POLICY MANAGEMENT SYSTEMS CORP, 10-K, 1998-03-25

POLICY MANAGEMENT SYSTEMS CORP
10-K, 1998-03-25
INSURANCE AGENTS, BROKERS & SERVICE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

For the fiscal year ended DECEMBER 31, 1997 Commission file number 1-10557

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

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

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

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $1,333,834,259 at March 17, 1998, based on the closing market
price of the Common Stock on such date, as reported by the New York Stock
Exchange.

The total number of shares of the registrant's Common Stock, $.01 per share
par value, outstanding at March 17, 1998, was 18,387,185.

DOCUMENTS INCORPORATED BY REFERENCE

Specified sections of the registrant's 1998 Proxy Statement in connection with
its 1998 Annual Meeting of Stockholders are incorporated by reference in Part
III hereof.

<PAGE>
PART I

ITEM 1. BUSINESS

THE COMPANY

ORGANIZATION AND GENERAL DEVELOPMENT

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

Prior to 1985, the Company operated primarily as a provider of insurance
software systems and related automation support services to the property and
casualty insurance market in the United States and Canada. Since that time,
the Company has expanded geographically into Europe, Asia and Australia, as
well as into the life and health insurance markets, the information services
market and the financial services market. However, as a result of certain
changes in the health insurance market, in 1995 the Company ceased doing
business in this market and focused principally on the needs of property and
casualty and life insurers and financial services providers. Through internal
development and acquisitions, the Company has expanded its software product
and services offerings to include client/server computing, strategic
alliances, and outsourcing, thereby strengthening the Company's ability to
serve the global insurance marketplace.

GEOGRAPHIC EXPANSION

The Company determined that developing international customers and
marketplaces was essential to becoming a leading provider of insurance
automation solutions and systems and related professional services to the
global insurance industry. The Company opened its Canadian office in 1977
and, since that time, has expanded operations to include Europe, Asia and
Australia. The Company currently has customers in 30 different countries (see
Segment Information).

Beginning in 1993, the Company significantly increased its presence in
European markets through certain strategic acquisitions (see Acquisitions).
In December 1993, the Company acquired Norwegian-based Vital Data A.S. ("Vital
Data"), which provided the Company with an outsourcing and development center
for the Company's Nordic life systems. In December 1994, the Company acquired
London, England-based Creative Holdings Group, Limited ("Creative"), to
strengthen the Company's position in the European, Australian and Asian
markets by providing the Company with a customer base of medium-sized general
insurance companies, as well as proven products for these markets.
Additionally, in October 1995, the Company purchased micado Beteiligungs-und
Verwaltungs GmbH ("micado"), a provider of software and services to German
insurance and financial services companies, further strengthening the
Company's European presence as well as providing the Company with expertise in
object-oriented technology.

ACQUISITIONS

During 1985, the Company initiated an expansion into the property and
casualty information services business to provide information to assist
insurers in risk selection, pricing and claims adjusting. By 1988, through
acquisitions of regional providers of these services, the Company had
developed a nationwide network to provide a full range of information
services. These services were further expanded from 1990 through 1994, with
the acquisition of companies that provide information services primarily
related to the life and health insurance industries. During 1997, the Company
sold its property and casualty information services business.

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

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

To further strengthen its position in Europe and other foreign markets,
the Company acquired Creative in December 1994 and micado in October 1995.
Creative provides services and products to medium-sized general insurance
companies. The acquisition of Creative positioned the Company to capitalize
on business opportunities throughout Europe, Asia, and Australia.
Headquartered in Germany, micado provides services and software to German
insurance and financial services companies. The acquisition of micado, in
addition to expanding the Company's customer base, positions the Company to
make significant advances in the use of object-oriented technology which has
been utilized in S3+TM, the Company's client/server solution for the property
and casualty insurance industry (see Client/Server Technology).

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

CLIENT/SERVER TECHNOLOGY

Prior to 1989, the Company offered insurance software systems to the
property and casualty insurance industry designed to run on traditional
mainframe, midrange and personal computers. In 1987, the Company began
research on an integrated relational database client/server solution for the
insurance industry known as Series III . Using relational databases and
cooperative processing between hardware platforms and allowing access to data
from multiple sources through advanced networks, Series III provides a flow of
information between insurance agents, branch offices and the home office of
insurance companies. Series III, with the release of workers' compensation
functionality in 1997, provides a comprehensive solution for all facets of the
property and casualty insurance industry worldwide The completion of Release
9.1 of Series III marked the first release of Series III functionality
utilizing the Microsoft Windows NT operating system and resulted in Series
III being renamed S3+ (All subsequent references to Series III will be S3+).
S3+ is currently able to process business for personal lines (primarily auto
and homeowners' policies) for the property and casualty insurance industry in
a Windows NT environment. The continued development of S3+ will incorporate
the Windows NT operating system capability for billing and collections,
commercial lines, and workers' compensation insurance. The Company also
continues to provide solutions to the property and casualty insurance industry
through its Series II products, an earlier generation of solutions, which are
traditional mainframe computer products. From its inception, S3+ was designed
for year 2000 processing and Series II products have been enhanced with the
capability of handling transactions with dates of the year 2000 and beyond.

The POINT System, the Company's midrange solution for the United States
and Latin American property and casualty insurance markets, has been
re-engineered to utilize client/server capabilities featuring a graphical user
interface client. The re-engineered POINT System, renamed Point+ utilizes
object-oriented technology and will be offered on multiple platforms and is
designed to process data in the year 2000 and beyond.

INSURE/90 , an IBM AS/400 based product, acquired during the
acquisition of Creative, became part of the Company's general insurance
software solution to the European, Asian and Australian markets. Currently
under development is I+ , the next generation of applications to ultimately
replace the INSURE/90 product, which will increase functionality and offer
client/server capabilities and object-oriented technology. INSURE/90 has been
updated with the capability of processing transactions for the year 2000 and
beyond.

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

STRATEGIC ALLIANCES

To expand its software product and services offerings, the Company has
formed certain strategic alliances. For example, the Company's initial efforts
on S3+ development were enhanced by a Development and Marketing Agreement
between the Company and International Business Machines Corporation ("IBM").
The Company has also entered into Value-Added Reseller and Industry Remarketer
agreements with IBM for the AS/400 and S/390 computer systems.

The Company also supports an open systems strategy, which allows the
host-based components of S3+ to be portable across other technology platforms.
As part of the open systems initiative, the Company joined Oracle's Business
Alliance Program, Sybase's Open Solutions Partners Program and Microsoft's
Solution Developer Program. As Value-Added Resellers for both Oracle and
Sybase, the Company positioned itself for developing its solutions to the
insurance industry based on customer demand.

INFORMATION TECHNOLOGY OUTSOURCING AND BUSINESS PROCESS OUTSOURCING

The Company provides outsourcing services to the insurance industry using
its data centers, technical personnel, business analysts, and insurance
specialists resources. The Company's data centers are located in North
America, Europe, and Australia.

As an extension of traditional Information Technology Outsourcing
("ITO"), the Company offers Business Process Outsourcing ("BPO") to the
property and casualty and life insurance industries. BPO is the third party
management, operation, and/or ownership of a customer's insurance related
internal business processes. It transcends systems outsourcing and management
by offering much more than data center operations, network management, and
application support. By combining advanced technologies with re-engineered
workflows, the Company is able to bring an increased level of efficiency to
its customers' business processes. Entrusting these processes to the Company
allows customers to take advantage of these efficiencies and focus resources
on core competencies.

BUSINESS STRATEGY

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

SEGMENT INFORMATION

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

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

2. Life and financial solutions enterprise software and services (generally
referred to as the "domestic life and financial solutions business"). This
segment provides software products, product support, professional
<PAGE>
services and outsourcing primarily to the US life insurance and financial
services markets. In 1995, this segment included the Company's health
services unit which was sold in June 1995.

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

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

5. Life information services. This segment provides information services,
principally physician reports and medical histories, to US life insurers.

In accordance with the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has adjusted all prior period financial information
to reflect these revised classifications.

The majority of the Company's revenues are generated from products and
services provided in the United States, although the Company does have
customers in a total of 30 foreign countries. The following table illustrates
the relative percentages of total revenue represented by the Company's
products and services by geographic region.
<TABLE>
<CAPTION>

Percent of Revenue
Year Ended December 31,
1997 1996 1995
----- ----- -----

<S> <C> <C> <C>
United States. . . . 74.4% 76.0% 78.1%
Canada . . . . . . . 1.9% 2.9% 3.0%
Europe . . . . . . . 17.0% 15.3% 13.3%
Asia and Australia . 6.7% 5.8% 5.6%
</TABLE>

Additional information regarding operating segments is contained in Note
12 of Notes to Consolidated Financial Statements.

SOFTWARE PRODUCTS

The Company offers over 100 business solutions, which include more than
70 application software systems, designed to meet the needs of the property
and casualty and life insurance and financial services markets.

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

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

<PAGE>
Client/server technologies serve as a platform for the Company's current
system offerings for the property and casualty and life insurance markets. A
primary advantage of the Company's software products is the full integration
of the information and data gathering, processing, underwriting, claims
handling and reporting processes for providers of insurance, creating a
cooperative processing environment. In this cooperative processing
environment, insurance professionals, using personal computer workstations,
are capable of processing multiple tasks concurrently with minimal clerical
support and data entry. The Company's software products utilize technologies
such as relational databases, graphical user interfaces, object-oriented
programming and imaging. The Company's objective is to provide software
systems which allow system upgrades, additions and interfaces to be
implemented quickly, with minimal disruption to ongoing operations.

The Company obtains licenses from third parties for a wide range of
software products and services which are used in varying degrees to develop
and enhance the Company's products and in performing services for its
customers. Such products range from mainframe operating systems to graphical
user interfaces. Although such products licensed from third parties are
important to the products and services offered by the Company, there is no
single product licensed from a third party that, if discontinued, would
significantly impact the Company's development of its products or performance
of its services.

PRODUCT SUPPORT AND SERVICES

PRODUCT SUPPORT

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

PROFESSIONAL SERVICES

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

ITO AND BPO SERVICES

The Company offers outsourcing services from its data centers located in
North America, Europe and Australia. These services range from providing
processing capabilities for highly regulated lines of business such as the
Florida Joint Underwriters' Association, Massachusetts automobile and other
automobile assigned risk plans, to providing complete processing capabilities
for all or most of a customer's business by making available software systems
licensed from the Company on a remote basis, to assuming complete systems
management, processing and administration support responsibilities for a
customer, including complete policyholder services and claims support. ITO
services are typically provided under contracts having terms from three to ten
years.

The Company also offers related BPO services within the property and
casualty and life insurance industries.

INFORMATION SERVICES

The Company offers information services designed to facilitate efficient
review of underwriting risks which may be ordered and received on an automated
basis through the Company's nationwide telecommunications network. These
information services, which assist insurance professionals in making more
informed decisions about risk selection, pricing and claims settlement,
currently include physician reports and medical histories provided through the
Company's database services.

<PAGE>
PRODUCT DEVELOPMENT

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

Examples of the Company's continuing product development efforts are the
Company's S3+ solution for property and casualty and the CyberLife solution
for the life and financial services industries (see Software Products above).

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

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

As part of this development effort and consistent with the Company's
desire to reuse its software assets, a number of the Company's other products,
including the Client Information System, DecisionWise system and the ViLink
Electronic Commerce Platform , are being integrated with CyberLife. This will
eliminate the need to develop similar functionality for CyberLife.

While the Company intends to continue to develop applications for IBM
architecture platforms, it also supports open systems. This open systems
approach, which allows the host-based components to be converted to various
platforms, will allow separate software products to be integrated with one
another, as well as with the customer's existing and future systems, whether
provided by the Company or other vendors.

The Company has completed the re-engineering of its POINT system, a
midrange solution designed for use by mid-sized property and casualty
insurance companies, to make it portable across different hardware platforms.
The Point+ system, with this open systems direction, will offer insurance
companies increased flexibility in adding functionality and processing power.

In an effort to maintain and strengthen its competitive position, the
Company invests substantial amounts in internal product development.
Expenditures for internal product development, which were capitalized, were
$62.5, $56.8 and $46.8 million in 1997, 1996 and 1995, representing 10.7%,
11.6% and 11.2% of total revenues, respectively. In addition to its
continuing development efforts, the Company, in the past several years, has
expended significant amounts on business and software product acquisitions in
an effort to expand its product and services offerings and its presence in the
marketplace.

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

<PAGE>
MARKETING AND CUSTOMERS

The Company primarily markets its products and services to several
thousand property and casualty and life insurance companies, independent
insurance agents and adjusters and financial institutions. In addition, the
Company offers its software products and automation and administration support
services in 30 foreign countries. At December 31, 1997, the Company was
providing its products and services to more than 7,600 insurance companies,
agents and adjusters. No single customer accounted for more than 10% of
revenues during the year ended December 31, 1997.

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

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

LICENSES AND PRODUCT PROTECTION

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

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

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

COMPETITION

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

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

SEASONALITY

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

At December 31, 1997, the Company had 5,794 full-time employees and 6,017
total employees located in offices worldwide.

ITEM 2. PROPERTIES

The Company owns its 700,000 square foot headquarters complex located on
145 acres in Blythewood, South Carolina. The Company leases space at 23
various locations for its regional and branch offices throughout the United
States. Internationally, the Company leases space at 23 locations throughout
Canada, Central and South America, Europe, Africa, Asia, Australia and New
Zealand.

The Company, through its data centers located in Blythewood, South
Carolina, Oslo, Norway and North Ryde, Australia, utilizes 21 mid-range and
mainframe computers. All computers are owned or held under short-term leases.
In total, these computers have over 16,000 megabytes of memory and are capable
of processing almost 1,400 million instructions per second. The Company is
currently utilizing 75% to 85% of this capacity.

ITEM 3. LEGAL PROCEEDINGS

In March 1994, Security Life of Denver Insurance Company ("SLD") brought
suit against the Company in the United States District Court for the District
of Colorado alleging breach of a life insurance joint development contract,
unfair trade practices, and fraud. SLD sought direct, indirect, consequential,
and punitive damages in excess of $80 million. In February 1997, following a
jury trial, the Court and jury entered judgment in favor of the Company
against SLD on the claims of fraud and unfair trade practices. A verdict and
judgment was returned against the Company for breach of contract and damages
of $3.5 million, together with pre-judgment interest. In addition, the jury
found that SLD was using the Company's trade secrets without permission. As a
result of post trial motions, the judgment was amended to delete the award of
pre-judgment interest and SLD was ordered to return the Company's systems.
Both the Company and SLD have appealed to the United States Court of Appeals.
Changes in the status of this proceeding could result in a change in the
Company's estimate of anticipated liability for the costs associated with
these matters.

The Company is also presently involved in litigation which commenced in
January of 1996 in the Circuit Court in Greenville County, South Carolina,
with Liberty Life Insurance Company and certain of its affiliates ("Liberty")
arising out of the parties' prior contractual relationship related to the
development and licensing of Series III life insurance systems and the
subsequent licensing of the Company's CYBERTEK life insurance systems.
Liberty's complaint alleges breach of contract, breach of express and implied
warranties, fraudulent inducement, breach of contract accompanied by a
fraudulent act, and recission. Liberty has alleged actual and consequential
damages in excess of $160 million and also seeks treble and punitive damages.
The Company has asserted various affirmative
<PAGE>
defenses and is pursuing counterclaims against Liberty for breach of contract,
recoupment, breach of good faith and fair dealing, and breach of contract
accompanied by a fraudulent act. The Company is seeking equitable relief,
including injunctive relief, and currently unspecified actual, compensatory
and consequential damages.

Based upon the allegations raised in a prior lawsuit and the SLD lawsuit,
the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"),
commenced in June 1995 a declaratory judgment action in the United States
District Court for the District of South Carolina against the Company to
determine St. Paul's obligation for defense costs and to indemnify the Company
for any payment related to these claims. The Company filed a counterclaim
against St. Paul seeking to recover the Company's defense costs in both
matters, coverage for damages, if any, awarded in those matters, and
consequential and punitive damages.

In connection with the dismissal of the prior lawsuit, St. Paul and the
Company agreed to dismiss with prejudice all claims against each other with
respect to the matter, and St. Paul agreed to reimburse the Company for the
Company's legal fees. The action continues as to the parties' claims related
to insurance coverage for the SLD matter.

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

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

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age Position
- ---- --- --------
<S> <C> <C>
G. Larry Wilson . . . 51 Chairman of the Board, President and Chief Executive Officer
David T. Bailey . . . 51 Executive Vice President
Paul R. Butare. . . . 46 Executive Vice President
Donald A. Coggiola. . 58 Executive Vice President
Stephen G. Morrison . 48 Executive Vice President, Secretary, General Counsel and
Chief Administrative Officer
Timothy V. Williams . 48 Executive Vice President and Chief Financial Officer

<FN>
G. Larry Wilson - Chairman of the Board (since 1985), President and Chief Executive
Officer of the Company (since 1980) and his current term as Director will expire in
1998. Employed by the Company since its inception.

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

Paul R. Butare - Executive Vice President of the Company since October 1995.
Responsible for the Life Insurance Group. In previous capacities with the Company,
Mr. Butare has had management responsibilities for Life sales and marketing, Life
product development, Property and Casualty marketing support and Property and
Casualty systems and product development. Employed by the Company since 1981.

Donald A. Coggiola - Executive Vice President of the Company since 1986. Responsible
for the Sales and Marketing Group. Employed by the Company since 1979. Retired
effective January 1, 1998.

