UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended DECEMBER 31, 1998 Commission file number 1-10557

POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)

SOUTH CAROLINA 57-0723125
(State or other jurisdiction of ( IRS Employer
Incorporation or organization) Identification No.)

ONE PMSC CENTER (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(803) 333-4000

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:
NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $1,150,737,770 at March 17, 1999, based on the closing
market price of the Common Stock on such date, as reported by the New York
Stock Exchange.

The total number of shares of the registrant's Common Stock, $.01 per share
par value, outstanding at March 17, 1999, was 35,886,073.

DOCUMENTS INCORPORATED BY REFERENCE

Specified sections of the registrant's 1999 Proxy Statement in connection
with its 1999 Annual Meeting of Stockholders are incorporated by reference in
Part III hereof.

PART I

ITEM 1. BUSINESS

THE COMPANY

ORGANIZATION AND GENERAL DEVELOPMENT

Policy Management Systems Corporation (the "Company"), a leading provider
of enterprise software and electronic commerce systems, related professional
services, and business process outsourcing designed to meet the needs of the
global insurance and related financial services industries, is a South
Carolina corporation incorporated in 1980. From 1974 until 1980, the Company
operated as a division of Seibels, Bruce & Company.

The Company initially operated as a provider of insurance software
systems and related automation support services to the property and casualty
insurance market in the United States and Canada. Over time, the Company has
expanded geographically into Europe, Asia and Australia, as well as into the
life insurance and financial services market. Through internal development
and acquisitions, the Company has expanded its software products and services
offerings which include advanced computing technologies, strategic alliances,
and outsourcing solutions, thereby strengthening the Company's ability to
serve the global insurance marketplace.

BUSINESS STRATEGY

The Company's business strategy is to offer value to customers by
structuring long-term relationships and agreements that provide its customers
with continuously updated solutions, while providing a high degree of
recurring revenues to the Company. During the early stages of the Company's
development, a major portion of its revenues was derived from systems
licensing activities. The Company has continued to expand as a provider of a
full range of business solutions to the global insurance and financial
services industries and now the majority of the Company's revenues are derived
from outsourcing and professional services activities.

SOFTWARE PRODUCTS

The Company offers over 100 business solutions, which include more than
80 application software systems, designed to meet the needs of the global
insurance and related financial services markets.

The Company's software products automate most insurance processing functions,
including various underwriting, claims, accounting, financial reporting,
regulatory reporting and cash management functions. The systems have been
designed to permit ease of use, providing flexibility in adapting to a
customer's specific requirements. The systems are also designed to be modular
in structure and to facilitate the application of updates and enhancements, as
well as the interfacing and integration with different systems. Most of the
Company's applications will operate on either a stand-alone basis or in
conjunction with other applications in the same product group.

The Company's primary software systems currently run on midrange and mainframe
hardware with either personal computers or terminals being used for user
access. The Company also supports an open systems strategy, which provides
for the host-based software components to be converted to certain open
platforms, allowing customers the capability of adding cost-effective
increments of processing power. The Company's systems incorporate
object-oriented technology and most applications are Internet-enabled (see
Product Development).

Client/server technologies serve as a platform for the Company's current
system offerings for the property and casualty and life insurance markets. A
primary advantage of the Company's software products is the full integration
of the information and data gathering, processing, underwriting, claims
handling and reporting processes for insurance providers, creating a
cooperative processing environment. In this cooperative processing
environment, insurance professionals, using personal computer workstations,
are capable of processing multiple tasks concurrently with minimal clerical
support and data entry. The Company's software products utilize technologies
such as

relational databases, graphical user interfaces, object-oriented programming,
imaging and the Internet. The Company's objective is to provide software
systems which allow system upgrades, additions and interfaces to be
implemented quickly, with minimal disruption to ongoing operations.

The Company obtains licenses from third parties for a wide range of software
products and services which are used in varying degrees to develop and enhance
the Company's products and in performing services for its customers. Such
products range from mainframe operating systems to graphical user interfaces.

The Company's primary software systems, as well as some of its newest product
offerings, are discussed below.

Series III , uses relational databases and cooperative processing between
hardware platforms and allows access to data from multiple sources through
advanced networks to provide both a comprehensive solution for all facets of
the property and casualty insurance industry worldwide and a flow of
information between insurance agents, branch offices and the home office of
insurance companies. The completion of Release 9.1 of Series III marked the
first release of Series III functionality utilizing the Microsoft Windows NT
operating system and resulted in it being renamed S3+ (All subsequent
references to Series III will be S3+). S3+ is currently able to process
business for personal lines (primarily auto and homeowners' policies) for the
property and casualty insurance industry in a Windows NT environment. The
continued development of S3+ will focus on enhancements of existing
functionality and incorporating Windows NT operating system capability for
commercial lines and workers' compensation insurance. From its inception, S3+
was designed for year 2000 processing.

The Company also continues to provide solutions to the property and casualty
insurance industry through its Series II products, an earlier generation of
solutions, which are traditional mainframe computer products. Series II
products have been enhanced with the capability of handling transactions with
dates of the year 2000 and beyond.

The POINT System, the Company's midrange solution for the United States
property and casualty insurance market, has been re-engineered to utilize
client/server capabilities featuring a graphical user interface client. The
re-engineered POINT System, renamed Point+ utilizes object-oriented
technology and is offered on International Business Machines Corporation's
("IBM") AS/400 and Windows NT and is designed to process data in the year
2000 and beyond.

INSURE/90 , an IBM AS/400 based product acquired with Creative Holdings Group,
Limited ("Creative") in 1994, became part of the Company's general insurance
software solution to the European, Asian and Australian markets. The next
generation of applications to ultimately replace the INSURE/90 product is I+.
I+ increases functionality and offers client/server capabilities and
object-oriented technology. I+ is capable of processing data in the year 2000
and beyond.

The Company's acquisition of CYBERTEK in August 1993 provided the Company with
the CK/4 Enterprise Solution, an integrated solution for the life insurance
industry. In March 1995, the Company made generally available the first
release of CyberLife , an integration of CYBERTEK functionality with
client/server technology. The Company's subsequent releases of CyberLife's
scalable platforms include those capable of processing on PC local area
networks ("LAN's") or on IBM mainframe hardware, and client processes
executing in a Windows environment. CyberLife is also capable of processing
data in the year 2000 and beyond.

In 1995, the Company purchased rights to Internet technology known as ViLink
Electronic Commerce Platform ("ViLink"), a tool for rapid development of web
sites based on insurance data. ViLink has enjoyed broad market acceptance in
the life insurance and related financial services industries.

Since April 1998, the Company has offered LoanXchange to the financial
services industry. LoanXchange is a fully integrated client/server mortgage
origination, processing, underwriting, and secondary marketing platform that
supports both retail and wholesale organizations.

During 1998, the Company shipped its first interactive Internet-based
application, PMSCiSolutions. This product extends the processing capabilities
of Series II to new audiences such as agents and consumers. Future releases
of PMSCiSolutions will provide similar functionality for other Company
administrative applications.

The Company's acquisition of TLG in 1998 provided the Company with PolicyLink.
Policy Link is an Internet-enabled client server system that supports life
insurance and annuity products.

Claims Outcome Advisor is one of the Company's first claims and benefits
solutions. It facilitates the return to work of employees on long-term
disability or with work-related injuries. This solutions maps medical and
job-related information to create possible return to work scenarios. The
first release of Claims Outcome Advisor covers back injuries, the most common
workers' compensation claim.

PRODUCT SUPPORT AND SERVICES

PRODUCT SUPPORT

Most customers initially licensing the Company's software systems pay a
monthly license fee which entitles the customer to Maintenance, Enhancements
and Services Availability ("MESA"). Under the maintenance provisions of MESA,
the Company provides telephone support and error correction to current base
versions of licensed systems. The enhancement provisions of MESA provide
unspecified additions or modifications to the licensed systems, if and when
they become generally available as a result of the Company's continuing
research and development efforts. Services availability allows customers
access to professional services, other than maintenance and enhancements,
which are provided under separate arrangements during the MESA term.

PROFESSIONAL SERVICES

The Company provides, on a time and materials basis, and in some
circumstances under fixed-price arrangements, professional consulting and
other services including needs analysis, implementation, modification, project
management and programming. In addition, the Company provides a full range of
training programs to customers using its products and technology.

OUTSOURCING SOLUTIONS

The Company offers information technology outsourcing ("ITO") services
from its data centers located in North America, Europe and Australia. These
services range from providing processing capabilities for highly regulated
lines of business to providing complete processing capabilities for all or
most of a customer's business. The services range from making available
software systems licensed from the Company on a remote basis, to assuming
complete systems management, processing and administration support
responsibilities for a customer, including complete policyholder services and
claims support. ITO/Business Process Outsourcing ("BPO") services are
typically provided under contracts having terms from three to ten years. By
combining advanced technologies with re-engineered workflows, the Company is
able to bring an increased level of efficiency to its customers' business
processes. Entrusting these processes to the Company allows customers to take
advantage of these efficiencies and focus resources on core competencies.

PRODUCT DEVELOPMENT

Historically, the computer software and services industry has experienced
rapid technological changes in hardware and software. Additionally, the
insurance industry is constantly subject to regulatory changes and new
requirements. This combination of changes requires the Company to
continuously develop new products and enhancements to existing products to
meet the automation needs of the global insurance and related financial
services industries.

Examples of the Company's continuing product development efforts are S3+,
CyberLife, Point+, Claims Outcome Advisor and PMSCiSolutions (see Software
Products above).

Although development efforts for S3+ for the property and casualty insurance
industry will continue, the majority of the components of S3+ have been
delivered since research began in 1987. With the completion of Release 8.0a
in 1997, S3+ offers a comprehensive solution to the property and casualty
industry worldwide in an IBM OS/2 operating system environment. The Company
has adopted object-oriented technology for current and future application
development. As such, it is the Company's goal that every new development
project uses the same technology and architecture to create new insurance
objects. S3+ incorporates object-oriented technology and also supports the
Microsoft Windows NT operating system. Development continues to convert the
functionality of the OS/2 product to compatibility with the Windows NT
operating system. This effort is focused on enhancing existing functionality
and providing commercial lines and workers compensation in a Windows NT
environment.

The development of CyberLife has represented a significant investment for
the Company. Beginning with the existing functionality of the CK/4 Enterprise
Solution, this development has involved creating a new architecture and
expanded capabilities employing object-oriented development techniques and
other leading-edge technologies making it a client/server enterprise-wide
system for the life insurance and related financial services industries.
CyberLife's underlying technologies include expert systems, relational
databases, real-time processing, and multi-platform implementations. The
system is designed to be scalable from IBM mainframes to LAN server platforms.
The client desktop functions with the Windows operating systems.

As part of this development effort and consistent with the Company's desire to
reuse its computer code, a number of the Company's other products, including
the Client Information System, DecisionWise system and ViLink, have been
integrated with CyberLife. This eliminates the need to develop similar
functionality for CyberLife. The Company intends to integrate PolicyLink with
Cyberlife providing an additional LAN solution.

While the Company intends to continue to develop applications for IBM
architecture platforms, it also supports open systems. For example, during
1998, the Company entered into an alliance with Microsoft (see "Strategic
Alliances" below). This open systems approach, which allows the host-based
components to be converted to various platforms, will allow separate software
products to be integrated with one another, as well as with the customer's
existing and future systems, whether provided by the Company or other vendors.

Claims Outcome Advisor is one of the Company's first claims and benefits
solutions. This Microsoft-compatible solution combines medical and
occupational skills to produce return-to-work plans. While the first release
of Claims Outcome Advisor covers back injuries, future releases will address
the remainder of workers' compensation claims as well as the most prevalent
bodily injuries.

The Company's recently added PMSCiSolutions to its list of Internet-based
products. PMSCiSolutions enables insurance companies to participate in
electronic commerce. It provides real-time Internet processing to agents and
consumers.

In an effort to maintain and strengthen its competitive position, the Company
invests substantial amounts in internal product development. Capitalized
internal product development expenditures were $59.6, $62.5 and $56.8 million
in 1998, 1997 and 1996, representing 9.8%, 12.1% and 13.4% of total revenues,
respectively. In addition to its continuing development efforts, the Company,
in the past several years, has invested significant amounts in business and
software product acquisitions in an effort to expand its product and services
offerings and its presence in the marketplace.

The Company intends to continue to expand its product and services offerings
through internal development and acquisitions.

MARKETING AND CUSTOMERS

The Company primarily markets its products and services to more than
1,000 property and casualty and life insurance companies, independent
insurance agents and adjusters and financial institutions. In addition, the
Company offers its software products and automation and administration support
services in 37 countries. No single customer accounted for more than 10% of
revenues during the year ended December 31, 1998.

The Company markets its products and services through a staff of approximately
170 employees, including sales and marketing support personnel, most of whom
are specialists in the insurance industry and information technology. The
Company's marketing force works extensively with each prospective customer to
assist in analyzing its specific requirements. Consequently, the sales cycle
for a prospective customer seeking a major automation based solution may
extend up to one year.

In addition to its own software products, the Company markets certain
third party software products to its customers. Typically, these products are
designed to perform noninsurance functions or to improve the control and
productivity of computer resources.

LICENSES AND PRODUCT PROTECTION

The Company relies upon contract, copyright and other bodies of law to protect
its products as trade secrets and confidential proprietary information. The
Company's agreements with its customers and prospective customers prohibit
disclosure of the Company's trade secrets and proprietary information to third
parties without the consent of the Company and generally restrict the use of
the Company's products to only the customers' operations. The Company also
informs its employees of the proprietary nature of its products and obtains
from them an agreement not to disclose trade secrets and proprietary
information. Notwithstanding those restrictions, it may be possible for
competitors of the Company to obtain unauthorized access to the Company's
trade secrets and proprietary information.

The Company owns numerous trademarks and service marks which are used in
connection with its business in all segments. These trademarks are important
to its business. Depending upon the jurisdiction, the Company's trademarks
are valid as long as they are in use and/or their registrations are properly
maintained and they have not been found to have become generic. Registrations
of these trademarks can generally be renewed indefinitely as long as the
trademarks are in use.

COMPETITION

The computer software and services industry is highly competitive. Based
upon its knowledge of the industry, the Company believes it is a leading
provider of enterprise and electronic commerce application software,
professional services, and outsourcing designed to meet the needs of the
global insurance and related financial services industries. Very large
insurers, which internally develop systems similar to those of the Company,
may or may not become major customers of the Company for software. There are
also a number of independent companies which offer software systems that
perform certain, but not all, of the functions performed by the Company's
systems.

There are a number of larger companies, including computer services, software
and outsourcing companies, consulting firms, computer manufacturers, and
insurance companies, that have greater financial resources than the Company
and possess the technological ability to develop software products similar to
those offered by the Company. These companies present a significant
competitive challenge to the Company's business. The Company competes on the
basis of its service, system functionality, performance, technological
advances and price.

ACQUISITIONS AND GEOGRAPHIC EXPANSION

International customers and marketplaces are essential to the Company
maintaining its position as a leading provider of insurance automation
solutions and systems and related professional services to the global
insurance industry. The Company opened its Canadian office in 1977 and, since
that time, has expanded operations to include Europe, Asia, Australia, and
Latin America. The Company currently has customers in 37 countries (see
Segment Information).

Beginning in 1985, the Company initiated an expansion into the property
and casualty information services business to provide information to assist
insurers in risk selection, pricing and claims adjusting. During 1997, the
Company sold its property and casualty information services business, and
during 1998, the Company sold its life information services business.

