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 June 30, 2001
                         Commission file number 0-23306

                                PROPHET 21, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified In Its Charter)


        Delaware                                         23-2746447
---------------------------------           ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)

19 West College Avenue, Yardley, Pennsylvania                              19067
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)


                                 (215) 493-8900
                       -----------------------------------
                             (Registrant's Telephone
                             Number, Including Area
                                     Code)


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


                                                       Name of each exchange
Title of each class                                     on which registered
-----------------------------                      -----------------------------

-----------------------------                      -----------------------------

-----------------------------                      -----------------------------

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

                          Common Stock, $.01 par value
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------


<PAGE>

     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. [ ]

     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant:  $11,118,611 at August 31, 2001 based on the last sales price
on that date.

     Indicate  the  number of  shares  outstanding  of each of the  Registrant's
classes of common stock, as of August 31, 2001:

Class                                                    Number of Shares
-----                                                    ----------------

Common Stock, $.01 par value                             3,783,646


     The  following  documents  are  incorporated  by reference  into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders  are incorporated by reference into Part
III of this Report.


                                      -i-
<PAGE>

                                TABLE OF CONTENTS
                                -----------------

               Item                                                         Page
               ----                                                         ----

PART I    1.   Business.......................................................1

          2.   Properties.....................................................7

          3.   Legal Proceedings..............................................7

          4.   Submission of Matters to a Vote of Security Holders............7


PART II   5.   Market for the Company's Common Equity
               and Related Stockholder Matters................................8

          6.   Selected Financial Data........................................9

          7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations ..........................10

          7A.  Quantitative and Qualitative Disclosures
               About Market Risk.............................................15

          8.   Financial Statements and Supplementary Data...................15

          9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure...........................15


PART III  10.  Directors and Executive Officers of the Company...............16

          11.  Executive Compensation........................................16

          12.  Security Ownership of Certain Beneficial Owners
               and Management................................................16

          13.  Certain Relationships and Related Transactions................16

PART IV   14.  Exhibits, Financial Statement Schedule,
                   and Reports on Form 8-K...................................17

SIGNATURES...................................................................18

EXHIBIT INDEX................................................................20

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE.....................F-1


                                       -ii-
<PAGE>

                                     PART I


Item 1.    BUSINESS.

GENERAL

     Since  1967,  Prophet  21 has  provided  durable  goods  distributors  with
innovative, adaptive solutions essential for running their businesses. With more
than 2,000  customers  and 70,000  users  conducting  over $35 billion in highly
complex  supply  chain  transactions  annually,  Prophet  21 is a true  business
partner,  helping  companies of all sizes leverage  technologies  and maintain a
competitive advantage.  Through its business technologies and services,  Prophet
21 seeks to streamline  customers'  business  processes  and reduce  transaction
costs to maximize profit and growth.

     Prophet 21 offers  enterprise  software  solutions  for  Microsoft  Windows
NT/Windows 2000 and UNIX.  Prophet 21's enterprise  software  solutions  provide
organizations  with  powerful,  customizable  applications  designed  to improve
customer  service and maximize  their  return on  investment.  In addition,  the
Company offers an Internet trading network that streamlines the commerce process
between distributors, their manufacturers/suppliers,  and customers. All Prophet
21 solutions are backed by a host of professional services.

     Prophet 21 markets its products and services to approximately 50,000 of the
approximately  120,000 durable goods  distributors and wholesalers  operating in
the United  States and Canada and, as of June 30, 2001,  has sold  approximately
2,800 systems across the United States and Canada. The Company's  customers vary
in size  from  small  distributors  with a few users to  larger  companies  with
several hundred users linking multiple  geographically  dispersed branches.  The
Company  sells its Prophet 21  CommerceCenter  and Prophet 21 Acclaim  solutions
through its 40 person  direct sales force  located in sales and service  offices
throughout  the United  States to a wide range of  industry  segments  including
industrial  manufacturer,  repair and operations  (MRO),  electrical  equipment,
plumbing  supplies/heating,  ventilation and air conditioning (HVAC), fasteners,
and others.

     The Company is a holding company incorporated in Delaware in December 1993.
The  principal  operations  of the Company are  conducted  through its  indirect
wholly-owned subsidiary, Prophet 21 (New Jersey), Inc., a New Jersey corporation
incorporated in 1967 under the name Programmed Control Corporation.

     Prophet 21 and Prophet 21 Acclaim are registered trademarks of the Company.
All other  trademarks  and  trade  names  referred  to in this Form 10-K are the
property of the respective owners and are not the property of the Company.

TRADING PARTNER CONNECT

     In April  2000,  Prophet 21  announced  its next phase of  e-business  with
Trading  Partner  Connect.  The venture is aimed at  streamlining  the  commerce
process of this heavily fragmented  marketplace through promoting  collaborative
commerce  among   manufacturers,   distributors   and  customers,   as  well  as
establishing interconnectivity with leading Internet trading communities.



                                       -1-
<PAGE>

     Fully interoperable with CommerceCenter or Acclaim, Trading Partner Connect
serves to preserve and enhance collaborative commerce among trading partners and
streamline the procurement process between distributors and their suppliers.

     Trading Partner Connect offers several components:

     o    B2B Marketplace - Provides relationship management tools and a catalog
          with access to millions of items

     o    B2B Buyer - Streamlines the procurement  process between  distributors
          and manufacturers/suppliers

     o    B2B Alliance - Provides distributors with the opportunity to engage in
          collaborative commerce with other distributors

     o    B2B  Seller - Provides  distributors  with a fully  hosted  integrated
          Web-based storefront solution

     o    B2B  Gateway  -  Provides   interconnectivity   to  other  procurement
          platforms and trading communities

PROPHET 21 COMMERCENTER AND PROPHET 21 ACCLAIM

     Prophet 21 offers  enterprise  software  solutions  for  Microsoft  Windows
NT/Windows  2000 and UNIX.  Fully  scalable,  Prophet 21's  enterprise  software
solutions  provide  organizations  with  powerful,   customizable   applications
designed to improve  customer  service and maximize  their return on investment.
Features  include  order  and  inventory  management,  purchasing,  pricing  and
promotion,   supply   chain   optimization,   financial   management,   customer
relationship  management,  business  analysis  and  reporting,  e-business,  and
warehouse  automation.  In addition,  solutions may be  implemented  onsite,  or
accessed via the Internet  through  Prophet 21's  Application  Service  Provider
(ASP) option.

     Prophet 21 CommerceCenter is an enterprise-wide solution, extending through
the supply  chain,  that  addresses  key  business  issues  such as  e-business,
customer service, margin shrinkage,  asset management and cash flow. The Company
has designed the system to address the business  management  automation needs of
distribution-centric  companies who desire a Microsoft  Backoffice  product that
supports  Microsoft SQL Server 7.0, a leading database for the Microsoft Windows
NT/Windows 2000 operating environment.

     Prophet 21 Acclaim is a UNIX based,  fully integrated,  scaleable  software
solution.  Acclaim's design philosophy is simple: provide adaptive,  easy-to-use
software to assist the  distributor in  streamlining  daily business  processes,
improve customer service,  increase  employee  productivity and maximize profit.
Acclaim  provides the application  functionality to support complex supply chain
transactions,   coupled  with  financial   tools  designed  to  synchronize  the
money-management  chain and  analysis  and  reporting  tools  developed  to help
customers make more informed business decisions.



                                       -2-
<PAGE>

     Bridging  the gap  between  the  traditional  marketplace  and  e-commerce,
Acclaim offers the middleware needed to perform real-time Internet  transactions
24 hours a day, 7 days a week via Prophet 21's Internet trading network, Trading
Partner  Connect.   Acclaim  should  enable  customers  to  maximize  return  on
investment  through  efficient,   effective  supply  chain  management;  provide
first-rate  customer  service;  respond and adapt to changing  business  demands
necessary  to  gain a  competitive  advantage;  and  harness  the  power  of the
Internet.

     Both  CommerceCenter and Acclaim are comprehensive,  feature-rich  systems.
The Company  believes  these  systems  can be  installed  rapidly and  supported
effectively  because its  trainers and customer  support  personnel  have a high
level of expertise with a single system. In addition, these solutions permit the
Company's  customers to  incorporate  readily the  Company's  periodic  software
enhancements. To facilitate the very specific and unique needs of its customers,
the Company provides custom software modifications.

     Both solutions are designed for use by distribution-centric  companies with
multi-branch  operations.  The  solutions  permit  these  companies to determine
system-wide  inventory status  instantaneously  and to ship orders  efficiently.
These  solutions  also  allow for  centralized  purchasing,  inventory  control,
billing and accounting,  thereby eliminating certain  branch-level  expenses and
permitting goods to be moved quickly while minimizing inventories. The Company's
communications  capabilities  include  configuration  of wide area  networks and
integration with local area networks.

     Prophet 21  CommerceCenter  and  Prophet 21 Acclaim are open  systems  that
allow the integration of complementary software products such as report writers,
faxing software,  warehouse management, forms creation and executive information
systems. The Company has successfully developed seamless integration to a number
of third-party products.

SALES AND MARKETING

     The Company  sells its products and services  through its 40 person  direct
sales force located in sales and service  offices  throughout the United States.
The  Executive  Vice  President  supervises  the field sales force.  The Company
employs a solution selling methodology with all of its sales personnel,  who are
trained and managed in accordance with this doctrine.  The Company believes that
its direct sales approach leads to long-term  relationships  with customers that
increase customer  satisfaction and provide opportunities for follow-on sales to
its  existing  customer  base.  The Company  believes  that as the  distribution
industry  continues  to evolve  and face new  challenges,  a  knowledgeable  and
solutions-oriented sales force will bring great value to its customers.

     The Company's  marketing  strategy is to provide  focused  marketing on the
industry  segments  served by the Company.  The Company  generates leads through
telemarketing,  direct mail, advertising, national and regional trade shows, and
Company-sponsored seminars.

     The Company's  marketing  department has the  responsibility of identifying
the market to be served by the Company's  products and  services.  The marketing
department  further guides the direction and strategy of the Company's  products
and services. The marketing department aggressively gathers information from the
Company's customer base, distribution market,


                                      -3-
<PAGE>

distribution-centric companies and leading supply chain consultants and industry
experts.  This data is then presented for  consideration  in regard to enhancing
current   products   and  for   creating   new  products  to  serve  new  market
opportunities.

     Prophet 21  conducts  an annual  summit  conference  to  provide  training,
exchange of ideas, and demonstrations of new products and features.  The Company
also conducts regional training and support conferences.

CUSTOMERS

     The Company has, as of June 30, 2001, sold approximately 2,800 systems. The
Company's  customers  vary in size from small  distributors  with a few users to
large  companies  with several  hundred  users linking  multiple  geographically
dispersed branches.

