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, 2000
                         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:  $26,024,994 at August 31, 2000 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, 2000:

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

Common Stock, $.01 par value                                   3,721,377


     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 2000 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........................................... 16

           8.   Financial Statements and Supplementary Data................. 16

           9.   Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure......................... 16


PART III   10.  Directors and Executive Officers of the Company............. 17

           11.  Executive Compensation...................................... 17

           12.  Security Ownership of Certain Beneficial Owners and
                Management.................................................. 17

           13.  Certain Relationships and Related Transactions.............. 17

PART IV    14.  Exhibits, Financial Statement Schedules,
                and Reports on Form 8-K..................................... 18

SIGNATURES.................................................................. 19

EXHIBIT INDEX............................................................... 21

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


                                      -ii-
<PAGE>

                                     PART I

ITEM 1.     BUSINESS.

GENERAL

     With over 2000  customers  conducting  over $35  billion in highly  complex
supply  chain  transactions  annually,  Prophet  21, Inc.  ("Prophet  21" or the
"Company")  provides  enterprise  software  and  services  for the  continuously
changing market demands of high-volume distribution-centric organizations in the
$1.7 trillion  durable goods industry.  For more than 30 years,  the Company has
provided  innovative,  adaptive  solutions  essential  to  running  complex  and
fast-moving organizations.

     The  Company   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
management  modules.  Prophet 21 Acclaim(R) is a comprehensive  solution for the
UNIX  platform and is powered by Progress  Software  Corporation's  DBMS,  while
Prophet 21 CommerceCenter  (formerly known as Prophet 21 Wholesale) utilizes the
Microsoft Windows NT/Windows 2000 operating environment.

     Prophet 21 markets its products and services to approximately 58,000 of the
approximately  120,000 durable goods  distributors and wholesalers  operating in
the United  States  and Canada  and,  as of June 30,  2000,  has sold over 2,700
systems  across the United States and Canada.  The Company's  customers  vary in
size  from  small  distributors  and  wholesalers  with a few  users  to  larger
companies with several hundred users linking multiple  geographically  dispersed
branches. The Company sells its Prophet 21 Acclaim and Prophet 21 CommerceCenter
solutions  through its 45 person direct sales force located in sales and service
offices  throughout  the  United  States to a wide  range of  industry  segments
including  industrial  MRO  (Manufacturer,  Repair and  Operations),  electrical
equipment,  plumbing supplies/HVAC (Heating,  Ventilation and Air Conditioning),
fasteners, and building materials marketplace.

     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 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.

TRADINGPARTNERCONNECT

        In April 2000,  Prophet 21 announced its next phase of  e-business  with
TradingPartnerConnect. The venture is aimed at streamlining the commerce process
of this heavily fragmented marketplace through promoting  collaborative commerce
among



                                      -1-
<PAGE>

manufacturers,   distributors   and   customers,   as   well   as   establishing
interconnectivity with leading Internet trading communities.

     Fully  interoperable with Acclaim or CommerceCenter,  TradingPartnerConnect
serves to preserve and enhance collaborative  commerce among trading partners --
streamlining the procurement  process between  distributors and their suppliers;
facilitating  interaction and excess inventory  visibility  among  distributors;
providing a comprehensive  business-to-business  (B2B) and  business-to-consumer
(B2C)  distribution-centric  "sell-side" solution;  and enabling connectivity to
best of breed end-user focused vertical  marketplaces,  corporate  exchanges and
e-procurement  solutions.  In addition  to its  ability to conduct  supply-chain
transactions,  TradingPartnerConnect  also offers commerce process services such
as supply chain  optimization  and business  analysis and reporting,  as well as
content and community  infrastructure  designed to support news and  information
publishing, advertising management, discussion forums, and customer relationship
management.  TradingPartnerConnect  is  expected to be rolled out in phases with
the formal launch set for 2001.

PROPHET 21 ACCLAIM AND PROPHET 21 COMMERCECENTER

     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.

     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  digital   marketplace,
TradingPartnerConnect.  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.

     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  certified
product  that  supports  Microsoft  SQL Server 7.0, a leading  database  for the
Microsoft Windows NT/Windows 2000 operating environment.

     Both Acclaim and CommerceCenter 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.



                                      -2-
<PAGE>

     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 Acclaim  and Prophet 21  CommerceCenter  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 45 person  direct
sales force located in sales and service  offices  throughout the United States.
The field sales force is supervised by an Executive Vice President.  The Company
employs a solution  selling  methodology.  All sales  personnel  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.  Information is gathered  aggressively by the marketing department
from the Company's  customer  base,  distribution  market,  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  annual  international  user  conferences  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, 2000, sold approximately 2,700 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.



                                      -3-
<PAGE>

     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, 2000,  approximately  85% 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.

     The Company provides Prophet 21  CommerceCenter  users a one-year  software
warranty.  The Company  offers to its  customers a  fee-based  support  contract
covering software support and product enhancements.  As of June 30, 2000, all of
the Company's active CommerceCenter  customers 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.  Support contracts have
terms 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 more than 180  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 life-long
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  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,   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.  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



                                      -4-
<PAGE>

Acclaim  and  Prophet 21  CommerceCenter)  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 2000, the Company released Prophet
21 CommerceCenter version 7.5 which featured complete credit card integration, a
warehouse  management  system and was Microsoft  Windows 2000 certified.  Eighty
employees are directly involved in programming and software development.

