BEST SOFTWARE INC, 10-K, 1999-03-24

BEST SOFTWARE INC
10-K, 1999-03-24
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 1998

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

COMMISSION FILE NUMBER 0-23117

BEST SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

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VIRGINIA 7372 54-1222526
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(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
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11413 ISAAC NEWTON SQUARE
RESTON, VA 20190
(703) 709-5200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE

Indicate by a 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of February 24, 1999, there were 11,705,886 shares of the Registrant's
Common Stock, no par value, outstanding, which is the only outstanding class of
common or voting stock of the Registrant. As of that date, the aggregate market
value of the shares of Common Stock held by non-affiliates of the Registrant
(based on the closing price for the Common Stock as quoted by the Nasdaq
National Market on such date), was approximately $204,121,387.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year ended
December 31, 1998, are incorporated by reference into Part III of this report on
Form 10-K.
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PERIOD ENDING DECEMBER 31, 1998 FORM 10-K
BEST SOFTWARE, INC.

INDEX

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ITEM PAGE
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PART I
ITEM 1: Business.................................................... 1
ITEM 2: Properties.................................................. 9
ITEM 3: Legal Proceedings........................................... 9
ITEM 4: Submission of Matters to a Vote of Security Holders......... 10
PART II
ITEM 5: Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
ITEM 6: Selected Consolidated Financial Data........................ 12
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
ITEM 7a: Quantitative and Qualitative Disclosures About Market
Risk...................................................... 31
ITEM 8: Financial Statements and Supplementary Data................. 32
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 33
ITEM 11: Executive Compensation...................................... 34
ITEM 12: Security Ownership of Certain Beneficial Owners and
Management................................................ 35
ITEM 13: Certain Relationships and Related Transactions.............. 35
PART IV
ITEM 14: Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 35
Signatures.................................................................. 38
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Best Software, FAS, FAS Encore, FAS Report Writer, FAS Property Tax, Best!
AM, Best! HR, Best! InfoPlan, Abra Applicant, Abra Resume Scan, Abra OrgChart,
Abra Custom Studio, Abra Taxfile, Abra Recruiting Solution, Abra Toolkit, Abra
Link, Abra Paylink, Abra Multi-Suite Consolidation, Best Internet Recruiter,
Best! Imperativ HRMS, Best! Imperativ Asset Accounting and Best! Imperativ are
trademarks, SupportPlus and Abra SupportPlus are service marks, BEST! (the Best
logo), FASTrack, Abra Suite, Abra Software, Abra Attendance, Abra HR, Abra
Payroll and Abra Train are registered trademarks, and FAS SupportPlus is a
registered service mark of the Company. All other trademarks and registered
trademarks used in this Form 10-K are the property of their respective owners.
See "Intellectual Property Rights and Licenses" for more details.
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PART I

ITEM 1. BUSINESS

OVERVIEW

Best Software, Inc. is a leading supplier of corporate resource management
software solutions, helping organizations to better manage their people, assets
and budgeting processes. The Company's feature-rich, cost-effective solutions
enhance productivity by automating management, compliance and reporting
functions in areas of specialized expertise that entail complex and frequently
changing laws and regulations. The Company's solutions have been designed to
complement core accounting systems and are scaleable from stand-alone desktop
applications running on personal computers to multi-user work group and
client/server programs designed for use on personal computer local area
networks. As of December 31, 1998, the Company had over 47,000 licensed customer
locations, representing approximately 133,000 licensed seats. In addition to
revenue from product licenses, training and implementation services, the Company
derives significant recurring revenue from maintenance and support agreements.
The Company reaches its large customer base and target market through a
multi-channel sales and marketing strategy that includes its network of value-
added resellers, accounting firms and consultants ("Business Partners"), a
direct-response telesales operation, strategic marketing alliances and a direct
national account sales organization.

On October 3, 1997, the Company sold 2,750,000 shares of Common Stock at an
offering price of $13.00 per share (the "Initial Public Offering"). This
transaction generated approximately $32 million of net proceeds to the Company.
The Company's Common Stock trades on the Nasdaq National Market under the
symbol: BEST. In December 1997, the Company's Board of Directors announced a
change in the fiscal year end from March 31 to December 31. Consequently, the
Company's 1997 fiscal period was a nine-month transition period ended December
31, 1997. The 1998 fiscal period was a twelve-month period ended December 31,
1998.

In October 1998, the Company closed on the acquisition of certain
technological assets of HRSoft, Inc., a provider of human resource software. The
acquisition price was approximately $1.8 million cash including out-of-pocket
acquisition costs of approximately $200,000.

CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this Form 10-K which are not
statements of historical fact are forward-looking statements that involve risks
and uncertainties. Such forward-looking statements are made only as of the date
of this Form 10-K. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results" as well as those
discussed elsewhere in this Form 10-K.

CORPORATE BACKGROUND

The Company was incorporated in Virginia in 1982. Unless the context
otherwise requires, "Best", or the "Company" refers to Best Software, Inc., a
Virginia corporation, and its wholly-owned subsidiaries. The Company's principal
executive offices are located at 11413 Isaac Newton Square, Reston, Virginia
20190. The Company's telephone number is (703) 709-5200.

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BUSINESS

PRODUCTS AND SERVICES

The Company licenses software to organizations to help manage their
corporate resources -- people, assets, and budgeting processes. The Company also
provides professional services relating to implementation, system setup, data
conversion, training and technical support.

ACCOUNTING PRODUCTS GROUP

The Company's Accounting Products Group ("APG") include fixed asset
management products, corporate budgeting process solutions and other accounting
products.

In the fiscal year ending December 31, 1998, the Company derived
approximately 53% of its total revenue from the APG, including software
licenses, royalties and related maintenance and support agreements and training
services, for both the current Windows products and the previous generation of
DOS products. As of December 31, 1998, the Company had over 32,000 licensed
customer locations, and over 25,000 active maintenance and support agreements.

The Company's asset management products automate and streamline the complex
and tedious processes necessary to accurately and reliably track and account for
fixed assets, including sophisticated depreciation calculations; maintaining
detailed historical data on, as well as tracking the location of, assets across
the enterprise; maintaining accurate audit trails; and preparing management and
tax reports and forms on demand. Historically the Company's fixed asset
management products and services were distributed under the "FAS" label. In 1998
the Company released a client/server fixed asset management solution called
Best! Imperativ Asset Accounting (BIAA). The asset management products are
highly versatile and are designed to meet the customer's specific asset
management needs. These products can be integrated with many core accounting
systems and are offered separately or in integrated suites. The Company supports
these products through the SupportPlus membership program, which provides
customers with software updates and unlimited telephone support by the Company's
technical support staff.

In April 1998, the Company released the newest asset management system,
BIAA, a client/server solution that delivers control over fixed assets with
accurate, timely reporting at a lower total cost of ownership. The product
utilizes the Microsoft BackOffice platform and allows integration into a variety
of financial accounting packages. BIAA provides scalability and compliance with
changing Internal Revenue Service (IRS) and Generally Accepted Accounting
Principles (GAAP) rules.

The FAS and BIAA products extend the functionality of core accounting
systems by enabling managers to monitor, in real-time, the acquisition,
transfer, depreciation and retirement of fixed assets, calculate depreciation
for book and tax purposes, and track assets for maintenance and insurance
purposes. FAS for Windows maintains a database of extensive information on each
asset and prepares comprehensive management reports and tax reports and forms.
FAS for Windows is designed to calculate asset depreciation using a variety of
standard depreciation methods which can be defined for up to seven books and may
easily be customized for additional methodologies. FAS Encore and BIAA are
designed for businesses that require more rigorous asset management. FAS Encore
and BIAA extend the functionality of FAS for Windows with additional features
such as automatic transfers and partial disposals of assets, batch reporting of
asset status and activity, replacement value calculations, password security,
and a built-in Crystal Reports-based report writer for creating customized
reports.

