -         320            -         320
Product Discontinuation          (151)       (308)         459           -
Amortization                        -           -       (6,068)     (6,068)
----------------------------------------------------------------------------
Balance, January 31, 1996      10,324      18,532      (17,189)     11,667
Additions                      13,000           -            -      13,000
Write-downs and dispositions        -      (6,539)       4,517      (2,022)
Amortization                        -           -       (5,067)     (5,067)
----------------------------------------------------------------------------
Balance, January 31, 1997      23,324      11,993      (17,739)     17,578
Additions                       1,010           -           -        1,010
Amortization                        -           -       (3,621)     (3,621)
----------------------------------------------------------------------------
Balance, January 31, 1998      24,334      11,993
Accumulated Amortization      (10,768)    (10,592)    $(21,360)
----------------------------------------------------------------------------
Net Balance, January 31, 1998 $13,566     $ 1,401                  $14,967
============================================================================

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.  Expected revenues and amortizable lives
are subject to revision  and balances are  periodically  evaluated  for possible
impairment. Accumulated amortization at January 31, 1998 and 1997 was $3,849 and
$2,754, respectively.

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 $3,047, $703 and $624 in fiscal 1997, 1996
and 1995,  respectively.  Accumulated  amortization  was $7,130 and $3,843 as of
January 31, 1998 and 1997, respectively.  The Company periodically evaluates its
goodwill for impairment by comparison of the carrying value against  anticipated
business performance.



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

                               1998      1997
------------------------------------------------
Employee compensation        $17,604   $13,376
Taxes other than income        3,558     2,875
Royalties                      2,630     2,065
Other                         12,445    10,516
------------------------------------------------
                             $36,237   $28,832
================================================

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

In October 1997, the American  Institute of Certified Public  Accountants issued
Statement of Position (SOP) 97-2, Software Revenue  Recognition,  which requires
that each element of a software licensing  arrangement be separately  identified
and accounted for based on the relative fair values of each element.  The SOP is
effective for transactions  that the Company will enter into beginning  February
1, 1998  and,  based  upon  current  revenue  recognition  policies,  management
believes that the effect of the adoption will not be material.

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

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 for the last three fiscal years:

                                                      1997      1996      1995
                                                    -------   --------  -------
Earnings:
  Income from Continuing Operations -
    Basic earnings per share                        $25,175   $13,666   $16,580

  Adjustments for dilutive securities:
    Interest expense on convertible debentures,
      net of tax                                        256         7         -
                                                    -------   -------   -------
    Adjusted income for diluted earnings per share  $25,431   $13,673   $16,580
                                                    =======   =======   =======


Weighted Average Shares:
  Basic weighted-average shares                      30,391    30,257    30,565

  Adjustments for dilutive securities:
    Employee stock options, net of tax proceeds         620       402       382
    Contingent stock awards, net of tax proceeds        270       394       372
    Convertible debentures                              583        16         -
                                                    -------   -------   -------
  Dilutive potential common shares                    1,473       812       754
                                                    -------   -------   -------
    Diluted weighted-average shares                  31,864    31,069    31,319
                                                    =======   =======   =======

Basic earnings per share                            $  0.83   $  0.45   $  0.54
                                                    =======   =======   =======

Diluted earnings per share                          $  0.80   $  0.44   $  0.53
                                                    =======   =======   =======

IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates its long-lived assets for
impairment  losses when  indicators of  impairment  are present by comparing the
undiscounted  cash flows to the assets' carrying  amount.  An impairment loss is
recorded if necessary.

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

SEGMENT  DISCLOSURES:  In June 1997,  the FASB issued SFAS No. 131,  Disclosures
About  Segments  of  an  Enterprise  and  Related  Information,  which  requires
disclosure of certain  information of a company's internal  operating  segments.
This Statement is effective for the Company's fiscal 1998 yearend, and will have
no  effect  on its  basic  financial  statements,  but will  require  additional
disclosures.

COMMON  STOCK  SPLIT:  On March 3,  1998,  the  Board of  Directors  declared  a
two-for-one stock split of the Company's Common Stock. The stock split is in the
form of a 100 percent stock dividend  payable March 26, 1998 to  shareholders of
record on March 16, 1998. The number of shares issued and outstanding at January
31, 1998, after giving retroactive effect to the split was 30,846,000. All share
and per share  information,  including  stock option,  stock  purchase and stock
ownership plan information, has been restated for all years presented to reflect
the split.