     The Company  provides  Prophet 21  CommerceCenter  users a one-year support
contract covering software support and product  enhancements.  After the initial
year,  customers can extend the support contract for a fee. As of June 30, 2001,
all of the Company's  active  CommerceCenter  customers  were covered by support
contracts.  There can be no assurance,  however, that customers will continue to
enter  into  support  contracts.  Support  contracts  have terms of one year and
continue thereafter unless terminated.

     The Company provides Prophet 21 Acclaim users a one-year  hardware warranty
and a 90-day software warranty.  Ninety days after the sale, customers typically
enter into a fee-based  support contract covering software and hardware support.
The Company offers software  enhancements at discounted  prices to customers who
have active support contracts. As of June 30, 2001,  approximately 85 percent of
the  Acclaim  users were  covered by support  contracts  following  the  initial
warranty  period.  There  can be no  assurance,  however,  that  customers  will
continue to enter into support contracts at this rate. Support contracts have an
initial term of one year and continue thereafter unless terminated.

PROFESSIONAL SERVICES

     Prophet 21 measures its success by how quickly and  efficiently it puts its
enterprise  solutions  to  work  for its  customers.  Through  its  professional
services  team,  the Company  employs 143  consultants,  educators and technical
support staff dedicated to maximizing return on investment, providing the latest
technology and streamlining  daily  operations.  The professional  services team
understands that the key to a successful  business lies not only with purchasing
the right software,  but also with  establishing a long-term  partnership with a
team who has the  application  expertise,  real world  business  experience  and
training skills to ensure a customer's financial and organizational growth.

     Once  Prophet 21  receives  an order,  the Company  provides  training  and
consultation,  including  advice on how to best operate the customer's  business
using  the  Prophet  21  solutions,   before  the  system  is  installed.  After
installation,  the  Company  typically  provides  applications  training  at the
customer's  location.  Customers  have telephone  access and Internet  access to
technical  specialists  who  respond to  hardware,  software,  and  applications
questions.  These  technical  support  specialists  diagnose and solve technical
problems  and assist  customers  with systems  integration  and use. The Company
tracks service reports through a state-of-the-art


                                      -4-
<PAGE>

customer  support  product,  which  maintains  current status reports as well as
historical  logs of  customer  interaction.  The  Company  develops a variety of
educational  tools and  programs to train  customers  in the Prophet 21 systems.
Such  programs  include fully  interactive  computer-based  training,  Web-based
training, video training, and nationwide instructor-based training seminars.

SOFTWARE DEVELOPMENT

     The  distribution  industry  is  characterized  by  changing  needs and the
Company's  success  depends,  to a large extent,  on its ability to  continually
modify  and  enhance  its  software  to meet  such  changing  needs.  Eighty-one
employees are directly involved in programming, software development and quality
assurance. The Company places great emphasis on software development and expects
to continue to  introduce  modifications  or  enhancements  to its software on a
periodic basis. The Company presently releases a modified or enhanced version of
Prophet  21  software  (Prophet  21  CommerceCenter   and  Prophet  21  Acclaim)
approximately  every eight to twelve months. The Company identifies customer and
marketplace  product  needs by direct  and  frequent  interaction  with users of
Prophet 21 software,  through customer satisfaction surveys and by understanding
the trends of the distribution and distribution-centric  marketplace.  In fiscal
2001, the Company released Prophet 21  CommerceCenter  versions 8 and 8.5, which
featured  personal digital assistant (PDA) integration on a Palm OS platform and
lot costing.

     The Company's  research and development  expenses were  approximately  $6.1
million,  $6.7 million and $8.0 million in the fiscal years ended June 30, 1999,
2000 and 2001,  respectively.  In 1996, the Company began  capitalizing  certain
software  development costs in connection with the general release of Prophet 21
CommerceCenter.  In 2000, the Company also began to capitalize  certain software
costs in connection  with Trading Partner  Connect.  Such  capitalized  software
development  costs amounted to $381,000 and $3,168,000 in the fiscal years ended
June 30, 2000 and 2001, respectively.

ASSEMBLY AND SUPPLIERS

     The  Company  relies on  third-party  vendors to develop,  manufacture  and
supply all of the hardware components of Prophet 21 solutions.  Manufacturing by
the Company consists of light assembly and systems integration.

     The Company  believes that several vendors are capable of providing most of
the components and parts used in the Company's  systems.  In certain  instances,
despite the availability of multiple sources, the Company has elected to procure
certain  components or parts from a single source to maintain quality control or
to develop a strategic relationship with a supplier. The Company has not entered
into any  long-term  supply  contracts  with its  vendors,  electing to purchase
components and parts on a purchase order basis. As a result,  the Company has no
assurance  that  components  and parts will be available  as  required,  or that
prices of such  components  and parts will not  increase.  In addition,  certain
components of Prophet 21 Acclaim,  including IBM RS/6000  computers and Progress
software, are available only from a single source.



                                      -5-
<PAGE>

BACKLOG

     The Company  normally  ships  systems  within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.

COMPETITION

     The market for business management  automation systems for the distribution
industry is highly  competitive.  The Company believes that it has approximately
30 direct competitors, represented by a mix of small, closely held companies and
divisions of larger companies that sell software or systems directly competitive
with  those of the  Company.  Certain of such  competitors  serve only a limited
number of industry segments within the distribution industry.

     The  Company  believes  that  the  principal  competitive  factors  in  the
distributor  and  wholesaler   automation  industry  include  product  features,
technical capabilities, system price/performance, vendor and product reputation,
financial  stability,  customer  service and support,  and timeliness of product
modifications and enhancements and that it competes  effectively with respect to
all of these factors.

INTELLECTUAL PROPERTY

     The Company's success is heavily dependent upon its intellectual  property,
including  its  software   technology.   Prophet  21  relies  principally  on  a
combination  of  copyright,  trademark  and  trade  secret  laws,  employee  and
third-party  non-disclosure  agreements,  and license  agreements to protect its
intellectual  property.  Nonetheless,  there can be no assurance  that the steps
taken by the Company to protect its  intellectual  property  will be adequate to
prevent  misappropriation  or  unlawful  copying of its  technology  or software
programs.  Copyright  and trade secret laws do not limit the rights of others to
independently  develop similar  technology and software  programs.  Although the
Company  believes  that its  software  products do not  infringe on any existing
proprietary rights of others,  there can be no assurance that third parties will
not assert infringement claims in the future.

     The Company  believes that, due to the rapid pace of innovation  within the
computer  industry,   factors  such  as  technological  and  creative  skill  of
personnel, knowledge and experience of management,  reputation,  maintenance and
support  and the  ability  to  develop,  enhance,  market and  acquire  software
products and services are more  important  for  establishing  and  maintaining a
competitive  position  within the industry than are patent,  copyright and other
legal protections for its technology.

EMPLOYEES

     As of June 30, 2001, the Company employed 313 persons full-time, of whom 56
were engaged in sales and  marketing;  143 were engaged in customer  service and
support, and installation; 81 were engaged in programming,  software development
and  quality  assurance;  and 33 were  engaged in  finance,  administration  and
management.  In addition, 41 were employed on a part-time basis (17 of whom were
engaged  in  administrative  functions).  None of the  Company's  employees  are
covered by collective  bargaining  agreements.  The Company believes that it has
been  successful in attracting  skilled  personnel.  Competition for experienced
sales and



                                      -6-
<PAGE>

marketing  personnel and software  programmers is intense.  The Company's future
success  will depend in part on its  ability to continue to attract,  retain and
motivate highly qualified  personnel.  The Company considers  relations with its
employees to be good.

ITEM 2.  PROPERTIES.

     The Company  leases  facilities in Yardley,  Pennsylvania  totaling  60,000
square feet from Dr. John E. Meggitt,  the Company's  Chairman of the Board, and
Mrs. Dorothy M. Meggitt, the Company's Secretary. This lease expires on June 30,
2003. The leased space in Pennsylvania is used for administration, a substantial
portion of sales and marketing,  customer service and support, assembly, quality
assurance  and software  development.  The Company also leases sales and service
offices in Los Angeles.

ITEM 3.  LEGAL PROCEEDINGS.

     There is no material  litigation pending to which the Company is a party or
to which any of its  property is subject.  The Company is involved  from time to
time as plaintiff or defendant in various  legal  actions  arising in the normal
course of business.  While the ultimate outcome of pending proceedings cannot be
predicted with certainty,  it is the opinion of management,  after  consultation
with respective counsel  representing the Company in such proceedings,  that the
resolution  of these  proceedings  should  not  have a  material  effect  on the
Company's consolidated financial position or results of operation.

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

       Not applicable.



                                      -7-
<PAGE>

                                     PART II

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

     Prior to March  1994,  there was no  established  market for the  Company's
common stock. Since March 11, 1994, the Company's common stock has traded on the
Nasdaq National Market ("NNM") under the symbol "PXXI."

     The following table sets forth the high and low sales prices for the common
stock for each of the quarters  since the quarter  ended  September  30, 1999 as
reported on NNM. Such quotations  reflect  inter-dealer  prices,  without retail
mark-up, mark-down or commission and may not represent actual transactions.

         Quarter Ended                   High                         Low
   ----------------------          ----------------             ----------------
     September 30, 1999                $13.75                        $6.875
     December 31, 1999                 $10.25                        $5.25
     March 31, 2000                    $20.25                        $9.563
     June 30, 2000                     $25.00                       $10.891
     September 30, 2000                $19.9375                     $12.25
     December 31, 2000                 $12.875                       $4.375
     March 31, 2001                     $8.875                       $5.6875
     June 30, 2001                      $7.00                        $4.50

     As of August 31, 2001, the  approximate  number of holders of record of the
common stock was 159 and the  approximate  number of  beneficial  holders of the
common stock was 1,519.

     The Company has never declared or paid  dividends on its common stock.  The
Company currently intends to retain any future earnings to finance the growth of
the business and,  therefore,  does not anticipate  paying any cash dividends in
the foreseeable future.




                                      -8-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

     The following table sets forth selected  consolidated  historical financial
data of the Company as of the dates and for the periods indicated.  The selected
financial  data set forth below for the Company as of June 30, 2000 and 2001 and
for each of the years in the three year  period  ended June 30, 2001 are derived
from the audited  consolidated  financial  statements included elsewhere herein.
The selected financial data set forth below for the Company as of June 30, 1997,
1998 and 1999 and for each of the years ended June 30, 1997 and 1998 are derived
from audited  consolidated  financial  statements not included elsewhere herein.
The  selected  financial  information  should  be read in  conjunction  with the
Consolidated  Financial  Statements  and the Notes thereto  appearing  elsewhere
herein. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations," which is included elsewhere in this Annual Report on
Form 10-K.