The FASTrack asset tracking solution is a comprehensive asset tracking
solution that utilizes third-party bar code scanning and imaging technologies
that enable the Company's customers to maintain complete and accurate physical
inventories of assets across the enterprise and to track the location of mobile
assets, conduct and reconcile physical inventories and automatically update all
asset records quickly and easily in order to prevent loss of assets and the
inefficiencies associated with inaccurate depreciation calculations based on
obsolete inventories. FASTrack can be used on a stand-alone basis or can be
seamlessly integrated with both FAS for Windows and FAS Encore.

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FAS Property Tax, released in February 1998, is a comprehensive property
tax software program that automates and simplifies the personal property tax
filing and compliance process. The program utilizes FAS and BIAA asset data and,
based on each jurisdiction's requirements, completes various
jurisdiction-specific property tax forms. Best FAS Property Tax allows customers
to review and adjust valuations, calculate and compare estimated values with
actual assessed values, process tax bills and bill taxes back to various
departments or external customers.

The Company's current FAS products and BIAA are 32-bit Windows programs
written in C++ that are compatible with Windows 95, Windows 98 and Windows NT
environments. These products operate with a standard SQL databases (Sybase SQL
Anywhere, Microsoft SQL Server or Microsoft Access). The Company also offers
16-bit Windows programs that are compatible with Windows 3.x operating
environment. FASTrack supports multiple bar code readers, including those from
Intermec Corporation and ScanSource Inc., along with a wide range of bar code
labels.

The Company is currently developing a software product designed to automate
the corporate budgeting process. This product will be designed to function as a
stand-alone system or to integrate with core accounting systems.

HUMAN RESOURCES PRODUCTS GROUP

In the year ended December 31, 1998, the Company derived approximately 38%
of its total revenue from its human resource and payroll product line, including
software licenses, royalties, maintenance and support agreements, and training
and consulting services, for both Windows and DOS customers. As of December 31,
1998, the Company had over 14,000 licensed customer locations. In addition, the
Company had over 29,000 active maintenance and support agreements, which in
certain cases reflect the purchase of multiple maintenance and support
agreements by single HRPG customers.

The Company's human resources products integrate human resource, payroll,
recruitment and training data into a single database. As a result, the products
enable businesses to more quickly and easily access and update employee data,
current job and pay information, job and pay history, salary and performance
reviews, employee benefits data, workers' compensation information, education
and training data. These products can be integrated with many core accounting
systems and are offered separately or in integrated suites. Historically the
Company's human resources and payroll products and services were distributed
under the "Abra" label. Beginning in 1998, the Human Resource Products Group
(HRPG) released Best! Imperativ HRMS (BIHRMS), a client/server solution that
offers self-service capability with multiple human resource functionality. The
Company's human resources and payroll management products provide a
comprehensive solution for the management of human resources functions. The
Company supports its products through the SupportPlus membership program, which
provides customers with software updates and unlimited telephone support by the
Company's technical support staff.

In June 1998, the HRPG added Best! Imperativ HRMS, a human resource
management software which leverages the Microsoft BackOffice platform. The
system provides organizations with a browser-based, three-tier client/server
human resource solution with lower total cost of ownership. In December 1998,
the Company released Best! Imperativ HRMS roles functionality enabling human
resource tools for managers and employees. Best! Imperativ HRMS roles-based
self-service functionality provides managers a way to automate the many tasks
associated with developing high potential employees and improves service to
employees by substituting instantaneous web processes for traditional paper
processed work flow.

Best Internet Recruiter, released in February 1998, is a recruiting service
that enables employers to quickly and conveniently place job listings on some
Internet sites, then select and analyze resumes through a single Web site. The
product enables employers to cost-effectively manage their on-line recruiting
needs.

Abra HR automates the human resources function, enabling businesses to more
quickly and easily maintain and update employee and benefit information,
including employee profiles, current and historic compensation information,
education and employment history, skill set records, medical benefits and
savings plan enrollment eligibility data, and performance reviews. Utilizing a
variety of built-in reports, Abra HR also

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enables businesses to instantaneously prepare cost analyses, summaries of
employee productivity and regulatory reports, including reports under
affirmative action, health and safety, workers' compensation and immigration
regulations. In addition, Abra HR can be easily customized to meet other unique
reporting requirements of a business.

Abra Payroll is an in-house payroll solution that enables businesses to
meet their payroll needs more cost-effectively than by utilizing third-party
service providers. Abra Payroll also provides secure, real-time access to
payroll data and enables users to comply with Federal and state tax and
withholding requirements more easily and efficiently, including preparation of
Forms W-2, 1099 and 941. The product also includes direct deposit capabilities
and electronic tax filing capabilities and interfaces with many popular general
ledger programs.

Abra Attendance tracks employee absences and leave accruals with built-in
features that enable businesses to define absence codes, handle Family and
Medical Leave Act compliance, and manage accruals and carryovers. Abra
Attendance enables businesses to create an array of attendance plans for any
employee using different seniority, accrual and carryover rules. Abra Attendance
integrates with Abra Payroll to provide updates of vacation and other balances
on employee pay stubs.

Abra Recruiting Solution is an integrated resume scanning and applicant
tracking software product, consisting of Abra Resume Scan and Abra Applicant.
Using the Abra Recruiting Solution, businesses can scan, organize and evaluate
incoming resumes, as well as search and review stored resumes electronically to
find appropriate job candidates. Abra Applicant automates the labor-intensive
process of sorting resumes and selecting candidates and enables businesses to
more easily and efficiently match job applicants' key skills, experience and
educational background with their specific needs. In addition, Abra Applicant
maintains easy-to-access information relating to candidate interview status and
the interviewers' comments and includes numerous easy-to-use forms of
correspondence, including acknowledgment, invitation, offer and rejection
letters.

Abra Train is a skill-based training management solution that allows
businesses to automate the tracking of employee training requirements and
history, the scheduling and management of courses and certifications and the
evaluation of the effectiveness of such initiatives.

Abra OrgChart, released in December 1998, allows customers to create
organization charts with a flexible Windows-based charting system. It allows
departmental and enterprise-wide customization and can be updated quickly and
easily. It can include any information from the Abra Suite database and
therefore offers the ability to create "what-if" scenarios with familiar
drag-and-drop or cut-and-paste techniques.

During the quarter ended June 30, 1998, the Company introduced a
customization tool for the comprehensive human resource software package. The
Abra Suite Custom Studio allows users to easily and cost-effectively customize
their requirements through two new tools, Abra Toolkit for end users and
Developer's Toolkit for Business Partners. The Abra Toolkits allow users to
create custom screens with more features and flexibility, as well as modify the
menus with the most efficient actions, processes, reports and rules for their
organizations.

Abra Suite, which includes Abra HR, Abra Payroll, Abra Applicant, Abra
Resume Scan, Abra Train, Abra OrgChart, Multi-Site Consolidation, Toolkit, Link,
and Paylink is a comprehensive, fully integrated, 32-bit software solution for
human resource and payroll professionals. Abra Suite adds new functionality and
takes advantage of capabilities inherent in the Windows 95 and Windows NT
operating systems and Microsoft Visual Studio.

Abra products are written using Microsoft Visual FoxPro, an object-oriented
environment and data management tool.

EUROPEAN PRODUCTS GROUP

The Company's European Products Group (EPG) develops and sells products and
services for the management of human resources. They integrate human resource,
payroll, recruitment and training data into a

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single system. As a result, the EPG's products enable businesses to more quickly
and easily access and update employee data, current job and performance reviews,
employee benefits data, education and training data. These products can be
integrated with many core accounting systems. EPG supports its products by
providing customers with software updates and unlimited telephone support by the
EPG's technical support staff.