     The Company's  research and development  expenses were  approximately  $3.8
million,  $6.1 million and $6.7 million in the fiscal years ended June 30, 1998,
1999 and 2000,  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  TradingPartnerConnect.  Such  capitalized  software
development costs amounted to $0 and $381,000 in the fiscal years ended June 30,
1999 and 2000, 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.

     In July 1991,  Prophet 21 entered into an  Authorized  Dealers and Industry
Remarketers   Agreement  with  IBM.  The  agreement  grants  to  the  Company  a
non-exclusive  right to purchase and license certain hardware products from IBM,
including IBM RS/6000  computers,  for  remarketing by the Company in the United
States.  Although the agreement contains no minimum purchase  requirements,  the
volume of  systems  purchased  by Prophet 21  affects  the  percentage  discount
received by the Company and may be a factor considered by IBM in connection with
Prophet  21's  continued  authorization  as  an  IBM  industry  remarketer.  The
agreement  is subject to annual  renewal  and may be  terminated  by IBM with or
without cause on three-months written notice. During the fiscal years ended June
30, 1998, 1999 and 2000, the Company's  hardware purchases from IBM totaled $7.4
million, $5.1 million and $3.1 million, respectively.



                                      -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, 2000, the Company employed 367 persons full-time, of whom 75
were engaged in sales and  marketing;  173 were engaged in customer  service and
support,  and  installation;   80  were  engaged  in  programming  and  software
development   and   quality   assurance;   and  39  were   engaged  in  finance,
administration  and  management.  In addition,  38 were  employed on a part-time
basis  (17 of  whom  were  engaged  in  administrative  functions).  None of the



                                      -6-
<PAGE>

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  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.

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 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, 1998 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, 1998                   $18.75                   $9.00
    December 31, 1998                    $14.625                  $9.25
    March 31, 1999                       $14.00                   $9.875
    June 30, 1999                        $10.75                   $7.25
    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

     As of September 11, 2000,  the  approximate  number of holders of record of
the Common Stock was 151 and the approximate number of beneficial holders of the
common stock was 1,772.

     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, 1999 and 2000 and
for each of the three years  ended June 30,  2000 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,  1996,  1997 and
1998 and for each of the years  ended June 30,  1996 and 1997 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,
                                             1996        1997         1998        1999         2000
                                             ----        ----         ----        ----         ----
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                        <C>         <C>          <C>         <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
 Software and hardware sales...........    $ 20,905    $ 22,537     $ 30,157    $ 29,786     $ 18,014
 Service and support...................      12,145      13,866       16,457      22,201       28,101
                                           --------    --------     --------    --------     --------
                                             33,050      36,403       46,614      51,987       46,115
                                           --------    --------     --------    --------     --------
Cost of revenue:
 Software and hardware sales...........      11,425      12,407       15,805      11,866        8,792
 Service and support...................       6,624       6,836        8,596      12,783       14,971
                                           --------    --------     --------    --------     --------
                                             18,049      19,243       24,401      24,649       23,763
                                           --------    --------     --------    --------     --------
   Gross profit........................      15,001      17,160       22,213      27,338       22,352
                                           --------    --------     --------    --------     --------

Operating expenses:
 Sales and marketing...................       8,346       8,306       10,078      12,559       11,598
 Research and development..............       2,248       3,001        3,811       6,109        6,700
 General and administrative............       2,543       2,667        3,098       3,899        4,346
                                           --------    --------     --------    --------     --------
   Total operating expenses............      13,137      13,974       16,987      22,567       22,644
                                           --------    --------     --------    --------     --------
   Operating income (loss).............       1,864       3,186        5,226       4,771         (292)
Interest income........................         408         376          304         286          397
                                           --------    --------     --------    --------     --------
   Income before taxes.................       2,272       3,562        5,530       5,057          105
Provision (benefit) for income taxes...         922       1,275        1,991       1,664         (491)
                                           --------    --------     --------    --------     --------
   Net income..........................    $  1,350    $  2,287     $  3,539    $  3,393     $    596
                                           ========    ========     ========    ========     ========

Basic earnings per share:
 Net income per share..................    $   0.34    $   0.60     $   0.98    $   0.92     $   0.16
                                           ========    ========     ========    ========     ========
 Weighted average common
  shares outstanding...................       4,003       3,813        3,601       3,705        3,627
                                           ========    ========     ========    ========     ========
Diluted earnings per share:
 Net income per share..................    $   0.34    $   0.60     $   0.90    $   0.85     $   0.15
                                           ========    ========     ========    ========     ========
 Weighted average common and
  common equivalent shares
  outstanding..........................       4,011       3,838        3,928       3,990        3,913
                                           ========    ========     ========    ========     ========

Balance Sheet Data
(at period end):
Working capital........................    $ 14,792    $ 11,699     $ 15,765    $ 18,306     $ 18,652
Total assets...........................      25,827      27,660       34,548      36,475       37,173
Stockholders' equity...................      18,976      18,743       23,789      26,019       27,607
---------------------

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.
</TABLE>

                                      -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 Acclaim or Prophet 21 CommerceCenter 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
and support.  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 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.

     Prophet 21 CommerceCenter  utilizes the Microsoft  Windows  NT/Windows 2000
operating  environment.  Prophet 21  CommerceCenter is targeted for medium-sized
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.

