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, 1998
                         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
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(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. [X]


     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant:  $19,601,405 at August 14, 1998 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 14, 1998:


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


Common Stock, $.01 par value                                   3,718,842


     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 1998 Annual Meeting of Stockholders  are incorporated by reference into Part
III of this Report.




                                       -2-
<PAGE>


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

                  Item                                                  Page
                  ----                                                  ----

PART I      1.    Business................................................4

            2.    Properties.............................................11

            3.    Legal Proceedings......................................12

            4.    Submission of Matters to a Vote of Security Holders....12


PART II     5.    Market for the Company's Common Equity
                  and Related Stockholder Matters........................13

            6.    Selected Financial Data................................14

            7.    Management's    Discussion   and   Analysis   of
                  Financial Condition and Results of Operations .........15

            8.    Financial Statements and Supplementary Data............22

            9.    Changes in and  Disagreements  with  Accountants
                  on Accounting and Financial Disclosure.................22


PART III    10.   Directors and Executive Officers of the Company........23

            11.   Executive Compensation.................................23

            12.   Security  Ownership of Certain Beneficial Owners
                  and Management.........................................23

            13.   Certain Relationships and Related Transactions.........23

PART IV     14.   Exhibits, Financial Statement Schedules,
                  and Reports on Form 8-K................................24

SIGNATURES...............................................................25

EXHIBIT INDEX............................................................27

FINANCIAL DATA AND SCHEDULES............................................F-1



                                       -3-
<PAGE>




                                    PART I



ITEM 1.     BUSINESS.


GENERAL

     Prophet  21,  Inc.   ("Prophet   21"  or  the   "Company")  is  a  provider
distribution-centric business management solutions developed exclusively for use
by  distribution  and wholesale  oriented  businesses.  Prophet 21 Solutions are
enterprise-wide solutions consisting of business application software, EDI, VMI,
DMI, electronic commerce,  business application training,  consulting,  software
customization,  application  hardware (when desired),  system  installation  and
implementation services,  supported by a dedicated customer service organization
and educational services.

     The  Company  addresses  the  automation  needs  of its  customers  through
comprehensive,  feature-rich  and  user-friendly  solutions  for  both  UNIX and
Microsoft  Windows NT environments.  The Company's lead UNIX offering is Prophet
21 Acclaim, a complete  distribution  industry management solution that combines
the  functionality  of the traditional  Prophet 21 System with the technology of
Progress Software  Corporation's  DBMS. Prophet 21 Acclaim is targeted for sales
to new and current Prophet 21 XL customers.  The Company's  Microsoft Windows NT
offering is Prophet 21 Servent,  a fully integrated  Microsoft  Windows NT-based
client/server  software suite.  Prophet 21 Servent is targeted for  medium-sized
companies seeking to solve their distribution-centric business requirements with
a Windows NT  client/server  solution.  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  Servent  product  is  suitable  for
distribution companies, as well as businesses that have a distribution component
of their operations.

     Prophet 21 markets its products and services to approximately 45,000 of the
roughly 300,000 distributors and wholesalers  operating in the United States and
Canada and, as of June 30, 1998,  had an installed  base of 1,800 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 Servent  solutions through its 47-person direct
sales force located in sales and service offices throughout the United States to
a wide range of industry segments including  industrial,  electrical,  plumbing,
electronic,  hardware,  heating  and  air  conditioning,   medical  and  dental,
janitorial, tile and general distribution.  The Company believes that one of its
competitive advantages is its accumulated knowledge of the distribution industry
gained over thirty  years,  which has enabled it to develop an  industry-focused
solution to satisfy the needs of its customers.

                                       -4-
<PAGE>

     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 System, Prophet 21 Acclaim, Prophet 21 Servent and the Company's
logo 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.


PROPHET 21'S MARKET

     Of the roughly 300,000 distributors and wholesalers operating in the United
States and Canada, Prophet 21 markets its products and services to approximately
45,000  businesses in a wide range of industry  segments  including  industrial,
electrical,  plumbing,  electronic,  hardware,  heating  and  air  conditioning,
medical and dental, janitorial, tile and general distribution.  Distributors and
wholesalers  warehouse  products and handle the movement of large  quantities of
inventory across a wide range of industries and play a critical role in the flow
of goods from  manufacturers  to retailers and consumers.  The Company  believes
that as the industry supply chains undergo changes, distributors and wholesalers
increasingly  are finding that the changing  business  environment  dictates the
need for automated business management systems. The Company believes that it has
the ability to provide "best of breed" order management and inventory management
to companies.  This unique ability  provides  significant  market  opportunities
beyond the existing pure distribution market.

     The Company's target market is highly  fragmented,  consisting of companies
ranging from small  one-location  companies to  multi-location  distributors and
wholesalers.  Distributors and wholesalers,  regardless of size, tend to operate
with  relatively  low margins  and, in order to compete  effectively,  must move
goods quickly at the least possible  expense and maintain  minimal  inventories.
Distributors and wholesalers with multiple  locations also must manage inventory
in a  cost-effective  manner across their various  branches.  In addition to the
competitive  pressures  inherent in the  distribution  industry,  suppliers  and
customers   increasingly  require  that  distributors  and  wholesalers  possess
sophisticated  technology,  including EDI and electronic commerce  capabilities,
which enable goods to be ordered and billed  computer-to-computer,  and bar code
labeling capabilities, which allow for automated and accurate product tracking.

     The  Company  believes  that a majority  of  distributors  and  wholesalers
presently rely on ineffective or outmoded systems to manage their businesses. In
addition, changes in technology,  Year 2000 issues, Euro currency conversion and
compliance,  evolving  distributor  needs and  consolidation in the distribution
industry supply chain dictate that companies upgrade their computer systems on a
continuing basis in order to maintain a competitive edge.


PROPHET 21 ACCLAIM

      Prophet 21 Acclaim is an enterprise-wide  solution  consisting of business
application  software,  business  application  training,  consulting,   software
customization,   hardware,  and

                                       -5-
<PAGE>

implementation  services.  These products are supported by a dedicated  customer
service  organization  and  educational  training.  The Company has designed the
system to address the business  management  automation needs of distributors and
distribution-centric companies.

     Many of the features of Prophet 21 Acclaim  have been  designed to meet the
specific  needs  of  the  distribution  industry,   with  emphasis  on  features
automating order processing,  inventory  management and control,  communications
networking  and product  pricing.  In addition,  the Company  offers  electronic
commerce such as EDI, VMI, DMI and Internet enabling  capabilities which provide
links between its customers and an expanding  number of trading partners who are
their customers and suppliers.

     The Company  provides a single,  comprehensive,  feature-rich  system.  The
Company  believes  that this  standardization  permits  systems to be  installed
rapidly and  supported  effectively  because  installers,  trainers and customer
support  personnel  have a high  level of  expertise  with a single  system.  In
addition,  this  standardization  permits the Company's customers to incorporate
readily the Company's  periodic  software  enhancements.  To facilitate the very
specific  and unique  needs of some of our  customers  the Company  does provide
custom software modifications through a separate custom software department.

     Prophet  21  Acclaim's  design  facilitates  its  use by  distributors  and
wholesalers with multi-branch  operations.  The system permits  distributors and
wholesalers to determine  system-wide  inventory status  instantaneously  and to
ship  orders  efficiently.  Prophet  21  Acclaim  also  allows  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  is an open  system  that  allows  the  integration  of
third-party software products such as report writers, faxing software, warehouse
automation,  forms creation and executive  information  systems. The Company has
successfully developed seamless integration to a number of third-party products.

PROPHET 21 SERVENT

     Prophet 21 Servent is an  enterprise-wide  solution  consisting of business
application software, application training, consulting,  software customization,
and implementation  services.  This product is supported by a dedicated customer
support  organization.  The  Company  has  designed  the system to  address  the
business  management  automation needs of distributors and  distribution-centric
companies.