Between 1986 and 1989, the Company, through business acquisitions, took the
initial steps towards becoming a major supplier of automated solutions to the
life insurance industry. Since then, the Company has continued to expand its
product and services offerings and, in August 1993, acquired CYBERTEK
Corporation ("CYBERTEK") of Dallas, Texas. CYBERTEK is a leading provider of
information management systems and processing solutions designed to meet the
needs of the life insurance and financial services industries.

Beginning in 1993, the Company significantly increased its presence in
European markets through certain strategic acquisitions.

In 1993, the Company acquired Norwegian-based Vital Data A.S. to expand the
Company's international growth into the Scandinavian countries of Norway,
Finland, Sweden, and Denmark. In 1994, the Company, through its subsidiary
PMS Norden, began developing systems for the Nordic market for individual
life, group life and pensions.

To further strengthen its position in Europe and other foreign markets, the
Company acquired London, England-based Creative in December 1994. Creative
provides services and products to medium-sized general insurance companies.
The acquisition of Creative positioned the Company to capitalize on business
opportunities throughout Europe, Asia, and Australia.

In October 1995, the Company purchased micado Beteiligungs-und Verwaltungs
GmbH ("micado") headquartered in Germany. micado provides services and
software to German insurance and financial services companies. The
acquisition of micado, in addition to expanding the Company's customer base,
positions the Company to make significant advances in the use of
object-oriented technology which has been utilized in S3+TM, the Company's
client/server solution for the property and casualty insurance industry (see
Advanced Computing Technology).

In October 1996, the Company acquired certain assets of Co-Cam Pty Ltd.,
headquartered in Melbourne, Australia, as a means to further strengthen its
presence in the Asian and Australian marketplaces.

In August 1998, the Company acquired The Leverage Group ("TLG"). TLG
owns Policy Link , a family of systems designed to support the administrative
tasks associated with administration, commission processing, payout
processing, and disbursement generation for life insurance and annuity
contracts. This acquisition provides the Company with a LAN-based
client-server solution supporting non-traditional life and financial services
products.

In December 1998, the Company acquired CAF Systemhaus fur
Anwendungsprogrammierung GmbH ("CAF") and related entities. CAF,
headquartered in Gilching, Germany, owns Visual Project Modeling Systems
("VP/MS"). VP/MS is designed to allow insurance companies to easily design
and implement computer code to administer new insurance products with reduced
programming cost and time-to market.

STRATEGIC ALLIANCES

Microsoft. In April 1998, the Company announced a new strategic business
alliance with Microsoft Corporation. Under this strategic alliance, the
Company and Microsoft will engage in joint development, sales and marketing
activities geared toward the insurance and related financial services
industries. The two companies are also working together to develop standards
for processing data in the insurance industry.

Lockheed Martin Corporation. The Company formed a strategic alliance for
systems outsourcing with Integrated Business Solutions, a unit of Lockheed
Martin Corporation ("Lockheed Martin"). In June 1998, a Data Processing
Services Agreement was completed and under its terms, the Company turned over
operation of its Blythewood, South Carolina, data center to Lockheed Martin.

SEGMENT INFORMATION

The Company has classified its operations into five operating segments.
The operating segments are the five revenue-producing components of the
Company for which separate financial information is produced for internal
decision making and planning purposes. The segments are as follows:

1. Property and casualty enterprise software and services (generally
referred to as "property and casualty"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US property and casualty insurance market.

2. Life and financial solutions enterprise software and services (generally
referred to "life and financial solutions"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US life insurance and related financial services markets.

3. International. This segment provides software products, product support,
professional services and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia, Australia and Canada.

4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories,
to US property and casualty insurers. It was sold in August 1997.

5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998.

The majority of the Company's revenues are generated from products and
services provided in the United States, although the Company does have
customers in a total of 37 countries. The following table illustrates the
relative percentages of total revenue represented by the Company's products
and services by geographic region.

Percent of Revenue
Year Ended December 31,
------------------------------
1998 1997 1996
----- ------ ----
United States . . . . 71.0% 67.7% 66.9%
Europe . . . . . . . 21.9 21.2 21.0
Asia and Australia. . 5.5 8.3 8.1
Canada . . . . . . . 1.6 2.8 4.0

Additional information regarding operating segments and geographic areas
is contained in Note 13 of Notes to Consolidated Financial Statements.

SEASONALITY

For discussion of seasonality, see Seasonality and Inflation in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES

At December 31, 1998, the Company had 5,706 full-time employees and 5,839
total employees located in offices worldwide.

ITEM 2. PROPERTIES

The Company owns its 867,000 square foot headquarters complex located on
145 acres in Blythewood, South Carolina. The Company leases space at 25
various locations for its regional and branch offices throughout the United
States. Internationally, the Company leases space at 31 locations throughout
Canada, Europe, Africa, Asia, Australia and New Zealand.

In July 1998, the Company turned over operation of its Blythewood, South
Carolina data center to Lockheed Martin. This data center has 9 mainframe and
mid-range computers, which have over 5 terabytes of disk storage and are
capable of processing over 1.75 billion instructions per second. The Company
is currently utilizing 85% of this capacity.

The Company's data center in Oslo, Norway has one mainframe computer, which
has over 2,000 megabytes of disk storage and is capable of processing over 200
million instructions per second. The Company is currently utilizing 80% of
this capacity.

The Company's data center in North Ryde, Australia has two mainframes and
three mid-range computers, which have over 3,000 megabytes of disk storage and
is capable of processing over 222 million instructions per second. The
Company is currently utilizing 80% of this capacity.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in litigation which commenced in January 1996 in the
Circuit Court in Greenville County, South Carolina, with Liberty Life
Insurance Company and certain of its affiliates ("Liberty") arising out of the
parties' prior contractual relationship related to the development and
licensing of Series III life insurance systems and the subsequent licensing of
the Company's CYBERTEK life insurance systems. Liberty's complaint alleges
breach of contract, breach of express and implied warranties, fraudulent
inducement, breach of contract accompanied by a fraudulent act, and recission.
Liberty has alleged actual and consequential damages in excess of $180 million
and also seeks treble and punitive damages. The Company has asserted various
affirmative defenses and is pursuing counterclaims against Liberty for breach
of contract, recoupment, breach of good faith and fair dealing, and breach of
contract accompanied by a fraudulent act. The Company is seeking equitable
relief, including injunctive relief, and currently unspecified actual,
compensatory and consequential damages.

In addition to the litigation described above, there are also various
other litigation proceedings and claims arising in the ordinary course of
business. The Company believes it has meritorious defenses and is vigorously
defending these matters.

While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age Position
- --------------- --- -----------------------------------------
G. Larry Wilson 52 Chairman of the Board, President and Chief
Executive Officer
David T. Bailey 52 Executive Vice President
Stephen G. Morrison 49 Executive Vice President, Secretary, General
Counsel and Chief Administrative Officer
Michael W. Risley 42 Executive Vice President
Timothy V. Williams 49 Executive Vice President and Chief Financial
Officer

G. Larry Wilson - Chairman of the Board (since 1985), President and Chief
Executive Officer of the Company (since 1980) and his current term as Director
will expire in 2001. Employed by the Company since its inception.

David T. Bailey - Executive Vice President of the Company since 1986.
Responsible for the Property and Casualty Group. Employed by the Company
since 1981.

Stephen G. Morrison - Executive Vice President, Secretary and General Counsel
of the Company since January 1994 and Chief Administrative Officer since 1997.
Responsible for the administration of the legal affairs of the Company, the
Legal and Business Services Group which includes legal, human resources and
corporate marketing. Employed by the Company since January 1994. Prior to
joining the Company, Mr. Morrison was engaged full time in the practice of law
as Senior Partner with Nelson, Mullins, Riley & Scarborough in Columbia, South
Carolina. In that capacity, Mr. Morrison served as the Company's chief
outside litigation counsel. Mr. Morrison will continue his affiliation with
Nelson, Mullins, Riley & Scarborough and continues to perform certain services
in that capacity.

Michael W. Risley - Executive Vice President of the Company since November
1998. Responsible for the Financial Solutions Group. Employed by the Company
since 1985.

Timothy V. Williams - Executive Vice President and Chief Financial Officer of
the Company since February 1994. Responsible for the Financial and
Operational Services Group. Employed by the Company since February 1994.
Prior to joining the Company, Mr. Williams served in senior management
capacities with Holiday Inn Worldwide, based in Atlanta, Georgia, most
recently as Executive Vice President of Corporate Services and Chief Financial
Officer.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is traded on the New York Stock Exchange,
symbol PMS. The Company has never paid or declared a cash dividend on its
common stock, nor currently has any intent to do so. The following table sets
forth, for the calendar periods indicated, the high and low market prices for
the Company's common stock, restated for the stock split that occurred in June
1998 (see Note 11 of Notes to Consolidated Financial Statements).

1998
High Low
--------- ---------

First Quarter . . . $40 11/32 $32
Second Quarter. . . 43 1/2 36 3/8
Third Quarter . . . 48 3/8 36 3/4
Fourth Quarter. . . 57 3/4 28 13/16

1997
High Low
--------- ---------

First Quarter . . . $23 5/16 $21
Second Quarter. . . 27 20 3/4
Third Quarter . . . 32 15/32 24
Fourth Quarter. . . 34 15/16 29 1/16

Title of Class
Common Stock, $.01 par value

The number of record holders of the Company's common stock was 1,204 as of
March 17, 1999.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

RESULTS OF OPERATIONS 1998 1997 1996 1995 1994
-------- -------- -------- --------- --------
(In thousands, except per share data)

Revenues. . . . . . . . . . . . . . . . . $607,458 $518,171 $423,310 $365,485 $300,385
Operating income. . . . . . . . . . . . . 87,432 79,193 69,565 16,285 4,450
Other income and (expenses), net. . . . . (2,136) (3,583) (2,677) (543) 1,256
Income from continuing operations
before income taxes (benefit) . . . . . 86,355 76,799 66,888 15,742 5,706
Discontinued operations, net. . . . . . . (465) 1,994 3,035 (4,959) (15,086)
Net income (loss) . . . . . . . . . . . . $ 53,271 $ 50,257 $ 45,997 $ 3,139 $ (9,658)
Basic earnings (loss) per share . . . . . $ 1.46 $ 1.38 $ 1.24 $ 0.08 $ (0.23)
Diluted earnings (loss) per share . . . . $ 1.36 $ 1.33 $ 1.22 $ 0.08 $ (0.23)
========= ========= ========= ========= =========

FINANCIAL CONDITION
Cash and equivalents, marketable
securities and investments. . . . . . . $ 35,674 $ 46,525 $ 30,838 $ 44,614 $ 34,304
Current assets. . . . . . . . . . . . . . 217,226 185,809 160,342 165,593 167,725
Current liabilities . . . . . . . . . . . 98,935 86,213 112,636 94,461 76,856
Working capital . . . . . . . . . . . . . 118,291 99,596 47,706 71,132 90,869
Total assets. . . . . . . . . . . . . . . 718,698 618,406 581,386 532,736 524,031
Long-term debt (excludes current portion) 85,000 37,714 34,268 14,873 4,162
Total liabilities . . . . . . . . . . . . 285,688 207,910 218,134 150,064 147,109
Stockholders' equity. . . . . . . . . . . 432,484 410,496 363,252 382,672 376,922

The above should be read in conjunction with the Consolidated Financial
Statements, Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in this Annual Report.
Prior year data has been reclassified to conform to current year
presentation.

The results of operations in 1998 include $13.3 million of special charges.
These pre-tax charges include $3.7 million related to the acquisition of The
Leverage Group ("TLG") and $9.6 million for the impairment of capitalized
software development costs which resulted from certain technology related
issues and changes in the Company's strategy (see Note 3 of Notes to
Consolidated Financial Statements).

The results of operations in 1996, 1995 and 1994 reflect special charges. The
results of operations in 1996 include a net special credit of $3.4 million.
This credit resulted from a pre-tax gain of $9.4 million related to the
recovery of previously incurred litigation costs and a pre-tax charge of $6.0
million related to other litigation. The results of operations in 1995
include special charges of $56.4 million (after taxes $39.9 million, or $2.06
per share). These charges principally related to the restructuring of the
Company's data processing facilities and information services business,
litigation costs, acquisition-related charges, impairment of certain
intangible assets and software associated with acquired businesses and the
gain on the sale of the Company's health services business. The results of
operations in 1994 reflect special charges of $67.5 million (after taxes $41.5
million or $1.99 per share). These charges principally related to the
impairment of intangible assets associated with acquired businesses and
discontinued acquired software products and changes in estimates associated
with previously established restructuring reserves.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Set forth below are certain operating items expressed as a percentage of
revenues and the percent increase (decrease) for those items between the
periods presented:

Percent
Increase (Decrease)
-----------------
Percentage of Revenues 1998 1997
Year Ended December 31, vs vs
-----------------------
1998 1997 1996 1997 1996
------ ------ ------ ------ ------

REVENUES:
Licensing . . . . . . . . . . . . . . . . . . 22.0% 25.6% 25.7% 0.8% 22.0%
Services. . . . . . . . . . . . . . . . . . . 78.0 74.4 74.3 22.9 22.6
------ ------ ------
100.0 100.0 100.0 17.2 22.4

OPERATING EXPENSES:
Cost of revenues:
Employee compensation and benefits . . . . . 44.0 41.8 38.9 23.3 31.6
Computer and communications expenses . . . . 5.9 6.2 6.6 11.0 15.6
Depreciation and amortization of property,
equipment and capitalized software costs 10.3 11.2 11.4 7.6 19.6
Other costs and expenses . . . . . . . . . . 3.9 5.3 9.1 (12.8) (29.0)
Selling, general and administrative expenses. . 17.5 18.3 16.1 12.6 39.0
Amortization of goodwill and other intangibles. 1.8 1.9 2.3 7.8 2.5
Impairment charges. . . . . . . . . . . . . . . 1.6 - - - -
Acquisition related charges:
Purchased research and development. . . . . . 0.3 - - - -
Purchased and internally developed software . 0.3 - - - -
Litigation settlement and expenses, net . . . . - - (0.8) - (100.0)
------ ------ ------
85.6 84.7 83.6 18.5 24.1

OPERATING INCOME. . . . . . . . . . . . . . . . 14.4 15.3 16.4 10.4 13.8

Equity in earnings of unconsolidated affiliates 0.2 0.2 - (2.2) -

Minority interest . . . . . . . . . . . . . . . - - - - -

OTHER INCOME AND EXPENSES, NET. . . . . . . . . (0.4) (0.7) (0.6) (40.4) 33.8
------ ------ ------

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . 14.2 14.8 15.8 12.4 14.8

Income taxes. . . . . . . . . . . . . . . . . . 5.4 5.5 5.6 14.3 19.3
------ ------ ------

INCOME FROM CONTINUING OPERATIONS . . . . . . . 8.8 9.3 10.2 11.3 12.3

Discontinued operations, net. . . . . . . . . . (0.1) 0.4 0.7 (123.3) (34.3)
------ ------ ------

NET INCOME. . . . . . . . . . . . . . . . . . . 8.7% 9.7% 10.9% 6.0% 9.3%
====== ====== ======

REVENUES

The Company's revenues are generated principally by licensing
standardized insurance software systems and providing outsourcing and
professional services to the global insurance and related financial services
industries. Licensing revenues are provided for under the terms of
nonexclusive and nontransferable agreements, which generally have a
noncancelable minimum term of six years and provide for an initial license
charge and a monthly license charge. Customers wishing to acquire perpetual
rights to use the Company's software enter into additional agreements to
acquire such rights. Services revenues are derived from professional support
services, which include implementation and integration assistance, consulting
and education services and outsourcing services.