Best! HR for client/server provides all the standard HR-related
functionality through multiple jobs and positions, multiple rates of pay,
expatriate and supplemental pay in multiple languages and currencies. In
addition, the system enables the tracking of historical changes occurring
outside employee records, such as benefit carrier history and job description
history.

Best! AM is an applicant administration module that enables customers to
efficiently process large volumes of job applications, including unsolicited
applications. The software tracks the various processes involved in
administering applications including creating the job requisition, tracking
receipt of an application, evaluating the application, scheduling an interview,
accepting an applicant and notifying unsuccessful applicants. The module may be
operated as a stand alone or integrated into Best! HR.

HR/Charter is a third party organizational charting and analysis product
that allows businesses to create organizational charts directly from their HR
database with multiple reporting relationships. It allows companies to
restructure with "what-if" scenarios with various levels of customization on a
"real-time" basis.

Executive TRACK for Windows provides an intuitive, graphical user interface
for maintaining and presenting qualitative human resources information. It
includes modules for succession planning, management development, and competency
profiling. Executive TRACK is available as a Windows, Client Server and Intranet
solution in single-user, network and client/server versions. The system
interfaces with other HRIS mainframes/databases and allows import/export of data
to and from corporate databases. It may be customized to include a fully
relational, one-button refresh from some of the most popular payroll programs.

PRODUCT DESIGN AND DEVELOPMENT

The Company intends to continue to develop its products to meet identified
market needs for applications that complement core accounting software systems
and to address the evolving technology needs of its customers. The Company's
current product development efforts are focused primarily on (i) developing new
enhanced versions of single-user and client/server products, (ii) completing
development of a next generation family of asset management solutions (iii)
using a standard API (application programming interface) to integrate the
Company's products with additional third-party core accounting systems and other
industry-specific applications and (iv) continuing to enhance and maintain the
current line-up of products in the market by adding features and upgrading the
products to support the latest technology platforms.

The Company intends to continue to identify market opportunities for new
product offerings that will complement its customers' core accounting systems.
For example, the Company is currently developing a software product designed to
automate the corporate budgeting process. Similar to the Company's current
products, this new budgeting product will be designed to function as a
stand-alone system or to integrate with core accounting systems.

The Company is currently developing a Payroll module to be added to Best!
Imperativ HRMS. The Payroll module includes comprehensive and flexible
functionality to provide organizations in the target market for Best! Imperativ
HRMS with the means or setting up, processing, and outputting employee and
employer earnings, taxes, and deductions. This module will be closely integrated
with the other modules of Best! Imperativ HRMS.

The Company is currently developing a multi-national version of Best!
Imperativ HRMS for use in the U.S. and overseas. This development effort is
being conducted in Dusseldorf, Germany and the United States. The multi-national
version will add multi-lingual, multi-currency and multi-jurisdictional
capabilities to the system. The multi-national version will be the basis for
future releases in Europe, Canada, and the U.S.

The Company's research and development staff combines tax, accounting and
asset, and human resources management expertise with programming skills. As of
December 31, 1998, the Company had 126 full-time
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software development personnel (or 25% of the total employee base) with
expertise in Windows, Windows NT, client/server and/or Internet environments. Of
these developers, six are Certified Public Accountants and nine are Certified
Payroll Professionals. In year ended December 31, 1998, the nine month
transition period ended December 31, 1997 and the fiscal year ended March 31,
1997, the Company incurred approximately $11.2 million, $6.7 million and $6.1
million, respectively, in research and development expenses.

The development and updating of asset, human resources and payroll
management software that incorporates complex regulations demands a rigorous
development cycle that is mandated by the ongoing adoption of new laws,
regulations and forms by federal, state, local other governments and other
regulatory agencies, as well as the uncertain timing of these changes and
releases. The Company has a team of software developers who are experienced in
this development and updating process and the Company has created a set of
proprietary development tools that simplify the process of producing updates and
annual versions of the Company's products within required time frames.

SALES AND MARKETING

The Company employs a multi-channel sales and marketing strategy utilizing
four primary channels: Business Partners, a direct-response telesales operation,
strategic marketing alliances and a direct national accounts sales organization.
The Company believes that this diverse sales and marketing strategy allows it to
reach its target markets in the most efficient and effective manner and reduces
reliance on any single distribution channel. The Company supports its
multi-channel sales and marketing strategy through national advertising in key
financial and business publications, sponsorship of promotional events for
customers and Business Partners and participation in trade shows and
conferences. The Company also uses its Web sites to provide information about
Company products and to reinforce the Company's brand image, as well as to
support its sales channels. As of December 31, 1998, the Company employed 117
persons in sales and marketing.

Business Partners. The Business Partner channel consists of (i) Big Five
and other accounting firms and accounting, human resources and payroll
management consultants and professionals ("professional referral partners") and
(ii) value-added resellers of core accounting and other business software
solutions ("VARs"). The Company believes that its Business Partners have
significant influence over product choices by customers and that its
relationships with its Business Partners are an essential element in its sales
and marketing efforts.

The Company's professional referral partners recommend the Company's
solutions to assist their clients in addressing asset, human resources and
payroll management needs. Because they typically are closely involved with
middle market businesses on a day-to-day basis, the Company's professional
referral partners are well-positioned to understand customer requirements and
make appropriate product recommendations. The Company believes that product
recommendations from accounting firms that have licensed the Company's solutions
for their internal use are particularly effective. The Company has entered into
national licensing relationships with four of the Big Five accounting firms and
has sold local licenses to approximately 3,000 national, regional and local
accounting firm locations. Use of the Company's solutions by clients of these
firms creates efficiencies for both the clients and the accounting firms in the
transmission and processing of asset, human resources and payroll data and
allows the accounting firm to focus more on providing business management and
other higher value services.

VARs are independent sales organizations that market and resell the
Company's products and offer training and local installation and implementation
services. VARs typically have specialized experience in financial or human
resources areas, and in many cases focus on selling to middle market businesses.
VARs market the Company's solutions through their own contacts and to sales
leads supplied by the Company. The Company requires VARs to undergo prescribed
training and certification procedures before being authorized to sell and
implement certain of the Company's software solutions. As of December 31, 1998,
the Company was affiliated with approximately 300 certified VARs.

Direct-Response Telesales. The Company solicits new customers for its
products through periodic targeted mailings to its prospects. Utilizing its
proprietary databases and other available mailing lists, the Company distributed
over 2.3 million pieces of direct mail relating to its product lines in the year
ended

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December 31, 1998 and 1.4 million pieces for the nine months ended December 31,
1997. Such mailings, as well as targeted advertising, generate interest from
potential customers by stressing the cost-effectiveness and functionality of the
Company's products, ongoing changes in government regulations and the support
and service provided by the Company. Responses from potential customers are
entered into the Company's automated lead-tracking system. Once the information
or a trial product has been delivered to the potential customer, follow-up calls
are made until the customer decides whether or not to license the product.

Strategic Marketing Alliances. The Company currently has formal and
informal strategic marketing alliances with over 25 of the leading core
accounting and other industry-specific software vendors. These alliances permit
these software vendors to incorporate the Company's products as specialized
integrated applications or add-on modules to enhance their product offerings.
These alliances benefit the Company by creating an additional sales channel and
by providing a strong recommendation of its products by leading software
vendors. The Company's strategic marketing alliance partners currently include
Great Plains Software, Inc., Infinium Software, Inc., Made 2 Manage, Inc.,
Platinum Software Corporation, Sage Software, Inc., Scala North America, Inc.,
and Solomon Software, Inc. in the United States and ADP GmbH, Germany savings
bank organization and Software4You in Germany.

Direct National Account Sales. The Company has a direct sales force that
currently markets the Company's products to larger middle market customers and
national accounts. As of December 31, 1998, the Company's direct sales force
consisted of 35 persons, located at the Company's offices in Reston, Virginia,
St. Petersburg, Florida and satellite locations throughout the United States. In
addition to marketing the Company's products to new customers, this channel
leverages the Company's broad installed customer base to sell additional
products to divisions or branches of existing customers. The Company is
aggressively expanding this channel with additional employees and resources to
enhance the sales of its Imperativ products.