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

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

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

The Company's common stock is traded on the New York Stock Exchange,
symbol PMS. The Company has never paid or declared a cash dividend on its
common stock. The following table sets forth, for the calendar periods
indicated, the high and low market prices for the Company's common stock.
<TABLE>
<CAPTION>

1997
High Low
------- ------
<S> <C> <C>
First Quarter... $ 46 5/8 $ 42
Second Quarter.. 54 41 1/2
Third Quarter... 64 15/16 48
Fourth Quarter.. 69 7/8 58 1/8
</TABLE>

<TABLE>
<CAPTION>
1996
High Low
------- ------
<S> <C> <C>
First Quarter... $53 3/4 $ 43 5/8
Second Quarter.. 55 1/2 43 7/8
Third Quarter... 50 1/2 33 1/8
Fourth Quarter.. 47 3/8 34 1/8
</TABLE>

Title of Class
Common Stock, $.01 par value

The number of record holders of the Company's common stock was 1,263 as of
March 17, 1998.

<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>

RESULTS OF OPERATIONS 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . $582,782 $488,230 $425,613 $357,587 $316,805
Operating income (loss) . . . . . . . . . 82,151 73,157 19,554 6,682 (75,747)
Other income and (expenses), net. . . . . (3,583) (2,677) (543) 1,256 10,656
Income from continuing operations
before income taxes (benefit) . . . . . 79,757 70,480 19,011 7,938 (65,091)
Discontinued operations, net. . . . . . . 333 979 (6,814) (16,286) (796)
Net income (loss) . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139 $ (9,658) $(56,134)
Basic earnings (loss) per share . . . . . $ 2.76 $ 2.47 $ 0.16 $ (0.46) $ (2.46)
Diluted earnings (loss) per share . . . . $ 2.67 $ 2.44 $ 0.16 $ (0.46) $ (2.44)
========= ========= ========= ========= =========

FINANCIAL CONDITION
Cash and equivalents, marketable
securities and investments. . . . . . . $ 46,525 $ 30,838 $ 44,614 $ 34,304 $156,772
Current assets. . . . . . . . . . . . . . 185,809 160,342 165,593 167,725 287,737
Current liabilities . . . . . . . . . . . 86,213 112,636 94,461 76,856 80,981
Working capital . . . . . . . . . . . . . 99,596 47,706 71,132 90,869 206,756
Total assets. . . . . . . . . . . . . . . 618,406 581,386 532,736 524,031 659,803
Long-term debt (excludes current portion) 37,714 34,268 14,873 4,162 5,655
Total liabilities . . . . . . . . . . . . 207,910 218,134 150,064 147,109 182,831
Stockholders' equity. . . . . . . . . . . 410,496 363,252 382,672 376,922 476,972

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

The results of operations in 1996, 1995, 1994 and 1993 reflect special charges. The
results of operations in 1996 reflect a net special credit of $3.4 million. This credit is a
result of a pre-tax gain of $9.4 million related to the recovery of previously incurred
litigation costs and a pre-tax charge of $6.0 million related to other litigation. The results
of operations in 1995 reflect special charges of $56.4 million (after taxes $39.9 million, or
$2.06 per share). These charges are principally related to the restructure of the Company's
data processing facilities and information services business, litigation costs,
acquisition-related charges, impairment of certain intangible assets and software associated
with acquired businesses and the gain on the sale of the Company's health services business.
The results of operations in 1994 reflect special charges of $67.5 million (after taxes $41.5
million or $1.99 per share). These charges are principally related to the impairment of
intangible assets associated with acquired businesses and discontinued acquired software
products and changes in estimates associated with previously established restructuring reserves.
The results of operations in 1993 reflect special charges of $98.8 million (after taxes $76.2
million or $3.29 per share). These charges are principally related to the impairment of certain
intangible assets associated with employee severance and outplacement and the future abandonment
of certain leased office facilities as well as certain other one-time charges.

See also Quarterly Consolidated Results of Operations and Note 11 of Notes to Consolidated
Financial Statements.
</TABLE>

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

RESULTS OF OPERATIONS

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

Percent
Increase (Decrease)
Percentage of Revenues 1997 1996
Year Ended December 31, vs vs
1997 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
REVENUES:
Licensing . . . . . . . . . . . . . . . . . . . . 22.8% 22.3% 24.0% 21.9% 6.7%
Services. . . . . . . . . . . . . . . . . . . . . 77.2 77.7 76.0 18.6 17.2
------ ------ ------
100.0 100.0 100.0 19.4 14.7

OPERATING EXPENSES:
Cost of revenues
Employee compensation and benefits . . . . . . . 39.9 37.0 33.0 28.6 28.9
Computer and communications expenses . . . . . . 6.0 6.5 6.5 9.2 16.1
Information services and data acquisition costs. 5.4 5.9 6.8 9.6 (0.5)
Depreciation and amortization of property,
equipment and capitalized software costs . . 10.0 9.9 11.6 20.1 (1.4)
Other costs and expenses . . . . . . . . . . . . 6.8 8.8 7.7 (7.5) 30.8
Selling, general and administrative expenses. . . . 16.0 15.5 15.4 23.5 15.2
Amortization of goodwill and other intangibles. . . 1.8 2.1 2.2 2.1 12.0
Litigation settlement and expenses, net . . . . . . - (0.7) 4.3 (100.0) (118.5)
Gain on sale of Health business and related assets. - - (1.9) - (100.0)
Business acquisition charges. . . . . . . . . . . . - - 0.6 - (100.0)
Purchased research and development. . . . . . . . . - - 3.4 - (100.0)
Loss on disposition of computer equipment . . . . . - - 4.3 - (100.0)
Impairment and restructuring credits (charges), net - - 1.6 - (103.6)
------ ------ ------
85.9 85.0 95.5 20.6 2.2

OPERATING INCOME. . . . . . . . . . . . . . . . . . 14.1 15.0 4.5 12.3 274.1

Equity in earnings of unconsolidated affiliates . . 0.2 - - - -

OTHER INCOME AND EXPENSES, NET. . . . . . . . . . . (0.6) (0.6) (0.1) 33.8 393.0
------ ------ ------

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . . . 13.7 14.4 4.4 13.2 270.7

Income taxes. . . . . . . . . . . . . . . . . . . . 5.1 5.2 2.1 17.2 181.1
------ ------ ------

INCOME FROM CONTINUING OPERATIONS . . . . . . . . . 8.6 9.2 2.3 10.9 352.3

Discontinued operations, net. . . . . . . . . . . . - 0.2 (1.6) (66.0) (114.4)
------ ------ ------

NET INCOME. . . . . . . . . . . . . . . . . . . . . 8.6% 9.4% 0.7% 9.3% 1,365.3%
====== ====== ======
</TABLE>

<PAGE>
The Company's revenues are generated principally by licensing to customers
standardized insurance software systems and providing automation and
administrative support and information services to the global insurance and
financial services industries. Licensing revenues are provided for under the
terms of nonexclusive and nontransferable license agreements, which generally
have a noncancelable minimum term of six years and provide for an initial
license charge and a monthly license charge. Services revenues are derived
from professional support services, which include implementation and
integration assistance, consulting and education services, information and
outsourcing services.

REVENUES

Licensing 1997 Change 1996 Change 1995
- --------------------------------------------------------------
(Dollars in Millions)

<S> <C> <C> <C> <C> <C>
Initial charges. . . . $ 69.9 34.7% $ 51.9 6.0% $ 48.8
Monthly charges. . . . 62.9 10.3 57.0 7.1 53.3
------- ------- -------
$132.8 21.9% $108.9 6.7% $102.1
======= ======= =======

Percentage of revenues 22.8% 22.3% 24.0%
- ---------------------- ------- ------- -------
</TABLE>

Initial license revenues for 1997 increased $18.0 million compared to
1996 with the following increases by business segment: domestic property and
casualty up 18.0% ($3.7 million); domestic life insurance and financial
solutions up 34.2% ($5.0 million); and international up 55.1% ($9.3 million).

Initial license revenues for 1996 increased $3.1 million compared to 1995
due principally to an increase in domestic life and financial solutions
initial licensing activity of $5.9 million (includes a decrease in divested
health services of $0.4 million). This increase was offset by a decrease of
$2.7 million in domestic property and casualty initial licensing. However,
initial license charges for 1995 included a $4.0 million non-recurring source
code license agreement with a cross-industry vendor and $4.8 million related
to joint marketing and distribution arrangements with NCR Corporation. These
revenues were replaced, in part, by a large license of the Company's Series II
and S3+ products executed during the fourth quarter of 1996 for $6.2 million.
(All references to Series III have been changed to S3+)

Initial license charges include right-to-use licenses of $8.2, $4.6, and
$5.6 million for 1997, 1996 and 1995, respectively. The right-to-use licenses
represent acquisitions by certain customers of perpetual rights in conjunction
with renewals of MESA by these customers, or in conjunction with the initial
license of a product. Initial license charges also include termination
charges (related to the buyout of monthly license charges) of $0.4, $1.7 and
$3.5 million for 1997, 1996 and 1995, respectively.

Because a significant portion of initial licensing revenues are recorded
at the time new systems are licensed, there can be significant fluctuations in
revenue from period to period. Set forth below is a comparison of domestic
and international initial license revenues for 1997, 1996 and 1995:

Initial licensing 1997 1996 1995
- ---------------------------------------------------------------
(Dollars in Millions)

<S> <C> <C> <C>
Property and casualty (domestic). . . . $23.8 $20.1 $22.8
Life and financial solutions (domestic) 19.9 14.9 9.0
International . . . . . . . . . . . . . 26.2 16.9 17.0
------ ------ ------
$69.9 $51.9 $48.8
====== ====== ======

Percentage of total revenues. . . . . . 12.0% 10.6% 11.5%
- --------------------------------------- ------ ------ ------
</TABLE>

Monthly license charges for 1997 increased $5.9 million compared to 1996
with the following increases by business segment: domestic life insurance and
financial solutions up 42.4% ($3.8 million); and international up
<PAGE>
18.3% ($2.1 million). These increases are related to increased licensing
activity. Domestic property and casualty monthly license charges remained
relatively unchanged.

Monthly license charges for 1996 increased $3.7 million compared to 1995.
This increase is principally related to an increase of $3.0 million in
licensing activity in the international segment due to the acquisitions of
Co-Cam in August 1996 and micado in October 1995. Domestic life and financial
solutions monthly license charges increased $1.2 million (includes a decrease
in divested health services of $0.5 million).

Licensing revenues in the United States are being impacted by various
market factors. Many insurance companies are spending significant amounts of
money to solve their year 2000 problems. To date, the Company does not
believe it has experienced a significant impact, positively or negatively,
from year 2000 issues (see Year 2000 Readiness for further discussion of the
year 2000 issue).

Services 1997 Change 1996 Change 1995
- ---------------------------------------------------------------------
(Dollars in Millions)

<S> <C> <C> <C> <C> <C>
Professional and outsourcing $380.6 23.1% $309.2 18.9% $260.0
Information. . . . . . . . . 64.6 (0.5) 64.9 8.0 60.1
Other. . . . . . . . . . . . 4.8 (5.9) 5.2 54.9 3.4
------- ------- -------
$450.0 18.6% $379.3 17.2% $323.5
======= ======= =======

Percentage of total revenues 77.2% 77.7% 76.0%
- ---------------------------- ------- ------- -------
</TABLE>

Professional and outsourcing services revenues for 1997 increased $71.4
million compared to 1996, with the following increases by business segment:
domestic property and casualty up 19.6% ($30.6 million); domestic life
insurance and financial solutions up 61.4% ($26.6 million); and international
up 12.9% ($14.2 million). The increases are principally due to increases in
implementation services and in the processing volumes of services provided to
new and existing customers. The increases were partially offset by the
elimination of approximately $11.4 million in revenue that generated no profit
related to the Florida Business Process Outsourcing ("BPO") unit.

Professional and outsourcing services revenues for 1996 increased $49.2
million compared to 1995. This increase was principally related to services
from both new and existing contracts amounting to $24.1 million for domestic
property and casualty, $5.9 million for domestic life and financial solutions
(includes a decrease in divested health services of $7.1 million) and $19.2
million for international. The increase in the international results was
principally due to the acquisition of Co-Cam in August 1996, and micado in
October 1995, and new services contracts in Europe.

The Company believes that the operational and financial characteristics
of its information services businesses differs substantially from its other
business. During 1997, the Company disposed of its remaining property and
casualty information services business (see Discontinued Operations). The
Company is continuing to evaluate its life information services business.

OPERATING EXPENSES

COST OF REVENUES

Employee compensation and benefits for 1997 increased 28.6% compared to
1996 principally as a result of the increased salaries and related costs
associated with the growth in staffing in all business units. For this
period, compensation and benefits increased 31.2% ($14.9 million)
internationally, while domestic increased 27.6% ($36.8 million).

Employee compensation and benefits for 1996 increased 28.9% compared to
1995, and principally resulted from increased salaries and related costs
associated with the acquisition of Co-Cam in August 1996, micado in October
1995 and increased costs associated with the growth in staffing for additional
professional and outsourcing services to
<PAGE>
new and existing customers. For this period, compensation and benefits
increased 68.5% ($19.2 million) internationally, while domestic increased
19.0% ($21.3 million).

Computer and communications expenses for 1997 increased 9.2% compared to
1996, principally as a result of increased communications, data circuit and
maintenance costs associated with the growth of the Company's domestic and
international outsourcing operations.

Computer and communications expenses for 1996 increased 16.1% compared to
1995, principally due to the effect of licensing expense related to the
Company's long-term license and maintenance agreement (entered into in March
1995) to acquire rights to certain operating systems management software
products for use in the Company's worldwide data center operations, and the
effect of lease expense associated with leases entered into as part of the
Company's restructuring of its data processing facilities.

Information services and data acquisition costs for 1997 increased 9.6%
compared to 1996, principally due to an increase in the volume of expenses for
attending physician statements related to the provision of life insurance
information services.

Information services and data acquisition costs for 1996 remained relatively
unchanged compared to 1995.

Depreciation and amortization of property, equipment and capitalized
software costs for 1997 increased 20.1% compared to 1996. This increase is
due principally to higher amortization expense resulting from the release of
the latest version of CyberLife client/server life insurance software in
October 1997. In addition, depreciation expense increased due to the
Company's increased investment in network and PC hardware.

Although depreciation and amortization of property, equipment and
capitalized software costs for 1996 decreased slightly compared to 1995,
amortization of internally developed software costs increased $3.7 million
(18.8%), principally due to amortization associated with the release of the
latest version of CyberLife client/server life insurance software in November
1996 and the release of the Company's property and casualty insurance S3+
client/server software systems in October 1996. Depreciation expense
decreased by $4.7 million as a result of the 1995 restructuring of the
Company's US data center and subsequent lease of computer equipment.

Other operating costs and expenses for 1997 decreased 7.5% compared to
1996. This decrease is primarily due to the elimination of costs (and
previously referenced revenues) for the BPO unit in Florida and an increase in
amounts capitalized principally related to the continued enhancement and
development of the Company's S3+ property and casualty insurance software,
CyberLife life insurance software and I+ international property and casualty
software. The decrease was partially offset by increased fees for the use of
consultants and independent contractors to satisfy staffing needs for certain
development and services activities, as well as increased rent and other
facility costs.

Other costs and expenses for 1996 increased 30.8% compared to 1995. Fees
related to the use of consultants and independent contractors increased,
principally the result of training costs in new technologies and the
satisfaction of staffing needs for certain development and services
activities. These increases were offset by an increase in amounts capitalized
principally related to the increased use of outside resources in the continued
enhancement and development of the Company's S3+ property and casualty
insurance software and CyberLife life insurance software as well as other
ongoing development projects, and decreased costs associated with the
reduction of certain assigned risk pools serviced by the Company's BPO
business.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses for 1997 increased 23.5%
compared to 1996, principally from the Company's investment in its
international sales force and administrative infrastructure.

Selling, general and administrative expenses for 1996 increased 15.2%
compared to 1995, almost entirely due to the Company's investment in its
international sales force and administrative infrastructure.

<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES

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

Amortization of goodwill and other intangibles for 1996 increased 12.0%
compared to 1995, principally due to the result of amortization of intangible
assets related to the October 1995 acquisition of micado.

LITIGATION SETTLEMENT AND EXPENSES, NET

In May 1996, the Company resolved its litigation with the California
State Automobile Association Inter-Insurance Bureau and the California State
Automobile Association ("CSAA"), concluding with an agreement for the mutual
dismissal of all related claims and counterclaims as well as the Company's
recovery of certain defense costs incurred relative to the CSAA matter, with
interest. As a result, the Company recorded a $9.4 million pre-tax gain for
this recovery during the second quarter of 1996. Additionally, in February
1997, the Company determined it was necessary to increase its estimate of
anticipated liability for the costs associated with the verdict in the
Security Life of Denver Insurance Company ("SLD") matter and as of December
31, 1996 recorded an additional $6.0 million for the costs in this matter (see
Note 7 of Notes to Consolidated Financial Statements).

The Company, as of December 31, 1995, provided for $20.1 million in
estimated litigation costs arising from proceedings to which the Company was a
party. The costs provided included, but were not limited to, legal fees paid
or anticipated to be paid and other costs related to the Company's claims and
defenses for those matters.

In December 1994, the Company reached an agreement, which was
subsequently approved on May 26, 1995 by the United States District Court for
the District of South Carolina, to settle a shareholder class action. The
Company's portion of the settlement and associated litigation costs resulted
in a special charge of $34.2 million ($21.3 million after tax) in the fourth
quarter of 1994. In March 1995, the Company and its insurance carrier signed
an agreement to settle amounts contested and the carrier agreed to pay an
additional amount of $1.7 million in full settlement of the Company's claims.
Accordingly, the Company recorded a credit of $1.7 million, in the first
quarter of 1995, as a further adjustment to the estimated costs of settling
the securities class action.