     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



                                      -10-
<PAGE>

"believes,"  "expects," "may," "will," "should" or "anticipates" or the negative
thereof or other 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          Percentage Increase (Decrease)
                                                ---------------------          ------------------------------

                                                                                    Fiscal         Fiscal
                                                  Fiscal Year Ended               1999 over      2000 over
                                                        June 30,                    Fiscal        Fiscal
                                           ---------------------------------
                                               1998       1999        2000           1998          1999
                                               ----       ----        ----         --------       ------
<S>                                            <C>        <C>         <C>            <C>          <C>
Revenue:
 Software and hardware sales..........         64.7%      57.3%       39.1%          (1.2)%       (39.5)%
 Service and support..................         35.3       42.7        60.9           34.9          26.6
                                             ------     ------      ------
                                              100.0      100.0       100.0           11.5         (11.3)
                                             ------     ------      ------
Cost of revenue:
 Software and hardware sales..........         33.9       22.8        19.1          (24.9)        (25.9)
 Service and support..................         18.4       24.6        32.5           48.7          17.1
                                             ------     ------      ------
                                               52.3       47.4        51.6            1.0          (3.6)
                                             ------     ------      ------
    Gross profit......................         47.7       52.6        48.4           23.1         (18.2)
                                             ------     ------      ------

Operating expenses:
 Sales and marketing..................         21.6       24.1        25.2           24.6          (7.7)
 Research and development.............          8.2       11.8        14.5           60.3           9.7
 General and administrative...........          6.6        7.5         9.4           25.9          11.5
                                             ------     ------      ------
    Total operating expenses..........         36.4       43.4        49.1           32.8           0.4
                                             ------     ------      ------
    Operating income (loss)...........         11.2        9.2        (0.7)          (8.7)       (106.1)
Interest income.......................          0.7        0.6         0.9           (5.9)         38.8
                                             ------     ------      ------
    Income before income taxes........         11.9        9.8         0.2           (8.6)        (97.9)
Provision (benefit) for income taxes..          4.3        3.2        (1.1)         (16.4)       (129.5)
                                             ------     ------      ------
    Net income........................          7.6%       6.6%        1.3%          (4.1)        (82.4)
                                             ======     ======      ======
</TABLE>



                                      -12-
<PAGE>

     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.

     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  continues  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.



                                      -13-
<PAGE>

     Income taxes.  The  Company's  effective tax rate was 32.9% and (467.6)% in
fiscal 1999 and 2000, respectively.

     Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998

     Revenue.  Revenue  increased by 11.5%, or $5,373,000,  from  $46,614,000 in
fiscal 1998 to $51,987,000  in fiscal 1999.  Software and hardware sales revenue
decreased by 1.2%, or $371,000,  from  $30,157,000 in fiscal 1998 to $29,786,000
in fiscal 1999. Such decrease was attributable primarily to the reclassification
of  certain  revenue  items   (application,   implementation   and  installation
consulting  services)  that were  formerly  bundled  into system sales in fiscal
1998.  Had it not been for this  reclassification,  software and hardware  sales
revenue would have  increased by 3.0%, or $915,000,  from  $30,157,000 in fiscal
1998 to  $31,072,000 in fiscal 1999. The decrease in software and hardware sales
was offset in part by the  increase in the number of systems  sold.  Service and
support revenue  increased by 34.9%, or $5,744,000,  from  $16,457,000 in fiscal
1998 to $22,201,000 in fiscal 1999. This increase was attributable  primarily to
an  increase  in the  number  of new  users who have  entered  into  maintenance
contracts,  an increase in services  performed by the Company in connection with
its educational  services department and sales of consulting services which were
previously  included in system sales revenue.  However,  had it not been for the
reclassification,  service and support  would have only  increased by 27.1%,  or
$4,458,000, from $16,457,000 in fiscal 1998 to $20,915,000 in fiscal 1999.

     Gross profit. The Company's gross profit increased by 23.1%, or $5,125,000,
from  $22,213,000  in fiscal 1998 to  $27,338,000  in fiscal 1999.  Gross profit
margin  increased  from 47.7% of revenue in fiscal 1998 to 52.6% in fiscal 1999.
Gross profit from software and hardware sales increased by 24.9%, or $3,568,000,
from  $14,352,000  in fiscal 1998 to  $17,920,000  in fiscal 1999.  Gross profit
margin  attributable  to software and  hardware  sales  increased  from 47.6% of
software and hardware  sales revenue in fiscal 1998 to 60.2% in fiscal 1999. The
increase in such gross profit and gross profit margin was attributable primarily
to favorable  sales mix, with a larger  percentage of revenue being derived from
sales of the  Company's  Prophet  21  CommerceCenter  product  and,  to a lesser
extent, to increased sales of the Company's optional software offerings, each of
which  carries  higher  margins.  Gross profit from service and support  revenue
increased by 19.8%,  or  $1,557,000,  from  $7,861,000  in 1998 to $9,418,000 in
1999. Gross profit margin  attributable to service and support revenue decreased
from  47.8% of service  and  support  revenue in fiscal  1998 to 42.4% in fiscal
1999.  The  increase  in such gross  profit  was  attributable  primarily  to an
increase in the number of new users who have entered into maintenance contracts.
The decrease in gross profit margin was  attributable to an increase in staff in
the consulting departments.

     Sales and marketing  expenses.  Sales and marketing  expenses  increased by
24.6%, or $2,481,000,  from  $10,078,000 in fiscal 1998 to $12,559,000 in fiscal
1999,   and   increased  as  a  percentage  of  revenue  from  21.6%  to  24.2%,
respectively. Such expenses increased in absolute dollars and as a percentage of
revenue  due  primarily  to  increased  compensation  expenses  associated  with
staffing and increased investment in marketing.

