INTERGRAPH CORP, 10-K, 1999-03-30

INTERGRAPH CORP
10-K, 1999-03-30
COMPUTER INTEGRATED SYSTEMS DESIGN

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 0-9722

INTERGRAPH CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 63-0573222
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

Intergraph Corporation
Huntsville, Alabama 35894-0001
---------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (256) 730-2000
--------------

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)

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. ( )

As of January 31, 1999, there were 48,690,820 shares of Intergraph
Corporation Common Stock $0.10 par value outstanding. The aggregate
market value of the voting stock held by nonaffiliates of the
registrant was approximately $231,974,000 based on the closing sale
price of such stock as reported by NASDAQ on January 29, 1999,
assuming that all shares beneficially held by executive officers and
members of the registrant's Board of Directors are shares owned by
"affiliates," a status which each of the executive officers and
directors individually disclaims.

DOCUMENTS INCORPORATED BY REFERENCE

Documents Form 10-K Reference
--------- -------------------

Portions of the Annual Report to Shareholders
for the year ended December 31, 1998 Part I, Part II, Part IV

Portions of the Proxy Statement for the
May 13, 1999 Annual Shareholders' Meeting Part III

PART I

ITEM 1. BUSINESS

Overview

Intergraph Corporation (the "Company"), founded in 1969, is a
vendor of enterprise computing solutions, including hardware,
software, consulting and support services, for technical,
creative, and information technology (IT) professionals working
in a variety of industry sectors and government.

The Company offers open, industry standard technical solutions
for the enterprise, including Microsoft Corporation's Windows-
based software, Intel Corporation's microprocessor-based
hardware, and related services to meet engineering, design,
modeling, analysis, mapping, IT, and creative computing needs.
The Company's products are sold through industry-focused direct
and indirect channels worldwide, with United States and European
revenues representing approximately 80% of total revenues for
1998.

Background

Until the mid 1990s, the unique demands of high end technical
computing required tremendous processing and graphics
capabilities that could only be performed using reduced
instruction set computing (RISC) workstations for the UNIX
operating system. These systems cost considerably more than the
Intel microprocessor-powered/Microsoft Windows-based PCs widely
used today for word processing, spreadsheets, and other less
demanding applications.

In 1992, the Company began evaluation of a transition from its
own Clipper RISC microprocessor to the Intel microprocessor and
from the UNIX operating system to Microsoft's Windows NT, a 32
bit operating system powerful enough to run both technical and
business applications on a less expensive hardware platform. In
late 1992, the Company concluded that systems with Intel
microprocessors and Windows operating systems would become
capable of supporting high end computing and other enterprise
wide computing environments, while at the same time maintaining
interoperability with existing UNIX-based systems. The Company,
therefore, chose to migrate products from its own Clipper
microprocessor to Intel's and from the UNIX operating system to
Windows NT. This decision, in effect, expanded the availability
of the Company's workstations and software applications to
Windows-based computing environments not previously addressed by
the Company. It also allowed the Company's software applications
to operate on a variety of other hardware architectures provided
by vendors using the Windows NT operating system. Prior to this
decision, the Company's software applications operated
principally on its proprietary hardware platforms.

At the end of 1994, the Company completed a two-year
development effort to port its technical software applications to
the Windows NT operating system, and to make Windows NT available
on all of its workstations. Sales of Windows-based software grew
to represent 48% of software revenues in 1994, 70% in 1995, 78%
in 1996, 87% in 1997, and 90% in 1998.

The Company ceased development of its own Clipper RISC
microprocessor at the end of 1993 and made a substantial
investment in the redesign of its hardware platform for
utilization of Intel's microprocessor. The Company chose to use
only Intel microprocessors and to focus its efforts and image
creation toward its core capabilities, specifically very high
performance computational and 3D graphics capabilities. This
high-end market place in the Windows NT operating system
environment is supported only by Intel products. The transition
from its proprietary hardware architecture to that of Intel was
substantially completed during 1994. Intel-based systems grew to
represent 74% of hardware unit sales in 1994, 95% in 1995, and
approximately 100% in 1996, 1997 and 1998. See "Manufacturing
and Sources of Supply" and Item 3, Legal Proceedings, following
for discussion of litigation between the Company and Intel, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for discussion of effects of the Intel
dispute on operating results of the Company.

Reflecting a trend toward outsourcing in the industry, on
November 13, 1998, the Company completed a transaction with SCI
Technology, Inc. (SCI), a wholly owned subsidiary of SCI Systems,
Inc., pursuant to which the Company sold substantially all of its
U.S. manufacturing inventory and assets to SCI, and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. In addition, the Company licensed
certain related intellectual property to SCI, and SCI employed
approximately 300 of the Company's manufacturing employees. For
a complete description of the SCI transaction, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1998 annual report,
portions of which are incorporated by reference in this Form 10-K
annual report.

Significant contingencies related to the SCI transaction
include the right of SCI to return to the Company any inventory
included in the initial sale that proves unusable in the
manufacturing of current products, the ability of the Company to
obtain most favorable pricing for products purchased from SCI
through higher volumes, and the ability of the Company to
accurately forecast its requirements of SCI.

The Company expects to benefit from its outsourcing to SCI
through lower employee headcount and lower per unit costs for
materials and overhead expenses, both of which should improve
earnings and cash flow. Outsourcing will also allow Intergraph
Computer Systems, the Company's hardware business unit, to focus
on its core competencies of graphics, workstations, and systems
integration. However, the Company retains the risk associated
with inventory excess and obsolescence, defined in the agreement
as any component or material in SCI's inventory for more than 60
days and which is in excess of demand as reflected in the
Company's six month forecast, if not mitigated by SCI with the
vendor. The Company has the option to either purchase this
inventory from SCI or authorize SCI to obtain liquidation offers
from third parties.

Currently, the Company, through its Intergraph Computer Systems
business unit, markets and sells a complete line of workstations,
personal computers (PCs), and servers based on Intel's Pentium,
Pentium Pro, Pentium II and Pentium III Xeon microprocessors and
the Windows NT operating system. The Company's Intel/Windows-
based solutions include low to high-end workstations and PCs,
servers, software applications, peripherals, consulting,
networking, system migration, training, and maintenance and
support services. Depending upon user requirements, these
products and services can be provided as point solutions or as
integrated, complete solutions that include all necessary
hardware, software, and support services.

The Company believes that its operating system and hardware
architecture strategies are the correct choices. However,
competing operating systems and products are available in the
market, and competitors of the Company offer or are adopting
Windows NT and Intel as the systems for their products.
Improvement in the Company's operating results will depend on its
ability to accurately anticipate customer requirements and
technological trends and to rapidly and continuously develop and
deliver new hardware and software products that are competitively
priced, offer enhanced performance, and meet customers'
requirements for standardization and interoperability, and will
further depend on its ability to successfully implement its
strategic direction. In addition, the Company faces significant
operational and financial uncertainty of unknown duration due to
its dispute with Intel.

In terms of broad market segments, the Company's
mapping/geographic information systems and
architecture/engineering/construction product applications
continue to dominate the Company's product mix at approximately
47% and 19% of total systems sales in 1998, respectively,
compared to 57% and 27%, respectively, in 1997. In March 1998,
the Company sold its Solid Edge and Engineering Modeling System
product lines to Electronic Data Systems Corporation and its
Unigraphics Solutions, Inc. subsidiary. As a result, mechanical
design, engineering and manufacturing applications no longer
represent a significant portion of the Company's product mix.
These applications represented 14% of total systems sales in
1997. For further information regarding the sale of these
product lines, see Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report.

Business Entities

Intergraph Computer Systems
- ---------------------------
In January 1998, Intergraph Computer Systems (ICS) was
established as a wholly-owned subsidiary of the Company.
Headquartered in Huntsville, Alabama with a staff of
approximately 1,200 people worldwide, ICS develops and supplies
high performance Intel/Windows NT-based graphics workstations and
PCs, servers, and 3D graphics subsystems.

Intergraph Computer Systems is comprised of three business
units: Visual Computing, Intense3D, and Enterprise Solutions.
Visual Computing develops and supplies high performance Windows
NT-based graphics solutions for creative professionals in markets
that include publishing and prepress, digital media, and
production broadcasting. Intense3D develops and supplies state
of the art three dimensional graphics subsystems to major
workstation OEMs, including the Visual Computing business unit of
ICS. Enterprise Solutions provides Intel/Windows-based PCs,
workstations, and servers for enterprise computing, other
hardware products, and enterprise service solutions that include
networking solutions, firewalls, installation packages, systems
management solutions, consulting, training, and support.

Visual Computing offers workstation products for a range of
users. TDZ 3D graphics workstations offer animators, mechanical
CAD designers, and other graphics professionals high end,
industry standard graphics and computing power on price
competitive Pentium II-based systems running Windows NT. StudioZ
workstations are Pentium II/Windows NT-based systems for creating
computer generated images and digital betacam quality video for
the entertainment and broadcast markets. ExtremeZ 2D graphics
workstations are Pentium II-based systems for prepress and
publishing professionals. All computer systems offer numerous
options that permit customers to select systems that meet their
unique needs, including a selection of display monitors,
upgradeable memory, and specialized peripherals.

Intense3D provides high-performance, Windows NT-based 3D
graphics accelerators for visualization, CAD, digital content
creation, virtual reality, and simulation software applications.
Options include a complete range of Intense3D Wildcat and
Intense3D Pro accelerators for mainstream 3D applications up to
the most demanding creative and technical applications.

Enterprise Solutions' product and service offerings include
Intel/Windows-based PCs, workstations, servers, fully integrated
optical disk products, backup solutions, firewalls, networking
and system management solutions, as well as consulting,
installation packages, rapid application deployment solutions,
and Microsoft training. Depending on user requirements,
Enterprise Solutions' products and services can be provided as
point solutions or as integrated solutions that include all
necessary hardware, software, and support services for an
enterprise.

Intergraph Computer Systems also offers special purpose
peripherals such as disk and tape drives, printers, and other
devices which may be manufactured in house or sold as original
equipment from third parties.

Intergraph Public Safety, Inc.
- ------------------------------
In January 1997, Intergraph Public Safety, Inc. (IPS) was
established as a wholly-owned subsidiary of the Company.
Headquartered in Huntsville, Alabama, IPS provides total public
safety solutions on a global basis. IPS solutions include
computer hardware and software systems, training, maintenance,
customer support, and outsourcing services.

On January 1, 1999, the Utilities business of Intergraph was
formally merged into IPS, increasing the subsidiary's total
headcount to approximately 660 people worldwide. IPS's popular
dispatch technology is a complementary application to the
Utilities mainstream geospatial products, such as ActiveFRAMME.
By linking the two, the Company is responding to utilities'
increased demand for a total solution that integrates AM/FM/GIS,
outage management and computer-aided dispatch. The Utilities
business will continue to further develop the Company's core
geospatial offerings, while collaboration with Intergraph Public
Safety will augment those offerings by adding computer-aided
dispatch and outage management components.

IPS utility solutions assist companies in the management of
customer centric geographic information systems (GIS) data
containing all the information necessary for distributing
electricity or gas, tracking distribution, and managing service
disruptions. IPS's geospatial resource management solution
spatially enables this data, integrating operational support
systems such as outage analysis, providing real time information
for customer service, and increasing operational efficiency
enterprisewide. Utility solutions offered by IPS include
engineering design and facilities management, technical document
workflow and archiving, mobile computing and field support,
outage management, spatial data analysis and data warehouse, and
real time display facility analysis.

The merger allows the Utilities group to focus expertise and
resources in three strategic industry sectors: electric; gas,
water and pipeline; and telecommunications. Sales, marketing and
project services efforts are vertically focused along these
segment lines.

IPS public safety develops, markets, and implements computer-
based solutions for emergency medical and rescue units, fire
departments, law enforcement organizations, and other public
safety agencies around the world. Other industries utilizing IPS
solutions include automobile clubs for roadside assistance, and
airports, campuses, and military bases for security systems.

IPS's public safety strategy is to provide products
representing a complete solution for public safety agencies. All
IPS products are designed to participate in a comprehensive,
integrated public safety information system. These products
include computer-aided dispatch, police, fire, and emergency
management systems, records management systems, jail management
systems, civil process and mug shot systems, mobile computer
systems, integrated radio and telephony solutions, interfaces to
alarm systems, management information reporting systems,
personnel rostering systems, and training management systems.

The foundation product for IPS is its computer-aided dispatch
system. This product fully integrates interactive, intelligent
mapping with dispatching, records management, and state of the
art communications capabilities. Designed specifically to
support command and control operations, the system is composed of
high performance graphics workstations and software. Records
management is enhanced by a database that includes geographic map
information as well as address, incident history, and traffic
pattern data.

IPS solutions are Intel processor/Windows NT-based and rely on
Oracle Corporation's relational databases. By incorporating
industry standard hardware and software with its products, IPS is
able to provide customers with the best price and performance
features available. IPS distributes its products worldwide
through direct and indirect sales channels. IPS distributes its
Utilities products directly in the U.S. Outside the U.S.,
Utilities products are sold through the Intergraph Corporation
distribution channels.

VeriBest, Inc.
- --------------
In January 1996, VeriBest, Inc. was established as a wholly-
owned subsidiary of the Company. VeriBest employs a staff of
approximately 270 people worldwide, with concentrations at its
corporate headquarters in Boulder, Colorado and development
centers in Huntsville, Alabama and Mountain View, California.

VeriBest serves the electronics design automation market,
providing software design tools, design processes, and consulting
services for developers of electronic systems. The first
electronic design automation (EDA) company to port its tools to
Windows NT and fully support computer-aided-engineering/computer-
aided-design/printed circuit board tools in the Intel/Windows
environment, VeriBest provides its electronic system design
solutions to the computer, telecommunications, automotive,
industrial control, and consumer industries.

VeriBest's core competencies include analog and digital
simulation, signal integrity, printed circuit board (PCB)
implementation, and enterprisewide design data and process
management, and full FPGA/PLD design support including
integration with logic synthesis tools from Synopsys and
Synplicity. These core competencies are focused on several
current market trends: the switch from point tools to integrated
tools suites, the switch to hardware description languages for
FPGA and PLD design, very high speed PCB's in the
telecommunications and computer market segments, and the adoption
of Windows NT as a workstation class operating system.
Integration is particularly important because it increases the
efficiency of the product development process, which
substantially improves the customer's ability to get their
products to market. To further improve customer's time to
market, VeriBest offers consulting services to customize the
product design process for each customer's unique product
development needs and enterprise data management philosophy.

VeriBest distributes its products worldwide through a direct
sales channel, telesales, value added resellers, e-commerce (the
Web), and through original equipment manufacturer (OEM)
arrangements. VeriBest's multi-level distribution strategy,
started in 1997, was enhanced by two events that occurred at the
end of 1998. In December 1998, VeriBest shipped new versions of
all of its products. This release of software, some two years in
the making, allows VeriBest to more efficiently sell its
technology at multiple price points through multiple channels.
In November of 1998 it was announced that the FPGA vendor Actel
had selected VeriBest as the source from which it would OEM a
full tool suite for the design of its high performance FPGA and
PLD silicon products. The addition of the Actel installed base
is expected to substantially enhance the over 18,000 seats of
VeriBest software currently installed around the world.

Intergraph
- ----------
Intergraph develops, markets, and supports technical solutions
for the enterprise, including open, interdisciplinary software
applications, specialized industry specific hardware, consulting,
and support services. Intergraph provides these business
solutions to three primary industries: process and building,
mapping and geoengineering (including transportation and state
and local governments), and federal government.

Intergraph's principal software applications are based on
Microsoft Windows, including operating systems, architecture
components, and development environments. This open technology
foundation enables Intergraph's software to interoperate with
thousands of third-party Windows-based technical and business
applications as well as with UNIX-based applications. An
additional graphics foundation used by the Company for certain
Intergraph software applications is MicroStation, software owned
by Bentley Systems, Inc., an approximately 50%-owned affiliate of
the Company. MicroStation provides fundamental graphics element
creation, maintenance, and display functions for the Company's
UNIX- and Intel-based workstations. In 1998, MicroStation sales
represented approximately 8% of the Company's total software
revenue. See Item 3, Legal Proceedings, following and
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 12 of Notes to Consolidated
Financial Statements contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for discussion of the Company's
arbitration proceedings and business relationship with Bentley
Systems, Inc.

Process & Building. Intergraph provides total life cycle
solutions to the process and building industries, including plant
design, architectural, and shipbuilding solutions, as well as
global service and support.

For more than 20 years, engineering/procurement/and
construction (EPC) contractors, and process plant owner/operators
have used Intergraph solutions to design, construct, operate and
maintain petrochemical, chemical, pharmaceutical, food and
beverge, oil and gas, power generation, and mining industries
from small stand-alone facilities to large global projects.
Intergraph life cycle solutions increase the value of plant data
by optimizing its storage, creation, management, integration, and
access across the global enterprise. Intergraph solutions reduce
design and contruction time, lower costs, enhance global
execution, extend the life and usability of engineering data, and
make data an integral part of the facility asset.

According to industry analyst Daratech of Cambridge,
Massachusetts, in 1998 Intergraph held a 56.6% revenue share of
the 3D plant design and visualization market, more than 3.5 times
more than the closest competitor. In the 2D plant design market
segment, Intergraph held a 15.5% revenue share, an increase of
18.6% over 1997. Combined with revenue share from the recently
acquired PID business, Intergraph holds a 22.2% revenue share -
virtually tied with the number two vendor, Bentley Systems,
(22.3%) in the 2D plant design market place.

Demand for Intergraph Plant Design System (PDS), the Company's
flagship plant design solution, remains strong. PDS provides:

- - Automation that improves productivity
- - Three-dimensional modeling that helps designers create a
better design
- - Interference-checking to reduce or eliminate field rework
- - Accurate material takeoffs that cut costs
- - Specification-driven design and checking that improves
accuracy

PDS supports process flow diagrams, piping and instrumentation
diagrams, instrumentation data management, piping, equipment,
heating/ventilation/air conditioning, electrical, structural, and
other engineering aspects of a plant.

The Intergraph SmartPlant family of process solutions,
including SmartPlant P&ID, SmartPlant Explorer, and SmartSketch,
is an open line of discipline-specific software tools that
provides an integrated solution for the entire plant life cycle.
Knowledge-based, intuitive, easy-to-use, accessible, flexible,
and data neutral, SmartPlant supports global workflows. It
enables users to create logical and physical definitions of the
plant model and enables access to plant data from conceptual
design to decommissioning.

The successor to PDS, SmartPlant includes expanded
functionality for front-end engineering and design (FEED),
operation, and maintenance phases. An open system that preserves
legacy plant data, SmartPlant will access and use PDS project and
related data, enabling users to migrate to SmartPlant on a module-
by-module basis, as their resources allow.

Relying on 20 years of industry experience and market
leadership, Intergraph develops life cycle information management
solutions that unlock the true value of plant data, making it
easily accessible and usable. Intergraph's engineering
information management solution is the Asset & Information
Management (AIM) suite.

Intergraph's architectural solutions automate the building
design process. With the Project Architect family,
architecture/engineering firms and corporate or governmental
offices can develop and model building concepts as well as
produce construction documents. Included in the Project
Architect family are capabilities for producing three-dimensional
models of design concepts, architectural drawings, reports,
engineering plans, and construction drawings. Intergraph
FrameWorks Plus models the physical structure of buildings.
FrameWorks Plus integrates with third-party analysis software for
evaluating designs by simulating stresses encountered in end use.

Shipbuilding solutions provide software systems and services
for commercial and military ship design, construction, and
management. In cooperation with international industry partners,
Intergraph is developing the next generation solution that will
streamline shipbuilding processes, lower manpower and material
costs, and reduce the time to construct world class marine
vessels. This software solution will provide the capability to
create a ship design that speeds product development from
conception to market delivery. It also provides capabilities for
performing risk analysis, design integrity and functional
engineering review of new and modified product designs.

Mapping and Geoengineering. To help agencies strategically and
efficiently manage transportation networks, Intergraph
transportation solutions integrate maps, photos, property
records, survey and engineering data, inspection reports, traffic
safety, and congestion statistics. Intergraph photogrammetry,
civil engineering, and mapping products provide transportation
solutions that include imaging, design, modeling, reprographics,
plotting, training, integration, and professional services.

Industry and government transportation professionals use
Intergraph photogrammetry solutions as a front end to mapping,
geographic information systems (GIS), and civil engineering
software from a variety of leading vendors. Photogrammetry is
used for spatial and volume measurement of terrain in studies of
the earth's surface. By comparing sequences of aerial
photographs taken over time, professionals can monitor land use
and environmental compliance, develop site plans for highways and
railways, perform defense reconnaissance, and plan improvements
in urban infrastructure and utilities. Intergraph's Windows NT-
based end-to-end digital photogrammetry production system
includes tools for aerotriangulation, mapping, automatic digital
terrain model collection, and orthophoto generation. Intergraph
also offers a software kit that transforms a PC into a low-cost,
high-performance photogrammetry seat for applications such as
model orientation, stereo compilation, and digital terrain
modeling (DTM) collection and editing.

For civil engineering, Intergraph's SelectCAD family of
products allows departments of transportation and
engineering/construction firms to easily switch between AutoCAD,
IntelliCad 98 and MicroStation platforms, while using the same
civil engineering tools for each of the various graphics engines.
InRoads SelectCAD provides features needed for projects ranging
from field design to construction. The software offers advanced
DTM capability plus associative alignments with spirals, user-defined
typical sections, and parametrically driven decision tables. Plans,
profiles, cross sections, contour maps or shaded analytical models
can be extracted to the user's standards.

For state and local governments, Intergraph develops and
implements civil engineering and mapping/GIS solutions for land
records and mapping, asset management, public works, public
safety, transportation engineering, infrastructure modeling,
planning, and other functions.

Intergraph's suite of civil engineering solutions offers local
governments a full complement of solutions, from data collection
to site design to water resources. Intergraph civil design
products integrate with Intergraph GIS solutions to meet the
needs of state and city governments around the world. Both civil
and GIS product lines remove proprietary barriers by providing
automated mapping, spatial analysis, network modeling, and
integration with multimedia, satellite imagery, spreadsheets,
documents, and more. The software also provides seamless
integration with major vendor data formats.

Intergraph's mapping/GIS solutions help governments improve
public service, respond more efficiently to legislated and
political mandates, implement successful GIS systems quickly, and
reduce the total cost of GIS ownership. The dominant mapping/GIS
solution for transportation agencies is Intergraph's GeoMedia, a
complete Windows-based desktop GIS solution for all decision
support query and reporting activities. Using GeoMedia software,
GIS professionals can access multiple geographic data sources
simultaneously for display, analysis, and presentation. GeoMedia
uses data servers to enable users to view and analyze multiple
databases simultaneously, allows integration of multiple data
types in a single environment, includes a complete set of
advanced analysis, and provides an open development platform for
creating custom applications. Designed to accommodate the
enterprisewide GIS environment, GeoMedia and GeoMedia Web Map
together enable open data access, analysis, and distribution of
spatial data and information across the World Wide Web for use
throughout the enterprise.

Intergraph's MGE is used by transportation agencies as a high-
end software for basemap analysis. MGE is the foundation for
Intergraph's Modular GIS Environment (MGE) family of mapping and
GIS software products. MGE offers project management, coordinate
system operations, data query and access, multiple configuration
options, and a range of common tools valuable to MGE modules.
MGE is interoperable with the GeoMedia product suite.

Also provided are solutions for end-to-end digital map and
cartographic production. These solutions help cartographers
manage the map production environment. From map scanning to map
printing, Intergraph's end-to-end cartographic production tools
provide the means to collect, process, and output data.

Federal Systems. The Federal Systems business unit of
Intergraph markets and sells commercial off-the-shelf and
specially developed products and services to government agencies
around the world. Federal Systems' offerings include ruggedized
workstations, mapping and information systems, environmental
management solutions, modeling and simulation systems, and state
of the art security systems. Intergraph has been a top provider
of computer hardware, software, and professional services
solutions to the U.S. government for many years.

Product Development

The Company believes a strong commitment to ongoing product
development is critical to success in the interactive computer
graphics industry.

Product development expenditures include all costs related to
designing new or improving existing hardware and software.
During the year ended December 31, 1998, the Company spent $83.8
million (8.1% of revenues) for product development activities
compared to $98.1 million (8.7% of revenues) in 1997, and $103.4
million (9.4% of revenues) in 1996. See Management's Discussion
and Analysis of Financial Condition and Results of Operations
contained in the Company's 1998 annual report, portions of which
are incorporated by reference in this Form 10-K annual report,
for further discussion of product development expenses, including
portions capitalized and their recoverability.

The industry in which the Company competes continues to be
characterized by rapid technological change, which results in
shorter product cycles, higher performance and lower priced
product offerings, intense price and performance competition, and
development and support of software standards that result in less
specific hardware and software dependencies by customers. The
Company believes the life cycle of its products to be less than
two years, and it is therefore engaged in continuous product
development activity. The operating results of the Company and
others in the industry will continue to depend on the ability to
accurately anticipate customer requirements and technological
trends and to rapidly and continuously develop and deliver new
hardware and software products that are competitively priced,
offer enhanced performance, and meet customers' requirements for
standardization and interoperability.

Manufacturing and Sources of Supply

Reflecting a trend toward outsourcing in the industry, on
November 13, 1998, the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology, Inc. (SCI),
a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. Prior to the sale, this
responsibility, which included the assembly and testing of
components and subassemblies manufactured by the Company and
others, was that of Intergraph Computer Systems (ICS), a wholly-
owned subsidiary of the Company. This outsourcing is expected to
bring the manufacturing and materials costs of ICS in line with
those of its competitors. ICS does, however, retain certain
risks, including its ability to accurately forecast its
manufacturing requirements of SCI and risks associated with
inventory excess and obsolescence as defined in the agreement.
For a complete description of the SCI transaction and its
anticipated impact on future operating results and cash flows,
see Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report.

Substantially all of the Company's microprocessor needs are
currently supplied by Intel Corporation. See Item 3, Legal
Proceedings, following and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for a discussion of
the Company's litigation proceedings with Intel and its related
effects on the Company's microprocessor supply and results of
operations.

The Company is not required to carry extraordinary amounts of
inventory to meet customer demands or to ensure allotment of
parts from its suppliers.

Sales and Support

Sales. The Company's systems are sold through a combination of
direct and indirect channels in approximately 65 countries
worldwide. Direct channel sales, which provide the majority of
the Company's systems revenues, are generated by the Company's
direct sales force through sales offices in over 40 countries
worldwide. The efforts of the direct sales force are augmented
by sales through indirect channels, including dealers, value
added resellers, distributors, and system integrators. Sales
through indirect channels provided approximately 22% of total
Company systems revenues in 1998 and 1997, compared to 18% in
1996.

Each of the Company's four major business entities maintains
its own sales force. Intergraph's selling efforts are organized
along key industry lines (process and building, federal systems,
and mapping and geoengineering, including transportation,
photogrammetry, and state and local governments) for its major
product applications. The Company believes an industry focus
better enables it to meet the specialized needs of customers. In
general, the direct sales forces are compensated through a
combination of base salary and commission. Sales quotas are
established along with certain incentives for exceeding quota.
Additional specific incentive programs may be established
periodically.

Customer Support. The Company believes that a high level of
customer support is important to the sale of interactive graphics
systems. Customer support includes preinstallation guidance,
customer training, onsite installation, hardware preventive
maintenance, repair service, software help desk and technical
support services in addition to consultative professional
services. The Company employs engineers and technical
specialists to provide customer assistance, maintenance, and
training. Maintenance and repair of systems are covered by
standard warranties and by maintenance agreements to which most
users subscribe. The trend in the industry toward lower priced
products and longer warranty periods has resulted in reduced
levels of maintenance revenue for the Company. The Company
believes this trend will continue in the future, though it may be
partially offset by growth in the Company's professional services
business. The Company is endeavoring to grow its services
business and has redirected the efforts of its hardware
maintenance organization to focus increasingly on systems
integration and training. Revenues on these services, however,
produce lower gross margins than maintenance revenues.

International Operations

International markets, particularly Europe and Asia, continue
in importance to the industry and to the Company. Sales outside
the U.S. represented approximately 51% of total revenues in 1998
and 53% in 1997. European and Asia Pacific revenues represented
31% and 10%, respectively, of total revenues in 1998 (31% and
12%, respectively, in 1997). The Company's operations are
subject to and may be adversely affected by a variety of risks
inherent in doing business internationally, such as government
policies or restrictions, currency exchange fluctuations, and
other factors.

There are currently wholly-owned sales and support subsidiaries
of the Company located in every major European country. European
subsidiaries are supported by service and technical assistance
operations located in The Netherlands. Outside of Europe, the
Company's systems are sold and supported through a combination of
subsidiaries and distributorships. At December 31, 1998, the
Company had approximately 1,300 employees in Europe, 780
employees in the Asia Pacific region, and 650 employees in other
international locations.

Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations. The Company conducts business in all major markets
outside the U.S., but the most significant of these operations
with respect to currency risk are located in Europe and Asia.
Local currencies are the functional currencies for the Company's
European subsidiaries. The U.S. dollar is the functional
currency for all other international subsidiaries. With respect
to the currency exposures in these regions, the objective of the
Company is to protect against financial statement volatility
arising from changes in exchange rates with respect to amounts
denominated for balance sheet purposes in a currency other than
the functional currency of the local entity. The Company will
therefore enter into forward exchange contracts related to
certain balance sheet items, primarily intercompany receivables,
payables, and formalized intercompany debt, when a specific risk
has been identified. Periodic changes in the value of these
contracts offset exchange rate related changes in the financial
statement value of these balance sheet items. Forward exchange
contracts, generally less than three months in duration, are
purchased with maturities reflecting the expected settlement
dates of the balance sheet items being hedged, and only in
amounts sufficient to offset possible significant currency rate
related changes in the recorded values of these balance sheet
items, which represent a calculable exposure for the Company from
period to period. Since this risk is calculable and these
contracts are purchased only in offsetting amounts, neither the
contracts themselves nor the
exposed foreign currency denominated balance sheet items are
likely to have a significant effect on the Company's financial
position or results of operations. The Company does not
generally hedge exposures related to foreign currency denominated
assets and liabilities that are not of an intercompany nature,
unless a significant risk has been identified. It is possible
the Company could incur significant exchange gains or losses in
the case of significant, abnormal fluctuations in a particular
currency. By policy, the Company is prohibited from market
speculation via forward exchange contracts and therefore does not
take currency positions exceeding its known financial statement
exposures, and does not otherwise trade in currencies. At
December 31, 1998, the Company's only outstanding forward
contracts related to formalized intercompany loans between the
Company's European subsidiaries.

The Company has historically experienced slower collection
periods for its international accounts receivable than for
similar sales to customers in the United States. The Company is
experiencing slow collections throughout the Middle East region,
particularly in Saudi Arabia. Total accounts receivable from
Middle Eastern customers was approximately $23 million at
December 31, 1998 and $21 million at December 31, 1997.

See Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 4, and 11 of Notes to
Consolidated Financial Statements contained in the Company's 1998
annual report, portions of which are incorporated by reference in
this Form 10-K annual report, for further discussion of the
Company's international operations.