GAIN ON SALE OF HEALTH BUSINESS AND RELATED ASSETS

During the first half of 1993, the Company experienced a significant
decrease in revenues from its health services business unit. The Company
evaluated various options and during the second quarter of 1995 committed to
sell the health services business and cease to market any health insurance
related software systems. In June 1995, the Company completed the sale of its
health services unit for a total consideration of $9.3 million in cash. After
selling expenses and other accrued costs, the Company recorded a pre-tax gain
of $8.1 million (see Note 10 of Notes to Consolidated Financial Statements).

BUSINESS ACQUISITION CHARGES

During the fourth quarter of 1995, the Company recorded charges
aggregating $2.6 million relating principally to costs, previously deferred,
of an acquisition in Europe expected to close during the fourth quarter of
1995, that was not consummated ($1.2 million), and the settlement of certain
contracts acquired through previous acquisitions ($1.4 million).

PURCHASED RESEARCH AND DEVELOPMENT

In connection with the October 1995 acquisition of micado, the Company
expensed $14.5 million relating to purchased research and development. This
amount was determined based on the estimated replacement cost related to the
acquired technology for which technological feasibility has not been
established and no alternative future use existed.

<PAGE>
LOSS ON DISPOSITION OF COMPUTER EQUIPMENT

As a result of growth in the Company's existing client/user base, the
addition of new outsourcing customers and advances in central processing unit
technology, the Company, during the fourth quarter of 1995, restructured its
data center equipment by beginning migration from BIPOLAR technology to newer
CMOS technology. The Company entered into renewable lease agreements to
acquire this technology, which will also allow the Company to take advantage
of technological advances in this area without the large capital burden and
lack of flexibility resulting from the purchase of such technology. As a
result of the migration, the Company disposed of its existing data processing
equipment, with a net book value of $18.0 million, for $4.2 million in cash,
and recorded a one-time charge on the disposition of this equipment of $13.8
million. Concurrent with this technology upgrade, the Company upgraded certain
of its data storage equipment to a more advanced architecture. As
consideration for these storage systems upgrades, the Company exchanged
existing data storage systems, with an aggregate net book value of $6.0
million, and paid $2.0 million cash, resulting in a one-time charge of $4.6
million. These charges, aggregating $18.4 million, are recorded under Loss on
disposition of computer equipment for the year ended December 31, 1995.

IMPAIRMENT AND RESTRUCTURING CHARGES

During the fourth quarter of 1995, the Company recorded charges
aggregating $6.7 million to write-off or write-down, as appropriate, the
carrying values of certain identifiable intangible assets and goodwill related
to prior business acquisitions ($5.2 million) and computer software ($1.5
million).

OPERATING INCOME

1997 operating income increased 12.3% ($9.0 million) compared to 1996.
Domestic property and casualty operating income increased 9.6%, domestic life
and financial solutions operating income increased 44.6% and international
operating income increased 31.8%. The increase in operating income is
primarily related to increases in licensing and professional services
revenues.

Operating income, after the effects of the litigation settlement,
litigation recovery and credit to impairment and restructuring expense, was
$73.2 million for the year ended December 31, 1996. In May 1996, the Company
recorded a $9.4 million pre-tax gain for the recovery of legal expenses
following the resolution of the CSAA matter. At year end 1996, the Company
also recorded a $6.0 million pre-tax charge following the judgment in the SLD
matter.

Operating income, after the effects of the gain from the sale of the
health services business and special charges, was $19.6 million for the year
ended December 31, 1995. These results include a gain from the sale of the
Company's health services unit of approximately $8.1 million. Special charges
aggregating $60.8 million recorded during the year ended December 31, 1995
relate to impairment and restructuring charges, net ($6.8 million), litigation
settlement and other legal expenses ($18.5 million), charges incurred in
connection with the restructure of the Company's data center facilities ($18.4
million), and certain charges related to business acquisitions ($17.1
million).

Excluding special charges and credits, operating income for 1997 was
$82.2 million compared to $69.5 million for 1996 and $72.1 million for 1995.
Operating income, as a percentage of total revenues, excluding the effects of
the special charges described above, was 14.1% for 1997, 14.2% for 1996 and
16.9% for 1995.

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

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

First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
1997 initial license revenues. . . . $11.3 $16.6 $16.9 $25.1 $ 69.9
% of annual initial license revenues 16.2% 23.8% 24.2% 35.8% 100.0%
% of total revenues. . . . . . . . . 8.6% 11.8% 11.5% 15.3% 12.0%

1996 initial license revenues. . . . $10.4 $12.0 $10.1 $19.4 $ 51.9
% of annual initial license revenues 20.1% 23.2% 19.4% 37.3% 100.0%
% of total revenues. . . . . . . . . 9.5% 10.6% 8.2% 13.7% 10.6%

1995 initial license revenues. . . . $11.9 $ 9.5 $11.3 $16.1 $ 48.8
% of annual initial license revenues 24.5% 19.4% 23.1% 33.0% 100.0%
% of total revenues. . . . . . . . . 11.8% 9.1% 10.8% 14.0% 11.5%
</TABLE>

OTHER INCOME AND EXPENSES

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

During 1996, the Company made large cash expenditures related to the
October 1995 acquisition of micado ($6.4 million), the repurchase of 759,512
of the 1,519,024 shares of common stock held by GAP Coinvestment Partners and
General Atlantic Investors 14 L.P. ($38.0 million) in March 1996 and the
repurchase of 645,500 shares of the Company's outstanding common stock on the
open market ($35.6 million) under its share repurchase authorization in March
1996. Consequently, the Company maintained a higher level of debt and a lower
level of investable funds during 1996, resulting in an increase in interest
expense of $1.7 million and a decrease in investment income of $0.4 million.

INCOME TAXES

The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.4%, 36.2% and 61.1% for the years ended December 31,
1997, 1996 and 1995, respectively The effective income tax rate for 1995
increased as a result of the Company's expensing, for book purposes, purchased
research and development associated with its October 1995 acquisition of
micado (see Note 2 of Notes to Consolidated Financial Statements),
nondeductible write-offs of goodwill impairment (see Note 11 of Notes to
Consolidated Financial Statements) and the nondeductible amortization of
goodwill. These effects were offset, in part, by the higher tax basis than
book basis of the assets divested related to the sale of the Company's health
services unit (see Note 10 of Notes to Consolidated Financial Statements) and
differences between the US tax rate and tax rates imposed on the income of
foreign subsidiaries.

DISCONTINUED OPERATIONS

Income from operations of the discontinued property and casualty
information services segment (before taxes) for 1997 decreased 66.0% compared
to 1996, due primarily to the segment operating for only a portion of 1997.

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

<PAGE>
Income from operations of the discontinued property and casualty information
services segment (before taxes) for 1996 increased 114.4% compared to 1995,
due in part to restructuring costs of $3.9 million recorded in 1995 and an
operating loss attributable to the risk services portion of the segment of
approximately $4.2 million for 1995.

NEW ACCOUNTING STANDARDS

In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components, and is effective for fiscal years beginning after December 15,
1997. The adoption of FAS 130 is not expected to have a material effect on
the Company's disclosures.

In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates, and is effective for fiscal years beginning after December 15, 1997,
with earlier application encouraged. The Company adopted FAS 131 at December
31, 1997 and has included the appropriate disclosures in Note 12 of Notes to
Consolidated Financial Statements.

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

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

LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
(In Millions)
<S> <C> <C>
Cash and equivalents, marketable securities and investments $ 46.5 $ 30.8
Current assets 185.8 160.3
Current liabilities 86.2 112.6
Working capital 99.6 47.7
Current portion of long-term debt 1.2 31.2
Long-term debt 37.7 34.3

Cash provided by operations $126.2 $ 96.8
Cash used by investing activities (95.2) (91.3)
Cash used by financing activities (20.6) (18.7)
</TABLE>

The Company's current ratio (current assets divided by current
liabilities) stood at 2.2 at December 31, 1997, which management believes is
sufficient when combined with the available credit facilities to provide for
day-to-day operating needs and the flexibility to take advantage of investment
opportunities. The Company has available (net of amounts outstanding at
December 31, 1997) $163 million under its five year $200 million credit
facility, should management choose debt financing for any of the Company's
operating, investing or financing activities. Also, the Company has available
an uncommitted $15.0 million operating line of credit with which it may choose
to fund temporary operating cash needs.

<PAGE>
During 1997, the Company capitalized $62.5 million of internal software
development costs principally related to the development of its S3+
client/server property and casualty software (including the incorporation of
object-oriented technology and support for Microsoft Windows NT ) and
CyberLife object-oriented client/server life insurance software, as well as
other ongoing projects in support of its domestic and international product
strategies.

Significant expenditures planned for 1998, excluding any possible
business acquisitions and stock repurchases, are as follows: acquisition of
data processing and communications equipment, support software, buildings,
building improvements and office furniture, fixtures and equipment and costs
relating to the internal development of software systems.

The Company has historically used the cash generated from operations for
the development and acquisition of new products, acquisition of businesses and
repurchase of the Company's stock. The Company anticipates that, subject to
market conditions, it will continue to use its cash for all of these purposes
in the future and that projected cash from operations will be able to meet
presently anticipated needs; however, the Company may also consider incurring
debt, as discussed above, as needed to accomplish specific objectives in these
areas and for other general corporate purposes.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

The timing and amount of the Company's revenues are subject to a number
of factors, including, but not limited to, the timing of customers' decisions
to enter into large license agreements with the Company, which make estimation
of operating results prior to the end of a quarter or year extremely
uncertain. Additionally, while management believes that the Company's
financing needs for the foreseeable future will be satisfied from cash flows
from operations and the Company's currently existing credit facility,
unforeseen events or adverse economic or business trends may significantly
increase cash demands beyond those currently anticipated or affect the
Company's ability to generate/raise cash to satisfy financing needs.

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

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

YEAR 2000 READINESS

Many existing computer programs were designed to use only two digits to
identify a year in date fields. If not corrected, these applications could
fail or produce erroneous results when working with dates in the Year 2000 and
beyond. This Year 2000 issue may potentially affect the Company in four
areas: its product offerings, its services offerings, third-party products
used internally, and its suppliers. The Company's various business units have
been responsible for the assessment, remediation, validation and
implementation of Year 2000 corrective actions.

The application code of the Company's primary product offerings, S3+,
Series II, INSURE/90 , POINT , CyberLife and CYBERTEK CK/4 products, were
either initially designed or have been updated in their currently available
releases to be capable of processing and storing date data with dates in both
the twentieth (1900's) and twenty-first (2000's) centuries. The Company is
currently conducting an inventory and verifying the Year 2000 readiness of the
third-party products with which these Company applications are designed to
operate in order to validate that no unanticipated Year 2000 issues exist. In
addition, the Company also is in the process of conducting an inventory and
assessing other Company and third-party products previously licensed by the
Company to customers to determine if any renovation efforts may be required in
relation to these products.

In its services offerings, the Company has assessed and commenced Year
2000 remediation of the applications used in processing the data of its
Information Technology Outsourcing ("ITO") and BPO services customers. Some
of these remediation efforts are complete and some are still in various stages
of coding, testing or implementation. The Company intends to complete these
Year 2000 remediation efforts and required testing, in a Year 2000 test
environment, prior to the need for these services to process data involving
dates in the twenty-first century.

The primary third-party products used by the Company for its internal
operation include its data center hardware and software, internal financial
systems, and network and PC hardware and software. The Company's Blythewood
data center has completed its hardware and operating software inventory
assessments and has substantially completed the remediation efforts of
updating these hardware and software assets for the Year 2000 requirements.
The Company's Australian and European data centers also have completed their
inventory assessment and are implementing the hardware and operating software
enhancements required for Year 2000 remediation.

In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to
replace its existing systems. The selected solution is currently being
implemented, is designed to meet Year 2000 requirements, and is scheduled to
be operational at the end of 1998. In addition, the Company is commencing an
inventory and assessing all of its network and PC hardware and software to
determine if any Year 2000 remediation upgrades will be required.

Finally, the primary suppliers upon whom the Company's services are
dependent are electric utility and telephone companies who provide services to
the Company's various offices and data centers. If these services are
interrupted for a prolonged period due to the suppliers' Year 2000 problems,
it will disrupt the Company's ability to provide its services to customers,
notwithstanding the backup battery and diesel power supplies available for the
data center locations.

As discussed above, the Company has not yet fully completed its Year 2000
evaluations or its remediation efforts. If such remediation efforts are not
completed on a timely basis, Year 2000 issues could have a material impact on
the Company's operations and financial results. However, based upon the
Company's experience to date, at this time, it is not anticipated that the
completion of remaining Year 2000 remediation efforts will have an adverse
material effect upon the Company's financial position or results of
operations.

<PAGE>
SEASONALITY AND INFLATION

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

The Company's domestic property and casualty segment has an outsourcing
contract in Florida. In 1996, the state of Florida legislatively imposed six
month homeowner policies as opposed to the normal twelve month policies. This
decision was reversed later that year, but now has a carryover effect, which
may last for several years and places most policy renewal dates in the latter
part of the year. Since a significant percentage of the Company's revenue
under this contract is derived from processing renewals, the carryover effect
has caused a portion of the revenue to shift to the last half of the year.

Although the Company cannot accurately determine the amounts attributable
thereto, the Company has been affected by inflation through increased costs of
employee compensation and other operating expenses. To the extent permitted
by the marketplace for the Company's products and services, the Company
attempts to recover increases in costs by periodically increasing prices.
Additionally, most of the Company's license agreements and long-term services
agreements provide for annual increases in charges.
____________________________________________________

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this annual report that are not descriptions of
historical facts may be forward-looking statements that are subject to risks
and uncertainties, including economic, competitive and technological factors
affecting the Company's operations, markets, products, services and prices, as
well as other specific factors discussed in Note 13 of Notes to Consolidated
Financial Statements and elsewhere herein and in the Company's filings with
the Securities and Exchange Commission. These and other factors may cause
actual results to differ materially from those anticipated.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

Index to Consolidated Financial Statements and Supplementary Data

Page

<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:

Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 27

Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . 28

Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 30

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 31

QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 50

SUPPLEMENTAL SCHEDULES:

Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . 51

Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

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

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
POLICY MANAGEMENT SYSTEMS CORPORATION

We have audited the accompanying consolidated balance sheets of Policy
Management Systems Corporation as of December 31, 1997 and 1996 and the
related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Policy
Management Systems Corporation and subsidiaries as of December 31, 1997 and
1996 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

Coopers & Lybrand L.L.P.

Atlanta, Georgia
February 10, 1998
<PAGE>
<TABLE>
<CAPTION>

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)

<S> <C> <C> <C>
REVENUES:
Licensing . . . . . . . . . . . . . . . . . . . . . . $132,811 $108,923 $102,092
Services. . . . . . . . . . . . . . . . . . . . . . . 449,971 379,307 323,521
--------- --------- ---------
582,782 488,230 425,613
--------- --------- ---------
OPERATING EXPENSES:
Cost of revenues
Employee compensation and benefits. . . . . . . . . 232,519 180,825 140,304
Computer and communications expenses. . . . . . . . 34,745 31,812 27,408
Information services and data acquisition costs . . 31,562 28,809 28,941
Depreciation and amortization of property,
equipment and capitalized software costs. . . . . 58,259 48,525 49,220
Other costs and expenses. . . . . . . . . . . . . . 39,709 42,914 32,804
Selling, general and administrative expenses. . . . . 93,383 75,615 65,664
Amortization of goodwill and other intangibles. . . . 10,454 10,240 9,142
Litigation settlement and expenses, net . . . . . . . - (3,422) 18,465
Gain on sale of Health business and related assets. . - - (8,139)
Business acquisition charges. . . . . . . . . . . . . - - 2,573
Purchased research and development. . . . . . . . . . - - 14,500
Loss on disposition of computer equipment . . . . . . - - 18,422
Impairment and restructuring credits (charges), net . - (245) 6,755
--------- --------- ---------
500,631 415,073 406,059
--------- --------- ---------

OPERATING INCOME. . . . . . . . . . . . . . . . . . . . 82,151 73,157 19,554

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

OTHER INCOME AND EXPENSES:
Investment income . . . . . . . . . . . . . . . . . . 1,528 2,316 2,764
Interest expense and other charges. . . . . . . . . . (5,111) (4,993) (3,307)
--------- --------- ---------
(3,583) (2,677) (543)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 79,757 70,480 19,011
Income taxes. . . . . . . . . . . . . . . . . . . . . . 29,833 25,462 9,058
--------- --------- ---------

INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . 49,924 45,018 9,953

DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued P&C
Information Services less applicable income taxes
(benefit) of $238, $589, and $(4,116), respectively 397 979 (6,814)
Loss on disposal of P&C Information Services, less
applicable income tax benefit of $38. . . . . . . . (64) - -
--------- --------- ---------
333 979 (6,814)
--------- --------- ---------

NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139
========= ========= =========

BASIC EARNINGS PER SHARE:
Income from continuing operations . . . . . . . . . . 2.74 2.42 0.51
Income from discontinued operations . . . . . . . . . 0.02 0.05 (0.35)
--------- --------- ---------
$ 2.76 $ 2.47 $ 0.16
========= ========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations . . . . . . . . . . 2.65 2.39 0.51
Income from discontinued operations . . . . . . . . . 0.02 0.05 (0.35)
--------- --------- ---------
$ 2.67 $ 2.44 $ 0.16
========= ========= =========

WEIGHTED AVERAGE COMMON SHARES. . . . . . . . . . . . . 18,234 18,604 19,391
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION. . . . 18,833 18,833 19,630
========= ========= =========
<FN>
See accompanying notes.
</TABLE>

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS

December 31,
1997 1996
- -------------------------------------------------------------------------------------
(In Thousands, Except Share Data)

<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents. . . . . . . . . . . . . . . . . . . . . $ 32,179 $ 22,121
Marketable securities . . . . . . . . . . . . . . . . . . . . 3,280 2,234
Receivables, net of allowance for uncollectible amounts
of $2,628 ($883 at 1996). . . . . . . . . . . . . . . . . . 128,789 116,113
Income tax receivable . . . . . . . . . . . . . . . . . . . . 1,098 1,383
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 3,628 2,651
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,835 15,840
--------- --------
Total current assets. . . . . . . . . . . . . . . . . . . 185,809 160,342