     Many of the features of Prophet 21 Servent  have been  designed to meet the
specific needs of the distribution industry and distribution-centric  companies,
with emphasis on features  automating  order  management,  order  configuration,
inventory management and control,  product pricing and financials.  In addition,
the  Company  offers  electronic  commerce  such  as EDI and  Internet  enabling
capabilities which provide links between its customers and an expanding

                                       -6-
<PAGE>

number of trading  partners who are their  customers and  suppliers.  Prophet 21
Servent  extends  the supply  chain.  Servent is aimed at  customers  desiring a
Microsoft Windows NT solution.

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

     Prophet  21  Servent's   design   facilitates   its  use  by   wholesalers,
distributors and  distribution-centric  companies with multi-branch  operations.
The system permits these  companies to determine  system-wide  inventory  status
instantaneously and to ship orders  efficiently.  Prophet 21 Servent also allows
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 Servent  is an open  system  that  allows  the  integration  of
third-party software products such as report writers, faxing software, warehouse
automation,  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  47-person  direct
sales force located in sales and service  offices  throughout the United States.
The field  sales  force is  supervised  by a Vice  President  of Sales  with two
directors,  one for  Prophet 21 Acclaim  and one for  Servent,  who  monitor and
manage sales performance and assist in sales activity under the direction of the
Vice  President  of Sales.  The  Company's  direct  sales  force  focuses on the
distribution  industry and understands  the specific needs and  mission-critical
applications of distributors and wholesalers  within targeted industry segments.
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 our customers.

     The Company's  marketing  strategy is to provide  focused  marketing on the
industry  segments  served  by  the  Company,  in  particular,  the  industrial,
electrical,  plumbing,  electronic,  hardware,  heating  and  air  conditioning,
medical and dental,  janitorial,  tile and general distribution industries.  The
Company  generates  leads  through  telemarketing,   direct  mail,  advertising,
national and regional trade shows and Company-sponsored seminars.

                                       -7-
<PAGE>

     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.


CUSTOMERS

     The Company had, as of June 30, 1998,  an installed  base of  approximately
1,800 systems.  The Company's  customers vary in size from small distributors or
wholesalers  with a few users to larger  companies  with several  hundred  users
linking multiple geographically dispersed branches. Currently, approximately 50%
of the Company's  customers have multiple locations  connected by communications
networks.  The  Company  serves a wide  range of  industry  segments,  including
industrial,   electrical,   plumbing,  electronic,  hardware,  heating  and  air
conditioning,  medical and dental,  janitorial,  tile and general  distribution.
During the three fiscal years ended June 30, 1998, no one customer accounted for
10% or more of the Company's revenue.


SYSTEMS TRAINING AND TECHNICAL SUPPORT SERVICES

     A key element of the Company's  business  strategy is to provide  extensive
training and support to its  customers.  The Company has  established a customer
service and support, and installation  organization,  consisting of 143 persons,
that provides  installation,  implementation  and post-sales support for systems
under warranty or maintenance contract. Additionally, commencing in fiscal 1998,
the Company began providing services through its Educational Services division.

     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's  Educational Services division 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.

     The Company  provides Prophet 21 Acclaim and Prophet 21 XL users a one-year
hardware  warranty and a 90-day software  warranty.  Ninety days after the sale,
customers  typically  enter  into  a  fee-based  maintenance  contract  covering
software and hardware  support.  The Company  offers  software  enhancements  at
discounted prices to customers who have entered

                                      -8-
<PAGE>

into  maintenance  contracts.  As of June  30,  1998,  approximately  85% of the
Company's customers were covered by maintenance  contracts following the initial
warranty  period.  There  can be no  assurance,  however,  that  customers  will
continue to enter into maintenance contracts at this rate. Maintenance contracts
have an initial term of one year and continue thereafter unless terminated.

     The Company provides Prophet 21 Servent users a one-year software warranty.
The Company  offers to its customers  fee-based  maintenance  contract  covering
software support and product enhancements.  There can be no assurance,  however,
that customers will enter into maintenance contracts. Maintenance contracts have
terms of one year.

     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.


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
(Acclaim and Servent)  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 following the trends of the distribution and distribution-centric
marketplace. In fiscal 1998, the Company released its newest product, Servent, a
fully-integrated   Microsoft  Windows  NT-based  client/server  software  suite.
Servent is targeted  for  medium-sized  companies  attempting  to  leverage  the
Windows NT  client/server  environment and integrate their financial  management
with order, inventory and purchasing management. The Servent product is suitable
for  distribution  companies  and  distribution-centric  companies  which should
enable the  Company to expand its market  beyond the pure  general  distribution
marketplace. In addition, the Company develops modifications and enhancements to
its  software to address  the  specific  needs of targeted  segments in order to
continue to increase  the number of features  and improve the  applications  for
such  industry   segments.   Sixty-four   employees  are  directly  involved  in
programming and software development.

     The Company's lead UNIX offering is Prophet 21 Acclaim, a complete business
management system that combines the functionality of the traditional  Prophet 21
System with the technology of Progress Software  Corporation's  DBMS. Prophet 21
Acclaim is targeted for sales to new and current customers. It has been designed
so that  current  Prophet 21 XL users can easily move to this new product  while
preserving their existing technology infrastructure.

      The Company's  research and development  expenses were  approximately $2.2
million,  $2.7 million and $3.5 million in the fiscal years ended June 30, 1996,
1997 and 1998,  respectively.  In 1996,  the  Company  also  began  capitalizing
certain  software  development  costs

                                       -9-
<PAGE>

in connection with the general  release of Servent.  Such  capitalized  software
development  costs  amounted to  $1,813,000  and  $1,565,000 in the fiscal years
ended  June  30,  1997  and  1998,  respectively,  of  which  $426,000  has been
amortized.


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  elects 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, 1996, 1997 and 1998, the Company's  hardware purchases from IBM totaled $5.2
million, $5.4 million and $7.4 million, respectively.


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.

                                      -10-
<PAGE>

     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, 1998, the Company employed 305 persons full-time, of whom 63
were engaged in sales and  marketing;  143 were engaged in customer  service and
support,  and  installation;   64  were  engaged  in  programming  and  software
development   and   quality   assurance;   and  35  were   engaged  in  finance,
administration  and  management.  In addition,  34 were  employed on a part-time
basis  (17 of  whom  were  engaged  in  administrative  functions).  None of the
Company's employees are covered by collective bargaining agreements. The Company
believes  that  it  has  been  successful  in  attracting   skilled   personnel.
Competition  for  experienced   sales  and  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

                                       -11-
<PAGE>

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 Atlanta and Chicago.


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.



                                       -12-
<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, 1996 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, 1996               $ 6.25              $ 4.75
     December 31, 1996                $ 6.50              $ 5.00
     March 31, 1997                   $ 6.50              $ 5.625
     June 30, 1997                    $ 6.00              $ 4.50
     September 30, 1997               $13.625             $ 5.375
     December 31, 1997                $16.125             $10.375
     March 31, 1998                   $16.25              $10.125
     June 30, 1998                    $19.50              $12.75

     As of August 14, 1998, the  approximate  number of holders of record of the
Common Stock was 179.

     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.


                                       -13-
<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, 1997 and 1998 and
for each of the three years  ended June 30,  1998 are  derived  from the audited
financial  statements included elsewhere herein. The selected financial data set
forth below for the Company as of June 30,  1994,  1995 and 1996 and for each of
the years ended June 30, 1994 and 1995 are derived from the 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 are included elsewhere in
this Annual Report on Form 10-K.