NOTE 2 - ACQUISITIONS

During fiscal 1997, the Company made several individually small acquisitions. 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. In accordance  with SFAS No. 109,  Accounting for Income Taxes,
the purchase  price has been adjusted by $1.7 million to reflect  deferred taxes
on the intangible assets,  whose amortization will be nondeductible.  The excess
purchase  price,  as adjusted  for  deferred  taxes,  over book value of the net
assets acquired was $16.4 million, of all of which was allocated to goodwill and
is being amortized over 20 years.

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

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

All of the  fiscal  1997  acquisitions  described  above were  accounted  for as
purchases and, accordingly,  operating results of these businesses subsequent to
the date of acquisition  were included in the Company's  consolidated  financial
statements.

The following is a summary of pro forma operating results as if the acquisitions
had taken place at the beginning of fiscal 1996:

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

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

On January 21,  1997,  the  Company  acquired  all of the common  stock of Macro
Educational   Systems,   Inc.   (Macro),   a   California-based   developer   of
administrative software for the K-12 educational market, for approximately $13.9
million,  through the issuance of $7.0  million of  convertible  debentures  and
cash.  Additional  payments up to $6.0  million may be earned  between  1998 and
2001, subject to achieving certain earnings levels.

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

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

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

NOTE 3 - DISCONTINUED OPERATIONS

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

NOTE 4 - LEASES

The Company leases office facilities under noncancelable  operating leases which
expire in various years through 2003.  Rental  expense for all operating  leases
was $9,167 in fiscal  1997,  $8,544 in fiscal  1996,  and $7,987 in fiscal 1995.
Future  minimum  rental  expense  as of  January  31,  1998,  for  noncancelable
operating  leases  with  initial  or  remaining  terms in  excess of one year is
$17,262 and is payable as follows:  fiscal 1998 - $5,979;  fiscal 1999 - $4,327;
fiscal 2000 - $3,315; fiscal 2001 - $2,530; fiscal 2002 - $1,040 and $71 beyond.

In August 1997, the Company  entered into a five-year  operating lease agreement
for a facility in Cedar Rapids,  Iowa.  The total cost of the assets  covered by
the  lease as of  January  31,  1998  was  $11,751.  The  lease  provides  for a
substantial  residual  value  guarantee by the Company at the end of the initial
term and  includes  purchase  and  renewal  options at fair market  values.  The
amounts of future minimum  operating  lease  payments  listed above excludes any
payment related to the residual value guarantee which is due upon termination of
the lease.  The Company has the right to exercise a purchase option with respect
to the leased building or the building can be sold to a third party. The Company
expects the fair market value of the building, subject to the purchase option or
sale to a third  party,  to  substantially  reduce or  eliminate  the  Company's
payment under the residual value guarantee.  The Company is obligated to pay the
difference  between the maximum amount of the residual  value  guarantee and the
fair market value of the building at the  termination  of the lease.  At January
31, 1998 the maximum  amount of the  residual  value  guarantee  relative to the
assets under lease at January 31, 1998 is approximately $9,871.

NOTE 5 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

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




                                1998       1997
--------------------------------------------------
Revolving credit borrowing    $     -    $     -
Convertible debentures          7,000      7,000
Unsecured note                  5,228      6,535
ESOP borrowing                  2,000      3,000
Other borrowings,
  principally foreign           4,616      3,613
--------------------------------------------------
                               18,844     20,148
Less current maturities        (6,448)    (3,819)
--------------------------------------------------
Long-term debt                $12,396    $16,329
==================================================

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  $7,000  of
Convertible Debentures as partial consideration for the stock purchase of Macro,
see Note 2. These debentures are due in five equal annual installments, with the
first  installment due on February 21, 1998.  These debentures carry an interest
rate of 6.1%, and are convertible into common stock at $12.00 per share.

Unsecured  Note:  This  unsecured  term note is due in April 2001.  The note has
annual principal payments of $1,307, and bears interest at .95% over LIBOR.

ESOP Borrowing: The ESOP loan, secured by unallocated shares of Common Stock and
guaranteed by the Company,  is due in May 1999. The loan has annual  payments of
$1,000, with an interest rate of .75% over LIBOR.

Scheduled  Maturities:   The  aggregate  principal  amounts  of  long-term  debt
scheduled  for  repayment in each of the five fiscal years 1998 through 2002 are
$6,448,  $4,611,   $2,991,  $2,789,  and  $0,  respectively,   with  $2,005  due
thereafter. In each fiscal year, interest paid approximates interest expense.