<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended June 30,
                                               1997          1998          1999          2000          2001
                                               ----          ----          ----          ----          ----
                                                            (In Thousands, Except Per Share Data)

<S>                                         <C>           <C>           <C>           <C>           <C>
Statement of Operations Data:
Revenue:
  Software and hardware sales..........     $ 22,537      $ 30,157      $ 29,786      $ 18,014      $ 12,571
  Service and support..................       13,866        16,457        22,201        28,101        28,238
                                            --------      --------      --------      --------      --------
                                              36,403        46,614        51,987        46,115        40,809
                                            --------      --------      --------      --------      --------
Cost of revenue:
  Software and hardware sales..........       12,407        15,805        11,866         8,792         7,241
  Service and support..................        6,836         8,596        12,783        14,971        13,975
                                            --------      --------      --------      --------      --------
                                              19,243        24,401        24,649        23,763        21,216
                                            --------      --------      --------      --------      --------
    Gross profit.......................       17,160        22,213        27,338        22,352        19,593
                                            --------      --------      --------      --------      --------
Operating expenses:
  Sales and marketing..................        8,306        10,078        12,559        11,598        11,769
  Research and development.............        3,001         3,811         6,109         6,700         8,000
  General and administrative...........        2,667         3,098         3,899         4,346         4,954
                                            --------      --------      --------      --------      --------
    Total operating expenses...........       13,974        16,987        22,567        22,644        24,723
                                            ---------     --------      --------      --------      --------
    Operating income (loss)............        3,186         5,226         4,771          (292)       (5,130)
Interest income........................          376           304           286           397          700
                                            --------      --------      --------      --------      --------
    Income (loss) before taxes.........        3,562         5,530         5,057           105        (4,430)
Provision (benefit) for income taxes...        1,275         1,991         1,664          (491)       (2,278)
                                            --------      --------      --------      --------      --------
    Net income (loss)..................     $  2,287      $  3,539      $  3,393      $    596      $ (2,152)
                                            ========      ========      ========      ========      ========

Basic earnings (loss) per share:
 Net income (loss) per share...........     $   0.60      $   0.98      $   0.92      $   0.16      $  (0.58)
                                            ========      ========      ========      ========      ========
Weighted average common
  shares outstanding...................        3,813         3,601         3,705         3,627         3,739
                                            ========      ========      ========      ========      ========
Diluted earnings (loss) per share:
 Net income (loss) per share...........     $   0.60      $   0.90      $   0.85      $   0.15      $  (0.58)
                                            ========      ========      ========      ========      ========
 Weighted average common and
   common equivalent shares
   outstanding.........................        3,838         3,928         3,990         3,913         3,739
                                            ========      ========      ========      ========      ========

Balance Sheet Data
(at period end):
Working capital........................     $ 11,699      $ 15,765      $ 18,306      $ 18,652      $ 18,966
Total assets...........................       27,660        34,548        36,475        37,173        38,273
Stockholders' equity...................       18,743        23,789        26,019        27,607        25,811
</TABLE>

---------------------
Note: Certain items in prior years' financial  statements have been reclassified
for  comparative  purposes.  See  "Note 1.  Summary  of  Significant  Accounting
Policies" to the audited  consolidated  financial  statements included elsewhere
herein.


                                      -9-
<PAGE>

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

GENERAL

     The Company provides  enterprise  software and service for the continuously
changing market demands of high-volume distribution-centric organizations in the
$1.7 trillion durable goods industry.  Prophet 21 develops, markets and supports
a complete suite of fully integrated,  industry-specific enterprise applications
consisting of order and inventory management, pricing and promotions,  warehouse
automation,  procurement, finance, business analysis and reporting, and customer
relationship  modules.  In  addition,  Prophet  21  provides  industry-specific,
distribution-centric   enterprise   solutions  for  select   markets   including
industrial MRO,  electrical  equipment,  plumbing  supplies/HVAC,  fasteners and
building materials marketplace.

     A significant  portion of the Company's revenue is derived from the sale of
either Prophet 21 CommerceCenter or Prophet 21 Acclaim software solutions. Other
sources of revenue include:  customer support maintenance  contracts,  equipment
maintenance (when purchased via Prophet 21), the sale of professional  services,
and optional  third-party  software  products.  Each Prophet 21 Acclaim solution
includes  the Prophet 21 Acclaim  software,  an IBM RISC  System/6000  computer,
various  optional   third-party   software  products  and  hardware  components,
training,  support and  installation.  Each Prophet 21  CommerceCenter  solution
includes the Prophet 21  CommerceCenter  software,  training  and  support.  The
Company develops a variety of educational  tools and programs to train customers
in the Prophet 21 systems.  Such  programs  include  interactive  computer-based
training,  video  training and remote  training.  The Company's  cost of revenue
consists  principally  of the costs of hardware  components,  customer  support,
installation and training and, to a lesser extent, third-party software.

     Prophet 21 CommerceCenter  utilizes the Microsoft  Windows  NT/Windows 2000
operating  environment.  Prophet 21  CommerceCenter  is targeted  for  companies
looking  to solve  their  distribution-centric  business  requirements  with the
Microsoft Windows NT/Windows 2000 operating environment.  These companies desire
a solution  that provides a  transaction-intensive  sales order  management  and
inventory  management  solution to meet their customer service needs.  They also
require a  solution  that  integrates  with an  accounting  solution  and can be
implemented in a cost-effective manner. The Prophet 21 CommerceCenter product is
suitable for distribution-oriented  companies, as well as businesses that have a
distribution component of their own.

     Prophet 21 Acclaim is a complete  distribution industry management solution
that combines the  functionality  of the traditional  Prophet 21 system with the
technology of Progress Software. It has been designed so that current Prophet 21
users can move to this new product while  preserving  their existing  technology
infrastructure.

     The  statements  contained in this Annual  Report on Form 10-K that are not
historical facts are  forward-looking  statements (within the meaning of Section
21E of the  Securities  Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things,  the use of forward-looking  terminology such as "believes,"  "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other


                                      -10-
<PAGE>

variations thereon or comparable terminology, or by discussions of strategy that
involve  risks  and  uncertainties.  From  time  to  time,  the  Company  or its
representatives have made or may make forward-looking  statements,  orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized  executive officer
of the Company. These forward-looking  statements,  such as statements regarding
anticipated future revenues, capital expenditures and other statements regarding
matters that are not historical facts, involve predictions. The Company's actual
results,  performance or achievements  could differ  materially from the results
expressed in, or implied by, these forward-looking  statements.  Potential risks
and  uncertainties  that could affect the  Company's  future  operating  results
include,  but are not limited to: (i) economic  conditions,  including  economic
conditions related to the computer industry; (ii) the availability of components
and parts from the  Company's  vendors at current  prices and levels;  (iii) the
intense competition in the markets for the Company's products and services; (iv)
the  Company's  ability to protect  its  intellectual  property;  (v)  potential
infringement claims against the Company for its software  development  products;
(vi) the Company's ability to obtain customer  maintenance  contracts at current
levels; and (vii) the Company's ability to develop, market, provide, and achieve
market acceptance of new service offerings to new and existing clients.



                                      -11-
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth for the periods  indicated certain financial
data as a percentage of revenue and the  percentage  change in the dollar amount
of such data compared to the prior comparable period:

<TABLE>
<CAPTION>
                                                              Percentage of Revenue
                                                              ---------------------
                                                                Fiscal Year Ended
                                                                      June 30,
                                                -----------------------------------------------
                                                    1999              2000               2001
                                                    ----              ----               ----
<S>                                                <C>               <C>                <C>
Revenue:
  Software and hardware sales..............         57.3%             39.1%              30.8%
  Service and support......................         42.7              60.9               69.2
                                                  ------            ------             ------
                                                   100.0             100.0              100.0
                                                  ------            ------             ------
Cost of revenue:
  Software and hardware sales..............         22.8              19.1               17.7
  Service and support......................         24.6              32.5               34.3
                                                  ------            ------             ------
                                                    47.4              51.6               52.0
                                                  ------            ------             ------
     Gross profit..........................         52.6              48.4               48.0
                                                  ------            ------             ------
Operating expenses:
  Sales and marketing......................         24.1              25.2               28.9
  Research and development.................         11.8              14.5               19.6
  General and administrative...............          7.5               9.4               12.1
                                                  ------            ------             ------
     Total operating expenses..............         43.4              49.1               60.6
                                                  ------            ------             ------
     Operating income (loss)...............          9.2              (0.7)             (12.6)
Interest income............................          0.6               0.9                1.7
                                                  ------            ------             ------
     Income (loss) before income taxes.....          9.8               0.2              (10.9)
Provision (benefit) for income taxes.......          3.2              (1.1)              (5.6)
                                                  ------            ------             ------
     Net income (loss).....................          6.6%              1.3%              (5.3)%
                                                  ======            ======             ======
</TABLE>

     Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000

     Revenue.  Revenue  decreased by 11.5%, or $5,306,000,  from  $46,115,000 in
fiscal 2000 to  $40,809,000  in fiscal year 2001.  Software and  hardware  sales
revenue  decreased by 30.2%, or $5,443,000,  from  $18,014,000 in fiscal 2000 to
$12,571,000  in fiscal year 2001.  This decrease was  attributable  primarily to
lower sales of the Acclaim and CommerceCenter  products due to a softness in the
market.  Service  and support  revenue  increased  by 0.5%,  or  $137,000,  from
$28,101,000 in fiscal 2000 to $28,238,000 in fiscal year 2001. This increase was
attributable  primarily  to an  increase  in  e-commerce  services,  offset by a
decrease in services related to the Acclaim product.

     Gross profit. The Company's gross profit decreased by 12.3%, or $2,759,000,
from $22,352,000 in fiscal 2000 to $19,593,000 in fiscal year 2001. Gross profit
margin  decreased  from 48.4% of  revenue in fiscal  2000 to 48.0% of revenue in
fiscal 2001.  Gross profit from software and hardware sales  decreased by 42.2%,
or $3,892,000, from $9,222,000 in fiscal 2000 to $5,330,000 in fiscal year 2001.
Gross profit margin  attributable  to software and hardware sales decreased from
51.2% in fiscal  2000 to 42.4% in fiscal year 2001.  The  decrease in such gross
profit and gross profit margin was attributable primarily to a decrease in sales
volume and the  relatively  fixed nature of certain costs that are spread over a
smaller sales base.  Gross profit



                                      -12-
<PAGE>

from  service  and  support  revenue  increased  by 8.6%,  or  $1,133,000,  from
$13,130,000  in fiscal 2000 to  $14,263,000  in fiscal year 2001.  Gross  profit
margin  attributable  to service and  support  revenue  increased  from 46.7% of
service  and  support  revenue in fiscal  2000 to 50.5% of service  and  support
revenue in fiscal  2001.  The  increase  in such gross  profit and gross  profit
margin  was  attributable  primarily  to the  efficiencies  gained by  web-based
support as  opposed  to manual  telephone  support,  and  higher  margins on the
Company's e-commerce services.