Property and equipment, net . . . . . . . . . . . . . . . . . . 116,433 115,757
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 3,271 4,866
Income tax receivable . . . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net . . . . . . . . . . . . . . 69,125 83,363
Capitalized software costs, net . . . . . . . . . . . . . . . . 204,118 177,875
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 21,996 23,420
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 11,066 6,483
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,547 5,239
--------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $618,406 $581,386
========= ========

LIABILITIES
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . $ 57,345 $ 61,435
Accrued restructuring charges . . . . . . . . . . . . . . . . 145 2,478
Accrued contract termination costs. . . . . . . . . . . . . . 830 407
Current portion of long-term debt . . . . . . . . . . . . . . 1,191 31,222
Income taxes payable. . . . . . . . . . . . . . . . . . . . . 7,499 6,623
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . 18,806 9,840
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 631
--------- --------
Total current liabilities . . . . . . . . . . . . . . . . 86,213 112,636

Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 37,714 34,268
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 80,496 67,538
Accrued restructuring charges . . . . . . . . . . . . . . . . . 1,366 1,340
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,121 2,352
--------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . 207,910 218,134
--------- --------

Commitments and contingencies (Note 7)

STOCKHOLDERS' EQUITY
Special stock, $.01 par value, 5,000,000 shares authorized. . . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
18,339,304 shares issued and outstanding (18,179,186 at 1996) 183 182
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 112,090 106,104
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 306,367 256,110
Foreign currency translation adjustment . . . . . . . . . . . . (8,144) 856
--------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 410,496 363,252
--------- --------
Total liabilities and stockholders' equity. . . . . . . $618,406 $581,386
========= ========

<FN>
See accompanying notes.
</TABLE>

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

Unrealized
Foreign Holding
Additional Currency Loss on
Common Paid-In Retained Translation Marketable
Stock Capital Earnings Adjustment Securities Total
- ---------------------------------------------------------------------------------------
(Dollars In Thousands)

<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994. . . $194 $170,323 $206,974 $ (451) $(118) $376,922

Net income. . . . . . . . . . . - - 3,139 - - 3,139
Stock options exercised
(73,130 shares) . . . . . . . - 3,079 - - - 3,079
Unrealized holding gain on
marketable securities . . . . . - - - - 118 118
Foreign currency translation
adjustment. . . . . . . . . . - - - (586) - (586)
----- --------- -------- -------- ------ ---------

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

Net income. . . . . . . . . . . - - 45,997 - - 45,997
Stock options exercised
(148,084 shares). . . . . . . 2 6,291 - - - 6,293
Repurchase of 1,405,012 shares
of common stock . . . . . . . (14) (73,589) - - - (73,603)
Foreign currency translation
adjustment. . . . . . . . . . - - - 1,893 - 1,893
----- --------- -------- -------- ------ ---------

BALANCE, DECEMBER 31, 1996. . . 182 106,104 256,110 856 - 363,252

Net income. . . . . . . . . . . - - 50,257 - - 50,257
Stock options exercised
(240,018 shares). . . . . . . 3 11,018 - - - 11,021
Repurchase of 79,900 shares
of common stock . . . . . . . (2) (5,032) - - - (5,034)
Foreign currency translation
adjustment. . . . . . . . . . - - - (9,000) - (9,000)
----- --------- -------- -------- ------ ---------

BALANCE, DECEMBER 31, 1997. . . $183 $112,090 $306,367 $(8,144) $ - $410,496
===== ========= ======== ======== ====== =========

<FN>
See accompanying notes.
</TABLE>

POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------
(In Thousands)

<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . 72,276 62,265 60,700
Deferred income taxes. . . . . . . . . . . . . . . . 13,365 20,392 (21,692)
Provision for uncollectible accounts . . . . . . . . 2,951 510 567
Impairment charges . . . . . . . . . . . . . . . . . 75 - 6,756
Loss on disposition of computer equipment. . . . . . - - 18,422
Purchased research and development . . . . . . . . . - - 14,500
Business acquisition charges . . . . . . . . . . . . - - 2,573
Changes in assets and liabilities:
Accrued restructuring and lease termination costs. . (2,307) (10,076) (1,713)
Receivables. . . . . . . . . . . . . . . . . . . . . (14,032) (17,299) (5,901)
Income tax receivable. . . . . . . . . . . . . . . . 285 667 24,981
Accounts payable and accrued expenses. . . . . . . . (4,422) (9,524) 16,911
Income taxes payable . . . . . . . . . . . . . . . . 876 4,805 (2,028)
Other, net . . . . . . . . . . . . . . . . . . . . . 6,900 (955) (12,540)
---------- ---------- ---------
Cash provided by operations . . . . . . . . . . 126,224 96,782 104,675
---------- ---------- ---------

INVESTING ACTIVITIES
Proceeds from sales/maturities of
available-for-sale securities. . . . . . . . . . . . 250 2,050 25,000
Purchases of available-for-sale securities . . . . . . . - - (19,966)
Proceeds from maturities of held-to-maturity securities. - 1,000 5,736
Purchases of held-to-maturity securities . . . . . . . . - - (3,694)
Investment in unconsolidated affiliate . . . . . . . . . (4,850) (2,315) -
Acquisition of property and equipment. . . . . . . . . . (31,761) (28,852) (24,483)
Capitalized internal software development costs. . . . . (62,508) (56,775) (46,770)
Proceeds from sale of business segment . . . . . . . . . 2,900 - -
Purchased software . . . . . . . . . . . . . . . . . . . - (1,192) (711)
Proceeds from disposal of property and equipment . . . . 806 980 4,555
Contract acquisition costs . . . . . . . . . . . . . . . - - (10,000)
Business acquisitions (6,178) (28,231)
---------- ---------- ---------
Cash used by investing activities . . . . . . . (95,163) (91,282) (98,564)
---------- ---------- ---------

FINANCING ACTIVITIES
Payments on long-term debt . . . . . . . . . . . . . . . (181,219) (210,265) (20,002)
Proceeds from borrowing under credit facilities. . . . . 154,634 258,862 27,678
Issuance of common stock under stock option plans. . . . 11,021 6,293 3,079
Repurchase of outstanding common stock . . . . . . . . . (5,034) (73,603) -
---------- ---------- ---------
Cash provided (used) by financing activities. . (20,598) (18,713) 10,755
---------- ---------- ---------

Effect of exchange rate changes on cash. . . . . . . . . . . (405) 240 542
Net increase (decrease) in cash and equivalents. . . . . . . 10,058 (12,973) 17,408
Cash and equivalents at beginning of period. . . . . . . . . 22,121 35,094 17,686
---------- ---------- ---------
Cash and equivalents at end of period. . . . . . . . . . . . $ 32,179 $ 22,121 $ 35,094
========== ========== =========

SUPPLEMENTAL INFORMATION
Interest paid. . . . . . . . . . . . . . . . . . . . . . $ 5,005 $ 3,811 $ 2,323
Income taxes paid (refunded) . . . . . . . . . . . . . . 12,229 (2,193) 2,793

<FN>
See accompanying notes.
</TABLE>

<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

REVENUE RECOGNITION

The Company's revenues are generated primarily by licensing to customers
standardized insurance software systems and providing automation and
administrative support and information services to the global insurance and
financial services industries.

Software systems are licensed under the terms of substantially standard
nonexclusive and nontransferable license agreements, which generally have a
noncancelable minimum term of six years and provide for an initial license
charge and a monthly license charge. The initial license charge, which grants
a right to use the software system currently available at the time the
license is signed, is recognized as revenue upon delivery of the product and
receipt of a signed contractual obligation, if collectibility is probable and
no significant vendor obligations remain. The monthly license charge provides
access to Maintenance, Enhancements and Services Availability ("MESA"). Under
the maintenance provisions of MESA, the Company provides telephone support and
error correction to current versions of licensed systems. Under the
enhancement provisions of MESA, the Company will provide any additions or
modifications to the licensed systems, which the Company may deliver from time
to time to licensees of those systems if and when they become generally
available. The monthly license charge is recognized as revenue on a monthly
basis throughout the term of the MESA provision of the license agreement.
Services availability allows customers access to professional services, other
than maintenance and enhancements, which are provided under separate
arrangements during the MESA term.

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

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

<PAGE>
The Company also offers information and outsourcing services ranging from
making available software licensed from the Company on a remote processing
basis from the Company's data centers, to complete systems management,
processing, administrative support and automated information services, through
the Company's nationwide telecommunications network using the Company's data
base products. Outsourcing services are typically provided under contracts
having terms from three to ten years. Generally, agreements to provide
information services have terms from one to five years, and in some cases
month-to-month. Revenues from substantially all outsourcing and information
services are recognized at the time the service is performed and losses, if
any, are recognized in the period in which they are determined.

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

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

Realized gains and losses are included in net income and the cost of
securities sold is based on the specific identification method. There were no
sales of marketable securities during the years ended December 31, 1997 and
1996.

PROPERTY AND EQUIPMENT

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

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

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"),
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the expected future
cash flows of those assets are less than the assets' carrying amount. FAS 121
also addresses the accounting for long-lived assets that are expected to be
sold or discarded. The Company adopted FAS 121 on January 1, 1996.

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

<PAGE>
The Company amortizes goodwill over an estimated life of 15 years for goodwill
related to information and computer services company acquisitions and 10 years
for goodwill related to software company acquisitions. The Company believes
these lives appropriately reflect the current economic circumstances for such
businesses and the related period of future benefit. Longer lives will be
used for future business acquisitions only where independent third party
studies support such lives.

Other identifiable purchased intangible assets are being amortized on a
straight-line basis over their estimated period of benefit ranging from 5 to
10 years.

CAPITALIZED SOFTWARE COSTS

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," certain costs incurred in the internal development of computer
software which is to be licensed to customers, and costs of purchased computer
software, consisting primarily of software acquired through business
acquisitions, are capitalized and amortized over the estimated useful life,
generally 3 to 5 years, at the greater of the amount computed using (i) the
ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues of that product or (ii) the
straight-line method. Costs which are capitalized as part of internally
developed software primarily include direct and indirect costs associated with
payroll, computer time and allocable depreciation and other direct allocable
costs, among others. Product enhancements are improvements to an existing
product that are intended to extend the life or significantly improve the
marketability of the original product. Costs incurred for product enhancement
are charged to expense as research and development until technological
feasibility of the enhancement has been established. Upon release of the
enhanced product, the unamortized value of the original product is added to
the capitalized cost of the enhancement and amortized using the estimated life
of the enhancement. All costs incurred prior to the establishment of
technological feasibility have been expensed as research and development costs
during the periods in which they were incurred and amounted to $0.6, $0.2 and
$0.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company also recorded a write-off of $14.5 million
representing purchased research and development costs during 1995 (see Note
2). The amount by which unamortized software costs exceeds the net realizable
value, if any, is recognized in the period it is determined.

INCOME TAXES

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

BASIC AND DILUTED EARNINGS PER SHARE

Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). For the Company, the numerator is the same
for both basic and diluted EPS. The following is a reconciliation of the
denominator used in the calculation:

Year ended December 31,
1997 1996 1995
Weighted Average Shares
- --------------------------------------------------------
(In Thousands)

<S> <C> <C> <C>
Basic EPS. . . . . . . . . . . . 18,234 18,604 19,391
Effect of common stock options . 599 229 239
------ ------ ------
Diluted EPS. . . . . . . . . . . 18,833 18,833 19,630
====== ====== ======
</TABLE>

<PAGE>
Options to purchase 243,050, 3,000 and 375,000 shares of common stock at
$69.38, $66.00 and $81.90 per share, respectively, were outstanding but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price for the Company's common
stock for the period.

FOREIGN CURRENCY TRANSLATION

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

NEW ACCOUNTING STANDARDS

OTHER MATTERS

Certain prior year amounts have been reclassified or restated to conform
to current year presentation. See also Note 12.

<PAGE>
NOTE 2. ACQUISITIONS

In August 1996, the Company acquired certain assets of Co-Cam Pty Ltd.
and related entities ("Co-Cam") for approximately $6.0 million. Co-Cam,
headquartered in Australia, is principally a software and services provider
for superannuation and pension administration systems. The acquisition has
been recorded using the purchase method of accounting. Accordingly, the
Consolidated Statement of Operations of the Company for the year ended
December 31, 1996, includes the results of operations of Co-Cam from the date
of acquisition.

In October 1995, the Company acquired micado Beteiligungs-und Verwaltungs
GmbH ("micado"). Headquartered in Germany, micado is principally a software
provider to German insurance and financial services companies. The
acquisition was financed principally from cash provided by operations and
borrowings under the Company's credit facilities. The acquisition has been
recorded using the purchase method of accounting. Accordingly, the
Consolidated Statement of Operations for the year ended December 31, 1995,
includes the results of operations of micado from the date of acquisition. In
connection with the acquisition, the Company recorded an estimated liability
of $0.4 million at October 1, 1995, included in Impairment and restructuring
charges, net, in the accompanying Consolidated Statements of Operations, to
provide for certain relocation and severance costs of consolidating existing
operations in Germany with micado. At October 1, 1995, the Company also
recorded a charge of $14.5 million representing purchased research and
development for which technological feasibility had not yet been established
and for which there is no alternative future use. Under the terms of the
purchase agreement, payment of approximately $6.2 million of the purchase
price was deferred at the date of acquisition and was paid during 1996.

The total costs of the acquisition were determined, and assigned to the net
assets acquired, as follows:

micado
1995
--------
(In Thousands)

<S> <C>
Total consideration paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $30,806
Direct costs of acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 915
-------
Total cost to be assigned to net assets acquired. . . . . . . . . . . . . . . 31,721
Add - Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . 12,762
Less - Cost assigned to tangible and identifiable intangible assets acquired 25,840
- Write-off of purchased research and development . . . . . . . . . . . 14,500
-------
Cost assigned to goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,143
=======
</TABLE>

Supplemental pro-forma information is not presented since this
acquisition was not material to the Company's consolidated results of
operations in the year of acquisition.

During the fourth quarter of 1995, the Company recorded charges
aggregating $2.6 million relating principally to costs, previously deferred,
of an acquisition in Europe which was expected to close during the fourth
quarter of 1995 and was not consummated.

<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

Estimated December 31,
Useful Life 1997 1996
- -----------------------------------------------------------------------------
(Years) (In Thousands)

<S> <C> <C> <C>
Cost:
Land. . . . . . . . . . . . . . . . . . . . . - $ 2,729 $ 2,729
Buildings and improvements. . . . . . . . . . 10-40 63,717 63,670
Construction in progress. . . . . . . . . . . - 1,338 232
Leasehold improvements. . . . . . . . . . . . 1-10 3,872 2,799
Office furniture, fixtures and equipment. . . 5-15 51,324 46,389
Computer and communications equipment
and support software. . . . . . . . . . . . 2-5 127,621 115,966
Other . . . . . . . . . . . . . . . . . . . . 3-5 5,354 6,434
---------- ----------
255,955 238,219
Less: Accumulated depreciation and amortization (139,522) (122,462)
---------- ----------
Property and equipment, net $ 116,433 $ 115,757
========== ==========

</TABLE>

Depreciation and amortization charged to expense was $27.6, $23.7, and
$28.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively.

As a result of growth in the Company's existing client/user base, the
addition of new outsourcing customers and advances in central processing unit
technology, the Company, during the fourth quarter of 1995, restructured its
data center equipment by beginning migration from BIPOLAR technology to newer
CMOS technology. The Company entered into renewable lease agreements for this
technology. As a result of the migration, the Company disposed of its
existing central processing unit and associated equipment, with a net book
value of $18.0 million, for $4.2 million in cash, and recorded a one-time
charge on the disposition of this equipment of $13.8 million. Concurrent with
this technology upgrade, the Company upgraded certain of its data storage
equipment to a more advanced architecture. As consideration for these storage
systems upgrades, the Company exchanged existing data storage systems, with an
aggregate net book value of $6.0 million, and paid $2.0 million cash,
resulting in a one-time charge of $4.6 million. These one-time charges,
aggregating $18.4 million, are recorded under Loss on disposition of computer
equipment in the accompanying Consolidated Statement of Operations for the
year ended December 31, 1995.

NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of goodwill and other intangible assets is as follows:

December 31,
1997 1996
- ---------------------------------------------------------------
(In Thousands)

<S> <C> <C>
Goodwill. . . . . . . . . . . . . . . . . $ 61,884 $ 65,639
Customer lists. . . . . . . . . . . . . . 19,922 20,860
Contract acquisition costs. . . . . . . . 15,000 15,000
Covenants not to compete. . . . . . . . . 4,660 5,136
Other . . . . . . . . . . . . . . . . . . 6,066 6,662
--------- ---------
107,532 113,297
Less: Accumulated amortization. . . . . . (38,407) (29,934)
--------- ---------
Goodwill and other intangible assets, net $ 69,125 $ 83,363
========= =========
</TABLE>

<PAGE>
Amortization charged to expense was $10.6, $10.4 and $9.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Goodwill and
other intangible assets with an aggregate carrying value of $5.2 million were
written off as part of impairment and restructuring charges recorded during
the year ended December 31, 1995 (see Note 11).

NOTE 5. CAPITALIZED SOFTWARE COSTS

A summary of capitalized software costs is as follows:

December 31,
1997 1996
- --------------------------------------------------------
(In Thousands)

<S> <C> <C>
Internally developed software . $ 329,552 $ 267,461
Purchased software. . . . . . . 26,315 29,518
---------- ----------
355,867 296,979
Less: Accumulated amortization. (151,749) (119,104)
---------- ----------
Capitalized software costs, net $ 204,118 $ 177,875
========== ==========

</TABLE>

Amortization charged to expense was $33.9, $28.1 and $23.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Purchased
software with an aggregate carrying value of $1.5 million was written off as
part of impairment and restructuring charges recorded during the year ended
December 31, 1995 (see Note 11).