U.S. Government Business

Total revenue from the United States government was
approximately $166 million in 1998, $177 million in 1997, and
$161 million in 1996, representing approximately 16% of total
revenue in 1998 and 1997, and 15% in 1996. The majority of these
revenues are attributed to the Federal Systems business unit of
the Intergraph operating segment.

The Company sells to the U.S. government under long term
contractual arrangements, primarily indefinite delivery,
indefinite quantity and cost plus award fee contracts, and
through commercial sales of products not covered by long term
contracts. Approximately 44% of total federal government
revenues are earned under long term contracts. The Company
believes its relationship with the federal government to be good.
While it is fully anticipated that these contracts will remain in
effect through their expiration, the contracts are subject to
termination at the election of the government. Any loss of a
significant government contract would have an adverse impact on
the results of operations of Intergraph Federal Systems and the
Company as a whole.

The Company has historically experienced slower collection
periods for its U.S. government accounts receivable than for its
commercial customers. At December 31, 1998, accounts receivable
from the U.S. government was approximately $55 million versus
approximately $53 million at December 31, 1997.

Backlog

An order is entered into backlog only when the Company receives
a firm purchase commitment from a customer. The Company's
backlog of unfilled systems orders at December 31, 1998 and 1997
was $237 million and $169 million, respectively. Substantially
all of the December 1998 backlog of orders is expected to be
shipped during 1999.

The Company does not consider its business to be seasonal,
though typically fourth quarter orders and revenues exceed those
of other quarters.

The Company does not ordinarily provide return of merchandise
or extended payment terms to its customers.

Competition

The industry in which the Company competes continues to be
characterized by price and performance competition. To compete
successfully, the Company and others in the industry must
accurately anticipate customer requirements and technological
trends and rapidly and continuously develop products with
enhanced performance that can be offered at competitive prices.
The Company, along with other companies in the industry, engages
in the practice of price discounting to meet competitive industry
conditions. Other important competitive factors include quality,
reliability, customer service and support, and training.
Management of the Company believes that competition will remain
intense, particularly in product pricing.

Competition in the interactive computer graphics industry
varies among the different product application areas. The
Company considers its principal competitors in the interactive
computer graphics market to be IBM, Hewlett Packard Corporation,
Compaq Computer Corporation, Sun MicroSystems, Inc., Silicon
Graphics, Inc., and Mentor Graphics, Inc. In the low end
graphics market, Intergraph competes with the software products
of Autodesk, Inc., Bentley Systems, Inc. (an approximately 50%-
owned affiliate of the Company), Softdesk, Inc., and several
smaller companies. In the personal computer market, Intergraph
competes with vendors such as Compaq Computer Corporation and
Dell Computer Corporation. The primary competitors of Intergraph
Public Safety are TriTech Software Systems, Litton PRC, Tiburon,
Inc., and Printrak International Inc. VeriBest's primary
competitors are Cadence Design Systems, Inc., Viewlogic Systems,
Inc., and Mentor Graphics, Inc. Several companies with greater
financial resources than the Company, including IBM, Hewlett
Packard, Sun, and Compaq are active in the industry.

The Company provides point solutions and solutions which are
Windows compliant and integrated -- workstations, servers,
peripherals, and software configured by the Company to work
together and satisfy customers' requirements. By delivering such
integration, the Company believes it has an advantage over other
vendors who provide only hardware or software, leaving system
integration to the customer. In addition, the Company believes
that its experience and extensive worldwide customer service and
support infrastructure represent a competitive advantage.

Environmental Affairs

The Company's manufacturing facilities are subject to numerous
laws and regulations designed to protect the environment,
particularly from plant wastes and emissions. In the opinion of
the Company, compliance with these laws and regulations has not
had, and should not have, a material effect on the capital
expenditures, earnings, or competitive position of the Company.

Licenses, Copyrights, Trademarks, Patents, and Proprietary
Information

The Company develops its own graphics, data management, and
applications software as part of its continuing product
development activities. The Company has standard license
agreements with Microsoft Corporation for use and distribution of
the Windows NT operating system and with UNIX Systems
Laboratories for use and distribution of the UNIX operating
system. The license agreements are perpetual and allow the
Company to sublicense the operating systems software upon payment
of required sublicensing fees. The Company also has an extensive
program for the licensing of third party application and general
utility software for use on systems and workstations.

The Company has a non-exclusive license agreement with Bentley
Systems, Inc. (Bentley), an approximately 50%-owned affiliate of
the Company, under which the Company sells MicroStation, a
software product developed and maintained by Bentley and utilized
in many of the Company's software applications, via its direct
sales force, and via its indirect sales channels if MicroStation
is sold with other Intergraph products. See Item 3, Legal
Proceedings, following and Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 12 of
Notes to Consolidated Financial Statements contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for further
discussion of the Company's affiliation with Bentley.

The Company owns and maintains a number of registered patents
and registered and unregistered copyrights, trademarks, and
service marks. The patents and copyrights held by the Company
are the principal means by which the Company preserves and
protects the intellectual property rights embodied in the
Company's hardware and software products. Similarly, trademark
rights held by the Company are used to preserve and protect the
goodwill represented by the Company's registered and unregistered
trademarks.

As industry standards proliferate, there is a possibility that
the patents of others may become a significant factor in the
Company's business. Personal computer technology is widely
available, and many companies, including Intergraph, are
attempting to develop patent positions concerning technological
improvements related to personal computers and workstations.
With the possible exception of its ongoing litigation with Intel
(in which the Company expects to prevail), it does not appear the
Company will be prevented from using the technology necessary to
compete successfully, since patented technology is typically
available in the industry under royalty bearing licenses or
patent cross licenses, or the technology can be purchased on the
open market. Any increase in royalty payments or purchase costs
would increase the Company's costs of manufacture, however, and
it is possible that some key improvement necessary to compete
successfully in markets served by the Company may not be
available.

An inability to retain significant third party license rights,
in particular the Microsoft license, to protect the Company's
copyrights, trademarks, and patents, or to obtain current
technical information or any required patent rights of others
through licensing or purchase, all of which are important to
success in the industry in which the Company competes, could
significantly reduce the Company's revenues and adversely affect
its results of operations.

Technology significant to the Company is sometimes made
available in the form of proprietary information or trade secrets
of others. Prior to the dispute with Intel, Intel had made
freely available technical information used by the Company to
design, market and support its products that use Intel
components. Such information is claimed by Intel to be
proprietary and is made available by Intel only under
nondisclosure agreements. Prior to the April 1998 ruling of the
Alabama Court (See Item 3, Legal Proceedings, following), Intel
was withholding such information, attempting to cancel existing
agreements and refusing to enter into new nondisclosure
agreements with the Company. Intel's actions are the subject
matter of current litigation, and Intel has appealed the April
1998 court ruling. Intel's actions have damaged the Company by
slowing the introduction of new products using Intel components
and preventing proper maintenance and support of Company products
using Intel components. The Company expects the Appeals Court to
uphold the April 1998 ruling. However, if the ruling is
overturned, the Company will be materially affected and may be
forced to alter its future business plans or to accept
unfavorable terms from Intel in settlement of the lawsuit.

Risks and Uncertainties

In addition to those described above and in Item 3, Legal
Proceedings, following, the Company has risks and uncertainties
related to its business and operating environment. See
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Consolidated
Financial Statements contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for further discussion of these risks
and uncertainties.

Employees

At December 31, 1998, the Company had approximately 6,700
employees. Of these, approximately 2,730 were employed outside
the United States. The Company's employees are not subject to
collective bargaining agreements, and there have been no work
stoppages due to labor difficulties. Management of the Company
believes its relations with employees to be good.

ITEM 2. PROPERTIES

The Company's corporate offices and primary manufacturing
facility are located in Huntsville, Alabama. With the exception
of VeriBest, all of the Company's operating segments have
corporate headquarters located within the Huntsville facilities.
VeriBest is headquartered in Boulder, Colorado with development
centers in Huntsville, Alabama and Mountain View, California.
The Company's operating segments maintain sales and support
facilities throughout the world.

The Company owns over 1,800,000 square feet of space in
Huntsville that is utilized for manufacturing, product
development, sales and administration. The Huntsville facilities
also includes over 500 acres of unoccupied land. The Company
maintains subsidiary company facilities, including those of its
VeriBest operating segment, and sales and support locations in
major U.S. cities outside of Huntsville through operating leases.

Under the terms of its manufacturing outsourcing agreement with
SCI, the Company is leasing its Huntsville manufacturing
facilities, consisting of approximately 248,000 square feet of
space, to SCI for a period of six to twelve months before SCI
moves the former Intergraph manufacturing operation to another
facility. It is anticipated that the transition of manufacturing
from Intergraph to SCI facilities will take place in the second
quarter of 1999.

Outside the U.S., the Company owns approximately 450,000 square
feet of space, primarily its Nijmegen distribution center and
European headquarters facility. Sales and support facilities are
leased in most major international locations.

The Company considers its facilities to be adequate for the
immediate future.

ITEM 3. LEGAL PROCEEDINGS

Intel Corporation
- -----------------

The Company filed a legal action on November 17, 1997, in U.S.
District Court, the Northern District of Alabama, Northeastern
Division (the "Alabama Court"), charging Intel Corporation, the
supplier of all of the Company's microprocessor supply, with
anticompetitive business practices. In the lawsuit, Intergraph
alleges that Intel is attempting to coerce the Company into
relinquishing to Intel certain computer hardware patents through
a series of wrongful acts, including interference with business
and contractual relations, interference with technical assistance
from third party vendors, breach of contract, negligence,
misappropriation of trade secrets, and fraud based upon Intel's
failure to promptly notify the Company of defects in Intel's
products and timely correction of such defects, and further
alleging that Intel has infringed upon the Company's patents.
The Company's patents define the architecture of the cache memory
of an Intergraph developed microprocessor. The Company believes
this architecture is at the core of Intel's entire Pentium line
of microprocessors and systems. On December 3, 1997, the Company
amended its complaint to include a count charging Intel with
violations of federal antitrust laws. Intergraph asserts claims
for compensatory and treble damages resulting from Intel's
wrongful conduct and infringing acts, and punitive damages in an
amount sufficient to punish and deter Intel's wrongful conduct.
Additionally, the Company requested that Intel be enjoined from
continuing the alleged wrongful conduct which is anticompetitive
and/or violates federal antitrust laws, so as to permit
Intergraph uninterrupted development and sale of Intel-based
products.

On November 21, 1997, the Company filed a motion in the Alabama
Court to enjoin Intel from disrupting or delaying its supply of
products and product information, pending resolution of
Intergraph's legal action. On April 10, 1998, the Alabama Court
ruled in favor of Intergraph and ordered that Intel be
preliminarily enjoined from terminating Intergraph's rights as a
strategic customer in current and future Intel programs, and from
otherwise taking any action adversely affecting Intel's business
relationship with Intergraph or Intergraph's ability to design,
develop, produce, manufacture, market or sell products
incorporating, or based upon, Intel products or information. The
Court's ruling requires that Intel carry out business with
Intergraph under the same terms and conditions, with the same
rights, privileges, and opportunities as Intel makes available to
Intergraph's competitors who are also strategic customers of
Intel. In response to the Alabama Court's decision, on April 16,
1998, Intel appealed to the United States Court of Appeals for
the Federal Circuit (the "Appeals Court"). Intel and the Company
have each filed briefs with the Appeals Court, and oral arguments
were presented on December 9, 1998. No decision has been
entered.

Intel filed a retaliatory legal action on November 17, 1997, in
the U.S. District Court, the Northern District of California (the
"California Court"), requesting, among other things, i) that the
Court declare Intergraph's patents invalid and/or not infringed
by Intel, ii) that Intergraph be enjoined from making further
assertions that Intel's customers infringe Intergraph's patents
through use of Intel's microprocessors, iii) that the Court
declare that Intel has no obligation to disclose any of its trade
secrets or other confidential information to Intergraph, and iv)
that the Court declare that Intel's decision to discontinue the
provision of trade secrets and other confidential information to
Intergraph does not violate any doctrine of federal or state
statutory or common law. Intel filed a second legal action in
the California Court on November 24, 1997, charging Intergraph
with breach of contract related to wrongful retention of and
failure to return Intel information supplied under nondisclosure
agreements, and misappropriation of trade secrets as a result of
the same. Intel asserted claims for damages and awards and
requested a preliminary and permanent injunction under which
Intergraph would return and make no further use of Intel
confidential information. On December 8, 1997, the Alabama Court
directed the Company and Intel to file joint motions in the
California cases to stay the two legal actions brought by Intel,
pending the Court's consideration of a motion to transfer and
consolidate venue. The joint motions were filed and stays were
granted by the California Court. On January 15, 1998, Intel
filed a motion before the Alabama Court for a change in venue to
California. On May 18, 1998, the Alabama Court denied this
motion, and Intel subsequently dropped the two retaliatory
lawsuits which Intel had brought against the Company in
California.

On June 17, 1998, Intel filed its answer in the Alabama case,
which included counterclaims against Intergraph, including claims
that Intergraph has infringed seven patents of Intel. On July 8,
1998, the Company filed its answer to the Intel counterclaims,
among other things denying any liability under the patent
infringement asserted by Intel. On June 17, 1998, Intel filed a
motion before the Alabama Court seeking a summary judgment
holding that Intel is licensed to use the patents that the
Company asserted against Intel in the Company's original
complaint. This "license defense" is based on Intel's
interpretation of the facts surrounding the acquisition by the
Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. The Company is vigorously
contesting Intel's motion for summary judgment on the license
defense, and filed a cross motion with the Alabama Court
September 15, 1998 requesting summary adjudication in favor of
the Company. No decision has been entered.

On November 13, 1998, the Company amended its complaint to
include two additional counts of patent infringement against
Intel. The Company requested the court to issue a permanent
injunction enjoining Intel from further infringement, and to
order that the financial impact of the infringement be calculated
and awarded in treble to Intergraph. No decision has been
entered.

On January 29, 1999, Intergraph filed a motion requesting the
Alabama Court to require Intel to show cause why it should not be
held in contempt for its failure to comply with the Court's
automated discovery order and for improperly designating
discovery materials as protected by the attorney client
privilege. In its motion, Intergraph requested the Court to set
a status conference on discovery and a hearing on its motion. No
decision has been entered.

In a scheduling order entered June 25, 1998, the Alabama Court
set a trial date of February 14, 2000.

Bentley Systems, Inc.
- ---------------------

The Company is the owner of approximately 50% of the
outstanding stock of Bentley Systems, Inc. ("Bentley"), the
developer and owner of MicroStation, a software product utilized
in many of the Company's software applications and for which the
Company serves as a nonexclusive distributor. In May 1997, the
Company received notice of the adverse determination of an
arbitration proceeding with Bentley in which the Company had
alleged that Bentley inappropriately and without cause terminated
a contractual arrangement with the Company, and in which Bentley
had filed a counterclaim against the Company seeking significant
damages as the result of the Company's alleged failure to use
best efforts to sell software support services pursuant to terms
of the contractual arrangement terminated by Bentley. The
arbitrator's award against the Company was in the amount of $6.1
million. In addition, the contractual arrangement that was the
subject of this arbitration was terminated effective with the
award and, as a result, the Company no longer sells the related
software support services under this agreement. The Company and
Bentley have entered into a new agreement which establishes
single support services between the two companies.

In a second proceeding brought in March 1996, Bentley commenced
arbitration against the Company with the American Arbitration
Association, Atlanta, Georgia, alleging that the Company failed
to properly account for and pay to Bentley certain royalties on
its sales of Bentley software products, and seeking significant
damages. Hearings on this matter are in process and are
scheduled to conclude with a decision from the arbitration panel
in second quarter of 1999. The Company denies that it has
breached any of its contractual obligations to Bentley and is
vigorously defending its position in this proceeding, but at
present is unable to predict an outcome.

See Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for further discussion of the Company's
business relationship with Intel and Bentley and effects of
litigation and arbitration proceedings on the Company's financial
position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.

EXECUTIVE OFFICERS OF THE COMPANY

Certain information with respect to the executive officers of
the Company is set forth below. Officers serve at the discretion
of the Board of Directors.

Name Age Position Officer Since
- ---- --- -------- -------------

James W. Meadlock 65 Chairman of the Board
and Chief Executive Officer 1969
James F. Taylor Jr. 54 Executive Vice President and
Director, Intergraph
Corporation and Chief Executive
Officer, Intergraph Public
Safety, Inc. 1977
Robert E. Thurber 58 Executive Vice President and
Director 1977
Lawrence F. Ayers Jr. 66 Executive Vice President 1987
Klaas Borgers 54 Executive Vice President 1994
Penman R. Gilliam 61 Executive Vice President 1994
Lewis N. Graham Jr. 44 Executive Vice President 1997
Richard H. Lussier 53 Executive Vice President 1996
Nancy B. Meadlock 60 Executive Vice President 1969
Wade C. Patterson 37 Executive Vice President,
Intergraph Corporation and
Chief Executive Officer and
President, Intergraph Computer
Systems 1994
Stephen J. Phillips 57 Executive Vice President 1987
Preetha R. Pulusani 38 Executive Vice President 1997
Charles E. Robertson Jr. 45 Chief Executive Officer and
President, VeriBest, Inc. 1992
William E. Salter 57 Executive Vice President 1984
K. David Stinson Jr. 45 Executive Vice President 1996
John W. Wilhoite 47 Executive Vice President and
Chief Financial Officer 1988
Edward A. Wilkinson 65 Executive Vice President 1987
Allan B. Wilson 50 Executive Vice President 1982
Manfred Wittler 58 Executive Vice President 1989

James W. Meadlock, a founder of the Company, has served as
Chairman of the Board of Directors since the Company's inception
in 1969 and is Chief Executive Officer. Mr. Meadlock received a
degree in electrical engineering from North Carolina State
University in 1956. Mr. Meadlock and Nancy B. Meadlock are
husband and wife.

James F. Taylor Jr. joined the Company in July 1969, shortly
after its formation, and is considered a founder. He has served
as a Director since 1973. Mr. Taylor was responsible for the
design and development of the Company's first commercial computer-
aided-design products and for many application specific products.
Mr. Taylor was elected Vice President in 1977. He is currently
an Executive Vice President of the Company and Chief Executive
Officer of Intergraph Public Safety, Inc. Mr. Taylor holds a
bachelor's degree in mathematics.

Robert E. Thurber, a founder of the Company, has been a
Director since 1972. In June 1977, Mr. Thurber was elected Vice
President and is currently Executive Vice President and Chief
Engineer. He is responsible for development of requirements and
strategic direction for application solutions. Mr. Thurber holds
a master's degree in engineering.

Lawrence F. Ayers Jr. joined the Company in September 1987
after 32 years in federal government mapping where he became the
Civilian Director of the Defense Mapping Agency. He served as
Vice President for International Federal Marketing until February
1993. From 1993 to October 1995, he served as Executive Vice
President for the Utility and Mapping Sciences application group.
At present, he serves on the Intergraph staff as Executive Vice
President. Mr. Ayers holds a bachelor's degree in civil
engineering and a master's degree in public administration. Mr.
Ayers has served on a number of national policy committees for
the National Academy of Science and the National Academy of
Public Administration, including the Transportation Research and
Highway Research committees.

Klaas Borgers joined the Company in 1991. He was elected Vice
President in 1994 and has served as Executive Vice President of
the Company and Chief Operating Officer of Intergraph Computer
Systems since 1997. A key person in the development and growth
of Intergraph Computer Systems worldwide operations, Mr. Borgers
directs ICS's sales, services, manufacturing and distribution
operations.

Penman R. Gilliam joined the Company in April 1994 as Executive
Vice President responsible for federal programs. Mr. Gilliam is
the manager responsible for the federal mapping and information
systems organization and the Company's Midworld operations. Mr.
Gilliam came to Intergraph from Hughes Aircraft Company where he
was Vice President of Hughes Communications and Data Systems
Division. From late 1987 through early 1993, Mr. Gilliam served
as Deputy Director of the Defense Mapping Agency (DMA), the
senior civilian responsible for overall production, operations,
and research. Mr. Gilliam also held a number of other positions
with DMA, including production management positions in St. Louis
and Washington D.C. and a program director's position for DMA's
digital production system. Mr. Gilliam holds a bachelor's degree
in mathematics and geology.

Lewis N. Graham Jr. joined the Company in 1985 and has been
involved in the design and delivery of imaging and mapping
systems during most of his career with the Company. He was
elected Vice President in 1997 and has served as Executive Vice
President, managing the mapping and geoengineering division of
Intergraph, since August 1998. Mr. Graham holds a bachelor's
degree in physics and a master's degree in electrical
engineering.

Richard H. Lussier joined the Company in 1979. He was promoted
to Vice President of Sales in 1981 and was later promoted to
Executive Vice President of Worldwide Sales and Support. Mr.
Lussier left the Company in 1990 to pursue personal business
interests. He rejoined the Company in 1996 as Executive Vice
President of U.S. Sales. He is currently responsible for
InterCAP, a wholly-owned Intergraph subsidiary, which develops
and markets world-leading technical illustration software as well
as WEB enabling technology. Mr. Lussier holds a master's degree
in business administration.

Nancy B. Meadlock, a founder of the Company, served as a
Director from 1969 until May 1996, excluding the period from
February 1970 to February 1972. Mrs. Meadlock served as
Secretary for 10 years, was elected Vice President in 1979, and
is currently an Executive Vice President. She holds a master's
degree in business administration. Mrs. Meadlock and James W.
Meadlock are wife and husband.

Wade C. Patterson joined the Company in 1984 as a design
engineer developing UNIX and central processing unit (CPU)
subsystems for Intergraph workstation products. In 1992, Mr.
Patterson managed Windows NT workstation projects as the Company
made the transition from reduced instruction set computing CPUs
to Intel microprocessor-based CPUs. Mr. Patterson has been
responsible for hardware development and marketing for Intergraph
Computer Systems, the Company's hardware subsidiary, since August
1994. He was elected Vice President at that time and is
currently an Executive Vice President of the Company and Chief
Executive Officer and President of Intergraph Computer Systems.
He holds a bachelor's degree in electrical engineering.

Stephen J. Phillips joined the Company as Vice President and
General Counsel in November 1987 when Intergraph purchased the
Advanced Processor Division of Fairchild Semiconductor, where Mr.
Phillips was General Patent Counsel. He was elected Executive
Vice President in August 1992. Mr. Phillips holds a master's
degree in electrical engineering and a juris doctor in law.

Preetha R. Pulusani joined the Company in 1980 as a software
engineer, and since that time has held several positions in the
areas of marketing and development of mapping technology for the
Company. She was elected Vice President in 1997 and has served
as Executive Vice President, responsible for the mapping and
geographic information systems business of Intergraph, since
August 1998. Ms. Pulusani holds a master's degree in computer
science.

Charles E. Robertson Jr. joined the Company in 1992. He has
served as Chief Executive Officer and President of VeriBest, Inc.
since its inception in January 1996. Prior to his current
position, Mr. Robertson held executive positions within the
Company and at Mentor Graphics, Daisy Systems, and Cadnetix. He
holds a bachelor's degree in electrical engineering and computer
science.

William E. Salter joined the Company in April 1973. Since that
time, he has served in several managerial positions in the
Company's federal systems business and as Director of Marketing
Communications. Dr. Salter was elected Vice President in August
1984 and is currently an Executive Vice President of the Company.
He holds a doctorate in electrical engineering.

K. David Stinson Jr. joined the Company in 1996. Prior to
joining the Company, Mr. Stinson acted as Vice President of
Engineering and Nuclear Projects for the Tennessee Valley
Authority (TVA), the nation's largest government owned electric
power utility. Before joining TVA, he was founder and Chief
Executive Officer of Digital Engineering, responsible for
developing software to assist with the operations, maintenance,
and environmental qualification of nuclear facilities and other
process plants. Mr. Stinson was elected Executive Vice President
in 1996, responsible for the process and building business of
Intergraph. He is a graduate of the U.S. Air Force Academy and
holds a masters degree in management administration science.

John W. Wilhoite joined the Company in July 1985 after eleven
years with Price Waterhouse & Co. He has been Controller of the
Company since 1986 and was elected Vice President in 1988. In
May 1998, he was elected Executive Vice President of Finance and
was named Chief Financial Officer in December 1998. Mr. Wilhoite
holds a bachelor's degree in business administration and is a
certified public accountant.

Edward A. Wilkinson joined the Company in 1985 as Director of
Government Relations. He was elected Vice President of Federal
Systems in 1987 and Executive Vice President in 1994. Prior to
joining the Company, Mr. Wilkinson served 34 years in the U.S.
Navy, retiring with the rank of Rear Admiral. He holds a
master's degree in mechanical engineering.

Allan B. Wilson joined the Company in 1980 and was responsible
for the development of international operations outside of Europe
and North America. He was elected Vice President in May 1982 and
Executive Vice President in November 1982. Mr. Wilson is
currently responsible for sales and support for the Company's
Asia Pacific region. He holds bachelor's and master's degrees in
electrical engineering.

Manfred Wittler joined the Company in 1989 as Vice President.
In 1991, he was elected Executive Vice President and is currently
responsible for sales and support for Europe, Canada, and Latin
America. From 1983 through 1989, Mr. Wittler held several
positions with Data General Corporation in Europe, including
Division Vice President. He holds a doctorate in engineering.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS

The information appearing under "Dividend Policy" and "Price
Range of Common Stock" on page 56 of the Intergraph Corporation
1998 annual report to shareholders is incorporated by reference
in this Form 10-K annual report.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data for the five years ended December 31,
1998, appearing under "Five Year Financial Summary" on the inside
front page of the Intergraph Corporation 1998 annual report to
shareholders is incorporated by reference in this Form 10-K
annual report.

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

Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 18 to 33 of the
Intergraph Corporation 1998 annual report to shareholders is
incorporated by reference in this Form 10-K annual report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

Information relating to the Company's market risks appearing
under "Impact of Currency Fluctuations and Currency Risk
Management" and "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 30 to 33 of the Intergraph
Corporation 1998 annual report to shareholders is incorporated by
reference in this Form 10-K annual report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and report of independent
auditors appearing on pages 34 to 55 of the Intergraph
Corporation 1998 annual report to shareholders are incorporated
by reference in this Form 10-K annual report.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information appearing under "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of
1934" on pages 4 to 5 of the Intergraph Corporation proxy
statement relative to the annual meeting of shareholders to be
held May 13, 1999, is incorporated by reference in this Form 10-K
annual report. Directors are elected for terms of one year at
the annual meeting of the Company's shareholders.

Information relating to the executive officers of the Company
appearing under "Executive Officers of the Company" on pages 16
to 18 in this Form 10-K annual report is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information appearing under "Executive Compensation" on
pages 6 to 13 of the Intergraph Corporation proxy statement
relative to the annual meeting of shareholders to be held May 13,
1999, is incorporated by reference in this Form 10-K annual
report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information appearing under "Common Stock Outstanding and
Principal Shareholders" on pages 1 to 3 of the Intergraph
Corporation proxy statement relative to the annual meeting of
shareholders to be held May 13, 1999, is incorporated by
reference in this Form 10-K annual report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

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

Page in
Annual Report *
---------------

(a) 1) The following consolidated financial statements of
Intergraph Corporation and subsidiaries and the
report of independent auditors thereon are
incorporated by reference from the Intergraph
Corporation 1998 annual report to shareholders:

Consolidated Balance Sheets at December 31, 1998
and 1997 34

Consolidated Statements of Operations for the
three years ended December 31, 1998 35

Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 36

Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1998 37

Notes to Consolidated Financial Statements 38-54

Report of Independent Auditors 55

* Incorporated by reference from the indicated pages
of the 1998 annual report to shareholders.

Page in
Form 10-K
---------------

2) Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts and
Reserves for the three years ended December 31, 1998 24

All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.

Financial statements of 50%-or-less-owned companies have been
omitted because the registrant's proportionate share of income
before income taxes of the companies is less than 20% of
consolidated loss before income taxes, and the investments in and
advances to the companies are less than 20% of consolidated total
assets.

3) Exhibits

Page in
Number Description Form 10-K
------ ----------- ----------------

3(a) Certificate of Incorporation, Bylaws,
and Certificate of Merger (1).

3(b) Amendment to Certificate of Incorporation (2).

3(c) Restatement of Bylaws (3).

4 Shareholder Rights Plan, dated August 25,
1993 (4) and amendment dated March 16, 1999.

10(a)* Employment Contract of Manfred Wittler dated
November 1, 1989 (5) and amendment
dated February 18, 1998 (9).

10(b) Loan and Security Agreement, by and between
Intergraph Corporation and Foothill Capital
Corporation, dated December 20, 1996 and
amendments dated January 14, 1997 (6),
November 25, 1997 (9), and October 30,
1998 (10).

10(c)* Intergraph Corporation 1997 Stock Option Plan (6).

10(d)* Agreement between Intergraph Corporation and
Green Mountain, Inc. dated April 1, 1998 (7).

10(e) Indemnification Agreement between Intergraph
Corporation and each member of the Board of
Directors of the Company dated June 3, 1997 (8).

10(f)* Employment Contract of Wade Patterson dated
May 30, 1997 (8) and amendment dated
November 2, 1998.

10(g)* Intergraph Corporation Nonemployee Director
Stock Option Plan (9).

10(h) Amended and Restated First Mortgage and
Security Agreement, by and between Intergraph
Corporation and Foothill Capital Corporation,
dated November 25, 1997 (9).

10(i)* Employment Contract of Klaas Borgers dated
September 1, 1997.

10(j) Asset Purchase Agreement by and among SCI
Technology, Inc. as Buyer and Intergraph
Corporation as Seller dated November 13,
1998, with Exhibits and Schedule 1 (10).

10(k)* Intergraph Computer Systems Holding, Inc.
1998 Stock Option Plan.

13 Portions of the Intergraph Corporation 1998
Annual Report to Shareholders incorporated
by reference in this Form 10-K Annual Report

21 Subsidiaries of the Company 25

23 Consent of Independent Auditors 26

27 Financial Data Schedule

* Denotes management contract or compensatory plan,
contract, or arrangement required to be filed as an
Exhibit to this Form 10-K

- ----------

(1) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1984, under the Securities Exchange Act
of 1934, File No. 0-9722.

(2) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1987, under the Securities Exchange Act
of 1934, File No. 0-9722.

(3) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, under the Securities Exchange Act
of 1934, File No. 0-9722.

(4) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated August 25,
1993, under the Securities Exchange Act of 1934, File
No. 0-9722.

(5) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, under the Securities Exchange Act of
1934, File No. 0-9722.

(6) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, under the Securities Exchange Act of
1934, File No. 0-9722.

(7) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, under the Securities Exchange Act
of 1934, File No. 0-9722.

(8) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, under the Securities Exchange Act
of 1934, File No. 0-9722.

(9) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, under the Securities Exchange Act
of 1934, File No. 0-9722.

(10) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated November 13,
1998, under the Securities Exchange Act of 1934, File
No. 0-9722.