     Sales and marketing  expenses.  Sales and marketing  expenses  increased by
1.5%, or $171,000, from $11,598,000 in fiscal 2000 to $11,769,000 in fiscal year
2001,   and   increased  as  a  percentage  of  revenue  from  25.2%  to  28.9%,
respectively. Such expenses increased in absolute dollars and as a percentage of
revenue due primarily to increased costs  associated  with the Company's  User's
Conference during the third quarter of fiscal 2001.

     Research  and  development  expenses.  Research  and  development  expenses
increased by 19.4%, or $1,300,000,  from $6,700,000 in fiscal 2000 to $8,000,000
in fiscal year 2001,  and  increased  as a  percentage  of revenue from 14.5% to
19.6%,  respectively.  Research and development  expenses  increased in absolute
dollars and as a percentage of revenue due primarily to increased  investment in
its Trading Partner Connect product.

     General and administrative  expenses.  General and administrative  expenses
increased by 14.0%, or $608,000, from $4,346,000 in fiscal 2000 to $4,954,000 in
fiscal year 2001,  and  increased as a percentage of revenue from 9.4% to 12.1%,
respectively.  General and administrative expenses increased in absolute dollars
and as a percentage of revenue due primarily to increased  professional services
and salaries.

     Income taxes. The Company's  effective tax rate was (467.6)% and (51.4)% in
fiscal 2000 and 2001,  respectively.  The  difference  between the effective tax
rate and the  statutory  tax rate was  primarily due to state taxes and research
and development credits.

     Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999

     Revenue.  Revenue  decreased by 11.3%, or $5,872,000,  from  $51,987,000 in
fiscal 1999 to $46,115,000  in fiscal 2000.  Software and hardware sales revenue
decreased  by  39.5%,  or  $11,772,000,  from  $29,786,000  in  fiscal  1999  to
$18,014,000  in fiscal  2000.  This  decrease  was  attributable  primarily to a
slowdown  in  software  market  sales  caused by  potentially  new and  existing
customer  concerns  relating  to issues in  connection  with the Year 2000 and a
shift in  demand to  e-commerce  products.  Other  factors  contributing  to the
decrease included the Company's focus on larger accounts which typically require
a longer sales cycle than traditionally  targeted Prophet 21 customers.  Service
and support  revenue  increased by 26.6%,  or  $5,900,000,  from  $22,201,000 in
fiscal 1999 to  $28,101,000  in fiscal  2000.  This  increase  was  attributable
primarily  to an increase in services  sold and an increase in the number of new
users who have entered into maintenance contracts.



                                      -13-
<PAGE>

     Gross profit. The Company's gross profit decreased by 18.2%, or $4,986,000,
from  $27,338,000  in fiscal 1999 to  $22,352,000  in fiscal 2000.  Gross profit
margin  decreased  from 52.6% of  revenue in fiscal  1999 to 48.4% of revenue in
fiscal 2000.  Gross profit from software and hardware sales  decreased by 48.5%,
or  $8,698,000,  from  $17,920,000  in fiscal 1999 to $9,222,000 in fiscal 2000.
Gross profit margin  attributable  to software and hardware sales decreased from
60.2% in fiscal 1999 to 51.2% in fiscal 2000.  The decrease in such gross profit
and gross profit margin was attributable primarily to a decrease in sales volume
and a change in product  mix.  Gross  profit from  service  and support  revenue
increased by 39.4%, or $3,712,000, from $9,418,000 in fiscal 1999 to $13,130,000
in fiscal 2000. Gross profit margin  attributable to service and support revenue
increased  from 42.4% of service and support  revenue in fiscal 1999 to 46.7% of
service and support  revenue in fiscal  2000.  The increase in such gross profit
and gross profit margin was attributable  primarily to increased  revenues which
increased faster than the fixed expenses associated with the delivery of service
and support.

     Sales and marketing  expenses.  Sales and marketing  expenses  decreased by
7.7%, or $961,000,  from  $12,559,000  in fiscal 1999 to  $11,598,000  in fiscal
2000,   and   increased  as  a  percentage  of  revenue  from  24.2%  to  25.2%,
respectively.  Such  expenses  decreased  in absolute  dollars due  primarily to
decreased  compensation  expenses  associated  with  decreased  revenues.   Such
expenses increased as a percentage of revenue due to decreased sales volume.

     Research  and  development  expenses.  Research  and  development  expenses
increased by 9.7%, or $591,000,  from $6,109,000 in fiscal 1999 to $6,700,000 in
fiscal  2000,  and  increased  as a  percentage  of revenue from 11.8% to 14.5%,
respectively.  Research and development  expenses  increased in absolute dollars
and as a percentage of revenue due  primarily to an increase in salary  expenses
related to  increased  staffing  as the Company  continued  to invest in product
development.

     General and administrative  expenses.  General and administrative  expenses
increased by 11.5%, or $447,000, from $3,899,000 in fiscal 1999 to $4,346,000 in
fiscal  2000,  and  increased  as a  percentage  of  revenue  from 7.5% to 9.4%,
respectively.  General and administrative expenses increased in absolute dollars
and  as  a  percentage  of  revenue  due  primarily  to  increased   salary  and
professional fees.

     Income taxes.  The  Company's  effective tax rate was 32.9% and (467.6)% in
fiscal 1999 and 2000,  respectively.  The  difference  between the effective tax
rate and the statutory tax rate for fiscal 2000 was primarily due to state taxes
and research and development credits.

LIQUIDITY AND CAPITAL RESOURCES

     Since its inception,  the Company has funded its operations  primarily from
cash generated by operations and available  cash,  including funds raised in the
Company's  initial public  offering  completed in March 1994. The Company's cash
flow provided by operations  was  $3,567,000,  $9,233,000 and $3,578,000 for the
fiscal years ended June 30, 1999, 2000 and 2001, respectively.

     The Company's working capital was approximately $18,652,000 and $18,966,000
at June 30, 2000 and 2001, respectively.


                                      -14-
<PAGE>

     The Company  invested  $1,714,000,  $1,711,000  and  $1,331,000  in capital
equipment  and  leasehold  improvements  in fiscal  years  1999,  2000 and 2001,
respectively.  There  are  no  material  commitments  for  capital  expenditures
currently outstanding.  The Company also invested $0, $381,000 and $3,168,000 in
software  development costs which were capitalized during the fiscal years ended
June 30, 1999, 2000 and 2001, respectively.

     The Company does not have a significant  concentration  of credit risk with
respect to accounts  receivable due to the large number of customers  comprising
the Company's  customer base and their dispersion  across  different  geographic
regions. The Company performs on-going credit evaluations and generally does not
require collateral.  The Company maintains reserves for potential credit losses,
and, to date, such losses have been within the Company's expectations.

     The Company  believes that available funds and the cash flow expected to be
generated  from  operations  will be adequate to satisfy its current and planned
operations for at least the next 12 months.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial  statements  required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial  statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K."

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

     On January 26,  2000,  the  Company  dismissed  PricewaterhouseCoopers  LLP
("PWC"),  as its independent  accountants.  In connection with its audit for the
year  ended  June  30,  1999  and  through  January  26,  2000,  there  were  no
disagreements  with PWC on any matters of  accounting  principles  or practices,
financial  statement  disclosure,  or auditing  scope or procedure  which caused
disagreements which if not resolved to the satisfaction of PWC would have caused
them to make  reference  thereto in their report on the financial  statements of
the  Company  for  such  year.  The  report  of PWC on the  Company's  financial
statements  as of and for the year  ended  June 30,  1999  contained  no adverse
opinion or  disclaimer  of  opinion  and was not  modified  or  qualified  as to
uncertainty,  audit scope, or accounting principle.  The decision to dismiss PWC
was approved by both the Audit  Committee  of the Board of Directors  and by the
full Board of  Directors of the Company.  PWC has  furnished  the Company with a
letter  addressed  to the  Securities  and  Exchange  Commission  stating  their
agreement with the above statements.

     On  February  1, 2000,  the Company  retained  KPMG LLP as its  independent
accountants.



                                      -15-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
2001 Annual Meeting of Stockholders is incorporated  herein by reference to such
proxy statement.

ITEM 11. EXECUTIVE COMPENSATION.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 2001  Annual  Meeting of  Stockholders  is
incorporated herein by reference to such proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 2001
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 2001 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.



                                      -16-
<PAGE>

                                     PART IV

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

(a)    (1)     Financial Statements.

               Reference  is  made  to  the  Index  to  Consolidated   Financial
               Statements and Schedule on Page F-1.

(a)    (2)     Financial Statement Schedule.

               Reference  is  made  to  the  Index  to  Consolidated   Financial
               Statements and Schedule on Page F-1.

(a)    (3)     Exhibits.

               Reference is made to the Index to Exhibits on Page 20.

(b)            Reports on Form 8-K.

               No reports on Form 8-K have been filed  during the quarter  ended
               June 30, 2001.





                                      -17-
<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  this 27th day of
September, 2001.


                                            PROPHET 21, INC.



                                            By: /s/ Charles L. Boyle, III
                                            --------------------------------
                                                Charles L. Boyle, III, President
                                                     and Chief Executive Officer



                                      -18-
<PAGE>

     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.

             Signature                    Title                      Date
             ---------                    -----                      ----

/s/Charles L. Boyle, III     President, Chief Executive       September 27, 2001
--------------------------   Officer and Director
   Charles L. Boyle, III     (Principal Executive Officer)


/s/ Thomas M. Giuliani       Chief Financial Officer and      September 27, 2001
--------------------------   Treasurer (Principal
   Thomas M. Giuliani        Financial and Accounting
                             Officer)

/s/ John E. Meggitt, Ph.D.   Chairman of the Board and        September 27, 2001
--------------------------    Director
   John E. Meggitt, Ph.D.


/s/ Dorothy M. Meggitt       Secretary and  Director          September 27, 2001
--------------------------
   Dorothy M. Meggitt


/s/ David D. Gathman         Director                         September 27, 2001
--------------------------
   David D. Gathman


/s/ Daniel J. Malcolm        Director                         September 27, 2001
--------------------------
   Daniel J. Malcolm


/s/ Donald M. Gleklen        Director                         September 27, 2001
--------------------------
   Donald M. Gleklen



                                      -19-
<PAGE>

                                  EXHIBIT INDEX


    Exhibit         Description of
      No.           Exhibit
------------        ----------------------------

      3.1           Certificate of Incorporation.  (Incorporated by reference to
                    Exhibit 3.1 to the Company's  Registration Statement on Form
                    S-1 (File Number  33-74276) which became  effective on March
                    10, 1994.)

      3.2           By-laws.  (Incorporated  by  reference to Exhibit 3.2 to the
                    Company's  Registration  Statement  on Form S-1 (File Number
                    33-74276) which became effective on March 10, 1994.)