Licensing 1998 Change 1997 Change 1996
--------- ------- ------ ------- ------- -------
(Dollars in millions)

Initial charges. . . . $ 67.7 (3.1)% $ 69.8 34.8% $ 51.8
Monthly charges. . . . 66.1 5.2 62.9 10.3 57.0
------- ------- -------
$133.8 0.8% $132.7 22.0% $108.8
======= ======= =======

Percentage of revenues 22.0% 25.6% 25.7%

Initial license revenues for 1998 decreased $2.1 million compared to 1997
with the following increases or decreases by business segment: property and
casualty down 12.7% ($3.1 million); life and financial solutions up 36.6%
($7.3 million); and international down 24.5% ($6.3 million).

Initial license revenues for 1997 increased $18.0 million compared to 1996
with the following increases by business segment: property and casualty up
18.0% ($3.8 million); life and financial solutions up 34.2% ($5.1 million);
and international up 55.1% ($9.1 million).

Initial license charges include right-to-use licenses of $15.5, $10.2, and
$4.6 million for 1998, 1997 and 1996, respectively. Right-to-use licenses
represent the acquisition by certain customers of the right-to-use component
of their remaining monthly license charge obligation, if any, plus the
acquisition of a perpetual right to use the product thereafter. Since these
types of licenses represent an acceleration of future revenues, they reduce
future monthly license charges. Initial license charges also include contract
termination fees of $4.9, $0.2 and $0 million for 1998, 1997 and 1996,
respectively. Additionally, 1998 initial license charges include $4.9 million
from licensing of the recently acquired TLG products and $2.2 million of
license agreements with the purchaser of the discontinued life information
services segment. In 1997, initial license charges include $1.8 million of
initial license agreements with the purchaser of the discontinued property and
casualty information services segment.

Because a significant portion of initial licensing revenues are recorded at
the time new systems are licensed, there can be significant fluctuations in
revenue from period to period. Set forth below is a comparison of initial
license revenues by segment for 1998, 1997 and 1996:

Initial licensing 1998 1997 1996
----------------- ----- ----- -----
(Dollars in millions)

Property and casualty. . . . $20.8 $23.9 $20.1
Life and financial solutions 27.2 19.9 14.8
International. . . . . . . . 19.7 26.0 16.9
------ ------ ------
$67.7 $69.8 $51.8
====== ====== ======

Percentage of total revenues 11.1% 13.5% 12.2%

Monthly license charges for 1998 increased $3.2 million compared to 1997.
The life and financial solutions segment's monthly license charges increased
25.0% ($2.9 million) due to increased licensing activity. The property and
casualty and international segments' monthly license charges remained
relatively unchanged.

Monthly license charges for 1997 increased $5.9 million compared to 1996
with the following increases by business segment: life and financial
solutions up 42.4% ($3.8 million); and international up 18.3% ($2.1 million).

These increases are related to increased licensing activity. Property and
casualty monthly license charges remained relatively unchanged.

Services 1998 Change 1997 Change 1996
-------- ------ ------ ------ ------ ------
(Dollars in Millions)

Professional and outsourcing $469.6 23.4% $380.6 23.1% $309.3
Information. . . . . . . . . 0.7 31.2 0.5 (28.8) 0.7
Other. . . . . . . . . . . . 3.3 (24.3) 4.4 (3.6) 4.5
------- ------- -------
$473.6 22.9% $385.5 22.6% $314.5
======= ======= =======

Percentage of total revenues 78.0% 74.4% 74.3%

Professional and outsourcing services revenues for 1998 increased $89.0
million compared to 1997, with the following increases by business segment:
property and casualty up 19.1% ($35.6 million); life and financial solutions
up 55.1% ($38.5 million); and international up 12.0% ($14.9 million). The
increases are principally due to increases in implementation services and in
the processing volumes of services provided to new and existing customers.

Professional and outsourcing services revenues for 1997 increased $71.3
million compared to 1996, with the following increases by business segment:
property and casualty up 19.6% ($30.6 million); life and financial solutions
up 61.4% ($26.5 million); and international up 12.9% ($14.2 million). The
increases are principally due to increases in implementation services and in
the processing volumes of services provided to new and existing customers.
The increases were partially offset by the elimination of approximately $11.4
million in revenue that generated no profit related to the Florida Business
Process Outsourcing ("BPO") unit.

The Company's confidence in forecasting the demand for new large
enterprise licenses and new services agreements was lower at the end of 1998
than it was earlier in the year. This is primarily due to the continuing
impact of Year 2000 demands on customer resources and decision processes and
the emergence of the Internet and the resulting changing priorities of some
insurance companies.

At the end of the third quarter and during the fourth quarter of 1998, the
Company completed fewer transactions than were previously forecast. Some of
these opportunities were deferred while others were foregone in favor of
alternative strategies. Although the Company believes that the demands of the
Year 2000 have provided licensing and servicing opportunities with some
customers, it also has delayed or prevented other opportunities. In addition,
the Year 2000 has caused an unprecedented level of investment in systems and
remediation services. The Company is unable to accurately predict how the
demand for new licensing and services will be affected by these investments.

Furthermore, the Company believes most insurance companies were required
to complete remediation of their policy administration systems by the third
quarter of 1998. However, many insurance companies' information technology
("IT") departments are continuing to focus on Year 2000 remediation issues and
testing of their applications, suppliers and data processing environments.
This continuing level of distraction and asset allocation limits the Company's
ability to accurately predict licensing and services demand over the next
twelve to eighteen months.

The Company believes that system evaluations and decision processes are
also being affected by uncertainties related to the Internet. The emergence
of the Internet as a viable insurance distribution channel is causing a
re-evaluation of the traditional methods of distribution for insurance
products. The Company also believes that in order for insurance companies to
capitalize on this new distribution method they will be required to redesign
their business models and related support systems. The issues raised by the
emergence of the Internet and related technology requirements will be
distracting and confusing for many insurance companies and complicate the
process of transitioning the insurance industry to client/server architecture.
Therefore, customer uncertainty as to their Internet and client/server
business strategies may extend sales cycles for large enterprise systems.

OPERATING EXPENSES

COST OF REVENUES

Employee compensation and benefits for 1998 increased 23.3% compared to
1997. The net increase results principally from higher salaries and related
costs associated with the growth in professional services staffing being
somewhat offset by the transfer of certain employee costs to computer and
communication expenses as a result of the Company's data center outsourcing
agreement with Lockheed Martin Corporation ("Lockheed Martin"). Had these
employee costs not been transferred, 1998 employee compensation and benefits
would have increased 25% by comparison to last year. Compensation and
benefits increased 22.8% ($14.2 million) internationally and 23.6% ($36.4
million) domestically.

Employee compensation and benefits for 1997 increased 31.6% compared to 1996
principally as a result of the increased salaries and related costs associated
with the growth in staffing in all business units. Compensation and benefits
increased 31.2% ($14.9 million) internationally and 31.8% ($37.2 million)
domestically.

Computer and communications expenses for 1998 increased 11.0% compared to
1997. At the beginning of the third quarter, the Company entered into a data
center outsourcing agreement with Lockheed Martin. As a result, certain costs
previously included in employee compensation and benefits are now included in
computer and communications expense. Had these employee costs not been
transferred, 1998 computer and communications expenses would have remained
relatively unchanged by comparison to last year. The savings from the
outsourcing agreement were offset by increased communications volumes,
increased network and PC related expenses and increased license fees for
operational data center software.

Computer and communications expenses for 1997 increased 15.6% compared to
1996, principally as a result of increased communications, data circuit and
maintenance costs associated with the growth of the Company's domestic and
international outsourcing operations.

Depreciation and amortization of property, equipment and capitalized software
costs for 1998 increased 7.6% compared to 1997 principally due to higher
amortization expense resulting from various releases of the Company's
internally developed software products. However, as a percentage of revenue,
depreciation and amortization expense declined to 10.3% from 11.2% in 1997.

Depreciation and amortization of property, equipment and capitalized software
costs for 1997 increased 19.6% compared to 1996. This increase is due
principally to higher amortization expense resulting from the release of
version 9702 of CyberLife client/server life insurance software in October
1997. In addition, depreciation expense increased due to the Company's
increased investment in network and PC hardware.

Other operating costs and expenses for 1998 decreased 12.8% compared to
1997 principally due to lower consultant, contract loss and bad debt expense,
partially offset by increased facility costs and decreased amounts of
capitalized software development costs.

Other operating costs and expenses for 1997 decreased 29.0% compared to 1996.
This decrease is primarily due to the elimination of costs (and previously
referenced revenues) for the BPO unit in Florida and an increase in amounts
capitalized principally related to the continued enhancement and development
of S3+, CyberLife and I+. The decrease was partially offset by increased fees
for the use of consultants and independent contractors to satisfy staffing
needs for certain development and services activities, as well as increased
rent and other facility costs.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses for 1998 increased 12.6%
compared to 1997, principally due to increased bonus, commission, and rent,
partially offset by decreased third party commissions. As a percentage of
revenue, selling general and administrative expenses declined to 17.5% from
18.3% in 1997.

Selling, general and administrative expenses for 1997 increased 39.0% compared
to 1996, principally from the Company's investment in its international sales
force and administrative infrastructure.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES

Amortization of goodwill and other intangibles for 1998 increased 7.8%
compared to 1997, principally due to the amortization of costs associated with
the acquisition of TLG and the Lockheed Martin outsourcing arrangement.

Amortization of goodwill and other intangibles for 1997 remained relatively
unchanged compared to 1996.

IMPAIRMENT AND ACQUISITION RELATED CHARGES

The results of operations in 1998 include $13.3 million of special
charges. These pre-tax charges include $3.7 million related to the
acquisition of TLG and $9.6 million for the impairment of capitalized software
development costs which resulted from certain technology related issues and
changes in the Company's strategy (see Note 3 of Notes to Consolidated
Financial Statements).

LITIGATION SETTLEMENT AND EXPENSES, NET

In May 1996, the Company resolved a litigation matter with an agreement for
the mutual dismissal of all related claims and counterclaims as well as the
Company's recovery of certain defense costs, with interest. As a result, the
Company recorded a $9.4 million pre-tax gain for this recovery during the
second quarter of 1996. Additionally, in February 1997, the Company
determined it was necessary to increase its estimate of anticipated liability
for the costs associated with a verdict in another litigation matter and as of
December 31, 1996, recorded an additional $6.0 million for the costs in this
matter.

OPERATING INCOME

1998 operating income increased 10.4% compared to 1997. Increases in
segment operating income were: property and casualty up 4.9%, life and
financial solutions up 74.0% and international up 15.4%. The increase in
operating income is primarily related to increases in professional services
and outsourcing revenues while operating costs increased at a slower rate than
the related revenue.

1997 operating income increased 13.8% compared to 1996. Increases in segment
operating income were: property and casualty up 10.8%, life and financial
solutions up 47.1% and international up 28.3%. The increase in operating
income is primarily related to increases in licensing and professional
services revenues.

Excluding special charges and credits, operating income for 1998 was $100.8
million compared to $79.2 million for 1997 and $65.9 million for 1996.
Operating income, as a percentage of total revenues, excluding the effects of
the special charges described above, was 16.6% for 1998, 15.3% for 1997 and
15.6% for 1996.

A significant portion of both the Company's revenues and its operating income
is derived from initial licensing charges received as part of the Company's
software licensing activities. Because a substantial portion of these
revenues are recorded at the time systems are licensed, there can be
significant fluctuations from quarter-to-quarter and year-to-year in the
revenues and operating income derived from licensing activities. This is
attributable principally to the timing of customers' decisions to enter into
license agreements with the Company, which the Company is unable to control.

Set forth below is a comparison of initial license revenues by quarter
expressed as a percentage of annual initial license revenues and total
revenues for each of the years presented:

First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
(Dollars in Millions)

1998 initial license revenues. . . . $ 12.6 $13.0 $14.7 $27.4 $ 67.7
% of annual initial license revenues 18.6 % 19.2% 21.7% 40.5% 100.0%
% of total revenues. . . . . . . . . 9.0% 9.0% 9.7% 16.0% 11.1%

1997 initial license revenues. . . . $ 11.3 $16.6 $16.9 $25.0 $ 69.8
% of annual initial license revenues 16.2% 23.8% 24.2% 35.8% 100.0%
% of total revenues. . . . . . . . . 9.8% 13.4% 12.8% 17.0% 13.5%

1996 initial license revenues. . . . $ 10.4 $12.0 $10.0 $19.4 $ 51.8
% of annual initial license revenues 20.1% 23.2% 19.4% 37.3% 100.0%
% of total revenues. . . . . . . . . 11.0% 12.4% 9.3% 15.5% 12.2%

OTHER INCOME AND EXPENSES

Investment income for 1998 was relatively unchanged compared to 1997.
Interest expense decreased 27.5% for 1998 compared to 1997, principally due to
lower levels of borrowed funds under the Company's credit facility and the
capitalization of interest on construction in progress.

Due to reduced levels of investable funds during 1997, investment income
decreased $0.8 million compared to 1996. Interest expense was relatively
unchanged.

INCOME TAXES

The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 39.7%, 37.4%, and 36.2% for the years ended December 31,
1998, 1997 and 1996, respectively. The effective income tax rate on
continuing operations was 37.8%, 37.2% and 35.8% for the years ended December
31, 1998, 1997 and 1996, respectively.

DISCONTINUED OPERATIONS, NET

Loss from discontinued operations increased for 1998 compared to 1997,
principally due to (i) an additional loss of $1.0 million, net of tax,
recognized during 1998 related to the write down of capitalized software and
receivables of the property and casualty information services segment; (ii)
partial year operating results in 1998 compared to full year operating results
in 1997 for the life information services segment; and (iii) no operating
results in 1998 compared to eight months operating results in 1997 for the
property and casualty information services segment.

Income from discontinued operations decreased for 1997 compared to 1996,
principally due to partial year operating results in 1997 compared to full
year operating results in 1996 for the property and casualty information
services segment.

For additional information on the discontinued operations, see Note 13 of
Notes to Consolidated Financial Statements.

NEW ACCOUNTING STANDARDS

130 at January 1, 1998 and has included the appropriate disclosures in the
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income.

In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
subsequently amended. As amended, SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions, and is effective for transactions entered into in fiscal years
beginning after December 31, 1997. The Company adopted SOP 97-2 at January 1,
1998 and the amendments in order of their issuance. The adoption did not have
a material impact on the Company's financial statements.

In February 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use, and is effective for fiscal years beginning
after December 31, 1998, with earlier adoption encouraged. The Company
adopted SOP 98-1 at January 1, 1998. The adoption did not have a material
effect on the Company's financial statements.

In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued,
effective for fiscal years beginning after June 15, 1999, with earlier
adoption encouraged. SFAS 133 requires companies to record derivative
instruments on the balance sheet as assets and liabilities, measured at fair
value. Gain or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative. The
Company does not enter into derivative instruments except occasionally to
hedge the foreign currency exchange and interest rate risk of specific
projected transactions. The Company was not holding any derivative
instruments at December 31, 1998 and 1997.