NOTE 6. LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt is as follows:

December 31,
1997 1996
- ----------------------------------------------
(In Thousands)

<S> <C> <C>
Credit facility borrowings . $37,000 $62,000
Notes payable. . . . . . . . 1,905 3,490
------- -------
38,905 65,490

Less: Current portion. . . . 1,191 31,222
------- -------
Long-term debt . . . . . . . $37,714 $34,268
======= =======
</TABLE>

On August 8, 1997, the Company entered into a new credit facility for
$200 million with a syndicate of financial institutions to provide an
additional source of funds for general corporate purposes. The facility bears
a term of five years. Borrowings under the facility bear interest payable at
per annum rates based upon the London Interbank Offering Rate plus a spread
above certain of these rates ranging from 0.225% to 0.350% dependent upon
certain financial ratios of the Company. Additionally, the Company pays a per
annum facility fee on the aggregate amount of the commitments ranging from
0.10% to 0.15%. The Company is subject to certain covenants including, but
not limited to, the maintenance of certain operating ratios and levels of
tangible net worth. The average interest rate applicable to borrowings under
credit facilities was 6.01% and 6.16% for the years ended December 31, 1997
and 1996, respectively.

<PAGE>
NOTE 7. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

On March 27, 1995, the Company entered into a long-term license and
maintenance agreement in order to acquire rights to certain operating system
management software products for use in the Company's worldwide data center
operations. The agreement, which has an initial term of ten years, may be
renewed and extended for an additional period of five years, subject to mutual
agreement and other modifications. Minimum contract payments by the Company
over the initial ten-year term aggregate $33.0 million payable in specified
annual installments which escalate over the ten-year period. In addition to
minimum contract payments, the Company will pay an annual supplemental revenue
fee, subject to certain provisions in the agreement, equal to a specified
annual percentage of the Company's applicable prior year annual gross
revenues, less the specified annual installment for such period. Minimum
contract payments will be expensed on a straight-line basis over the initial
ten-year term. Annual supplemental revenue fees, if any, will be accrued in
the period in which determined. The agreement provisions for the supplemental
revenue fee were not met for 1996, and the Company made no supplemental
payment in 1997 for the 1996 period.

On April 7, 1995, the Company finalized certain terms of a ten-year
agreement with an insurance holding company and its subsidiaries, initially
entered into in November 1994. The Company is to provide certain data
processing and other professional services as required. The minimum
contractual processing revenues are expected to be in excess of $60 million
over the term of the agreement. The Company incurred costs of $10 million
related to this agreement in the second quarter of 1995 ($5 million in the
fourth quarter of 1994), which have been deferred as contract acquisition
costs and are being expensed on a straight-line basis over the term of the
agreement. At December 31, 1997, the net unamortized amounts related to this
continuing agreement, included in other intangible assets, were $10.8
million.

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

The Company occupies leased facilities under various operating leases
expiring through 2014. The leases for certain facilities contain options for
renewal and provide for escalation of annual rentals based upon increases in
the lessors' operating costs. Rent expense under leases for facilities was
$10.0, $7.7 and $7.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.

The Company leased certain data processing and related equipment
primarily under operating leases expiring through 2003. Rent expense under
operating leases for such equipment was $7.9, $7.5 and $4.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively.

Future minimum lease obligations under noncancelable operating leases are
stated below and include payments over 17 years aggregating $3.4 million
related to a leasehold planned for future abandonment, net of subleases (in
thousands):
<TABLE>
<CAPTION>

Year Ending December 31,
- ------------------------

<S> <C>
1998 . . . . . . $13,860
1999 . . . . . . 12,120
2000 . . . . . . 11,221
2001 . . . . . . 9,970
2002 . . . . . . 7,083
Thereafter . . . 10,762
-------
Total. . . . . . $65,016
=======
</TABLE>

<PAGE>
CONTINGENCIES - LEGAL PROCEEDINGS

The Company is also presently involved in litigation which commenced in
January of 1996 in the Circuit Court in Greenville County, South Carolina,
with Liberty Life Insurance Company and certain of its affiliates ("Liberty")
arising out of the parties' prior contractual relationship related to the
development and licensing of Series III life insurance systems and the
subsequent licensing of the Company's CYBERTEK life insurance systems.
Liberty's complaint alleges breach of contract, breach of express and implied
warranties, fraudulent inducement, breach of contract accompanied by a
fraudulent act, and recission. Liberty has alleged actual and consequential
damages in excess of $160 million and also seeks treble and punitive damages.
The Company has asserted various affirmative defenses and is pursuing
counterclaims against Liberty for breach of contract, recoupment, breach of
good faith and fair dealing, and breach of contract accompanied by a
fraudulent act. The Company is seeking equitable relief, including injunctive
relief, and currently unspecified actual, compensatory and consequential
damages.

<PAGE>
NOTE 8. INCOME TAXES

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

<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------

<S> <C> <C> <C>
Provision for taxes at the statutory rate . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in provision from:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 1.1 (3.4) (31.4)
Revaluation of deferred state income tax liability. . . - - (4.0)
Purchased research and development. . . . . . . . . . . - - 62.7
Nontaxable investment income. . . . . . . . . . . . . . (0.1) - (1.8)
State and local income taxes, net of federal tax effect 1.3 1.8 3.0
Differences in foreign and US tax rate. . . . . . . . . 0.6 - (23.2)
Deferred tax asset valuation allowance. . . . . . . . . - - 14.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . (0.5) 2.8 6.0
----- ----- ------
2.4 1.2 26.1
----- ----- ------
Effective income tax provision rate . . . . . . . . . . . 37.4% 36.2% 61.1%
===== ===== ======
</TABLE>

An analysis of the income tax provision is as follows:

Year ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------
(In Thousands)

<S> <C> <C> <C>
Current domestic taxes . . . . . . . . . . . . . . . . . $ 4,947 $ 2,494 $(1,858)
Current foreign taxes. . . . . . . . . . . . . . . . . . 8,464 4,835 3,309
------- ------- --------
Total current taxes. . . . . . . . . . . . . . . . . . 13,411 7,329 1,451
------- ------- --------
Deferred income taxes relating to temporary differences:
Depreciation and amortization
of property, equipment and intangibles . . . . . . . 2,138 664 (1,748)
Capitalized software development costs . . . . . . . . 10,917 10,511 8,876
Impairment and restructuring of operations . . . . . . 865 3,120 1,312
Revaluation of deferred state income tax liability . . - - (497)
Litigation settlement and expenses, net. . . . . . . . 1,754 4,184 (3,445)
Other. . . . . . . . . . . . . . . . . . . . . . . . . 948 243 (1,007)
------- ------- --------
16,622 18,722 3,491
------- ------- --------
Total income tax provision . . . . . . . . . . . . . . . $30,033 $26,051 $ 4,942
======= ======= ========
</TABLE>

<PAGE>
An analysis of the net deferred income tax liability is as follows:

December 31,
1997 1996
- ---------------------------------------------------------------
(In Thousands)

<S> <C> <C>
Current deferred assets:
Net operating loss carryforward. . . . . . $ 515 $ 176
Restructuring loss from foreign operations 196 790
Other. . . . . . . . . . . . . . . . . . . 2,917 1,685
------- --------
Current deferred assets. . . . . . . . . 3,628 2,651
------- --------

Long-term deferred assets:
State tax credits. . . . . . . . . . . . . 285 907
Net operating loss carryforward. . . . . . 7,567 9,095
Foreign tax credit carryforward. . . . . . 5,197 3,846
Other. . . . . . . . . . . . . . . . . . . 8,947 9,572
------- --------
Long-term deferred assets. . . . . . . . 21,996 23,420
------- --------
Total deferred assets. . . . . . . . . $25,624 $26,071
======= ========

Long-term deferred liabilities:
Depreciation and amortization of property,
equipment and intangibles. . . . . . . . $14,709 $15,899
Capitalized software development costs . . 63,911 53,844
Other. . . . . . . . . . . . . . . . . . . 1,876 (2,205)
------- --------
Total deferred liabilities . . . . . . $80,496 $67,538
======= ========
</TABLE>

The Company generated a $23.9 million net operating loss for the year
ended December 31, 1995 for federal and state tax purposes. These loss
carryforwards expire in 2010. Certain foreign subsidiaries of the Company
have net operating loss carryforwards at December 31, 1997 totaling
approximately $5.1 million, which may be used to offset future taxable income.
The foreign carryforwards have no expiration period.

No provision has been made for federal income taxes on unremitted
earnings of certain of the Company's foreign subsidiaries (approximately $28
million at December 31, 1997) since the Company plans to permanently reinvest
all such earnings. However, if such earnings were remitted, there would be
additional federal income tax expense of $2.3 million.

The Company has foreign tax credit carryforwards at December 31, 1997 of
$5.2 million which will expire as follows: $3.8 million on December 31, 2000,
and $1.4 million on December 31, 2001. The Company recorded a valuation
allowance of $3.1 million at December 31, 1995 related to certain deferred tax
assets that are not anticipated to be utilized through normal operating
results.

NOTE 9. EMPLOYEE BENEFIT PLANS

PROFIT SHARING PLAN AND TRUST

Prior to July 1, 1995, eligible employees were covered under the Policy
Management Systems Corporation Profit Sharing Plan and Trust. The Company's
contributions to this Plan were determined by the Board of Directors of the
Company. Employees made no contributions to this Plan. The Company made no
contributions to the Plan for 1995 and on July 1, 1995, all accounts of all
participants in this Plan were merged into the Company's 401(k) Retirement
Savings Plan.

<PAGE>
401(K) RETIREMENT SAVINGS PLAN

The Company offers the Policy Management Systems Corporation 401(k)
Retirement Savings Plan to eligible employees. Effective January 1, 1995, the
Company began matching 100% of the first 3% of salary contributed by the
participant and matching 50% of the next 3% of salary contributed by the
participant. Subject to limits imposed by the Internal Revenue Service, the
Internal Revenue Code and the Plan, participants may also make additional
before-tax and after-tax contributions that are not subject to matching
contributions by the Company. Participants have several options as to how
their contributions and vested Company contributions are invested. Effective
July 1, 1995, non-vested and current Plan year Company contributions are
invested in common stock of the Company. The Company's contribution on behalf
of participating employees was $3.8, $3.3 and $3.6 million for the years ended
December 31, 1997, 1996 and 1995, respectively.

STOCK OWNERSHIP PLAN

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

STOCK OPTION PLANS

The Company currently has various plans under which options to purchase
shares of the Company's common stock have been granted to eligible employees
and members of the Board of Directors of the Company and its subsidiaries.
Options under these plans expire ten years after the grant date except that
options under the 1993 Long Term Incentive Plan for Executives (the "1993
Plan") expire in January 2003. During 1997, options were granted under the
1989 Stock Option Plan only. During 1996 and 1995, options were granted under
the 1993 Plan and the 1989 Stock Option Plan.

Options granted under all plans except the 1993 Plan have exercise prices
at 100% of market value at date of grant and generally become exercisable
either at the rate of 20%, 25% or 33 1/3% per year (cumulative) beginning one
year from date of grant.

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

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

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

<PAGE>
Pro forma information regarding net income and earnings per share is required
by FAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.7%, 6.4% and 6.5%; volatility factors of the expected market price of the
Company's common stock of 35.4%, 37.5% and 39.7%; and weighted-average
expected life of the options of 4.4, 5.0 and 5.1 years.

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

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

Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Net Income
As reported . . . . . . . . . . . . . . . . . . $50,257 $45,997 $3,139
Pro forma . . . . . . . . . . . . . . . . . . . 43,698 41,789 2,161

Basic earnings per share
As reported . . . . . . . . . . . . . . . . . . $ 2.76 $ 2.47 $ 0.16
Pro forma . . . . . . . . . . . . . . . . . . . 2.40 2.25 0.11

Diluted earnings per share
As reported . . . . . . . . . . . . . . . . . . $ 2.67 $ 2.44 $ 0.16
Pro forma . . . . . . . . . . . . . . . . . . . 2.32 2.22 0.11

</TABLE>
Option activity under all of the stock option plans is summarized as follows:

Year Ended December 31,
1997 1996 1995
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year . . . 3,458,882 $48.95 3,106,164 $49.78 2,804,328 $50.56
Granted. . . . . . . . . . . . . . . . 609,750 45.89 589,468 42.82 674,359 47.99
Exercised. . . . . . . . . . . . . . . (240,018) 37.44 (148,084) 36.34 (73,130) 37.48
Forfeited. . . . . . . . . . . . . . . (30,724) 45.92 (88,666) 58.35 (299,393) 56.04
---------- ---------- ----------
Outstanding at end of year . . . . . . 3,797,890 $49.21 3,458,882 $48.95 3,106,164 $49.78
========== ========== ==========

Options exercisable at year end. . . . 1,685,592 1,218,203 1,119,562

Shares available for future grant. . . 914,734 1,304,260 1,995,162

Weighted-average fair value of options
granted during the year $17.39 $18.72 $21.52
</TABLE>

<PAGE>
The following table summarizes information about fixed options outstanding at
December 31, 1997:

Options Outstanding Options Exercisable
----------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
24 to 30 . . 168,230 5.8 years $29.59 168,230 $29.59
31 to 36 . . 509,935 6.8 years 34.34 212,345 33.73
43 to 49 . . 2,032,734 7.5 years 45.62 625,704 45.20
50 to 54 . . 465,941 6.4 years 51.29 248,763 50.24
66 to 82 . . 621,050 4.9 years 76.92 430,550 74.83
--------- ---------
3,797,890 1,685,592
========= =========
</TABLE>

NOTE 10. CERTAIN TRANSACTIONS

DISCONTINUED OPERATIONS

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

OTHER

During 1997, the Company repurchased 79,900 shares of the Company's stock
on the open market.

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

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

Also during 1996, the Company repurchased 645,500 shares of its common
stock on the open market. There were no shares repurchased during the twelve
months ended December 31, 1995.

On June 30, 1995, the Company sold its health services unit for a total
consideration of $9.3 million in cash. After selling expenses of $0.5 million,
the net book value of assets sold of $0.5 million, liabilities resulting from
the sale, including severance liabilities for certain employees and other
reserves of $1.5 million, and the present value of a sublease executed by the
purchaser for certain office space of $1.3 million, the Company recorded a
pre-tax gain of $8.1 million, for the year ended December 31, 1995.

<PAGE>
NOTE 11. IMPAIRMENT AND RESTRUCTURING CHARGES

During 1995, the Company continued to examine its options to improve the
overall performance of the risk information services business. The risk
information services business continued to reflect declining sales and
earnings, reporting revenues of $22.7 million for the year ended December 31,
1995 and an operating loss of $4.2 million. As a result of its continued
detailed business assessment, the Company determined that there were no
further services or investment alternatives that could bring these operations
to profitability and that the cash losses related to the risk information
services business would continue into the future. As a result, the Company
decided to restructure its property and casualty information services business
and cease providing certain data collection services, including property
inspections, commercial audits and pre-employment checks. The Company sold the
pre-employment business and completely ceased and abandoned operations in
property inspections and commercial audits. As a result, the Company recorded,
at December 31, 1995, restructuring charges of $3.7 million for disposal and
severance charges related to exiting these operations. This amount is
included in discontinued property and casualty information services segment
results.

In 1995, the Company performed a detailed assessment of the on-site
medical correspondence information services business and determined that the
expected future cash flows of this business did not support the carrying value
of the related goodwill and identifiable intangible assets. As a result, at
October 1, 1995, the Company recorded impairment charges of $1.8 million to
write-off the carrying value of the identifiable intangible assets ($1.1
million) and goodwill ($0.7 million).

As part of a 1983 business acquisition, the Company acquired a billing
and collection system (CABILS), which was originally utilized in specialty
processing or the processing of assigned risk business for the Company's
customers (principally those customers acquired in the business acquisition)
and, later, evolved into the basis for a portion of the Company's full
property and casualty total policy management processing for voluntary as well
as assigned risk business. During 1995, several of the Company's customers of
this business opted to either move some or all states served by them to LAD
servicing carriers or to not renew their agreements for these services for
other reasons. In addition, the Texas Plan implemented rate increases and a
mandatory takeout plan which had the effect of further decreasing the number
of policies served by the Company. During 1995, the Company decided to
migrate its property and casualty total policy management processing to its
S3+ technology, replacing the software acquired in 1983. Based on a detailed
business assessment performed by the Company, the anticipated cash flows for
this business for the period until the S3+ migration was completed did not
support the carrying value of the software and related goodwill associated
with this business. As a result, the Company recorded, at October 1, 1995,
impairment charges of $2.8 million to write-off the carrying value of the
software ($0.4 million) and related goodwill ($2.4 million).

During 1995, the Company ceased the active marketing of certain
processing software utilized in the processing of individual accident and
health business by the Company's life and financial solutions business. A
cash flow valuation performed by the Company indicated that the expected
future cash flows of this business did not entirely support the carrying value
of the goodwill associated with this business, which was originally acquired
in 1987. As a result, the Company recorded at December 31, 1995 impairment
charges of $0.9 million to write-down the carrying value of the related
goodwill to its estimated net realizable value.

The Company determined that a development and design tool used in the
development of certain of its property and casualty software no longer
provided significant service potential to the Company's development efforts.
As the Company's license for the tool is non-transferable, the Company
recorded an impairment charge at October 1, 1995 of $1.1 million to write-off
the remaining carrying value of this software.