COMPETITION

The market for the Company's products is highly competitive. Although the
Company is not aware of any competitor which competes with it across all of its
product lines, a variety of companies currently offer products that compete with
one or more of the Company's product lines. In addition, as the Company targets
new markets and introduces new product lines, it expects to encounter
competition from additional competitors. The Company's products compete
primarily on the basis of product features and functions, product quality and
reliability, timeliness of product release and updating, ease of use, brand
recognition, quality of customer support, price and product line breadth. The
Company believes that its products generally compete effectively with respect to
these factors.

The Company faces different competitors for each of its product lines. The
Company's asset management products compete principally with products offered by
the Bureau of National Affairs, Inc., Decision Support Technology, Inc.,
Creative Solutions and Computer Language Research, Inc. The Company's Best!
Imperativ Asset Accounting product competes principally with general ledger
accounting companies which offer a basic fixed asset module along with the core
accounting systems. The Company's human resources and payroll management
products compete primarily with Spectrum Human Resource Systems Corporation,
Human Resources Microsystems and Ceridian Corporation (FLX) in the single-user
and work group environment, and the Company competes with products offered by
PeopleSoft, Inc., Ultimate Software Group, Inc., Cyborg, Inc. and SAP AG in the
client/server environment. The Company's human resources and payroll management
products also compete with payroll service bureaus, such as ADP, Inc. and
Paychex, Inc., and with in-house management information systems staffs. The
Company's European products compete primarily with SAP AG, PeopleSoft GmbH,
Oracle GmbH, CGI GmbH, P&I AG, Soft-Research, and Mita4. Several of the
Company's competitors or potential competitors have significantly greater
financial, technical and marketing resources than the Company. There can be no
assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with new
competitors. In addition, there can be no assurance that competitors will not
develop products that are superior to the Company's products or achieve greater
market acceptance. Competitive pressures in the form of aggressive price
competition could also have a material adverse effect on the Company's business,
operating

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results and financial condition. The Company's future success will depend
significantly upon its ability to increase its share of its target markets, to
maintain and increase its renewal revenues from existing customers and to sell
additional products, product enhancements, maintenance and support agreements
and training and consulting services to existing customers and new customers.
There can be no assurance that the Company will continue to compete favorably or
that competition will not have a material adverse effect on the Company's
business, operating results or financial condition.

TECHNICAL SUPPORT AND SERVICES

The Company believes that offering quality service and support is strategic
to its overall business objectives and provides the Company with a significant
opportunity to differentiate itself from competitors. The Company offers its
customers maintenance and technical support through its SupportPlus membership
programs, and also offers training and consulting services. The Company derives
a significant portion of its revenue from maintenance and services. As of
December 31, 1998, the Company employed 136 persons in technical support and
services functions. In the fiscal year ended December 31, 1998, approximately
50% of the Company's revenue or $35.0 million were derived from support,
training and other professional services, which compares to 49% or $18.2 million
for the nine months ended December 31, 1997 and 49% or $19.3 million for the
fiscal year ended March 31, 1997.

The Company's SupportPlus and other membership programs provide customers
expert telephone support for Accounting and Human Resource products, software
updates to reflect tax law and government regulatory changes, feature
enhancements, newsletter subscriptions, unlimited access to a support center on
the Company's internet site and special discounts on new products and services.
In the fiscal year ended December 31, 1998 approximately 90% of the Company's US
customers purchased maintenance and support agreements in connection with their
initial licenses of Company products and approximately 90% for the nine months
ended December 31, 1997 and 85% in the year ended December 31, 1998. During each
of these periods, the Company achieved approximately 80% annual renewal rates
for its maintenance and support agreements on its US products, which typically
have a one-year term. The Company's telephone support organization provides
extensive product support to customers, including assistance in connection with
implementation, systems operation and regulatory compliance.

In addition to technical support, the Company offers its customers the
option to attend training seminars covering the use of the Company's solutions
in the US and Europe. The Company also offers a comprehensive seminar series
featuring basic through advanced interactive product training. Many of these
seminars offer professional education credits. The Company also offers on-site
training at client facilities. In certain circumstances, the Company's Business
Partners provide training and implementation services directly to customers.

The Company is continuing to expand its consulting services operation,
which provides installation, training, data conversion, implementation and other
consulting services. The Company believes these consulting services will become
increasingly important as it introduces and enhances its client/server products
in the future.

INTELLECTUAL PROPERTY RIGHTS AND LICENSES

Except for Best! Imperativ HRMS, Executive Track and the European products,
the Company generally does not execute signed license agreements with its
customers, but instead seeks to protect its software and other intellectual
property through a combination of trade secret, copyright and trademark law,
confidentiality agreements and contractual restrictions on copying and
disclosure contained in its "shrink-wrap" licenses and nondisclosure agreements
with its employees and contractors. The Company provides its products to
customers on a "right-to-use" basis under non-exclusive shrink-wrap licenses,
which generally are nontransferable and have a perpetual term.

The Company's license agreements generally provide that the software is
provided "as is" without warranty of any kind; however, the Best Imperativ HRMS
license Agreement contains a warranty that the
8
<PAGE> 11

product will perform substantially in accordance with the accompanying written
materials for a specified period.

Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem, particularly
in international markets and as a result of the growing use of the Internet.
Licensees do not sign the Company's shrink wrap licenses and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's products and technologies.

The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products. As
the number of software products in the industry increases and the functionality
of these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time-consuming and expensive to defend, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse effect
on the Company's business, operating results and financial condition.

EMPLOYEES

As of December 31, 1998, the Company had 500 full-time employees, including
126 employees primarily engaged in research and development, 136 in technical
support and services, 158 in sales, marketing and customer service, and 80 in
operations, finance and administration. The Company believes current employee
relations are good.

ITEM 2. PROPERTIES

The Company's corporate headquarters, including its product development,
product management, professional services and technical support for the APG,
sales and marketing operations, and principal administrative functions are
located in 58,000 square feet of office space in a building located in Reston,
Virginia. The Company occupies the space under leases expiring on July 2003,
subject to the Company's right to extend the term by two years for part of the
space, and by two or five years for the remainder of the space. The Company's
subsidiary, Abra Software, Inc., which provides product development, product
management, sales and marketing, professional services and technical support for
the human resources products, leases 32,000 square feet of office space in St.
Petersburg, Florida, under a lease that expires in December 2002. The Company's
primary European operations are located in Dusseldorf, Germany where they occupy
approximately 13,000 square feet under a lease that expires in December 2002.
The Company also leases space in Berlin and Munich, Germany, Vienna, Austria and
Burlington, Ontario, Canada. Total rent expense for the Company's facilities was
approximately $1.6 million for the year ended December 31, 1998, $865,000 for
the nine months ended December 31, 1997 and $1.0 million for the fiscal year
1997. The Company believes that its existing facilities are suitable and
adequate for its present needs and that suitable additional space will be
available as needed to accommodate any expansion of operations.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. The Company is
not currently a party to any legal proceedings. An unfavorable outcome in any
future litigation could have a material adverse effect on the Company's
business, operating

9
<PAGE> 12

results, and financial condition. In addition, any litigation, regardless of
outcome, can have a material adverse impact on the Company because of defense
costs, diversion of management resources and other factors.

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

No matters were submitted for vote of security holders in the quarter ended
December 31, 1998.

PART II

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

The Company's Common Stock began trading on the Nasdaq National Market
under the symbol "BEST" on September 30, 1997.