LIQUIDITY AND CAPITAL RESOURCES
December 31,
1998 1997
-------- -------
(In Millions)

Cash and equivalents, marketable securities and investments $ 35.7 $ 46.5
Current assets. . . . . . . . . . . . . . . . . . . . . . . 217.2 185.8
Current liabilities . . . . . . . . . . . . . . . . . . . . 98.9 86.2
Working capital . . . . . . . . . . . . . . . . . . . . . . 118.3 99.6
Current portion of long-term debt . . . . . . . . . . . . . 15.8 1.2
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 85.0 37.7

Cash provided by operations . . . . . . . . . . . . . . . . $ 99.8 $128.2
Cash (used) by investing activities . . . . . . . . . . . . (138.2) (97.6)
Cash provided (used) by financing activities. . . . . . . . 32.2 (20.6)

The Company's current ratio (current assets divided by current
liabilities) stood at 2.2 at December 31, 1998. Management believes this is
sufficient when combined with the available credit facility to provide for
day-to-day operating needs and the flexibility to take advantage of investment
opportunities. At December 31, 1998, the Company had available $115 million
of its five year $200 million credit facility. The Company also had available
a $15 million uncommitted operating line of credit, all of which was
outstanding at December 31, 1998.

During 1998, the Company capitalized $59.6 million of internal software
development costs principally related to the development of its S3+
client/server property and casualty software (including the incorporation of
object-oriented technology and support for Microsoft Windows NT ) and
CyberLife object-oriented client/server life insurance software, as well as
other ongoing projects in support of its domestic and international product
strategies.

Significant expenditures planned for 1999, excluding any possible business
acquisitions and stock repurchases, are as follows: acquisition of data
processing and communications equipment, support software, buildings, building

improvements and office furniture, fixtures and equipment and costs relating
to the internal development of software systems.

The Company has historically used the cash generated from operations for the
development and acquisition of new products, capital expenditures, acquisition
of businesses and repurchase of the Company's stock. The Company anticipates
that, subject to market conditions, it will continue to use its cash for all
of these purposes in the future and that projected cash from operations, along
with currently available borrowing capacity, will be able to meet presently
anticipated needs.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's operating results and financial condition may be impacted by a
number of factors, including, but not limited to, the following, any of which
could cause actual results to vary materially from current and historical
results or the Company's anticipated future results.

Currently, the Company's business is focused principally within the global
property and casualty and life and financial solutions industries.
Significant changes in the regulatory or market environment of these
industries could impact demand for the Company's software products and
services. Additionally, there is increasing competition for the Company's
products and services, and there can be no assurance that the Company's
current products and services will remain competitive, or that the Company's
development efforts will produce products with the cost and performance
characteristics necessary to remain competitive. Furthermore, the market for
the Company's products and services is characterized by rapid changes in
technology and the emergence of the Internet as a viable insurance
distribution channel. The Company's success will depend on the level of
market acceptance of the Company's products, technologies and enhancements,
and its ability to introduce such products, technologies and enhancements to
the market on a timely and cost effective basis, and maintain a labor force
sufficiently skilled to compete in the current environment.

Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental agency
and changes associated with newly elected state administrations or newly
appointed regulators.

The timing and amount of the Company's revenues are subject to a number of
factors, such as the timing of customers' decisions to enter into large
license agreements with the Company, which make estimation of operating
results prior to the end of a quarter or year extremely uncertain.
Additionally, while management believes that the Company's financing needs for
the foreseeable future will be satisfied from cash flows from operations and
the Company's currently existing credit facility, unforeseen events or adverse
economic or business trends may significantly increase cash demands beyond
those currently anticipated or affect the Company's ability to generate/raise
cash to satisfy financing needs.

A significant portion of both the Company's revenue and its operating income
is derived from initial licensing charges received as part of the Company's
software licensing activities. Because a substantial portion of these
revenues is recorded at the time new systems are licensed, there can be
significant fluctuations from period to period in the revenues and operating
income derived from licensing activities. This is attributable principally to
the timing of customers' decisions to enter into license agreements with the
Company, which the Company is unable to control. The Company believes that
current and potential customers' decisions to enter into license agreements
with the Company may be significantly affected by strategies to make their
existing information systems capable of handling the year 2000, however, at
this time the Company is unable to predict what the future impact, if any,
will be.

Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be
considered to be a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.

YEAR 2000

General
- -------

Many existing computer programs were designed to use only two digits to
identify a year in date fields. If not corrected, these applications could
fail or produce erroneous results when working with dates of the Year 2000 and
beyond.

Beginning in the fourth quarter of 1997, the Company initiated consolidation
of its Year 2000 activities under a centralized Year 2000 Project Office.
Prior to that, individual business units were responsible for the assessment,
remediation, validation and implementation of Year 2000 corrective actions.

There following seven phases are included in the Company's Year 2000 project:

Planning. Educating the organization on Year 2000 issues and concerns, the
readiness efforts necessary, and preparing for the next phase of the Year 2000
readiness project.
Inventory. Cataloguing all organizational components, including products,
external or internal interfaces, hardware and software that may require
remediation and testing to adequately address Year 2000 concerns.
Triage. Prioritizing and categorizing all products, equipment, interfaces,
data, and facilities identified during the Inventory phase. Emphasis is
placed on the identification of: all mission critical components, those that
are least important, and those that fall in the middle
Assessment. Identifying remediation requirements for each component in order
of business risk prioritization determined during Triage.
Remediation. Repairing, replacing, or retiring components based on the work
identified during the Assessment phase. Unit tests on repaired applications
are also included in this phase.
Testing. Testing components that were repaired. Such tests include both
system tests and integrated tests in test environments with machine dates
advanced to reflect dates in the years 1999 and 2000.
Implementation. Migrating systems, applications, and hardware to production
environments, installation of replacement systems and the retirement of
designated components, as well as finalizing, documenting and taking care of
residual activities. This phase also includes the compilation and retention
of supporting documentation that conforms to prescribed corporate standards.

All phases are currently scheduled to be completed during the third quarter of
1999.

The Year 2000 issue may potentially affect the Company in four areas: its
product offerings, its service offerings, its internal systems, and its
suppliers and trading partners.

Product Offerings
- -------------------

The Company has updated the code of its primary product offerings to process
dates across the century boundary. Current testing has confirmed the ability
of the applications to process data in both centuries. Beyond that, additional
testing is scheduled on the Company's base products for the first half of 1999
in an environment that utilizes accelerated system dates (Year 2000
environment). This additional testing seeks to confirm that no unanticipated
problems will occur due to third party products with which the Company's
applications are designed to operate. Once all of the Company's base products
have been tested in a Year 2000 environment, redundant testing will continue
through the remainder of 1999.

Based on current inventories, the Company is also in the process of contacting
critical, third party dependencies to determine whether remediation efforts or
alternative measures to handle Year 2000 impacts are necessary.

Service Offerings
- -------------------

The Company has completed Year 2000 application code remediation for all
domestic property and casualty customers who will be Business Process
Outsourcing ("BPO")/Information Technology Outsourcing ("ITO")

customers after December 31, 1999. Live customer data is currently being
processed on these remediated applications in a production environment. Based
upon customer preference, additional testing is scheduled during 1999 in a
Year 2000 environment. This testing is designed to confirm that no
unanticipated problems will occur due to third party products with which the
Company's applications are designed to operate.

Internal Systems
- ------------------

Internal systems consist primarily of third-party products used by the Company
for its internal operations which include data center hardware and software,
internal financial and human resource systems, and network and PC hardware and
software. The Company's Blythewood data center has substantially completed its
hardware and operating software inventory, assessments, remediation, and
testing efforts in order to satisfy Year 2000 requirements. As of July 1,
1998, Lockheed Martin took over the data processing equipment and operational
control of the Blythewood data center and remaining remediation efforts will
be coordinated with Lockheed Martin. The Company's Australian and European
data centers have substantially completed their inventory and assessment of
hardware and operating software for Year 2000 requirements. Final
implementation for all data centers is scheduled for completion by June 30,
1999.

In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to
replace its existing systems. The financial components of the selected
solution are substantially operational. The solution's human resources
functionality is scheduled to be fully operational during the third quarter of
1999. The selected solution meets Year 2000 requirements.

The Company is inventorying and assessing all of its network and PC hardware
and software to determine if any Year 2000 remediation upgrades will be
required. The majority of the inventory and assessment phases are complete.
The Company has also assessed readiness with respect to non-IT systems which
relate primarily to the ordinary maintenance and operation of its physical
facilities, such as elevators, heating and air conditioning.

Suppliers and Trading Partners
- ----------------------------------

The Company's ability to operate is dependent on relationships with certain
suppliers and trading partners, such as electric utilities and telephone
companies, who provide services to the Company's various offices and data
centers ("mission critical suppliers and trading partners"). The Company
expects to complete the process of identifying all potential mission critical
suppliers and trading partners prior to the end of the second quarter of 1999.
Any identified mission critical third party systems and data interfaces will
be tested, to the extent practical, in a Year 2000 environment. The Company's
ability to influence cooperation is partially dependent on the significance of
the Company's relationship with its suppliers and trading partners. The
Company anticipates completing this phase of its Year 2000 readiness project
in the second quarter of 1999.

Year 2000 Costs
- ------------------

Since 1993, the Company estimates that it has incurred approximately $16
million of costs in addressing Year 2000 remediation issues and will spend
approximately $3 million during 1999. Based on the Company's experience to
date, it is not anticipated that the completion of the remaining Year 2000
remediation efforts will have a material adverse effect upon the Company's
financial position or results of operations. The Company's past and
anticipated future remediation costs are funded by operations.

Year 2000 Risks
- ------------------

The Company's products are designed to be used with and require use of
third-party products, such as operating systems and compilers. Also,
customers often modify the Company's products to suit their unique
requirements. If these third parties experience Year 2000 failures of their
products, or if customers experience system failures as a result of their
modifications or for other reasons, the Company could become involved in
disputes or litigation related to the cause of such system failures.

In addition, the failure to correct material Year 2000 problems could result
in an interruption in, or a failure of, certain normal business activities or
operations and litigation. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and the Company's customers and prospective customers, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its mission
critical suppliers and trading partners. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.

The Company continues to develop contingency plans to minimize the effect of
such disruptions.

Readers are cautioned that forward-looking statements contained in this Year
2000 section should be read in conjunction with the Company's disclosures
under the heading "Factors That May Affect Future Results" above.

EURO CONVERSION

On January, 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro and have agreed to adopt the euro as their common legal currency
on that date. It is also possible that some of the non-participating
countries may also choose to convert to the euro at a later date. From
January 1, 1999, to December 31, 2001, there will be a transition period,
during which the participating countries may conduct transactions in either
their legacy currency or the euro. On January 1, 2002, new euro-denominated
bills and coins will be issued, and by July 1, 2002, all legacy currency bills
and coins will be withdrawn, finalizing the conversion to the euro.

The Company is currently evaluating methods to address the issues involved
with the introduction of the euro, including the conversion of its products in
the relevant markets and impacts on the processes for preparing taxation and
accounting records.

The Company is surveying licensees of its products domiciled or doing business
in the participating countries. The needs of each licensee may vary with
regards to converting to the euro depending on how and when they choose to
convert. The Company is preparing strategies to modify its products licensed
in the participating countries to convert to the euro. These modifications
will be made available to licensees for a fee. Implementation of the
modifications is the responsibility of each licensee.

Company subsidiaries are incorporated in four of the participating countries:
Germany, Austria, the Netherlands and Ireland. The Company has implemented
new financial accounting systems that will enable it to convert the affected
operations to the euro in a timely and effective manner.

Based upon the Company's experience to date, it is not anticipated that the
euro conversion will have a material impact on the Company's consolidated
financial statements.

SEASONALITY AND INFLATION

The Company's operations have not proven to be significantly seasonal,
though as with many companies in the software business, the fourth quarter
tends to be the strongest quarter annually. Quarterly revenues and net income
can be expected to vary at times. This is attributable principally to the
timing of customers entering into license agreements with the Company. The
Company is unable to control the timing of these decisions.

Although the Company cannot accurately determine the amounts attributable
thereto, the Company has been affected by inflation through increased costs of
employee compensation and other operating expenses. To the extent permitted
by the marketplace for the Company's products and services, the Company
attempts to recover increases in

costs by periodically increasing prices. Additionally, most of the Company's
license agreements and long-term services agreements provide for annual
increases in charges.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 1998, the Company held no derivatives or similar
financial instruments bearing market risk related to interest rates, foreign
currency, equities or commodities. From time-to-time, the Company enters into
forward foreign currency exchange contracts to hedge specific anticipated
transactions in currencies other than the US dollar. Approximately 21% of the
Company's assets are invested in currencies other than the US dollar. There
are no material financial assets held in currencies outside of the functional
currencies of these subsidiaries.

The Company has variable rate debt explained in Note 7 of Notes to
Consolidated Financial Statements.
____________________________________________________

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this annual report that are not descriptions of
historical facts may be forward-looking statements that are subject to risks
and uncertainties, including economic, competitive and technological factors
affecting the Company's operations, markets, products, services and prices, as
well as other specific factors discussed in Note 14 of Notes to Consolidated
Financial Statements and elsewhere herein and in the Company's filings with
the Securities and Exchange Commission. These and other factors may cause
actual results to differ materially from those anticipated.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Supplementary Data

Page

REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:

Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 26

Consolidated Balance Sheets as of December 31, 1998 and 1997 . . . . . . . . . . . . . . . 27

Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . 28

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 29

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 30

QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 48

SUPPLEMENTAL SCHEDULES:

Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . 49

Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

<FN>

Supplemental schedules other than those listed above are omitted because of the absence of
conditions under which they are required or because the required information is included in the
consolidated financial statements or in the notes thereto.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Policy Management Systems Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity and comprehensive income present fairly, in all material respects, the
financial position of Policy Management Systems Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Atlanta, Georgia
February 9, 1999

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
------------------------------
1998 1997 1996
--------- --------- --------
(In thousands, except per share data)
REVENUES:

Licensing. . . . . . . . . . . . . . . . . . . . . . . . $133,814 $132,705 $108,816
Services . . . . . . . . . . . . . . . . . . . . . . . . 473,644 385,466 314,494
--------- --------- ---------
607,458 518,171 423,310
--------- --------- ---------
OPERATING EXPENSES:
Cost of revenues:
Employee compensation and benefits . . . . . . . . . . 267,386 216,779 164,702
Computer and communications expenses . . . . . . . . . 35,891 32,333 27,962
Depreciation and amortization of property,
equipment and capitalized software costs . . . . . . 62,391 57,959 48,445
Other costs and expenses . . . . . . . . . . . . . . . 23,940 27,459 38,656
Selling, general and administrative expenses . . . . . . 106,528 94,649 68,083
Amortization of goodwill and other intangibles . . . . . 10,565 9,799 9,564
Impairment and restructuring charges . . . . . . . . . . 9,593 - (245)
Acquisition related charges:
Purchased research and development . . . . . . . . . . 2,000 - -
Purchased and internally developed software. . . . . . 1,732 - -
Litigation settlement and expenses, net. . . . . . . . . - - (3,422)
--------- --------- ---------
520,026 438,978 353,745
--------- --------- ---------

OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 87,432 79,193 69,565

Equity in earnings of unconsolidated affiliates. . . . . . 1,163 1,189 -

Minority interest. . . . . . . . . . . . . . . . . . . . . (104) - -

OTHER INCOME AND EXPENSES:
Investment income. . . . . . . . . . . . . . . . . . . . 1,569 1,527 2,316
Interest expense and other charges . . . . . . . . . . . (3,705) (5,110) (4,993)
--------- --------- ---------
(2,136) (3,583) (2,677)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . 86,355 76,799 66,888
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 32,619 28,536 23,926
--------- --------- ---------

INCOME FROM CONTINUING OPERATIONS. . . . . . . . . . . . . 53,736 48,263 42,962

DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $252, $1,535, and $2,125, respectively. . . . . . . 389 2,058 3,035
Loss on disposal of discontinued operations, less
applicable income taxes (benefit) of $2,272 and ($38),
respectively. . . . . . . . . . . . . . . . . . . . . (854) (64) -
--------- --------- ---------
(465) 1,994 3,035
--------- --------- ---------

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 53,271 $ 50,257 $ 45,997
========= ========= =========

BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . . . . . . $ 1.47 $ 1.32 $ 1.16
(Loss) income from discontinued operations . . . . . . . (0.01) 0.06 0.08
--------- --------- ---------
$ 1.46 $ 1.38 $ 1.24
========= ========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . . . . . . $ 1.37 $ 1.28 $ 1.14
(Loss) income from discontinued operations . . . . . . . (0.01) 0.05 0.08
--------- --------- ---------
$ 1.36 $ 1.33 $ 1.22
========= ========= =========

WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . . . . . . 36,441 36,468 37,208
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION . . . . . 39,289 37,666 37,666
========= ========= =========

<FN>

See accompanying notes.