<PAGE>
NOTE 12. SEGMENT INFORMATION

2. Life and financial solutions enterprise software and services (generally
referred to as the "domestic life and financial solutions business"). This
segment provides software products, product support, professional services and
outsourcing primarily to the US life insurance and financial services markets.
In 1995, this segment included the Company's health services unit which was
sold in June 1995.

5. Life information services. This segment provides information services,
principally physician reports and medical histories, to US life insurers.

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

Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS
Enterprise software and services
Property and casualty . . . . . . . . . . . . . . $250,086 $ 216,093 $ 193,470
Life and financial solutions. . . . . . . . . . . 102,593 67,276 54,096
Life information services . . . . . . . . . . . . . 64,610 64,920 60,128
--------- ----------- -----------
Total US revenues . . . . . . . . . . . . . . . 417,289 348,289 307,694
International . . . . . . . . . . . . . . . . . . . 165,493 139,941 117,919
--------- ----------- -----------
Total revenues from continuing operations . $582,782 $ 488,230 $ 425,613
========= =========== ===========

Discontinued Operations
Property and casualty information services. . . . 64,649 93,679 111,689

INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Enterprise software and services
Property and casualty . . . . . . . . . . . . . . $ 71,295 $ 65,046 $ 55,597
Life and financial solutions. . . . . . . . . . . 21,647 14,970 17,556**
Life information services . . . . . . . . . . . . . 3,371 3,321 3,174
Corporate . . . . . . . . . . . . . . . . . . . . . (26,624) (19,638)* (81,187)*
--------- ----------- -----------
Total US operating income . . . . . . . . . . . 69,689 63,699 (4,860)
International . . . . . . . . . . . . . . . . . . . 12,462 9,458 24,414
--------- ----------- -----------
Income from continuing operations
before income taxes. . . . . . . . . . . . 82,151 73,157 19,554
--------- ----------- -----------

Equity in earnings of unconsolidated affiliates . . . 1,189 - -
Other income and expenses . . . . . . . . . . . . . . (3,583) (2,677) (543)
Income taxes. . . . . . . . . . . . . . . . . . . . . 29,833 25,462 9,058
--------- ----------- -----------
Income from continuing operations. . . . . . . . $ 49,924 $ 45,018 $ 9,953
========= =========== ===========

DISCONTINUED OPERATIONS
Property and casualty information services. . . . . $ 533 $ 1,568* $ (10,930)*
Income taxes (benefit). . . . . . . . . . . . . . . 200 589 (4,116)
--------- ----------- -----------
Discontinued operations, net. . . . . . . . . . $ 333 $ 979 $ (6,814)
========= =========== ===========

DEPRECIATION AND AMORTIZATION
Enterprise software and services
Property and casualty . . . . . . . . . . . . . . $ 40,828 $ 36,245 $ 42,488
Life and financial solutions. . . . . . . . . . . 12,590 10,429 7,677
Life information services . . . . . . . . . . . . . 1,828 1,392 1,100
Corporate . . . . . . . . . . . . . . . . . . . . . 278 172 261
International . . . . . . . . . . . . . . . . . . . 16,342 13,788 8,882
Transferred to selling, general and administrative. (3,153) (3,261) (2,046)
--------- ----------- -----------
Total depreciation and amortization . . . . . . $ 68,713 $ 58,765 $ 58,362
========= =========== ===========

Discontinued Operations
Property and casualty information services. . . . 178 255 293

<FN>
*Discontinued and Corporate operating income includes special charges and write-offs.
**Includes operating income from the health services unit (divested June 1995) of $1.0
million and a pre-tax gain of $8.1 million on the sale of the unit's business related
assets.
</TABLE>

<PAGE>

As of December 31,
1997 1996 1995
- --------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Enterprise software and services
Property and casualty. . . . . . . . $394,376 $331,539 $ 409,296
Life and financial solutions . . . . 82,010 90,475 96,491
Information services
Property and casualty (discontinued) - 21,129 20,495
Life . . . . . . . . . . . . . . . . 14,957 26,140 23,241
Corporate. . . . . . . . . . . . . . . 8,464 15,168 26,746
--------- --------- ----------
Total US identifiable assets . . . 499,807 484,451 576,269
International. . . . . . . . . . . . . 142,881 123,232 135,949
Eliminations . . . . . . . . . . . . . (24,282) (26,297) (179,482)
--------- --------- ----------
Total identifiable assets. . . . . $618,406 $581,386 $ 532,736
========= ========= ==========

LONG-LIVED ASSETS
US . . . . . . . . . . . . . . . . . . $361,383 $345,641 $ 303,341
International. . . . . . . . . . . . . 71,214 75,403 63,802
--------- --------- ----------
Total long-lived assets. . . . . . $432,597 $421,044 $ 367,143
========= ========= ==========
</TABLE>

NOTE 13. SIGNIFICANT RISKS AND UNCERTAINTIES

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

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

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

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

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

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

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

First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
1997
Revenues. . . . . . . . . . . . . . . . . $131,187 $140,628 $147,659 $163,308
Operating income. . . . . . . . . . . . . 16,307 17,666 21,323 26,855
Other income and expenses, net. . . . . . (790) (1,012) (1,007) (774)
Income from continuing operations
before income taxes . . . . . . . . . . 15,886 16,975 20,590 26,306
Discontinued operations, net. . . . . . . 171 95 67 -
Net income. . . . . . . . . . . . . . . . $ 10,092 $ 10,694 $ 12,937 $ 16,534
Basic earnings per share. . . . . . . . . $ 0.56 $ 0.59 $ 0.71 $ 0.90
Diluted earnings per share. . . . . . . . $ 0.55 $ 0.58 $ 0.68 $ 0.85

1996
Revenues. . . . . . . . . . . . . . . . . $109,937 $114,007 $123,069 $141,217
Operating income. . . . . . . . . . . . . 17,967 24,735 14,651 15,804
Other income and expenses, net. . . . . . (115) (432) (1,099) (1,031)
Income from continuing operations
before income taxes . . . . . . . . . . 17,852 24,303 13,552 14,773
Discontinued operations, net. . . . . . . 74 206 403 296
Net income. . . . . . . . . . . . . . . . $ 11,628 $ 15,803 $ 9,007 $ 9,559
Basic earnings per share. . . . . . . . . $ 0.60 $ 0.85 $ 0.50 $ 0.53
Diluted earnings per share. . . . . . . . $ 0.59 $ 0.83 $ 0.49 $ 0.52

1995
Revenues. . . . . . . . . . . . . . . . . $101,424 $104,393 $104,459 $115,337
Operating income (loss) . . . . . . . . . 19,904 18,383 18,370 (37,103)
Other income and (expenses), net. . . . . (268) (292) (4) 21
Income (loss) from continuing operations
before income taxes (benefit) . . . . . 19,636 18,091 18,366 (37,082)
Discontinued operations, net. . . . . . . (945) (854) (781) (4,234)
Net income (loss) . . . . . . . . . . . . $ 11,320 $ 12,090 $ 11,594 $(31,865)
Basic earnings (loss) per share . . . . . $ 0.58 $ 0.62 $ 0.60 $ (1.64)
Diluted earnings (loss) per share . . . . $ 0.58 $ 0.61 $ 0.58 $ (1.64)

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

The results of operations in 1995 reflect special charges recorded in the fourth
quarter of $58.6 million (after taxes $42.9 million, or $2.21 per share).
Additionally, the Company recorded credits of $1.7 million (after taxes $1.0 million,
or $.05 per share) and charges of $7.9 million (after taxes $4.9 million or $0.25 per
share), in the first and second quarters, respectively. On June 30, 1995, the
Company sold its health services unit and recorded a pre-tax gain of $8.1 million
(after taxes $6.7 million, or $0.35 per share).

For a further discussion of these special charges/credits see Management's
Discussion and Analysis of Financial Condition and Results of Operations and Note 11
of Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
SCHEDULE II

POLICY MANAGEMENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS

Additions
----------------
Balance Charged
at Charged to Balance
Beginning to Other at End
Description of Period Expenses Accounts Deductions of Period
- --------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible amounts
Year ended December 31, 1997. . . . . . . . . . . $ 883 3,750 - (2,005)(1) $ 2,628

Allowance for uncollectible amounts
Year ended December 31, 1996. . . . . . . . . . . $ 2,042 687 - (1,846)(1) $ 883

Allowance for uncollectible amounts
Year ended December 31, 1995. . . . . . . . . . . $ 1,024 1,201 - (183)(1) $ 2,042

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

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

Accrued restructuring and lease termination costs
Year ended December 31, 1995. . . . . . . . . . . $16,444 3,850(2) - (6,399)(3) $13,895

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

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

Allowance for deferred tax assets
Year ended December 31, 1995. . . . . . . . . . . $ - - 3,090 - $ 3,090

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

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
POLICY MANAGEMENT SYSTEMS CORPORATION

Our report on the consolidated financial statements of Policy Management
Systems Corporation is included on page 26 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 25 of this Form 10-K.

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 required to be
included therein.

Coopers & Lybrand L.L.P.

Atlanta, Georgia
February 10, 1998

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information other than the listing of Executive Officers of the Company,
which is set forth in Part I of this Form 10-K, is contained under the heading
"Election of Directors" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section of the Company's 1998 Proxy Statement titled "Compensation
Plans and Arrangements" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The sections of the Company's 1998 Proxy Statement titled "Principal
Stockholders" and "Stock Ownership of Directors, Director Nominees and
Executive Officers" are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The sections of the Company's 1998 Proxy Statement titled "Certain
Transactions" and "Compensation Committee Interlocks and Insider
Participation" are incorporated herein by reference.

PART IV

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

FINANCIAL STATEMENTS AND SCHEDULES

See Index to Consolidated Financial Statements and Supplementary Data on
page 25.

EXHIBITS FILED

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

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

Form 11-K for the Company's 401(k) Retirement Savings Plan for the year
ended December 31, 1997 is incorporated herein by reference.

FORM 8-K

The Company did not file any reports on Form 8-K during the last quarter
of the year ended December 31, 1997.

<PAGE>
SIGNATURES

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

(REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION

BY (SIGNATURE) /s/ Timothy V. Williams
DATE March 18, 1998 Timothy V. Williams, Executive Vice President
and Chief Financial Officer

BY (SIGNATURE) /s/ Jacques E. McCormack
DATE March 18, 1998 Jacques E. McCormack, Vice President,
Corporate Controller

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

BY (SIGNATURE) /s/ G. Larry Wilson
(NAME AND TITLE) G. Larry Wilson, Chairman of the Board of Directors,
DATE March 18, 1998 President and Chief Executive Officer

BY (SIGNATURE) /s/ Alfred R. Berkeley, III
(NAME AND TITLE) Alfred R. Berkeley, III, Director
DATE March 18, 1998

BY (SIGNATURE) /s/ Donald W. Feddersen
(NAME AND TITLE) Donald W. Feddersen, Director
DATE March 18, 1998

BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE March 18, 1998

BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE March 18, 1998

BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE March 18, 1998

BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE March 18, 1998

<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION

EXHIBIT INDEX

Exhibit
Number

3. ARTICLES OF INCORPORATION AND BY-LAWS

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

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

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

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

10. MATERIAL CONTRACTS

A. Policy Management Systems Corporation 1986 Stock Option Plan (filed as
an Exhibit to Form 10-K for the year ended December 31, 1986, and is
incorporated herein by reference)

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

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

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

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

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

G. Shareholders' Agreement, dated April 26, 1994, among Policy Management
Systems Corporation, General Atlantic Partners 14, L.P. and GAP Coinvestment
Partners (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1994, and is incorporated herein by reference)

H. Registration Rights Agreement, dated April 26, 1994, among Policy
Management Systems Corporation, General Atlantic Partners 14, L.P. and GAP
Coinvestment Partners (filed as an Exhibit to Form 10-Q for the quarter ended
September 30, 1994, and is incorporated herein by reference)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CC. Annual Bonus Program for Executive Officers (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1997, and is incorporated herein by
reference)

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

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

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

GG. Employment Agreement dated January 1, 1998, and Addendum No. 1 thereto
dated January 26, 1998, with Donald A. Coggiola (filed herewith)

21. SUBSIDIARIES OF THE REGISTRANT

A. Filed herewith

23. CONSENTS OF EXPERTS AND COUNSEL

A. Consent of Coopers & Lybrand filed herewith

27. FINANCIAL DATA SCHEDULES

A. 1997 filed herewith (EDGAR version only)

B. 1996 and 1995, as restated, filed herewith (EDGAR version only)

C. First Quarter 1997 and 1996, as restated, filed herewith (EDGAR
version only)

D. Six Months Ended 1997 and 1996, as restated, filed herewith (EDGAR
version only)

E. Nine Months Ended 1997 and 1996, as restated, filed herewith (EDGAR
version only)

EMPLOYMENT AGREEMENT
--------------------

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of January 1, 1998, by
and between Policy Management Systems Corporation, a South Carolina
corporation ("Employer"), and DONALD A. COGGIOLA ("Employee").

WHEREAS, Employer and Employee wish to alter their current employment
arrangement; and

WHEREAS, Employer and Employee are desirous of continuing Employee's
employment with Employer for the period of five years beginning January 1,
1998, and on the terms and conditions, set forth herein.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and obligations herein contained, the parties hereby agree as follows:

1. EMPLOYMENT. Employer hereby employs Employee, and Employee accepts
----------
such employment, according to the terms and conditions set forth in this
Agreement.

2. TERM.
----

(a) The term of Employee's employment hereunder shall be for a period
commencing on January 1, 1998, and continuing through December 31, 2002.
Notwithstanding the foregoing, Employee's employment by Employer hereunder may
be earlier terminated, subject to Section 10 hereof. The period of time
between the commencement and termination of Employee's employment hereunder
shall be referred to herein as the "Employment Period."

(b) In the event of a "Change in Control" on or before June 30, 1998, as
defined in Section 10 of this Agreement, the five year term shall be extended
for an additional 12-month period.

3. POSITION AND SERVICES.
---------------------

(a) Employee shall hold the position of Special Consultant to the CEO of
Employer and will report to the CEO. Employee shall have the following duties
and responsibilities: (i) sales and marketing consulting; (ii) consulting on
improvements in customer satisfaction; (iii) consulting on pricing of products
and services; (iv) to keep his knowledge and education current in the fields
of insurance and insurance related technologies; and (v) such other duties and
responsibilities as are mutually agreed to by Employee and the CEO of
Employer. Such duties are expected to include special assignments of
significance to Employer and Employee shall have no sales quotas.

<PAGE>

(b) Employee shall spend 1,000 hours per annum in the employment of
Employer and report quarterly to the General Counsel the hours expected within
15 days after the end of each calendar quarter. Notwithstanding the
foregoing, Employee shall have the right to enter into such consulting or
other working relationships as he may choose. Employee agrees to notify the
General Counsel of any such consulting or working arrangement within a
reasonable time prior to entering such an arrangement. Employee will not
offer consulting or other services to PMSC's customers or prospects which are
offered by Employer nor will Employee offer consulting or other services which
enhance the position of a competitor vis-a-vis Employer.

4. BASE SALARY.
-----------

(a) Employer shall pay to Employee an initial base salary at an annual
rate of $370,000, subject to applicable income and employment tax withholdings
and all other required and authorized payroll deductions and withholdings.
Employee's salary shall be payable in accordance with Employer's payroll
practices. Employee's annual base salary will not be adjusted during the
Employment Period.

(b) In the event of a "Change in Control" on or before June 30, 1998, as
defined in Section 10 of this Agreement, Employee's base salary, as in effect
immediately prior to such Change in Control, shall be increased to 150% of
such base salary.

5. INDEMNIFICATION. During the Term and thereafter, Employer shall
---------------
indemnify and hold harmless Employee to the fullest extent permitted by
applicable law and the Articles of the Incorporation and By-laws of Employer
from and against losses, claims, damages, costs, expenses, liabilities or
judgments or amounts paid in settlement with the approval of Employer of or in
consideration with any claim, action, suit proceeding or investigation based
in whole or in part on the fact that Employee is or was an officer or employee
of Employer. Any subsequent changes to the Employer's Articles of
Incorporation or By-Laws reducing the indemnity rights granted to Employer's
officers shall not affect the rights granted hereunder.

6. MUTUAL RELEASES. Upon the execution of this Agreement and as
----------------
consideration for their mutual obligations hereunder, Employee and Employer
--
each agree to execute and honor the terms of a waiver and release of all
preexisting claims against one another in the forms set forth in Exhibit A
(Employee) and Exhibit B (Employer) hereto, which are incorporated herein by
reference.

<PAGE>

7. ARBITRATION. Except as to actions for injunctive relief as provided in
-----------
Section 15 hereof, any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted, as
provided below, before a single arbitrator or three arbitrators, in the State
of South Carolina, in accordance with the rules of the American Arbitration
Association then in effect. It is hereby expressly agreed that the arbitrator
or arbitrators in any proceeding conducted hereunder shall not have the
authority to award punitive damages to either party hereto. Except as may be
required to enter judgment on the award as provided below, the proceedings and
award of any such arbitration shall at all times be kept confidential by the
parties hereto, and the parties shall require the arbitrator or arbitrators to
maintain the same confidentiality. Judgment may be entered on the arbitration
award in any court having jurisdiction. All expenses of any arbitration
proceeding hereunder shall be borne by the party who, as determined by the
arbitrator or arbitrators, is not the prevailing party in the arbitration,
including, without limitation, the reasonable attorneys' fees and expenses of
the prevailing party. In any arbitration under this Agreement, a party
requesting arbitration shall notify the other party in writing of the
existence of the dispute setting forth all issues to be resolved. The parties
shall first attempt to agree upon a mutually agreeable arbitrator to decide
the dispute. If the parties are unable to mutually agree upon a single
arbitrator within 30 days of the notice of dispute, then within 45 days of the
notice of dispute each party shall notify the other of the name, address and
telephone number of their selected arbitrator. The two arbitrators so
selected shall then select a third independent arbitrator within 75 days from
the notice of dispute and the dispute will be determined by the three
arbitrators so selected. The vote of two of the three arbitrators shall be
required in support of any decision or award by the three arbitrator panel.