- ----------

(b) Reports on Form 8-K - on November 25, 1998, the Company filed
a Current Report on Form 8-K (dated November 13, 1998) which
reported a transaction pursuant to which the Company sold
substantially all of its U.S. manufacturing assets to SCI
Technology, Inc. (SCI), and SCI assumed responsibility for
manufacturing of substantially all of the Company's hardware
products.

(d) Financial statement schedules - the response to this portion
of Item 14 is submitted as a separate section of this report.

- ----------

Information contained in this Form 10-K annual report may include
statements that are forward looking as defined in Section 21E of
the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward looking
statements. Additional information concerning factors that could
cause actual results to differ materially from those in the
forward looking statements is contained in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" section of the Company's 1998 annual report, portions
of which are incorporated by reference in this Form 10-K annual
report.

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.

INTERGRAPH CORPORATION

By /s/ James W. Meadlock Date: March 29, 1999
---------------------------
James W. Meadlock
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)

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.

Date
----

/s/ James W. Meadlock Chief Executive Officer and March 29, 1999
- --------------------------- Chairman of the Board
James W. Meadlock (Principal Executive Officer)

/s/ James F. Taylor Jr. Executive Vice President and March 29, 1999
- --------------------------- Director, Intergraph
James F. Taylor Jr. Corporation, and Chief
Executive Officer, Intergraph
Public Safety, Inc.

/s/ Robert E. Thurber Executive Vice President and March 29, 1999
- --------------------------- Director
Robert E. Thurber

/s/ Keith H. Schonrock Jr. Director March 29, 1999
- ---------------------------
Keith H. Schonrock Jr.

- --------------------------- Director March 29, 1999
Larry J. Laster

- --------------------------- Director March 29, 1999
Thomas J. Lee

- --------------------------- Director March 29, 1999
Sidney L. McDonald

/s/ John W. Wilhoite Executive Vice President March 29, 1999
- --------------------------- and Chief Financial Officer
John W. Wilhoite (Principal Financial and
Accounting Officer)

INTERGRAPH CORPORATION AND SUBSIDIARIES

SCHEDULE II ---- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Column A Column B Column C Column D Column E
- ------------------ ---------- ---------- ---------- -------------
Additions
Balance at charged to
beginning costs and Balance at
Description of period expenses Deductions end of period
- ------------------ ---------- ---------- ---------- -------------

Allowance for doubtful
accounts deducted
from accounts
receivable in the
balance sheet 1998 $14,488,000 3,168,000 3,842,000 (1) $13,814,000
1997 $16,703,000 2,844,000 5,059,000 (1) $14,488,000
1996 $20,399,000 (2,049,000) (3) 1,647,000 (1) $16,703,000

Allowance for
obsolete inventory
deducted from
inventories in the
balance sheet 1998 $36,508,000 19,346,000 24,605,000 (2) $31,249,000
1997 $43,223,000 15,582,000 22,297,000 (2) $36,508,000
1996 $34,441,000 24,189,000 15,407,000 (2) $43,223,000

(1) Uncollectible accounts written off, net of recoveries.

(2) Obsolete inventory reduced to net realizable value.

(3) The Company provides its allowance for doubtful accounts on a
specific identification basis. In 1996, significant improvement
in collection prospects on several large accounts occurred,
resulting in reversal of amounts previously provided in the
allowance for doubtful accounts.

INTERGRAPH CORPORATION AND SUBSIDIARIES

EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT

Percentage of
State or Other Voting
Jurisdiction Securities
Name of Incorporation Owned by Parent
- --------------------------------- ---------------- ---------------
InterCAP Graphics Systems, Inc. Delaware 100
Intergraph Asia Pacific, Inc. Delaware 100
Intergraph Computer Systems Holding, Inc. Delaware 100
Intergraph European Manufacturing, L.L.C. Delaware 100
Intergraph (Italia), L.L.C. Delaware 100
Intergraph (Middle East), L.L.C. Delaware 100
Intergraph Public Safety, Inc. Delaware 100
VeriBest, Inc. Delaware 100
Intergraph Benelux B.V. The Netherlands 100
Intergraph CAD/CAM (Danmark) A/S Denmark 100
Intergraph CR spol. s r.o. Czech Republic 100
Intergraph (Deutschland) GmbH Germany 100
Intergraph Espana, S.A. Spain 100
Intergraph Europe (Polska) Sp. z o.o. Poland 100
Intergraph Finland Oy Finland 100
Intergraph (France) SA France 100
Intergraph GmbH (Osterreich) Austria 100
Intergraph Hungary, Ltd. Hungary 100
Intergraph Norge A/S Norway 100
Intergraph (Portugal) Sistemas de Computacao
Grafica, S.A. Portugal 100
Intergraph SR s.r.o. Slovac Republic 100
Intergraph (Sverige) AB Sweden 100
Intergraph (Switzerland) A.G. Switzerland 100
Intergraph (UK), Ltd. United Kingdom 100
Intergraph Computer Systems Benelux B.V. The Netherlands 100
Intergraph Computer Systems (Deutschland) GmbH Germany 100
Intergraph Computer Systems France, SA France 100
Intergraph Computer Systems Italia Srl Italy 100
Intergraph Computer Systems, Ltd United Kingdom 100
Intergraph Computer Systems Nordic AB Sweden 100
Intergraph Public Safety Belgium N.V. The Netherlands 100
Intergraph Public Safety Deutschland, GmbH Germany 100
Public Safety France, SA France 100
Intergraph Public Safety U.K., Ltd. United Kingdom 100
VeriBest GmbH Germany 100
VeriBest International, Ltd. United Kingdom 100
VeriBest S.A. France 100
Intergraph China, Ltd. Hong Kong 100
Intergraph BEST (Vic) Pty. Ltd. Australia 100
Intergraph Computer (Shenzhen) Co. Ltd. China 100
Intergraph Corporation (N.Z.) Limited New Zealand 100
Intergraph Corporation Pty. Ltd. Australia 100
Intergraph Corporation Taiwan Taiwan, R.O.C 100
Intergraph Hong Kong Limited Hong Kong 100
Intergraph Japan K.K. Japan 100
Intergraph Korea, Ltd. Korea 100
Intergraph Public Safety (NZ) Limited New Zealand 100
Intergraph Public Safety Pty., Ltd. Australia 100
Intergraph Systems Singapore Pte Ltd. Singapore 100
VeriBest K.K. Japan 100
Intergraph Computer Services Industry & Trade,
A.S. Turkey 100
Intergraph Canada, Ltd. Canada 100
Intergraph Computer Systems Canada, Inc. Canada 100
Intergraph Public Safety Canada Ltd. Canada 100
Intergraph de Mexico, S.A. de C.V. Mexico 100
Intergraph Electronics Ltd. Israel 100
Intergraph Servicios de Venezuela C.A. Venezuela 100
Intergraph Saudi Arabia Ltd. Saudi Arabia 75

EXHIBIT 23 ---- CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual
Report (Form 10-K) of Intergraph Corporation and subsidiaries of
our report dated February 1, 1999, included in the 1998 Annual
Report to Shareholders of Intergraph Corporation.

Our audits also included the financial statement schedule of
Intergraph Corporation listed in Item 14(a)(2). This schedule
is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth herein.

We also consent to the incorporation by reference in the
Registration Statement (Form S-3 No. 33-25880) pertaining to the
Stock Bonus Plan dated December 22, 1988; in the Registration
Statement (Form S-8 No. 33-53849) pertaining to the Intergraph
Corporation 1992 Stock Option Plan dated May 27, 1994; in the
Registration Statement (Form S-8 No. 33-57211) pertaining to the
Assumption of Options under the InterCAP Graphics Systems, Inc.
1989 Stock Option Plan and 1994 Nonqualified Stock Option
Program dated January 10, 1995; in the Registration Statement
(Form S-8 No. 33-59621) pertaining to the 1995 Intergraph
Corporation Employee Stock Purchase Plan dated May 26, 1995; and
in the related Prospectuses, of our report dated February 1,
1999, with respect to the consolidated financial statements and
schedule of Intergraph Corporation and subsidiaries included or
incorporated by reference in the Annual Report (Form 10-K) for
the year ended December 31, 1998.

/s/ Ernst & Young LLP

Birmingham, Alabama
March 29, 1999

AMENDMENT NO. 1 TO RIGHTS AGREEMENT

Amendment No. 1 to Rights Agreement dated as of March 16,
1999, amending the Rights Agreement, dated as of August 25, 1993
(the "Rights Agreement"), between Intergraph Corporation, a
Delaware corporation (the "Company"), and Harris Trust & Savings
Bank, an Illinois banking corporation, as Rights Agent (the
"Rights Agent," which term shall include any successor Rights
Agent under the Rights Agreement at the Company's direction).

WITNESSETH:

WHEREAS, on August 25, 1993, the Company and the Rights
Agent entered into the Rights Agreement;

WHEREAS, Section 26 of the Rights Agreement provides that
prior to the Distribution Date, the Company and the Rights Agent
may amend any provision of the Rights Agreement without the
approval of any holders of certificates representing shares of
Common Stock; and

WHEREAS, on November 5, 1998, the Board of Directors of the
Company determined to amend the Rights Agreement and directed the
Rights Agent to enter into this Amendment;

NOW, THEREFORE, for and in consideration of the premises,
the Rights Agreement is amended as follows:

1. Section 1(m) of the Rights Agreement is amended to read
as follows:

[Intentionally Left Blank]

2. Section 1(r) of the Rights Agreement is amended to read
as follows:

[Intentionally Left Blank]

3. Section 3(c) of the Rights Agreement is deleted in
its entirety and amended to read as follows:

(c) Rights shall be issued by the Company in
respect of all Common Shares (other than Common Shares
issued upon the exercise or exchange of any Right)
issued or delivered by the Company (whether originally
issued or delivered from the Company's treasury) after
the Record Date but prior to the earlier of the
Distribution Date and the Expiration Date.
Certificates evidencing such Common Shares shall have
stamped on, impressed on, printed on, written on or
otherwise affixed to them the following legend or such
similar legend as the Company may deem appropriate and
as is not inconsistent with the provisions of this
Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any
stock exchange or transaction reporting system on which
the Common Shares may from time to time be listed or
quoted, or to conform to usage:

This Certificate also evidences
and entitles the holder hereof
to certain Rights as set
forth in a Rights Agreement between
Intergraph Corporation and Harris
Trust and Savings Bank,
dated August 25, 1993, as amended
March 16, 1999 (the "Rights
Agreement"), the terms of which are
hereby incorporated herein by
reference and a copy of which is on
file at the principal executive
offices of Intergraph Corporation.
Under certain circumstances, as set
forth in the Rights Agreement, such
Rights may be redeemed, may be
exchanged, may expire, may be
amended or may be evidenced by
separate certificates and no longer
be evidenced by this Certificate.
Intergraph Corporation will mail to
the holder of this Certificate a
copy of the Rights Agreement
without charge promptly after
receipt of a written request
therefor. Under certain
circumstances as set forth in the
Rights Agreement, Rights
beneficially owned by an Acquiring
Person or any Affiliate or
Associate of an Acquiring Person
(as such terms are defined in the
Rights Agreement) may become null
and void.

4. Section 23(a) of the Rights Agreement is deleted in
its entirety and amended to read as follows:

(a) The Board of Directors of the Company may, at
its option, at any time prior to the earlier of
(i) the Distribution Date or (ii) the Final
Expiration Date, redeem all, but not less than
all, of the then outstanding Rights at the
Redemption Price. The redemption of the Rights by
the Board may be made effective at such time, on
such basis and with such conditions as the Board,
in its sole discretion, may establish.

5. Section 26 of the Rights Agreement is deleted in
its entirety and amended to read as follows:

Supplements and Amendments. Prior to the
Distribution Date and subject to the last sentence of
this Section 26, if the Company so directs, the Company
and the Rights Agent may from time to time supplement
or amend any provision of this Agreement without the
approval of any holders of certificates representing
Common Shares. From and after the Distribution Date
and subject to the last sentence of this Section 26,
the Company and the Rights Agent may supplement or
amend this Agreement without the approval of any
holders of Right Certificates in order (i) to cure any
ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent
with any other provisions herein, (iii) to shorten or
lengthen any time period hereunder, or (iv) to
supplement or amend the provisions hereunder in any
manner which the Company may deem desirable, including,
without limitation, the addition of other events
requiring adjustment to the Rights under Sections 11 or
13 hereof or procedures relating to the redemption of
the Rights, which supplement or amendment shall not, in
the good faith determination of the Board of Directors,
adversely affect the interests of the holders of Right
Certificates (other than an Acquiring Person or an
Affiliate or Associate of an Acquiring Person). Upon
the delivery of a certificate from an officer of the
Company which states that the proposed supplement or
amendment is in compliance with the terms of this
Section 26 and certification that the Board of Directors
has approved the supplement or amendment, the Rights Agent
shall execute such supplement or amendment; provided,
however, that the failure or refusal of the Rights Agent
to execute such supplement or amendment shall not affect
the validity of any supplement or amendment adopted by the
Company, any of which shall be effective in accordance
with the terms thereof. Notwithstanding anything in this
Agreement to the contrary, no supplement or amendment
shall be made which decreases the stated Redemption
Price or the period of time remaining until the Final
Expiration Date or which modifies a time period
relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable. Further,
notwithstanding anything in this Agreement to the contrary,
no supplement or amendment that changes the rights and
duties of the Rights Agent under this Agreement will be
effective against the Rights Agent without the execution
of such supplement or amendment by the Rights Agent.

IN WITNESS THEREOF, the parties hereto have caused this
Amendment No.1 to Rights Agreement to be duly executed as of the
date first above written.

INTERGRAPH CORPORATION

By: /s/ Stephen J. Phillips
______________________________________
Name: Stephen J. Phillips
Title: Assistant Secretary

HARRIS TRUST AND SAVINGS BANK

By: /s/ Dennis M. Sneyers
_____________________________________
Name: Dennis M. Sneyers
Title: Vice President

November 2, 1998

Mr. Wade Patterson
117 Woodrow Balch Drive
Huntsville, Alabama 35806

Dear Wade:

You and Intergraph Corporation have entered into an
Employment Agreement in the form of a letter agreement dated
May 30, 1997. A copy of that Employment Agreement is
attached hereto. That Agreement continues in full force and
effect until its termination.

By this letter, Intergraph Corporation extends to you the
option to terminate that Employment Agreement on or after
December 31, 1999 under all terms set forth in this letter,
by providing written notice delivered to General Counsel of
Intergraph Corporation. Termination of the Employment
Agreement shall not constitute termination of your
employment with Intergraph Corporation, which will continue
on an employment-at-will basis, under all the terms set
forth in this letter.

Within thirty (30) days following the delivery of written
notice of your termination of the Employment Agreement on or
after December 31, 1999, Intergraph Corporation will pay to
you the sum of two million dollars ($2,000,000).

During the period of your continuing at-will employment
following the termination of your Employment Agreement, the
following terms and conditions will apply:

1. Your employment will be subject to the policies set
forth in the Intergraph Policy Manual as it may be modified
from time-to-time for all employees.

2. It is understood and agreed that you will continue to
be engaged in outside business for Intellicomp Corporation
and that this business is not a violation of Intergraph's
policy on Conflicts of Interest, so long as it does not
interfere unduly with your ability to perform your duties
for Intergraph.

3. The Proprietary Information and Inventions Agreement,
separately executed May 31, 1997, the terms of which
comprise a material part of the Employment Agreement, is
attached hereto and incorporated herein and shall continue
in full force and effect and comprises a material part of
this Letter Agreement.

Page 2
November 2, 1998
Mr. Wade C. Patterson

4. Inventions made for Intellicomp Corporation are not
covered by the terms of the attached Proprietary Information
and Inventions Agreement.

5. For a period of one (1) year after your employment with
Intergraph or its subsidiary ends for any reason, you will
not accept employment with or act as a consultant to any
Intergraph competitor in the United States in any technical
field in which Intergraph has a business interest.

6. This Letter Agreement supersedes all prior discussions
and documents that relate to the subject matter covered
herein. This Letter Agreement can be altered only in
writing and signed by you and by the CEO of Intergraph.

7. All amounts set forth in this Letter Agreement shall be
subject to tax and other withholding under Intergraph's
usual compensation practices.

Please indicate your acceptance of the above terms by
signing in the space indicated below.

INTERGRAPH CORPORATION

By: /s/ James M. Meadlock
_______________________
James M. Meadlock,
Chief Executive Officer of
Intergraph Corporation

AGREED and ACCEPTED:

/s/ Wade C. Patterson
_______________________
Wade C. Patterson

Attachments
SJP:lee

CONTRACT OF EMPLOYMENT 710-008

The private company, Intergraph European Manufacturing LLC,
having its principal place of business at Nijmegen with a
subsidiary office at Hoofddorp, The Netherlands, hereinafter
referred to as "the company", and

Name Klaas Borgers
Address Hoofdstr. 161
Sassenheim, Netherlands

hereinafter referred to as "the employee", hereby declare to
have entered into an agreement effective date, September
1, 1997, the terms of which are as follows:

Appointment and Duration
- ------------------------
The employee will be employed by the company at Intergraph
European Manufacturing LLC located in the Nijmegen
Distribution Facility, as Executive Vice President, World-
wide Operations for Intergraph Computer Systems, Inc., and
Executive Vice President, Intergraph Corporation, reporting
to Mr. Wade Patterson, President, Intergraph Computer
Systems, Inc. (ICS), and Executive Vice President Intergraph
Corporation, in job grade 1, commencing on October 1, 1997.

For the remuneration provided herein the employee shall
perform all of the duties of Executive Vice President,
World-wide Operations for ICS (this includes world-wide
sales, manufacturing, distribution and support as well as
the product marketing for ICS in Hoofddorp) for the assigned
territory.

This agreement has been entered into for a unlimited period
of time until, but will be terminated by rights, without a
formal notice being required, on the last day of the month
during which the employee becomes eligible for a pension or
retirement.

The company is entitled to redefine the duties entrusted to
the employee or to adapt them to new circumstances or
transfer the employee to another office-location should such
measures be in the interest of the company; decisions on
such measures being at the sole discretion of the company.
Should such alterations be of a more permanent nature, the
company will discuss its measures with the employee prior to
effectuation.

The employee shall devote his entire working time and
intention to the business of the company and use his best
efforts to carry out the appointed tasks to the best of his
ability.

Termination and Severance
- -------------------------
If the employee resigns voluntarily the employee must give
Intergraph a minimum of two (2) months written notice.

Upon involuntary termination the company will give the
employee two (2) months written notice, during which time
the employee may be required to work, at the Company's
discretion.

Intergraph may wish to repatriate you elsewhere within the
worldwide Intergraph organization after your assignment in
Hoofddorp, the Netherlands. It you accept a job within
Intergraph, you will be transferred to the new location
according to local transfer policy. If the Company and the
Employee cannot reach acceptable terms, and the Company
wishes to end your contract, a termination according to
Dutch Law will be established.

Remuneration
- ------------
On entering upon his duties the employee will receive a
gross base salary of DFL 270,000 per annum. In addition,
the employee shall receive the standard employee benefits
package for the Netherlands.

Representation Costs
- --------------------
You will be paid representation costs of DFL 750.00 per
month beginning October 1, 1997, according to the Personnel
Policy Manual.

Office Hours
- ------------
The employee shall work at least 40 hours per week for the
company. The office hours are from 8.30 - 12.30 and from
13.00 - 17.00 hrs.

The employee is obliged, should this be essential for the
satisfactory execution of the business of the company, to
carry out duties outside the agreed working hours if his
superior(s) request him to do so.

Transfer Assistance
- -------------------
Intergraph will pay annually tax consulting services with
documented receipts, for the preparation of your tax returns
both in The Netherlands and The United States. The payment
for preparation of tax returns will conclude one year after
termination.

Company Car
- -----------
The company provides a company car in accordance with job
grade 1 for the use of the employee, subject to the current
Company Car Policy as recorded in the Personnel Policy
Manual.

Within reason private use of the car is allowed, but subject
to the current Company Car Policy. A monthly net charge for
the private use of the company car will be deducted from the
employee's salary.

In case the employee is unable to perform his duties for
more than two months because of illness or other reasons,
the company has the right to reclaim the car immediately.

Vacation/Leave
- --------------
The employee is entitled to a vacation of 25 working days
annually.

Any remaining leave to which rights have been acquired
during any year must have been taken up by 1st April of the
following year. If the employee neglects to take his
vacation before this date he forfeits his rights.

Pension Plan
- ------------
The employee is eligible to continue to participate in the
company Pension Plan for ececutives, the C-Polis Plan, to
which both the employee and the company contribute, provided
the employee is 25 years old. The premiums which the
employee owes by becoming a participator will be deducted
from his salary each month by the company and paid into the
pension fund. The bylaws of the pension plan contain
detailed information on the rights and obligations of the
parties concerned.
Any further details concerning the pension plan will be
provided separately.

Health and Disability
- ---------------------
If the employee is unable to perform his duties because of
illness or other reasons, he is obliged to inform the
company of any such disability on the first day of this
disability by 9.30 hrs., in accordance with the procedure
stated in the Personnel Policy Manual.

In case of illness the company shall supplement the sickness
benefit the employee receives according to the social
security system so that the employee will receive an amount
which is the equivalent of his net monthly salary.

Supplementary payments will be made during the first twelve
months of the employee's illness, but in no case shall such
payments be made after the employee has become eligible for
a pension. Furthermore, no such payments will be made if the
employee is not eligible for sickness benefit according to
the social security system.

Health Insurance
- ----------------
The employee is obliged to contribute to the collective
health insurance effected by the company, provided the
employee meets the requirements made or the employee may
elect to remain on the benefit plan in the US

The company will reimburse 50 percent gross of the premiums
the employee owes for health insurance (maximum class 2 B).

The employee authorizes the company, through signing this
agreement, to deduct from his salary each month 1/12 of the
premium.

Stock Purchase Plan
- -------------------
The company offers the employee the opportunity to
participate in the Intergraph Stock Purchase Plan. Further
details can be obtained form the Human Resources department.

Secrecy
- -------
Both company and employee are obliged to do or refrain from
doing everything employers and employees are expected to do
or refrain from doing in accordance with the demands which
can reasonably be made in the case of a company-employee
relationship.

Both during the time of employment and after termination of
this agreement the employee is obliged to maintain the
strictest secrecy concerning any information he has obtained
in the course of his duties which pertains to the business
and interests of the company and which the employee knows or
may reasonably be expected to infer to be of a confidential
nature. The employee is obliged to refrain from supplying
any information to third parties concerning names, addresses
and other details concerning the company's clients without
prior approval from the company. All information, drawings,
specifications and other documents which the company has
supplied to the employee, or which the employee has drawn up
or helped to draw up in the course of his duties remain the
property of the company and shall be returned to the company
forthwith, should the company request the employee to do so.
Any such documents, or copies of documents, drawings and
specifications which the employee has in his care, shall be
returned in any case when this agreement is terminated.

This agreement shall be governed by and construed in accordance
with the law of The Netherlands.

While employed by the company the employee shall not
undertake any activities on behalf of other companies or on
behalf of himself pertaining to the carrying out of a
profession or the execution of a business, without prior
written permission from the company.
Any stipulations made here or in the Personnel Policy
Manual, which forms an integral part of this agreement, are
subject to change.

/s/ Wade Patterson
__________________________
Wade Patterson Date: 12/11/97
Executive Vice President
Intergraph Corporation

I herewith declare to accept the terms of this agreement and
I confirm that the information given by me to the company
during the procedure which preceded this agreement and on
the basis of which this agreement was made, faithfully
reflects the true state of affairs and that no information
has been withheld by me which could reasonably be expected
to have had an influence on this agreement. Herewith I
declare furthermore to be in good health and to be willing
and prepared to undertake business trips should the company
require me to do so.

/s/ Klaas Borgers
_________________________
Klaas Borgers Date: 30-10-97
Vice President European Support

INTERGRAPH COMPUTER SYSTEMS HOLDING, INC.
1998 STOCK OPTION PLAN

ARTICLE I: Purpose

The purposes of the Intergraph Computer Systems Holding,
Inc. Stock Option Plan are (i) to align the interests of the
Company's shareholders and recipients of Options under the
Plan by increasing the proprietary interest of such recipients
in the Company's growth and success and (ii) to advance the
interests of the Company by attracting and retaining well-
qualified persons by providing such persons with performance-
related incentives.

ARTICLE II: Definitions

For purposes of the Plan, the following terms shall
have the following meanings:

"Affiliate" shall mean any corporation, partnership or
any other entity in which the Company owns, directly or
indirectly, at least a ten percent (10%) beneficial interest
or any individual, corporation, partnership or any other
entity which owns, directly or indirectly, at least a five
percent (5%) beneficial interest in the Company.

"Board" shall mean the Board of Directors of the
Company or a Committee appointed by the Board of Directors
of the Company.

"Cause" shall mean (i) dishonesty, (ii) theft, (iii)
fraud, (iv) embezzlement, (v) commission of a felony or a
crime involving moral turpitude, (vi) substantial dependence
or addiction to alcohol or any drug, (vii) conduct disloyal
to the Company or its affiliates, or (viii) willful
dereliction of duties or disregard of lawful instructions or
directions of the officers or directors of the Company or
its affiliates relating to a material matter.

"Change in Control" shall mean (a) the acquisition of
the power to direct, or cause the direction of, the
management and policies of the Company by a person (not
previously possessing such power), acting alone or in
conjunction with others, whether through the ownership of
Common Stock, by contract or otherwise, or (b) the
acquisition, directly or indirectly, of the power to vote
more than 50% of the outstanding Common Stock by any person
or by two or more persons acting together. For purposes of
this definition, (1) the term "person" means a natural
person, corporation, partnership, joint venture, trust,
government or instrumentality of a government, and (2)
customary agreements with or between underwriters and
selling group members with respect to a bona fide public
offering of Common Stock shall be disregarded.

"Code" shall mean the Internal Revenue Code of 1986, as
amended, or any successor legislation.

"Committee" shall mean the members of the Board, or a
committee appointed by the Board to administer this Plan,
such committee to at all times shall consist of two or more
members of the Board. The Board may from time to time
remove members from, or add members to, the Committee.
Vacancies on the Committee shall be filled by the Board.
The Committee shall select one of its members as Chairman
and shall hold meetings at such times and places as it may
determine.

"Common Stock" shall mean the common stock, $.10 par
value per share, of the Company.

"Company" shall mean Intergraph Computer Systems
Holding, Inc., a Delaware corporation, and its wholly owned
subsidiaries.

"Disability" shall mean the permanent and total
inability, by reason of physical or mental infirmity, or
both, of a Participant to perform the work customarily
assigned to him by the Company. The determination of the
existence or nonexistence of Disability shall be made by the
Board pursuant to a medical examination by a medical doctor
selected or approved by the Board.

"Eligible Person" shall mean any Person eligible to
participate in the Plan pursuant to Article III of the Plan.

"Exchange Act" shall mean the Securities Exchange Act
of 1934.

"Fair Market Value" shall mean the fair market value of
a share of Common Stock as determined in good faith by the
Board, using such methodology as it in its sole discretion
may deem appropriate, or, if at any time the Common Stock is
publicly traded on any exchange or any over-the-counter
market, the average of the bid and asked price on the date
of determination for a share of Common Stock as reported by
the Wall Street Journal, or, if the Wall Street Journal does
not report such closing price, such price as reported by a
newspaper or trade journal selected by the Board, shall be
the fair market value of a share of Common Stock.

"ISO" shall mean an Option granted under this Plan to
purchase Common Stock which is intended by the Company to
satisfy the requirements of Code Section 422.

"Non-ISO" shall mean an Option granted under this Plan
to purchase Common Stock which is not intended by the
Company to satisfy the requirements of Code Section 422.

"Option" shall mean an ISO or a Non-ISO granted
pursuant to Article VII hereof.

"Participant" shall mean any Person to whom an Option
has been granted pursuant to this plan.

"Person" shall mean any individual, corporation,
general or limited partnership, limited liability company or
other entity.

"Plan" shall mean this Intergraph Computer Systems
Holding, Inc. Stock Option Plan, as amended from time to
time.

"Retirement" shall mean termination of employment under
the terms of the Company's then current retirement program.

"Rule 16b-3" shall mean Rule 16b-3 promulgated under
Section 16(b) of the Exchange Act or any successor to such
rule.

"Ten Percent Shareholder" shall mean any Person who,
immediately prior to the time an Option is granted to such
Person pursuant to the Plan, directly or indirectly owns
Common Stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the
Company. For purposes of this Plan, an individual shall be
treated as owning any Common Stock which is owned by such
individual's brothers and sisters (whether by the whole or
half blood), spouse, ancestors and lineal descendants, and
stock owned directly or indirectly by or for a corporation,
partnership, trust or estate shall be considered as being
owned proportionately by or for its shareholders, partners,
or beneficiaries. Stock available for purchase pursuant to
an Option, however, shall not be treated as owned for
purposes of this paragraph.

ARTICLE III: Eligibility and Participation

Employees of the Company who, in the judgment of the
Board, are responsible for or contribute to the management,
growth and/or profitability of the business of the Company
are eligible to be granted Options under the Plan.
Participants shall be selected from time to time by the
Board, in its sole discretion, from among those eligible,
and the Board shall determine, in its sole discretion, the
number of shares of Common Stock subject to an Option.

ARTICLE IV: Shares Available

Section 4.1 Number; Limitations. The total number of
shares of Common Stock subject to issuance under the Plan
may not exceed 5,000,000, subject to adjustment as provided
by Section 4.3. The shares to be delivered under the Plan
may consist, in whole or in part, of authorized but unissued
shares of Common Stock or treasury Common Stock not reserved
for any other purpose.

Section 4.2 Unused Stock. In the event any shares of
Common Stock are subject to an Option which, for any reason,
expires, terminates or, with the consent of the Participant,
is canceled as to such shares, such Common Stock may again
be made available for issuance under the Plan.

Section 4.3 Adjustment Provisions. In the event of
any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in
capitalization, or any distribution to holders of Common
Stock other than a cash dividend, the number and class of
shares available under the Plan, the number and class of
shares subject to each outstanding Option and the purchase
price per share, and the number and class of shares subject
to each other outstanding Option shall be appropriately
adjusted by the Committee, such adjustments to be made
without a change in the aggregate purchase price or
reference price set forth in the agreements or other
documents describing such Options.

ARTICLE V: Effective Date

The effective date of this Plan shall be the date it is
adopted by the Board, provided that the shareholders of the
Company shall approve this Plan in accordance with Rule 16b-
3 and, to the extent this Plan provides for the issuance of
ISOs, the shareholders of the Company shall approve those
portions of this Plan related to the granting of ISOs within
twelve (12) months after the date of adoption. If any
Options are granted under the Plan before the date of such
shareholder approval, such Options automatically shall be
granted subject to such approval.

ARTICLE VI: Administration

Section 6.1 Administration and Interpretation. This
Plan shall be administered by the Board. The Board acting
in its absolute discretion shall exercise such powers and
take such action as expressly called for under this Plan
and, further, the Board shall have the power to interpret
this Plan and (in the event that the Company becomes subject
to the reporting requirements of Section 16(b) of the
Exchange Act, subject to Rule 16b-3) to take such other
action in the administration and operation of this Plan as
the Board deems equitable under the circumstances, which
action shall be binding on the Company, on each affected
Participant, and on each other person directly or indirectly
affected by such action.