     Research  and  development  expenses.  Research  and  development  expenses
increased by 60.3%, or $2,298,000,  from $3,811,000 in fiscal 1998 to $6,109,000
in fiscal 1999,  and  increased  as a percentage  of revenue from 8.2% to 11.8%,
respectively. Research and development



                                      -14-
<PAGE>

expenses  increased  in  absolute  dollars  and as a  percentage  of revenue due
primarily to an increase in salary  expenses and  professional  fees  associated
with the Company's new product release, Prophet 21 CommerceCenter.

     General and administrative  expenses.  General and administrative  expenses
increased by 25.9%, or $801,000, from $3,098,000 in fiscal 1998 to $3,899,000 in
fiscal  1999,  and  increased  as a  percentage  of  revenue  from 6.6% to 7.5%,
respectively.  General and administrative expenses increased in absolute dollars
and as a  percentage  of revenue  due  primarily  to an increase in bad debt and
compensation  expenses.  These  increases  were offset in part by decreased fees
paid to the Company's outside professionals.

     Income  taxes.  The  Company's  effective  tax rate was  36.0% and 32.9% in
fiscal 1998 and 1999, respectively.

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 (used) provided by operations was ($53,000),  $3,567,000 and $9,233,000 for
the fiscal years ended June 30, 1998, 1999 and 2000, respectively.

     The Company's working capital was approximately $18,306,000 and $18,652,000
at June 30, 1999 and 2000, respectively.

     The Company  invested  $1,657,000,  $1,714,000  and  $1,711,000  in capital
equipment  and  leasehold  improvements  in fiscal  years  1998,  1999 and 2000,
respectively.  There  are  no  material  commitments  for  capital  expenditures
currently outstanding.  The Company also invested $1,565,000, $0 and $381,000 in
software development costs which were capitalized during fiscal years ended June
30, 1998, 1999 and 2000, 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 24 months.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting   Bulletin   ("SAB")  No.  101  "Revenue   Recognition  in  Financial
Statements."  SAB No.  101,  as amended  by SAB No.  101A and SAB No.  101B,  is
required to be  implemented  in the quarter ended June 30, 2001.  The Company is
currently analyzing the potential impact of SAB



                                      -15-
<PAGE>

No. 101 (as amended) on its revenue recognition  policies.  Although the Company
believes its historical accounting policies and practices conform with generally
accepted  accounting  principles,  there  can be no  assurance  that the  formal
implementation  of SAB No.  101 (as  amended)  will not result in changes to its
historical  accounting  policies and practices or to the manner in which certain
transactions  are  presented  and  disclosed  in  the   consolidated   financial
statements.


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  Schedules,
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 audits for each
of the two years in the period 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  reports  on the  financial
statements  of the Company for such  years.  The report of PWC on the  Company's
financial statements for each of the two years in the period 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.



                                      -16-
<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
2000 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 2000  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 2000
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 2000 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.



                                      -17-
<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 21.

(b)         Reports on Form 8-K.

            No reports on Form 8-K have been filed during the quarter ended June
            30, 2000.



                                      -18-
<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, 2000.

                                      PROPHET 21, INC.



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



                                      -19-
<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, 2000
-------------------------
  Charles L. Boyle, III     Officer and Director
                            (Principal Executive Officer)


/s/Thomas M. Giuliani       Chief Financial Officer and       September 27, 2000
-------------------------
  Thomas M. Giuliani        Treasurer (Principal Financial
                            and Accounting Officer)

/s/John E. Meggitt, Ph.D.   Chairman of the Board and         September 27, 2000
-------------------------
  John E. Meggitt, Ph.D.    Director



/s/Dorothy M. Meggitt       Secretary and  Director           September 27, 2000
-------------------------
  Dorothy M. Meggitt

/s/Louis J. Cissone         Director                          September 27, 2000
-------------------------
  Louis J. Cissone

/s/Mark A. Timmerman        Director                          September 27, 2000
-------------------------
  Mark A. Timmerman



                                      -20-
<PAGE>

                                  EXHIBIT INDEX

   Exhibit
     No.            Description of 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.

    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, such amendments filed herewith.

    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, such amendments filed herewith.

    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.)

    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.)


                                      -21-
<PAGE>

    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 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            International  Business Machines  Corporation  Agreement for
                    Authorized  Dealers and  Industry  Remarketers,  as amended,
                    with exhibits.  (Incorporated  by reference to Exhibit 10.17
                    to the  Company's  Registration  Statement on Form S-1 (File
                    Number 33-74276) which became effective on March 10, 1994.)

    10.10           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.)

   10.11*           Indemnification  Agreement  dated as of May 18, 1994 between
                    the Company and Louis J. Cissone. (Incorporated by reference
                    to Exhibit 10.19 to the Company's Annual Report on Form 10-K
                    for the year ended June 30, 1994.)

   10.12*           Indemnification  Agreement  dated as of May 18, 1994 between
                    the  Company  and  Mark  A.  Timmerman.   (Incorporated   by
                    reference to Exhibit 10.20 to the Company's Annual Report on
                    Form 10-K for the year ended June 30, 1994.)

   10.13*           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 year ended June 30, 1996.)

   10.14+           Change in Control  Severance Pay Agreement  dated as of July
                    25,  2000 by and  between  the Company and Charles L. Boyle,
                    III.

   10.15+           Change in Control  Severance Pay Agreement  dated as of July
                    25, 2000 by and between the Company and Thomas M. Giuliani.


                                      -22-
<PAGE>

    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.