<TABLE>
<CAPTION>

                                                       FISCAL YEAR ENDED JUNE 30,
                                             1994(1)    1995       1996      1997      1998
                                             -------    ----       ----      ----      ----
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S>                                          <C>        <C>        <C>         <C>       <C>    
Revenue:
 System sales...........................     $27,871    $21,295    $20,905     $22,537   $30,157
 Service and support......                     9,598      9,948     12,145      13,866    16,457
                                              ------    -------    -------     -------   -------
                                              37,469     31,243     33,050      36,403    46,614
                                             -------    -------    -------     -------   -------
Cost of revenue:
 System sales...........................      14,563     12,610     11,672      12,640    16,064
 Service and support....................       5,275      5,723      6,624       7,144     8,952
                                             -------    -------    -------     -------   -------
                                              19,838     18,333     18,296      19,784    25,016
                                             -------    -------    -------     -------   -------
   Gross profit.........................      17,631     12,910     14,754      16,619    21,598
                                             -------    -------    -------     -------   -------
Operating expenses:
 Sales and marketing....................       8,765      8,146      8,346       8,306    10,078
 General and administrative.............       2,550      2,251      2,296       2,434     2,839
 Research and development...............       2,620      2,907      2,248       2,693     3,455
 Severance expense......................          --        378         --          --        --
                                             -------    -------    -------     -------   -------
   Total operating expenses.............      13,935     13,682     12,890      13,433    16,372
                                             -------    -------    -------     -------   -------
   Operating income (loss)                     3,696       (772)     1,864       3,186     5,226
Interest income.........................         129        374        408         376       304
                                             -------    -------    -------     -------   -------
   Income (loss) before taxes...........       3,825       (398)     2,272       3,562     5,530
Provision (benefit) for income taxes....       1,474       (171)       922       1,275     1,991
                                             -------    -------    -------     -------   -------
   Net income (loss)....................     $ 2,351    $  (227)   $ 1,350     $ 2,287   $ 3,539
                                             =======    =======    =======     =======   =======
Basic earnings per share:
 Net income (loss) per share............     $  0.69    $ (0.06)   $  0.34     $  0.60   $  0.98
                                             =======    =======    =======     =======   =======
 Weighted average common
  shares outstanding....................       3,410      4,002      4,003       3,813     3,601
                                             =======    =======    =======     =======   =======
Diluted earnings per share:
 Net income (loss) per share............     $  0.69    $ (0.06)   $  0.34     $  0.60   $  0.90
                                             =======    =======    =======     =======   =======
 Weighted average common and
  common equivalent shares   
  outstanding...........................       3,410      4,002      4,011       3,838     3,928
                                             =======    =======    =======     =======   =======
  

BALANCE SHEET DATA
(AT PERIOD END):
Working capital.........................     $15,222    $15,172    $14,797(2)  $11,720   $15,832
Total assets............................      25,157     23,145     25,832      27,681    34,615
Stockholders' equity....................      17,838     17,631     18,981      18,764    23,856
---------------------
<FN>
(1) Includes in general and  administrative  expenses a compensation  expense of
$240,500  resulting from the difference  between the exercise price and the fair
market value of the Common Stock underlying the 370,000 stock options granted in
December  1993.  Excluding  this charge,  general and  administrative  expenses,
operating  income,  net  income  and  net  income  per  share  would  have  been
$2,309,000, $3,937,000, $2,592,000 and $0.76, respectively.

(2) Certain items in prior years financial statements have been reclassified for
comparative purposes.  See "Note 1. Summary of Significant Accounting Policies,"
to the audited financial statements included elsewhere herein.
</FN>
</TABLE>


                                      -14-
<PAGE>

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


GENERAL

     The Company was established to provide  innovative  software solutions that
meet the  changing  business  demands  of  distribution  operations  within  the
extended  supply  chain.  Prophet 21  develops,  markets and supports a complete
suite of Year 2000 compliant,  distribution-centric  enterprise applications for
either Windows NT or UNIX for finance,  order management,  inventory management,
purchasing  and   electronic   commerce.   In  addition,   Prophet  21  provides
industry-specific,  distribution-centric enterprise solutions for select markets
including  industrial,  automotive,  aerospace and defense,  electrical  supply,
electronics, and plumbing and HVAC.

     The Company's  revenue is derived primarily from the sale of either Prophet
21 Acclaim or Prophet 21 Servent  Software  Solutions.  Other sources of revenue
include:  customer support maintenance  contracts,  equipment  maintenance (when
purchased via Prophet 21), the sale of optional  third-party  software  products
and training services provided by the Company's  Educational Services Department
which began operations in fiscal 1998. Each Prophet 21 Acclaim Solution includes
the  Prophet 21 Acclaim  Software,  an IBM RISC  System/6000  computer,  various
optional  third-party  software  products  and  hardware  components,  training,
support and installation.  Each Prophet 21 Servent Solution includes the Prophet
21  Servent  Software,   training,  support  and  installation.   The  Company's
Educational  Services  Department  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.

     In fiscal 1996, the Company  introduced its next  generation  UNIX product,
Prophet 21 Acclaim. A complete  distribution  industry  management solution that
combines  the  functionality  of the  traditional  Prophet  21  System  with the
technology  of  Progress  Software  Corporation's  DBMS.  Prophet  21 Acclaim is
targeted  for sales to new and  current  Prophet  21 XL  customers.  It has been
designed so that current XL users can move to this new product while  preserving
their  existing  technology  infrastructure.  The general  release of Prophet 21
Acclaim began late in the second quarter of fiscal 1997.

     In the second  quarter of fiscal 1998,  the Company  introduced  its newest
product,  Prophet 21 Servent,  a fully  integrated  Microsoft  Windows  NT-based
client/server  software suite.  Servent is targeted for  medium-sized  companies
looking to solve their distribution-centric business requirements with a Windows
NT  client/server  solution.  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 Servent product is suitable for distribution oriented
companies,  as well as businesses  that have a  distribution  component of their
own. The general release of Servent began in the third quarter of fiscal 1998.

                                      -15-
<PAGE>

     The  statements  contained in this Annual  Report on Form 10-K that are not
historical facts are  forward-looking  statements (within the meaning of Section
21E of the  Securities  Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things,  the use of forward-looking  terminology such as "believes,"  "expects,"
"may,"  "will,"  "should"  or  "anticipates"  or the  negative  thereof or other
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,  Year 2000 compliance 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.




                                       -16-
<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          1997 over      1998 over
                                        June 30,                Fiscal         Fiscal
                               ------------------------
                                1996     1997      1998          1996           1997
                                ----     ----      ----          ----           ----

<S>                             <C>      <C>       <C>            <C>           <C>  
Revenue:
 System sales.................  63.3%    61.9%     64.7%          7.8%          33.8%
 Service and support..........  36.7     38.1      35.3          14.2           18.7
                               -----    -----     -----
                               100.0    100.0     100.0          10.1           28.0
                               -----    -----     -----
Cost of revenue:
 System sales.................  35.3     34.7      34.5           8.3           27.1
 Service and support..........  20.0     19.6      19.2           7.9           25.3
                               -----    -----     -----
                                55.3     54.3      53.7           8.1           26.4
                               -----    -----     -----
   Gross profit...............  44.7     45.7      46.3          12.6           30.0
                               -----    -----     -----

Operating expenses:
 Sales and marketing..........  25.3     22.8      21.6          (0.5)          21.3
 General and administrative...   6.9      6.7       6.1           6.0           16.6
 Research and development.....   6.8      7.4       7.4          19.8           28.3
                               -----    -----     -----
   Total operating expenses...  39.0     36.9      35.1           4.2           21.9
                               -----    -----     -----
   Operating income...........   5.7      8.8      11.2          70.9           64.0
Interest income...............   1.2      1.0       0.7          (7.8)         (19.1)
   Income before income
   taxes......................   6.9      9.8      11.9          56.8           55.2
Provision for income taxes....   2.8      3.5       4.3          38.3           56.2
                               -----    -----     -----
   Net income.................   4.1%     6.3%      7.6%         69.4           54.7
                               =====    =====     =====
</TABLE>