Each member of the Committee and each member of the
Board shall be fully justified in relying or acting in good
faith upon any report made by the independent public
accountants of the Company and upon any other information
furnished in connection with the Plan by any person or
persons other than such member. In no event shall any
person who is or has been a member of the Committee or of
the Board be liable for any determination made or other
action taken by him or any failure by him to act in reliance
upon any such report or information, if in good faith.

Neither the Board nor any member thereof shall be
liable for any act, omission, interpretation, construction
or determination made in connection with the Plan in good
faith, and the members of the Board may be entitled to
indemnification and reimbursement by the Company in respect
of any claim, loss, damage or expense (including attorney's
fees) arising therefrom to the full extent permitted by law
and under any directors' and officers' liability insurance
that may be in effect from time to time, in all events as a
majority of the Board then in office may determine from time
to time, as evidenced by a written resolution thereof. In
addition, no member of the Board and no employee of the
Company shall be liable for any act or failure to act, by
any other member or other employee, or by any agent, to whom
duties in connection with the administration of this Plan
have been delegated, or for any act or failure to act by
such member or employee, except in circumstances involving
such member's or employee's bad faith, gross negligence,
intentional fraud or violation of a statute.

Section 6.2 Options. The Board shall have full
authority, consistent with the terms of the Plan, to grant
Options, and other stock-based awards to Eligible Persons.
In particular, and without limitation, the Board shall have
the authority:

(a) to select the Participants to whom Options may
from time to time be granted hereunder;

(b) to determine the types of Options, and
combinations thereof, to be granted hereunder to Eligible
Persons;

(d) to determine the terms and conditions, not
inconsistent with the terms of this Plan, of any Option
granted hereunder (including, but not limited to, any
restriction or limitation on exercise or transfer, any
vesting schedule or acceleration thereof, or any forfeiture
provisions or waiver thereof, regarding any Option and the
shares of Common Stock relating thereto, based on such
factors as the Board shall determine in its sole
discretion);

(e) to determine whether Common Stock and other
amounts payable with respect to an Option under the Plan
shall be deferred either automatically or at the election of
the Participant; and

(f) to modify or waive any restrictions or limitations
contained in, and grant extensions to or accelerate the
vesting of, any outstanding Options as long as such
modifications, waivers, extensions or accelerations are
consistent with the terms of this Plan; but no such changes
shall impair the rights of any Participant without his or
her consent.

An Option shall be evidenced by written agreements
between the Company and the Participant to whom the Option
is granted and no such Option shall be valid until so
evidenced.

ARTICLE VII: Stock Options

Section 7.1 Grants. Options shall be either ISOs or
Non-ISOs. The Board shall have the authority to grant to
any Eligible Person one or more ISOs or Non-ISOs. With
respect to Options granted under this Plan, if the Fair
Market Value (determined at the date of grant) of Common
Stock with respect to which ISOs may become exercisable for
the first time in any calendar year by any Participant is
greater than $100,000, then any such Options in excess of
such amount, if any, shall constitute Non-ISOs and shall not
be ISOs.

Section 7.2 Terms of Options. Options granted under
this Plan shall be subject to the following terms and
conditions and shall be in such form and contain such
additional terms and conditions, not inconsistent with the
terms of this Plan, as the Board shall deem desirable:

(a) Exercise Price. The exercise price per share of
Common Stock purchasable under an Option shall be determined
by the Committee at the time of grant, provided that no ISO
shall have an exercise price less than 100% of the Fair
Market Value of the Common Stock on the date such Option is
granted, and, provided further, that no ISO which is granted
to a Ten Percent Shareholder shall have an exercise price
that is less than 110% of the Fair Market Value of the
Common Stock on the date such ISO is granted.

(b) Option Term. The term of each Option shall be
fixed by the Board, but no Option shall be exercisable more
than ten (10) years after the date the Option is granted,
and no ISO which is granted to a Ten Percent Shareholder
shall be exercisable more than five (5) years after the date
the Option is granted.

(c) Vesting and Exercisability. Except as provided in
Article VI and X hereof, all Options granted under this Plan
shall vest over a five (5) year period, with twenty-five
percent (25%) of the shares subject to each such Option
grant to become first exercisable on the second anniversary
of the date the Option is granted, and an additional twenty-
five percent (25%) of the shares subject to each such Option
to become exercisable on each anniversary date thereafter.

(d) Exercisability Upon Termination. In the event of
the termination of a Participant's employment with the
Company, the rights under any then outstanding Option
granted pursuant to the Plan shall terminate upon the
earlier of the expiration date of the Option and (i) in the
event of death, Disability or Retirement, sixty (60) days
after such date of termination, or (ii), in the event of
termination for any reason other than death, Disability or
Retirement, sixty (60) days after such date of termination.

(e) Method of Exercise. An Option may be exercised
(i) by giving written notice to the Company specifying the
number of whole shares of Common Stock to be purchased with
the purchase price therefor to be payable in full either (A)
in cash (B) in previously owned whole shares of Common Stock
(for which the holder of the Option has good title free and
clear of all liens and encumbrances) with their Fair Market
Value determined as of the date of exercise, (C) with
respect to Non-ISOs, by authorizing the Company to retain
whole shares of Common Stock which would otherwise be
issuable upon exercise of the Option with their Fair Market
Value determined as of the date of exercise, or (D) a
combination of (A), (B) and (C), in each case to the extent
determined by the Board at the time of grant of the Option,
and (ii) by executing such documents as the Company may
reasonably request. No shares of Common Stock shall be
issued until the full purchase price has been paid.

Section 7.3 Option Agreement. As determined by the
Board on the date of grant, each Option shall be evidenced
by a written option agreement, substantially in the form
attached hereto as Exhibit A, that shall specify, among
other things, the type of Option granted, the Option price,
the duration of the Option, and the number of shares of
Common Stock to which the Option pertains. The Option
Agreement shall set forth the schedule on which such Options
become exercisable.

ARTICLE VIII: Buy-Sell Provisions; Restrictions
on Transfer of Common Stock

Section 8.1 Buy-Sell Provisions. In the event that a
Participant's employment with the Company is terminated, the
Company shall have the right and option to repurchase all of
the shares of Common Stock then held by the Participant
which were acquired pursuant to Options granted under this
Plan in accordance with the terms and conditions set forth
below.

(a) Termination Due to Death, Disability, or Retirement.

(i) In the event the employment of a Participant is
terminated by reason of death, Disability or Retirement, the
Participant or his or her estate or legatee, as the case may
be, shall have the right and option, but not the obligation,
to demand that the Company repurchase all, but not less than
all, of the shares of Common Stock then held by the
Participant which were acquired pursuant to Options granted
under this Plan; provided, however, that in the event that
the Common Stock becomes publicly traded, any Common Stock
then held by such Participant shall not be subject to the
provisions of this Section 8.1. Such right and option shall
be exercisable for a period of sixty (60) days from the date
the Option expires as set forth in Section 7.2(d) hereof.

(ii) The purchase price to be paid by the Company for
each of the shares of Common Stock subject to this Section
8.1 shall be the Fair Market Value of such shares of Common
Stock on the date of termination, or, in the case of Options
which are exercised following the date of termination the
date of exercise of the Option by the Participant or his or
her estate or legatee, as the case may be.

(iii)The closing of the purchase by the Company,
if any, shall take place at the principal office of the
Company on a date designated by the Company. The designated
date shall not be more than sixty (60) days after the date
on which the Participant or his or her estate or legatee, as
the case may be, exercises its option to sell the shares of
Common Stock owned by the Participant pursuant to Section
8.1(a)(i) above, unless the purchase price for the Common
Stock has not yet been determined, in which case the closing
shall occur not more than sixty (60) days following the
determination of such purchase price. At closing, the
Participant or the Participant's legal representative shall
relinquish all further right, title, and interest in the
Common Stock owned by the Participant and shall surrender
and deliver to the Company all of the certificates
representing the Common Stock owned by the Participant, with
appropriate endorsement thereon or duly executed stock
powers. All Common Stock sold to the Company shall be free
from liens, options, or encumbrances of any kind.

(iv) The full amount of the purchase price shall be
paid, by Company check, at the closing.

(b) Termination Other Than for Death, Disability, or
Retirement.

(i) If the employment of the Participant shall
terminate for any reason other than death, Disability, or
Retirement, the Company shall have the right and option to
repurchase all, but not less than all, of the shares of
Common Stock then held by the Participant that were acquired
pursuant to Options granted under this Plan; provided,
however, that in the event that the Common Stock becomes
publicly traded, any Common Stock then held by such
Participant shall not be subject to the provisions of this
Section 8.1. Such right and option shall be exercisable for
a period of one hundred and eighty (180) days following the
date of termination, except, in the case of shares subject
to the exercise of Options, such one hundred and eighty
(180) day period shall commence after the expiration of the
Option as set forth in Section 7.2(d) hereof.

(ii) In the event of Participant's voluntary
termination or in the event Participant's employment is
terminated by the Company for Cause, the purchase price to
be paid by the Company for each of the shares of Common
Stock of the Participant subject to this Section 8.1 shall
be the purchase price actually paid by such Participant for
such shares of Common Stock. In the event Participant's
employment is terminated by the Company without Cause, the
purchase price to be paid by the Company for each of the
shares of Common Stock of the Participant subject to this
Section 8.1 shall be the Fair Market Value of such shares of
Common Stock on the date of termination.

(iii)The closing of the purchase by the Company,
if any, shall take place at the principal office of the
Company on a date designated by the Company. The designated
date shall not be more than thirty (30) days after the date
on which the Company exercises its option described in
Section 8.1(b)(ii) above, unless the purchase price for the
Common Stock has not yet been determined, in which case the
closing shall occur not more than thirty (30) days following
the determination of such purchase price. At closing, the
Participant or the Participant's legal representative shall
relinquish all further right, title and interest in and to
the Common Stock and shall surrender and deliver to the
Company all of his certificates representing Common Stock,
with appropriate endorsement thereon or daily executed stock
powers. All Common Stock sold to the Company shall be free
from liens, options, or encumbrances of any kind.

(iv) Payment of the purchase price shall be made by
check in the amount of twenty-five percent (25%) of the
purchase price, and a promissory note of the Company in the
amount of the remainder of the purchase price. Such note
shall be payable in four (4) equal annual installments of
principal, commencing on the first anniversary of the event
causing the repurchase, and such note shall bear interest
payable annually at a fixed rate equal to seventy-five
percent (75%) of the prime lending rate as reported in the
Money Rates section of The Wall Street Journal on the date
of closing. Such note shall give the Company the right, at
any time and from time to time, to prepay any or all of the
outstanding balance, without penalty.

(c) Buyout and Settlement Provisions. In addition to
the provisions discussed above, the Board may at any time
offer to buy out an Option previously granted, based on such
terms and conditions as the Board shall establish and
communicate to the Participant at the time such offer is
made.

Section 8.2 Restrictions on Transfer. In addition to
the provisions set forth in Section 8.1 above, the Board
shall impose such restrictions on any shares of Common Stock
acquired pursuant to Options under the Plan as it may deem
advisable, including, without limitation, the right of first
refusal described below, restrictions under applicable
federal securities law, restrictions imposed by any stock
exchange upon which such shares of Common Stock are then
listed, and restrictions under any blue sky or state
securities laws applicable to such shares.

For so long as the Common Stock is not publicly traded
on any exchange or any over-the-counter market, if at any
time during a Participant's lifetime, following the
acquisition of Common Stock pursuant to an Option granted
under this Plan, the Participant shall desire to sell all or
any part of the shares acquired by Participant pursuant to
such Option, the Participant may sell the same only after
offering it to the Company in the following manner:

(a) The Participant shall serve notice upon the
Company stating that the Participant has received a bona
fide offer for the sale of shares of the Common Stock and
setting forth the following information: (i) the number of
shares of the Participant's Common Stock proposed to be
sold; (ii) the name and address of the person offering to
purchase such Common Stock; and (iii) the sale price and
terms of payment of such sale. Such notice shall also
contain an offer by the Participant to sell such shares of
the Common Stock to the Company at the price offered by such
bona fide offeror.

(b) For a period of thirty (30) days after receipt of
such notice, the Company shall have the right and option to
purchase all or a portion of the shares of Common Stock so
offered. If the Company fails to exercise such option with
respect to all or a portion of such shares of Common Stock,
subject to applicable legal restrictions (including
restrictions affecting the resale of such shares), the
Participant shall be free to sell such remaining shares of
Common Stock to the person named in the aforesaid notice at
a price and upon the terms and conditions set forth in such
notice; provided, however, that such disposition shall be
made within thirty (30) days following the termination of
the option of the Company to purchase such shares of Common
Stock.

ARTICLE IX: Termination or Amendment

This Plan may be amended by the Board from time to time
to the extent that the Board deems necessary or appropriate;
provided, however, that no amendment shall be made which
would impair the rights of a Participant with respect to
Options theretofore granted or which would impair the value
of such Options, without such Participant's consent; and,
provided further, that (a) no such amendment shall be made
absent the approval of the shareholders of the Company as
required under Section 422 of the Code, as may be amended
from time to time, (1) to increase the number of shares of
Common Stock reserved under Section 4.1, or (2) to change
the class of employees eligible for Options under Article
III hereof, (b) at such time as the Company becomes subject
to the reporting requirements of the Exchange Act, if and to
the extent of any restriction relating thereto in Rule 16b-3
or any other provision of the Exchange Act, the Board shall
not amend this Plan absent the approval of the shareholders
of the Company (1) to increase materially the benefits
accruing to a Participant under the Plan, (2) to increase
materially the number of securities which may be issued
under the Plan, or (3) otherwise modify materially the
requirements as to eligibility for participation in the
Plan, and (c) no provision of this Plan shall be amended
more than once every six months if amending such provision
would result in the loss of an exemption under Rule 16b-3.
Any amendment which specifically applies to Non-ISOs shall
not require shareholder approval unless such approval is
necessary to comply with Section 16 of the Exchange Act.
The Board also may suspend the granting of Options under
this Plan at any time and may terminate this Plan at any
time; provided, however, the Board shall not have the right
unilaterally to modify, amend or cancel any Option granted
before such suspension or termination unless (1) the
Participant consents in writing to such modification,
amendment or cancellation or (2) there is a dissolution or
liquidation of the Company or a transaction described in
Section 4.3 or Article X of this Plan.

ARTICLE X: Sale or Merger or Change in Control

Section 10.1 Sale or Merger. If the Company agrees to
sell all or substantially all of its assets for cash or
property or for a combination of cash and property or agrees
to any merger, consolidation, reorganization, division or
other corporate transaction in which Common Stock is
converted into another security or into the right to receive
securities or property and such agreement does not provide
for the assumption or substitution of Options, each Option
may, at the direction and discretion of the Board, be (a)
canceled unilaterally by the Company (subject to such
conditions, if any, as the Board deems appropriate under the
circumstances) in exchange for whole shares of Common Stock
(and cash in lieu of a fractional share), the number of
which, if any, shall be determined by the Board on a date
set by the Board for this purpose based upon the value of
such Options as determined in good faith by the Board using
such methodology as it in its sole discretion may deem
appropriate, or (b) canceled unilaterally by the Company if
the Option Price equals or exceeds the Fair market Value of
a share of Common Stock on such date.

Section 10.2 Change in Control. If there is a Change
in Control of the Company or a tender or exchange offer is
made for Common Stock other than by the Company, the Board
thereafter shall have the right to take such action with
respect to any outstanding Options as the Board deems
appropriate under the circumstances to protect the interest
of the Company in maintaining the integrity of such Options
under this Plan, including following the procedures set
forth in Section 10.1 for a sale or merger of the Company.
The Board shall have the right to take different action
under this Section 10.2 with respect to different
Participants or different groups of Participants, as the
Board deems appropriate under the circumstances. In no
event, however, shall the Board take any action under this
Section 10.2 which would impair the value of such Options,
without the affected Participant's consent.

ARTICLE XI: Duration of the Plan

No Option shall be granted under this Plan on or after
the earlier of:

(a) the tenth anniversary of the effective date of
this Plan (as determined under Article V of this Plan), in
which event this Plan thereafter shall continue in effect
until all outstanding Options have been exercised in full
and/or became fully vested or no longer are exercisable; or

(b) the date on which all of the Common Stock reserved
under Section 4.1 of this Plan has (as a result of the
exercise and/or vesting of Options granted under this Plan)
been issued or no longer is available for use under this
Plan, in which event this Plan also shall terminate on such
date.

ARTICLE XII: General Provisions

Section 12.1 Unfunded Status of Plan. This Plan is
intended to be unfunded. With respect to any payments as to
which a Participant has a fixed and vested interest but
which are not yet made to a Participant by the Company,
nothing contained herein shall give any such Participant any
rights that are greater than those of a general creditor of
the Company.

Section 12.2 No Right to Employment. Neither this
Plan nor the grant of any Option hereunder shall give any
employee of the Company any right with respect to
continuance of employment by the Company, nor shall this
Plan or the grant of an Option hereunder be a limitation in
any way on the right of the Company by which an employee is
employed to terminate his or her employment at any time.

Section 12.3 Use of Proceeds. The proceeds received
by the Company from the sale of Common Stock pursuant to the
exercise of Options under the Plan shall be added to the
Company's general funds and used for general corporate
purposes.

Section 12.4 Other Plans. In no event shall the value
of, or income arising from, any Options under this Plan be
treated as compensation for purposes of any pension, profit
sharing, life insurance, disability or any other retirement
or welfare benefit plan now maintained or hereafter adopted
by the Company, unless such plan specifically provides to
the contrary.

Section 12.5 Section 16. It is intended that the Plan
and any Options granted to a person subject to Section 16 of
the Exchange Act meet all of the requirements of Rule 16b-3.
If any provision of the Plan or any Option grant would
disqualify the Plan or such Option, or would otherwise not
comply with Rule 16b-3, such provision or Option shall be
construed or deemed amended to conform to Rule 16b-3.

Section 12.6 No Restriction on Right of Company to
Effect Corporate Changes. Nothing in the Plan shall affect
the right or power of the Company or its shareholders to
make or authorize any adjustments, recapitalizations,
reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of
the Company, or any issue of stock or of options, warrants
or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are
superior to or affect the Common Stock or the rights thereof
or which are convertible into or exchangeable for Common
Stock, or the dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether
of a similar character or otherwise.

Section 12.7 Withholding of Taxes. As a condition to
the grant of an Option, the vesting of any Option or the
lapse of any restrictions pertaining thereto, the Company
may, in the discretion of the Board, require the Participant
to pay such sum to the Company as may be necessary to
discharge the Company's obligations with respect to any
taxes, assessments or other governmental charges imposed on
property or income received by a Participant pursuant to the
Plan. In the discretion of the Board, such payment may be
in the form of cash or other property. In the discretion of
the Board, the Company may (i) make available for delivery a
lesser number of shares, in satisfaction of such taxes,
assessments or other governmental charges, or (ii) deduct or
withhold from any payment or distribution to a Participant
whether or not pursuant to the Plan; provided, however, that
notwithstanding any of the above, the Participant ultimately
shall be responsible for the payment of taxes with respect
to Options granted under this Plan.

Section 12.8 Shareholder Rights. A Participant shall
have no rights as a shareholder with respect to any shares
issued or issuable with respect to an Option until a
certificate or certificates evidencing such shares shall
have been issued to or for the benefit of such Participant,
and no adjustment shall be made for dividends or
distributions or other rights in respect of any share for
which the record date is prior to the date upon which the
Participant shall become the holder of record thereof.

Section 12.9 No Assignment of Benefits. No Option or
other benefit payable under this Plan shall, except as
otherwise specifically provided by this Plan or by law, be
transferable in any manner other than by will or the laws of
descent and distribution, and any attempt to transfer any
such benefit shall be void. Options may only be exercised
or settled during the Participant's lifetime by the
Participant or his or her guardian, conservator or other
legal representative. Options or other benefits payable
under this Plan shall not in any manner be subject to the
debts, contracts, liabilities, engagements or torts of any
person who shall be entitled to such benefit, nor shall it
be subject to attachment or legal process for or against
such person.

Section 12.10 Governing Law. This Plan and actions
taken in connection herewith shall be governed and construed
in accordance with the laws of the State of Delaware
(without regard to applicable Delaware principles of
conflict of laws).

Section 12.11 Construction. Wherever any words are
used in this Plan in the masculine gender, they shall be
construed as though they were also used in the feminine
gender in all cases where they would so apply, and wherever
any words are used herein in the singular form, they shall
be construed as though they were also used in the plural
form in all cases where they would so apply.

Section 12.12 Exceptions. Exception to the
aforementioned rules and condition may only be granted by
vote of the Board of Director.

Five Year Financial Summary

- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands except per share amounts)

Revenues $1,032,790 $1,124,305 $1,095,333 $1,097,978 $1,041,403
Nonrecurring
operating charges
(credit) 15,843 1,095 10,545 6,040 ( 4,826)
Loss from operations (114,206) (54,916) (68,724) (54,145) (72,642)
Gains on sales of
assets 112,533 4,858 11,173 6,493 5,815
Net loss ( 19,634) (70,237) (69,112) (45,348) (70,220)
Net loss per share,
basic and diluted ( .41) ( 1.46) ( 1.46) ( .98) ( 1.56)
Working capital 216,520 204,534 230,804 261,140 282,893
Total assets 695,974 720,989 756,347 826,045 839,618
Total debt 83,213 104,665 65,644 69,541 61,114
Shareholders' equity 355,332 368,783 447,263 504,064 522,337

Information contained in this report may include statements that are
forward-looking as defined in Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements. Additional information concerning factors that
could cause actual results to differ materially from those in the forward-
looking statements is contained in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of this
Annual Report.

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

RESULTS OF OPERATIONS

Summary. The following summarized financial data sets forth the
results of operations of the Company for the three years in the
period ended December 31, 1998. The complete consolidated financial
statements of the Company, including footnote disclosures, are
presented on pages 34 to 54 of this annual report.

- ----------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
(In millions except per share amounts)

Revenues $1,033 $1,124 $1,095
Cost of revenues 708 724 692
- ----------------------------------------------------------------------
Gross profit 325 400 403

Operating expenses 423 454 461
Nonrecurring operating charges 16 1 11
- ----------------------------------------------------------------------
Loss from operations (114) ( 55) ( 69)

Interest expense ( 8) ( 7) ( 5)
Arbitration award --- ( 6) ---
Gains on sales of assets 113 5 11
All other income (expense) - net ( 5) ( 3) ( 3)
- ----------------------------------------------------------------------
Loss before income taxes ( 14) ( 66) ( 66)

Income tax expense ( 6) ( 4) ( 3)
- ----------------------------------------------------------------------
Net loss $ ( 20) $( 70) $( 69)
======================================================================
Net loss per share, basic and diluted $ (.41) $(1.46) $(1.46)
======================================================================

In 1993, the Company began the process of transformation of its
proprietary, closed-system product offerings to the open computing
environment of products based on Intel Corporation hardware and
Microsoft Corporation software. The dedication of significant
Company resources to hardware, software, and system implementation
for this new environment contributed substantially to the Company's
operating losses for the years 1993 through 1996.

For hardware implementation, the Company chose to use only Intel
processors and to focus its efforts and image creation on its core
capabilities, specifically very high performance computational and
graphics capabilities. This high-end market in the Windows NT
operating system environment is supported only by Intel-based
hardware products. The Company expected that its four year hardware
development effort and investment in the high-end graphics market
would result in substantially increased revenues and profits in 1997,
but these benefits were not realized due primarily to actions of
Intel described separately in the "Intel Litigation" section of this
report. In addition, demand for the Company's software products did
not meet expectations and gross margin on product sales continued to
decline due primarily to price competition in the industry.

In 1998, the Company's revenues and operating results continued to be
impacted by its dispute with Intel, as resulting delays in new
product releases eliminated the potential for revenue growth and
increased the Company's inventory obsolescence charges. Price
competition in the industry has also continued to adversely affect
the Company's margins. Operating expenses have been reduced in
reaction to lower sales volumes and through various restructuring
actions, but have been offset to a degree by increased legal expenses
related to Intel and other matters.

The Company expects that the industry will continue to be
characterized by higher performance and lower priced products,
intense competition, rapidly changing technologies, shorter product
cycles, and development and support of software standards that result
in less specific hardware and software dependencies by customers.
The Company believes that its operating system and hardware
architecture strategies are the correct choices. However, competing
operating systems and products are available in the market, and
competitors of the Company offer or are adopting Windows NT and Intel
as the systems for their products. Improvement in the Company's
operating results will depend on its ability to accurately anticipate
customer requirements and technological trends and to rapidly and
continuously develop and deliver new hardware and software products
that are competitively priced, offer enhanced performance, and meet
customers' requirements for standardization and interoperability, and
will further depend on its ability to successfully implement its
strategic direction. In addition, the Company faces significant
operational and financial uncertainty of unknown duration due to its
dispute with Intel. To achieve and maintain profitability, the
Company must substantially increase sales volume and/or continue to
align its operating expenses with the level of revenue and gross
margin being generated.

Nonrecurring Operating Charges. In first quarter 1998, the Company
reorganized its European operations to reflect the organization of
the Company into four distinct business units and to align operating
expenses more closely with revenue levels in that region. The cost
of this reorganization was originally estimated and recorded at $5.4
million, primarily for employee severance pay and related costs.
During the remainder of 1998, approximately $2.2 million of the
costs accrued in the first quarter were reversed as the result of
incurrence of lower severance costs than originally anticipated. In
the fourth quarter, additional European reorganization costs of $2
million were recorded for further headcount reductions. The net
year to date charge of $5.2 million is included in "Nonrecurring
operating charges" in the 1998 consolidated statement of operations.
Approximately 80 European positions have been eliminated in the
sales and marketing, general and administrative, and pre- and post-
sales support areas. Cash outlays related to this charge
approximated $3.1 million in 1998, with the remaining costs to be
paid during 1999. The Company estimates the European reorganization
will result in annual savings of approximately $7 million.

In fourth quarter 1998, the Company took further actions,
principally in the form of direct workforce reductions, to align the
operating expenses of its unprofitable businesses with their current
revenue levels. Approximately 100 positions were eliminated,
primarily in the Company's VeriBest and Intergraph Computer Systems
business units. The costs of this reduction in force (approximately
$1.3 million) are included in "Nonrecurring operating charges" in
the 1998 consolidated statement of operations. Related cash outlays
approximated $.8 million in 1998, with the remainder to be paid in
1999. The Company estimates that these headcount reductions will
result in annual savings of approximately $7 million.

The remainder of the 1998 nonrecurring operating charges consists
primarily of write-offs of a) certain intangible assets, primarily
capitalized business system software no longer in use, b) goodwill
recorded on a prior acquisition of a domestic subsidiary and
determined to be of no value, and c) a noncompete agreement with a
former third party consultant. Prior to the write-off, amortization
of these intangibles accounted for approximately $3.4 million of the
Company's annual operating expenses.

In fourth quarter 1996, the Company recorded a nonrecurring
operating charge of $10.5 million, consisting of a $7.2 million
revaluation of the assets of two unprofitable business units held
for sale and an unrelated $3.3 million write-off of deferred
financing costs due to early termination of the Company's revolving
credit agreement with a group of lenders. The $10.5 million charge
is included in "Nonrecurring operating charges" in the 1996
consolidated statement of operations. In early 1997, the Company
sold the two unprofitable business units that were the subject of
the 1996 charge. The total loss on these sales was $8.3 million, of
which $7.2 million had been included in the 1996 asset revaluation.
The remaining loss of $1.1 million is included in "Nonrecurring
operating charges" in the 1997 consolidated statement of operations.
Revenues and losses of these two business units totaled $24 million
and $16 million, respectively, for the full year 1996. Assets of
the business units totaled $14 million at December 31, 1996. The
two business units did not have a material effect on the Company's
results of operations for the period in 1997 prior to their
disposal.

Gains on Sales of Assets. As part of the efforts of the Company to
focus on its core competencies, in 1998 the Company sold its Solid
Edge and Engineering Modeling system product lines at a gain of
$102.8 million and its printed circuit board manufacturing facility
at a gain of $8.3 million. See "Nonoperating Income and Expense"
following for further detail.

SCI. Reflecting the trend toward outsourcing in the industry, on
November 13, 1998, the Company completed a transaction with SCI
Technology Inc. (SCI), a wholly owned subsidiary of SCI Systems,
Inc., pursuant to which the Company sold substantially all of its
U.S. manufacturing inventory and assets to SCI, and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. In addition, the Company licensed
certain related intellectual property to SCI, and SCI employed
approximately 300 of the Company's manufacturing employees. The
total purchase price for the assets was approximately $62.4 million,
$42.5 million of which was received during the fourth quarter of
1998. The final purchase price installment of $19.9 million was
received on January 12, 1999. Proceeds from the sale have been
utilized primarily to retire the Company's existing debt. The
Company's gain on this transaction of $1.5 million is included in
"Gains on sales of assets" in the 1998 consolidated statement of
operations.

Significant contingencies related to the transaction include the
right of SCI to return to the Company any inventory included in the
initial sale that proves unusable in the manufacturing of current
products, the ability of the Company to obtain most favorable
pricing for products purchased from SCI through higher volumes, and
the ability of the Company to accurately forecast its requirements
of SCI.

The Company expects to benefit from lower employee headcount and
lower per unit costs for materials and overhead expenses, both of
which should improve earnings and cash flow. The Company retains
the risk associated with inventory excess and obsolescence, defined
in the agreement as any component or material in SCI's inventory for
more than 60 days and which is in excess of demand as reflected in
the Company's six month forecast, if not mitigated by SCI with the
vendor. The Company has the option to either purchase this
inventory from SCI or authorize SCI to obtain liquidation offers
from third parties.

In connection with this transaction, the Company's term loan and
security agreement was amended to incorporate the sale of the
Company's manufacturing inventory and assets to SCI and to modify
the borrowing base accordingly. See "Liquidity and Capital
Resources" for a further discussion of the impact of this
transaction on the Company's cash flow.

Litigation and Other Risks and Uncertainties. The Company has
extensive ongoing litigation, and its business is subject to certain
other risks and uncertainties, including those described below.

Intel Litigation. The Company filed a legal action on November 17,
1997, in U.S. District Court, the Northern District of Alabama,
Northeastern Division (the "Alabama Court"), charging Intel
Corporation, the supplier of all of the Company's microprocessor
supply, with anticompetitive business practices. In the lawsuit,
Intergraph alleges that Intel is attempting to coerce the Company
into relinquishing to Intel certain computer hardware patents through
a series of wrongful acts, including interference with business and
contractual relations, interference with technical assistance from
third party vendors, breach of contract, negligence, misappropriation
of trade secrets, and fraud based upon Intel's failure to promptly
notify the Company of defects in Intel's products and timely
correction of such defects, and further alleging that Intel has
infringed upon the Company's patents. The Company's patents define
the architecture of the cache memory of an Intergraph developed
microprocessor. The Company believes this architecture is at the
core of Intel's entire Pentium line of microprocessors and systems.
On December 3, 1997, the Company amended its complaint to include a
count charging Intel with violations of federal antitrust laws.
Intergraph asserts claims for compensatory and treble damages
resulting from Intel's wrongful conduct and infringing acts, and
punitive damages in an amount sufficient to punish and deter Intel's
wrongful conduct. Additionally, the Company requested that Intel be
enjoined from continuing the alleged wrongful conduct which is
anticompetitive and/or violates federal antitrust laws, so as to
permit Intergraph uninterrupted development and sale of Intel-based
products.