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS

December 31,
-------------------
1998 1997
--------- --------
(In thousands, except share data)
ASSETS
Current assets:

Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,013 $ 32,179
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,280
Receivables, net of allowance for uncollectible amounts of $2,051 ($2,628 at 1997) 104,299 89,920
Accrued revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,686 38,869
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,336 3,628
Other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,279 -
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,645 8,884
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,968 9,049
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,226 185,809

Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,436 116,433
Accrued revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,844 3,271
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . 81,401 69,125
Capitalized software costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 220,908 204,118
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,787 21,996
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,661 11,066
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,394 2,547
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $718,698 $618,406
========= =========

LIABILITIES
Current liabilities:
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . $ 57,129 $ 57,345
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 15,812 1,191
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,202 7,499
Unearned revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,804 18,806
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988 1,372
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 98,935 86,213

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 37,714
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,233 80,496
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,520 3,487
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,688 207,910
--------- ---------

Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526 -

Commitments and contingencies (Note 8)

STOCKHOLDERS' EQUITY
Special stock, $.01 par value, 5,000,000 shares authorized . . . . . . . . . . . . . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
36,357,139 shares issued and outstanding (18,339,304 at 1997). . . . . . . . . . . 364 183
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,396 112,090
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,454 306,367
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . (9,730) (8,144)
--------- ---------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 432,484 410,496
--------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $718,698 $618,406
========= =========

<FN>

See accompanying notes.

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
------ -------- --------- -------- --------
(Dollars in thousands)

BALANCE, DECEMBER 31, 1995 . . . . $194 $173,402 $210,113 $(1,037) $382,672

Comprehensive income
Net income . . . . . . . . . . . - - 45,997 - 45,997
Other comprehensive income,
net of tax
Foreign currency
translation adjustments. . . - - - 1,905 1,905
Unrealized loss on
marketable securities. . . . - - - (12) (12)
---------
Total comprehensive income 47,890
---------
Stock options exercised
(148,084 shares) . . . . . . . . 2 6,291 - - 6,293
Repurchase of 1,405,012 shares
of common stock. . . . . . . . . (14) (73,589) - - (73,603)
----- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 1996 . . . . 182 106,104 256,110 856 363,252

Comprehensive income
Net income . . . . . . . . . . . - - 50,257 - 50,257
Other comprehensive income,
net of tax
Foreign currency
translation adjustments. . . - - - (9,020) (9,020)
Unrealized gain on
marketable securities. . . . - - - 20 20
---------
Total comprehensive income 41,257
---------
Stock options exercised
(240,018 shares) . . . . . . . . 3 11,018 - - 11,021
Repurchase of 79,900 shares
of common stock. . . . . . . . . (2) (5,032) - - (5,034)
----- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 1997 . . . . 183 112,090 306,367 (8,144) 410,496

Comprehensive income
Net income . . . . . . . . . . . - - 53,271 - 53,271
Other comprehensive income,
net of tax
Foreign currency
translation adjustments (1,578) (1,578)
Unrealized loss on
marketable securities. . . . - - - (8) (8)
---------
Total comprehensive income 51,685
---------
Stock dividend (18,426,691 shares) 184 - (184) - -
Stock options exercised
(1,734,544 shares) . . . . . . . 18 61,623 - - 61,641
Repurchase of 2,143,400 shares
of common stock. . . . . . . . . (21) (91,317) - - (91,338)
----- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 1998 . . . . $364 $ 82,396 $359,454 $(9,730) $432,484
===== ========= ========= ======== =========

<FN>

See accompanying notes.

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ----------
(In thousands)
OPERATING ACTIVITIES

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,271 $ 50,257 $ 45,997
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 78,386 72,276 62,265
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 5,338 13,365 20,392
Provision for uncollectible accounts . . . . . . . . . . . . 90 2,951 510
Impairment charges . . . . . . . . . . . . . . . . . . . . . 9,593 75 -
Gain on disposal of discontinued operations. . . . . . . . . (1,986) - -
Acquisition related charges. . . . . . . . . . . . . . . . . 3,732 - -
Changes in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . (18,647) (3,999) (8,599)
Accrued revenues . . . . . . . . . . . . . . . . . . . . . . (11,390) (10,033) (8,700)
Accounts payable and accrued expenses. . . . . . . . . . . . (3,540) (4,422) (9,524)
Income taxes payable . . . . . . . . . . . . . . . . . . . . 1,564 876 4,805
Unearned revenues. . . . . . . . . . . . . . . . . . . . . . (3,825) 8,966 (1,510)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (12,793) (2,083) (6,996)
---------- ---------- ----------
Cash provided by operations . . . . . . . . . . . . . . 99,793 128,229 98,640
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sales/maturities of available-for-sale securities. 3,257 250 2,050
Proceeds from maturities of held-to-maturity securities. . . . . 2,969 - 1,000
Proceeds from sale of business segment . . . . . . . . . . . . . 23,826 2,900 -
Acquisition of property and equipment. . . . . . . . . . . . . . (61,699) (31,761) (28,852)
Capitalized internal software development costs. . . . . . . . . (59,642) (62,508) (56,775)
Business acquisitions. . . . . . . . . . . . . . . . . . . . . . (37,023) (1,837) (6,178)
Investment by minority interest. . . . . . . . . . . . . . . . . 425 - -
Investment in unconsolidated affiliate . . . . . . . . . . . . . (300) (4,850) (2,315)
Proceeds from disposal of property and equipment . . . . . . . . 1,031 806 980
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,013) (573) (2,810)
---------- ---------- ----------
Cash used by investing activities. . . . . . . . . . . . . . . . . . (138,169) (97,573) (92,900)
---------- ---------- ----------
FINANCING ACTIVITIES
Payments on long-term debt . . . . . . . . . . . . . . . . . . . (67,593) (181,219) (210,265)
Proceeds from borrowing under credit facilities. . . . . . . . . 129,500 154,634 258,862
Issuance of common stock under stock option plans. . . . . . . . 61,641 11,021 6,293
Repurchase of outstanding common stock . . . . . . . . . . . . . (91,338) (5,034) (73,603)
---------- ---------- ----------
Cash provided (used) by financing activities. . . . . . 32,210 (20,598) (18,713)
---------- ---------- ----------
Net (decrease) increase in cash and equivalents. . . . . . . . . . . (6,166) 10,058 (12,973)
Cash and equivalents at beginning of period. . . . . . . . . . . . . 32,179 22,121 35,094
---------- ---------- ----------
Cash and equivalents at end of period. . . . . . . . . . . . . . . . $ 26,013 $ 32,179 $ 22,121
========== ========== ==========

SUPPLEMENTAL INFORMATION
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,174 $ 3,328 $ 3,811
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . . 14,056 12,229 (2,193)

<FN>

Non-cash operating activities:
The Company has recorded a liability and corresponding asset related to the deferral of $2.5 million of
compensation expense payable in the form of restricted stock, vesting over five years.

Non-cash investing activities:
The Company transferred $11.3 million of property, plant and equipment at net book value to Lockheed
Martin in exchange for an other receivable (paid in January 1999).

See accompanying notes.

POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements are prepared on the basis of
generally accepted accounting principles and include the accounts of the
Company and its majority owned subsidiaries (collectively, the "Company").
All material intercompany balances and transactions have been eliminated. The
equity method of accounting is used when the Company does not have effective
control and has a 20% to 50% interest in other companies. Under the equity
method, original investments are recorded at cost and adjusted by the
Company's share of undistributed earnings or losses of these companies. These
equity interests include goodwill. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

REVENUE RECOGNITION

The Company's revenues are generated primarily by licensing standardized
insurance software systems and providing outsourcing and professional services
to the global insurance and related financial services industries.

Software systems are licensed under the terms of substantially standard
nonexclusive and nontransferable agreements, which generally have a
noncancelable minimum term of six years and provide for an initial license
charge and a monthly license charge. The initial license charge, which grants
a right to use the software system currently available at the time the
license is signed, is recognized as revenue upon delivery of the product and
receipt of a signed contractual obligation, if collectibility is probable.
The monthly license charge, which covers the right to use the product during
the term of the agreement, also provides access to Maintenance, Enhancements
and Services Availability ("MESA"). Under the maintenance provisions of MESA,
the Company provides telephone support and error correction to current
versions of licensed systems. Under the enhancement provisions of MESA, the
Company will provide unspecified additions or modifications to the licensed
systems, which the Company may deliver from time to time to licensees of those
systems if and when they become generally available. The monthly license
charge is recognized as revenue on a monthly basis throughout the term of the
MESA provision of the license agreement. Services availability allows
customers access to professional services, other than maintenance and
enhancements, which are provided under separate arrangements during the MESA
term. Customers wishing to acquire perpetual rights to use the Company's
software enter into additional agreements to acquire such rights.

The Company provides professional support services, including systems
implementation and integration assistance, consulting and educational
services, which are available under services agreements and charged for
separately. These services are generally provided under time and materials
contracts and in some circumstances under fixed price arrangements. Under
fixed price contracts, revenue is recognized on the basis of the estimated
percentage of completion of service provided. Changes in estimates to
complete and losses, if any, are recognized in the period in which they are
determined.

The Company does from time to time enter into certain joint development
arrangements. Although these arrangements are varied, the Company principally
will undertake custom development of a product or enhancement and typically
retain all marketing rights and titles to such development. The Company does,
however, have certain joint marketing arrangements. Joint development
arrangements are generally provided for under fixed price agreements and in
some circumstances on a time and materials basis. The Company recognizes
revenue equal to direct cost on the same basis as professional support
services; however, where technological feasibility has already been
established, the Company will capitalize the portion of development costs
which exceed customer funding provided under the joint development
arrangement.

The Company also offers Information Technology and Business Process
Outsourcing services ranging from making available Company software licensed
on a remote processing basis from the Company's data centers, to complete
systems management, processing, administrative support and automated
information services. Outsourcing services are typically provided under
contracts having terms from three to ten years. Revenues from substantially
all outsourcing are recognized at the time the service is performed and
losses, if any, are recognized in the period in which they are determined.

Accrued revenues on the Company's accompanying consolidated balance
sheets represent costs and related profits in excess of billings on certain
contracts. Accrued revenues were not billable at the balance sheet date,
based on the terms of the contract, but are recoverable over the remaining
life of the contract.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.

MARKETABLE SECURITIES

Debt securities included in the Company's investment portfolio for which there
is a positive intent and ability to hold to maturity are carried at amortized
cost. Debt securities that may be sold prior to maturity and all marketable
equity securities are classified as available-for-sale and carried at fair
value. The fair value is estimated based on quoted market prices for those or
similar investments. Net unrealized gains and losses, determined on the
specific identification method, on securities classified as available-for-sale
are carried as a separate component of accumulated other comprehensive income.

Realized gains and losses are included in net income and the cost of
securities sold is based on the specific identification method. Marketable
securities were sold for cash proceeds of $3.3 million during 1998. There
were no sales of marketable securities during the year ended December 31,
1997.

PROPERTY AND EQUIPMENT

Property and equipment, including support software acquired for internal use,
is stated at cost less accumulated depreciation and amortization. Property
and equipment is depreciated on a straight-line basis over its estimated
useful life.

Gains and losses on dispositions of property and equipment are determined
based on the difference between the cash plus the fair value of any assets
received (in the case of a nonmonetary transaction) less the net book value of
the asset disposed of at the date of disposition.

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

Identifiable intangible assets and goodwill are recorded and amortized over
their estimated economic lives or periods of future benefit. The lives
established for these assets are a composite of many factors which are subject
to change because of the nature of the Company's operations. This is
particularly true for goodwill which reflects value attributable to the
going-concern nature of acquired businesses, the stability of their
operations, market presence and reputation. Accordingly, the Company
evaluates the continued appropriateness of these lives and recoverability of
the carrying value of such assets based upon the latest available economic
factors and circumstances. The Company evaluates the recoverability of all
long-lived assets, including specific intangible assets and goodwill, based
upon a comparison of estimated future cash flows from the related operations
with the then corresponding carrying values of those assets. Impairment of
value, if any, is recognized in the period in which it is determined. A rate
considered to be commensurate with the risk involved is used to discount the
cash flows for any recognized impairment.

The Company amortizes most goodwill over an estimated life of 15 years. The
Company believes that this life appropriately reflects the current economic
circumstances for its acquired businesses and the related period of future
benefit.

Other identifiable purchased intangible assets are being amortized on a
straight-line basis over their estimated period of benefit ranging from 3 to
10 years.

CAPITALIZED SOFTWARE COSTS

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," ("SFAS 86") certain costs incurred after establishing technical
feasibility in the internal development of computer software which is to be
licensed to customers, and costs of purchased computer software, consisting
primarily of software acquired through business acquisitions, are capitalized
and amortized over the estimated useful life, generally 3 to 5 years, at the
greater of the amount computed using (i) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross
revenues of that product or (ii) the straight-line method. Costs which are
capitalized as part of internally developed software primarily include direct
and indirect costs associated with payroll, computer time and allocable
depreciation and other direct allocable costs, among others. Product
enhancements are improvements to existing products that are intended to extend
the life or significantly improve the marketability of the original product.
Costs incurred for product enhancements are charged to expense as research and
development until technological feasibility of the enhancement has been
established. Upon release of a product or enhancement, the unamortized value
of the original product is added to the capitalized cost of the enhancement
and amortized using the estimated life of the enhancement. All internal costs
incurred prior to the establishment of technological feasibility have been
expensed as research and development costs during the periods in which they
were incurred and amounted to $0.7, $0.6 and $0.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively. The amount by which
unamortized software costs exceeds the net realizable value, if any, is
recognized as a charge to income in the period it is determined.

INCOME TAXES

The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred
tax liabilities and assets are determined based on temporary differences
between the basis of certain assets and liabilities for income tax and
financial reporting purposes. These differences are primarily attributable to
differences in the recognition of depreciation and amortization of property,
equipment and intangible assets and certain software development costs and
revenues.