                                       -17-
<PAGE>

     FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

     REVENUE.  Revenue  increased by 28.0% or $10,211,000,  from  $36,403,000 in
fiscal 1997 to  $46,614,000  in fiscal 1998.  System sales revenue  increased by
33.8% or  $7,620,000,  from  $22,537,000 in fiscal 1997 to $30,157,000 in fiscal
1998. This increase was attributable primarily to sales of the Company's Prophet
21 Acclaim  product.  Also  contributing to the increase in system sales revenue
were  sales of the  Company's  new  Servent  product,  which  began in the Third
Quarter of Fiscal  1998 and,  to a lesser  extent,  the  increase in the sale of
optional Prophet 21 software.  Service and support revenue increased by 18.7% or
$2,591,000,  from $13,866,000 in fiscal 1997 to $16,457,000 in fiscal 1998. 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 new Educational  Services division and, to
a lesser extent, sales of services related to the Company's new Servent product.

     GROSS PROFIT. The Company's gross profit increased by 30.0%, or $4,979,000,
from  $16,619,000  in fiscal 1997 to  $21,598,000  in fiscal 1998.  Gross profit
margin  increased  from 45.7% of  revenue in fiscal  1997 to 46.3% of revenue in
fiscal 1998.  Gross profit from system sales  increased by 42.4%, or $4,196,000,
from  $9,897,000  in fiscal 1997 to  $14,093,000  in fiscal  1998.  Gross profit
margin attributable to system sales increased from 43.9% of system sales revenue
in fiscal 1997 to 46.7% in fiscal 1998.  The  increases in such gross profit and
gross profit margin were  attributable  primarily to the increased  sales of the
Company's  Prophet  21 Acclaim  product  and to the sales of the  Company's  new
Servent  product.  Gross  profit from service and support  revenue  increased by
11.6%, or $783,000,  from $6,722,000 in fiscal 1997 to $7,505,000 in 1998. Gross
profit margin  attributable to service and support revenue  decreased from 48.5%
of service  and  support  revenue in fiscal  1997 to 45.6% in fiscal  1998.  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
such gross profit margin was attributable primarily to an increase in salary and
staffing expenses  associated with the Company's Education Services division and
Servent support division.

     SALES AND MARKETING  EXPENSES.  Sales and marketing  expenses  increased by
21.3%,  or $1,772,000,  from  $8,306,000 in fiscal 1997 to $10,078,000 in fiscal
1998,   but   decreased  as  a  percentage  of  revenue  from  22.8%  to  21.6%,
respectively.  Such  expenses  increased  in absolute  dollars due  primarily to
increased commission expenses associated with the Company's increased sales, and
to a lesser extent,  increased costs associated with the Company's annual User's
Conference. Sales and marketing expenses decreased as a percentage of revenue as
a result of increased sales volume.

     GENERAL AND ADMINISTRATIVE  EXPENSES.  General and administrative  expenses
increased by 16.6%, or $405,000, from $2,434,000 in fiscal 1997 to $2,839,000 in
fiscal  1998,  but  decreased  as a  percentage  of  revenue  from 6.7% to 6.1%,
respectively.  The  increase in absolute  dollars in general and  administrative
expenses  was due to  increases  in  compensation  expenses and fees paid to the
Company's outside professionals.  General and administrative  expenses decreased
as a percentage of revenue as a result of increased sales volume.


                                       -18-
<PAGE>

     RESEARCH  AND  DEVELOPMENT  EXPENSES.  Research  and  development  expenses
increased by 28.3%, or $762,000, from $2,693,000 in fiscal 1997 to $3,455,000 in
fiscal 1998, but remained constant as a percentage of revenue at 7.4%.  Research
and  development  expenses  increased  in absolute  dollars due  primarily to an
increase in salary  expenses and  staffing.  Research and  development  expenses
remained  constant as a  percentage  of revenue as a result of  increased  sales
volume.  The  Company  also  capitalized   $1,565,000  in  software  development
expenditures during fiscal 1998.

     INCOME  TAXES.  The  Company's  effective  tax rate was  35.8% and 36.0% in
fiscal 1997 and 1998, respectively.

     FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996

     REVENUE.  Revenue  increased by 10.1%, or $3,353,000,  from  $33,050,000 in
fiscal 1996 to  $36,403,000  in fiscal 1997.  System sales revenue  increased by
7.8%, or  $1,632,000,  from  $20,905,000 in fiscal 1996 to $22,537,000 in fiscal
1997.  This  increase was  attributable  primarily to sales of the Company's new
Prophet  21 Acclaim  product  which  began late in the second  quarter of fiscal
1997.  Such increase was offset,  in part, by a decrease in programming  revenue
and by lower sales  volume of Prophet 21 XL Software  upgrades as many  existing
customers,  during the first quarter of fiscal 1997, were evaluating  whether to
upgrade to XL9, the latest version of the Company's XL Software, or purchase the
new Prophet 21 Acclaim product.  Service and support revenue increased by 14.2%,
or  $1,721,000,  from  $12,145,000 in fiscal 1996 to $13,866,000 in fiscal 1997.
This  increase  was  attributable  primarily to an increase in the number of new
users who have entered into maintenance  contracts and, to a lesser extent, to a
price increase  implemented by the Company on such maintenance  contracts during
the second  quarter of fiscal 1997 and to an increase in services  performed  by
the Company in connection with the general release of the new Prophet 21 Acclaim
product.

     GROSS PROFIT. The Company's gross profit increased by 12.6%, or $1,865,000,
from  $14,754,000  in fiscal 1996 to  $16,619,000  in fiscal 1997.  Gross profit
margin  increased  from 44.7% of  revenue in fiscal  1996 to 45.7% of revenue in
fiscal 1997. Gross profit from system sales increased by 7.2%, or $664,000, from
$9,233,000  in fiscal 1996 to  $9,897,000  in fiscal 1997.  Gross profit  margin
attributable  to system sales  decreased  from 44.2% of system sales  revenue in
fiscal 1996 to 43.9% in fiscal  1997.  The  increase in gross profit from system
sales was  attributable  primarily  to sales of the  Company's  new  Prophet  21
Acclaim  product  which  began late in the second  quarter of fiscal  1997.  The
decrease in gross profit margin from system sales was attributable  primarily to
decreased  sales  volume of  optional  Prophet 21  software  which,  in general,
carries higher margins.  Gross profit from service and support revenue increased
by 21.8%, or $1,201,000,  from $5,521,000 in fiscal 1996 to $6,722,000 in fiscal
1997. Gross profit margin  attributable to service and support revenue increased
from  45.5% of service  and  support  revenue in fiscal  1996 to 48.5% in fiscal
1997.  The  increases  in  such  gross  profit  and  gross  profit  margin  were
attributable  primarily  to an  increase  in the  number  of new  users who have
entered into maintenance  contracts and, to a lesser extent, to a price increase
implemented  by the  Company  on such  maintenance  contracts  during the second
quarter of fiscal 1997 and to an 

                                       -19-
<PAGE>

increase in services  performed  by the Company in  connection  with the general
release of the new Prophet 21 Acclaim product.