On November 21, 1997, the Company filed a motion in the Alabama Court
to enjoin Intel from disrupting or delaying its supply of products
and product information pending resolution of Intergraph's legal
action. On April 10, 1998, the Alabama Court ruled in favor of
Intergraph and ordered that Intel be preliminarily enjoined from
terminating Intergraph's rights as a strategic customer in current
and future Intel programs, and from otherwise taking any action
adversely affecting Intel's business relationship with Intergraph or
Intergraph's ability to design, develop, produce, manufacture, market
or sell products incorporating, or based upon, Intel products or
information. The Court's ruling requires that Intel carry out
business with Intergraph under the same terms and conditions, with
the same rights, privileges, and opportunities as Intel makes
available to Intergraph's competitors who are also strategic
customers of Intel. In response to the Alabama Court's decision, on
April 16, 1998, Intel appealed to the United States Court of Appeals
for the Federal Circuit (the "Appeals Court"). Intel and the Company
have each filed briefs with the Appeals Court, and oral arguments
were presented on December 9, 1998. No decision has been entered.

Intel filed a retaliatory legal action on November 17, 1997, in the
U.S. District Court, the Northern District of California (the
"California Court"), requesting, among other things, i) that the
Court declare Intergraph's patents invalid and/or not infringed by
Intel, ii) that Intergraph be enjoined from making further assertions
that Intel's customers infringe Intergraph's patents through use of
Intel's microprocessors, iii) that the Court declare that Intel has
no obligation to disclose any of its trade secrets or other
confidential information to Intergraph, and iv) that the Court
declare that Intel's decision to discontinue the provision of trade
secrets and other confidential information to Intergraph does not
violate any doctrine of federal or state statutory or common law.
Intel filed a second legal action in the California Court on November
24, 1997, charging Intergraph with breach of contract related to
wrongful retention of and failure to return Intel information
supplied under nondisclosure agreements, and misappropriation of
trade secrets as a result of the same. Intel asserted claims for
damages and awards and requested a preliminary and permanent
injunction under which Intergraph would return and make no further
use of Intel confidential information. On December 8, 1997, the
Alabama Court directed the Company and Intel to file joint motions in
the California cases to stay the two legal actions brought by Intel,
pending the Court's consideration of a motion to transfer and
consolidate venue. The joint motions were filed and stays were
granted by the California Court. On January 15, 1998, Intel filed a
motion before the Alabama Court for a change in venue to California.
On May 18, 1998, the Alabama Court denied this motion, and Intel
subsequently dropped the two retaliatory lawsuits which Intel had
brought against the Company in California.

On June 17, 1998, Intel filed its answer in the Alabama case, which
included counterclaims against Intergraph, including claims that
Intergraph has infringed seven patents of Intel. On July 8, 1998,
the Company filed its answer to the Intel counterclaims, among other
things denying any liability under the patent infringement asserted
by Intel. On June 17, 1998, Intel filed a motion before the Alabama
Court seeking a summary judgment holding that Intel is licensed to
use the patents that the Company asserted against Intel in the
Company's original complaint. This "license defense" is based on
Intel's interpretation of the facts surrounding the acquisition by
the Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. The Company is vigorously
contesting Intel's motion for summary judgment on the license
defense, and filed a cross motion with the Alabama Court September
15, 1998 requesting summary adjudication in favor of the Company. No
decision has been entered.

On November 13, 1998, the Company amended its complaint to include
two additional counts of patent infringement against Intel. The
Company requested the court to issue a permanent injunction enjoining
Intel from further infringement, and to order that the financial
impact of the infringement be calculated and awarded in treble to
Intergraph. No decision has been entered.

On January 29, 1999, Intergraph filed a motion requesting the Alabama
Court to require Intel to show cause why it should not be held in
contempt for its failure to comply with the Court's automated
discovery order and for improperly designating discovery materials as
protected by the attorney client privilege. In its motion,
Intergraph requested the Court to set a status conference on
discovery and a hearing on its motion. No decision has been entered.

In a scheduling order entered June 25, 1998, the Alabama Court set a
trial date of February 14, 2000.

Background. The Company's patents relate to its RISC (reduced
instruction set computing)-based Clipper microprocessor, which was
the industry's first attempt to bring mainframe computing power to
compact, low cost, integrated circuit technology. In 1992,
Intergraph began evaluation of a transition from Clipper to Intel's
microprocessor for use in its future workstation products. At that
time, Intel had little experience with workstations or the
workstation market and had been unsuccessful in the development of
its own RISC-based microprocessor for the workstation market. In
1993, Intergraph began discussions with Intel regarding this
transition. Based on Intel's representations regarding its
microprocessor development plans for the workstation market,
Intergraph began the transition from Clipper to Intel-based design,
and the two companies cooperated in introduction to the market of the
Intel/Windows NT platform as an alternative to the RISC/UNIX
platform. The Company ceased further design of its Clipper
microprocessor at the end of 1993, and made a substantial investment
in redesign of its hardware platform for utilization of Intel
microprocessors. The Company relied on the assurances,
representations, and commitments of Intel that they would supply
Intergraph's microprocessor needs on fair and reasonable terms, and
would provide Intergraph with the essential technical information,
assistance, and advice necessary to utilize the microprocessors to be
developed and supplied by Intel. As a result of the assurances of
Intel and its transition to Intel-based workstations, Intergraph is
technologically and economically bound to the use of Intel's
microprocessors.

Effects. The Company's workstations are developed for and sold in
the high-end workstation market. Successful participation in this
market requires involvement in Intel product development programs
that provide advance information for the development of new products
to be sold by Intergraph and others and permit formulation of
standards and specifications for those new products. During 1997,
Intergraph's product design and release cycle was severely impacted
by Intel's refusal to provide Intergraph with advance technology and
product information and immediate information on Intel defects and
corrections. Intel continues to provide that information to the
Company's competitors. Intel's refusal to provide this vital
information has delayed the Company's new product releases by one to
six months. These delays have resulted in lost sales for the
Company as well as increased discounting on available products,
severely impacting the Company's revenues and margins. While the
April 1998 ruling of the Alabama Court requires Intel to provide
Intergraph with advance product samples and technical information,
the Company lost considerable sales momentum and continued to feel
residual effects from the dispute through the end of 1998, including
shipment problems resulting from a non-Intel chipset used in certain
of the Company's workstations. In late 1997, when the dispute
looked as if it might jeopardize the Company's supply of Intel
components, an alternate chipset supplier was selected for some
designs. In the third quarter of 1998, that vendor had difficulty
delivering enough parts to the Company, resulting in a significant
backlog that could not be shipped until the fourth quarter.
Additionally, the Company believes that while Intel is supplying it
with advance product samples and technical information, Intel's
responsiveness is not at the same level as prior to the dispute.
It was not until October 1998 that all of the Company's hardware
product offerings contained the latest Intel technology and were
technologically back in line with industry competition.

The Company believes it was necessary to take legal action against
Intel in order to defend its workstation business, its intellectual
property, and the investments of its shareholders. The Company is
vigorously prosecuting its positions and defending against Intel's
claims and believes it will prevail in these matters, but at present
is unable to predict an outcome. The Company does expect, however,
that adverse effects on its operations will continue in the near term
including, but not limited to, increased legal and administrative
expenses associated with the lawsuit. Additionally, if the Company
were to lose the Intel appeal (which is not anticipated by the
Company), it would be forced to significantly alter its business
plans, and its computer hardware business would be placed at
significant risk. The Company is actively considering alternative
strategies for its hardware business but has reached no conclusions
on those alternatives. The costs of pursuit of any such strategies
would likely be prohibitive.

See "Other Risks and Uncertainties" below for additional information
regarding Intel's actions.

Bentley Litigation. The Company is the owner of approximately 50% of
the outstanding stock of Bentley Systems, Inc. (Bentley), the
developer and owner of MicroStation, a software product utilized in
many of the Company's software applications and for which the Company
serves as a nonexclusive distributor. In May 1997, the Company
received notice of the adverse determination of an arbitration
proceeding with Bentley in which the Company had alleged that Bentley
inappropriately and without cause terminated a contractual
arrangement with the Company, and in which Bentley had filed a
counterclaim against the Company seeking significant damages as the
result of the Company's alleged failure to use best efforts to sell
software support services pursuant to terms of the contractual
arrangement terminated by Bentley. The arbitrator's award against
the Company was in the amount of $6.1 million and is included in
"Arbitration award" in the 1997 consolidated statement of operations.
Approximately $5.8 million in fees otherwise owed the Company by
Bentley were offset against the amount awarded Bentley. In addition,
the contractual arrangement that was the subject of this arbitration
was terminated effective with the award and, as a result, the Company
no longer sells the related software support services under this
agreement. The Company and Bentley have entered into a new agreement
which establishes single support services between the two companies.

In a second proceeding brought in March 1996, Bentley commenced
arbitration against the Company, alleging that the Company failed to
properly account for and pay to Bentley certain royalties on its
sales of Bentley software products, and seeking significant damages.
Hearings on this matter are in process and are scheduled to conclude
with a decision from the arbitration panel in second quarter of 1999.
The Company denies that it has breached any of its contractual
obligations to Bentley and is vigorously defending its position in
this proceeding, but at present is unable to predict an outcome. A
decision by the arbitration panel in favor of Bentley could
immediately and significantly impact the results of operations and
cash position of the Company.

Other Risks and Uncertainties. The Company develops its own
graphics, data management, and applications software as part of its
continuing product development activities. The Company has standard
license agreements with Microsoft Corporation for use and
distribution of the Windows NT operating system and with UNIX Systems
Laboratories for use and distribution of the UNIX operating system.
The license agreements are perpetual and allow the Company to
sublicense the operating systems software upon payment of required
sublicensing fees. The Company also has an extensive program for the
licensing of third-party application and general utility software for
use on systems and workstations.

The Company owns and maintains a number of registered patents and
registered and unregistered copyrights, trademarks, and service
marks. The patents and copyrights held by the Company are the
principal means by which the Company preserves and protects the
intellectual property rights embodied in the Company's hardware and
software products. Similarly, trademark rights held by the Company
are used to preserve and protect the goodwill represented by the
Company's registered and unregistered trademarks.

As industry standards proliferate, there is a possibility that the
patents of others may become a significant factor in the Company's
business. Personal computer technology is widely available, and many
companies, including Intergraph, are attempting to develop patent
positions concerning technological improvements related to personal
computers and workstations. With the possible exception of its
ongoing litigation with Intel (in which the Company expects to
prevail), it does not appear the Company will be prevented from using
the technology necessary to compete successfully, since patented
technology is typically available in the industry under royalty
bearing licenses or patent cross licenses, or the technology can be
purchased on the open market. Any increase in royalty payments or
purchase costs would increase the Company's costs of manufacture,
however, and it is possible that some key improvement necessary to
compete successfully in markets served by the Company may not be
available.

An inability to retain significant third party license rights, in
particular the Microsoft license, to protect the Company's
copyrights, trademarks, and patents, or to obtain current technical
information or any required patent rights of others through licensing
or purchase, all of which are important to success in the industry in
which the Company competes, could significantly reduce the Company's
revenues and adversely affect its results of operations.

Technology significant to the Company is sometimes made available in
the form of proprietary information or trade secrets of others.
Prior to the dispute with Intel, Intel had made freely available
technical information used by the Company to design, market and
support its products that use Intel components. Such information is
claimed by Intel to be proprietary and is made available by Intel
only under nondisclosure agreements. Prior to the April 1998 ruling
of the Alabama Court, Intel was withholding such information,
attempting to cancel existing agreements and refusing to enter into
new nondisclosure agreements with the Company. Intel's actions are
the subject matter of current litigation, and Intel has appealed the
April 1998 court ruling. Intel's actions have damaged the Company by
slowing the introduction of new products using Intel components and
preventing proper maintenance and support of Company products using
Intel components. The Company expects the Appeals Court to uphold
the April 1998 ruling. However, if the ruling is overturned, the
Company will be materially affected and may be forced to alter its
future business plans or to accept unfavorable terms from Intel in
settlement of the lawsuit.

Until recently, most computer programs were written to store only
two digits of date-related information. Such programs may be unable
to distinguish between the year 1900 and the year 2000. Unless
corrected or replaced, programs with this inability could cause data
processing malfunctions and computer system failures. The Company
has initiated a program to mitigate and/or prevent possible adverse
effects on operations of Year 2000 problems in its software and
hardware products sold to customers and in its internally used
software and hardware.

The Company's efforts to identify and resolve Year 2000 issues
related to its hardware and software product offerings are nearing
completion. All products currently offered in the Company's standard
price list are Year 2000 compliant or will be so certified as new
versions and utilities are released. In addition, the Company has
completed a significant effort to contact its customers and business
partners to ensure that customers are aware of how to acquire
detailed Year 2000 information regarding any Intergraph-produced
product. The Company's Web site allows customers to request specific
product information related to the Year 2000 issue, and provides a
mechanism for requesting specific product upgrade paths. Customers
under maintenance contract with the Company are being upgraded to
compliant versions of the Company's software, and selected hardware
remedies have been completed where appropriate. Accordingly, the
Company does not believe that any Year 2000 problems in its installed
base of products or in its current product offerings present a
material exposure for the Company. However, the Company could suffer
a loss of maintenance revenue should its customers discontinue any
noncompliant products and not replace them with other products of the
Company, and product sales could be lost should customers replace any
noncompliant products with products of other companies. In addition,
any liability claims by customers would increase the Company's legal
expenses and, if successful, could have an adverse impact on the
results of operations and financial position of the Company.

The Company's product compliance costs have not had and are not
anticipated to have a material impact on its results of operations or
financial condition.

Year 2000 readiness of the Company's business critical internal
systems has been made a top priority by the Company's Year 2000
Program Team. These efforts were primarily concentrated in the third
and fourth quarters of 1998, with significant efforts continuing
through the first half of 1999. All business critical internal
systems upgrades and programming changes are scheduled to be tested
and implemented by the end of second quarter 1999. The Company is
currently on target to meet this deadline. In the fourth quarter of
1998, the Company selected several new financial and administrative
systems, in part a response to Year 2000 issues, which will be
implemented over the next two years. Certain of these new systems
form a part of the Company's Year 2000 internal solution and will be
implemented in 1999. The Company estimates that costs related to new
systems implementations, the majority of which will be capitalized as
internal use software and amortized to operations over the estimated
useful lives of the systems, will approximate $6 - 10 million in 1999
and 2000, a portion of which relates directly to Year 2000 issues.
If certain system replacements and changes are not completed timely,
the Year 2000 issue could have an adverse impact on the
administrative systems of the Company. The Company believes that it
will successfully implement all internal systems changes and
replacements necessary to ensure the Year 2000 compliance of all
business critical internal systems, but has contingency plans to
further upgrade existing systems if implementation falls behind
schedule.

The Company is conducting a program of investigation with its
critical suppliers to ensure continuous and uninterrupted supply, and
includes Year 2000 provisions in its new supplier agreements. This
program consists primarily of a major survey campaign and aggressive
follow-up with significant suppliers to monitor compliance. The
Company has also initiated discussions with other entities with which
it interacts electronically, including customers and financial
institutions, to ensure those parties have appropriate plans to
remediate any Year 2000 issues. To date, responses to third party
Year 2000 surveys do not provide assurance that these third parties
will achieve Year 2000 compliance, as most companies are reluctant to
make such representations. However, most of these parties have Year
2000 programs in place and, to date, no significant risks have been
identified. There cannot be complete assurance that the systems of
other companies on which the Company relies will be converted timely,
and the Company could be adversely impacted by any suppliers,
customers, and other businesses who do not successfully address this
issue. The Company continues to assess these risks in order to
reduce any potential adverse impact. The Company will develop
contingency plans by the end of second quarter 1999 to address
potential third party noncompliance issues, should any be present.

The costs of the Year 2000 project and the dates on which significant
phases will be completed are based on management's best estimates,
which have been derived utilizing numerous assumptions of future
events, including the continued availability of certain resources,
third party modification plans, and other factors. There can be no
assurance that these estimates of costs and completion dates will be
achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes and implement new systems in a
timely manner, and similar uncertainties.

The Company believes it has an effective program in place to resolve
the Year 2000 issue with respect to its internal systems in a timely
manner; however, it has not yet completed all necessary phases of
this program. In the event that the Company does not complete any
additional phases, which is not anticipated, the Company could
experience significant delays in sales order processing, shipping,
invoicing, and collections, among other areas. In addition, the
Company's operations could be materially adversely affected if Year
2000 compliance is not achieved by significant vendors.

See Notes 1, 4, 6, 7, and 11 to Consolidated Financial Statements for
further discussion of risks and uncertainties related to the Company.

Orders. Systems orders for 1998 were $794 million, a 3% increase
over the prior year after increases of 7% and 1% in 1997 and 1996,
respectively. Order levels in 1996 and 1997 were adversely affected
by slower than anticipated customer and market acceptance of the
Windows NT/Intel strategy and, in 1997 and 1998, by the previously
described actions of Intel. Orders in 1996 and 1997 were
characterized by less than anticipated demand for the Company's
hardware product offerings and by weakened demand for its software
products. New software and certain of the new hardware products
released in 1996 did not generate significant orders or revenues
during the year. Releases of the Company's software products based
on its Jupiter technology were delayed until late 1996 and initially
contained certain performance problems. These problems were resolved
in subsequent releases of the products during fourth quarter 1996 and
first quarter 1997, and sales momentum began to increase during the
second quarter of 1997. However, hardware orders in the last half of
1997 were adversely impacted by a two month delay in shipment of the
Company's TDZ 2000 line of workstations resulting from Intel's
wrongful conduct and delays. Order levels in 1998 were further
reduced by the March sale of the Company's Solid Edge and Engineering
Modeling System product lines and by the continuing effects of the
dispute with Intel. By the end of fourth quarter 1998, all of the
Company's hardware product offerings contained the latest Intel
technology and were technologically back in line with industry
competition. Fourth quarter 1998 orders improved to $242 million,
leaving the Company with a year-end backlog of $237 million, the
highest level since 1992.

Geographic Regions. U.S. orders, including federal government
orders, totaled $450 million for the year, up 11% after an increase
of 24% in 1997 and a decline of 7% in 1996. The 1996 orders decline
resulted primarily from a decrease in orders in one of the Company's
unprofitable business units sold in early 1997. Excluding this
business unit, U.S. orders for 1997 were up 29% and flat for 1996.
The increases in both 1997 and 1998 are attributable to growth in the
Company's hardware business and in orders received from the federal
government. Federal orders were up 25% and 5%, respectively, in 1997
and 1998. The 1998 orders growth, both federal and commercial, was
concentrated primarily in the fourth quarter as the U.S. hardware
business began to recover slightly from the effects of the Intel
dispute. International orders for 1998 totaled $344 million for the
year, a 6% decline from the prior year after a decline of 7% in 1997
and an increase of 9% in 1996. Asia Pacific orders totaled $65
million in 1998, a decrease of 11% from 1997, after declining 35% in
1997 and increasing 45% in 1996. Growth in that region in 1996 was
due to several individually significant orders for the Company's
public safety products and related consulting services. Such orders
did not recur in 1997 or 1998. Additionally, devaluation of Asian
currencies, most notably the Korean won, had a negative impact on
orders for the region during the fourth quarter of 1997 and
throughout 1998. European orders totaled $210 million, down 5% from
the prior year level, after remaining flat in 1997 and declining 5%
in 1996. European and Asian order levels in terms of U.S. dollars
were reduced by approximately 2% and 9%, respectively, in 1998 (10%
and 5%, respectively, in 1997) due to strengthening of the U.S.
dollar against the currencies of those regions.

New Products. During 1996, the Company introduced a complete line of
workstations and servers for the high-end marketplace based on
Intel's Pentium Pro microprocessor. In addition, the Company
introduced a new add-in 3D graphics card which provides workstation
class 3D graphics to the Pentium- or Pentium Pro- based personal
computer. During 1997, the Company added a line of Intel/Windows-
based personal workstations priced to compete in the PC market. The
workstations have features and performance required by professional
users and provide 3D graphics that the Company believes will be
required by users in the future. The Company also introduced twelve
new workstations in its TD and TDZ lines, including the first Windows
NT-based workstations using dual Intel Pentium II processors. Also
introduced were two new InterServe servers, the ImageStation Z
digital photogrammatic workstation, and the first 28-inch, high
resolution, wide-format monitor. These new products commenced
shipping at various dates throughout 1997 but, as previously
described, the Company suffered delays in new product development and
shipping due to actions of Intel that placed the Company at a
competitive disadvantage.

Also during 1997, the Company introduced and began shipping GeoMedia
1.0, a Jupiter-based software product which allows users to access
data warehouses virtually anywhere in the world and simultaneously
perform analyses with varying data types and formats.

During 1998 the Company introduced its new Wildcat 3D graphics
technology, which increases the performance of Windows NT-based
workstations beyond current 3D graphics technology. This technology
enables creative and technical professionals to work interactively in
real time with more realistic full-sized, fully textured 3D models.
The technology, which was originally scheduled to ship in December
1998, began delivering in late October in the Company's TDZ
workstations. New products that are under development by the Company
leverage the existing Wildcat technology to deliver up to four times
more performance. This new Wildcat series of 3D graphics
accelerators will be available in the Company's TDZ workstations as
well as in workstations of other computer vendors.

The success of new product introductions is dependent on a number of
factors, including market acceptance, the Company's management of
risk associated with product transition, the effective management of
inventory levels in line with anticipated demand, and the industry-
wide risk that new products may have defects in the introductory
stage. Because of these uncertainties, the Company cannot determine
the ultimate effect that new products will have on its sales or
operating results.

Revenues. Total revenues for 1998 were $1 billion, down 8% from the
prior year level after a 3% increase in 1997 and flat revenues in
1996.

Systems. Sales of Intergraph systems in 1998 were $726 million, down
8% after increases of 8% and 2% in 1997 and 1996, respectively.
Factors previously cited as affecting systems orders in total and on
a geographic basis, including the actions of Intel in 1997 and 1998,
also affected systems revenues over the three-year period.
Competitive conditions manifested in declining per unit sales prices
continue to adversely affect the Company's systems revenues and
margin.

Geographic Regions. In total, the 1998 revenue decline was primarily
due to factors associated with the Intel lawsuit and the sale of the
Company's Solid Edge and Engineering Modeling System product lines
and, in Asia, to currency and economic problems affecting the region.
U.S. systems sales, including sales to the federal government,
decreased by 1% in 1998 after increasing by 17% and 2% in 1997 and
1996, respectively. Growth in U.S. systems sales was depressed in
1996 by a revenue decline in one of the Company's unprofitable
business units sold in early 1997. Excluding this business unit,
U.S. sales growth was 22% in 1997 and 7% in 1996. The revenue
decline in 1998 was due primarily to a 7% decrease in sales to the
federal government, partially offset by growth in the Company's
public safety business. During the second half of 1997 and the first
quarter of 1998, Intergraph Public Safety secured several large U.S.
installations, significantly increasing the subsidiary's revenue
base. International sales totaled $339 million for the year, down
12% from the prior year after a slight increase in 1997 and a 3%
increase in 1996. European sales were down 13%, after an increase of
3% in 1997 and a 6% decline in 1996 as the result of weak demand for
the Company's software products. Asia Pacific systems sales were
down 25% after a 12% decline in 1997 and a 25% increase in 1996.

Software. Sales of the Company's software applications declined by
16% in 1998 after a 1% decline in 1997 and a 9% decline in 1996.
Sales of MicroStation declined by 46%, 34% and 39% in 1998, 1997 and
1996, respectively (see "MicroStation" below for further discussion).
Additionally, 1996 revenues were adversely affected by the previously
discussed delays in new software releases. In 1997 and 1998, sales
of the Company's plant design software applications increased by 21%
and 19%, respectively, partially offsetting the effect of the loss in
MicroStation sales. However, 1998 revenues were further reduced by
an 82% decline in sales of mechanical software applications as a
result of the sale of the Company's Solid Edge and Engineering
Modeling System product lines. (See "Nonoperating Income and Expense"
below for further discussion.)

In terms of broad market segments, the Company's mapping/geographic
information systems and architecture/engineering/construction product
applications continue to dominate the Company's product mix at
approximately 47% and 19% of total systems sales in 1998,
respectively, (57% and 27%, respectively, in 1997). Due to the sale
of the Company's Solid Edge and Engineering Modeling System product
lines in March 1998, mechanical design, engineering and manufacturing
applications no longer represent a significant portion of the
Company's product mix. These applications represented 14% of total
systems sales in 1997. Sales of Windows-based software represented
approximately 90% of total software sales in 1998, up from
approximately 87% in 1997 and 80% in 1996. UNIX-based software
comprised approximately 10% of total 1998 software sales, down from
approximately 13% in 1997 and 20% in 1996.

Hardware. Total hardware revenue decreased by 10% in 1998, after
increasing by 22% and 12% in 1997 and 1996, respectively.
Workstation and server unit volume increased 6% in 1998, 67% in 1997
and 42% in 1996, while workstation and server revenue declined by 9%
in 1998 after increasing by 6% and 18% in 1997 and 1996,
respectively. Price competition continues to erode per unit selling
prices, and volumes in 1998 were suppressed by the aforementioned
factors associated with the Intel lawsuit. Revenue from other
hardware products decreased by 11% in 1998, after increasing by 64%
in 1997 and decreasing by 1% in 1996. Both the 1997 increase and the
1998 decline relate primarily to sales of graphics cards and storage
devices. Sales of the Company's first add-in 3D graphics cards,
which began shipping during the third quarter of 1996, were initially
strong and grew throughout 1997. However, 1998 sales were below the
Company's expectations as the products approached the end of their
life cycle. The Company expects the demand for graphics cards to
increase throughout 1999 with the availability of new products based
upon its Wildcat 3D graphics technology. Intel-based systems
represented approximately 100% of hardware unit sales for the three
years ended December 31, 1998.

Federal Government Sales. Total revenue from the United States
government was approximately $166 million in 1998, $177 million in
1997 and $161 million in 1996, representing approximately 16% of
total revenues in 1998 and 1997 and 15% in 1996. In 1998, U.S.
government orders and revenues were characterized by weakened demand
for the Company's hardware product offerings, due partially to
increasing price competition within the industry. The Company sells
to the U.S. government under long-term contractual arrangements,
primarily indefinite delivery, indefinite quantity and cost-plus
award fee contracts, and through commercial sales of products not
covered by long-term contracts. Approximately 44% of total federal
government revenues are earned under long-term contracts. The
Company believes its relationship with the federal government to be
good. While it is fully anticipated that these contracts will remain
in effect through their expiration, the contracts are subject to
termination at the election of the government. Any loss of a
significant government contract would have an adverse impact on the
results of operations of the Company.

MicroStation. Through the end of 1994, the Company had an exclusive
license agreement with Bentley Systems, Inc., an approximately 50%-
owned affiliate of the Company, under which the Company distributed
MicroStation, a software product developed and maintained by Bentley
and utilized in many of the Company's software applications. As a
result of settlement of a dispute between the companies relative to
the exclusivity of the Company's distribution license, effective
January 1, 1995, the Company has a nonexclusive license to sell
MicroStation via its direct sales force and to sell MicroStation via
its indirect sales channels if MicroStation is sold with other
Intergraph products. See "Litigation and Other Risks and
Uncertainties" preceding for a description of arbitration proceedings
between the Company and Bentley.

The Company's sales of MicroStation have declined each year since the
1994 change in the license agreement, by approximately 39% in 1996,
34% in 1997, and 46% in 1998. The Company estimates this revenue
decline, along with a per copy royalty increase in 1996, adversely
affected its results of operations by approximately $7 million or
$.14 per share in 1997 and by approximately $26 million or $.52 per
share in 1996. In 1998, MicroStation sales represented 8% of total
software revenue. The Company is unable to predict the level of
MicroStation sales that will occur in the future, but it is likely
that such sales will be further reduced.

Maintenance and Services. Maintenance and services revenue consists
of revenues from maintenance of Company systems and from Company
provided services, primarily training and consulting. These forms of
revenue totaled $307 million in 1998, down 9% after declines of 9%
and 5% in 1997 and 1996, respectively. Maintenance revenues totaled
$213 million in 1998, down 13% after declines of 13% and 12% in 1997
and 1996, respectively. The trend in the industry toward lower
priced products and longer warranty periods has resulted in reduced
levels of maintenance revenue, and the Company believes this trend
will continue in the future. Services revenue represented 9% of
total revenues in 1998, an increase of one percentage point from the
previous year. Growth in services revenue has partially offset the
decline in maintenance revenue. The Company is endeavoring to grow
its services business and has redirected the efforts of its hardware
maintenance organization to focus increasingly on systems
integration. Revenues on these services, however, typically produce
lower gross margins than maintenance revenues.

Gross Margin. The Company's total gross margin was 31.5% in 1998,
down 4.1 points after declines of 1.2 points and 2.3 points in 1997
and 1996, respectively.

Margin on systems sales declined 5.4 points in 1998, 1.2 points in
1997 and 2.3 points in 1996. Competitive pricing conditions in the
industry and an increasing hardware content in the product mix
reduced systems margin in all three years. Margin was adversely
impacted in 1996 by the increase in MicroStation product cost and
further affected in 1997 by a decrease in the mix of international
systems revenues to total Company systems revenues, due in part to
strengthening of the U.S. dollar in international markets, primarily
Europe and Asia. In 1998, margin was negatively impacted by
unfavorable volume related manufacturing variances and inventory
revaluations incurred prior to the outsourcing of the Company's
manufacturing to SCI in November. Systems margins continue to be
negatively impacted by strengthening of the U.S. dollar in
international markets and by the previously discussed factors
associated with the Intel dispute. In 1999, the Company expects to
realize slight improvement in its systems margin as a result of its
outsourcing agreement with SCI and associated reductions in
headcount and materials costs.

In general, the Company's systems margin may be lowered by price
competition, a higher hardware content in the product mix, a stronger
U.S. dollar in international markets, the effects of technological
changes on the value of existing inventories, and a higher mix of
federal government sales, which generally produce lower margins than
commercial sales. Systems margins may be improved by higher software
content in the product, a weaker dollar in international markets, a
higher mix of international systems sales to total systems sales, and
reductions in prices of component parts, which generally tend to
decline over time in the industry. The Company is unable to predict
the effects that many of these factors may have on its systems
margins. While the Company expects to achieve cost savings through
its outsourcing agreement with SCI, it also continues to expect
pressure on its systems margin as a result of increasing industry
price competition.

Margin on maintenance and services revenue declined by 1.1 points in
1998 after declines of .8 points in 1997 and 2.2 points in 1996. The
margin declines over the past three years have resulted primarily
from declining maintenance revenues. The Company closely monitors
its maintenance and services costs and has taken certain measures,
including reductions in headcount, to align these costs with current
revenue levels. The Company believes that the trend in the industry
toward lower priced products and longer warranty periods will
continue to reduce its maintenance revenue, which will pressure
maintenance margin in the absence of corresponding cost reductions.