The following table presents the high and low sale prices for each quarter
since the Initial Public Offering:

<TABLE>
<CAPTION>
HIGH LOW
QUARTER ENDED: ---- ---
<S> <C> <C>
December 31, 1997......................................... $15.000 $ 8.250
March 31, 1998............................................ $16.625 $ 9.125
June 30, 1998............................................. $22.875 $15.063
September 30, 1998........................................ $24.688 $16.625
December 31, 1998......................................... $28.500 $14.000
</TABLE>

The closing price on December 31, 1998 was $23.750 per share. On February
24, 1999 the closing price was $17.4375 per share.

Shareholders

On February 24, 1999 the Company had approximately 95 holders of record.

Dividends

The Company paid a dividend of $0.455 per share of Common Stock to
shareholders of record on February 20, 1997 and a dividend of $0.915 per share
of Common Stock to shareholders of record on June 27, 1997. All of the Board
members (or their affiliates) except for Mr. Richard A. Lefebvre and Dr. W.
Frank King were shareholders as of the record date for payment of the first
dividend and all of the Board members (or their affiliates) except Dr. W. Frank
King were shareholders as of the record date for payment of the second dividend.
In connection with the two dividends, Mr. James F. Petersen received $2,876,903;
Mr. Timothy A. Davenport received $137,100; Edison, an affiliate of Mr. John H.
Martinson, received $5,527,292; Ms. Dorothy T. Webb, who was then a director of
the Company, received $1,027,586; Dr. Herbert R. Brinberg received $20,550; Mr.
Lefebvre received $3,294; and PNC Capital Corp. ("PNC"), a shareholder of the
Company and an affiliate of Mr. Peter V. Del Presto, who was then a director of
the Company, received the payments described in the following paragraph.

The Loan and Warrant Purchase Agreement by and between PNC and the Company
dated as of March 2, 1993, prohibited the Company from issuing cash dividends to
its shareholders until the closing of an initial public offering. In
consideration for PNC's waiver of this restriction in connection with the two
dividend issuances described above, the Company agreed, with regard to the first
dividend, to reduce the per share exercise price of the PNC Warrant by the
dividend amount (i.e., from $2.667 to $2.213 per share), and, with regard to the
second dividend, to pay PNC a dividend equivalent payment of $432,338 ($0.915
multiplied by the 472,500 shares underlying the PNC Warrant) and to amend the
PNC Warrant to reduce the then current per share exercise price thereunder by
20% of the dividend value (i.e., from $2.213 to $2.029 per share).

The Company paid a dividend of $3,556,264 in the aggregate ($0.455 per
share of Common Stock) to shareholders of record on February 20, 1997 and a
dividend of $7,565,114 in the aggregate ($0.915 per share of Common Stock) to
shareholders of record on June 27, 1997. Other than these dividends, the Company
has

10
<PAGE> 13

never paid cash dividends on its Common Stock. The Company currently intends to
retain any future earnings to fund the development and growth of its business,
and does not anticipate paying any cash dividends for the foreseeable future.

Stock Buyback

On December 1, 1997, the Company announced that its Board of Directors had
approved the repurchase by the Company of up to an aggregate of 200,000 shares
of its Common Stock. The Company intends to issue any such repurchased shares
pursuant to its stock plans. As of December 31, 1997, the Company had purchased
approximately 10,000 shares under the repurchase program. The Company did not
repurchase any shares in 1998 and the repurchase agreement expired on September
30, 1998.

Use of Proceeds

The net proceeds of the Company's Initial Public Offering remain invested
and available for future product development, working capital, acquiring or
investing in businesses, technologies or products complimentary to the Company's
business or other general corporate purposes. The registration statement
(Registration No. 333-33275) for the Initial Public Offering was filed on Form
S-1 with the Securities and Exchange Commission on September 29, 1997. The
Initial Public Offering completed on October 3, 1997, in which the Company sold
2,750,000 shares of common stock at an offering price of $13.00 per share,
generated approximately $32 million of net proceeds to the Company. The Company
incurred approximately $1.0 million in expenses related to the Initial Public
Offering. The Underwriters of the offering were Hambrecht & Quist, LLC and
William Blair & Company, LLC.

In March 1998, the Company acquired HR Management Software GmbH (HRS), a
leading provider of human resource software in the European marketplace, for
approximately $10.4 million, consisting of cash and Common Stock. In October
1998, the Company acquired certain technological assets of HRSoft, Inc., a
provider of human resource software. The cash acquisition price was
approximately $1.8 million. In December 1998, the Company acquired a 25% share
of S&P AG, a provider of payroll software in the European marketplace, for
approximately $600,000 in cash.

11
<PAGE> 14

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

To better understand the following financial information, investors should
also read "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and Notes
thereto. In December 1997, the Company announced a change in its fiscal year end
to December 31 from March 31. The following selected financial data is in
thousands, except per share data:

<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------------ ---------------------- ----------------------
1995 1996 1997 1996 1997 1997 1998
-------- -------- -------- ----------- -------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
License fees and royalty............ $20,346 $22,677 $20,161 $15,171 $18,384 $23,375 $34,406
Services............................ 14,677 16,552 19,323 14,147 18,157 23,332 34,924
------- ------- ------- ------- ------- ------- -------
Total........................... 35,023 39,229 39,484 29,318 36,541 46,707 69,330
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License fees and royalty............ 3,806 4,501 2,251 1,448 1,443 2,247 1,997
Services............................ 4,357 5,306 5,675 4,110 4,537 6,100 11,425
------- ------- ------- ------- ------- ------- -------
Total........................... 8,163 9,807 7,926 5,558 5,980 8,347 13,422
------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 26,860 29,422 31,558 23,760 30,561 38,360 55,908
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................. 11,354 12,812 14,355 10,811 13,247 16,792 24,604
Research and development............ 5,707 7,389 6,089 4,751 6,650 7,987 11,157
General and administrative.......... 4,284 5,789 5,554 4,162 4,808 6,201 8,295
Write-off of purchased research and
development....................... -- -- -- -- -- -- 4,170
Amortization of acquired
intangibles....................... 3,177 1,435 -- -- -- -- 882
------- ------- ------- ------- ------- ------- -------
Total........................... 24,522 27,425 25,998 19,724 24,705 30,980 49,108
------- ------- ------- ------- ------- ------- -------
Operating income...................... 2,338 1,997 5,560 4,036 5,856 7,380 6,800
------- ------- ------- ------- ------- ------- -------
Other (expense) income, net:
Interest (expense) income, net...... (176) (145) 351 226 263 389 2,323
Gain on sale of product lines....... -- 750 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total........................... (176) 605 351 226 263 389 2,323
------- ------- ------- ------- ------- ------- -------
Income from continuing operations
before income taxes................. 2,162 2,602 5,911 4,262 6,119 7,769 9,123
Income tax provision (benefit)........ 550 (925) 1,475 1,930 2,350 1,895 3,500
------- ------- ------- ------- ------- ------- -------
Income from continuing operations..... 1,612 3,527 4,436 2,332 3,769 5,874 5,623
Gain on disposal of discontinued
business............................ 1,903 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................ $ 3,515 $ 3,527 $ 4,436 $ 2,332 $ 3,769 $ 5,874 $ 5,623
======= ======= ======= ======= ======= ======= =======
Basic net income per share from
continuing operations............... $ 0.25 $ 0.54 $ 0.67 $ 0.36 $ 0.45 $ 0.69 $ 0.49
======= ======= ======= ======= ======= ======= =======
Diluted net income per share from
continuing operations............... $ 0.19 $ 0.44 $ 0.54 $ 0.28 $ 0.38 $ 0.59 $ 0.46
======= ======= ======= ======= ======= ======= =======
Basic net income per share............ $ 0.54 $ 0.54 $ 0.67 $ 0.36 $ 0.45 $ 0.69 $ 0.49
======= ======= ======= ======= ======= ======= =======
Diluted net income per share.......... $ 0.42 $ 0.44 $ 0.54 $ 0.28 $ 0.38 $ 0.59 $ 0.46
======= ======= ======= ======= ======= ======= =======
Basic weighted average shares
outstanding......................... 6,499 6,528 6,581 6,532 8,445 8,483 11,455
======= ======= ======= ======= ======= ======= =======
Diluted weighted average shares
outstanding......................... 8,397 8,030 8,263 8,231 9,809 9,961 12,180
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 3,534 $ 8,105 $13,365 $45,432 $46,280
Working (deficit) capital................. (5,169) (583) (912) 26,549 25,352
Total assets.............................. 13,794 17,625 21,160 57,010 74,570
Deferred maintenance and service
revenue................................. 8,814 9,398 12,288 16,231 19,889
Long-term debt............................ 2,954 2,133 650 -- 125
Redeemable convertible preferred stock.... 500 500 500 -- --
Redeemable common stock warrants.......... 206 296 642 -- --
Shareholders' (deficit) equity............ (4,202) (698) (144) 29,754 40,162
</TABLE>