    27.1+           Financial Data Schedule for the year ended June 30, 2000.

    27.2+           Financial Data Schedule for the year ended June 30, 1999.

    27.3+           Financial Data Schedule for the year ended June 30, 1998.

------------
*       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.




                                      -23-
<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, 1999 and 2000.................................................. F-4

Consolidated Statements of Operations for the
  years ended June 30, 1998, 1999 and 2000................................ F-5

Consolidated Statements of Stockholders'
  Equity for the years ended
  June 30, 1998, 1999 and 2000............................................ F-6

Consolidated Statements of Cash Flows for the
  years ended June 30, 1998, 1999 and 2000................................ 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 balance sheet as of June 30, 1999
and the related consolidated statements of operations,  stockholders' equity and
cash flows for each of the two years in the period  ended June 30, 1999  present
fairly, in all material respects, the financial position,  results of operations
and cash flows of Prophet 21, Inc. and its Subsidiaries at June 30, 1999 and for
each of the two years in the period  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 audits.  We conducted  our audits 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  audits  provide  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 sheet of Prophet 21, Inc.
and subsidiaries as of June 30, 2000 and the related consolidated  statements of
operations,  stockholders' equity, and cash flows for the year 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 audit.

We conducted our audit 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  audit  provides  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, 2000, and the results of their  operations and their
cash  flows for the year then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.



KPMG LLP
Philadelphia, Pennsylvania
September 15, 2000



                                      F-3
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                          (IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
                                                                           JUNE 30,
                                                                  ---------------------------
                                                                     1999             2000
                                                                     ----             ----
                                     ASSETS
<S>                                                               <C>               <C>
Current assets
  Cash and cash equivalents..............................         $   2,520         $   8,219
  Marketable securities..................................             1,661             2,415
  Accounts receivable, net of allowance for
    doubtful accounts of $261 and $398, respectively.....            19,743            12,869
  Advanced billings......................................             2,140             2,084
  Inventories............................................               666               698
  Deferred income taxes..................................               156               711
  Prepaid and other current assets.......................             1,148               978
                                                                  ---------         ---------
     Total current assets................................            28,034            27,974
Long-term marketable securities..........................             3,175             4,620
Equipment and improvements, net..........................             3,100             3,078
Software development costs, net..........................             2,131             1,233
Other assets.............................................                35               268
                                                                  ---------         ---------
      Total assets.......................................         $  36,475         $  37,173
                                                                  =========         =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable.......................................         $   2,737         $   2,385
  Accrued expenses and other liabilities.................             1,715             1,714
  Commissions payable....................................               708               549
  Taxes payable..........................................             1,206               819
  Profit sharing plan contribution payable...............               403               158
  Deferred income........................................             2,959             3,697
                                                                  ---------         ---------
     Total current liabilities...........................             9,728             9,322
                                                                  ---------         ---------

Deferred income taxes....................................               728               244
                                                                  ---------         ---------

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; 4,193,603 and 4,320,808 shares issued,
    respectively; 3,593,613 and 3,720,818 shares
    outstanding, respectively............................                42                43
  Additional paid-in capital.............................            10,734            11,764
  Retained earnings......................................            19,339            19,935
  Accumulated other comprehensive loss...................               (82)             (121)
  Treasury stock at cost, 599,990 shares.................            (4,014)           (4,014)
                                                                  ----------        ----------
     Total stockholders' equity..........................            26,019            27,607
                                                                  ---------         ---------
     Total liabilities and stockholders' equity..........         $  36,475         $  37,173
                                                                  =========         =========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      F-4
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
                                                                   Year Ended June 30,
                                                      ------------------------------------------
                                                          1998            1999            2000
                                                          ----            ----            ----
<S>                                                     <C>             <C>             <C>
Revenue:
  Software and hardware sales...................        $30,157         $29,786         $18,014
  Service and support...........................         16,457          22,201          28,101
                                                        -------         -------         -------
                                                         46,614          51,987          46,115
                                                        -------         -------         -------
Cost of revenue:
  Software and hardware sales..................          15,805          11,866           8,792
  Service and support..........................           8,596          12,783          14,971
                                                        -------         -------         -------
                                                         24,401          24,649          23,763
                                                        -------         -------         -------
  Gross profit.................................          22,213          27,338          22,352
                                                        -------         -------         -------

Operating expenses:
  Sales and marketing..........................          10,078          12,559          11,598
  Research and development.....................           3,811           6,109           6,700
  General and administrative...................           3,098           3,899           4,346
                                                        -------         -------         -------
                                                         16,987          22,567          22,644
                                                        -------         -------         -------
    Operating income (loss) ...................           5,226           4,771            (292)
Interest income................................             304             286             397
                                                        -------         -------         -------
Income before taxes............................           5,530           5,057             105
Provision (benefit) for income taxes............          1,991           1,664            (491)
                                                        -------         -------         -------
Net income.....................................         $ 3,539         $ 3,393         $   596
                                                        =======         =======         =======
Basic earnings per share:
  Net income per share.........................         $  0.98         $  0.92         $  0.16
                                                        =======         =======         =======
  Weighted average common shares outstanding...           3,601           3,705           3,627
                                                        =======         =======         =======
Diluted earnings per share:
  Net income per share..........................        $  0.90         $  0.85         $  0.15
                                                        =======         =======         =======
  Weighted average common and common
   equivalent shares outstanding...............           3,928           3,990           3,913
                                                        =======         =======         =======
</TABLE>