The industry in which the Company competes is characterized by rapid
technological change. This technological change is an important
consideration in the Company's overall manufacturing and inventory
management program, in which the Company endeavors to purchase only
parts and systems utilizable with the technology of its current
product offerings and as spares for the customer contracted
maintenance of systems in its installed customer base. In November
1998 the Company sold substantially all of its U.S. manufacturing
assets, including inventories with a book value of approximately $60
million, to SCI, and SCI assumed responsibility for the manufacturing
of substantially all of the Company's hardware products. (See "SCI"
preceding for a complete description of this transaction.) Effective
inventory and purchasing management remains necessary in order for
the Company to provide SCI with accurate and timely information
regarding its needs. Any unanticipated change in technology or an
inability of the Company to accurately forecast its manufacturing
needs could significantly and adversely affect gross margins and
reported results of operations.

Operating Expenses (exclusive of nonrecurring operating charges).
Operating expenses declined by 7% in 1998, 2% in 1997 and 3% in 1996.
In response to the level of its operating losses, the Company has
reduced the total number of its employees by 21% during the three-
year period ended December 31, 1998.

Product development expense declined by 15% in 1998 after declines of
5% and 7% in the two preceding years. Employee headcount in the
development areas has been significantly reduced over the last three
years through reductions in force, attrition, and the sale of two
unprofitable business units in early 1997. Additionally, 1996 and
1998 expenses were reduced due to additional software development
projects qualifying for capitalization, in 1996 for the Company's
Jupiter technology and in 1998 for its Geomedia product line.

The Company capitalizes a portion of the cost of development of new
products and amortizes those costs against revenues later generated
by those products. Though the Company regularly reviews its
capitalized development costs to ensure recognition of any decline in
value, it is possible that, for any given product, revenues will not
materialize in amounts anticipated due to industry conditions that
include intense price and performance competition, or that product
lives will be reduced due to shorter product cycles. Should these
events occur, the carrying amount of capitalized development costs
would be reduced and would produce adverse effects on systems margin
and results of operations.

Sales and marketing expense decreased 6% in 1998, after declines of
2% in 1997 and 5% in 1996. Expenses in all three years were reduced
by the strengthening of the U.S. dollar against international
currencies, primarily in Europe and Asia. The expense decline in
1996 reflected the benefits of restructuring actions taken in 1995.
In 1997, expenses were significantly reduced due to the sale of two
unprofitable business units, but the resulting benefits were
partially offset by increased trade show activity and advertising
expenses for the Company's new products. The 1998 decline is
primarily due to across the board expense reductions in Europe
resulting from restructuring actions taken in the first quarter (See
"Nonrecurring Operating Charges").

General and administrative expense for 1998 was flat with the prior
year level after increases of 3% and 4% in 1997 and 1996,
respectively. In 1996, installation of new internal business
systems, increased legal expenses, and amortization of deferred
financing costs related to the Company's line of credit increased
general and administrative expense. The 1997 expense increase
resulted primarily from increased legal expenses (see "Litigation and
Other Risks and Uncertainties"), partially offset by strengthening of
the U.S. dollar. In 1998, legal expenses continued to increase, but
their impact was offset by benefits resulting from European headcount
reductions and the continued strengthening of the U.S. dollar.

Nonoperating Income and Expense. Interest expense was $7.5 million
in 1998, $6.6 million in 1997 and $5.1 million in 1996. The
Company's average outstanding debt has increased over the three-year
period due to operating losses and resultant borrowings under the
Company's revolving credit facility and term loan. However, the
average rate of interest paid on the debt has declined approximately
2 points from the 1996 level due to generally declining rates and a
change in lenders and terms under the Company's primary credit
facility. See "Liquidity and Capital Resources" below for a
discussion of the Company's current financing arrangements.

In March 1998, the Company sold its Solid Edge and Engineering
Modeling System product lines to Electronic Data Systems Corporation
and its Unigraphics Solutions, Inc. subsidiary for $105 million in
cash. The Company recorded a gain on this transaction of $102.8
million. This gain is included in "Gains on sales of assets" in the
1998 consolidated statement of operations. Full year 1997 revenues
and operating loss for these product lines were $35.2 million and
$4.1 million, respectively. Based on 1997 performance, the Company
estimates that the sale of this business resulted in an improvement
in its 1998 operating results of approximately $5 million, excluding
the impact of the gain on the sale.

In April 1998, the Company sold the assets of its printed circuit
board manufacturing facility for $16 million in cash. The Company
recorded a gain on this transaction of $8.3 million. This gain is
included in "Gains on sales of assets" in the 1998 consolidated
statement of operations. The Company is now outsourcing its printed
circuit board needs. This operational change did not materially
impact the Company's results of operations in 1998.

In 1997, the Company incurred a $6.1 million or $.13 per share charge
for a contract arbitration award to Bentley Systems, Inc. This
charge is included in "Arbitration award" in the 1997 consolidated
statement of operations. See "Litigation and Other Risks and
Uncertainties" and "Revenues" preceding for further discussion of the
Company's business relationship with Bentley, its sales of
MicroStation, and the financial effects on the Company of changes in
this business relationship.

Also in 1997, the Company sold a stock investment in a publicly
traded affiliate, resulting in a gain of $4.9 million or $.10 per
share. During 1996, the Company sold stock investments in affiliated
companies for a total gain of $11.2 million or $.23 per share. These
gains are included in "Gains on sales of assets" in the consolidated
statements of operations.

"Other income (expense) - net" in the consolidated statements of
operations consists primarily of interest income, foreign exchange
gains (losses), equity in the earnings of investee companies, and
other miscellaneous items of nonoperating income and expense.
Significant items included in these amounts are foreign exchange
losses of $2.7 million in 1997 and $4.6 million in 1996.

Income Taxes. The Company incurred losses before income taxes of
$13.6 million in 1998, $66.2 million in 1997 and $66.1 million in
1996. Income tax expense for the three years ended December 31, 1998
resulted primarily from taxes on individually profitable subsidiaries
and from alternative minimum tax on gains from the sale of assets in
1998.

Note 8 of Notes to Consolidated Financial Statements contains a
reconciliation of statutory to actual income tax benefit or expense
and further details of the Company's tax position, including net
operating loss and tax credit carryforwards.

Results by Operating Segment. Effective January 1, 1998, the Company
divided its business into four reporting segments for operational and
management purposes: Intergraph Computer Systems (ICS), Intergraph
Public Safety, Inc. (IPS), VeriBest, Inc. and the Software and
Federal Systems (Federal) business (Intergraph). ICS supplies
high performance Windows NT-based graphics workstations and PCs, 3D
graphic subsystems, servers, and other hardware products. IPS
develops, markets, and implements systems for public safety agencies.
VeriBest serves the electronic design automation market, providing
software design tools, design processes, and consulting services for
developers of electronic systems. Intergraph supplies software and
solutions, including hardware purchased from ICS, consulting, and
services to the federal government and to the process and building
and infrastructure industries.

The Company evaluates performance of its operating segments based on
revenue and income from operations. Sales among the operating
segments, the most significant of which are sales of hardware
products from ICS to the other segments, are accounted for under a
transfer pricing policy. Transfer prices approximate prices that
would be charged for the same or similar property to similarly
situated unrelated buyers. In the U.S., intersegment sales of
products and services to be used for internal purposes are charged at
cost. For international subsidiaries, transfer price is charged on
intersegment sales of products and services to be used for either
internal purposes or sale to customers. Certain expenses, primarily
general and administrative expenses, not directly attributable to an
operating segment are considered corporate in nature and not charged
to any operating segment. In addition, gains on sales of assets and
nonrecurring charges to operations (see "Summary" section above),
which were significant in 1998, are not credited or charged to the
operating segments.

The Company's current model for evaluation of the performance of its
operating segments was adopted in 1998 for that and future years. In
prior years the Company utilized several variations of the current
model, depending on the Company's structure and its business
environment at the time. Segment financial information for years
prior to 1998 has not been restated to conform to the 1998 model
because it is impractical to do so. Since VeriBest and IPS have been
operating as separate subsidiaries since 1996 and 1997, respectively,
and since by nature of their businesses they are less affected by
changes from the model utilized before 1998, comparable information
is available. See Note 11 of Notes to Consolidated Financial
Statements.

In 1998, ICS incurred an operating loss of $68.1 million on revenues
of $453.7 million. This loss excludes the impact of certain
nonrecurring income and operating expense items associated with ICS's
operations, including gains totaling $9.8 million on the sales of its
printed circuit board and manufacturing inventory and assets, and
nonrecurring operating expenses of $.8 million, primarily for
employee terminations. ICS's operating loss for the year resulted
primarily from a systems gross margin of 9%, which is insufficient to
cover the current level of operating expenses. ICS was significantly
adversely impacted in 1998 by factors associated with the Company's
dispute with Intel, the effects of which included lost momentum, lost
revenue and margin as well as increased operating expenses, primarily
for marketing and public relations expenses. Margins were severely
impacted by volume and inventory value related manufacturing
variances incurred prior to the outsourcing of its manufacturing to
SCI. For 1999, ICS estimates that this outsourcing will slightly
improve its systems margins. In addition, ICS expects its operating
results to improve due to headcount reductions taken during 1998.
During the year, ICS's headcount was reduced by approximately 33% due
to employee terminations, the outsourcing of manufacturing, and
normal attrition. See "Litigation and Other Risks and Uncertainties"
for further discussion of significant uncertainties that may
adversely affect the results of operations of ICS and the Company.

In 1998, Intergraph Public Safety earned operating income of $3.5
million on revenues of $51.1 million, compared to an operating loss
in 1997 of $2.2 million on revenues of $50.4 million. Systems margin
increased by 6.4 points from the 1997 level, due primarily to growth
in the subsidiary's U.S. revenue base. In addition, sales and
marketing and general and administrative expenses declined by 29% and
26%, respectively, from the prior year level, primarily the result of
reduced compensation costs incurred by the IPS international
locations.

VeriBest incurred operating losses of $12.4 million, $16.4 million,
and $15.5 million in 1998, 1997, and 1996, respectively, on revenues
of $28.2 million, $29.3 million, and $31 million. Systems revenues
declined by 13% and 19%, respectively, in 1997 and 1998, reflecting
weakening demand for the subsidiary's software products. In 1998,
the decline in systems revenues was partially offset by a 25%
increase in maintenance revenues as the result of sales force focus
on increasing the subsidiary's maintenance revenue base. Results for
1997 were negatively impacted by a 5 point decline in gross margin,
primarily the result of declining systems revenues, partially offset
by a 5% decline in operating expenses. Losses for 1998 were reduced
by a 5 point improvement in gross margin as the result of declining
royalty costs, and by an additional 10% reduction in operating
expenses. VeriBest's headcount has declined by approximately 28%
since the subsidiary's inception in January 1996. In 1999, VeriBest
expects to realize improvements in its revenues, margins and
operating expenses as it directs its selling efforts toward a newly
developed line of proprietary products and realizes benefits of its
reduced headcount and revised selling strategy toward indirect
methods.

In 1998, the Software business earned operating income of $14.1
million on revenues of $534.2 million. This income excludes the
impact of certain nonrecurring income and operating expense items
associated with Software operations, including the gain of $102.8
million on the sale of the business unit's Solid Edge and Engineering
Modeling System product lines and nonrecurring operating charges of
$14.6 million, primarily for asset write-offs and employee
terminations. In 1998, Federal incurred an operating loss of $3.6
million on revenues of $158.6 million. Revenues in 1998 were
adversely impacted by weakened demand for the Company's hardware
product offerings, due partially to increasing price competition
within the industry.

See Note 11 of Notes to Consolidated Financial Statements for further
details of results by operating segment.

Impact of Currency Fluctuations and Currency Risk Management.
Fluctuations in the value of the U.S. dollar in international markets
can have a significant impact on the Company's results of operations.
For 1998, approximately 51% of the Company's revenues were derived
from customers outside the United States, primarily through
subsidiary operations. Most subsidiaries sell to customers and incur
and pay operating expenses in local currency. These local currency
revenues and expenses are translated to U.S. dollars for reporting
purposes. A stronger U.S. dollar will decrease the level of reported
U.S. dollar orders and revenues, decrease the dollar gross margin,
and decrease reported dollar operating expenses of the international
subsidiaries. During 1998, the U.S. dollar strengthened on average
from the prior year level, which decreased reported dollar revenues,
orders, and gross margin, but also decreased reported dollar
operating expenses in comparison to the prior year period. The
Company estimates that strengthening of the U.S. dollar in 1998 and
1997 in its international markets, primarily Europe and Asia,
adversely impacted 1998 and 1997 results of operations by
approximately $.10 and $.30 per share, respectively. Such currency
effects did not materially affect the Company's results of operations
in 1996. To illustrate the sensitivity of the Company's results of
operations to changes in international currency exchange rates, the
Company estimates that the result of a uniform 10% strengthening in
the value of the dollar relative to the currencies in which the
Company's sales are denominated would result in a decrease in
earnings of approximately $9 million for the year ended December 31,
1999. Likewise a uniform 10% weakening in the value of the dollar
would result in increased earnings of approximately $13 million for
the year ended December 31, 1999. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange
rates, exchange rate fluctuations may also affect the volume of sales
and foreign currency sales prices. The Company's estimation of the
effects of changes in foreign currency exchange rates does not
consider potential changes in sales levels or local currency prices.

The Company conducts business in all major markets outside the U.S.,
but the most significant of these operations with respect to currency
risk are located in Europe and Asia. Local currencies are the
functional currencies for the Company's European subsidiaries. The
U.S. dollar is the functional currency for all other international
subsidiaries. With respect to the currency exposures in these
regions, the objective of the Company is to protect against financial
statement volatility arising from changes in exchange rates with
respect to amounts denominated for balance sheet purposes in a
currency other than the functional currency of the local entity. The
Company will therefore enter into forward exchange contracts related
to certain balance sheet items, primarily intercompany receivables,
payables, and formalized intercompany debt, when a specific risk has
been identified. Periodic changes in the value of these contracts
offset exchange rate related changes in the financial statement value
of these balance sheet items. Forward exchange contracts, generally
less than three months in duration, are purchased with maturities
reflecting the expected settlement dates of the balance sheet items
being hedged, and only in amounts sufficient to offset possible
significant currency rate related changes in the recorded values of
these balance sheet items, which represent a calculable exposure for
the Company from period to period. Since this risk is calculable,
and these contracts are purchased only in offsetting amounts, neither
the contracts themselves nor the exposed foreign currency denominated
balance sheet items are likely to have a significant effect on the
Company's financial position or results of operations. The Company
does not generally hedge exposures related to foreign currency
denominated assets and liabilities that are not of an intercompany
nature, unless a significant risk has been identified. It is
possible the Company could incur significant exchange gains or losses
in the case of significant, abnormal fluctuations in a particular
currency. By policy, the Company is prohibited from market
speculation via forward exchange contracts and therefore does not
take currency positions exceeding its known financial statement
exposures, and does not otherwise trade in currencies.

At December 31, 1998, the Company had net outstanding forward
exchange contracts of approximately $7.6 million ($37.4 million at
December 31, 1997), maturing at various dates through March 31, 1999.
The fair values of these contracts approximated original contract
amounts based on the insignificant amounts the Company would pay or
receive to transfer the contracts to third parties at December 31,
1998. Net cash flow from forward contract activity, consisting of
realized gains and losses from settlement of exposed assets and
liabilities at exchange rates in effect at the settlement date rather
than at the time of recording, settlement of the forward contracts
purchased to mitigate these exposures, and payment of bank fees on
the forward contracts was not significant for any year in the three
year period ended December 31, 1998. Deferred gains and losses as of
December 31, 1998 and 1997 were not significant.

At December 31, 1998, the Company's only outstanding forward
contracts related to formalized intercompany loans between the
Company's European subsidiaries. Contracts outstanding at December
31, 1997 included hedges relating to intercompany loans made between
the U.S. and Europe. As of first quarter 1998, the Company is no
longer hedging its U.S. exposures related to foreign currency
denominated intercompany loans. To illustrate the sensitivity of the
Company's result of operations to changes in exchange rates for
international currencies underlying its intercompany loans, the
Company estimates that a uniform 10% strengthening in the value of
the dollar relative to the currencies in which such intercompany
loans are denominated at December 31, 1998 would result in a loss in
earnings of an insignificant amount. Conversely, assuming a 10%
weakening in the value of the dollar relative to these currencies,
the Company would recognize an insignificant exchange gain. This
calculation assumes that each exchange rate would change in the same
direction relative to the U.S. dollar.

The Company is exposed to foreign currency risks related to certain
of its financial instruments, primarily debt securities held by its
European subsidiaries, long-term mortgages on certain of its European
facilities, and an Australian term loan. The effect of a uniform 10%
change in exchange rates relative to the currencies in which these
financial instruments are denominated would not have a material
impact on the Company's results of operations.

Euro Conversion. On January 1, 1999, eleven member countries of the
European Monetary Union (EMU) fixed the conversion rates of their
national currencies to a single common currency, the "Euro". The
national currencies of the participating countries will continue to
exist through July 1, 2002. Euro currency will begin to circulate on
January 1, 2002. With respect to the Company, U.S. and European
business systems are being upgraded to accommodate the Euro.
Conversion of all financial systems will be completed at various
times through the remainder of 1999. The Company is prepared to
conduct business in Euros during 1999 with those customers and
vendors who choose to do so. The Company is continuing to evaluate
business implications resulting from full Euro conversion by 2002,
including the impact of cross-border price transparency within the
EMU and exposure to market risk with respect to financial
instruments. While the Company has not yet completed its assessment
of these business implications on its results of operations or
financial condition, it does not anticipate this impact will be
material.

See Notes 1 and 4 of Notes to Consolidated Financial Statements for
further information related to management of currency risk.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, cash totaled $95.5 million, up $48.8 million
from year-end 1997. Net cash consumed by operations in 1998 and 1997
was $31.1 million and $20.9 million, respectively, versus a net
generation of cash of $26 million in 1996. The net consumption of
cash in 1998 reflects the negative cash flow effects of increased
operating losses. In 1997, an inventory build-up consumed
approximately $16 million as a result of an anticipated increase in
hardware unit sales volume and customer demand for faster delivery of
products. The net increase in cash of $48.8 million in 1998 is the
result of various sales of assets, as further described below.

Net cash provided by investing activities in 1998 was $99.6 million,
compared to net cash consumption of $30.7 million in 1997 and $31.7
million in 1996. Investing activities in 1998 included $160.5
million in proceeds from sales of various assets, including the
Company's Solid Edge and Engineering Modeling System product lines,
its manufacturing inventory and assets, and its printed circuit board
manufacturing facility, and an investment of $26.3 million for the
purchase of Zydex software rights. Other significant investing
activities included capital expenditures of $17.3 million in 1998
($24.8 million in 1997 and $30.6 million in 1996), primarily for
Intergraph products used in hardware and software development and
sales and marketing activities, expenditures for capitalizable
software development of $15.7 million in 1998 ($10.6 million in 1997
and $15.5 million in 1996), and proceeds of $5.7 million in 1997 and
$11.6 million in 1996 from sales of business units and investments in
affiliated companies.

Net cash used for financing activities totaled $19.3 million for
1998, versus a net cash generation of $48.4 million in 1997,
including net debt repayments of $22.3 million in 1998 and net
borrowings of $44.9 million in 1997.

The Company's collection period for accounts receivable was
approximately 81 days as of December 31, 1998, representing a slight
decline from the prior year. Approximately 67% of the Company's 1998
revenues were derived from international customers and the U.S.
government, both of which traditionally carry longer collection
periods. The Company is experiencing slow collections throughout the
Middle East region, particularly in Saudi Arabia. Total accounts
receivable from Middle Eastern customers was approximately $23
million at December 31, 1998 and $21 million at December 31, 1997.
Total U.S. government accounts receivable was $55 million at December
31, 1998 ($53 million at December 31, 1997). The Company endeavors
to enforce its payment terms with these and other customers, and
grants extended payment terms only in very limited circumstances.

The Company expects that capital expenditures will require $20
million to $25 million in 1999, primarily for Intergraph products
used in product development and sales and marketing activities. The
Company's revolving credit agreement, among other restrictions,
limits the level of the Company's capital expenditures.

Under the Company's January 1997 four year fixed term loan and
revolving credit agreement, available borrowings are determined by
the amounts of eligible assets of the Company (the "borrowing base"),
as defined in the agreement, including accounts receivable and
inventory, with maximum borrowings of $125 million. The $25 million
term loan portion of the agreement is due at expiration of the
agreement. Borrowings are secured by a pledge of substantially all
of the Company's assets in the U.S. The rate of interest on all
borrowings under the agreement is the greater of 7% or the Norwest
Bank Minnesota National Association base rate of interest (7.75% at
December 31, 1998) plus .625%. The average effective rate of
interest was 9.1% for the period of time in 1998 during which the
Company had outstanding borrowings under this agreement. The
agreement requires the Company to pay a facility fee at an annual
rate of .15% of the maximum amount available under the credit line,
an unused credit line fee at an annual rate of .25% of the
average unused portion of the revolving credit line, and a monthly
agency fee. At December 31, 1998, the Company had outstanding
borrowings of $39.5 million, the $25 million term-loan portion of
which was classified as long-term debt in the consolidated balance
sheet, and an additional $31.6 million of the available credit line
was allocated to support letters of credit issued by the Company and
the Company's forward exchange contracts. As of this same date, the
borrowing base, representing the maximum available credit under the
line, was approximately $90 million ($78 million at February 26,
1999).

In October 1998, the term loan and security agreement was amended to
incorporate the sale of the Company's manufacturing assets to SCI and
to modify the borrowing base accordingly. This transaction has
resulted in an approximate $15 million borrowing base reduction,
primarily for eligible inventories that were sold to SCI.

The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures.
In addition, the agreement includes restrictive covenants that limit
or prevent various business transactions (including repurchases of
the Company's stock, dividend payments, mergers, acquisitions of or
investments in other businesses, and disposal of assets including
individual businesses, subsidiaries, and divisions) and limit or
prevent certain other business changes.

At December 31, 1998, the Company had approximately $73 million in
debt on which interest is charged under various floating rate
arrangements, primarily its four year term loan and revolving credit
agreement, mortgages, and an Australian term loan (see Note 7 of
Notes to Consolidated Financial Statements). The Company is exposed
to market risk of future increases in interest rates on these loans,
with the exception of the Australian term loan, on which the Company
has entered into an interest rate swap agreement. To illustrate the
sensitivity of the Company's results of operations to changes in
interest rates on its debt, the Company estimates that its results of
operations would not be materially affected by a two point increase
or decrease in the average interest rates related to its floating
rate debt. This hypothetical change in rates was determined based on
the trend of the Company's actual rates over the past three years.
The Company's estimation assumes a level of debt consistent with the
December 31, 1998 level and does not consider the effects that
further operating losses, if any, will have on the balance of debt
outstanding.

In 1997 and 1998, the Company did not generate adequate cash to fund
its operations and build cash reserves. The Company expects
improvement in its operating cash flows in 1999 as a result of
improved earnings, the outsourcing of its manufacturing operations,
and other management actions, described further above, undertaken to
reduce operating costs. The Company believes that the combination of
improved cash flow from operations, its existing cash balances, and
cash available under its revolving credit agreement will be adequate
to meet cash requirements for 1999. In the near term, the Company
must increase sales volume and continue to align its operating
expenses with the level of revenue being generated if it is to fund
its operations and build cash reserves without reliance on funds
generated from asset sales and from external financing.

FOURTH QUARTER 1998

Revenues for the fourth quarter were $286.7 million, down 5% from
fourth quarter 1997. The Company incurred a net loss of $20.9
million ($.43 per share) for the quarter, flat with the fourth
quarter 1997 loss. Operating expenses declined by 11% from fourth
quarter 1997, due primarily to reductions in headcount and an
increase in software development costs qualifying for capitalization.
However, the positive impact of this operating expense decline was
offset by expenses of approximately $7 million ($.14 per share)
incurred in fourth quarter 1998 relating to the Company's transition
to outsourcing of its manufacturing operations, and by a $2.1 million
($.04 per share) nonrecurring operating charge for employee
terminations. Exchange rate fluctuations did not have a significant
impact on fourth quarter 1998 results of operations.

INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

- ---------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands except share and per share amounts)

Assets
Cash and cash equivalents $ 95,473 $ 46,645
Accounts receivable, net 312,123 324,654
Inventories 38,001 105,032
Other current assets 48,928 25,693
- ---------------------------------------------------------------------------
Total current assets 494,525 502,024
Investments in affiliates 12,841 14,776
Other assets 61,240 53,566
Property, plant, and equipment, net 127,368 150,623
- ---------------------------------------------------------------------------
Total Assets $695,974 $720,989
===========================================================================

Liabilities and Shareholders' Equity
Trade accounts payable $ 64,545 $ 60,945
Accrued compensation 42,445 48,330
Other accrued expenses 79,160 71,126
Billings in excess of sales 68,137 66,680
Short-term debt and current maturities
of long-term debt 23,718 50,409
- ---------------------------------------------------------------------------
Total current liabilities 278,005 297,490
Deferred income taxes 3,142 460
Long-term debt 59,495 54,256
- ---------------------------------------------------------------------------
Total liabilities 340,642 352,206
- ---------------------------------------------------------------------------
Shareholders' equity:
Common stock, par value $.10 per share --
100,000,000 shares authorized;
57,361,362 shares issued 5,736 5,736
Additional paid-in capital 222,705 226,362
Retained earnings 249,808 269,442
Accumulated other comprehensive income -
cumulative translation adjustment 4,161 1,090
- ---------------------------------------------------------------------------
482,410 502,630
Less -- cost of 8,719,612 treasury shares
at December 31, 1998, and 9,183,845
treasury shares at December 31, 1997 (127,078) (133,847)
- ---------------------------------------------------------------------------
Total shareholders' equity 355,332 368,783
- ---------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $695,974 $720,989
===========================================================================

The accompanying notes are an integral part of these consolidated
financial statements.

INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

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

Revenues
Systems $ 726,135 $ 786,278 $ 725,828
Maintenance and services 306,655 338,027 369,505
- ------------------------------------------------------------------------------
Total revenues 1,032,790 1,124,305 1,095,333
- ------------------------------------------------------------------------------
Cost of revenues
Systems 513,822 514,416 465,645
Maintenance and services 193,616 209,550 226,263
- ------------------------------------------------------------------------------
Total cost of revenues 707,438 723,966 691,908
- ------------------------------------------------------------------------------
Gross profit 325,352 400,339 403,425

Product development 83,786 98,073 103,397
Sales and marketing 235,985 251,833 256,482
General and administrative 103,944 104,254 101,725
Nonrecurring operating charges 15,843 1,095 10,545
- ------------------------------------------------------------------------------
Loss from operations (114,206) (54,916) (68,724)

Interest expense ( 7,460) ( 6,614) ( 5,137)
Arbitration award --- ( 6,126) ---
Gains on sales of assets 112,533 4,858 11,173
Other income (expense) -- net ( 4,501) ( 3,439) ( 3,424)
- ------------------------------------------------------------------------------
Loss before income taxes ( 13,634) (66,237) (66,112)

Income tax expense ( 6,000) ( 4,000) ( 3,000)
- ------------------------------------------------------------------------------
Net loss $ ( 19,634) $ (70,237) $ (69,112)
==============================================================================

Net loss per share
-basic and diluted $ ( .41) $ ( 1.46) $ ( 1.46)
==============================================================================

Weighted average shares outstanding
-basic and diluted 48,376 47,945 47,195
==============================================================================

The accompanying notes are an integral part of these consolidated
financial statements.

INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Cash Provided By (Used For):
Operating Activities:
Net loss $( 19,634) $(70,237) $(69,112)
Adjustments to reconcile net loss to
net cash provided by (used for) operating
activities:
Depreciation and amortization 54,720 60,332 75,820
Noncash portion of arbitration award --- 5,835 ---
Noncash portion of nonrecurring
operating charges 11,506 --- 10,545
Deferred income tax expense 95 1,555 2,496
Gains on sales of assets (112,533) ( 4,858) (11,173)
Net changes in current assets and
liabilities 34,738 (13,573) 17,437
- --------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities ( 31,108) (20,946) 26,013
- --------------------------------------------------------------------------------

Investing Activities:
Proceeds from sales of assets 160,487 5,749 11,561
Purchases of property, plant, and equipment ( 17,264) (24,785) (30,563)
Capitalized software development costs ( 15,738) (10,592) (15,492)
Purchase of software rights ( 26,292) --- ---
Other ( 1,559) ( 1,038) 2,816
- --------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities 99,634 (30,666) (31,678)
- --------------------------------------------------------------------------------

Financing Activities:
Gross borrowings 10,689 75,896 18,366
Debt repayment ( 32,949) (30,950) (22,764)
Proceeds of employee stock purchases
and exercises of stock options 2,940 3,483 3,834
- --------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities ( 19,320) 48,429 ( 564)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 378) ( 846) 496
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 48,828 ( 4,029) ( 5,733)
Cash and cash equivalents at beginning of year 46,645 50,674 56,407
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 95,473 $ 46,645 $ 50,674
================================================================================

The accompanying notes are an integral part of these consolidated
financial statements.

<TABLE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income (loss) Stock Equity
- --------------------------------------------------------------------------------------------------------------------
(In thousands except share amounts)
<S> <C> <C> <C> <C> <C> <C>

Balance at January 1, 1996 $5,736 $233,940 $408,791 $8,650 $(153,053) $504,064
Comprehensive income (loss):
Net loss --- --- (69,112) --- --- (69,112)
Other comprehensive income (loss):
Unrealized holding gain on
securities of affiliate --- --- --- 6,858 --- 6,858
Foreign currency translation
adjustments --- --- --- ( 2,601) --- ( 2,601)
--------
Comprehensive loss --- --- --- --- --- (64,855)
========

Issuance of 352,759 shares under
employee stock purchase plan --- (1,594) --- --- 5,143 3,549
Issuance of 53,898 shares upon
exercise of stock options --- ( 501) --- --- 786 285
Issuance of 438,357 shares in
connection with a professional
services agreement --- (2,390) --- --- 6,390 4,000
Other --- 220 --- --- --- 220
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,736 229,675 339,679 12,907 (140,734) 447,263

Comprehensive income (loss):
Net loss --- --- (70,237) --- --- (70,237)
Other comprehensive income (loss):
Net unrealized holding loss
on securities of affiliate --- --- --- ( 6,858) --- ( 6,858)
Foreign currency translation
adjustments --- --- --- ( 4,959) --- ( 4,959)
--------
Comprehensive loss --- --- --- --- --- (82,054)
========

Issuance of 432,263 shares under
employee stock purchase plan --- (3,149) --- --- 6,301 3,152
Issuance of 40,187 shares upon
exercise of stock options --- ( 255) --- --- 586 331
Other --- 91 --- --- --- 91
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 5,736 226,362 269,442 1,090 (133,847) 368,783

Comprehensive income (loss):
Net loss --- --- (19,634) --- --- (19,634)
Other comprehensive income -
foreign currency translation
adjustments --- --- --- 3,071 --- 3,071
--------
Comprehensive loss --- --- --- --- --- (16,563)
========

Issuance of 464,230 shares under
employee stock purchase plan --- (3,829) --- --- 6,769 2,940
Other --- 172 --- --- --- 172
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $5,736 $222,705 $249,808 $4,161 $(127,078) $355,332
===============================================================================================================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation: The consolidated financial statements
include the accounts of Intergraph Corporation and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with
generally accepted accounting principles requires that management
make estimates and assumptions that affect the amounts reported in
the financial statements and determine whether contingent assets
and liabilities, if any, are disclosed in the financial statements.
The ultimate resolution of issues requiring these estimates and
assumptions could differ significantly from the resolution
currently anticipated by management and on which the financial
statements are based.