BASIC AND DILUTED EARNINGS PER SHARE

Basic and diluted earnings per share ("EPS") are calculated according to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("FAS 128"). Weighted average common shares outstanding for all
periods have been restated to reflect the stock split in June 1998 (see Note
11). For the Company, the numerator is the same for the calculation of both
basic and diluted EPS. The following is a reconciliation of the denominator
used in the EPS calculations (in thousands):

Year Ended December 31,
----------------------
1998 1997 1996
------ ------ -------
Weighted Average Shares
- -----------------------

Basic EPS. . . . . . . . . . . 36,441 36,468 37,208
Effect of common stock options 2,848 1,198 458
------ ------ ------
Diluted EPS. . . . . . . . . . 39,289 37,666 37,666
====== ====== ======

All options to purchase shares of common stock were included in the
computation of diluted EPS for 1998.

FOREIGN CURRENCY TRANSLATION

The local currencies of the Company's foreign subsidiaries have been
determined to be their functional currencies. Assets and liabilities of
foreign subsidiaries are translated into United States dollars at current
exchange rates and resulting translation adjustments are included as a
separate component of accumulated other comprehensive income. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the year. Transaction gains and losses, which were not
material, are included in the results of operations of the period in which
they occur.

The effect on the Company's operating revenues of adverse foreign currency
exchange fluctuations (stated as current year international revenues
translated at prior year average exchange rates) was $8.0 and $6.7 million for
1998 and 1997, respectively.

NEW ACCOUNTING STANDARDS

In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components, and is effective for fiscal years beginning after December 15,
1997. The Company adopted SFAS 130 at January 1, 1998 and has included the
appropriate disclosures in the Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive Income.

OTHER MATTERS

Certain prior year amounts have been reclassified or restated to conform to
current year presentation.

NOTE 2. ACQUISITIONS

On August 31, 1998, the Company purchased 100% of the outstanding common
stock of The Leverage Group ("TLG") for $25 million in cash. An independent
appraiser estimated the fair market value of the assets acquired and
liabilities assumed including the in-process research and development
("IPR&D"). TLG owns Policy Link , a family of systems designed to support the
administrative tasks associated with administration, commission processing,
payout processing, and disbursement generation for life insurance and annuity
contracts. In addition to continuing to market certain systems, the Company
intends to integrate the family of systems with its existing product,
Cyberlife , to provide a local area network solution that administers products
ranging from traditional whole and term-life insurance to non-traditional,
wealth-accumulation products including annuities and variable annuities. The
Company recorded acquisition charges of approximately $3.7 million related to
the purchase of TLG.

Approximately $2.0 million of these charges represent estimated purchased
IPR&D based on the income approach valuation method. This amount reflects the
fair value of a single subsystem that was substantially complete, is not being
marketed and will be used in the Company's research and development
activities. Consistent with the Company's basis of accounting for costs
incurred to develop its software, this subsystem is not capitalizable under
SFAS 86 and has no alternative future use. The Company will spend
approximately $1.0 million through 1999 to complete integration of this
subsystem. The Company believes it will successfully integrate the family of
systems with its existing product.

The remainder of the acquisition charges represents the previously
capitalized historical cost of software purchased and internal in-process
development of the Company that is no longer capitalizable based on SFAS 86 as
a result of the acquisition.

In December 1998, the Company acquired CAF Systemhaus fur
Anwendungsprogrammierung GmbH ("CAF"), headquartered in Gilching, Germany, and
related entities for approximately $7.0 million. CAF's Visual Project
Modeling Systems ("VP/MS") are designed to allow insurance companies to easily
design and implement computer code to administer new insurance products with
reduced programming cost and time-to market. The acquisition has been
recorded using the purchase method of accounting.

In August 1996, the Company acquired certain assets of Co-Cam Pty Ltd.
and related entities ("Co-Cam") for approximately $6.0 million. Co-Cam,
headquartered in Australia, is principally a software and services provider
for superannuation and pension administration systems.

The acquisitions above have been recorded using the purchase method of
accounting. Accordingly, the Consolidated Statements of Operations of the
Company include the results of operations from the date of acquisition.

NOTE 3. IMPAIRMENT CHARGES

During the fourth quarter of 1998, the Company recorded impairment
charges in the amount of $9.6 million to write-off the unamortized portion of
capitalized software development costs of principally two products. During
the last three years, the Company invested approximately $4.2 million in the
development of a new software product called Visual Product Builder ("VPB").
VPB is designed to allow insurance companies to easily design and implement
computer code to administer new insurance products with reduced programming
costs and time to market. During the Company's 1998 fourth quarter strategic
planning, it became apparent that for technical and architectural reasons, VPB
would not reach the level of market acceptance initially anticipated. Also
during the fourth quarter, the Company identified CAF as a potential
acquisition candidate, primarily based on CAF's successful development of
VP/MS. VP/MS provides substantially the same function as VPB but without the
technical and architectural issues that VBP presented. Therefore, the Company
wrote off $3.9 million of unamortized previously capitalized VPB internal
development costs.

Also during its 1998 fourth quarter strategic planning, the Company determined
to cease marketing its policy administration software in the Latin American
market to pursue an alliance with another software vendor in that market.
Consequently, the Company wrote off $4.5 million of unamortized internal
development costs.

The remaining amount of the impairment charges also constituted unamortized
development costs of lesser products that were determined to be unrecoverable
through future license revenues.

NOTE 4. PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows (in thousands):

December 31,
Estimated ---------------------
Useful Life 1998 1997
---------- --------- ---------
(Years)

Land. . . . . . . . . . . . . . . . . . . . . . - $ 2,562 $ 2,729
Buildings and improvements. . . . . . . . . . . 10-40 61,509 63,717
Construction in progress. . . . . . . . . . . . - 11,923 1,338
Leasehold improvements. . . . . . . . . . . . . 1-10 5,808 3,872
Office furniture, fixtures and equipment. . . . 5-15 54,635 51,324
Computer and communications equipment
and support software. . . . . . . . . . . . . 2-5 109,870 123,817
Internal use software . . . . . . . . . . . . . 3-7.5 11,981 3,804
Other . . . . . . . . . . . . . . . . . . . . . 3-5 5,511 5,354
---------- ----------
263,799 255,955
Less: Accumulated depreciation and amortization (128,363) (139,522)
---------- ----------
Property and equipment, net $ 135,436 $ 116,433
========== ==========

Depreciation and amortization charged to expense was $26.4, $27.6, and
$23.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of goodwill and other intangible assets is as follows (in
thousands):

December 31,
-------------------
1998 1997
-------- --------

Goodwill. . . . . . . . . . . . . . . . . $ 73,156 $ 61,884
Customer lists. . . . . . . . . . . . . . 21,181 19,922
Contract acquisition costs. . . . . . . . 15,000 15,000
Covenants not to compete. . . . . . . . . 9,158 4,660
Other . . . . . . . . . . . . . . . . . . 8,688 6,066
--------- ---------
127,183 107,532
Less: Accumulated amortization. . . . . . (45,782) (38,407)
--------- ---------
Goodwill and other intangible assets, net $ 81,401 $ 69,125
========= =========

Amortization charged to expense was $10.8, $10.6 and $10.4 million for
the years ended December 31, 1998, 1997 and 1996, respectively. During 1998,
the Company recorded $20.4 and $2.6 million of intangible assets related to
the acquisitions of TLG and CAF, respectively.

NOTE 6. CAPITALIZED SOFTWARE COSTS

A summary of capitalized software costs is as follows (in thousands):

December 31,
----------------------
1998 1997
---------- ----------

Internally developed software . $ 374,172 $ 329,552
Purchased software. . . . . . . 36,067 26,315
---------- ----------
410,239 355,867
Less: Accumulated amortization. (189,331) (151,749)
---------- ----------
Capitalized software costs, net $ 220,908 $ 204,118
========== ==========

Amortization charged to expense was $41.1, $33.9 and $28.1 million for
the years ended December 31, 1998, 1997 and 1996, respectively. During 1998,
the Company recorded $4.4 and $3.7 million of purchased software related to
the acquisitions of TLG and CAF, respectively.

NOTE 7. LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt is as follows (in thousands):

December 31,
------------------
1998 1997
-------- --------

Credit facility borrowings $ 85,000 $37,000
Line of credit . . . . . . 15,000 -
Notes payable. . . . . . . 812 1,905
-------- -------
100,812 38,905
Less: Current portion. . . 15,812 1,191
-------- -------
Long-term debt . . . . . . $ 85,000 $37,714
======== =======

Interest cost incurred was $2.9, $3.7 and $4.1 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest cost
capitalized was $0.8, $0.1 and $0.1 million during 1998, 1997 and 1996,
respectively.

The Company has a credit facility for $200 million with a syndicate of
financial institutions to provide an additional source of funds for general
corporate purposes. The facility, entered into in August 1997, bears a term
of five years. Borrowings under the facility bear interest payable at per
annum rates based upon the London Interbank Offering Rate plus a spread above
certain of these rates ranging from 0.225% to 0.350% dependent upon certain
financial ratios of the Company. Additionally, the Company pays a per annum
facility fee on the aggregate amount of the commitments ranging from 0.10% to
0.15%. The Company is subject to certain covenants including, but not limited
to, the maintenance of certain operating ratios and levels of tangible net
worth. The average interest rate applicable to borrowings under credit
facilities was 5.87% and 6.01% for the years ended December 31, 1998 and 1997,
respectively.

NOTE 8. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

On March 27, 1995, the Company entered into a long-term license and
maintenance agreement in order to acquire rights to certain operating system
management software products for use in the Company's worldwide data center
operations. The agreement, which has an initial term of ten years, may be
renewed and extended for an additional period of five years, subject to mutual
agreement and other modifications. Minimum contract payments by the Company
over the initial ten-year term aggregate $33.0 million payable in specified
annual installments which escalate over the ten-year period. In addition to
minimum contract payments, the Company will pay an annual supplemental revenue
fee, subject to certain provisions in the agreement, equal to a specified
annual percentage of the Company's applicable prior year annual gross
revenues, less the specified annual installment for such period. Minimum
contract payments will be expensed on a straight-line basis over the initial
ten-year term. Annual supplemental revenue fees, if any, will be accrued in
the period in which determined. The agreement provisions for the supplemental
revenue fee were not met for 1997 or 1998.

On April 7, 1995, the Company finalized certain terms of a ten-year agreement
with an insurance holding company and its subsidiaries, initially entered into
in November 1994. The Company is to provide certain data processing and other
professional services as required. The minimum contractual processing
revenues are expected to be in excess of $60 million over the term of the
agreement. The Company incurred costs of $15 million related to this
agreement during 1995 and 1994, which have been deferred as contract
acquisition costs and are being expensed on a straight-line basis over the
term of the agreement. At December 31, 1998, the net unamortized amount
related to this continuing agreement, included in other intangible assets, was
$9.3 million.

In June 1998, a Data Processing Services Agreement was completed between the
Company and Lockheed Martin. Under its terms, the Company turned over
operations of its Blythewood, South Carolina, data center to Lockheed Martin
on July 1, 1998. The agreement sets forth an annual fee due for each year for
the ten years of the agreement, payable in monthly installments. The amount
was determined based on baseline resources, however, it will be adjusted for
over or under usage of resources, inflation, and benchmarking results. The
baseline payments are as follows (in thousands): 1999 - $19,082, 2000 -
$19,854, 2001 - $22,672, 2002 - $26,636, 2003 - $27,415, thereafter -
$147,921. The Company also made a $2 million deposit in 1998 with an
additional $2.6 million deposit to be paid in 1999. These amounts will reduce
future payments beginning in June 2003.

During 1997, the Company entered into two five year renewable lease and
maintenance agreements to lease certain data processing equipment for use in
its worldwide data center operations. Minimum lease payments over the initial
terms of the agreements aggregate $8.6 million payable in specified monthly
installments. At the end of the term of each agreement, the Company has the
option to purchase the leased equipment at fair market value, upgrade the
equipment with the latest technology, or discontinue each lease. Under the
terms of the Lockheed Martin outsourcing agreement entered into during 1998,
these leases will be assumed by Lockheed Martin.

The Company occupies leased facilities under various operating leases expiring
through 2014. The leases for certain facilities contain options for renewal
and provide for escalation of annual rentals based upon increases in the
lessors' operating costs. Rent expense under leases for facilities was $12.8,
$10.0 and $7.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

The Company leased certain data processing and related equipment primarily
under operating leases expiring through 2003. Rent expense under operating
leases for such equipment was $5.2, $7.9 and $7.5 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

Future minimum lease obligations under noncancelable operating leases are
stated below and include payments over 16 years aggregating $3.2 million
related to a leasehold planned for future abandonment, net of subleases (in
thousands):

Year Ending December 31,
--------------------------
1999 . . . . $13,678
2000 . . . . 12,731
2001 . . . . 11,100
2002 . . . . 9,303
2003 . . . . 5,793
Thereafter . 15,063
-------
Total . . . $67,668
=======

CONTINGENCIES - LEGAL PROCEEDINGS

The Company is involved in litigation which commenced in January 1996 in
the Circuit Court in Greenville County, South Carolina, with Liberty Life
Insurance Company and certain of its affiliates ("Liberty") arising out of the
parties' prior contractual relationship related to the development and
licensing of Series III life insurance systems and the subsequent licensing of
the Company's CYBERTEK life insurance systems. Liberty's complaint alleges
breach of contract, breach of express and implied warranties, fraudulent
inducement, breach of contract accompanied by a fraudulent act, and recission.
Liberty has alleged actual and consequential damages in excess of $180 million
and also seeks treble and punitive damages. The Company has asserted various
affirmative defenses and is pursuing counterclaims against Liberty for breach
of contract, recoupment, breach of good faith and fair dealing, and breach of
contract accompanied by a fraudulent act. The Company is seeking equitable
relief, including injunctive relief, and currently unspecified actual,
compensatory and consequential damages.

In addition to the litigation described above, there are also various other
litigation proceedings and claims arising in the ordinary course of business.
The Company believes it has meritorious defenses and is vigorously defending
these matters.

NOTE 9. INCOME TAXES

A reconciliation of the difference between the actual income tax
provision and the expected provision, computed using the applicable statutory
rate, is as follows:

Year Ended December 31,
------------------
1998 1997 1996
---- ---- ----

Provision for taxes at the statutory rate . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in provision from:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.1 (3.4)
State and local income taxes, net of federal tax effect 1.5 1.3 1.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 - 2.8
----- ----- -----
4.7 2.4 1.2
----- ----- -----
Effective income tax provision rate . . . . . . . . . . . 39.7% 37.4% 36.2%
===== ===== =====

An analysis of the income tax provision is as follows (in thousands):

Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------

Current domestic taxes . . . . . . . . . . . . . . . . . $22,470 $ 6,983 $ 2,857
Current foreign taxes. . . . . . . . . . . . . . . . . . 4,039 8,464 4,835
-------- -------- --------
Total current taxes. . . . . . . . . . . . . . . . . . 26,509 15,447 7,692
-------- -------- --------
Deferred income taxes relating to temporary differences:
Depreciation and amortization
of property, equipment and intangibles . . . . . . . (1,608) 2,138 664
Capitalized software development costs . . . . . . . . 8,281 10,917 10,511
Impairment and restructuring of operations . . . . . . - 865 3,120
Litigation settlement and expenses, net. . . . . . . . (553) 1,754 4,184
Contract loss reserve. . . . . . . . . . . . . . . . . 1,787 24 170
Other. . . . . . . . . . . . . . . . . . . . . . . . . 727 (1,112) (290)
-------- -------- --------
8,634 14,586 18,359
-------- -------- --------
Total income tax provision . . . . . . . . . . . . . . . $35,143 $30,033 $26,051
======== ======== ========

Actual current tax liabilities are lower than tax expenses reflected
above for 1998, 1997 and 1996 by $16.9, $2.0 and $0.4 million, respectively,
for the stock option deduction benefit recorded as a credit to stockholders'
equity.