     SALES AND  MARKETING  EXPENSES.  Sales  and  marketing  expenses  decreased
slightly by 0.5%,  or $40,000,  from  $8,346,000 in fiscal 1996 to $8,306,000 in
fiscal  1997,  and  decreased  as a  percentage  of revenue from 25.3% to 22.8%,
respectively.  Sales and marketing expenses decreased in absolute dollars and as
a percentage of revenue due primarily to the fact that the User's Conference was
scheduled  only once in fiscal 1997 and, to a lesser extent,  reduced  marketing
costs related to a decrease in staffing. Such decreases were offset, in part, by
increased  salesperson  compensation and to increased marketing costs associated
with the new Prophet 21 Acclaim product.

     GENERAL AND ADMINISTRATIVE  EXPENSES.  General and administrative  expenses
increased by 6.0%, or $138,000,  from $2,296,000 in fiscal 1996 to $2,434,000 in
fiscal  1997,  but  decreased  as a  percentage  of  revenue  from 6.9% to 6.7%,
respectively.  The  increase in absolute  dollars in general and  administrative
expenses  was  due  to  an  increase  in  compensation  expenses.   General  and
administrative  expenses  decreased  as a  percentage  of revenue as a result of
increased sales volume.

     RESEARCH  AND  DEVELOPMENT  EXPENSES.  Research  and  development  expenses
increased by 19.8%, or $445,000, from $2,248,000 in fiscal 1996 to $2,693,000 in
fiscal  1997,  and  increased  as a  percentage  of  revenue  from 6.8% to 7.4%,
respectively.  Such  increases  were due  primarily  to an  increase  in  salary
expenses and  staffing.  The Company  also  capitalized  $1,813,000  in software
development expenditures during fiscal 1997.

     INCOME  TAXES.  The  Company's  effective  tax rate was  40.6% and 35.8% in
fiscal 1996 and 1997, 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 from (used by) operations was $1,263,000, $5,773,000 and ($638,000) for the
fiscal years ended June 30, 1996, 1997 and 1998, respectively.

     The Company's  working  capital was $11,720,000 and $15,832,000 at June 30,
1997 and 1998, respectively.

     The Company  invested  $1,069,000,  $1,440,000  and  $1,657,000  in capital
equipment  and   leasehold   improvements   in  fiscal  1996,   1997  and  1998,
respectively.  There are no other material  commitments for capital expenditures
currently  outstanding.  The Company also invested  $1,813,000 and $1,565,000 in
software  development costs which were capitalized during the fiscal years ended
June 30, 1997 and 1998.

                                      -20-
<PAGE>

     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.

     In fiscal 1997, the Company's  Board of Directors  approved  resolutions to
repurchase  up to 600,000  shares of the  Company's  Common Stock in open market
purchases.  As of June 30, 1998, the Company had repurchased 442,900 shares at a
cost of $2,518,000.

     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.


YEAR 2000 COMPLIANCE

     The  Company  believes  that it has  sufficiently  assessed  its  state  of
readiness with respect to its Year 2000 compliance. The Company does not believe
that Year 2000  compliance  will result in material  investments by the Company,
nor does the Company anticipate that the Year 2000 Problem will have any adverse
effects on the business operations or financial  performance of the Company. The
Company  does not  believe  that it has any  material  exposure to the Year 2000
Problem with respect to its own information systems.  There can be no assurance,
however,  that the Year 2000 Problem  will not  adversely  affect the  Company's
business, operating results and financial condition.

     The Company  believes  that each of its  products  is Year 2000  compliant,
however,  it has no control over  whether  software  modification  made by third
parties or the combination of its products with the software  developed by third
parties and combined  with the Company's  products will be Year 2000  compliant.
Additionally,  there  can be no  assurance  that  such  potential  instances  of
non-compliance  will not  adversely  affect the  Company's  business,  operating
results and  financial  condition.  The Company has  established  no reserve for
auditing its software  products or for correcting  Year 2000  compliance  issues
with such products.

     Although the Company  believes its  products are Year 2000  compliant,  the
purchasing  patterns of customers  and  potential  customers  may be affected by
issues  associated with the Year 2000 Problem.  As companies expend  significant
resources to correct their current data storage  solutions,  these  expenditures
may  result in  reduced  funds to  purchase  products  as those  offered  by the
Company. There can be no assurance that the Year 2000 Problem will not adversely
affect the  Company's  business,  operating  results  and  financial  condition.
Conversely,  the Year 2000  Problem  may cause  other  companies  to  accelerate
purchases,  thereby  causing an increase in  short-term  demand and a consequent
decrease in long-term demand for the Company's products.


                                      -21-
<PAGE>


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.

      Not applicable.





                                      -22-
<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
1998 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 1998  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 1998
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 1998 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.



                                      -23-
<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 Financial  Statements and Schedule
            on Page F-1.

(a)  (2)    Financial Statement Schedule.

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

(a)  (3)    Exhibits.

            Reference is made to the Index to Exhibits on Page 26.

(b)         Reports on Form 8-K.

            No reports on Form 8-K have been filed  during the fiscal year ended
            June 30, 1998.



                                      -24-
<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 23rd day of
September, 1998.


                                          PROPHET 21, INC.



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


                                      -25-
<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 23, 1998
------------------------
  Charles L. Boyle, III       Officer and Director
                              (Principal Executive Officer)


/s/Thomas M. Giuliani         Chief Financial Officer and     September 23, 1998
------------------------
  Thomas M. Giuliani          Treasurer (Principal
                              Financial and Accounting
                               Officer)


/s/John E. Meggitt, Ph.D      Chairman of the Board and       September 23, 1998
------------------------
  John E. Meggitt, Ph.D.      Director
 


/s/Dorothy M. Meggitt         Secretary and  Director         September 23, 1998
------------------------
  Dorothy M. Meggitt


/s/Louis J. Cissone           Director                        September 23, 1998
------------------------
  Louis J. Cissone



/s/Mark A. Timmerman          Director                        September 23, 1998
------------------------
  Mark A. Timmerman



                                      -26-
<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 of the Company adopted  December 6, 1993,
                       as amended December 15, 1993.  (Incorporated by reference
                       to Exhibit 4.1 to the Company's Registration Statement on
                       Form S-1 (File Number 33-74276) which became effective on
                       March 10, 1994.)

   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*                Employment Agreement dated as of July 1, 1993 between the
                       Company and Neil Jaffe.  (Incorporated  by  reference  to
                       Exhibit 10.4 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 April 20, 1995, such amendments filed herewith.

                                      -27-
<PAGE>

EXHIBIT
   NO.                 DESCRIPTION OF EXHIBIT
-----------            ----------------------

  10.4*                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.)

  10.5*                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.)

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

  10.7*                Indemnification  Agreement dated as of December 6,  1993
                       between the Company  and Thomas  F. Ward.  (Incorporated
                       by   reference   to  Exhibit   10.9  to  the   Company's
                       Registration   Statement   on  Form  S-1  (File   Number
                       33-74276) which became effective on March 10, 1994.)

  10.8*                Indemnification  Agreement  dated as of  December 6, 1993
                       between  the Company  and Neil  Jaffe.  (Incorporated  by
                       reference to Exhibit 10.10 to the Company's  Registration
                       Statement on Form S-1 (File Number 33-74276) which became
                       effective on March 10, 1994.)

  10.9*                Indemnification  Agreement  dated as of  December 6, 1993
                       between the Company and Richard Hercus.  (Incorporated by
                       reference to Exhibit 10.11 to the Company's  Registration
                       Statement on Form S-1 (File Number 33-74276) which became
                       effective on March 10, 1994.)

  10.10**              Lease dated July 1,  1998 by and between John E. Meggitt
                       and Dorothy M. Meggitt as Landlord,  and the Company, as
                       Tenant.
  10.11                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.)

  10.12                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.)

                                      -28-
<PAGE>

EXHIBIT
   NO.                 DESCRIPTION OF EXHIBIT
-----------            ----------------------

  10.13                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.)

  10.14                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.)