12
<PAGE> 15

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

INTRODUCTION

CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Certain of the statements contained in this Form 10-K which are not statements
of historical fact are forward-looking statements that involve risks and
uncertainties. Such forward-looking statements are made only as of the date of
this Form 10-K. The Company's actual results could differ materially from those
contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below under
"Certain Factors That May Affect Future Results" as well as those discussed
elsewhere in this Form 10-K. References to the Company's "fiscal" year mean the
twelve months ended on March 31 of that calendar year until December 1997, when
the Company announced a change in its fiscal year end to December 31 from March
31. Consequently, the Company's prior fiscal period was a nine-month transition
period ended December 31, 1997. Currently, the Company's fiscal year runs from
January 1 through December 31.

OVERVIEW

Best Software, Inc. is a leading supplier of corporate resource management
software solutions, helping organizations to better manage their people, assets
and budgeting processes. The Company's feature-rich, cost-effective solutions
enhance productivity by automating management, compliance and reporting
functions in areas of specialized expertise that entail complex and frequently
changing laws and regulations. The Company's solutions have been designed to
complement core accounting systems and are scaleable from stand-alone desktop
applications running on personal computers to multi-user work group and
client/server programs designed for use on personal computer local area
networks. As of December 31, 1998, the Company had over 47,000 licensed customer
locations, representing approximately 133,000 licensed seats. In addition to
revenue from product licenses, the Company derives significant recurring revenue
from maintenance and support agreements. The Company reaches its large customer
base and target market through a multi-channel sales and marketing strategy that
includes its network of value-added resellers, accounting firms and consultants
("Business Partners"), a direct-response telesales operation, strategic
marketing alliances and a direct sales organization.

The Company launched its FAS fixed asset management product line in 1983
and a professional tax preparation software product line in 1985. In 1991, the
Company acquired the Abra human resources and payroll management product line.
Between 1992 and 1994, the Company purchased a write-up product line for
accountants, a small business accounting software product line (the "MYOB
product line") and a service bureau payroll product line for accountants. The
Company thereafter decided to focus primarily on serving middle market
businesses, and sold its professional tax preparation software business in April
1994 and its service bureau payroll and write-up product lines for accountants
in August 1995. In May 1996, the Company licensed its MYOB product line to a
third party. Under such license (the "MYOB License"), the Company received
royalties over the previous three years. This agreement ended in March 1999 when
the purchaser exercised its option to acquire ownership of the MYOB product
which required all outstanding royalties to become due immediately. The Company
agreed to accept $1.8 million in cash and a non-interest bearing note due in
December 1999 for the balance.

In 1998, the Company extended its human resource and payroll offerings
through acquisitions. In March 1998, the Company acquired HR Management Software
GmbH (HRS), a leading provider of human resource software in the European
marketplace. In October 1998, the Company acquired certain technological assets
of HRSoft, Inc., a provider of human resource software. In December 1998, the
Company acquired a 25% share of S&P AG, a provider of payroll software in the
European marketplace.

13
<PAGE> 16

Prior to fiscal 1994, substantially all of the Company's revenues from the
APG and HRPG product lines were derived from licenses of DOS-based versions of
these products. Since fiscal 1994, the Company has introduced Windows versions
of these products and, since fiscal 1995, a significant number of the Company's
DOS customers have migrated to the Company's Windows-based products.
Additionally, since the introduction of multi-user versions of its products in
fiscal 1995, the Company has sold an increased number of multi-user licenses of
its APG and HRPG products. Upon the introduction of a new product or an enhanced
version of an existing product, the Company has typically derived significant
license fee revenue from trade-ups by existing customers. Typically, the license
fees paid for trade-ups are lower than the license fees for an initial license.
In addition, the Windows-based products and the multi-user products generally
have higher average license fees and gross margins than the DOS-based products.

In addition to revenue from product licenses, the Company derives
significant recurring revenue from maintenance and support agreements. In the
year ended December 31, 1998 approximately 90% of the Company's customers
purchased maintenance and support agreements in connection with their initial
licenses of Company products compared to approximately 90% in the nine months
ended December 31, 1997 and 85% in the fiscal year ended March 31, 1997.
Additionally, during each of these periods, the Company has achieved average
annual renewal rates for its maintenance and support agreements of approximately
80%. Under its maintenance and support agreements, the Company provides
technical support and periodic software updates. In late 1997, the Company
launched its consulting services, which include installation, set-up and
conversion services. Training and consulting revenue are anticipated to have
lower gross margins than revenue from maintenance and support agreements. In the
year ended December 31, 1998 and in the nine months ended December 31, 1997,
approximately 50% of total revenue were attributable to services, of which a
substantial portion was derived from maintenance and support agreements.
Maintenance and support agreements are generally priced as a percentage of the
initial license fee for the underlying products.

The Company recognizes revenue on license fees upon shipment of the
product, net of provisions for returns and allowances, provided that no
significant Company obligations remain and that collection of the resulting
account receivable is probable. For products with free trial periods, revenue is
recognized upon expiration of the trial period and acceptance of the product by
the customer. Revenue from the MYOB License is recognized ratably within each
year of the term of the license agreement, based on specified annual royalty
payments. Revenue from maintenance and support agreements is recognized pro rata
over the term of the agreements, which is generally one year. Revenue from other
services, such as training and consulting, is recognized as the services are
provided.

The Company employs a multi-channel sales and marketing strategy utilizing
four primary channels: Business Partners, a direct-response telesales operation,
strategic marketing alliances and a direct national account sales organization.
In 1995, the Company began to develop its national account organization and has
invested and expects to continue to invest in the development of this channel.
The Company expects that sales through direct channels will generally have
higher gross margins than sales through indirect channels, although these higher
margins may be offset in whole or in part by increased sales and marketing
expenses. In addition, in October 1996, the Company established a wholly owned
subsidiary in Ontario, Canada to localize and market certain of the Company's
products in the Canadian market.

The Company has made, and intends to continue to make, significant
investments in research and development to develop new products and enhanced
client/server versions of its existing products. In addition, the Company
releases periodic updates of its products to incorporate regulatory changes. As
of December 31, 1998, the Company had 126 full-time software development
personnel with expertise in Windows, Windows NT, client/server and/or Internet
environments. Of these developers, six are Certified Public Accountants and nine
are Certified Payroll Professionals.

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standard No. 86 "Accounting For The Costs Of
Computer Software To Be Sold, Leased Or Otherwise Marketed". Costs incurred
prior to establishment of technological feasibility are expensed as incurred and
reflected as research and development costs. There were no software development
costs capitalized in the year ended December 31, 1998, the nine-month period
ended December 31, 1997 or the

14
<PAGE> 17

fiscal year ended March 31, 1997. During these periods, the time between the
establishment of technological feasibility and general release was very short.
Costs otherwise capitalizable after technological feasibility were insignificant
and, therefore, were expensed as incurred.