An analysis of the net deferred income tax assets and liabilities is as
follows (in thousands):

December 31,
------------------
1998 1997
------- --------

Current deferred assets. . . . . . . . . . . $ 9,336 $ 3,628
------- -------

Long-term deferred assets:
Net operating loss carryforward. . . . . . 7,567 7,567
Foreign tax credit carryforward. . . . . . 6,161 5,197
Other. . . . . . . . . . . . . . . . . . . 11,059 9,232
------- -------
Long-term deferred assets. . . . . . . . 24,787 21,996
------- -------
Total deferred assets. . . . . . . . . $34,123 $25,624
======= =======

Long-term deferred liabilities:
Depreciation and amortization of property,
equipment and intangibles. . . . . . . . $17,629 $14,709
Capitalized software development costs . . 77,237 63,911
Other. . . . . . . . . . . . . . . . . . . 3,367 1,876
------- -------
Total deferred liabilities . . . . . . $98,233 $80,496
======= =======

Certain foreign subsidiaries of the Company have net operating loss
carryforwards at December 31, 1998 totaling approximately $10.7 million, which
may be used to offset future taxable income. The foreign carryforwards have
no expiration period. The Company has a valuation allowance of $1.7 million
at December 31, 1998, related to certain of the foreign net operating losses
that it does not anticipate utilizing.

No provision has been made for federal income taxes on unremitted earnings of
certain of the Company's foreign subsidiaries (approximately $37 million at
December 31, 1998) since the Company plans to permanently reinvest all such
earnings. However, if such earnings were remitted, there would be additional
federal income tax expense of $2.6 million.

The Company has foreign tax credit carryforwards at December 31, 1998 of $6.2
million which will expire as follows: $3.8 million on December 31, 2000, $1.4
million on December 31, 2001 and $1.0 million on December 31, 2002.

NOTE 10. EMPLOYEE BENEFIT PLANS

STOCK EMPLOYEE COMPENSATION TRUST

In February 1999, the Company created a Stock Employee Compensation Trust
(the "SECT"). The SECT will purchase shares of the Company's common stock on
the open market, which will be released to fund various compensation related
plans as necessary. The SECT is a non-qualified grantor trust whose financial
statements will be consolidated with the Company's. Shares in the trust will
be presented in the manner of treasury stock, as a reduction of stockholder's
equity.

401(K) RETIREMENT SAVINGS PLAN

The Company offers the Policy Management Systems Corporation 401(k) Retirement
Savings Plan to eligible employees. The Company matches 100% of the first 3%
of salary contributed by the participant and matches 50% of the next 3% of
salary contributed by the participant. Subject to limits imposed by the
Internal Revenue Service, the Internal Revenue Code and the Plan, participants
may also make additional before-tax and after-tax contributions that are not
subject to matching contributions by the Company. Participants have several
options as to how their contributions and vested Company contributions are
invested. Non-vested and current Plan year Company contributions are invested
in common stock of the Company. The Company's contribution on behalf of
participating employees was $5.3, $3.8 and $3.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

RESTRICTED STOCK OWNERSHIP PLAN

In August 1998, the Company established the Restricted Stock Ownership
Plan. Participation in the Plan is mandatory for United States-based officers
and directors until they have satisfied the applicable guidelines. Under the
guidelines, officers are required to hold Company stock in multiples of their
base salary ranging from 1 times salary for vice presidents, to 5 times salary
for the Chief Executive Officer. Directors who are not employees are required
to hold 5 times the annual retainer for directors. Directors and officers
have annual targeted percentages of ownership to achieve each year and are to
achieve 100% of the guideline for their office within 6 years of the Plan's
adoption or their first election to the office to which this guideline is
applicable.

Under the Plan, annual retainers for directors and annual bonuses for
officers are paid partially in cash and partially in restricted stock.
Generally, for those directors and officers who have achieved their annual
targeted percentages of ownership, annual retainers or any annual bonuses will
be paid 50% in cash and 50% in restricted stock (with a 50% addition to the
stock portion to adjust value for restrictions). For directors and officers
who have not achieved their annual targeted percentage of ownership, annual
retainers or any annual bonuses will be paid 100% in restricted stock (with
only a 25% addition to adjust value for restrictions). Directors and officers
may elect not to participate in the Plan after having achieved 100% of the
stock ownership guidelines applicable to their positions. In addition, other
managers who receive an annual bonus may elect to participate in a manner
similar to officers who are at guideline. The aggregate number of shares of
common stock that may be issued pursuant to all awards under the Plan is
500,000 shares. During 1998, 1,836 shares were issued under the Plan.

STOCK OWNERSHIP PLAN

In May 1995, the Company established a stock ownership plan through which
eligible employees of the Company and its participating affiliates may acquire
shares of the Company's common stock through regular payroll deductions.
Participants may make after-tax contributions in multiples of $5.00, with a
minimum deduction per pay period of $10.00 and a maximum deduction per pay
period of the lesser of $900.00 or 10% of regular salary. The Company makes a
matching contribution equal to 15% of participants' contributions.
Participants who withdraw

shares acquired under the Plan within two years of the date of purchase are
ineligible to make further contributions to purchase shares under the Plan for
twelve months after such withdrawal.

STOCK OPTION PLANS

The Company has two plans under which options to purchase shares of the
Company's common stock have been granted to eligible employees and members of
the Board of Directors of the Company and its subsidiaries. Options under the
1989 Stock Option Plan (the "1989 Plan") expire ten years after the grant date
and options under the 1993 Long Term Incentive Plan for Executives (the "1993
Plan") expire in January 2003. During 1998, options were granted under the
1989 Plan and the 1993 Plan. During 1997, options were granted under the 1989
Plan only. During 1996, options were granted under the 1989 Plan and the 1993
Plan.

Options granted under the 1989 Plan have exercise prices at 100% of market
value at date of grant and generally become exercisable either at the rate of
20%, 25% or 33 1/3% per year (cumulative) beginning one year from date of
grant.

Participants in the 1993 Plan have exercise rights as a percentage of market
value at date of grant as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996
- - 102%; 1997 - 101%; and 1998 - 100%. Options granted under the Plan in 1993
became exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997;
and 50% on January 1, 1999. For individuals who were selected to participate
in the Plan, the number of options granted and what percentage becomes
exercisable on the above dates are determined according to formulas described
in the Plan.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This Statement requires that companies with
stock-based compensation plans either recognize compensation expense based on
new fair value accounting methods or continue to apply the provisions of
Accounting Principles Board Opinion No. 25 and disclose pro forma net income
and earnings per share assuming the fair value method had been applied.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals (or exceeds) the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net income and earnings per share is required
by FAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
5.2%, 5.7% and 6.4%; volatility factors of the expected market price of the
Company's common stock of 36.2%, 35.4% and 37.5%; and weighted-average
expected life of the options of 4.3, 4.4 and 5.0 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except per share data):

Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Net income

As reported. . . . . . . $53,271 $50,257 $45,997
Pro forma. . . . . . . . 44,634 43,691 41,778

Basic earnings per share
As reported. . . . . . . $ 1.46 $ 1.38 $ 1.24
Pro forma. . . . . . . . 1.22 1.20 1.12

Diluted earnings per share
As reported. . . . . . . $ 1.36 $ 1.33 $ 1.22
Pro forma. . . . . . . . 1.14 1.16 1.11

Option activity under all of the stock option plans is summarized as
follows:

Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- ---------- -------

Outstanding at beginning of year . . . 7,595,780 $24.61 6,917,764 $24.48 6,212,328 $24.89
Granted. . . . . . . . . . . . . . . . 1,037,932 34.61 1,219,500 22.95 1,178,936 21.41
Exercised. . . . . . . . . . . . . . . (2,066,731) 21.93 (480,036) 18.72 (296,168) 18.18
Forfeited. . . . . . . . . . . . . . . (382,214) 24.07 (61,448) 22.96 (177,332) 29.18
----------- ---------- ----------
Outstanding at end of year . . . . . . 6,184,767 $27.23 7,595,780 $24.61 6,917,764 $24.48
=========== ========== ==========

Options exercisable at year end. . . . 2,500,327 3,371,184 2,436,406

Shares available for future grant. . . 0 (1) 1,829,468 2,608,520

Weighted-average fair value of options
granted during the year $12.80 $ 8.70 $ 9.28
<FN>

(1) The Company may make no further grants under its existing stock option plans.

The following table summarizes information about fixed options outstanding at
December 31, 1998:

Options Outstanding Options Exercisable
----------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- --------- -------- ---------- ------- --------- --------

15 170,568 5.3 years $15.11 170,568 $15.11
16 to 18 557,138 6.5 years 17.23 161,572 16.99
21 to 24 2,724,073 6.6 years 22.87 1,081,412 22.71
25 to 27 612,256 6.0 years 25.87 320,275 25.55
33 to 40 1,379,068 6.9 years 34.60 404,000 34.68
41 to 46 741,664 4.0 years 40.97 362,500 40.95
--------- ---------
6,184,767 2,500,327
========= =========

NOTE 11. STOCK SPLIT

In May 1998, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend, whereby each shareholder
of record as of June 1, 1998, received on June 15, 1998, one additional share
of common stock for each share owned as of the record date. As a result of
the split, 18,426,691 shares were issued and $0.2 million was transferred from
Retained Earnings to Common Stock. Weighted average common shares outstanding
and per share amounts for all periods presented have been restated to reflect
the stock split. Share amounts reflected on the Consolidated Balance Sheet
and Consolidated Statements of Changes in Stockholder's Equity and
Comprehensive Income reflect the actual share amounts for each period
presented.

NOTE 12. CERTAIN TRANSACTIONS

DISCONTINUED OPERATIONS

The Company sold its life information services segment in May 1998 for $23.8
million, net of selling expenses, resulting in a gain of $3.0 million, pretax
and a gain of $0.1 million, net of tax. The difference in gain for tax
purposes primarily results from the inability to deduct goodwill related to
the sale for tax purposes. The operations of this segment are presented as
discontinued operations in the accompanying Consolidated Statements of
Operations. See Note 13 for income from operations of the discontinued
segment.

The Company also recognized an additional loss during 1998 of $1.0 million,
net of tax, on the sale of its property and casualty information services
segment. This loss is included in discontinued operations in the accompanying
Consolidated Statements of Operations.

On August 31, 1997, the Company completed the sale of substantially all of the
assets of its property and casualty information services segment for cash
proceeds of $2.9 million. The Company retained the working capital of this
business (approximately $14.3 million). This transaction produced a
non-recurring gain of $1.7 million. Also, during the third quarter of 1997,
the Company abandoned a related business. As a result, the Company recorded a
non-recurring charge of $1.8 million, principally related to capitalized
software.

OTHER

During 1998, the Company repurchased 2,143,400 shares (2,388,200 restated for
stock split) of the Company's stock on the open market.

During 1998, the life segment executed a license agreement for $2.2 million
with the purchaser of the discontinued life information services segment.

During 1997, the Company repurchased 79,900 shares (159,800 restated for stock
split) of the Company's stock on the open market.

During 1997, the property and casualty segment executed a license
agreement covering several of the Company's information access and electronic
commerce software products for $1.8 million with the purchaser of the
discontinued property and casualty information services.

On April 8, 1996, the Company repurchased 759,512 (1,519,024 restated for
stock split) of the 1,519,024 shares of the Company's common stock held by GAP
Coinvestment Partners and General Atlantic Partner 14 L.P. (collectively
"General Atlantic Investors") and the remainder of the Company's shares owned
by General Atlantic Investors were purchased by Continental Casualty Company,
a licensee of the Company's S3+ solutions. The repurchase by the Company, at a
price of $50.00 per share ($25.00 restated for stock split), resulted in an
aggregate cash expenditure (after related costs) of approximately $38.7
million.

Also during 1996, the Company repurchased 645,500 shares (1,291,000 restated
for stock split) of its common stock on the open market.

NOTE 13. SEGMENT INFORMATION

1. Property and casualty enterprise software and services (generally referred
to as "property and casualty"). This segment provides software products,
product support, professional services and outsourcing primarily to the US
property and casualty insurance market.

2. Life and financial solutions enterprise software and services (generally
referred to as "life and financial solutions"). This segment provides
software products, product support, professional services and outsourcing
primarily to the US life insurance and related financial services markets.

5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998.

Information about the Company's operations for the past three years is as
follows:

Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- --------- -----------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS

Property and casualty . . . . . . . . . . . . . $ 280,633 $249,331 $ 216,093
Life and financial solutions. . . . . . . . . . 150,564 101,593 67,276
----------- --------- -----------
Total US revenues . . . . . . . . . . . . . . 431,197 350,924 283,369
International . . . . . . . . . . . . . . . . . 176,261 167,247 139,941
----------- --------- -----------
Total revenues from continuing operations $ 607,458 $518,171 $ 423,310
=========== ========= ===========

Discontinued Information Services Operations
Property and casualty . . . . . . . . . . . . . $ - $ 64,649 $ 93,679
Life. . . . . . . . . . . . . . . . . . . . . . 11,968 64,611 64,920

INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Property and casualty . . . . . . . . . . . . . $ 75,567 $ 72,055 $ 65,045
Life and financial solutions. . . . . . . . . . 37,626 21,627 14,700
Corporate . . . . . . . . . . . . . . . . . . . (39,758)* (26,622) (19,638)*
----------- --------- -----------
Total US operating income . . . . . . . . . . 73,435 67,060 60,107
International . . . . . . . . . . . . . . . . . 13,997 12,133 9,458
----------- --------- -----------
Operating income. . . . . . . . . . . . . . 87,432 79,193 69,565

Equity in earnings of unconsolidated affiliates 1,163 1,189 -
Minority interest . . . . . . . . . . . . . . . (104) - -
Other income and expenses . . . . . . . . . . . (2,136) (3,583) (2,677)
Income taxes. . . . . . . . . . . . . . . . . . 32,619 28,536 23,926
----------- --------- -----------
Income from continuing operations . . . . . $ 53,736 $ 48,263 $ 42,962
=========== ========= ===========

DISCONTINUED INFORMATION SERVICES OPERATIONS
Property and casualty . . . . . . . . . . . . . $ (1,586) $ 533 $ 1,568*
Life. . . . . . . . . . . . . . . . . . . . . . 3,672 2,958 3,592
Other income and expenses . . . . . . . . . . . (27) - -
Income taxes. . . . . . . . . . . . . . . . . . 2,524 1,497 2,125
----------- --------- -----------
Discontinued operations, net. . . . . . . . . $ (465) $ 1,994 $ 3,035
=========== ========= ===========

<FN>

*Corporate and Discontinued operating income includes special charges and write-offs.