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


                                      F-5
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                              Accumulated
                                                                                 Other                              Total
                                                      Additional                 Compre-                Compre-    Stock-
                                      Common Stock     Paid-In     Retained      hensive    Treasury    hensive    holders'
                                     Shares  Amount    Capital     Earnings       Loss       Stock      Income     Equity
                                     ------  ------    -------     --------   ------------  --------    -------    --------

<S>                                  <C>     <C>      <C>          <C>          <C>         <C>         <C>        <C>
Balance, June 30, 1997...........    4,002   $  40    $  8,835     $ 12,407     $  (21)     $(2,518)               $18,743
Issuance of common stock in
  connection with exercise of
  stock options..................      142       1       1,038                                                       1,039
Income tax benefit from stock
  options exercised..............                          413                                                         413
Employee stock purchase plan.....       10       1         100                                                         101
Other comprehensive loss.........                                                  (46)                 $   (46)       (46)
Net income.......................                                     3,539                               3,539      3,539
                                                                                                         ------
Comprehensive income.............                                                                         3,493
                                   -------   -----    --------     --------     -------     -------      ======    -------
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
                                   =======   =====    ========     ========     ======      =======                =======
</TABLE>

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


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30,
                                                          ----------------------------------
                                                            1998           1999        2000
                                                            ----           ----        ----
 <S>                                                       <C>            <C>         <C>
Cash flows from operating activities:
 Net income...........................................    $ 3,539        $ 3,393     $   596
                                                          -------        -------     -------
 Adjustments to reconcile net income to
  net cash (used) provided by operating activities:
   Depreciation and amortization......................      1,778          2,677       3,105
   Gain on sale of equipment..........................         (3)            (2)         (2)
   Provision for losses on accounts receivable........        259            845         904
   Deferred taxes.....................................        334           (437)     (1,039)
   Tax benefit deriving from exercise and sale of
      stock option shares.............................        413             26         144
 (Increases) decreases in operating assets:
   Accounts receivable................................     (7,266)        (3,387)      5,970
   Advanced billings..................................        (38)          (124)         56
   Inventories........................................       (285)           736         (32)
   Prepaid expenses and other current assets..........       (314)          (418)        170
   Other assets.......................................        126             78        (233)
 Increases (decreases) in operating liabilities:
   Accounts payable...................................        323           (953)       (352)
   Accrued expenses...................................        634             75        (160)
   Taxes payable......................................         48            538        (387)
   Profit sharing plan contribution payable...........        101             12        (245)
   Deferred income....................................        298            508         738
                                                          -------        -------     -------
   Total adjustments..................................     (3,592)           174       8,637
                                                          -------        -------     -------
 Net cash (used) provided by operating activities.....        (53)         3,567       9,233
                                                          -------        -------     -------
 Cash flows from investing activities:
   Purchases of equipment and improvements, net.......     (1,657)        (1,714)     (1,711)
   Software development costs.........................     (1,565)            --        (381)
   Purchase of marketable securities..................     (2,975)        (2,600)     (4,690)
   Maturity of marketable securities..................      5,470          2,250       2,400
                                                          -------        -------     -------
 Net cash used by investing activities................       (727)        (2,064)     (4,382)
                                                          -------        -------     -------
 Cash flows from financing activities:
   Purchase of treasury stock.........................         --         (1,496)         --
   Stock option transactions..........................         49             --          --
   Employee stock purchase plan.......................        101            262         217
   Stock options exercised............................      1,053             60         670
                                                          -------        -------     -------
 Net cash  provided (used) by financing activities....      1,203         (1,174)        887
                                                          -------        -------     -------
 Effect of exchange rate changes on cash..............        (46)           (15)        (39)
                                                          -------        -------    --------
 Net  increase in cash and cash equivalents...........        377            314       5,699
 Cash and cash equivalents at beginning of period.....      1,829          2,206       2,520
                                                          -------        -------    --------
 Cash and cash equivalents at end of period...........    $ 2,206        $ 2,520     $ 8,219
                                                          =======        =======     =======

 Supplemental cash flow disclosures:
   Income taxes paid..................................    $ 1,468        $ 1,528     $   647
                                                          =======        =======     =======
</TABLE>

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

                                      F-7
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE 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 38
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.



                                      F-8
<PAGE>

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


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     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  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.

     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,
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,  1999 and 2000  represent  amounts
billed in advance to customers  for  maintenance  in  accordance  with  contract
terms.

     In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting   Bulletin   ("SAB")  No.  101  "Revenue   Recognition  in  Financial
Statements."  SAB No.  101,  as amended  by SAB No.  101A and SAB No.  101B,  is
required to be  implemented  in the quarter ended June 30, 2001.  The Company is
currently  analyzing  the  potential  impact of SAB No. 101 (as  amended) on its
revenue  recognition  policies.  Although the Company  believes  its  historical
accounting  policies and practices  conform with generally  accepted  accounting


                                      F-9
<PAGE>

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


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

principles,  there can be no assurance that the formal implementation of SAB No.
101 (as  amended)  will not  result  in  changes  to its  historical  accounting
policies  and  practices  or to the  manner in which  certain  transactions  are
presented and disclosed in the consolidated financial statements.

     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.

     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
utilizing  the  estimated   economic  life  of  three  years.   Amortization  of
capitalized  software  development costs ($426,  $1,279 and $1,279 for the years
ended June 30, 1998, 1999 and 2000,  respectively)  is charged to cost of sales.
For the years ended June 30, 1999 and 2000, the Company capitalized $0 and $381,
respectively,  of software development costs. All other research and development
costs 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,
2000, no impairment was indicated.