  10.15*               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.)

  10.16*               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.)

  10.17*               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.)

   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.)

   27                  Financial Data Schedule.



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


                                      -29-
<PAGE>




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


                                                                          Page
                                                                          ----

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

Consolidated Balance Sheets as of
  June 30, 1997 and 1998...................................................F-3

Consolidated Statements of Operations for the
  years ended June 30, 1996, 1997 and 1998.................................F-4

Consolidated Statements of Stockholders'
  Equity for the years ended
  June 30, 1996, 1997 and 1998.............................................F-5

Consolidated Statements of Cash Flows for the
  years ended June 30, 1996, 1997 and 1998.................................F-6

Notes to Consolidated Financial Statements.................................F-7

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

Schedule II................................................................S-2




                                       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  sheets  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  present  fairly,  in all material  respects,  the  financial  position of
Prophet  21, Inc.  and its  Subsidiaries  as of June 30, 1998 and 1997,  and the
results of their  operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We  conducted  our audits in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP
August 17, 1998



                                      F-2
<PAGE>

                      PROPHET 21, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                        (In Thousands, Except Shares)
<TABLE>
                                                                     June 30,
                                                      ---------------------------------
                                                                 1997          1998
                                                                 ----          ----
                                     ASSETS
<S>                                                         <C>            <C>     
Current assets
  Cash and cash equivalents............................     $  1,829       $  2,206
  Marketable securities................................        4,082          1,555
  Accounts receivable, net of allowance
   for doubtful accounts of $218
   and $240, respectively..............................       10,412         17,201
  Billed and unearned maintenance contracts............        1,760          2,016
  Inventories..........................................        1,117          1,402
  Deferred income taxes................................          163            203
  Prepaid and other current assets.....................          437            797
                                                             -------       --------
    Total current assets...............................       19,800         25,380
Long-term marketable securities........................        2,835          2,825
Equipment and improvements, net........................        2,536          2,887
Software development costs, net........................        2,271          3,410
Other assets...........................................          239            113
                                                            --------       --------
     Total assets......................................     $ 27,681       $ 34,615
                                                            ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable......................................    $  3,367       $  3,690
  Accrued expenses and other liabilities................       1,171          1,540
  Commissions payable...................................         479            808
  Taxes payable.........................................         620            668
  Profit sharing plan contribution payable..............         290            391
  Deferred income.......................................       2,153          2,451
                                                            --------       --------
    Total current liabilities...........................       8,080          9,548
                                                            --------       --------

Deferred income taxes...................................         837          1,211
                                                            --------       --------
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; 4,002,500 and 4,153,642 shares issued,
   respectively; 3,559,600 and 3,710,742 outstanding,
   respectively.........................................          40             42
  Additional paid-in capital............................       8,835         10,386
  Retained earnings.....................................      12,407         15,946
  Treasury stock at cost, 442,900 shares................      (2,518)        (2,518)
                                                            --------       --------
    Total stockholders' equity..........................      18,764         23,856
                                                            --------       --------
    Total liabilities and stockholders' equity..........    $ 27,681       $ 34,615
                                                            ========       ========


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       F-3
<PAGE>

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



                                                  Year Ended June 30,
                                        ----------------------------------------
                                            1996         1997          1998
                                            ----         ----          ----

Revenue:
  System sales.......................      $20,905      $22,537       $30,157
  Service and support................       12,145       13,866        16,457
                                           -------      -------       -------
                                            33,050       36,403        46,614
                                           -------      -------       -------
Cost of revenue:
  System sales.......................       11,672       12,640        16,064
  Service and support................        6,624        7,144         8,952
                                           -------      -------       -------
                                            18,296       19,784        25,016
                                           -------      -------       -------
  Gross profit.......................       14,754       16,619        21,598
                                           -------      -------       -------

Operating expenses:
  Sales and marketing................        8,346        8,306        10,078
  General and administrative.........        2,296        2,434         2,839
  Research and development...........        2,248        2,693         3,455
                                           -------      -------       -------
                                            12,890       13,433        16,372
                                           -------      -------       -------
   Operating income..................        1,864        3,186         5,226
Interest income......................          408          376           304
                                           -------      -------       -------
Income before taxes..................        2,272        3,562         5,530
Provision for income taxes...........          922        1,275         1,991
                                           -------      -------       -------
Net income...........................      $ 1,350      $ 2,287       $ 3,539
                                           =======      =======       =======
Basic earnings per share:
  Net income per share...............      $   .34      $   .60       $   .98
                                           =======      =======       =======
Weighted average common shares 
    outstanding......................        4,003        3,813         3,601
                                           =======      =======       =======
Diluted earnings per share:
  Net income per share...............      $   .34      $   .60       $   .90
                                           =======      =======       =======
  Weighted average common and common 
    equivalent shares outstanding....        4,011        3,838         3,928
                                           =======      =======       =======




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

                                       F-4
<PAGE>

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


                                                         Additional                                     Total
                                      Common Stock         Paid-In       Retained       Treasury     Stockholders'
                                      ------------            
                                   Shares      Amount     Capital        Earnings        Stock          Equity
                                   ------      ------     -------        --------       --------     -------------

<S>                                  <C>       <C>        <C>            <C>           <C>            <C>     
Balance, June 30, 1995 ........      4,002     $    40    $  8,821       $  8,770      $     --       $ 17,631
Net income ....................                                             1,350                        1,350
                                   --------    -------    --------       --------       -------       --------
Balance, June 30, 1996 ........      4,002          40       8,821         10,120            --         18,981
Repurchase of common stock ....       (443)                                              (2,518)        (2,518)
Stock option transactions .....                                 14                                          14
Net income ....................                                             2,287                        2,287
                                   --------    -------    --------       --------       -------       --------
Balance, June 30, 1997 ........      3,559          40       8,835         12,407        (2,518)        18,764
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
Net income ....................                                             3,539                        3,539
                                  --------     -------    --------       --------       -------       --------
Balance, June 30, 1998 ........      3,711     $    42    $ 10,386       $ 15,946      $ (2,518)      $ 23,856
                                  ========     =======    ========       ========      ========       ========















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

                                       F-5
<PAGE>

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

<TABLE>
<CAPTION>

                                                                   Year Ended June 30,
                                                          ----------------------------------
                                                             1996          1997       1998
                                                             ----          ----       ----

<S>                                                         <C>          <C>        <C>    
Cash flows from operating activities:
Net income..............................................    $ 1,350     $ 2,287    $ 3,539
                                                            -------     -------    -------
Adjustments to reconcile net income to
 net cash provided by (used by) operating activities:
  Depreciation and amortization.........................      1,006       1,047      1,778
  Gain on sale of equipment.............................         --         (13)        (3)
  Provision for losses on accounts receivable...........        247         233        259
  Deferred taxes........................................        150         693        334
(Increases) decreases in operating assets:             
  Accounts receivable...................................     (2,232)       (243)    (7,266)
  Billed and unearned maintenance.......................        (62)       (133)       (38)
  Inventories...........................................       (574)        429       (285)
  Prepaid expenses and other current assets.............         41         181       (360)
Increases in operating liabilities:                    
  Accounts payable......................................        456         445        323
  Accrued expenses......................................        337         407        634
  Taxes payable.........................................         --         197         48
  Profit sharing plan contribution payable                      225          40        101
  Deferred income.......................................        319         203        298
                                                            -------     -------    -------
  Total adjustments.....................................        (87)      3,486     (4,177)
                                                            -------     -------    -------
Net cash provided (used) by operating activities........      1,263       5,773       (638)
                                                            --------    --------   -------
Cash flows from investing activities:
  Cash purchases of equipment and improvements..........     (1,069)     (1,440)    (1,657)
  Software development costs............................       (458)     (1,813)    (1,565)
  Purchase of marketable securities.....................     (9,160)     (5,550)    (2,975)
  Maturity of marketable securities.....................      5,450       4,540      5,470
  Other assets..........................................       (230)         26        126
                                                            --------    --------   -------
Net cash used by investing activities...................     (5,467)     (4,237)      (601)
                                                            -------     -------    -------
Cash flows from financing activities:
  Purchase of treasury stock............................         --      (2,518)        --
  Stock option transactions.............................         --         (49)        49
  Employee stock purchase plan..........................         --          --        101
  Stock options exercised including tax benefits........         --          --      1,466
                                                            -------     -------    -------
  Net cash (used) provided by financing activities......         --      (2,567)     1,616
                                                            -------     -------    -------
  Net (decrease) increase in cash and cash equivalents..     (4,204)     (1,031)       377
  Cash and cash equivalents at beginning of period......      7,064       2,860      1,829
                                                            -------     -------    -------
  Cash and cash equivalents at end of period............    $ 2,860     $ 1,829    $ 2,206
                                                            =======     =======    =======