      4.1*          1993 Stock Plan, as amended.  (Incorporated  by reference to
                    Exhibit 4.1 to the Company's  Annual Report on Form 10-K for
                    the fiscal year ended June 30, 2000.)

      4.2*          1997  Employee  Stock  Purchase   Plan.   (Incorporated   by
                    reference to Exhibit 4.1 to the Company's  Quarterly  Report
                    on Form 10-Q for the quarter ended December 31,1997.)

     10.1*          Employment  Agreement  dated as of July 1, 1993  between the
                    Company and John E. Meggitt.  (Incorporated  by reference to
                    Exhibit 10.1 to the Company's Registration Statement on Form
                    S-1 (File Number  33-74276) which became  effective on March
                    10,  1994.)  Employment  Agreement  amended by Amendments to
                    Employment  Agreement dated January 26, 1995 and February 3,
                    1995.  (Incorporated  by  reference  to Exhibit  10.1 to the
                    Company's  Annual  Report on Form 10-K for the  fiscal  year
                    ended June 30, 2000.)

     10.2*          Employment  Agreement  dated as of July 1, 1993  between the
                    Company  and  Charles  L.  Boyle,   III.   (Incorporated  by
                    reference  to  Exhibit  10.2 to the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)  Employment  Agreement amended
                    by Amendments to Employment Agreement dated January 27, 1995
                    and April 20,  1995.  (Incorporated  by reference to Exhibit
                    10.2 to the  Company's  Annual  Report  on Form 10-K for the
                    fiscal year ended June 30, 2000.)

     10.3*          Indemnification  Agreement  dated  as of  December  6,  1993
                    between the Company and John E.  Meggitt.  (Incorporated  by
                    reference  to  Exhibit  10.6 to the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)


                                      -20-
<PAGE>

   Exhibit          Description of
      No.           Exhibit
------------        ----------------------------


     10.4*          Indemnification  Agreement  dated  as of  December  6,  1993
                    between the Company and Dorothy M. Meggitt. (Incorporated by
                    reference  to  Exhibit  10.7 to the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)

     10.5*          Indemnification  Agreement  dated  as of  December  6,  1993
                    between the Company and Charles L. Boyle, III. (Incorporated
                    by reference to Exhibit 10.8 to the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)

     10.6           Lease dated July 1, 1998 by and between  John E. Meggitt and
                    Dorothy M. Meggitt as Landlord,  and the Company, as Tenant.
                    (Incorporated by reference to exhibit 10.10 to the Company's
                    Annual  Report on Form 10-K for the  fiscal  year ended June
                    30, 1998.)

     10.7           Form of Employment  Agreement by and between the Company and
                    each salesman.  (Incorporated  by reference to Exhibit 10.13
                    to the  Company's  Registration  Statement on Form S-1 (File
                    Number 33-74276) which became effective on March 10, 1994.)

     10.8           Form of Employee's Invention Assignment, Non-Competition and
                    Confidential   Information   Agreement.   (Incorporated   by
                    reference  to Exhibit  10.14 to the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)

     10.9           Progress   Software   Value   Added   Reseller    Agreement.
                    (Incorporated by reference to Exhibit 10.18 to the Company's
                    Registration  Statement on Form S-1 (File  Number  33-74276)
                    which became effective on March 10, 1994.)

     10.10*         Indemnification  Agreement  dated as of  September  24, 1996
                    between the Company and Thomas M. Giuliani. (Incorporated by
                    reference to Exhibit 10.17 to the Company's Annual Report on
                    Form 10-K for the fiscal year ended June 30, 1996.)

     10.11*+        Form  of  Indemnification  Agreement  entered  into  by  the
                    Company and each of its Directors.


                                      -21-
<PAGE>



   Exhibit          Description of
      No.           Exhibit
------------        ----------------------------

      21            List  of  subsidiaries  of  the  Company.  (Incorporated  by
                    reference  to  Exhibit  21  to  the  Company's  Registration
                    Statement  on Form S-1 (File Number  33-74276)  which became
                    effective on March 10, 1994.)

     23.1+          Consent of PricewaterhouseCoopers LLP.

     23.2+          Consent of KPMG LLP.


------------------

*    A management  contract or compensatory  plan or arrangement  required to be
     filed as an exhibit pursuant to Item 14(c) of Form 10-K.

+    Filed herewith. All other exhibits previously filed.



                                      -22-
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE


                                                                            Page
                                                                            ----
Report of Independent Accountants............................................F-2

Independent Auditors' Report.................................................F-3

Consolidated Balance Sheets as of
   June 30, 2000 and 2001....................................................F-4

Consolidated Statements of Operations for the
   years ended June 30, 1999, 2000 and 2001..................................F-5

Consolidated Statements of Stockholders'
   Equity for the years ended
   June 30, 1999, 2000 and 2001..............................................F-6

Consolidated Statements of Cash Flows for the
   years ended June 30, 1999, 2000 and 2001..................................F-7

Notes to Consolidated Financial Statements...................................F-8

Report of Independent Accountants............................................S-1

Independent Auditors' Report.................................................S-2

Schedule II..................................................................S-3





                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:

In  our  opinion,  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and cash flows for the year  ended June 30,  1999  present
fairly,  in all material  respects,  the results of operations and cash flows of
Prophet 21,  Inc.  and its  Subsidiaries  for the year ended June 30,  1999,  in
conformity with accounting principles generally accepted in the United States of
America.  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 audit.  We conducted  our audit of these  statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable  basis for the opinion  expressed above. We have not
audited the  consolidated  financial  statements  of Prophet  21,  Inc.  and its
Subsidiaries for any period subsequent to June 30, 1999.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 11, 1999



                                      F-2
<PAGE>

                          Independent Auditors' Report



The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Prophet 21, Inc.
and  subsidiaries  as of June 30,  2001 and  2000 and the  related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
then ended.  These consolidated  financial  statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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 Prophet 21, Inc. and
subsidiaries  as of June 30, 2001 and 2000, and the results of their  operations
and their  cash flows for the years then  ended in  conformity  with  accounting
principles generally accepted in the United States of America.


KPMG LLP


Philadelphia, Pennsylvania
August 3, 2001





                                      F-3
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (In Thousands, Except Shares and Per Share Amounts)

<TABLE>
<CAPTION>
                                                                            June 30,
                                                              ----------------------------------
                                                                    2000                 2001
                                                                    ----                 ----
                                   ASSETS
<S>                                                           <C>                 <C>
Current assets
   Cash and cash equivalents...............................   $     8,219         $     9,702
   Marketable securities...................................         2,415               3,571
   Accounts receivable, net of allowance for
     doubtful accounts of $398 and $369, respectively......        12,869               8,882
   Advanced billings.......................................         2,084               2,739
   Inventories.............................................           698               1,207
   Deferred income taxes...................................           711               1,784
   Prepaid and other current assets........................           978               2,525
                                                              -----------         -----------
      Total current assets.................................        27,974              30,410
Long-term marketable securities............................         4,620               1,312
Equipment and improvements, net............................         3,078               2,887
Software development costs, net............................         1,233               3,522
Other assets...............................................           268                 142
                                                              -----------         -----------
       Total assets........................................   $    37,173         $    38,273
                                                              ===========         ===========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Accounts payable........................................   $     2,385         $     3,133
   Accrued expenses and other liabilities..................         1,714               3,070
   Commissions payable.....................................           549                 422
   Taxes payable...........................................           819                 403
   Profit sharing plan contribution payable................           158                 138
   Deferred income.........................................         3,697               4,278
                                                              -----------         -----------
      Total current liabilities............................         9,322              11,444
                                                              -----------         -----------

Deferred income taxes......................................           244               1,018
                                                              -----------         -----------

Commitments and contingent liabilities
Stockholders' equity
   Preferred stock--$0.01 par value, 1,500,000 shares
     authorized; no shares issued or outstanding...........            --                  --
   Common stock--$0.01 par value, 10,000,000 shares
     authorized; 4,320,808 and 4,376,987 shares issued,
     respectively; 3,720,818 and 3,776,997 shares
     outstanding, respectively.............................            43                  44
   Additional paid-in capital..............................        11,764              12,110
   Retained earnings.......................................        19,935              17,783
   Accumulated other comprehensive loss....................          (121)               (112)
   Treasury stock at cost, 599,990 shares..................        (4,014)             (4,014)
                                                              -----------         -----------
      Total stockholders' equity...........................        27,607              25,811
                                                              -----------         -----------
      Total liabilities and stockholders' equity...........   $    37,173         $    38,273
                                                              ===========         ===========

 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                    ------------------------------------------------------
                                                          1999                2000                2001
                                                          ----                ----                ----
<S>                                                  <C>                 <C>                  <C>
Revenue:
   Software and hardware sales.................      $  29,786           $  18,014            $  12,571
   Service and support.........................         22,201              28,101               28,238
                                                     ---------           ---------            ---------
                                                        51,987              46,115               40,809
                                                     ---------           ---------            ---------
Cost of revenue:
   Software and hardware sales.................         11,866               8,792                7,241
   Service and support.........................         12,783              14,971               13,975
                                                     ---------           ---------            ---------
                                                        24,649              23,763               21,216
                                                     ---------           ---------            ---------
   Gross profit................................         27,338              22,352               19,593
                                                     ---------           ---------            ---------

Operating expenses:
   Sales and marketing.........................         12,559              11,598               11,769
   Research and development....................          6,109               6,700                8,000
   General and administrative..................          3,899               4,346                4,954
                                                     ---------           ---------            ---------
     Total operating expenses .................         22,567              22,644               24,723
                                                     ---------           ---------            ---------
     Operating income (loss) ..................          4,771                (292)              (5,130)
Interest income................................            286                 397                  700
                                                     ---------           ---------            ---------
Income (loss) before taxes.....................          5,057                 105               (4,430)
Provision (benefit) for income taxes...........          1,664                (491)              (2,278)
                                                     ---------           ---------            ---------
Net income (loss)..............................      $   3,393           $     596            $  (2,152)
                                                     =========           =========            =========
Basic earnings (loss) per share:
   Net income (loss) per share.................      $    0.92           $    0.16            $   (0.58)
                                                     =========           =========            =========
   Weighted average common shares
     outstanding...............................          3,705               3,627                3,739
                                                     =========           =========            =========
Diluted earnings (loss) per share:
   Net income (loss) per share.................      $    0.85           $    0.15            $   (0.58)
                                                     =========           =========            =========
   Weighted average common and common
     equivalent shares outstanding.............          3,990               3,913                3,739
                                                     =========           =========            =========