     Comprehensive Income

     Statement   of  Financial   Accounting   Standards   No.  130,   "Reporting
Comprehensive   Income"  requires  net  foreign  exchange  gains  or  losses  on
translation  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  (which
includes net income) are displayed separately in the consolidated  statements of
stockholders' equity.



                                      F-10
<PAGE>

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


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     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 Per Share:

     Net earnings per common share is computed in accordance  with the Financial
Accounting  Standards  Board  ("FASB")  SFAS No. 128 "Earnings per Share" ("SFAS
128").  Under  SFAS 128,  basic  earnings  per share  excludes  dilution  and is
computed by dividing net income by the weighted  average number of common shares
outstanding for the period.  Diluted  earnings per share is computed by dividing
net earnings 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.

     The  following  table  sets  forth the  computation  of basic and  dilutive
earnings per share:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JUNE 30,
                                                        1998            1999           2000
                                                        ----            ----           ----
<S>                                                   <C>             <C>            <C>
Net income...................................         $ 3,539         $ 3,393        $   596
Weighted average common shares outstanding...           3,601           3,705          3,627
Effect of dilutive securities:
  Stock options..............................             327             285            286
                                                     --------        --------       --------
Weighted average common and common
  equivalent shares outstanding..............           3,928           3,990          3,913
                                                     ========        ========       ========
Basic earnings per share.....................         $  0.98         $  0.92        $  0.16
Diluted earnings per share...................         $  0.90         $  0.85        $  0.15
</TABLE>


                                      F-11
<PAGE>

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


2.  EQUIPMENT AND IMPROVEMENTS:

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

<TABLE>
<CAPTION>
                                                                     JUNE 30,
                                                         ------------------------------
                                                            1999                  2000
                                                            ----                  ----
<S>                                                       <C>                  <C>
Equipment..........................................       $  2,042             $  2,000
Computer systems...................................          6,554                7,618
Furniture and fixtures.............................          1,051                1,275
Leasehold improvements.............................            771                  813
                                                          --------             --------
                                                            10,418               11,706
Accumulated depreciation and amortization..........         (7,318)              (8,628)
                                                          --------             ---------
                                                          $  3,100             $  3,078
                                                          ========             ========
</TABLE>

     Depreciation  and  amortization  expense of  $1,352,  $1,398 and $1,826 was
charged  to  operations  for the  years  ended  June 30,  1998,  1999 and  2000,
respectively.


3.  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, 2000 are:

<TABLE>
<CAPTION>
FISCAL YEAR                          RELATED PARTY         THIRD PARTY               TOTAL
-----------                          -------------         -----------               -----
<S>                                   <C>                  <C>                    <C>
2001........................          $        461         $       40             $     501
2002........................                   475                 13                   488
2003........................                   490                 --                   490
                                      ------------         ----------             ---------
                                      $      1,426         $       53             $   1,479
                                      ============         ==========             =========
</TABLE>

     Rent expense,  including  related party  transactions,  for the years ended
June 30, 1998, 1999 and 2000 was $542, $537 and $562, respectively.



                                      F-12
<PAGE>


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


4.  INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                                  YEAR ENDED JUNE 30,
                                                       ----------------------------------------
                                                           1998          1999           2000
                                                           ----          ----           ----
<S>                                                      <C>           <C>             <C>
Federal:
  Current......................................          $ 1,559       $ 1,926         $  402
  Deferred.....................................              334          (395)          (893)
                                                         -------       -------         ------
                                                           1,893         1,531           (491)
                                                         -------       -------         ------
State:
  Current......................................               98           175            129
  Deferred.....................................               --           (42)          (129)
                                                         -------       -------         ------
                                                              98           133             --
                                                         -------       -------         ------
                                                         $ 1,991       $ 1,664         $ (491)
                                                         =======       =======         ======
</TABLE>

     The income tax benefits  related to the exercise of stock options  amounted
to $413, $26 and $144 for 1998, 1999 and 2000,  respectively,  and were credited
to additional paid-in capital.

     Deferred  income  taxes arise from  temporary  differences  resulting  from
income and expense items  reported for financial  accounting and tax purposes in
different  periods.  Deferred  taxes are  primarily  classified  as  current  or
non-current  depending on the  classification  of the assets and  liabilities to
which they relate.

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

<TABLE>
<CAPTION>
                                                                       Year ended June 30,
                                                                ---------------------------------
                                                                  1998        1999        2000
                                                                  ----        ----        ----
<S>                                                                 <C>         <C>         <C>
Statutory tax rate......................................            34%         34%         34%
State taxes, net of Federal benefit.....................             1           3         (41)
Research and development credit.........................            --          --        (371)
Provision to return adjustment..........................            --          --         (95)
Non-deductible expense..................................             1          --           5
Other...................................................            --          (4)         --
                                                                 -----       -----       -----
                                                                    36%         33%       (468)%
                                                                 =====       =====       =====
</TABLE>




                                      F-13
<PAGE>

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


4.  INCOME TAXES (CONTINUED):

     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.  Amounts  giving  rise to  deferred  income  taxes are as
follows:

<TABLE>
<CAPTION>
                                                                            June 30,
                                                                    ----------------------
                                                                       1999          2000
                                                                    ----------   -----------
<S>                                                                  <C>            <C>
Current deferred tax assets:
  Allowance for doubtful accounts.........................           $   99         $  152
  Accrued vacation........................................               45             72
  Inventory capitalization................................               12             13
  State net operating loss carryforward...................               --             82
  Research and development credit carryforward............               --            392
                                                                     ------         ------
                                                                        156            711
Non-current deferred tax asset:
  Depreciation............................................               88            227

Non-current deferred tax liability:
  Software development costs..............................             (816)          (471)
                                                                     -------        ------

     Total................................................           $ (572)        $  467
                                                                     =======        ======
</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  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 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,  2000.  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.