  Supplemental cash flow disclosures:
    Income taxes paid...................................    $   847     $  395     $ 1,468
                                                            =======     =======    =======


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


                                       F-6
<PAGE>



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



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 amounts of revenue and expenses  during the
reporting  period.  Actual  results could differ from those  estimates.  Certain
items in prior year 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. At various times throughout the year, the
Company maintains cash balances in excess of FDIC limits.

     MARKETABLE SECURITIES:

     Marketable  securities  consist  primarily of governmental debt instruments
with an initial  maturity  of three  months or more.  The Company  accounts  for
investments in accordance with Statement of Financial Accounting Standards Board
("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.


     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-7
<PAGE>
                       PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                 (In Thousands)

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.   Leasehold
improvements  are amortized over the shorter of their estimated  useful lives or
remaining lease term. 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 income statement 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:

     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.  Billed  and  unearned  maintenance  at  June  30,  1997  and  1998
represents  amounts billed in advance to customers for maintenance in accordance
with contract terms.

     WARRANTY:

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

     CAPITALIZED SOFTWARE:

     The Company  capitalizes  software  development costs associated with a new
product  pursuant  to SFAS No.  86.  Such  costs  were  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 are charged to cost of sales. At June 30,
1997 and 1998,  the  Company  had  capitalized  $1,813  and  $1,565 of  software
development costs. All other research and development costs have been expensed.



                                       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):

     INCOME TAXES:

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

     NET INCOME PER SHARE:

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128  "Earnings  per Share"  ("SFAS 128") which has replaced the former rules for
earnings per share  computations,  presentation  and  disclosure.  Under the new
standard, basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares  outstanding  for the period.  Diluted  earnings  per share  reflects the
potential  dilution that could occur if  securities or other  contracts to issue
Common Stock were exercised or converted into Common Stock.  SFAS 128 requires a
dual  presentation  of basic and diluted  earnings  per share on the face of the
income statement.

     The Company has adopted  SFAS 128 during  fiscal year 1998 and, as required
by the  standard,  has restated all prior  period  earnings per share data.  The
Company's  diluted  earnings per share amounts as calculated  under SFAS 128 are
not  materially  different  from  those  computed  under the  former  accounting
standard.

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

                                                         Years Ended,
                                                           June 30,
                                                1996         1997         1998
                                                ----         ----         ----

Net Income .................................   $1,350       $2,287       $3,539
Weighted average common shares outstanding..    4,003        3,813        3,601
Basic earnings per share ...................   $ 0.34       $ 0.60       $ 0.98
Effect of dilutive securities:
  Stock Options.............................        8           25          327
Weighted average common and common
 equivalent shares outstanding .............    4,011        3,838        3,928
Diluted earnings per share .................   $ 0.34       $ 0.60       $ 0.90


                                       F-9
<PAGE>
                      PROPHET 21, INC. AND SUBSIDIARIES
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (In Thousands)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     NEW ACCOUNTING STANDARDS:

     Statement   of   Financial   Accounting   Standards   No.  130   "Reporting
Comprehensive  Income" ("SFAS 130"), which was issued in June 1997, is effective
for fiscal  years  beginning  after  December  15,  1997.  SFAS 130  establishes
standards  for  reporting  and  disclosure  of  comprehensive   income  and  its
components in a full set of general-purpose  financial  statements.  The Company
believes  that it does not have a  significant  amount of  comprehensive  income
(loss),  as  defined,  if any.  Accordingly,  the  Company  believes  that  this
statement  will not have a  material  effect on its future  financial  statement
presentations.

     In  June  1997,   Statement  of  Financial  Accounting  Standards  No.  131
"Disclosures  About  Segments of an Enterprise and Related  Information"  ("SFAS
131")  was also  issued.  This  pronouncement  is  effective  for  fiscal  years
beginning  after  December 15, 1997 and  requires  disclosures  about  operating
segments and enterprise-wide disclosures about products and services, geographic
areas and major customers.  Effective July 1, 1998, the Company will comply with
the requirements of SFAS 131 and make the necessary disclosures.

     During 1997, the American  Institute of Certified Public Accountants issued
Statement  of Position  (SOP) 97-2,  "Software  Revenue  Recognition",  which is
effective for transactions entered into in fiscal years beginning after December
15, 1997,  and  supersedes SOP 91-1.  Management  does not  anticipate  that the
implementation of the guidance set forth in SOP 97-2 will have a material impact
on its current revenue recognition policies.


2.  EQUIPMENT AND IMPROVEMENTS:

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

                                                                 June 30,
                                                                 --------
                                                             1997        1998
                                                             ----        ----

Equipment...............................................   $ 2,197     $ 2,123
Computer systems........................................     3,971       5,196
Furniture and fixtures..................................       767         929
Leasehold improvements..................................       525         627
                                                           -------     -------
                                                             7,460       8,875
Accumulated depreciation
 and amortization.......................................    (4,924)     (5,988)
                                                           -------     --------
                                                            $2,536      $2,887
                                                            ======      ======

     Depreciation  and  amortization  expense of  $1,006,  $1,047 and $1,778 was
charged  to  operations  for the  years  ended  June 30,  1996,  1997 and  1998,
respectively.


                                       F-10
<PAGE>
                       PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                 (In Thousands)

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, 1998 are:

FISCAL YEAR                   RELATED PARTY     THIRD PARTY           TOTAL
-----------                   -------------     -----------           -----

1999....................         $   432          $    26           $  458
2000....................             446               --              446
2001....................             461               --              461
2002....................             475               --              475
2003....................             490               --              490
                                 -------          -------           ------
                                 $ 2,304          $    26           $2,330
                                 =======          =======           ======


     Rent expense,  including  related party  transactions,  for the years ended
June 30, 1996, 1997 and 1998 was $535, $539 and $542, respectively.


4.  INCOME TAXES:

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

                                                    YEAR ENDED JUNE 30,
                                            ------------------------------------
                                               1996        1997        1998
                                               ----        ----        ----
Federal:
  Current..............................       $ 675      $  611       $1,146
  Deferred.............................         113         569          334
                                               ----       -----        -----
                                                788       1,180        1,480
                                               ----       -----        -----
State:
  Current..............................          60           2           98
  Deferred.............................          37         124           --
                                               ----       -----        -----
                                                 97         126           98
                                               ----       -----        -----
Foreign:
  Current..............................          37         (31)          --

Additional paid in capital from
benefit of stock options exercised.....          --          --          413
                                               ----        ----        -----
                                              $ 922      $1,275       $1,991
                                               ====       =====        =====



                                      F-11
<PAGE>

                      PROPHET 21, INC. AND SUBSIDIARIES
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



4.  INCOME TAXES (CONTINUED):

     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  classified  as current or  non-current
depending  on the  classification  of the assets and  liabilities  to which they
relate.