Effective January 1, 1998, the Company divided its business into
four separate units for operational and management purposes:
Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc.
(IPS), VeriBest, Inc., and the Software and Federal Systems
business (Intergraph). ICS supplies high performance Windows NT-
based graphics workstations and PCs, 3D graphics subsystems,
servers, and other hardware products. IPS develops, markets, and
implements systems for public safety agencies. VeriBest serves the
electronics design automation market, providing software design
tools, design processes, and consulting services to developers of
electronic systems. Intergraph supplies software and solutions,
including hardware, consulting, and services to the federal
government and to the process and building and infrastructure
industries. The Company's products are sold worldwide, with United
States and European revenues representing approximately 80% of
total revenues for 1998. See Note 11 for further information
regarding the Company's operating segments and the geographic
markets it serves.

The Company's hardware products and integrated software applications
are used for computer-aided design, manufacturing, and engineering,
mapping and geographic information services, public safety, and
technical information management in technical fields such as utilities,
facilities management, architecture, engineering, construction,
mechanical, and electronics design, and mapping and geographic
information systems.

Cash Equivalents: The Company's excess funds are generally
invested in short-term, highly liquid, interest-bearing securities,
which may include short-term municipal bonds, time deposits, money
market preferred stocks, commercial paper, and U.S. government
securities. The Company's investment policy limits the amount of
credit exposure to any single issuer of securities. All cash
equivalents are stated at fair market value based on quoted market
prices. Investments with original maturities of three months or
less are considered to be cash equivalents for purposes of
financial statement presentation.

The Company's investments in debt securities are valued at fair
market value with any unrealized gains and losses reported as a
component of shareholders' equity, net of tax. At December 31,
1998 and 1997, the Company held various debt securities, all within
three months of maturity at those dates, with fair market values of
$54,000,000 and $10,000,000, respectively. Gross realized gains
and losses on debt securities sold during the years ended December
31, 1998 and 1997 were not significant, and there were no
unrealized holding gains or losses on debt securities at December
31, 1998 or 1997.

Inventories: Inventories are stated at the lower of average cost
or market and are summarized as follows:

- --------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------
(In thousands)

Raw materials $ 2,739 $ 35,799
Work-in-process 3,594 37,357
Finished goods 15,597 11,760
Service spares 16,071 20,116
- --------------------------------------------------------
Totals $38,001 $105,032
========================================================

On November 13, 1998, the Company sold substantially all of its
U.S. manufacturing assets (including inventories with a book value
of approximately $60,000,000) to SCI Technology Inc. (SCI), a
wholly owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. For a complete description of this
transaction, see "SCI" included in Management's Discussion and
Analysis of Financial Condition and Results of Operations on page
20 of this annual report.

The industry in which the Company competes is characterized by
rapid technological change. This technological change is an
important consideration in the Company's overall inventory
management program, in which the Company endeavors to carry only
parts and systems utilizable with the technology of its current
product offerings and as spares for the contracted maintenance of
systems in its installed customer base. The Company regularly
estimates the degree of technological obsolescence in its
inventories and provides inventory reserves on that basis. Though
the Company believes it has adequately provided for any such
declines in inventory value to date, any unanticipated change in
technology could significantly affect the value of the Company's
inventories and thereby adversely affect gross margins and results
of operations. In addition, an inability by the Company to
accurately forecast its manufacturing requirements of SCI could
adversely affect gross margin and results of operations.

Investments in Affiliates: Investments in companies in which the
Company believes it has the ability to influence operations or
finances are accounted for by the equity method. Investments in
companies in which the Company does not exert such influence are
accounted for at fair value if such values are readily determinable,
and at cost if such values are not readily determinable. Effective
January 1, 1998, the Company ceased accounting for its investment
in Bentley Systems, Inc., an approximately 50%-owned affiliate of
the Company, under the equity method due to a lack of significant
influence. See Note 12 and "Litigation and Other Risks and
Uncertainties" included in Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 20 to 24
of this annual report for further discussion of the Company's
arbitration proceedings and business relationship with Bentley.
The book value of the Company's investment in Bentley was
approximately $12,700,000 at December 31, 1998. The Company is
unable to determine the fair value of that investment.

During 1997, the Company sold its stock investment in a publicly
traded affiliate at a gain of $4,858,000. At December 31, 1996,
the unrealized gain on this investment resulting from periodic mark-
to-market adjustments totaled $6,858,000 and was included in
"Investments in affiliates" and "Unrealized holding gain on
securities of affiliate" in the consolidated balance sheet at that
date. During 1996, the Company sold stock investments in
affiliated companies for a total gain of $11,173,000. These gains
are included in "Gains on sales of assets" in the consolidated
statements of operations.

Internal Use Software: In March 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, which defines computer software costs to be
capitalized or expensed to operations. The Statement is effective
for fiscal year 1999 for the Company. Implementation of this new
accounting standard is not expected to have a material impact on
the Company's consolidated operating results or financial position
as the Company has historically been in substantial compliance with
the practice required by the Statement.

Property, Plant, and Equipment: Property, plant, and equipment,
summarized below, is stated at cost. Depreciation is provided
using the straight line method over the estimated useful lives
described below.

- --------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------
(In thousands)

Land and improvements (15-30 years) $ 13,948 $ 13,664
Buildings and improvements (30 years) 132,759 136,517
Equipment, furniture, and fixtures (3-8 years) 239,735 290,217
- --------------------------------------------------------------------------
386,442 440,398
Allowances for depreciation (259,074) (289,775)
- --------------------------------------------------------------------------
Totals $127,368 $150,623
==========================================================================

Treasury Stock: Treasury stock is accounted for by the cost
method. The Board of Directors of the Company has authorized the
purchase of up to 20,000,000 shares of the Company's common stock
in the open market. As of December 31, 1998, the Company had
purchased approximately 18,800,000 shares for the treasury with the
last purchase occurring in 1994. Further purchases of stock for
the treasury are restricted by terms of the Company's term loan and
revolving credit agreement. See Note 7. Treasury stock activity
is presented in the consolidated statements of shareholders' equity.

Revenue Recognition: Revenues from systems sales with no
significant post-shipment obligations are recognized as equipment
and/or software are shipped, with any post-shipment costs accrued
at that time. Revenues on systems sales with significant post-
shipment obligations, including the production, modification, or
customization of software, are recognized by the percentage-of-
completion method, with progress to completion measured on the
basis of completion of milestones, labor costs incurred currently
versus the total estimated cost of performing the contract over its
term, or other factors appropriate to the individual contract of
sale. The total amount of revenues to be earned under these
contracts is generally fixed by contractual terms. The Company
regularly reviews its progress on these contracts and revises the
estimated costs of fulfilling its obligations. Due to
uncertainties inherent in the estimation process, it is possible
that completion costs will be further revised on some of the
Company's long-term contracts, which could delay revenue
recognition and decrease the gross margin to be earned on these
contracts. Any losses identified in the review process are
recognized in full in the period in which determined.

Revenues from certain contracts with the U.S. government, primarily
cost-plus award fee contracts, are recognized monthly as costs are
incurred and fees are earned under the contracts.

Maintenance and services revenues are recognized ratably over the
lives of the maintenance contracts or as services are performed.

Effective January 1, 1998, the Company adopted American Institute
of Certified Public Accountants Statement of Position 97-2,
Software Revenue Recognition. The Statement requires each element
of a software sale arrangement to be separately identified and
accounted for based on the relative fair value of each element.
Revenue cannot be recognized on any element of the sale arrangement
if undelivered elements are essential to functionality of the
delivered elements. Adoption of this new accounting standard did
not significantly affect the Company's 1998 results of operations
since the Company's revenue recognition policies have historically
been in substantial compliance with the practices required by the
new pronouncement.

Billings may not coincide with the recognition of revenue.
Unbilled accounts receivable occur when revenue recognition
precedes billing to the customer, and arise primarily from
commercial sales with predetermined billing schedules, U.S.
government sales with billing at the end of a performance period,
and U.S. government cost-plus award fee contracts. Billings in
excess of sales occur when billing to the customer precedes revenue
recognition, and arise primarily from maintenance revenue billed in
advance of performance of the maintenance activity and systems
revenue recognized on the percentage-of-completion method.

Product Development Costs: The Company capitalizes certain costs
of computer software development incurred after the technological
feasibility of the product has been established. Such capitalized
costs are amortized on a straight-line basis over a period of two
to five years. Amortization of these capitalized costs, included
in "Cost of revenues - Systems" in the consolidated statements of
operations, amounted to $15,500,000 in 1998, $13,600,000 in 1997,
and $16,100,000 in 1996. The unamortized balance of these
capitalized costs, included in "Other assets" in the consolidated
balance sheets, totaled $23,000,000 and $23,300,000 at December 31,
1998 and 1997, respectively.

Although the Company regularly reviews its capitalized development
costs to ensure recognition of any decline in value, it is possible
that, for any given product, revenues will not materialize in
amounts anticipated due to industry conditions that include intense
price and performance competition, or that product lives will be
reduced due to shorter product cycles. Should either of these
events occur, the carrying amount of capitalized development costs
would be reduced, producing adverse effects on systems cost of
revenues and results of operations.

Foreign Currency Exchange and Translation: Local currencies are
the functional currencies for the Company's European subsidiaries.
The U.S. dollar is the functional currency for all other
international subsidiaries. Foreign currency gains and losses
resulting from remeasurement or settlement of receivables and
payables denominated in a currency other than the functional
currency, together with gains and losses and fees paid in
connection with the Company's forward exchange contracts, are
included in "Other income (expense) - net" in the consolidated
statements of operations. Net exchange gains (losses) totaled
$800,000 in 1998, ($2,700,000) in 1997, and ($4,600,000) in 1996.
Translation gains and losses resulting from translation of
subsidiaries' financial statements from the functional currency
into dollars for U.S. reporting purposes and foreign currency gains
and losses resulting from remeasurement of intercompany advances of
a long-term investment nature are included in the "Accumulated
other comprehensive income - cumulative translation adjustment"
component of shareholders' equity.

Derivative Financial Instruments: Derivatives utilized by the
Company consist of forward exchange contracts and interest rate
swap agreements. The Company is prohibited by policy from taking
derivative positions exceeding its known balance sheet exposures
and from otherwise trading in derivative financial instruments.

The Company conducts business in all major markets outside the
U.S., but the most significant of these operations with respect to
currency risk are located in Europe and Asia. With respect to the
currency exposures in these regions, the objective of the Company
is to protect against financial statement volatility arising from
changes in exchange rates with respect to amounts denominated for
balance sheet purposes in a currency other than the functional
currency of the local entity. The Company will therefore enter
into forward exchange contracts related to certain balance sheet
items, primarily intercompany receivables, payables, and formalized
intercompany debt, when a significant risk has been identified.
Periodic changes in the value of these contracts offset exchange
rate related changes in the financial statement value of these
balance sheet items. Forward exchange contracts are purchased with
maturities reflecting the expected settlement dates of the balance
sheet items being hedged, which are generally less than three
months, and only in amounts sufficient to offset possible
significant currency rate related changes in the recorded values of
these balance sheet items. The Company does not generally hedge
the exposures related to other foreign currency denominated assets
and liabilities, unless a significant risk has been identified.
Forward exchange contracts are accounted for under the fair value
method. Under this method, realized and unrealized gains and
losses on forward exchange contracts are recognized as offsets to
gains and losses resulting from the underlying hedged transactions
in the period in which exchange rates change and are included in
"Other income (expense) - net" in the consolidated statements of
operations. Bank fees charged on the contracts are amortized over
the period of the contract. Gain or loss on termination of a
forward exchange contract is recognized in the period in which the
contract is terminated. In the event of early settlement of a
hedged intercompany asset or liability, the related forward
exchange contract gains or losses are recognized in the period in
which exchange rates change.

The Company enters into interest rate swap agreements to reduce the
risk of increases in interest rates on certain of its outstanding
floating rate debt. The Company enters into agreements in which
the principal and term of the interest rate swap match those of the
specific debt obligation being hedged. The Company pays a fixed
rate of interest and receives payment based on a variable rate of
interest, and is thus exposed to market risk of potential decreases
in interest rates. Interest rate swap agreements are accounted for
under the accrual method. Under this method, the differences in
amounts paid and received under interest rate swap agreements are
recognized in the period in which the payments and receipts occur
and are included in "Interest expense" in the consolidated
statements of operations. Gain or loss on termination of an
interest rate swap agreement is deferred and amortized as an
adjustment to interest expense over the remaining term of the
original contract life of the terminated swap agreement. In the
event of early extinguishment of a debt obligation, any realized or
unrealized gain or loss on the related swap agreement is recognized
in income coincident with the extinguishment gain or loss.

Amounts payable to or receivable from counterparties related to
derivative financial instruments are included in "Other accrued
expenses" or "Other current assets" in the consolidated balance
sheets. These amounts were not significant at December 31, 1998 or
1997.

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, requiring companies
to recognize all derivatives as either assets or liabilities on the
balance sheet and to measure the instruments at fair value. This
statement is effective for fiscal year 2000 for the Company.
Implementation of this new accounting standard is not expected to
have a material impact on the Company's consolidated operating
results or financial position.

See Note 4 for further details of the Company's derivative
financial instruments.

Stock-Based Compensation Plans: The Company maintains a stock
purchase plan and two fixed stock option plans for the benefit of
its employees.

Under the stock purchase plan, employees purchase stock of the
Company at 85% of the closing market price of the Company's stock
as of the last pay date of each calendar month. No compensation
expense is recognized for the difference in price paid by employees
and the fair market value of the Company's stock at the date of
purchase.

Under the fixed stock option plans, stock options may be granted to
directors and other employees at fair market value or at a price
less than fair market value at the date of grant. No compensation
expense is recognized for options granted at fair market value.
Expense associated with grants at less than fair market value,
equal to the difference in exercise price and fair market value at
the date of grant, is recognized over the vesting period of the
options.

In accordance with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company has provided pro forma basis information
to reflect results of operations and earnings per share had
compensation expense been recognized for employee stock purchases
and for stock options granted at market value at date of grant.
See Note 9.

Income Taxes: The provision for income taxes includes federal,
international, and state income taxes currently payable or
refundable and income taxes deferred because of temporary
differences between the financial statement and tax bases of assets
and liabilities. See Note 8.

Net Loss Per Share: Basic loss per share is computed using the
weighted average number of common shares outstanding. Diluted loss
per share is computed using the weighted average common and
equivalent common shares outstanding. Employee stock options are
the Company's only common stock equivalent and are included in the
calculation only if dilutive (see Note 9). Weighted average common
and equivalent common shares outstanding for both the basic and
diluted loss per share calculations for the years ended December
31, 1998, 1997, and 1996, were 48,376,000, 47,945,000, and
47,195,000, respectively.

Comprehensive Income: Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Under this Statement, all nonowner
changes in equity during a period are reported as a component of
comprehensive income (loss). With respect to the Company, such
nonowner equity items include foreign currency translation
adjustments and unrealized gains and losses on certain investments
in debt and equity securities. The Company's comprehensive losses
for the three years ended December 31, 1998 are displayed in the
Consolidated Statements of Shareholders' Equity. Accumulated other
comprehensive income at the end of each of these three years
consisted of foreign currency translation adjustments, with the
exception of the December 31, 1996 balance which also included a
$6,858,000 unrealized holding gain on securities of an affiliate.
There was no income tax effect related to any of the items included
in other comprehensive income for any of the three years in the
period ended December 31, 1998. See Note 8 for details of the
Company's tax position, including net operating loss carryforwards,
and its policy for reinvestment of subsidiary earnings.

Reclassifications: Certain reclassifications have been made to the
previously reported consolidated statements of operations and cash
flows for the years ended December 31, 1997 and 1996 to provide
comparability with the current year presentation.

NOTE 2 -- LITIGATION AND OTHER RISKS AND UNCERTAINTIES.
In addition to those described in Notes 1, 4, 6, 7, and 11, the
Company has certain risks related to its business and economic
environment, and has extensive ongoing litigation as described in
"Litigation and Other Risks and Uncertainties" included in
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 20 to 24 of this annual report.

NOTE 3 -- NONRECURRING OPERATING CHARGES.
The Company recorded nonrecurring operating charges totaling
$15,843,000 in 1998, $1,095,000 in 1997, and $10,545,000 in 1996.
For a complete description of these charges, see "Nonrecurring
Operating Charges" included in Management's Discussion and Analysis
of Financial Condition and Results of Operations on page 19 of
this annual report.

NOTE 4 -- FINANCIAL INSTRUMENTS.
Information related to the Company's financial instruments, other
than cash equivalents and stock investments in less than 50%-owned
companies, is summarized below.

Short- and Long-Term Debt: The balance sheet carrying amounts of
the Company's floating rate debt (approximately $73,000,000 at
December 31, 1998), consisting primarily of loans under a revolving
credit agreement, mortgages, and a term loan (see Note 7),
approximate fair market values since interest rates on the debt
adjust periodically to reflect changes in market rates of interest.
With the exception of the Australian term loan (see Note 7), the
Company is exposed to market risk of future increases in interest
rates on these loans. The carrying amounts of fixed rate debt
approximate fair market values based on current interest rates for
debt of the same remaining maturities and character.

Forward exchange contracts: Outstanding notional amounts for the
Company's forward exchange contracts were $7,586,000 and
$37,357,000 at December 31, 1998 and 1997, respectively. The table
below summarizes in U.S. dollars the face amounts of these
contracts by major currency. For purposes of presentation, foreign
currency amounts are translated to dollars at the rates in effect
at each balance sheet date. "Sell" amounts represent the U.S.
dollar equivalent of commitments to sell currencies, and "buy"
amounts represent the U.S. dollar equivalent of commitments to
purchase currencies.

- -------------------------------------------------------------------------------
December 31, 1998 1997
---------------------------- ---------------------------
Net Forward Net Forward
Contract Contract
Sell Buy Position Sell Buy Position
- -------------------------------------------------------------------------------
(In thousands)

German mark $--- $ --- $ --- $22,536 $ 5,217 $17,319
Italian lira --- --- --- 12,271 814 11,457
British pound --- 2,690 (2,690) 7,573 8,827 (1,254)
French franc --- --- --- 4,362 1,836 2,526
Swiss franc --- 3,986 (3,986) 1,564 5,386 (3,822)
Spanish peseta --- --- --- 1,407 1,296 111
Belgian franc 362 --- 362 1,254 230 1,024
Other currencies --- 1,272 (1,272) 14,354 4,358 9,996
- -------------------------------------------------------------------------------
Totals $362 $7,948 $(7,586) $65,321 $27,964 $37,357
===============================================================================

These notional amounts do not necessarily represent amounts to be
exchanged between the Company and the counterparties to the forward
exchange contracts, and as such, they do not represent the amount
of the Company's currency related exposures at those dates. The
amounts potentially subject to risk, arising from the possible
inability of the counterparties to meet the terms of the contracts,
are generally limited to the amounts, if any, by which the
counterparties' obligations exceed those of the Company. Net
receivables from/payables to counterparties related to forward
exchange contracts were not significant at December 31, 1998 or
1997. These carrying amounts approximated fair value at those
dates due to the short duration (generally three months or less) of
the contracts.

Forward exchange contracts outstanding at December 31, 1998 relate
solely to formalized intercompany loans between the Company's
European subsidiaries. Contracts outstanding at December 31, 1997
included hedges relating to intercompany loans between the U.S. and
Europe. As of first quarter 1998, the Company is no longer hedging
its U.S. exposures related to foreign currency denominated
intercompany loans.

Based on the terms of outstanding forward exchange contracts and
the amount of the related balance sheet exposures at December 31,
1998 and 1997, the Company's results of operations would not be
materially affected by a 10% increase or decrease in exchange rates
underlying the contracts and the exposures hedged. Cash
requirements of forward exchange contracts are limited to receipt
of an amount equal to the exchange gain or payment of an amount
equal to the exchange loss at the contract settlement date, and
payment of bank fees related to the contracts. Net cash flow from
forward contract activity, consisting of realized gains and losses
from settlement of exposed assets and liabilities at exchange rates
in effect at the settlement date rather than at the time of
recording, settlement of the forward contracts purchased to
mitigate the exposures, and payment of bank fees on the forward
contracts, was not significant for any year in the three year
period ended December 31, 1998.

Interest rate swap agreements: In 1996, the Company entered into
an interest rate swap agreement in the principal amount of its
Australian term loan agreement (approximately $10,000,000 at
December 31, 1998). The agreement is for a period of approximately
six years, and its expiration date coincides with that of the term
loan. Under the agreement, the Company pays a 9.58% fixed rate of
interest and receives payment based on a variable rate of interest.
The weighted average receive rate of the agreement at December 31,
1998 and 1997 was 6.54% and 6.49%, respectively. The fair market
value of this interest rate swap agreement at December 31, 1998 was
approximately $600,000. Fair market value was determined by
obtaining a bank quote and represents the amount the Company would
pay should the Company's obligation under the instrument be
transferred to a third party at the reporting date. Cash
requirements of the Company's interest rate swap agreement are
limited to the differential between the fixed rate paid and the
variable rate received.

NOTE 5 -- SUPPLEMENTARY CASH FLOW INFORMATION.
Changes in current assets and liabilities, net of the effects of
business divestitures and nonrecurring operating charges, in
reconciling net loss to net cash provided by (used for) operations
are as follows:

- -------------------------------------------------------------------------------
Cash Provided By (Used For) Operations
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands)

(Increase) decrease in:
Accounts receivable $16,939 $(25,624) $(8,547)
Inventories 7,580 (21,296) 21,299
Other current assets 8,706 9,905 11,810
Increase (decrease) in:
Trade accounts payable 2,600 11,449 (1,513)
Accrued compensation and other
accrued expenses (1,649) 4,123 (5,344)
Billings in excess of sales 562 7,870 ( 268)
- -------------------------------------------------------------------------------
Net changes in current assets and liabilities $34,738 $(13,573) $17,437
===============================================================================

Cash payments for income taxes totaled $5,200,000, $6,100,000, and
$4,900,000 in 1998, 1997, and 1996, respectively. Cash payments
for interest in those years totaled $7,700,000, $6,400,000, and
$5,000,000, respectively.

Significant noncash investing and financing transactions in 1998
included the sale of assets in part for a deferred installment
payment of approximately $20,000,000. (See Note 14.) Investing
and financing transactions in 1997 that did not require cash
included the sale of two noncore business units of the Company in
part for notes receivable and future royalties totaling $3,950,000.
Investing and financing transactions in 1996 that did not require
cash included the issuance of 438,357 shares of the Company's
common stock with a fair market value of $4,000,000 in connection
with a professional services agreement related to the Company's
efforts to build its public safety business in the Asia Pacific
region and a $6,858,000 favorable mark-to-market adjustment of an
investment in an affiliated company.

NOTE 6 -- ACCOUNTS RECEIVABLE.
Concentrations of credit risk with respect to accounts receivable
are limited due to the diversity of the Company's customer base.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
Historically, the Company has not experienced significant losses
related to trade receivables from individual customers or from
groups of customers in any geographic area, with the exception of
the 1994 write-off of a $5,500,000 receivable from a Middle Eastern
customer. The Company's total accounts receivable from Middle
Eastern customers approximated $22,900,000 at December 31, 1998,
and $20,700,000 at December 31, 1997.

Revenues from the U.S. government were $166,100,000 in 1998,
$177,100,000 in 1997, and $160,800,000 in 1996, representing
approximately 16% of total revenue in 1998 and 1997, and 15% in
1996. Accounts receivable from the U.S. government was
approximately $55,200,000 and $52,500,000 at December 31, 1998 and
1997, respectively. The Company sells to the U.S. government under
long-term contractual arrangements, primarily indefinite delivery,
indefinite quantity and cost-plus award fee contracts, and through
commercial sales of products not covered by long-term contracts.
Approximately 44% of total federal government revenues are earned
under long-term contracts. The Company believes its relationship
with the federal government to be good. While it is fully
anticipated that these contracts will remain in effect through
their expiration, the contracts are subject to termination at the
election of the government. Any loss of a significant government
contract would have an adverse impact on the results of operations
of the Company.

Accounts receivable includes unbilled amounts of $77,400,000 and
$80,900,000 at December 31, 1998 and 1997, respectively. These
amounts include amounts due under long-term contracts of
approximately $25,000,000 and $35,000,000, at December 31, 1998 and
1997, respectively.

The Company maintained reserves for uncollectible accounts,
included in "Accounts receivable" in the consolidated balance
sheets at December 31, 1998 and 1997, of $13,800,000 and
$14,500,000, respectively.

NOTE 7 -- DEBT AND LEASES.
Short- and long-term debt is summarized as follows:

- ----------------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------
(In thousands)

Revolving credit agreement and term loan $39,461 $ 64,640
Australian term loan 9,963 13,237
Long-term mortgages 20,712 10,323
Other secured debt 9,210 10,187
Short-term credit facilities 3,312 5,153
Other 555 1,125
- ----------------------------------------------------------------------
Total debt 83,213 104,665
Less amounts payable within one year 23,718 50,409
- ----------------------------------------------------------------------
Total long-term debt $59,495 $ 54,256
======================================================================

Under the Company's January 1997 four year fixed term loan and
revolving credit agreement, available borrowings are determined by
the amounts of eligible assets of the Company (the "borrowing
base"), as defined in the agreement, including accounts receivable
and inventory, with maximum borrowings of $125,000,000. The
$25,000,000 term loan portion of the agreement is due at expiration
of the agreement. Borrowings are secured by a pledge of
substantially all of the Company's assets in the U.S. The rate of
interest on all borrowings under the agreement is the greater of 7%
or the Norwest Bank Minnesota National Association base rate of
interest (7.75% at December 31, 1998) plus .625%. The average
effective rate of interest was 9.1% for the period of time in 1998
during which the Company had outstanding borrowings under this
agreement. The agreement requires the Company to pay a facility
fee at an annual rate of .15% of the amount available under the
credit line, an unused credit line fee at an annual rate of .25% of
the average unused portion of the revolving credit line, and a
monthly agency fee. At December 31, 1998, the Company had
outstanding borrowings of $39,461,000, the $25,000,000 term loan
portion of which was classified as long-term debt in the
consolidated balance sheet, and an additional $31,600,000 of the
available credit line was allocated to support letters of credit
issued by the Company and the Company's forward exchange contracts.
As of this same date, the borrowing base, representing the maximum
available credit under the line, was approximately $90,000,000
($78,000,000 at February 26, 1999).

The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures.
In addition, the agreement includes restrictive covenants that
limit or prevent various business transactions (including
repurchases of the Company's stock, dividend payments, mergers,
acquisitions of or investments in other businesses, and disposal of
assets including individual businesses, subsidiaries, and
divisions) and limit or prevent certain other business changes.

In October 1998, the term loan and security agreement was amended
to incorporate the sale of the Company's manufacturing assets to
SCI and to modify the borrowing base accordingly. This transaction
has resulted in an approximate $15,000,000 borrowing base
reduction, primarily for eligible inventories that were sold to
SCI.

In August 1995, the Company entered into a term loan agreement with
an Australian bank totaling 35,000,000 Australian dollars
(approximately $23,000,000). The loan is payable in varying
installments through August 2002 and bears interest at the bank's
variable short-term lending rate, which ranged from 4.9% to 5.36%
in 1998 (5.8% to 7.1% in 1997). Letters of credit totaling
approximately $10,000,000 are pledged as security under the loan
agreement. During 1996, the Company entered into a six-year
interest rate swap agreement in the amount of the term loan to
reduce the risk of increases in interest rates, effectively
converting the interest rate on this loan to a fixed rate of 9.58%.

The Company has three long-term mortgages on certain of its
European facilities, payable in varying installments through the
year 2010. Two of the mortgages bear interest at the floating
Amsterdam Interbank Offering Rate, which ranged from 3.3% to 3.7%
in 1998 (3.1% to 3.8% in 1997), plus 1%. The third mortgage, which
was entered into in December 1998, bears interest at the United
Kingdom base rate (6.25% at December 31, 1998) plus 1%. The amount
borrowed under this mortgage totals approximately $10,500,000.

Other secured debt consists of debt to various financial
institutions payable in varying installments through 2017 and
secured by certain assets of the Company, including facilities and
internally used computer equipment. In March of 1997, the Company
entered into an agreement for the sale and leaseback of one of its
facilities. The amount borrowed totals approximately $8,400,000
and is payable over a period of 20 years at an implicit rate of
interest of 10.7%. The weighted average interest rate on this and
all other secured debt was approximately 11.0% for 1998 and 11.2%
for 1997.

See Note 4 for discussion of fair values of the Company's debt and
interest rate swap agreements.

The Company leases various property, plant, and equipment under
operating leases as lessee. Rental expense for operating leases
was $26,600,000 in 1998, $30,400,000 in 1997, and $34,200,000 in
1996. Subleases and contingent rentals are not significant.
Future minimum lease payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining terms of
one year or more are as follows:

- ------------------------------------------------------
Operating
Lease Commitments
- ------------------------------------------------------
(In thousands)

1999 $20,600
2000 14,600
2001 8,900
2002 5,500
2003 3,600
Thereafter 23,100
- ------------------------------------------------------
Total future minimum lease payments $76,300
======================================================

NOTE 8 -- INCOME TAXES.
The components of loss before income taxes are as follows:

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

U.S. $( 4,008) $(57,527) $(42,381)
International ( 9,626) ( 8,710) (23,731)
- -------------------------------------------------------------------
Total loss before income taxes $(13,634) $(66,237) $(66,112)
===================================================================

Income tax expense consists of the following:

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

Current benefit (expense):
Federal $(3,353) $ 1,400 $ 3,351
International (2,552) (3,845) (3,855)
- -------------------------------------------------------------------
Total current (5,905) (2,445) ( 504)
- -------------------------------------------------------------------
Deferred benefit (expense):
Federal --- (1,726) (2,447)
International ( 95) 171 ( 49)
- -------------------------------------------------------------------
Total deferred ( 95) (1,555) (2,496)
- -------------------------------------------------------------------
Total income tax expense $(6,000) $(4,000) $(3,000)
===================================================================

Deferred income taxes included in the Company's balance sheet
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax return purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows:

- ------------------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------------------
(In thousands)

Current Deferred Tax Assets (Liabilities):
Inventory reserves $13,348 $ 15,235
Vacation pay and other employee benefit accruals 5,705 5,617
Other financial statement reserves, primarily
allowances for doubtful accounts and warranty 10,333 9,226
Profit on uncompleted sales contracts 3,074 ( 1,759)
Other current tax assets and liabilities, net ( 1,298) ( 5,916)
- -----------------------------------------------------------------------------
31,162 22,403
Less asset valuation allowance (28,344) (22,275)
- -----------------------------------------------------------------------------
Total net current asset (1) 2,818 128
- -----------------------------------------------------------------------------

Noncurrent Deferred Tax Assets (Liabilities):
Net operating loss and tax credit carryforwards:
U.S. federal and state 56,636 78,559
International operations 43,555 40,316
Depreciation ( 8,116) ( 9,907)
Capitalized software development costs ( 7,281) ( 7,604)
Other noncurrent tax assets and liabilities, net 3,194 ( 7,051)
- -----------------------------------------------------------------------------
87,988 94,313
Less asset valuation allowance (91,130) (94,773)
- -----------------------------------------------------------------------------
Total net noncurrent liability ( 3,142) ( 460)
- -----------------------------------------------------------------------------
Net deferred tax liability $( 324) $( 332)
=============================================================================
(1) Included in "Other current assets" in the consolidated balance sheets.