Effective October 3, 1997 the Company sold 2,750,000 shares of common stock
at an offering price of $13.00 per share (the "Initial Public Offering"). This
transaction generated approximately $32 million of net proceeds to the Company
after deduction of all related expenses. As part of the Initial Public Offering,
all of the Company's outstanding Preferred Stock automatically converted into
shares of its Common Stock, and certain warrant redemption rights expired. A
partial exercise of a warrant occurred immediately prior to the close of the
offering. During the Initial Public Offering through December 31, 1997, the
holder of a warrant to purchase 472,500 shares of Common Stock elected to
partially exercise the warrant of Common Stock in a cashless exercise
transaction. As a result of this transaction, the holder of the warrant received
100,599 shares of Common Stock and 353,296 warrants remained exercisable. In
April 1998 the holder exercised the remaining 353,296 warrants in a cashless
exercise transaction resulting in the issuance of 317,000 shares.

In fiscal 1994, the Company established a valuation allowance for certain
deferred tax assets. The valuation allowance was subsequently reduced as a
result of the Company's analysis of then current levels of earnings and
anticipated operating results. As a result, the Company's effective tax rate has
been significantly lower than the applicable statutory rates. The Company
expects that the effective tax rate in future periods will more closely reflect
statutory rates.

15
<PAGE> 18

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed in thousands of dollars. The
Company currently derives substantially all of its revenue from its APG, HRPG
and EPG product lines and related services (collectively, the "Ongoing
Business"). The Company's financial statements for the year ended March 31, 1997
and for the nine months ended December 31, 1996 include operating results
relating to the MYOB product line and, therefore, are not indicative of the
results of operations attributable to the Ongoing Business. Beginning with the
nine month transition period ended December 31, 1997, the Ongoing Business is
the same as the information presented.

<TABLE>
<CAPTION>
NINE MONTHS YEAR
YEAR ENDED ENDED
ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, --------------------- ---------------------
1997 1996 1997 1997 1998
--------- ----------- ------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and royalty.............. $20,161 $15,171 $18,384 $23,375 $34,406
Services.............................. 19,323 14,147 18,157 23,332 34,924
------- ------- ------- ------- -------
Total............................ 39,484 29,318 36,541 46,707 69,330
------- ------- ------- ------- -------
Cost of revenue:
License fees and royalty.............. 2,251 1,448 1,443 2,247 1,997
Services.............................. 5,675 4,110 4,537 6,100 11,425
------- ------- ------- ------- -------
Total............................ 7,926 5,558 5,980 8,347 13,422
------- ------- ------- ------- -------
Gross margin............................... 31,558 23,760 30,561 38,360 55,908
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 14,355 10,811 13,247 16,792 24,604
Research and development.............. 6,089 4,751 6,650 7,987 11,157
General and administrative............ 5,554 4,162 4,808 6,201 8,295
Write-off of purchased research and
development......................... -- -- -- -- 4,170
Amortization of acquired
intangibles......................... -- -- -- -- 882
------- ------- ------- ------- -------
Total............................ 25,998 19,724 24,705 30,980 49,108
------- ------- ------- ------- -------
Operating income........................... 5,560 4,036 5,856 7,380 6,800
Other income, net.......................... 351 226 263 389 2,323
------- ------- ------- ------- -------
Income before income taxes................. 5,911 4,262 6,119 7,769 9,123
Income tax provision....................... 1,475 1,930 2,350 1,895 3,500
------- ------- ------- ------- -------
Net income................................. $ 4,436 $ 2,332 $ 3,769 $ 5,874 $ 5,623
======= ======= ======= ======= =======
Gross Margins:
Gross margin on license fees and
royalty revenue..................... $17,910 $13,723 $16,941 $21,128 $32,409
Gross margin on services revenue...... $13,648 $10,037 $13,620 $17,232 $23,499
</TABLE>

16
<PAGE> 19

The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue.

<TABLE>
<CAPTION>
NINE MONTHS YEAR
YEAR ENDED ENDED
ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, ------------------- -------------------
1997 1996 1997 1997 1998
--------- ----------- ----- ----------- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and royalty.............. 51.1% 51.7% 50.3% 50.0% 49.6%
Services.............................. 48.9 48.3 49.7 50.0 50.4
----- ----- ----- ----- -----
Total............................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
License fees and royalty.............. 5.7 4.9 4.0 4.8 2.9
Services.............................. 14.4 14.0 12.4 13.1 16.5
----- ----- ----- ----- -----
Total............................ 20.1 18.9 16.4 17.9 19.4
----- ----- ----- ----- -----
Gross margin............................... 79.9 81.1 83.6 82.1 80.6
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing................... 36.4 36.9 36.2 36.0 35.5
Research and development.............. 15.4 16.2 18.2 17.1 16.1
General and administrative............ 14.0 14.2 13.2 13.2 12.0
Write-off of purchased research and
development......................... -- -- -- -- 6.0
Amortization of acquired
intangibles......................... -- -- -- -- 1.3
----- ----- ----- ----- -----
Total............................ 65.8 67.3 67.6 66.3 70.9
----- ----- ----- ----- -----
Operating income........................... 14.1 13.8 16.0 15.8 9.7
Other income, net.......................... 0.9 0.8 0.7 0.8 3.4
----- ----- ----- ----- -----
Income before income taxes................. 15.0 14.6 16.7 16.6 13.1
Income tax provision....................... 3.8 6.6 6.4 4.0 5.0
----- ----- ----- ----- -----
Net income................................. 11.2% 8.0% 10.3% 12.6% 8.1%
===== ===== ===== ===== =====
Gross Margins:
Gross margin on license fees and
royalty revenue..................... 88.8% 90.5% 92.2% 90.4% 94.2%
Gross margin on services revenue...... 70.6% 70.9% 75.0% 73.9% 67.3%
</TABLE>

RESULTS FOR YEAR ENDED DECEMBER 31, 1998 AND NINE MONTHS ENDED DECEMBER 31,
1997

License Fees and Royalty Revenue. License fees and royalty revenue
consists of fees from software licenses and royalties from the MYOB License. As
a percentage of total revenue, license fees and royalty revenue decreased from
50.3% for the nine months ended December 31, 1997 to 49.6% for the year ended
December 31, 1998. The decrease as a percentage of total revenue from the nine
months ended December 31, 1997 to the year ended December 31, 1998 was the
result of the increased efforts in providing support services to our customers,
increased services provided with our client/server products, and the additional
revenue from the European operations acquired in 1998 which produce a higher
relative percentage of service revenue.

Services Revenue. Services revenue includes revenue from maintenance and
support agreements, training, consulting and implementation services. As a
percentage of total revenue, services revenue increased from 49.7% for the nine
months ended December 31, 1997 to 50.4% for the year ended December 31, 1998.
The increase in services revenue as a percentage of total revenue from the nine
months ended December 31, 1997 to the year ended December 31, 1998 was primarily
due to the increase in maintenance and support agreements, which resulted from a
larger installed base of customers, and higher average contract value as well as
the increased revenue provided by our acquired European operations. To a lesser
extent, the increase in

17
<PAGE> 20

services revenue was due to the Company's increased focus on providing training
services and other consulting services.

Cost of License Fees and Royalty Revenue. Cost of license fees and royalty
revenue consists primarily of costs of media, product manuals, shipping and
fulfillment, and royalties paid to third parties. As a percentage of total
revenue, cost of license fees and royalty revenue decreased from 4.0% for the
nine months ended December 31, 1997 to 2.9% for the year ended December 31,
1998. As a percentage of license fees and royalty revenue, cost of license fees
and royalty revenue decreased from 7.8% for the nine months ended December 31,
1997 to 5.8% for the year ended December 31, 1998. The decrease in percentage of
cost of license fees and royalty revenue from the nine months ended December 31,
1997 to the year ended December 31, 1998 was primarily due to a change in the
media on which the Company's products were delivered from diskettes to lower
cost CD-ROMs and other efficiency efforts resulting in cost reductions. These
cost savings increased the gross margins on license fees from 92.2% for the nine
months ended December 31, 1997 to 94.2% for the year ended December 31, 1998.