                                      F-14
<PAGE>

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


5.  RELATED PARTY TRANSACTIONS:

     The Company leases office space from its principal stockholders under lease
terms  expiring  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, 1998, 1999 and 2000 was $467, $481 and $510, 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  government
obligations.  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, 1998, 1999 and 2000.

     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, 1998, 1999 and 2000 were $378, $380 and $150, respectively.


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.



                                      F-15
<PAGE>


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


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     Stock Option Plan:

     Under the Company's 1993 Stock Plan (the "Plan"),  the Company has reserved
1,000 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 FASB issued SFAS No. 123,  "Accounting for  Stock-Based  Compensation"
("SFAS 123") 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 123 is  optional  and the Company did not elect
these provisions of SFAS 123.  However,  pro forma disclosures as if the Company
adopted the cost  recognition  provisions of SFAS 123 in fiscal years 1998, 1999
and 2000 are required by SFAS 123 and are presented below.

     The Company granted stock options in 1998, 1999 and 2000 for employees. The
stock options granted in 1998, 1999 and 2000 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 1998, 1999 and 2000 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 these stock options granted in 1998, 1999 and 2000.



                                      F-16
<PAGE>


                        PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE 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, 1998,
1999 and 2000 and the changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                                                                     Weighted
                                                              Exercise Price          Average
                                              Shares(1)          Per Share         Exercise Price
-------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>                     <C>
Options outstanding at June 30, 1997            697,500        $4.125 to $7.000        $5.950

                                Granted          98,000       $8.500 to $15.250        $9.710
                               Canceled         (22,500)      $5.250 to $12.750       $11.920
                              Exercised        (136,600)       $4.750 to $7.000        $6.830
Non-qualified Options in 1997
                                Granted          10,000                  $5.375        $5.375
-------------------------------------------------------------------------------------------------

Options outstanding at June 30, 1998            646,400       $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

Options exercisable at June 30,
                                   1998         332,580        $4.125 to $7.000        $5.830
                                   1999         531,823       $4.125 to $15.250        $6.160
                                   2000         532,567       $4.125 to $22.375        $6.500
=================================================================================================

(1)     Not reported in thousands
</TABLE>




                                      F-17
<PAGE>

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


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of June 30, 2000:

<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       265,245         5.82          $4.950        265,245          $4.950
   $7.000 to $9.250       334,100         5.33          $7.750        243,601          $7.260
 $15.250 to $18.125       126,167         8.85         $16.600         23,721         $16.000
 $20.000 to $22.375        18,500         9.77         $21.090              0          $0.000
------------------------------------------------------------------------------------------------------
  $4.125 to $22.375       744,012         6.21          $8.585        532,567          $6.500
------------------------------------------------------------------------------------------------------
(1)     Not reported in thousands
</TABLE>

     Had compensation cost for the Company's stock-based  compensation plan been
determined consistent with SFAS 123, the Company's net income and net income per
common share would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                                                    June 30,
                                                 -----------------------------------------------
                                                     1998             1999              2000
                                                 -------------   --------------    -------------
<S>                                                 <C>              <C>                <C>
Net Income:                     As reported         $3,539           $3,393             $596
                                Pro forma            3,317            3,212              533

Basic earnings per share:       As reported          $0.98            $0.92            $0.16
                                Pro forma             0.92             0.87             0.15

Diluted earnings per share:     As reported          $0.90            $0.85            $0.15
                                Pro forma             0.84             0.81             0.14
</TABLE>

     The  effects  of  applying  SFAS 123 in this pro forma  disclosure  are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
the 1996 fiscal year.

     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,  1998,
1999 and 2000: dividend yield of 0.00%;  risk-free interest rate of 6.05%, 5.47%
and 6.30%,  respectively;  the  expected  life of options is  estimated  to be 4
years; and a volatility of 32.75%, 45.66% and 60.61%, respectively.


                                      F-18
<PAGE>

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


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     The weighted  average fair value of options granted during the fiscal years
ending June 30, 1998, 1999 and 2000 was $3.31, $6.83 and $7.29, 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, 2000, 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 to make  available 100
shares of the Company's Common Stock for purchase by the Company's employees. As
of June 30, 2000,  the Company's  employees had purchased 67 shares at a cost of
$580.



                                      F-19
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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


Our audits 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 each of the two years in
the period  then 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 each
of the two years in the period then 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 September 15, 2000, we reported on the  consolidated  balance
sheet of Prophet 21, Inc. and  subsidiaries as of June 30, 2000, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the year then ended,  which are included herein. In connection with our audit of
the aforementioned  consolidated financial statements,  we have also audited the
related 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
audit.

     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
September 15, 2000


                                      S-2
<PAGE>

                                                                     SCHEDULE II

                                PROPHET 21, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
Allowance for Doubtful Accounts
<CAPTION>
                                 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>
1998..................           $ 218,111            $ 259,404            $ 237,515           $ 240,000
1999..................             240,000              845,054              824,063             260,991
2000..................             260,991              904,415              767,166             398,240

</TABLE>






                                       S-3