NOTE 6 - INCOME TAXES

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



                              Current
                       -----------------------
Fiscal Year            Federal  State  Foreign  Deferred  Total
-----------------------------------------------------------------
1997                   $14,540  $2,806  $1,300  $(1,846) $16,800
1996                    16,197   1,320     864   (5,514)  12,867
1995                    10,079   1,465      70     (434)  11,180
-----------------------------------------------------------------

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

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

                                          1998       1997
                                         ------     ------
Deferred tax assets:
  Reserves for uncollectibles            $2,561     $2,801
  Foreign operating loss carryforwards    2,826      2,778
  Accrued vacation pay                    1,792      1,511
  Rotable service parts amortization        980      1,260
  Intangible amortization                 1,453      1,198
  Deferred expenses                         783        689
  Other                                     602      1,431
  Valuation allowance                    (2,826)    (2,778)
------------------------------------------------------------
  Total deferred tax assets               8,171      8,890
------------------------------------------------------------
Deferred tax liabilities:
  Acquired intangible amortization        7,688      6,592
  Accelerated depreciation                4,542      5,197
  Net capitalized software                1,921      1,929
  Other                                     410        557
------------------------------------------------------------
  Total deferred tax liabilities         14,561     14,275
------------------------------------------------------------
  Net deferred tax liabilities          $ 6,390    $ 5,385
============================================================

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

                                     1997      1996      1995
                                    ------    ------    ------
Statutory rate                       35.0%     35.0%     35.0%
State income taxes, net of
  federal benefit                     4.4       3.2       3.1
Intangible amortization               1.0       1.7       1.0
Foreign sales corporation            (0.2)     (0.5)     (0.1)
Research and development credits     (0.1)     (0.6)     (0.3)
Affordable housing credit            (0.6)     (1.0)     (1.0)
Foreign operating losses              1.1       3.2       3.2
Purchased research and development      -       7.4         -
Other                                (0.6)      0.1      (0.6)
---------------------------------------------------------------
Effective rate                       40.0%    48.5%     40.3%
===============================================================

The  Company  made income tax  payments  of $18,991,  $47,693 and $10,335 in the
fiscal years 1997, 1996, and 1995, 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. 100,000,000 shares of $.03 par value Common Stock are authorized
(post-split). 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 1997,  1996
and 1995:

                                           1997      1996      1995
                                         -------   -------    ------
      Net income - as reported           $25,175   $49,580     $22,259
      Net income - pro forma              23,988    49,069      21,925
      Earnings per share - as reported:
         Basic                           $  0.83   $  1.64     $  0.73
         Diluted                            0.80      1.59        0.71
      Earnings per share - pro forma:
         Basic                           $  0.79   $  1.62     $  0.72
         Diluted                            0.76      1.58        0.70


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:

                                           1997       1996       1995
                                          ------     ------     ------

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

The weighted-average fair value of the options granted during fiscal years 1997,
1996 and 1995 were $4.40, $5.16 and $4.20, respectively.

The Company has five Employee  Stock Option Plans (1984,  1986,  1990,  1995 and
1997).  Options to purchase Common Stock of the Company are granted to employees
at 100% of fair market value on the date of grant and are exercisable  over a 60
or 63 month period.  Shares available for grant under the Plans totaled 669,700,
454,000 and 760,500 at January 31, 1998, 1997 and 1996, 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, 1995       1,895,000       $ 6.85
      Granted                         459,500         9.26
      Cancelled                      (131,900)        7.57
      Exercised                      (328,700)        5.62
                                    ---------        -----
    Balance, January 31, 1996       1,893,900         7.60
      Granted                         451,700        11.37
      Cancelled                      (188,900)        8.27
      Exercised                      (462,580)        7.43
                                    ---------        -----
    Balance, January 31, 1997       1,694,120         8.57
      Granted                         862,148        13.13
      Cancelled                       (92,908)        9.51
      Exercised                      (309,246)        7.57
                                    ---------       ------
    Balance, January 31, 1998       2,154,114       $10.50
                                    =========       ======

Options for 679,182;  627,140 and 746,500 shares were exercisable at January 31,
1998, 1997 and 1996, with weighted average  exercise prices of $8.07,  $7.43 and
$7.24,  respectively.  Exercise prices for options outstanding as of January 31,
1998 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 - 8.00      647,334     $ 6.72        1.7 years        437,828      $ 6.78
  8.38 -12.00      664,580      10.44        3.4 years        198,654       10.14
 12.25 -18.75      842,200      13.52        5.1 years         42,700       12.99
                 ---------     ------                         -------      ------
                 2,154,114     $10.50                         679,182      $ 8.07
                 =========     ======                         =======      ======
</TABLE>

The  Company  has  two  Long-Term   Incentive  Plans  (L-TIP)  approved  by  the
shareholders,  (1990 and 1997).  During fiscal 1990, pursuant to the 1990 L-TIP,
342,800 shares were issued to participants on a restricted basis. At January 31,
1998,  30,690 shares  remained  restricted,  83,210 shares  distributed  and the
balance  having  been  forfeited.  The  shares  distributed  and  the  remaining
restricted  shares  which vest on January  31,  1999,  contingent  on  continued
employment, were earned by participants during fiscal 1996.