8. EMPLOYEE BENEFITS AND PERQUISITES.
---------------------------------

(a) During the period of employment, Employee shall be entitled to receive
the same standard employment benefits as other employees of Employer receive
from time to time. Employee shall be entitled to fully participate in all of
Employer's future employee benefit programs for employees generally, in
accordance with their then-existing terms. Nothing herein shall be
interpreted as limiting Employer's right to amend or terminate any employee
benefit plan or program at any time in any manner as applied to employees of
Employer generally. Employee shall receive, at their current asset book value
as of January 1, 1998, title to the office furniture and equipment in use by
Employee on the effective date of this Agreement and a $45,000 credit toward
an automobile of Employee's choice.

(b) In order to stay abreast of trends in the insurance and technology
industries, Employee may attend up to four trade shows, conferences or
seminars per year and at least one may be outside the continental United
States. Attendance shall be at Employer's expense and subject to Employer's
policy and procedures governing expense reimbursement.

<PAGE>

(c)
Employee's life insurance benefit will be maintained at the current level and
will not be reduced during the term of this Agreement.

(d) Employee's vested benefits will not be changed unless they are
enhanced during the term of this Agreement. In the event of such enhancement,
Employee shall be entitled to the enhanced benefit.

9. WORKING FACILITIES. Employee shall be entitled to perform his duties
------------------
from facilities outside of Employer's facilities, including his residence.
When working at Employer's facilities, Employee shall be furnished an office,
clerical support, and other facilities and services at the level provided to
Vice Presidents of the Employer for the performance of his duties as needed.
Employee shall also be provided with access to the Employer's computer network
and e-mail services and an Employee telephone credit card for use in
performing services for the Employer.

10. TERMINATION. This Agreement does not grant Employee any right or
-----------
entitlement to be retained by Employer, and shall not affect or prejudice
Employer's right to discharge Employee for the specific reasons set forth
below.

(a) TERMINATION BY EMPLOYER FOR CAUSE. In the event of termination of
---------------------------------
Employee's employment hereunder by Employer "For Cause," Employee shall not be
entitled to any severance pay, except as otherwise provided in any applicable
benefits plans of Employer that cover Employee.

A termination of Employee's employment hereunder by Employer shall be deemed
to have occurred "For Cause" if, within a reasonable period after such
termination, a good faith finding shall be made by a majority of the Board
that such termination occurred as a result of any of the following: (A) any
act committed by Employee which shall represent a breach in any material
respect of any of the terms of this Agreement and which breach is not cured
within 30 days of receipt by Employee of written notice from Employer of such
breach; (B) improper conduct consisting of sexual harassment or act of moral
turpitude; (C) use of illegal drugs or unauthorized use of alcohol in the
workplace or being under the influence of illegal drugs or alcohol while at
work; or (D) any conviction of, or plea of nolo contendere to, a crime (other
than a traffic violation) that constitutes a felony under the laws of the
United States or any political subdivision thereof. Employer shall provide
written notice to Employee, within a reasonable time period, that the Board is
convening for purposes of determining whether Employee's termination of
employment was For Cause and Employee (or his representative) shall have the
right to appear before the Board in connection with such determination.

<PAGE>

If Employer intends to terminate this Agreement under either (B) or (C) above,
Employer shall first provide written notice to Employee and if the Employee
disputes the factual basis for Employer's right to so terminate, then the
dispute shall be submitted to arbitration under Section 7 and any termination
shall be delayed until the arbitration decision or award is entered.

(b) TERMINATION BY EMPLOYEE FOR GOOD REASON BEFORE OR AFTER A CHANGE IN
-------------------------------------------------------------------
CONTROL WHICH OCCURS PRIOR TO JUNE 30, 1998. In the event of termination of
-----------------------------------------
Employee's employment hereunder by Employee prior to the end of the five year
term "For Good Reason": (i) In the event of a "Change in Control", Employee
shall be entitled to severance payments in the form of continuation of
Employee's $370,000 base salary times 150%, as in effect immediately prior to
such termination, for the remainder of the five year term; and (ii) if such
termination is after a Change in Control which occurs prior to June 30, 1998,
for the remainder of the five year term Employee shall also receive an annual
payment equal to 150% of the highest annual bonus earned by Employee with
respect to his performance during the calendar years 1996 or 1997.

Such payment shall be made in equal monthly installments commencing the first
day of the first month following such termination.

The employment of Employee hereunder shall be deemed to have been terminated
"For Good Reason" upon termination of employment by Employee following a
"constructive termination event," subject to the provisions of this subsection
(b).

For purposes hereof, the following shall constitute constructive termination
events if such events occur prior to or after a "Change in Control" (as
hereinafter defined): a material breach by Employer of any of its obligations
to provide Employee with the compensation and benefits provided in Sections 4,
8 and 9 hereof.

For purposes hereof, the following shall constitute constructive termination
events if such events occur upon or after a "Change in Control": (1) any
reduction of Employee's salary; (2) a material reduction from pre-Change in
Control levels in Employee's employee benefits and perquisites, unless
Employer provides a substitute benefit that is at least as favorable on an
after-tax basis; and (3) a relocation of Employee's office by more than 35
miles that increases Employee's travel distance from home.

An event described above as a constructive termination event shall be treated
as a constructive termination event hereunder following the expiration of 30
days from the date Employee has notified Employer of the occurrence of such
event and his intention to treat such event as a constructive termination
event and

<PAGE>

terminate his employment on the basis thereof, provided that Employer has not
cured the constructive termination event before the expiration of such 30 day
period. Any notice given by Employee under this paragraph shall be effective
only if given to Employer in writing within 45 days after the event in question.

A "Change in Control" shall be deemed to have taken place upon the occurrence
of one of the following events:
(1) any "person" (as such term is defined in Section 3 (a) (9) of the
Exchange Act and as used in Sections 13 (d) (3) and 14 (d) (2) of the Exchange
Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 33 a% or more of the combined voting power of the Company's then
outstanding securities eligible to vote for the election of the Board (the
"Company Voting Securities"); provided, however, that the event described in
this paragraph shall not be deemed to be a Change in Control by virtue of any
of the following situations: (i) an acquisition by the Company or any of its
subsidiaries; (ii) an acquisition by any employee benefit plan or employee
stock plan sponsored or maintained by the Company or any of its subsidiaries
or any trustee or fiduciary with respect to such plan; or (iii) an acquisition
by any underwriter temporarily holding Company Voting Securities pursuant to
an offering of such securities;

(2) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof; provided, however, that any person becoming a director subsequent to
the date hereof, whose election, or nomination for election, by the Company's
shareholders was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board who are then on the Board (either by a specific
vote or by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such nomination)
shall be, for purposes of this paragraph (2), considered as though such person
were a member of the Incumbent Board, but excluding for this purpose any
individual elected or nominated as a director of the Company as a result of
any actual or threatened solicitation of proxies or consents by or on behalf
of any person other than the Board;

<PAGE>

(3) the consummation of a merger, consolidation, share exchange or similar
form of corporate reorganization of the Company or any of its subsidiaries
that requires the approval of the Company's shareholders, whether for such
transaction or the issuance of securities in connection with the transaction
or otherwise (a "Business Combination"), unless (i) immediately following such
Business Combination: (A) more than 50% of the total voting power of the
corporation resulting from such Business Combination (the "Surviving
Corporation") or, if applicable, the ultimate parent corporation which
directly or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving Corporation (the
"Parent Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to the Business Combination (or, if applicable,
shares into which such Company Voting Securities were converted pursuant to
such Business Combination), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan or employee
stock plan sponsored or maintained by the Surviving Corporation or Parent
Corporation or any trustee or fiduciary with respect to any such plan) is or
becomes the beneficial owner, directly or indirectly, of 33 a% or more of the
total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation), and (C) at least a majority of the members of the
board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), following the Business Combination,
were members of the Incumbent Board at the time of the Board's approval of the
execution of the initial agreement providing for such Business Combination or
(ii) the Business Combination is effected by means of the acquisition of
Company Voting Securities from the Company, and prior to such acquisition a
majority of the Incumbent Board approves a resolution providing expressly that
such Business Combination does not constitute a Change in Control under this
paragraph (3); or

(4) the shareholders of the Company approve a plan of complete liquidation
or dissolution of the Company or the sale or other disposition of all or
substantially all of the assets of the Company and its subsidiaries, other
than a sale or disposition of assets to a subsidiary of the Company.

If on or before June 30, 1998, the Company has received any offers or
inquiries or if the Company has commenced negotiations with a third party on a
transaction which results in a Change of Control transaction occurring, then
such Change in Control transaction shall be deemed to have occurred prior to
June 30, 1998, for the purposes of Section 4(b) and

<PAGE>

Section 10, provided, however, that any increases in compensation or change
in the meaning of "For Good Reason" shall not become effective until the
closing date of such transaction.

Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
33a% of the Company Voting Securities as a result of the acquisition of
Company Voting Securities by the Company which, by reducing the number of
Company Voting Securities outstanding, increases the percentage of shares
beneficially owned by such person; provided, that if a Change in Control would
occur as a result of such an acquisition by the Company (if not for the
operation of this sentence), and after the Company's acquisition such person
becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially
owned by such person, a Change in Control shall then occur.

For purposes of this Section 10 only, the term "subsidiary" means a
corporation of which the Company owns directly or indirectly 50% or more of
the voting power.

(c) TERMINATION AT END OF FIVE YEARS. Upon the expiration of this
--------------------------------
Agreement on December 31, 2002 unless extended by a Change of Control event,
Employee shall not be entitled to any severance pay.

(d) OTHER TERMINATIONS. In the event of termination of Employee's
------------------
employment by Employee absent a breach of this Agreement, Employee shall not
be entitled to any severance pay, except as otherwise provided in any
applicable benefit plans of Employer that cover Employee.

(e) CONDITIONS TO SEVERANCE BENEFIT.
-------------------------------

(i) As conditions of Employee's continued entitlement to the severance
payments provided by this Section 10, Employee is required to honor in
accordance with their terms the provisions of Section 11, 12, 13 and 14
hereof. In the event that Employee fails to abide by the foregoing, all
payments to which Employee may otherwise have been entitled under this Section
10 shall immediately terminate and be forfeited, and any portion of the base
salary continuation payments that may have been paid to Employee shall
forthwith be returned to Employer. The parties hereto agree that Employee is
under no affirmative obligation to seek to mitigate or offset the severance
payments provided by this Section 10.

(ii) For purposes only of this Section, Employee shall be treated as
having failed to honor the provisions of Sections 11, 12, 13 and 14 hereof
only upon the vote of a majority of the Board following notice of the alleged

<PAGE>

failure by Employer to Employee, an opportunity for Employee to cure the
alleged failure within a period of 30 days from the date of such notice and an
opportunity for Employee to be heard on the issue by the Board.

(f) POTENTIAL EXCISE TAXES. Should any payments made or benefits provided
----------------------
to Employee under this Agreement be subject to an excise tax pursuant to
Section 4999 of the Internal Revenue Code or any successor or similar
provision thereto, or comparable state or local tax laws, Employer shall pay
to Employee such additional compensation as is necessary (after taking into
account all federal, state, and local income taxes payable by Employee as a
result of the receipt of such compensation) to place Employee in the same
after-tax position he would have been in, had no such excise tax (or any
interest or penalties thereon) been paid or incurred. Employer shall pay such
additional compensation upon the earlier of: (i) the time at which Employer
withholds such excise tax from any payments to Employee; or (ii) 30 days after
Employee notifies Employer that Employee has filed a tax return which takes
the position that such excise tax is due and payable in reliance on a written
opinion of Employee's tax advisor that it is more likely than not that such
excise tax is due and payable. If Employee makes any additional payment with
respect to any such excise tax as a result of an adjustment to Employee's tax
liability by any federal, state, or local authority, Employer shall pay such
additional compensation within 30 days after Employee notifies Employer of
such payment.

11. CONFIDENTIALITY. Employee agrees that he will not at any time during
---------------
the term hereof or thereafter for any reason, in any fashion, form, or manner,
either directly or indirectly, divulge, disclose, or communicate to any
person, firm, corporation, or other business entity, in any manner whatsoever,
any confidential information or trade secrets concerning the business of
Employer (including the business of any unit thereof), which materially
effects Employer including, without limiting the generality of the foregoing,
the confidential information described in Exhibit C, which is attached hereto
and incorporated herein by reference. Employee hereby acknowledges and agrees
that the prohibition against disclosure of confidential information recited
herein is in addition to, and not in lieu of, any rights or remedies which
Employer may have available pursuant to the laws of any jurisdiction or at
common law to prevent the disclosure of confidential information or trade
secrets, and the enforcement by Employer of its rights and remedies pursuant
to this Agreement shall not be construed as a waiver of any other rights or
available remedies which it may possess in law or equity absent this
Agreement. The foregoing shall not prohibit the disclosure of information to
the extent such disclosure is required by law or judicial or governmental
process, provided however, that the party intending to disclose information
under this provision shall notify the other party of the intent to disclose a
reasonable time prior to such disclosure.

12. PROPERTY OF EMPLOYER. Employee acknowledges that from time to time in
--------------------
the course of

<PAGE>

providing services pursuant to this Agreement he shall have the opportunity to
inspect and use certain property, both tangible and intangible, of Employer,
and Employee hereby agrees that said property shall remain the exclusive
property of Employer, and Employee shall have no right or proprietary interest
in such property, whether tangible or intangible, including, without
limitation, Employer's customer and supplier lists, contract forms, books of
account, computer programs, and similar property.

13. NON-COMPETITION. Employee agrees that he shall not, during the
---------------
Employment Period and for a period of two (2) years after the termination or
end thereof, directly or indirectly compete with Employer by engaging in the
activities set forth in Exhibit D, which is attached hereto and incorporated
herein by reference (the "Prohibited Activities"), within the geographic area
which is set forth on Exhibit E, which is attached hereto and incorporated
herein by reference (the "Restricted Area"). For purposes of this Section 13,
Employee recognizes and agrees that Employer conducts and will conduct
business in the entire Restricted Area and that Employee will perform his
duties for Employer within the entire Restricted Area. Employee shall be
deemed to be engaged in and carrying on said Prohibited Activities if he
engages in said activities in any capacity whatsoever, including, but not
limited to, by or through a partnership of which he is a general or limited
partner or an employee engaged in said activities, or by or through a
corporation or association of which he owns five percent (5%) or more of the
stock or of which he is an officer, director, employee, member,
representative, joint venturer, independent contractor, consultant, or agent
who is engaged in said activities. Employee agrees that during the two (2)
year period described above, he will notify Employer of the name and address
of each Employer with whom he has accepted employment during said period and
provide a description of his position and duties. Such notification shall be
made in writing within 30 days after Employee accepts any such employment.

14. NON-SOLICITATION OF EMPLOYEES. Employee agrees that he shall not,
-----------------------------
during the Employment Period and for a period of two years after the
termination thereof, for any reason, directly or indirectly induce or attempt
to induce any employee of Employer to terminate his or her employment. During
the Employment Period and for a period of two years after the termination
thereof for any reason, Employee also will not, without prior written consent
of Employer, offer employment either on behalf of himself or on behalf of any
other individual or entity (i) to any employee of Employer, or (ii) to any
former employee of Employer during the first six months after the former
employee's termination of employment.

15. BREACH OF RESTRICTIVE COVENANTS. The parties agree that a breach or
-------------------------------
violation of Sections 11, 12, 13 and 14 hereof will result in immediate and
irreparable injury and harm to Employer, who shall have, in addition to any
and all remedies of law and other consequences under this Agreement, the right
to an injunction, specific performance or other equitable relief to prevent
the violation of the obligations hereunder.

<PAGE>

16. STOCK OPTIONS.
-------------

(i) Employee's change of position or status pursuant to this Agreement
does not constitute a demotion as defined in paragraph 7.4 of Employer's Long
Term Incentive Plan. All vested stock options must be exercised by Employee
during the period of employment or within 90 days thereafter or will be
forfeited in accordance with the terms of Employer's stock option plans.

(ii) Notwithstanding the provisions of Section 18 of this Agreement, the
provisions in Section 3C Additional Compensation of any Stock
-----------------------
Option/Non-Compete Agreement between the Employer and Employee which pre-date
this Agreement are deleted in their entirety and are superseded in full by
this Agreement.

(iii) Notwithstanding the provisions of Section 18 of this Agreement, the
provisions in any stock option agreement between Employer and Employee shall
continue to govern the rights of Employee with respect to those stock options
in the event of a "Change in Control" as that term is defined in the relevant
stock option agreement and this Agreement shall have no force or effect with
respect to such stock options.

(iv) Notwithstanding the provisions of Section 18 of this Agreement, the
Employee Stock Option/Non-Compete Agreements between Employer and Employee
dated on or after May 12, 1994, are amended to delete the provision in
paragraph 1 of such agreements which allow such options to be revoked by the
Compensation Committee of the Board.

(v) If existing stock options are repriced by the Company, Employee shall
participate in the repricing.

17. NOTICES. Any notice required to be given pursuant to the provisions
-------
of this Agreement shall be in writing and delivered personally or sent by
registered or certified mail, return receipt requested, or by a nationally
recognized overnight courier service, postage or delivery prepaid, to the
party named at the address set forth below, or at such other address as each
party may hereafter designate in a written notice to the other party delivered
in accordance with the terms of this Section 17:

Employer: Policy Management Systems Corporation
One PMS Center
Blythewood, SC 29016
Attention: General Counsel

Employee: Donald A. Coggiola
127 Old Mill Circle

<PAGE>

Columbia, South Carolina 29205

Any such notices shall be deemed to have been delivered when served personally
or, in the case of Notices sent by registered or certified mail or courier,
upon signature acknowledging receipt thereof.