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                      F-5
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                       Other                   Compre-      Total
                                                             Additional               Compre-                  hensive      Stock-
                                            Common Stock      Paid-In   Retained      hensive      Treasury    Income      holders'
                                          Shares    Amount    Capital   Earnings    Income (Loss)    Stock     (Loss)       Equity
                                          ------    ------    -------   --------    -------------    -----      -----      --------
<S>                                       <C>       <C>       <C>        <C>          <C>          <C>        <C>         <C>

Balance, June 30, 1998..................   4,154    $   42    $10,386    $15,946      $  (67)      $(2,518)               $ 23,789
Repurchase of common stock..............                                                            (1,496)                 (1,496)
Issuance of common stock in connection
   with exercise of stock options.......       9                   60                                                           60
Income tax benefit from stock options
   exercised............................                           26                                                           26
Employee stock purchase plan............      31                  262                                                          262
Other comprehensive loss................                                                 (15)                 $   (15)         (15)
Net income..............................                                   3,393                                3,393        3,393
                                                                                                              -------
Comprehensive income....................                                                                      $ 3,378
                                           -----    ------    -------    -------      ------       -------    =======     --------
Balance, June 30, 1999..................   4,194    $   42    $10,734    $19,339      $  (82)      $(4,014)                 26,019
Issuance of common stock in connection
   with exercise of stock options.......     101         1        669                                                          670
Income tax benefit from stock
   options exercised....................                          144                                                          144
Employee stock purchase plan............      26                  217                                                          217
Other comprehensive loss................                                                 (39)                 $   (39)         (39)
Net income..............................                                     596                                  596          596
                                                                                                              -------
Comprehensive income....................                                                                      $   557
                                           -----    ------    -------    -------      ------       -------    =======     --------
Balance, June 30, 2000                     4,321    $   43    $11,764    $19,935      $ (121)      $(4,014)               $ 27,607
Issuance of common stock in connection
   with exercise of stock options.......      18                   93                                                           93
Income tax benefit from stock
   options exercised....................                           22                                                           22
Employee stock purchase plan............      38         1        231                                                          232
Other comprehensive income..............                                                   9                  $     9            9
Net loss................................                                  (2,152)                              (2,152)      (2,152)
                                                                                                              -------
Comprehensive loss......................                                                                      $(2,143)
                                           -----    ------    -------    -------      ------       -------    =======     --------
Balance, June 30, 2001..................   4,377    $   44    $12,110    $17,783      $ (112)      $(4,014)               $ 25,811
                                           =====    ======    =======    =======      ======       =======                ========



The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                      F-6
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                       Year Ended June 30,
                                                               ----------------------------------------
                                                                  1999             2000           2001
                                                                  ----             ----           ----
<S>                                                            <C>              <C>            <C>
Cash flows from operating activities:
  Net income (loss).......................................     $    3,393       $      596     $( 2,152)
                                                               ----------       ----------     --------
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
     Depreciation and amortization........................          2,677            3,105        2,483
     Gain on sale of equipment............................             (2)              (2)          --
     Provision for losses on accounts receivable..........            845              904          639
     Deferred taxes.......................................           (437)          (1,039)        (299)
     Tax benefit deriving from exercise and sale of
        stock option shares...............................             26              144           22
  (Increases) decreases in operating assets:
     Accounts receivable..................................         (3,387)           5,970        3,348
     Advanced billings....................................           (124)              56         (655)
     Inventories..........................................            736              (32)        (509)
     Prepaid expenses and other current assets............           (418)             170       (1,547)
     Other assets.........................................             78             (233)         126
  Increases (decreases) in operating liabilities:
     Accounts payable.....................................           (953)            (352)         748
     Accrued expenses.....................................             75             (160)       1,229
     Taxes payable........................................            538             (387)        (416)
     Profit sharing plan contribution payable.............             12             (245)         (20)
     Deferred income......................................            508              738          581
                                                               ----------       ----------     --------
     Total adjustments....................................            174            8,637        5,730
                                                               ----------       ----------     --------
  Net cash provided by operating activities...............          3,567            9,233        3,578
                                                               ----------       ----------     --------
  Cash flows from investing activities:
     Purchases of equipment and improvements, net.........         (1,714)          (1,711)      (1,331)
     Software development costs...........................             --             (381)      (3,168)
     Purchase of marketable securities....................         (2,600)          (4,690)      (1,500)
    Maturity of marketable securities.....................          2,250            2,400        3,570
                                                               ----------       ----------     --------
  Net cash used by investing activities...................         (2,064)          (4,382)      (2,429)
                                                               ----------       ----------     --------
  Cash flows from financing activities:
     Purchase of treasury stock...........................         (1,496)              --           --
     Employee stock purchase plan.........................            262              217          232
    Stock options exercised...............................             60              670           93
                                                               ----------       ----------     --------
  Net cash  provided (used) by financing activities.......         (1,174)             887          325
                                                               ----------       ----------     --------
  Effect of exchange rate changes on cash.................            (15)             (39)           9
                                                               -----------      ----------     --------
  Net increase in cash and cash equivalents...............            314            5,699        1,483
  Cash and cash equivalents at beginning of period........          2,206            2,520        8,219
                                                               ----------       ----------     --------
  Cash and cash equivalents at end of period..............     $    2,520       $    8,219     $  9,702
                                                               ==========       ==========     ========
  Supplemental cash flow disclosures:
     Income taxes paid....................................     $    1,528       $      647     $    326
                                                               ==========       ==========     ========


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      F-7
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Basis of Presentation:

     The consolidated  financial  statements include the accounts of Prophet 21,
Inc.  and  its  wholly-owned  subsidiaries  (the  "Company").  All  intercompany
transactions  have been  eliminated.  The Company is a leading provider of fully
integrated, on-line business management systems developed exclusively for use by
distributors and wholesalers.

     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  and amounts of revenue and  expenses  during the  reporting  period.
Actual  results  could differ from those  estimates.  Certain items in the prior
years' financial statements have been reclassified for comparative purposes.

     Cash and Cash Equivalents:

     For purposes of the  statements  of cash flows,  the Company  considers all
highly  liquid  debt  instruments  purchased  with an initial  maturity of three
months or less to be cash equivalents.

     Marketable Securities:

     Marketable   securities   consist  primarily  of  state  governmental  debt
instruments  with an initial  maturity  of more than three  months.  The Company
accounts for  investments in accordance  with Statement of Financial  Accounting
Standards  ("SFAS") No. 115,  "Accounting  for Certain  Investments  in Debt and
Equity  Securities."  The  Company's  policy  is to  protect  the  value  of its
investment  portfolio and to minimize principal risk by earning returns based on
current  interest  rates.  All  of  the  Company's  marketable   securities  are
classified as  held-to-maturity as of the balance sheet date and are reported at
cost plus an adjustment for amortization,  which approximates fair market value.
The  Company's  marketable  securities  are scheduled to mature over the next 26
months.

     Inventories:

     Inventories   primarily   consist  of  purchased   hardware  and  software.
Inventories are stated at the lower of cost or market.  Cost is determined using
the average cost on a first-in, first-out method.

     Equipment and Improvements:

     Equipment and improvements  are recorded at cost and are depreciated  using
the  straight  line method  over their  estimated  useful  lives of three to ten
years.  Leasehold improvements are amortized over the shorter of their estimated
useful lives or remaining lease term (including


                                      F-8
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

renewal  periods in certain  instances).  When assets are  retired or  otherwise
disposed of, the cost and related accumulated  depreciation are removed from the
accounts  and  any  resulting  gain or loss is  reflected  in the  statement  of
operations  for the period.  The cost of  maintenance  and repairs is charged to
expense  as  incurred,   whereas   significant   renewals  and  betterments  are
capitalized.

     Capitalized Software:

     The Company  capitalizes  software  development costs associated with a new
product  pursuant to SFAS No. 86 "Accounting for the Costs of Computer  Software
to be Sold, Leased or Otherwise Marketed." Such costs are capitalized only after
technological  feasibility has been demonstrated.  Such capitalized  amounts are
amortized commencing with product introduction on a straight-line basis over the
estimated  economic life of the product.  Amortization  of capitalized  software
development  costs  ($1,279,  $1,279 and $879 for the years ended June 30, 1999,
2000 and 2001,  respectively)  is charged to cost of sales.  For the years ended
June 30, 2000 and 2001, the Company  capitalized $381 and $3,168,  respectively,
of  software  development  costs.  All other  research  and  development  costs,
including  amounts  related  to  assets  that will not be  utilized  and have no
alternative use, have been expensed.

     When  events  or  circumstances  so  indicate,  the  Company  assesses  the
potential  impairment of its intangible assets and other long-lived assets based
on  anticipated  undiscounted  cash  flows  from  operations.  Such  events  and
circumstances  include  a sale of all or a  significant  part of the  operations
associated with the long-lived asset, or a significant  decline in the operating
performance  of  the  asset.  If an  impairment  is  indicated,  the  amount  of
impairment  charge would be calculated by comparing the  anticipated  discounted
future cash flows to the carrying  value of the  long-lived  asset.  At June 30,
2001, no impairment was indicated.

     Revenue Recognition and Deferred Income:

     In 1997,  the American  Institute of Certified  Public  Accountants  issued
Statement  of  Position  (SOP)  97-2,  "Software  Revenue   Recognition,"  which
stipulates that revenue  recognized  from software  arrangements be allocated to
each  element  of the  arrangement  based on the  relative  fair  values  of the
elements,  such as software  products,  upgrades,  enhancements,  post  contract
customer  support,  installation  or  training.  The Company  offers the various
elements  individually,  and has  used  the  individual  prices  as a basis  for
allocation of revenues.  SOP 97-2 was adopted by the Company  effective  July 1,
1998  and did  not  result  in  significant  changes  to the  Company's  revenue
recognition policy.

     Revenue from software is recognized when a contract has been executed,  the
product  has  been  shipped  to  customers,   uncertainty  surrounding  customer
acceptance  becomes  insignificant  and collection of the related  receivable is
probable.  Maintenance  revenues  from  hardware and  software  support fees are
deferred and recognized  ratably over the contract period.  As the functionality
of the hardware is not dependent on any other services provided by the Company,



                                      F-9
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

hardware sales are recognized upon shipment. Deferred income represents accruals
for billed and  unearned  maintenance  and  advance  payments by  customers  for
maintenance.  Advanced  billings  at June 30,  2000 and 2001  represent  amounts
billed in advance to customers  for  maintenance  in  accordance  with  contract
terms.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting   Bulletin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements."  SAB No.  101  expresses  the  views of the SEC  staff in  applying
generally accepted accounting  principles to certain revenue recognition issues.
The  Company  adopted  the  provisions  of SAB No.  101 on April 1, 2001 and its
adoption did not have a material impact on its financial position or its results
of operations.

     Warranty:

     The Company  provides  warranties on its hardware and proprietary  software
against  design  defects.  A provision for future claims is recorded  based upon
historical experience.