During  fiscal 1995 and 1996,  pursuant to the 1990 L-TIP,  199,800  shares were
issued to  participants on a restricted  basis;  129,828 shares have been earned
and distributed with the balance having been forfeited.

During fiscal 1997, pursuant to the 1990 L-TIP,  150,000 shares were issued on a
restricted  basis. At January 31, 1998, 93,750 shares remain restricted with the
balance having been earned and  distributed.  The  restricted  shares are earned
upon  attainment of specified  Common Stock market prices and are  contingent on
continued employment.

During  fiscal  1997,  pursuant  to the 1997  L-TIP,  non-qualified  options  to
purchase  336,000  shares  of  Common  Stock  of the  Company  were  granted  to
participants  at 100% of fair market value on date of grant and are  exercisable
over 67 to 72 month  periods.  Vesting can be accelerated to January 31, 2000 on
achievement of specified  cumulative earnings per share amounts during the three
fiscal years then ended. At January 31, 1998,  there were 336,000 options shares
outstanding at a weighted average exercise price per share of $12.54.

The  Company has an  Employee  Stock  Purchase  Plan.  There were 57,784  shares
available for purchase under the Plan at January 31, 1998.

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 $2,195,  $1,638 and $1,900 in fiscal years 1997, 1996
and 1995, respectively.

EMPLOYEE STOCK  OWNERSHIP PLAN: The Company has an Employee Stock Ownership Plan
(ESOP) covering  substantially  all employees.  Benefits,  to the extent vested,
become available upon retirement or termination of employment.  During 1989, the
ESOP Trust borrowed $10,000 to purchase  1,584,000 shares of Common Stock.  Each
year,  the  Company  makes  contributions  to the  ESOP  which  are  charged  to
compensation  expense,  and used by the ESOP  Trust to make  loan  interest  and
principal  payments.  With each principal payment, a portion of the Common Stock
is  allocated  to  participating   employees.  In  fiscal  1997,  the  Company's
contribution  to the Plan  was  $1,000  plus  interest  of $61,  which is net of
dividends on unallocated  shares of $87. The Company's  contribution to the Plan
was $1,000 in fiscal  1996 and fiscal  1995,  and  interest,  which was  totally
offset by dividends  on  unallocated  shares,  was $77 in fiscal 1996 and $63 in
fiscal 1995.  There were 316,800 and 475,200  unallocated  shares at January 31,
1998 and 1997, respectively.

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

NOTE 9 - CONTINGENCY

Certain claims  asserted  against the Company by a former customer and discussed
in prior years were reduced to a formal complaint served on the Company on April
30, 1997. The lawsuit  alleges  certain claims against the Company in connection
with  three  loan  processing  and  servicing  agreements;  the  claims  are for
expenses, an undisclosed amount of lost profits and damages associated with loan
defaults. The Company has tendered the defense of this claim to its insurer, and
the insurer accepted the defense subject to a reservation of rights. The Company
has filed an answer to the  complaint  denying the claims and the  Company  will
vigorously  defend  this  litigation.  In  addition,  the  Company  has  filed a
counterclaim  against the former customer and its' corporate  affiliate  seeking
compensatory  damages in an amount to be determined  at trial.  The Company does
not believe the outcome of this  litigation  would result in a material  adverse
effect on the Company's financial position or results of operations.

NOTE 10 - BUSINESS SEGMENT INFORMATION

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

The Company's foreign operations and export sales are individually less than 10%
of total revenues.  Sales to all government  agencies for the fiscal years ended
January 31, 1998,  1997 and 1996 were  $185,186,  $180,993 and $148,313 of which
$63,005, $62,278, and $42,664,  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.


REPORT OF INDEPENDENT AUDITORS

We have  audited  the  accompanying  consolidated  balance  sheets  of  National
Computer Systems, Inc. and subsidiaries as of January 31, 1998 and 1997, 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,  1998.
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,  1998  and  1997,  and  the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity  with  generally
accepted accounting principles.



                              /s/ERNST & YOUNG LLP

Minneapolis, Minnesota
March 2, 1998