18. ENTIRE AGREEMENT.
----------------

(a) CHANGE, MODIFICATION, WAIVER. No change or modification of this
----------------------------
Agreement shall be valid unless it is in writing and signed by each of the
parties hereto. No waiver of any provision of this Agreement shall be valid
unless it is in writing and signed by the party against whom the waiver is
sought to be enforced. The failure of a party to insist upon strict
performance of any provision of this Agreement in any one or more instances
shall not be construed as a waiver or relinquishment of the right to insist
upon strict compliance with such provision in the future.

(b) INTEGRATION OF ALL AGREEMENTS. This Agreement constitutes the entire
-----------------------------
Agreement between the parties hereto with regard to the subject matter hereof,
and there are no agreements, understandings, specific restrictions,
warranties, or representations relating to said subject matter between the
parties other than those set forth herein or herein provided for. This
Agreement supersedes the June 30, 1997 Employment Agreement between Employer
and Employee and the June 30, 1997 Agreement is terminated by this Agreement.

(c) SEVERABILITY OF PROVISIONS. In the event that any one or more of the
--------------------------
provisions of this Agreement or any word, phrase, clause, sentence, or other
portion thereof (including without limitation the geographical and temporal
restrictions contained herein) shall be deemed to be illegal or unenforceable
for any reason, such provision or portion thereof shall be modified or deleted
in such a manner so as to make this Agreement as modified legal and
enforceable to the fullest extent permitted under applicable laws.

19. ASSIGNMENT. The rights, duties, and obligations under this Agreement
----------
may not be assigned by either party, except that if there is a Change in
Control as defined in Section 10, Employer may assign its rights and
obligations hereunder to the person, corporation, partnership, or other entity
which has gained such control. In addition, this Agreement shall be
assignable by Employer to any entity acquiring all or substantially all of the
assets of Employer. The provisions of this Agreement shall be binding on any
such assignee.

20. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the state of South Carolina.

<PAGE>

21. MISCELLANEOUS.
-------------

(a) FORM. As employed in this Agreement, the singular form shall include,
----
if appropriate, the plural.

(b) HEADINGS. The headings employed in this Agreement are solely for the
--------
convenience and reference of the parties and are not intended to be
descriptive of the entire contents of any paragraph and shall not limit or
otherwise affect any of terms, provisions, or construction thereof.

22. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall take effect as an original and all of which
-
shall evidence one and the same Agreement.

<PAGE>

IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.

EMPLOYER:
POLICY MANAGEMENT SYSTEMS CORPORATION

BY: /S/ 12-15-97
---------------
STEPHEN G. MORRISON

EMPLOYEE:

/S/ 12-15-97
---------------
DONALD A. COGGIOLA

<PAGE>

EXHIBIT A
---------

EMPLOYEE RELEASE AND COVENANT
-----------------------------

This RELEASE AND COVENANT is executed by Donald A. Coggiola ("Employee")
and delivered to Policy Management Systems Corporation ("Employer").

In consideration of the Employment Agreement between Employment Agreement
between Employer and Employee dated ______________, 1997, (the "Employment
Agreement"), Employee hereby agrees as follows:

Section 1. Release and Covenant. Employee, of his own free will,
--------------------
voluntarily releases and forever discharges Employer and its subsidiaries and
affiliates, and their respective directors, officers, employee, agents,
stockholders, successors, and assigns (both individually and in their official
capacities) from, and covenants not to sue or proceed against any of the
foregoing on the basis of, any and all past or present causes of action,
suits, agreements, or other claims which Employee, his dependents, relatives,
heirs, executors, administrators, successors, and assigns has or have against
Employer, including upon or by reason of any matter arising out of his
employment by Employer, and including, but not limited to, any alleged
violation of the Civil Rights Acts of 1964 and 1991, the Equal Pay at of 1963,
the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of
1973, the Older Workers Benefit Protection Act of 1990, the Americans with
Disabilities Act of 1990, and any other federal or state law, regulation, or
ordinance, or public policy, contract, or tort law, having any bearing
whatsoever on the terms and conditions of employment with Employer. This
release shall not, however, constitute a waiver of any of Employee's rights
upon termination of employment under the Employment Agreement or under any
Stock Option Plan in which Employee received stock options, or under the terms
of any employee benefit plan of Employer in which Employee is participating.

Section 2. Due Care. Employee acknowledges that he has received a copy
--------
of this Release prior to its execution and has been advised hereby of his
opportunity to review and consider this Release for 21 days prior to its
execution. Employee further acknowledges that he has been advised hereby to
consult with an attorney prior to executing this Release. Employee enters
into this Release having freely and knowingly elected, after due
consideration, to execute this Release and to fulfill the promises set forth
herein. This Release shall be revocable by Employee during the 7-day period
following its execution, and shall not become effective or enforceable until
the expiration of such 7-day period. In the event of such a revocation,
Employee shall not be entitled to the consideration for this Release set forth
above.

<PAGE>

Section 3. Reliance by Employee. Employee acknowledges that, in his decision
--------------------
to enter into this Release, he has not relied on any representations,
promises, or agreements of any kind, including oral statements by
representatives of Employer, except as set forth in this Release and the
Employment Agreement.

This RELEASE AND COVENANT is executed by Employee and delivered to
Employer on _____________, 1997.

EMPLOYEE:

By:

<PAGE>

EXHIBIT B
---------

EMPLOYER RELEASE AND COVENANT
-----------------------------

This RELEASE AND COVENANT is executed by Policy Management Systems
Corporation ("Employer") and delivered to Donald A. Coggiola ("Employee").

In consideration of the Employment Agreement between Employer and
Employee dated _________, 1997, (the "Employment Agreement"), Employer hereby
agrees as follows:

Employer releases and forever discharges Employee, his dependents, heirs,
executors, administrators, successors, and assigns (the "releasees") from, and
covenants not to sue or proceed against Employee and his releasees on the
basis of, any and all past or present causes of action, suits, arrangements,
or other claims which Employer has against Employee upon or by reason of any
matter, cause, or thing whatsoever, including, but not limited to, any matters
arising out of his employment by Employer. This release shall not, however,
constitute a waiver of any of Employer's rights under the Employment
Agreement.

This RELEASE AND COVENANT is executed by Employer and delivered to
Employee on _____________, 1997.

EMPLOYER:

By:

<PAGE>

EXHIBIT C

CONFIDENTIAL INFORMATION

1. All software/systems (including all present, planned, and future
software), whether licensed or unlicensed, developed by or on behalf of, or
otherwise acquired by Policy Management Systems Corporation or any of its
subsidiaries.

"All software/system" shall mean:

- - all code in whatever form
- - all data pertaining to the architecture and design of such software systems
- - all documentation in whatever form
- - all flowcharts
- - any reproduction or recreation in whole or in part of any of the above in
whatever form.

2. All business plans and strategies including:

- - strategic plans
- - product plans
- - marketing plans
- - financial plans
- - operating plans
- - resource plans
- - all research and development plans including all data produced by such
efforts.

3. Internal policies, procedures, methods, and approaches which are unique
to Policy Management Systems Corporation and are non-public.

4. Any information relating to the employment, job responsibility,
performance, salary, and compensation of any present or future officer or
employee of Policy Management Systems Corporation.

<PAGE>

EXHIBIT D

Acting in any capacity, either individually or with any corporation,
partnership, or other entity, directly or indirectly, in providing, or
proposing to provide, data processing software systems, related automation
support services and information services to the insurance industry,
including, but not limited to, application software, processing, consulting,
and related services, in the performance of any of the following types of
duties in any part of the insurance industry:

1. The performance of the sales and marketing functions.

2. The responsibility for sales revenue generation.

3. The responsibility for customer satisfaction.

4. The responsibility for research and development of insurance database
products.

5. The responsibility for the research and development of information
data processing systems and services.

6. The providing of input to pricing of products.

7. The planning and management of data processing services resources.

8. The coordination of the efforts of the various aspects of computer
systems services organizations with other functions.

9. The planning and management of information services resources.

10. The providing and management of an operations staff to support the
above listed activities.

<PAGE>

EXHIBIT E
RESTRICTED AREA

Fifty mile radius of the city limits of the following cities:

Toronto, Canada Birmingham, Alabama

Columbus, Ohio Minneapolis, Minnesota

Cincinnati, Ohio San Diego, California

Chicago, Illinois Melbourne, Australia

Dallas/Fort Worth, Texas Indianapolis, Indiana

Los Angeles, California St. Paul, Minnesota

Boston, Massachusetts Denver, Colorado

Philadelphia, Pennsylvania Mobile, Alabama

Hartford, Connecticut Seattle, Washington

San Francisco, California Bloomington, Illinois

New York City, New York Des Moines, Iowa

Columbia, South Carolina San Juan, Puerto Rico

Sydney, Australia El Paso, Texas

Honolulu, Hawaii Detroit, Michigan

Jacksonville, Florida Phoenix, Arizona

Milwaukee, Wisconsin San Antonio, Texas

Montreal, Canada Baltimore, Maryland

<PAGE>

EXHIBIT E (CONTD.)

Kansas City, Missouri San Jose, California

Stanford, Connecticut Memphis, Tennessee

Oklahoma City, Oklahoma Washington, D.C.

Atlanta, Georgia New Orleans, Louisiana

Houston, Texas London, England

Miami, Florida Paris, France

Princeton, New Jersey St. Louis, Missouri

Cleveland, Ohio Nashville, Tennessee

<PAGE>

ADDENDUM NO. 1

TO THE

EMPLOYMENT AGREEMENT

This Addendum is entered into on January 26, 1998 to be effective January 1,
1998, and is hereby made a part of and incorporated into the Employment
Agreement by and between POLICY MANAGEMENT SYSTEMS CORPORATION ("PMSC") and
DONALD A. COGGIOLA ("Employee"), dated January 1, 1998 (the "Agreement"). In
the event that any provision of this Addendum and any provision of the
Agreement is inconsistent or conflicting, the inconsistent or conflicting
provision of this Addendum shall be and constitute an amendment of the
Agreement and shall control, but only to the extent that such provision is
inconsistent or conflicting with the Agreement.

PMSC and Employee hereby agree to amend the above referenced Agreement as
follows:

1. The first sentence of Section 4(a) is deleted in its entirety and is
replaced with the following:

"Employer shall pay to Employee an initial base salary at an annual rate of
$387,000 for the calendar years 1998, 1999 and 2000 and at an annual rate of
$370,000 thereafter, subject to applicable income and employment tax
withholdings and all other required and authorized payroll deductions and
withholdings."

2. The last sentence of Section 8(a) is deleted in its entirety.

PMSC and Employee certify by their undersigned authorized agents that they
have read this Addendum and the Agreement and agree to be bound by their terms
and conditions.

PMSC EMPLOYEE

POLICY MANAGEMENT SYSTEMS CORPORATION DONALD A. COGGIOLA

By: /S/ 1/26/98 /S/ 1/26/98
------------- -------------
(Authorized Signature)
(in non-black ink, please)

Stephen G. Morrison
-------------------
(Name)
Executive Vice President and General
Counsel
-------
(Title)

1/26/98
-------
(Execution Date)

POLICY MANAGEMENT SYSTEMS CORPORATION'S
LIST OF SUBSIDIARIES
AS OF 12/31/97
JURISDICTION
OF INCORPORATION
SUBSIDIARY NAME OR ORGANIZATION
- ---------------- ---------------

PMSI, L.P. Texas Limited Partnership
Cybertek Solutions, L.P. Texas Limited Partnership
Policy Management Corporation South Carolina
PMSC Limited (formerly known as Policy Management Systems Delaware
International, Ltd.)
ViLink Corporation Delaware
Policy Management Systems Canada, Ltd. Canada
CYBERTEK Corporation Texas
Policy Management Systems Investment, Inc. Delaware
Policy Management Systems (Germany) GmbH Germany
Policy Management Systems (Barbados), Ltd. Barbados
Policy Management Systems Osterreich GmbH Austria
Policy Management Systems Norden AS Norway
PMSC Pty Limited (formerly known as PMS Asia-Pacific Pty Limited) Australia
PMS Creative Limited United Kingdom
PMSC Limited (formerly known as PMS Asia Pacific Limited) Hong Kong
Information Services Holding, Inc. Delaware
Life Software Holding, Inc. Delaware
Software Services Holding, Inc. Delaware
PMS micado Software Consult GmbH (formerly known as Micado Germany
Beteiligungs Und VerwaltungsGmbH)
Policy Management Systems Corporation AB (formerly known as Sweden
Policy Management Systems Norden Aktiebolag)
Policy Management Systems Norden A/S Denmark
Creative Computer Systems Pty. Ltd. Australia
Creative Solutions B.V. The Netherlands
Creative Software Development Limited United Kingdom
PMS Creative SA (Proprietary) Limited South Africa
Creative Insurance Services Limited United Kingdom
Policy Management Systems Europe Limited United Kingdom
PMS micado ProduktSysteme Gesellschaft fur EDV Vetrieb mbH Germany
Software Consult micado AG/SA/Ltd. Switzerland
PMSC Limited (formerly known as PMS Asia-Pacific (NZ) Limited) New Zealand
Policy Management Systems India Private Limited India
Branch office of PMSC Limited (Delaware) in Singapore Singapore
Representative office of Policy Management Systems
Europe Limited in Spain Spain
PMSC Limited (formerly known as PMS Creative (Ireland) Limited) Ireland
Branch office of PMSC Limited (Delaware) in Thailand Thailand

Exhibit 23

Consent of Independent Accountants

We consent to the incorporation by reference in the registration statements of
Policy Management Systems Corporation (the "Company") on Form S-8 (Nos.
33-59553, 33-59555 and 33-59575) of our report dated February 10, 1998 on our
audits of the consolidated financial statements and financial statement
schedule of the Company as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997, which report is included in
this Annual Report on Form 10-K

Coopers & Lybrand L.L.P.

Atlanta, Georgia
March 23, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF
POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 32179
<SECURITIES> 3280
<RECEIVABLES> 131417
<ALLOWANCES> 2628
<INVENTORY> 0
<CURRENT-ASSETS> 185809
<PP&E> 255955
<DEPRECIATION> 139522
<TOTAL-ASSETS> 618406
<CURRENT-LIABILITIES> 86213
<BONDS> 0
0
0
<COMMON> 183
<OTHER-SE> 410313
<TOTAL-LIABILITY-AND-EQUITY> 618406
<SALES> 0
<TOTAL-REVENUES> 582782
<CGS> 0
<TOTAL-COSTS> 396794
<OTHER-EXPENSES> 10454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5111
<INCOME-PRETAX> 79757
<INCOME-TAX> 29833
<INCOME-CONTINUING> 49924
<DISCONTINUED> 333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50257
<EPS-PRIMARY> 2.76
<EPS-DILUTED> 2.67

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 22121 35094
<SECURITIES> 2234 4615
<RECEIVABLES> 116996 97782
<ALLOWANCES> 883 2042
<INVENTORY> 0 0
<CURRENT-ASSETS> 160342 165593
<PP&E> 238219 212751
<DEPRECIATION> 122462 103568
<TOTAL-ASSETS> 581386 532736
<CURRENT-LIABILITIES> 112636 94461
<BONDS> 0 0
0 0
0 0
<COMMON> 182 194
<OTHER-SE> 363070 382478
<TOTAL-LIABILITY-AND-EQUITY> 581386 532736
<SALES> 0 0
<TOTAL-REVENUES> 488230 425613
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</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE QUARTERS
ENDED MARCH 31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
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<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
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<SECURITIES> 2492 3820
<RECEIVABLES> 121398 94563
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<CURRENT-ASSETS> 167709 177868
<PP&E> 244067 215363
<DEPRECIATION> 127879 107700
<TOTAL-ASSETS> 567300 553191
<CURRENT-LIABILITIES> 106458 81455
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0 0
0 0
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<OTHER-SE> 370443 396182
<TOTAL-LIABILITY-AND-EQUITY> 567300 553191
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<INCOME-PRETAX> 15887 17852
<INCOME-TAX> 5966 6298
<INCOME-CONTINUING> 9921 11554
<DISCONTINUED> 171 74
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10092 11628
<EPS-PRIMARY> .56 .60
<EPS-DILUTED> .55 .59

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
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<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 9626 17890
<SECURITIES> 2496 2799
<RECEIVABLES> 132824 107022
<ALLOWANCES> 764 1115
<INVENTORY> 0 0
<CURRENT-ASSETS> 178327 175242
<PP&E> 248857 223474
<DEPRECIATION> 132055 113217
<TOTAL-ASSETS> 580037 544682
<CURRENT-LIABILITIES> 98591 99584
<BONDS> 0 0
0 0
0 0
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<OTHER-SE> 379853 342000
<TOTAL-LIABILITY-AND-EQUITY> 580037 544682
<SALES> 0 0
<TOTAL-REVENUES> 271815 223944
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<TOTAL-COSTS> 186059 150869
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<INCOME-TAX> 12341 15004
<INCOME-CONTINUING> 20520 27151
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<CHANGES> 0 0
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<EPS-PRIMARY> 1.14 1.44
<EPS-DILUTED> 1.13 1.42

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 18639 8030
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<RECEIVABLES> 140172 103743
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<INVENTORY> 0 0
<CURRENT-ASSETS> 194164 160708
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<DEPRECIATION> 134375 116589
<TOTAL-ASSETS> 594173 548372
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<BONDS> 0 0
0 0
0 0
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<OTHER-SE> 394937 351136
<TOTAL-LIABILITY-AND-EQUITY> 594173 548372
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<INCOME-TAX> 20061 19952
<INCOME-CONTINUING> 33390 35755
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<CHANGES> 0 0
<NET-INCOME> 33723 36438
<EPS-PRIMARY> 1.85 1.94
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</TABLE>