Year Ended December 31,
-----------------------------
1998 1997 1996
-------- --------- --------
(In thousands)
DEPRECIATION AND AMORTIZATION

Property and casualty. . . . . . . . . . . . . . . $29,571 $26,203 $22,640
Life and financial solutions . . . . . . . . . . . 15,142 14,878 12,855
Corporate. . . . . . . . . . . . . . . . . . . . . 8,819 13,148 11,361
International. . . . . . . . . . . . . . . . . . . 23,840 16,682 14,414
Transferred to selling, general and administrative (4,416) (3,153) (3,261)
-------- -------- --------
Total depreciation and amortization. . . . . . . $72,956 $67,758 $58,009
======== ======== ========

Discontinued Information Services Operations
Property and casualty. . . . . . . . . . . . . . $ - $ 179 $ 253
Life . . . . . . . . . . . . . . . . . . . . . . 1,011 954 758

As of December 31,
-------------------------------
1998 1997 1996
--------- --------- ----------
(In thousands)
IDENTIFIABLE ASSETS

Enterprise software and services
Property and casualty. . . . . . . . $405,788 $339,649 $300,500
Life and financial solutions . . . . 153,484 103,701 99,194
Information services
Property and casualty (discontinued) - - 21,128
Life (discontinued). . . . . . . . . - 21,368 26,140
Corporate. . . . . . . . . . . . . . . 36,342 34,863 32,487
--------- --------- ---------
Total US identifiable assets . . . 595,614 499,581 479,449
International. . . . . . . . . . . . . 150,698 142,881 123,232
Eliminations . . . . . . . . . . . . . (27,614) (24,056) (21,295)
--------- --------- ---------
Total identifiable assets. . . . . $718,698 $618,406 $581,386
========= ========= =========

LONG-LIVED ASSETS
US . . . . . . . . . . . . . . . . . . $417,549 $361,383 $345,641
International. . . . . . . . . . . . . 83,923 71,214 75,403
--------- --------- ---------
Total long-lived assets. . . . . . $501,472 $432,597 $421,044
========= ========= =========

NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES

The Company's operating results and financial condition may be impacted
by a number of factors, including but not limited to the following, any of
which could cause actual results to vary materially from current and
historical results or the Company's anticipated future results.

Currently, the Company's business is focused principally within the global
property and casualty and life insurance and related financial services
industries. Significant changes in the regulatory or market environment of
these industries could impact demand for the Company's software products and
services. Additionally, there is increasing competition for the Company's
products and services, and there can be no assurance that the Company's
current products and services will remain competitive, or that the Company's
development efforts will produce products with the cost and performance
characteristics necessary to remain competitive. Furthermore, the market for
the Company's products and services is characterized by rapid changes in
technology and the emergence of the Internet as a viable insurance
distribution channel. The Company's success will depend on the level of
market acceptance of the Company's products, technologies and enhancements,
and its ability to introduce such products, technologies and enhancements to
the market on a timely and cost effective basis, and maintain a labor force
sufficiently skilled to compete in the current environment.

The timing and amount of the Company's revenues are subject to a number of
factors such as the timing of customers' decisions to enter into large license
agreements with the Company, which make estimation of operating results prior
to the end of a quarter or year extremely uncertain. Additionally, while
management believes that the Company's financing needs for the foreseeable
future will be satisfied from cash flows from operations and the Company's
currently existing credit facility, unforeseen events or adverse economic or
business trends may significantly increase cash demands beyond those currently
anticipated or affect the Company's ability to generate/raise cash to satisfy
financing needs.

As discussed in Note 1, the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Amounts affected by these estimates
include, but are not limited to, the estimated useful lives, related
amortization expense and carrying values of the Company's intangible assets
and the net realizable value of capitalized software development costs and
accrued reserves established for contingencies such as litigation and
restructuring activities. Changes in the status of certain matters or facts or
circumstances underlying these estimates could result in material changes to
these estimates, and actual results could differ from these estimates.

As a result of the above and other factors, the Company's earnings and
financial condition can vary significantly from quarter-to-quarter and
year-to-year. These variations may contribute to volatility in the market for
the Company's common stock.

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash equivalents, marketable securities
and trade receivables. The Company places its cash, cash equivalents and
marketable securities with high credit quality entities and limits the amount
of credit exposure with any one entity. In addition, the Company performs
ongoing evaluations of the relative credit standing of these entities, which
are considered in the Company's investment strategy.

Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the large number of entities comprising the
Company's customer base across the insurance industry. The Company performs
ongoing credit evaluations on certain of its customers' financial conditions,
but generally does not require collateral to support customer receivables. The
Company establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.

POLICY MANAGEMENT SYSTEMS CORPORATION
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)

First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
1998

Revenues . . . . . . . . . . . . . $ 140,421 $144,889 $151,303 $170,845
Operating income . . . . . . . . . 20,848 22,375 22,429 21,780
Other income and expenses, net . . (425) (370) (603) (738)
Income from continuing operations
before income taxes. . . . . . . 20,628 22,208 21,911 21,608
Discontinued operations, net . . . 322 (386) - (401)
Net income . . . . . . . . . . . . $ 13,189 $ 13,596 $ 13,171 $ 13,315
Basic earnings per share . . . . . $ 0.36(1) $ 0.37 $ 0.36 $ 0.37
Diluted earnings per share . . . . $ 0.34(1) $ 0.34 $ 0.33 $ 0.34

1997
Revenues . . . . . . . . . . . . . $ 115,083 $123,828 $131,955 $147,305
Operating income . . . . . . . . . 15,774(2) 16,643 20,738 26,038
Other income and expenses, net . . (790) (1,012) (1,007) (774)
Income from continuing operations
before income taxes. . . . . . . 15,354(2) 15,951 20,005 25,489
Discontinued operations, net . . . 468(2) 694 386 446
Net income . . . . . . . . . . . . $ 10,092 $ 10,694 $ 12,937 $ 16,534
Basic earnings per share . . . . . $ 0.28(1) $ 0.29 $ 0.35 $ 0.45
Diluted earnings per share . . . . $ 0.27(1) $ 0.29 $ 0.34 $ 0.43

1996
Revenues (3) . . . . . . . . . . . $ 94,376 $ 97,190 $107,174 $124,570
Operating income (3) . . . . . . . 17,217 23,577 13,638 15,133
Other income and expenses, net . . (115) (432) (1,099) (1,031)
Income from continuing operations
before income taxes (3). . . . . 17,102 23,145 12,539 14,102
Discontinued operations, net (3) . 503 876 1,006 650
Net income (3) . . . . . . . . . . $ 11,628 $ 15,803 $ 9,007 $ 9,559
Basic earnings per share (1,3) . . $ 0.30 $ 0.42 $ 0.25 $ 0.26
Diluted earnings per share (1,3) . $ 0.29 $ 0.42 $ 0.25 $ 0.26
<FN>

(1) Restated due to stock split on June 15, 1998.
(2) Reclass of $31, pretax, to discontinued operations ($19, net of tax).
(3) Restated for discontinued operations.

The results of operations in 1998 include $13.3 million of special charges.
These pre-tax charges include $3.7 million in the third quarter related to the
acquisition of TLG and $9.6 million in the fourth quarter for the impairment
of capitalized software development costs which resulted from certain
technical factors and changes in the Company's strategy.

The results of operations in 1996 reflect a litigation related pre-tax charge
recorded in the fourth quarter of $6.0 million. Additionally, the Company
recorded a litigation related pre-tax gain of $9.4 million in the third
quarter.

For a further discussion of these special charges/credits see Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 12 of Notes to Consolidated Financial Statements.

SCHEDULE II

POLICY MANAGEMENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS

Additions
------------------
Balance Charged
at Charged to Balance
Beginning to Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------------------------------------------------------------------------------------------
(In thousands)
Allowance for uncollectible amounts

Year ended December 31, 1998. . . . . . . . . . . $ 2,628 90 - (667)(1) $2,051

Allowance for uncollectible amounts
Year ended December 31, 1997. . . . . . . . . . . $ 883 2,951 - (1,206)(1) $2,628

Allowance for uncollectible amounts
Year ended December 31, 1996. . . . . . . . . . . $ 2,042 510 - (1,669)(1) $ 883

Accrued restructuring and lease termination costs
Year ended December 31, 1998. . . . . . . . . . . $ 1,511 62(2) - - $1,573

Accrued restructuring and lease termination costs
Year ended December 31, 1997. . . . . . . . . . . $ 3,818 109(2) - (2,416)(3) $1,511

Accrued restructuring and lease termination costs
Year ended December 31, 1996. . . . . . . . . . . $13,895 434(2) - (10,511)(3) $3,818

Allowance for deferred tax assets
Year ended December 31, 1998. . . . . . . . . . . $ 2,600 - 406 (1,329) $1,677

Allowance for deferred tax assets
Year ended December 31, 1997. . . . . . . . . . . $ 2,804 - (204) - $2,600

Allowance for deferred tax assets
Year ended December 31, 1996. . . . . . . . . . . $ 3,090 - (286) - $2,804

<FN>

Notes:
(1) Write-off of amounts uncollectible.
(2) Principally relates to amounts estimated for employee severance and outplacement and to
ongoing lease obligations and/or terminations for the planned future abandonment of certain
leased office facilities, including credit amounts for changes in these estimates.
(3) Principally cash payments related to lease terminations and employee severance and
outplacement costs.

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
POLICY MANAGEMENT SYSTEMS CORPORATION

Our audits of the consolidated financial statements of Policy Management
Systems Corporation referred to in our report dated February 9, 1999 appearing
on page 25 of this Form 10-K also included an audit of the financial statement
schedule listed in the index on page 49 of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

Atlanta, Georgia
February 9, 1999

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information other than the listing of Executive Officers of the Company,
which is set forth in Part I of this Form 10-K, is contained under the heading
"Board of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's 1999 Proxy Statement and is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section of the Company's 1999 Proxy Statement titled "Compensation
Plans and Arrangements" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The sections of the Company's 1999 Proxy Statement titled "Principal
Stockholders" and "Stock Ownership of Directors and Executive Officers" are
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section of the Company's 1999 Proxy Statement titled
"Compensation Committee Interlocks and Insider Participation" is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND SCHEDULES

See Index to Consolidated Financial Statements and Supplementary Data on
page 24.

EXHIBITS FILED

Exhibits required to be filed with this Annual Report on Form 10-K are
listed in the following Exhibit Index.

Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934,
the following annual report for the Company's employee stock purchase plan
will be furnished to the Commission when the information becomes available:

Form 11-K for the Company's 401(k) Retirement Savings Plan for the year ended
December 31, 1998 is incorporated herein by reference.

FORM 8-K

The Company did not file any reports on Form 8-K during the last quarter
of the year ended December 31, 1998.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

(REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION

BY (SIGNATURE) /s/ Timothy V. Williams
(NAME AND TITLE) Timothy V. Williams, Executive Vice President
DATE March 26, 1999 and Chief Financial Officer

BY (SIGNATURE) /s/ Jacques E. McCormack
(NAME AND TITLE) Jacques E. McCormack, Vice President,
DATE March 26, 1999 Corporate Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

BY (SIGNATURE) /s/ G. Larry Wilson
(NAME AND TITLE) G. Larry Wilson, Chairman of the Board of Directors,
DATE March 26, 1999 President and Chief Executive Officer

BY (SIGNATURE) /s/ Alfred R. Berkeley, III
(NAME AND TITLE) Alfred R. Berkeley, III, Director
DATE March 26, 1999

BY (SIGNATURE) /s/ Donald W. Feddersen
(NAME AND TITLE) Donald W. Feddersen, Director
DATE March 26, 1999

BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE March 26, 1999

BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE March 26, 1999

BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE March 26, 1999

BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE March 26, 1999

POLICY MANAGEMENT SYSTEMS CORPORATION

EXHIBIT INDEX

Exhibit
Number

3. ARTICLES OF INCORPORATION AND BY-LAWS

A. Bylaws of the Company, as amended through July 19, 1994, incorporating
all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated herein by
reference)

B. Articles of Incorporation of the Company, as amended through October
13, 1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)

4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES

A. Specimen forms of certificates for Common Stock of the Company (filed
as an Exhibit to Registration Statement No. 2-74821, dated December 16, 1981,
and is incorporated herein by reference)

10. MATERIAL CONTRACTS

A. Conformed copy of Development and Marketing Agreement between
International Business Machines Corporation and Policy Management Systems
Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form
SE filed on September 29, 1989, and is incorporated herein by reference)

B. Policy Management Systems Corporation 1989 Stock Option Plan (File No.
0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated
herein by reference)

C. Deferred Compensation Agreement with G. Larry Wilson (filed as an
Exhibit to Form 10-K for the year ended December 31, 1993, and is incorporated
herein by reference)

D. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by
reference)

E. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as
an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is
incorporated herein by reference)

F. Employment Agreement with Timothy V. Williams (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated herein by
reference)

G. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1992, and is incorporated herein by reference)

H. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1994, and is incorporated herein by reference)

I. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)

J. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for
Executives (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)

K. First Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)

L. Fourth Amendment to the Policy Management Systems Corporation 1989
Stock Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending
March 31, 1995, and is incorporated herein by reference)

M. Second and Third Amendments to the Policy Management Systems
Corporation 1989 Stock Option Plan (filed as Exhibits to Form 10-Q for the
quarter ended June 30, 1995, and is incorporated herein by reference)

N. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995,
and is incorporated herein by reference)

O. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995,
and is incorporated herein by reference)

P. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995,
and is incorporated herein by reference)

Q. Stock Option/Non-Compete Agreement Amendment No. 1 dated November 8,
1995, to Stock Option/Non-Compete Agreement dated July 20, 1995, with Paul R.
Butare (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)

R. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)

S. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May
10, 1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995,
and is incorporated herein by reference)

T. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated
herein by reference)

U. Shareholders Agreement dated March 8, 1996, between Policy Management
Systems Corporation and Continental Casualty Company (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by
reference)

V. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996,
and is incorporated herein by reference)

W. Employment Agreement Form dated November 7, 1996, for Messrs. Butare,
Morrison and Williams together with a schedule identifying particulars for
each executive officer (filed as an Exhibit to Form 10-K for year ended
December 31, 1996, and is incorporated herein by reference)

X. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated
October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31,
1996, and is incorporated herein by reference)

Y. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for named
executive officers together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended
March 31, 1997, and is incorporated herein by reference)

Z. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Butare, Morrison and Williams, together with a schedule identifying
particulars for each executive officer (filed as an Exhibit to Form 10-Q for
the quarter ended June 30, 1997, and is incorporated herein by reference)

AA. Form of Employment Agreements with Messrs. Wilson, Bailey and Coggiola
together with schedule identifying particulars for each executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)

BB. Credit Agreement dated as of August 8, 1997, among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National
Trust and Savings Association and the Other Financial Institution Party Hereto
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)

CC. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an exhibit to Form 10-Q for the quarter ended March 31, 1998
and is incorporated herein by reference)

DD. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1998,
and is incorporated herein by reference)

EE. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
exhibit to Form 10-Q for the quarter ended September 30, 1998, and is
incorporated herein by reference)

FF. Memorandum of Amendment of Employment Agreement with Paul R. Butare
dated December 10, 1998 (filed herewith)

GG. Employment Agreement with Michael W. Risley dated February 23, 1999,
effective November 10, 1998 (filed herewith)

HH. Annual Bonus Program for Executive Officers for the year 1998
(filed herewith)

21. SUBSIDIARIES OF THE REGISTRANT

A. Filed herewith

23. CONSENTS OF EXPERTS AND COUNSEL

A. Consent of PricewaterhouseCoopers filed herewith

27. FINANCIAL DATA SCHEDULES

A. 1998 filed herewith (EDGAR version only)

B. 1997 and 1996, as restated, filed herewith (EDGAR version only)