The valuation allowance for deferred tax assets, which consists
primarily of reserves against the tax benefit of net operating loss
carryforwards, increased by $2,426,000 in 1998 due to increases in
deferred tax assets of $21,118,000 arising from changes in
deductible temporary differences, offset by related reductions in
the benefit from net operating loss carryforwards of $18,684,000.
If realized these reserved tax benefits will be applied to reduce
income tax expense in the year of realization.

Net operating loss carryforwards are available to offset future
earnings within the time periods specified by law. At December 31,
1998, the Company had a U.S. federal net operating loss
carryforward of approximately $119,000,000 expiring from the year
2010 through 2012. International net operating loss carryforwards
total approximately $113,000,000 and expire as follows:

- -------------------------------------------------------
International
Net Operating Loss
December 31, 1998 Carryforwards
- -------------------------------------------------------
(In thousands)

Expiration:
3 years or less $ 20,000
4 to 5 years 18,000
6 to 10 years 5,000
Unlimited carryforward 70,000
- -------------------------------------------------------
Total $113,000
=======================================================

Additionally, the Company has $4,100,000 of U.S. alternative
minimum tax credit carryforward which has no expiration date. U.S.
research and development tax credit carryforwards of $7,800,000 are
available to offset regular tax liability through 2012.

A reconciliation from income tax benefit at the U.S. federal
statutory tax rate of 35% to the Company's income tax expense is as
follows:

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

Income tax benefit at federal statutory rate $ 4,772 $ 23,183 $ 23,139
Benefit from Foreign Sales Corp. (FSC) 44 150 1,963
Alternative minimum tax ( 453) --- ---
Tax effects of international operations, net (7,672) ( 5,617) ( 8,657)
Tax effect of U.S. tax loss carried forward 1,670 (23,205) (23,752)
Prior year taxes (2,482) 1,165 4,712
Other - net (1,879) 324 ( 405)
- -------------------------------------------------------------------------------
Income tax expense $(6,000) $( 4,000) $( 3,000)
===============================================================================

The Company does not provide for federal income taxes or tax
benefits on the undistributed earnings or losses of its
international subsidiaries, because earnings are reinvested and, in
the opinion of management, will continue to be reinvested
indefinitely. At December 31, 1998, the Company had not provided
federal income taxes on earnings of individual international
subsidiaries of approximately $41,000,000. Should these earnings
be distributed in the form of dividends or otherwise, the Company
would be subject to both U.S. income taxes and withholding taxes
in the various international jurisdictions. Determination of the
related amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its
hypothetical calculation. Withholding of approximately $2,000,000
would be payable if all previously unremitted earnings as of
December 31, 1998, were remitted to the U.S. company.

NOTE 9 -- STOCK-BASED COMPENSATION PLANS.
The Intergraph Corporation 1997 Stock Option Plan was approved by
shareholders in May 1997. Under this plan, the Company reserved a
total of 3,000,000 shares of common stock to grant as options to
key employees. Options may be granted at fair market value or at a
price less than fair market value on the date of grant. Options
are not exercisable prior to twenty four months from the date of
grant or later than ten years after the date of grant. At December
31, 1998, 741,250 shares were available for future grants.

The Intergraph Corporation Nonemployee Director Stock Option Plan
was approved by shareholders in May 1998. The Company has reserved
a total of 250,000 shares of common stock to grant as options under
this plan. The exercise price of each option granted is the fair
market value on the date of grant. Options are not exercisable
prior to one year from the date of grant or later than ten years
after the date of grant. Upon approval of this plan, members of
the Company's Board of Directors who were not otherwise employed by
the Company were granted options to purchase 3,000 shares of the
Company's common stock. Any new nonemployee director will be
granted an option to purchase 3,000 shares of common stock upon his
or her first election to the Board. At each annual meeting of
shareholders thereafter, each nonemployee director elected to the
Board will also be granted an option to purchase 1,500 shares of
the Company's common stock. At December 31, 1998, 238,000 shares
were available for future grants.

Under the 1995 Employee Stock Purchase Plan, 3,200,000 shares of
common stock were made available for purchase through a series of
five consecutive annual offerings each June beginning June 1, 1995.
In order to purchase stock, each participant may have up to 10% of
his or her pay, not to exceed $25,000 in any offering period,
withheld through payroll deductions. All full time employees,
except members of the Administrative Committee of the Plan, are
eligible to participate. The purchase price of each share is 85%
of the closing market price of the Company's common stock on the
last pay date of each calendar month. Employees purchased 464,230,
432,263, and 352,759, shares of stock in 1998, 1997, and 1996,
respectively, under the 1995 and predecessor Plans. At December
31, 1998, 1,759,234 shares were available for future purchases.

As allowed under the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company has elected to apply
Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in
accounting for its stock-based plans. Accordingly, the Company has
recognized no compensation expense for these plans. Had the
Company accounted for its stock-based compensation plans based on
fair value of awards at grant date consistent with the methodology
of SFAS 123, the Company's net loss and loss per share would have
been increased as indicated below. The effects of applying SFAS
123 on a pro forma basis for the three years in the period ended
December 31, 1998 are not likely to be representative of the
effects on reported pro forma net income (loss) for future years as
the estimated compensation costs reflect only options granted
subsequent to December 31, 1994.

Net loss As reported $(19,634) $(70,237) $(69,112)
Pro forma $(21,496) $(72,497) $(71,447)

Basic and diluted loss per share As reported $( .41) $( 1.46) $( 1.46)
Pro forma $( .44) $( 1.51) $( 1.51)
================================================================================

Under the methodology of SFAS 123, the fair value of the Company's
fixed stock options was estimated at the date of grant using the
Black Scholes option pricing model. The multiple option approach
was used, with assumptions for expected option life of 1.38 years
after vest date in 1998 (1.38 years in 1997 and 1.39 years in 1996)
and 45% expected volatility for the market price of the Company's
stock in 1998 (43% in 1997 and 40% in 1996). Dividend yield is
excluded from the calculation since it is the present policy of the
Company to retain all earnings to finance operations. Risk free
interest rates were determined separately for each grant and are as
follows:

- --------------------------------------------------------------------------------
1998 1997 1996
- -------------------------- -------------------------- --------------------------
Expected Life Risk Free Expected Life Risk Free Expected Life Risk Free
(in years) Interest Rate (in years) Interest Rate (in years) Interest Rate
- -------------------------- -------------------------- --------------------------
3.38 4.19% 3.38 6.28% 3.39 6.55%
4.38 4.28% 4.38 6.38% 4.39 6.67%
5.38 4.40% 5.38 6.34% 5.39 6.74%
6.38 4.53% 6.38 6.46% 6.39 6.79%
================================================================================

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 expected stock price volatility. Because
the Company's employee stock options have characteristics
significantly different from those of traded options, and because
the subjectivity of assumptions can materially affect estimates of
fair value, the Company believes the Black-Scholes model does not
necessarily provide a reliable single measure of the fair value of
its employee stock options.

Shares issued under the Company's stock purchase plan were valued
at the difference between the market value of the stock and the
discounted purchase price of the shares on the date of purchase.
The date of grant and the date of purchase coincide for this plan.

The weighted average grant date fair values of options granted to
employees during 1998, 1997, and 1996 were $2.37, $3.66, and $3.92,
respectively, under the 1997 and Nonemployee Director stock option
plans and $1.12, $1.29, and $1.78, respectively, under the 1995
stock purchase plan.

Activity in the Company's fixed stock option plans for the years
ended December 31, 1998, 1997, and 1996 is summarized as follows:

- --------------------------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 2,259,923 $ 9.61 1,831,417 $10.38 1,778,304 $10.42
Granted at fair
value 1,733,000 5.41 672,250 7.99 290,018 9.47
Exercised --- --- ( 40,187) 8.23 ( 53,898) 5.28
Expired --- --- ( 30,000) 16.00 ( 14,982) 9.23
Forfeited (405,750) 9.21 (173,557) 10.65 (168,025) 11.02
- --------------------------------------------------------------------------------
Outstanding at end
of year 3,587,173 $ 7.63 2,259,923 $ 9.61 1,831,417 $10.38
================================================================================

Exercisable at end
of year 728,171 $10.22 540,922 $ 9.62 247,874 $ 9.12
================================================================================

Further information relating to stock options outstanding at
December 31, 1998 is as follows:

- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
- --------------------------------------------------------------------------------
$ .90 to $ 3.75 17,690 5.88 years $ 1.30 17,690 $ 1.30
$5.375 to $ 7.938 2,231,750 9.50 5.96 --- ---
$8.875 to $12.25 1,337,733 6.48 10.49 710,481 10.44
- --------------------------------------------------------------------------------
3,587,173 8.36 $ 7.63 728,171 $10.22
================================================================================

Options shown above with a weighted average exercise price of $1.30
per share and a range of exercise prices of $.90 to $3.75 were
granted in 1995 as the result of a business acquisition in which
the Company assumed the total shares and price obligations under
the acquired company's stock option plans. All other option grants
during the three-year period ended December 31, 1998 were at the
fair market value of the Company's stock at date of grant.

NOTE 10 -- EMPLOYEE BENEFIT PLANS.
The Intergraph Corporation Stock Bonus Plan was established in 1975
to provide retirement benefits to substantially all U.S. employees.
Effective January 1, 1987, the Company amended the Plan to qualify
it as an employee stock ownership plan (ESOP). The Company made
contributions to the Plan in amounts determined at the discretion
of the Board of Directors, and the contributions were funded with
Company stock. Amounts were allocated to the accounts of
participants based on compensation. Benefits are payable to
participants subject to the vesting provisions of the Plan. The
Company has not made a contribution to the Plan since 1991.

In 1990, the Company established the Intergraph Corporation
SavingsPlus Plan, an employee savings plan qualified under Section
401(k) of the Internal Revenue Code, covering substantially all
U.S. employees. Employees can elect to contribute up to 15% of
their compensation to the Plan. The Company matches 50% of
employee contributions up to 6% of each employee's compensation.
Cash contributions by the Company to the Plan were $5,082,000,
$5,148,000, and $5,687,000, in 1998, 1997, and 1996, respectively.

The Company maintains various retirement benefit plans for employees
of its international subsidiaries, primarily defined contribution
plans that cover substantially all employees. Contributions to the
plans are made in cash and are allocated to the accounts of
participants based on compensation. Benefits are payable based on
vesting provisions contained in each plan. Contributions to the
plans were $3,110,000, $3,244,000, and $3,678,000, in 1998, 1997,
and 1996, respectively.

NOTE 11 -- SEGMENT INFORMATION.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement replaces
previous requirements that segment information be reported along
industry lines with a new operating segment approach. Operating
segments are defined as components of a business for which separate
financial information is regularly evaluated in determining
resource allocation and operating performance. The Company's
operating segments are Intergraph Computer Systems (ICS),
Intergraph Public Safety, Inc. (IPS), VeriBest, Inc. (VeriBest) and
the Software and Federal Systems (Federal) business (the Software
and Federal businesses form what is termed Intergraph), none of
which were considered to be reportable segments under previous
external reporting standards.

The Company's reportable segments are strategic business units
which are organized by the types of products sold and the specific
markets served. They are managed separately due to unique
technology and marketing strategy resident in each of the Company's
markets.

ICS supplies high performance Windows NT-based graphics
workstations and PCs, 3D graphics subsystems, servers, and other
hardware products. IPS develops, markets, and implements systems
for public safety agencies. VeriBest serves the electronic design
automation market, providing software design tools, design
processes, and consulting services for developers of electronic
systems. Intergraph supplies software and solutions, including
hardware purchased from ICS, consulting, and services to the
process and building and infrastructure industries and provides
services and specialized engineering and information technology to
support Federal government programs.

The Company evaluates performance of the operating segments based
on revenue and income from operations. The accounting policies of
the reportable segments are the same as those described in Note 1.
Sales among the operating segments, the most significant of which
are sales of hardware products from ICS to the other segments, are
accounted for under a transfer pricing policy. Transfer prices
approximate prices that would be charged for the same or similar
property to similarly situated unrelated buyers. In the U.S.,
intersegment sales of products and services to be used for internal
purposes are charged at cost. For international subsidiaries,
transfer price is charged on intersegment sales of products and
services to be used for either internal purposes or sale to
customers.

The following table sets forth revenues and operating income (loss)
by operating segment for the year ended December 31, 1998, together
with supplementary information related to depreciation and
amortization expense attributable to the operating segments.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
(In thousands) Intergraph
----------------- Total
ICS IPS VeriBest Software Federal Corporate Eliminations Company
- ------------------------------------------------------------------------------------------------------------------------
<S>
<C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Unaffiliated customers $268,447 $50,412 $ 27,783 $532,394 $153,754 --- --- $1,032,790
Intersegment revenues 185,234 712 460 1,815 4,863 --- $(193,084) ---
- ------------------------------------------------------------------------------------------------------------------------
Total Revenues $453,681 $51,124 $ 28,243 $534,209 $158,617 --- $(193,084) $1,032,790
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
before nonrecurring
operating charges $(68,144) $ 3,486 $(12,433) $ 14,126 $( 3,559) $(30,944) $( 895) $( 98,363)
- ------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization expense $ 10,314 $ 5,099 $ 3,839 $ 30,171 $ 3,003 $ 2,294 --- $ 54,720
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Amounts included in the "Corporate" column consist of general
corporate expenses, primarily general and administrative expenses
(including legal fees of $10,650,000) remaining after charges to
the operating segments based on segment usage of those services.
Significant profit and loss items for 1998 that are not allocated
to the segments and not included in the analysis above include
gains on sales of assets of $112,533,000 (see Note 14) and
nonrecurring operating charges of $15,843,000 (see Note 3).

The Company does not evaluate performance or allocate resources
based on assets and, as such, it does not prepare balance sheets
for its operating segments, other than those of its wholly-owned
subsidiaries.

The operating segment information presented above represents the
internal evaluation model adopted by the Company for 1998 and
future years. The Company has in prior years utilized several
variations of this model depending on the Company's structure and
its business environment at the particular time, but believes the
1998 model best reflects the operations and business structure of
the various segments and the Company for 1998 and the future.

The 1998 model differs significantly from those utilized in prior
years, specifically in the institution of a transfer pricing system
in 1998 and in the attribution of revenues to its ICS and Software
operating segments in sales transactions where both hardware and
software, and perhaps attendant services, are sold to a single
customer. The Company has found it impractical to restate prior
years' segment information to reflect the current reporting model,
since such a restatement would involve a transaction-by-transaction
analysis. Since VeriBest and IPS have been operating as separate
subsidiaries since 1996 and 1997, respectively, and since by nature
of their businesses they are less affected by changes from the
model utilized before 1998, comparable information is available.
VeriBest incurred operating losses of $16,381,000 in 1997 and
$15,463,000 in 1996 on revenues of $29,290,000 and $31,031,000,
respectively. IPS incurred an operating loss of $2,165,000 in 1997
on revenues of $50,418,000.

Revenues from the U.S. government were $166,100,000 in 1998,
$177,100,000 in 1997, and $160,800,000 in 1996, representing
approximately 16% of total revenue in 1998 and 1997, and 15% in
1996. The majority of these revenues are attributed to the Federal
unit of the Intergraph operating segment. The U.S. government was
the only customer accounting for more than 10% of consolidated
revenue in each of the three years in the period ended December 31,
1998.

International markets, particularly Europe and Asia, continue in
importance to the industry and to the Company. The Company's
operations are subject to and may be adversely affected by a
variety of risks inherent in doing business internationally, such
as government policies or restrictions, currency exchange
fluctuations, and other factors. Following is a summary of
external revenues and long-lived assets by principal geographic
area. For purposes of this presentation, revenues are attributed
to geographic areas based on customer location. Long-lived assets
include property, plant and equipment, investments in affiliates
and other noncurrent assets. Assets have been allocated to
geographic areas based on their physical location.

- --------------------------------------------------------------------------------
Revenues Long-lived Assets
- --------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)

United States $ 505,317 $ 528,411 $ 488,759 $139,128 $152,184 $174,842
Europe 317,840 355,179 365,349 40,878 41,467 50,346
Asia Pacific 107,512 133,864 146,240 17,975 21,304 23,069
Other
International 102,121 106,851 94,985 3,468 4,010 4,170
- --------------------------------------------------------------------------------
Total $1,032,790 $1,124,305 $1,095,333 $201,449 $218,965 $252,427
- --------------------------------------------------------------------------------

NOTE 12 -- RELATED PARTY TRANSACTIONS.
Bentley Systems, Inc.: The Company owns approximately 50% of
Bentley Systems, Inc., the developer and owner of MicroStation, a
software product utilized in many of the Company's software
applications and for which the Company serves as a nonexclusive
distributor. Under the Company's distributor agreement with
Bentley, the Company purchases MicroStation products for resale to
third parties.

The Company's purchases from Bentley totaled $1,339,000 in 1998,
$5,656,000 in 1997, and $14,244,000 in 1996. Amounts due from
Bentley or for which the Company holds the right to delivery of
Bentley products totaled $1,224,000 and $1,076,000 at December 31,
1998 and 1997, respectively. During the second quarter of 1997,
the Company offset receivables from Bentley of $5,835,000 against a
$6,126,000 obligation to Bentley resulting from an adverse contract
arbitration award. See "Litigation and Other Risks and
Uncertainties" included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 20 to 24
of this annual report for further discussion of the Company's
arbitration proceedings and business relationship with Bentley.

Loan Program for Executive Officers: In order to encourage
retention of Company stock by executive officers, the Company
adopted a loan program effective January 1993, under which
executive officers could borrow from the Company, on an unsecured
basis, an amount not exceeding (1) the market value of the common
stock of the Company owned by any such executive officer, and/or
(2) the net value (market price less exercise price) of exercisable
stock options owned by any such executive officer. Interest was
charged on these loans at the prevailing prime rate. Prior to the
April 30, 1998 expiration of the loan program, James W. Meadlock,
Chief Executive Officer and Chairman of the Board of the Company,
was indebted to the Company in the maximum amount of $6,129,000
under the program. Mr. Meadlock repaid his loan in full on
November 21, 1997.

NOTE 13 -- SHAREHOLDER RIGHTS PLAN.
On August 25, 1993, the Company's Board of Directors adopted a
Shareholder Rights Plan. As part of this plan, the Board of
Directors declared a distribution of one common stock purchase
right (a "Right") for each share of the Company's common stock
outstanding on September 7, 1993. Each Right entitles the holder
to purchase from the Company one common share at a price of $50,
subject to adjustment. The Rights are not exercisable until the
occurrence of certain events related to a person or a group of
affiliated or associated persons acquiring, obtaining the right to
acquire, or commencing a tender offer or exchange offer, the
consummation of which would result in beneficial ownership by such
a person or group of 15% or more of the outstanding common shares
of the Company. Rights will also become exercisable in the event
of certain mergers or an asset sale involving more than 50% of the
Company's assets or earnings power. Upon becoming exercisable,
each Right will allow the holder, except the person or group whose
action has triggered the exercisability of the Rights, to either
buy securities of Intergraph or securities of the acquiring
company, depending on the form of the transaction, having a value
of twice the exercise price of the Rights. The Rights trade with
the Company's common stock. The Rights are subject to redemption
at the option of the Board of Directors at a price of $.01 per
Right until the occurrence of certain events, and are exchangeable
for the Company's common stock at the discretion of the Board of
Directors under certain circumstances. The Rights expire on
September 7, 2003.

NOTE 14 -- ACQUISITIONS AND DIVESTITURES.
The Company filed a legal action in August 1995 seeking to
dissolve and wind up its business arrangement with Zydex, Inc., a
company with which it jointly developed its plant design software
application (PDS), and seeking an order allowing the Company to
continue the business of that arrangement without further
responsibility or obligation to Zydex. In November 1995, Zydex
filed a counterclaim against the Company alleging wrongful
dissolution of the business relationship and seeking both sole
ownership of PDS and significant compensatory and punitive
damages. In September 1997, the Court issued an order resolving
all disputed issues and requiring the parties to settle, and
dismissed the case. A closing of the final settlement agreement
occurred on January 15, 1998. The final settlement included the
purchase by Intergraph of 100% of the common stock of Zydex for
$26,300,000, with $16,000,000 paid at closing of the agreement and
the remaining amount payable in 15 equal monthly installments,
including interest. In March 1998, the Company prepaid in full
the remaining amount payable to Zydex. The former owner of Zydex
retains certain rights to use, but not sell or sublicense, PDS
products for a period of 15 years following the date of closing.
In addition to the purchase price of the common stock, the Company
was required to pay additional royalties to Zydex in the amount of
$1,000,000 at closing of the agreement. These royalties were
included in the Company's 1997 results of operations. The first
quarter 1998 cash payments to Zydex were funded by the Company's
primary lender and by proceeds from the sale of the Company's
Solid Edge and Engineering Modeling System product lines. The
Company accounted for the acquisition as the purchase of PDS
software rights and is amortizing those rights over an estimated
useful life of seven years. The unamortized balance,
approximately $22,500,000 at December 31, 1998, is included in
"Other assets" in the consolidated balance sheet. PDS is
currently the Company's highest volume software offering,
representing approximately 28% of total software sales for 1998.

In March 1998, the Company sold its Solid Edge and Engineering
Modeling System product lines to Electronic Data Systems
Corporation and its Unigraphics Solutions, Inc. subsidiary for
$105,000,000 in cash. The Company's gain on this transaction of
$102,767,000 is included in "Gains on sales of assets" in the 1998
consolidated statement of operations. Full year 1997 revenues and
operating losses for these product lines were $35,200,000 and
$4,100,000, respectively. Based on 1997 performance, the Company
estimates that the sale of this business resulted in an improvement
in its 1998 operating results of approximately $5,000,000,
excluding the impact of the gain on the sale.

In April 1998, the Company sold its printed circuit board
manufacturing facility for $16,002,000 in cash. The Company's gain
on this transaction of $8,275,000 is included in "Gains on sales of
assets" in the 1998 consolidated statement of operations. The
Company is now outsourcing its printed circuit board needs. This
operational change did not materially impact the Company's results
of operations in 1998.

In November 1998, the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology Inc. (SCI), a
wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. The total purchase price was
$62,404,000, $42,485,000 of which was received during the fourth
quarter of 1998. The final purchase price installment of
$19,919,000 was received on January 12, 1999. The Company's gain
on this transaction of $1,491,000 is included in "Gains on sales of
assets" in the 1998 consolidated statement of operations. For a
complete description of the SCI transaction and its anticipated
impact on future operating results and cash flows, see "SCI"
included in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 20 of this annual
report.

NOTE 15 - SUMMARY OF QUARTERLY INFORMATION - UNAUDITED

- --------------------------------------------------------------------------------
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
(In thousands except per
share amounts)

Year ended December 31, 1998:
Revenues $245,818 $246,613 $253,624 $286,735
Gross profit 77,923 76,470 78,100 92,859
Net income (loss) 49,442 (20,988) (27,173) (20,915)
Net income (loss) per share
- basic 1.03 ( .43) ( .56) ( .43)
- diluted 1.02 ( .43) ( .56) ( .43)
Weighted average shares
outstanding
- basic 48,219 48,311 48,416 48,547
- diluted 48,335 48,311 48,416 48,547

Year ended December 31, 1997:
Revenues $252,758 $288,609 $282,067 $300,871
Gross profit 87,610 109,115 101,177 102,437
Net loss (26,289) (16,027) ( 7,186) (20,735)
Net loss per share,
basic and diluted ( .55) ( .33) ( .15) ( .43)
Weighted average shares
outstanding, basic and diluted 47,758 47,888 48,006 48,121

================================================================================

First quarter 1998 earnings included a $2.13 per share gain on the
sale of the Company's Solid Edge and Engineering Modeling System
product lines and a $.31 per share charge for nonrecurring
operating expenses, primarily for employee termination costs and
write-off of certain intangible assets. Second quarter 1998 losses
were reduced by a $.17 per share gain on the sale of the Company's
printed circuit board manufacturing facility. Fourth quarter 1998
losses included expenses of approximately $.14 per share relating
to the Company's transition to outsourcing of its manufacturing
operation and a $.04 per share charge for nonrecurring operating
expenses, primarily for employee terminations.

Second quarter 1997 losses were increased by a $.13 per share
charge for an adverse contract arbitration award to Bentley
Systems, Inc. Third quarter 1997 losses were reduced by a $.10 per
share gain on the sale of an investment in an affiliated company.
The Company estimates that the strength of the U.S. dollar in the
fourth quarter of 1997 adversely impacted fourth quarter results of
operations by approximately $.15 per share in comparison to fourth
quarter 1996.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
Intergraph Corporation

We have audited the accompanying consolidated balance
sheets of Intergraph Corporation and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended
December 31, 1998. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Intergraph Corporation and
subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles.

/s/ Ernst & Young LLP
Birmingham, Alabama
February 1, 1999

DIVIDEND POLICY

The Company has never declared or paid a cash dividend on its common
stock. It is the present policy of the Company's Board of Directors
to retain all earnings to finance the Company's operations. In
addition, payment of dividends is restricted by the Company's term
loan and revolving credit agreement.

PRICE RANGE OF COMMON STOCK

Since April 1981, Intergraph common stock has traded on The NASDAQ
Stock Market under the symbol INGR. As of January 31, 1999, there
were 48,690,820 shares of common stock outstanding, held by 4,447
shareholders of record. The following table sets forth, for the
periods indicated, the high and low sale prices of the Company's
common stock as reported on The NASDAQ Stock Market.

- -------------------------------------------------------------------
1998 1997
Period High Low High Low
- -------------------------------------------------------------------

First Quarter $10 3/16 $8 1/4 $11 1/4 $7 3/8
Second Quarter 10 9/16 7 3/16 8 13/16 6 1/4
Third Quarter 8 5/8 5 1/2 12 7 5/8
Fourth Quarter 7 4 11/16 14 3/16 8 15/16
===================================================================

TRANSFER AGENT AND REGISTRAR

Harris Trust and Savings Bank
Shareholder Services Division
311 W. Monroe Street
P. O. Box A-3504
Chicago, IL 60690-3504
(312) 360-5116

CORPORATE COUNSEL

Lanier Ford Shaver & Payne P.C.
200 West Court Square, Suite 5000
Huntsville, AL 35801

INDEPENDENT AUDITORS

Ernst & Young LLP
AmSouth/Harbert Plaza, Suite 1900
Birmingham, AL 35203

FORM 10-K

A copy of the Company's Form 10-K filed with the Securities and
Exchange Commission is available without charge upon written
request to Shareholder Relations, Intergraph Corporation, Huntsville,
AL 35894-0001.

ANNUAL MEETING

The annual meeting of Intergraph Corporation will be held May 13,
1999, at the Corporate offices in Huntsville, Alabama.

BOARD MEMBERS AND OFFICERS

BOARD OF DIRECTORS EXECUTIVE VICE PRESIDENTS VICE PRESIDENTS

James W. Meadlock Wade C. Patterson Theron E. Anders
Chief Executive Officer Chief Executive Officer
and Chairman of the and President, Intergraph Michael Bezzant
Board Computer Systems
Henry J. Dipietro
James F. Taylor Jr. Lawrence F. Ayers Jr.
Executive Vice President Thomas J. Doran
Intergraph Corporation Klaas Borgers
and Chief Executive George H. Dudley
Officer, Intergraph Penman R. Gilliam
Public Safety, Inc. Jeffrey H. Edson
Lewis N. Graham Jr.
Robert E. Thurber Graeme J. Farrell
Executive Vice President Richard H. Lussier
Milford B. French
Keith H. Schonrock Jr. Nancy B. Meadlock
Aggie L. Frizzell
Larry J. Laster Stephen J. Phillips
Jeffrey P. Heath
Thomas J. Lee Preetha R. Pulusani
Fred D. Heddens
Sidney L. McDonald William E. Salter
Rune Kahlbom
K. David Stinson Jr.
Robert L. Kuehlthau
John W. Wilhoite
Milton H. Legg
Edward A. Wilkinson
Winston P. Newton
Allan B. Wilson
John R. Owens
Manfred Wittler
Robert Patience

Carl N. Reed

Charles E. Robertson Jr.
Chief Executive Officer
and President, VeriBest,
Inc.

Stephen B. Rowles

Gerhard Sallinger

James H. Slate

Richard L. Watson

Eugene H.Wrobel

SECRETARY

John R. Wynn

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 95,473
<SECURITIES> 0
<RECEIVABLES> 325,937<F1>
<ALLOWANCES> 13,814
<INVENTORY> 38,001
<CURRENT-ASSETS> 494,525
<PP&E> 386,442
<DEPRECIATION> 259,074
<TOTAL-ASSETS> 695,974
<CURRENT-LIABILITIES> 278,005
<BONDS> 59,495
0
0
<COMMON> 5,736
<OTHER-SE> 349,596
<TOTAL-LIABILITY-AND-EQUITY> 695,974
<SALES> 726,135
<TOTAL-REVENUES> 1,032,790
<CGS> 513,822
<TOTAL-COSTS> 707,438
<OTHER-EXPENSES> 439,558<F2>
<LOSS-PROVISION> 3,168<F3>
<INTEREST-EXPENSE> 7,460
<INCOME-PRETAX> (13,634)
<INCOME-TAX> (6,000)
<INCOME-CONTINUING> (19,634)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,634)
<EPS-PRIMARY> (0.41)<F4>
<EPS-DILUTED> (0.41)<F4>
<FN>
<F1>Accounts receivable in the Consolidated Balance Sheet is shown net of
allowances for doubtful accounts.
<F2>Other expenses include Product development expenses, Sales and marketing
expenses, General and administrative expenses, and Nonrecurring operating
charges.
<F3>The provision for doubtful accounts is included in Other expenses above.
<F4>Adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share, had no impact on the Company's loss per share calculations for any
year in the three year period ended December 31, 1998, due to the antidilutive
impact of the Company's employee stock options, which are the Company's only
common stock equivalent.
</FN>

</TABLE>