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


                                                        YEAR ENDED JUNE 30,
                                                    ---------------------------

                                                      1996     1997      1998
                                                      ----     ----      ----
Statutory tax rate.............................        34%      34%        34%
State taxes, net of Federal benefit............         3        2          1
Prior period tax...............................        --        3         --
Non-deductible expense.........................         2       (1)         1
Other..........................................         2       (2)        --
                                                    -----     -----     -----
                                                       41%      36%        36%
                                                    =====    =====      =====


                                      F-12
<PAGE>


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


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


                                                           June 30,
                                                    ----------------------
                                                       1997       1998
                                                    ----------------------
Current deferred tax asset:
  Allowance for doubtful accounts.............      $    84     $   88
  Accrued vacation............................           57         89
  Inventory capitalization....................           22         26
                                                    -------     ------
                                                        163        203

Non-current deferred tax asset:
  Depreciation................................           37         46

Non-current deferred tax liability:
  Software development costs..................         (874)     (1,257)
                                                    -------     -------

    Total.....................................      $  (674)    $(1,008)
                                                    =======     =======


5.  RELATED PARTY TRANSACTIONS:

     The Company rents 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, 1996, 1997 and 1998 was $438, $452 and $467, respectively.


                                       F-13
<PAGE>

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

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 not 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  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, 1996, 1997 and 1998.

     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, 1996, 1997 and 1998 were $250, $290 and $378, respectively.


8.  STOCKHOLDERS' EQUITY:

     PREFERRED STOCK:

     The Company has an authorized  class of 1,500,000 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.

     STOCK OPTION PLAN:

     Under the Company's 1993 Stock Plan (the "Plan"),  the Company has reserved
1,000,000   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

                                       F-14
<PAGE>

                        PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


8.  STOCKHOLDERS' EQUITY (CONTINUED):

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   granted  stock  options  in  1995  under  the  Plan  in  the  form  of
non-qualified stock options.

     The Company  applies APB Opinion No. 25,  "Accounting  for Stock  Issued to
Employees" ("APB25") 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 methods
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 1997 and
1998 are required by SFAS 123 and are presented below.

     The Company granted stock options in 1996, 1997 and 1998 to employees which
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 grant date.  The options  granted in 1996,  1997 and 1998 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 1996, 1997 and 1998.



                                       F-15
<PAGE>

                      PROPHET 21, INC. AND SUBSIDIARIES
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


8.  STOCKHOLDERS' EQUITY (CONTINUED):

     A summary of the status of the Company's stock options as of June 30, 1996,
1997 and 1998 and the changes during the years then ended is presented below:


--------------------------------------------------------------------------------
                                                      Exercise Price    Weighted
                                          Shares(1)   Per Share          Average
--------------------------------------------------------------------------------
Options outstanding at June 30, 1995      474,900     $4.125 to $7.00     $6.51

                             Granted      105,000      $4.80 to $5.25     $5.12
                            Canceled       (7,400)              $5.00     $5.00
--------------------------------------------------------------------------------

Options outstanding at June 30, 1996      572,500     $4.125 to $7.00     $6.27

                             Granted      140,000               $5.25     $5.25
                            Canceled      (15,000)              $4.80     $4.80
--------------------------------------------------------------------------------

Options outstanding at June 30, 1997      697,500     $4.125 to $7.00     $6.10

                             Granted       98,000     $8.50 to $15.25     $9.71
                            Canceled      (22,500)    $5.25 to $12.75    $11.92
                           Exercised     (136,600)     $4.75 to $7.00     $6.84
--------------------------------------------------------------------------------

Options outstanding at June 30, 1998      636,400    $4.125 to $15.25     $6.27
Non-qualified Options Granted              10,000              $5.375    $5.375
                                          -------
                                          646,400    $4.125 to $15.25     $6.27
                                                         
Options exercisable at June 30,
                            1996          367,500     $4.125 to $7.00     $6.53
                            1997          497,500     $4.125 to $7.00     $6.45
                            1998          440,066     $4.125 to $7.00     $6.11
================================================================================

(1)  Not reported in thousands

     The weighted  average fair value of options  granted during 1996,  1997 and
1998 was $1.80, $1.84 and $3.38, respectively.


                                       F-16
<PAGE>

                       PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9.  STOCKHOLDERS' EQUITY (CONTINUED):

     The following  table  summarizes  information  concerning  outstanding  and
exercisable options as of June 30, 1998:

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

                      Options Outstanding                  Options Exercisable

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

                               Weighted       Weighted                  Weighted
 Range of         Number of     Average        Average      Number of    Average
 Exercise         Options(1)   Remaining   Exercise Price    Options    Exercise
  Prices                        Life                                     Price
--------------------------------------------------------------------------------

 $4.125 to $6.00    325,900       7.78          $4.81        197,566      $5.03
  $7.00 to $8.50    315,500       6.34          $7.36        242,500      $7.00
          $15.25      5,000       9.32         $15.25              0        N/A
--------------------------------------------------------------------------------
$4.125 to $15.25    646,400       7.11          $6.27        440,066       $6.11
--------------------------------------------------------------------------------

(1)  Not reported in thousands

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

                                                        June 30,
                                        ----------------------------------------
                                           1996          1997            1998
                                        ------------  ------------  ------------
Net Income:          As reported          $1,350        $2,287          $3,539
                     Pro forma             1,334         2,200           3,317

Income per Share:    As reported          $ 0.34        $ 0.60          $ 0.90
                     Pro forma              0.33          0.57            0.84

     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 1996, 1997 and 1998:  dividend yield
of 0.00%; risk-free interest rates of 5.48%, 6.43% and 6.05%; respectively,  the
expected life of options is estimated to be 4 years;  and a volatility of 32.75%
for all grants.

                                       F-17
<PAGE>

                       PROPHET 21, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9.  STOCKHOLDERS' EQUITY (CONTINUED):


     STOCK REPURCHASE PROGRAM:

     In fiscal 1997, the Company's  Board of Directors  approved  resolutions to
repurchase  up to 600,000  shares of the  Company's  Common Stock in open market
purchases.  As of June 30, 1998, the Company had repurchased 442,900 shares at a
cost of $2,518,000.


     1997 EMPLOYEE STOCK PURCHASE PLAN:

     In fiscal 1997, the Company's Board of Directors and shareholders  approved
the adoption of the 1997 Employee Stock Purchase Plan to make available  100,000
shares of the Company's Common Stock for purchase by the Company's employees. As
of June 30, 1998, the Company's  employees had purchased  9,542 shares at a cost
of $99,713.


                                      F-18
<PAGE>



                      REPORT OF INDEPENDENT ACCOUNTANTS


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


     Our report on the consolidated financial statements of Prophet 21, Inc. and
Subsidiaries  is included on page F-2 of this Form 10-K. In connection  with our
audits of such financial statements,  we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.

     In our opinion,  the financial  statement  schedule referred to above, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
present  fairly,  in all  material  respects,  the  information  required  to be
included therein.





PricewaterhouseCoopers LLP
August 17, 1998


                                       S-1
<PAGE>





                                                                     SCHEDULE II


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


Allowance for Doubtful Accounts

                        BALANCE AT     CHARGED TO
YEAR ENDED             BEGINNING OF     COSTS AND     DEDUCTIONS     BALANCE AT
  JUNE 30,                PERIOD        EXPENSES      WRITE-OFFS   END OF PERIOD
----------             ------------    ----------     ----------   -------------

  1996.............     $205,000        $247,337       $242,940       $209,397
  1997.............      209,397         232,660        223,946        218,111
  1998.............      218,111         259,404        237,515        240,000




                                       S-2