     Comprehensive Income

     SFAS  No.  130,  "Reporting  Comprehensive  Income"  requires  net  foreign
exchange  translation  gains or  losses  to be  included  in  accumulated  other
comprehensive  loss in the  consolidated  balance sheet and in the disclosure of
comprehensive   income.  The  totals  of  other  comprehensive  loss  items  and
comprehensive  income  (loss)  are  displayed  separately  in  the  consolidated
statements of stockholders' equity.

     Income Taxes

     The Company  utilizes  the asset and  liability  approach  for income taxes
which requires the  recognition of deferred tax  liabilities  and assets for the
expected future tax consequences of temporary  differences  between the carrying
amount and the tax basis of assets and  liabilities  and operating  loss and tax
credit carryforwards.

     Net Income (Loss) Per Share:

     Net earnings  (loss) per common share is computed in  accordance  with SFAS
No. 128  "Earnings  per Share." Under SFAS No. 128,  basic  earnings  (loss) per
share  excludes  dilution and is computed by dividing  net income  (loss) by the
weighted  average number of common shares  outstanding  for the period.  Diluted
earnings  (loss) per share is  computed  by  dividing  net income  (loss) by the
weighted   average  number  of  common  shares  and  common  share   equivalents
outstanding during each year. The dilutive effect of stock options is calculated
using the treasury stock method.



                                      F-10
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per share:

<TABLE>
<CAPTION>
                                                                            Year ended June 30,
                                                                ------------------------------------------
                                                                   1999            2000              2001
                                                                   ----            ----              ----

<S>                                                             <C>             <C>             <C>
Net income (loss)......................................         $  3,393        $    596        $   (2,152)
                                                                ========        ========        ==========
Weighted average common shares outstanding.............            3,705           3,627             3,739
Effect of dilutive securities:
   Stock options.......................................              285             286                --
                                                                --------        --------        ----------
Weighted average common and common
  equivalent shares outstanding                                    3,990           3,913             3,739
                                                                ========        ========        ==========
Basic earnings (loss) per share........................         $   0.92        $   0.16        $    (0.58)
Diluted earnings (loss) per share......................         $   0.85        $   0.15        $    (0.58)
</TABLE>

2.  EQUIPMENT AND IMPROVEMENTS:

     A summary of the major  components  of equipment  and  improvements  are as
follows:

<TABLE>
<CAPTION>
                                                                             June 30,
                                                                ---------------------------------
                                                                   2000                    2001
                                                                   ----                    ----

<S>                                                             <C>                     <C>

Equipment..............................................         $  2,000                   2,002
Computer systems.......................................            7,618                   8,817
Furniture and fixtures.................................            1,275                   1,330
Leasehold improvements.................................              813                     840
                                                                --------                --------
                                                                  11,706                  12,989
Accumulated depreciation and amortization..............           (8,628)                (10,102)
                                                                --------                --------
                                                                $  3,078                $  2,887
                                                                ========                ========
</TABLE>

     Depreciation  and amortization  expenses of $1,504,  $1,735 and $1,522 were
charged  to  operations  for the  years  ended  June 30,  1999,  2000 and  2001,
respectively.


                                      F-11
<PAGE>



                       PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


3.  COMMITMENTS AND CONTINGENCIES:

     Leasing Arrangements:

     The Company leases certain facilities and equipment under various operating
lease  agreements  with  initial  terms  greater than one year.  Future  minimum
payments under noncancelable operating leases at June 30, 2001 are:

Fiscal Year            Related Party        Third Party               Total
-----------            -------------        -----------               -----

2002.............      $     475             $     13              $     488
2003.............            490                   --                    490
                       ---------             --------              ---------
                       $     965             $     13              $     978
                       =========             ========              =========

     Rent expenses,  including related party  transactions,  for the years ended
June 30, 1999, 2000 and 2001 were $537, $562 and $540, respectively.

     Litigation:

     There is no material  litigation pending to which the Company is a party or
to which any of its  property is subject.  The Company is involved  from time to
time as plaintiff or defendant in various  legal  actions  arising in the normal
course of business.  While the ultimate outcome of pending proceedings cannot be
predicted with certainty,  it is the opinion of management,  after  consultation
with respective counsel  representing the Company in such proceedings,  that the
resolution  of these  proceedings  should  not  have a  material  effect  on the
Company's consolidated financial position or results of operation.

4.  INCOME TAXES:

     The components of the provision (benefit) for income taxes are as follows:


                                              Year ended June 30,
                               ------------------------------------------------
                                    1999              2000              2001
                                    ----              ----              ----
Federal:
   Current...............       $   1,926           $   402          $  (2,169)
   Deferred..............            (395)             (893)               172
                                ---------           -------          ---------
                                    1,531              (491)            (1,997)
                                ---------           -------          ---------
State:
   Current...............             175               129                 --
   Deferred..............             (42)             (129)              (281)
                                ---------           -------          ---------
                                      133                --               (281)
                                ---------           -------          ---------
                                $   1,664           $  (491)         $  (2,278)
                                =========           =======          =========

     The income tax benefits  related to the exercise of stock options  amounted
to $26, $144 and $22 for 1999, 2000 and 2001, respectively, and were credited to
additional paid-in capital.


                                      F-12
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


4.  INCOME TAXES (CONTINUED):

     The provision  (benefit) for income taxes differs from the amount  computed
using the statutory Federal income tax rate as follows:

                                                      Year ended June 30,
                                              ---------------------------------

                                                1999         2000         2001
                                                ----         ----         ----

Statutory tax rate.......................         34%          34%         (34)%
State taxes, net of Federal benefit......          3          (41)          (6)
Research and development credit..........         --         (371)         (11)
Provision to return adjustment...........         --          (95)          --
Non-deductible expense...................         --            5           --
Other....................................         (4)          --           --
                                                ----         ----         ----
                                                  33%        (468)%        (51)%
                                                ====         ====         ====

     Deferred  income  taxes  reflect  the tax impact of  temporary  differences
between the assets and  liabilities  for financial  reporting  purposes and such
amounts as  measured  by tax laws and  regulations  and  operating  loss and tax
credit  carryforwards.  Deferred  taxes are  primarily  classified as current or
non-current  depending on the  classification  of the assets and  liabilities to
which they relate. Amounts giving rise to deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                 --------------------------
                                                                   2000              2001
                                                                 --------          --------
<S>                                                              <C>               <C>
Current deferred tax assets:
   Allowance for doubtful accounts........................       $   152           $   142
   Accrued vacation.......................................            72                94
   Inventory capitalization...............................            13                22
   State net operating loss carryforward..................            82               432
   Research and development credit carryforward...........           392             1,035
   Litigation fees........................................            --                57
   Charitable contributions...............................            --                 2
                                                                 -------           -------
                                                                     711             1,784
Non-current deferred tax asset:
   Depreciation...........................................           227               304

Non-current deferred tax liability:
   Software development costs.............................          (471)           (1,322)
                                                                 -------           -------

      Total...............................................       $   467           $   766
                                                                 =======           =======
</TABLE>

     In assessing  the ability to realize the  deferred  tax assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent upon the generation of future taxable


                                      F-13
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


4.  INCOME TAXES (CONTINUED):

income during periods in which those temporary  differences  become  deductible.
Management  considers  the  scheduled  reversal  of  deferred  tax  liabilities,
projected  future  taxable  income and tax  planning  strategies  in making this
assessment. In order to fully realize the total deferred tax assets, the Company
will need to generate  future  taxable income prior to the expiration of the net
operating loss and credit  carryforwards,  which expire at various years through
2020.  Based upon the level of historical  taxable  income and  projections  for
future  taxable income over the periods in which the temporary  differences  are
deductible,  management  believes it is more  likely  than not the Company  will
realize the benefit of the deferred  tax asset at June 30,  2001.  The amount of
the deferred tax asset considered  realizable,  however, could be reduced in the
near term if estimates of future taxable income during the  carryforward  period
are reduced.

5.  RELATED PARTY TRANSACTIONS:

     The Company  leases  office space from its principal  stockholders  under a
lease that expires on June 30, 2003.  The lease  agreement  includes a five-year
renewal provision at the Company's option.  Rent expense under the lease for the
years ended June 30, 1999, 2000 and 2001 were $481, $510 and $520, respectively.

6.  CONCENTRATION OF CREDIT RISK:

     Financial   instruments   which   potentially   subject   the   Company  to
concentration  of credit risk consist of cash and cash  equivalents,  marketable
securities  and  accounts  receivable.  The  Company  places  its  cash and cash
equivalents  with high  quality  financial  institutions,  thereby  limiting its
credit exposure.  The Company currently invests primarily in state  governmental
debt  instruments.  The Company believes that no significant  credit risk exists
with respect to these  investments.  There is no  significant  concentration  of
credit  risk with  respect to  accounts  receivable  due to the large  number of
customers  comprising the Company's  customer base and their  dispersion  across
different  geographic regions.  The Company performs on-going credit evaluations
and generally does not require  collateral.  The Company maintains  reserves for
potential  credit  losses,  and  such  losses  have  been  within   management's
expectations.

7.  EMPLOYEE BENEFIT PLANS:

     The Company has a qualified profit sharing plan covering employees who meet
certain  eligibility  requirements.  Contributions  are at the discretion of the
Board of Directors and may not exceed the maximum  amount  allowable for federal
income  tax  deduction.  The  Company  did not  make  any  contributions  to its
qualified profit sharing plan for the years ended June 30, 1999, 2000 and 2001.

     The Company  maintains a 401(k)  Retirement  Savings  Plan.  The  Company's
contributions  are at the  discretion of management and for the years ended June
30, 1999, 2000 and 2001 were $380, $150 and $138, respectively.


                                      F-14
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


8.  STOCKHOLDERS' EQUITY:

     Preferred Stock:

     The Company has an  authorized  class of 1,500  shares of  preferred  stock
which  may be  issued  by the  Board of  Directors  on such  terms and with such
rights,  preferences and designations as the Board may determine. As of June 30,
2001, no shares of preferred stock have been issued.

     Stock Option Plan:

     Under the Company's 1993 Stock Plan (the "Plan"),  the Company has reserved
1,200 shares of common stock for issuance of both  incentive  and  non-qualified
options.  Under the Plan,  options  to  purchase  shares of common  stock may be
granted to key  employees and  consultants.  The Plan provides that the exercise
price of incentive  options  shall not be less than the fair market value of the
shares  on the date of the  grant,  that  the  exercise  price of  non-qualified
options shall not be less than 75% of the fair market value of the shares on the
date of grant  and,  in either  case,  that no portion  of such  options  may be
exercised beyond ten years from the date of grant.

     Under the Plan,  the Company is  authorized to issue shares of common stock
pursuant to awards granted in various forms,  including  incentive stock options
(intended to qualify under Section 422 of the Internal  Revenue Code of 1986, as
amended), non-qualified stock options, and other similar stock-based awards.

     The Company  applies APB Opinion No. 25,  "Accounting  for Stock  Issued to
Employees" ("APB 25") and related interpretations in accounting for the Plan. In
1995, the Financial  Accounting Standards Board issued SFAS No. 123, "Accounting
for  Stock-Based  Compensation"  which,  if fully adopted by the Company,  would
change the  method the  Company  applies  in  recognizing  the cost of the Plan.
Adoption of the cost recognition  provisions of SFAS No. 123 is optional and the
Company  did not elect these  provisions  of SFAS No.  123.  However,  pro forma
disclosures as if the Company  adopted the cost  recognition  provisions of SFAS
No. 123 in fiscal years 1999, 2000 and 2001 are required by SFAS No. 123 and are
presented below.

     The Company granted stock options in 1999, 2000 and 2001 for employees. The
stock options granted in 1999, 2000 and 2001 have contractual terms of 10 years.
All options  granted to the employees and  directors  have an exercise  price no
less than the fair  market  value of the stock at the grant  date.  The  options
granted in 1999, 2000 and 2001 vest one-third each year,  beginning on the first
anniversary of the date of grant.

     In accordance with APB 25, the Company has not recognized any  compensation
cost for the stock options granted in 1999, 2000 and 2001.


                                      F-15
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     A summary of the status of the Company's stock options as of June 30, 1999,
2000 and 2001 and the changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                                                                                Weighted
                                                                    Exercise Price          Average Exercise
                                               Shares(1)              Per Share                  Price
---------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>                               <C>
Options outstanding at June 30, 1998            646,000           $4.125  to  $15.250               $6.140
                             Granted            125,000          $16.000  to  $16.125              $16.065
                            Canceled             (3,500)                      $16.125              $16.125
                           Exercised            (13,700)          $5.000  to   $7.000               $6.720
---------------------------------------------------------------------------------------------------------------
Options outstanding at June 30, 1999            754,200           $4.750  to  $16.000               $7.910
                             Granted            148,000           $9.250  to  $22.375              $13.948
                            Canceled            (57,500)                      $16.000              $16.000
                           Exercised           (100,688)          $4.500  to  $16.125               $6.470
---------------------------------------------------------------------------------------------------------------
Options outstanding at June 30, 2000            744,012           $4.125  to  $22.375               $8.585
                             Granted            129,500           $6.500  to  $15.875              $15.207
                           Cancelled           (120,334)          $8.500  to  $22.375              $16.288
                           Exercised            (17,601)          $4.750  to   $8.500               $5.251
---------------------------------------------------------------------------------------------------------------
Options outstanding at June 30, 2001            735,577           $4.125  to  $22.375               $8.571
===============================================================================================================
Options exercisable at June 30, 1999            531,823           $4.125  to  $15.250               $6.160
                                2000            532,567           $4.125  to  $22.375               $6.500
                                2001            565,020           $4.125  to  $22.375               $6.919
===============================================================================================================
(1)      Not reported in thousands
</TABLE>

     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of June 30, 2001:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                              Options Outstanding                            Options Exercisable
                             -----------------------------------------------------------------------------------------
                                            Weighted
                                             Average             Weighted                                Weighted
         Range of          Number of        Remaining             Average             Number of          Average
      Exercise Prices      Options(1)         Life            Exercise Price          Options(1)      Exercise Price
----------------------------------------------------------------------------------------------------------------------
<S>                        <C>               <C>                <C>                   <C>               <C>
 $4.125  to  $5.375        248,310           4.799              $  4.942              248,310           $  4.942
 $6.500  to  $9.250        329,600           4.335              $  7.673              281,598           $  7.477
$15.250  to $22.375        157,667           8.428              $ 16.161               35,112           $ 16.421
                           -------           -----              --------              -------           --------
                           735,577           5.369              $  8.571              565,020           $  6.919
----------------------------------------------------------------------------------------------------------------------
(1)   Not reported in thousands
</TABLE>




                                      F-16
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     Had compensation cost for the Company's stock-based  compensation plan been
determined consistent with SFAS No. 123, the Company's net income (loss) and net
income (loss) per common share would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                                                                      June 30,
                                                               -------------------------------------------------------
                                                                   1999                2000                 2001
                                                               --------------     ---------------      ---------------
<S>                                           <C>                   <C>                <C>                <C>
Net income (loss):                            As reported           $3,393             $ 596              $(2,152)
                                              Pro forma              3,212               533               (2,331)

Basic earnings (loss) per share:              As reported           $ 0.92             $0.16              $ (0.58)
                                              Pro forma               0.87              0.15                (0.63)

Diluted earnings (loss) per share:            As reported           $ 0.85             $0.15              $ (0.58)
                                              Pro forma               0.81              0.14                (0.63)
</TABLE>

     The effects of applying SFAS No. 123 in this pro forma  disclosure  are not
indicative of future amounts.

     The fair value of each stock  option  granted is  estimated  on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
weighted-average  assumptions  for grants in fiscal  years ended June 30,  1999,
2000 and 2001: dividend yield of 0.00%; risk-free interest rates of 5.47%, 6.30%
and 5.39%,  respectively;  the  expected  life of options is  estimated  to be 4
years; and a volatility factor of 45.66%, 60.61% and 58.88%, respectively.

     The weighted  average fair value of options granted during the fiscal years
ending June 30, 1999, 2000 and 2001 was $6.83, $7.29 and $7.65, respectively.

     Stock Repurchase Program:

     In fiscal 1997, the Company's  Board of Directors  approved  resolutions to
repurchase  up to 600  shares  of the  Company's  Common  Stock  in open  market
purchases. As of June 30, 2001, the Company had repurchased 600 shares at a cost
of $4,014.

     1997 Employee Stock Purchase Plan:

     In fiscal 1997, the Company's Board of Directors and stockholders  approved
the adoption of the 1997 Employee  Stock Purchase Plan (the "1997 Plan") to make
available 100 shares of the Company's common stock for purchase by the Company's
employees.  Subsequently,  the Board of Directors and  stockholders  approved an
increase in the number of shares  available  under the 1997 Plan from 100 shares
to 200 shares. As of June 30, 2001, approximately 95 shares remain available.



                                      F-17
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (In Thousands, Except Per Share Amounts)


9.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

     The  following  table  presents  certain  condensed   unaudited   quarterly
consolidated  financial  information  for each of the  quarters  in the two year
period  ended  June  30,  2001.  This  information  is  derived  from  unaudited
consolidated financial statements of the Company that include, in the opinion of
the Company,  all adjustments  (consisting  only of normal  recurring  accruals)
necessary for a fair presentation of results of operations for such periods. The
operating  results  for any quarter are not  necessarily  indicative  of results
which may be  obtained  for any future  period.  Although  the  Company  has not
experienced fluctuations in quarterly results due to seasonality,  the Company's
quarterly  results may  fluctuate as a result of other  factors,  including  the
timing of orders,  delays of shipments to customers due to delays in delivery of
hardware  components by the Company's vendors,  delays in new software releases,
new product  introductions by the Company or its competitors or levels of market
acceptance  for new products,  or the hiring of additional  staff.  Furthermore,
certain  of  the  Company's  costs,  including  personnel  and  facilities,  are
relatively  fixed in nature and,  therefore,  a decline in revenue in any fiscal
quarter typically results in lower profitability in that quarter.

<TABLE>
<CAPTION>
                                                                       Quarter Ended
                             Sept. 30,    Dec. 31,    Mar. 31,     June 30,     Sept. 30,    Dec. 31,    Mar. 31,     June 30,
                               1999         1999        2000         2000         2000         2000        2000         2001
                               ----         ----        ----         ----         ----         ----        ----         ----
<S>                          <C>        <C>          <C>          <C>           <C>          <C>          <C>         <C>

Revenue...............       $  9,286   $ 11,847     $ 11,541     $ 13,441      $  8,208     $  11,101    $ 10,736    $  10,764
                             --------    -------     --------     --------      --------     ---------    --------    ---------
Gross profit..........          3,601      6,210        6,182        6,359         3,060         5,899       5,623        5,011
                             --------   --------     --------     --------      --------     ---------    --------    ---------
Operating income
(loss)................         (1,438)       528          408          210        (2,499)          257        (829)      (2,059)
                             --------   --------     --------     --------      --------     ---------    --------    ---------
Net income (loss).....           (910)       405          337          764        (1,480)          289        (420)        (541)
                             --------   --------     --------     --------      --------     ---------    --------    ---------
Basic net income
(loss)per share.......       $  (0.25)  $   0.11     $   0.09     $   0.21      $  (0.40)    $    0.08    $  (0.11)   $   (0.14)
                             --------   --------     --------     --------      --------     ---------    --------    ---------
Diluted net income
(loss)per share.......       $  (0.25)  $   0.11     $   0.08     $   0.19      $  (0.40)    $    0.08    $  (0.11)   $   (0.14)
                             --------   --------     --------     --------      --------     ---------    --------    ---------
</TABLE>



                                      F-18
<PAGE>

                        Report of Independent Accountants



To the Board of Directors and Stockholders
of Prophet 21, Inc. and Subsidiaries:

Our audit of the  consolidated  financial  statements  referred to in our report
dated  August 11, 1999  included on page F-2 of this Form 10-K also  included an
audit of the financial  statement schedule as of and for the year ended June 30,
1999,  listed in the index on page F-1 of this Form 10-K.  In our opinion,  this
financial statement schedule as of and for the year ended June 30, 1999 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.



PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 11, 1999





                                      S-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:


     Under date of August 3,  2001,  we  reported  on the  consolidated  balance
sheets of Prophet 21, Inc. and  subsidiaries  as of June 30, 2001 and 2000,  and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for the years then ended,  which are included  herein.  In connection
with our audits of the aforementioned consolidated financial statements, we have
also audited the related  consolidated  financial  statement  schedule  included
herein. This financial statement schedule is the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion  on this  financial
statement schedule based on our audits.

     In our opinion,  such  financial  statement  schedule,  when  considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
presents fairly, in all material respects, the information set forth therein.


KPMG LLP

Philadelphia, Pennsylvania
August 3, 2001



                                      S-2
<PAGE>

                                                                    SCHEDULE II



                                Prophet 21, Inc.
                 Schedule II - Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
Allowance for Doubtful Accounts

                                   Balance at        Charged to
Year Ended                        Beginning of       Costs and       Deductions         Balance at
  June 30,                           Period          Expenses        Write-Offs       End of Period
----------                        -----------        ---------       ----------       -------------
<S>                                 <C>               <C>              <C>               <C>
   1999......................       $240,000          $845,054         $824,063          $260,991
   2000......................        260,991           904,415          767,166           398,240
   2001......................        398,240           638,660          667,552           369,348
</TABLE>



                                      S-3