Cost of Services Revenue. Cost of services revenue consists primarily of
personnel costs, telephone charges and other costs related to providing
telephone support, training, consulting and implementation services. As a
percentage of total revenue, cost of services revenue increased from 12.4% for
the nine months ended December 31, 1997 to 16.5% for the year ended December 31,
1998. As a percentage of services revenue, cost of services revenue increased
from 25.0% for the nine months ended December 31, 1997 to 32.7% for the year
ended December 31, 1998. The percentage increase of cost of services revenue
were attributable primarily to costs associated with additional personnel to
meet the demands of the increased number of maintenance and support customers
and the ramping up of services, and the increased services related to the
European operations. These additional costs decreased the gross margins on
services from 75.0% for the nine months ended December 31, 1997 to 67.3% for the
year ended December 31, 1998.

Sales and Marketing. Sales and marketing expenses consist primarily of
direct mail programs, advertising, other marketing programs, personnel costs,
commissions, travel and operating costs. As a percentage of total revenue, sales
and marketing expenses decreased from 36.2% for the nine months ended December
31, 1997 to 35.5% for the year ended December 31, 1998. The decrease is due to
the increase in revenue while maintaining spending levels and the increase in
services revenue which requires relatively less sales and marketing expense.

Research and Development. Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants. As a
percentage of total revenue, research and development expenses decreased from
18.2% for the nine months ended December 31, 1997 to 16.1% for the year ended
December 31, 1998. The percentage decrease is primarily a result of staffing
levels and other costs not increasing at the same rate that revenue is growing.

General and Administrative. General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations. As a percentage of total revenue, general and
administrative expenses decreased from 13.2% for the nine months ended December
31, 1997 to 12.0% for the year ended December 31, 1998. The percentage decrease
is primarily a result of staffing levels and other costs not increasing at the
same rate revenue was growing.

Write-off of purchased research and development. The write-off is the
result of purchased research and development associated with the Company's
acquisition of HRS in March 1998 and acquisition of certain technological assets
of HRSoft in October 1998. The combined one time charges of approximately $4.2
million represent 6.0% of total revenue for the year ended December 31, 1998.

In connection with the acquisition of HRS, the Company allocated $3.9
million of the $10.4 million purchase price to incomplete research and
development projects. This allocation represents the estimated fair value based
on future cash flows that have been adjusted by the project's cost-based
completion percentage of 35%. At the acquisition date, the development of this
project had not yet reached technological feasibility and the In-process
Research & Development ("IPR&D") in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date. The remainder
of the purchase price was allocated to

18
<PAGE> 21

completed technology, other intangibles and goodwill in the amounts of $793,000,
$278,000, and $5,515,000 respectively. These amounts are being amortized over
periods ranging from three to seven years.

The Company used an independent third-party appraiser to assess and value
the IPR&D. The values assigned to this asset were determined by identifying
significant research projects for which technological feasibility had not been
established. In the case of HRS, these included the development, programming and
testing activities associated with the creation of Generation X, a new HR system
for the European middle market. Valuation of non-Generation X development
efforts in the future was excluded from the research and development appraisal.

The nature of the efforts to develop the acquired in-process technology
into a commercially viable product relate to the completion of all planning,
designing, and prototyping and testing activities that are necessary to
establish that the proposed technologies meet their design specifications
including functional, technical, and economic performance requirements.

The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in developing
a commercially viable product, estimating the resulting net cash flows from the
expected sales of such a product, adjusted by the project's cost-based
completion percentage and discounted to the present value using an appropriate
discount rate.

Revenue growth rates for HRS were estimated by a third party appraiser
based on a detailed forecast prepared by management, as well as the appraiser's
discussions with finance, marketing, and engineering representatives of Best and
HRS. Revenue growth rates beyond 2000 were based on industry growth
expectations. Allocation of total HRS projected revenues to IPR&D was based on
the appraiser's discussions with Best and HRS management. The preponderance of
future revenues is expected to originate from the sale of products that are not
yet completed. HRS' existing products and technologies are rapidly approaching
obsolescence and future performance is highly dependent on the successful
completion of new HR systems being developed by HRS.

Selling, general and administrative expenses and profitability estimates
were determined based on management forecasts as well as an analysis of
comparable companies' margin expectations, including those of the Company.

The projections utilized in the transaction pricing and purchase price
allocation analysis exclude the potential synergistic benefits related
specifically to Best's ownership. Due to the relatively early stage of the
development and reliance on future, unproven products and technologies, the cost
of capital (discount rate) for HRS was estimated using venture capital rates of
return. Due to the nature of the forecast and the risks associated with the
projected growth and profitability of the development projects, a discount rate
of 30 to 33% was used to discount cash flows from the in-process products.
Because the in-process projects are such an integral part of the business
enterprise, only a moderate increase in the discount rate for the in-process
technology was deemed appropriate. This discount rate is commensurate with HRS'
market position, the uncertainties in the economic estimates described above,
the inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, the uncertainty surrounding the European economy, the
impact of the Euro conversion on the European economy, and the uncertainty
related to technological advances that could render even HRS' development stage
technologies obsolete.

The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. The in-process projects and
technologies acquired are progressing as planned, with no material changes
between actual results and the assumptions utilized in the allocation analysis.
No assurance can be given, however, that the underlying assumptions used to
estimate sales, development costs or profitability, or the events associated
with such projects, will transpire as estimated. For these reasons, actual
results may vary from projected results.

Remaining development efforts for HRS' research and development include
various phases of development, programming and testing. Costs to complete the
IPR&D are expected to approximate $4.3 million over the next two to three years.
Anticipated completion dates for the projects in progress will occur in 1999 at
19
<PAGE> 22

which time the Company expects to begin generating the economic benefits from
the technologies. Funding for such projects is expected to be obtained from
internally generated sources.

As evidenced by the continued support of the development of Generation X
and derivative products, management believes the Company has a reasonable chance
of successfully completing the research and development programs. However, as
with all of Best's software segments, there is risk associated with the
completion of the HRS research and development projects, and there is no
assurance that technological or commercial success will be achieved.

If the development of Generation X and derivative products is unsuccessful,
the sales and profitability of the Company may be adversely affected in future
periods. Commercial results are also subject to uncertain market events, and
risks, which are beyond the Company's control, such as trends in technology,
changes in government regulation, market size and growth, and product
introduction or other actions by competitors.

In connection with the acquisition of certain technological assets of
HRSoft, the Company allocated $320,000 of the $1.8 million of the purchase price
to incomplete research and development projects. This allocation represents the
estimated fair value based on future cash flows that have been adjusted by the
project's cost-based completion percentage of 18%. At the acquisition date, the
development of this project had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date. The remainder of the purchase price
was allocated to existing products and goodwill in the amounts of $410,000 and
$1.07 million, respectively. These amounts are being amortized over periods
ranging from four to seven years.

Amortization of Acquired Intangibles. In 1998 the amortization of acquired
intangibles relates to the capitalized cost of certain identifiable intangibles
and goodwill resulting from the acquisition of HRS and HRSoft in 1998.
Amortization was approximately $882,000 in the year ended December 31, 1998. The
acquired intangibles and goodwill is being amortized over a useful life of three
to seven years.

Other Income, Net. Other income consists primarily of earnings from
investments, net of any interest expense. Other income (net) was 0.7% of total
revenue for the nine months ended December 31, 1997 and 3.4% for the year ended
December 31, 1998. The increase in other income for the year ended December 31,
1998 was attributable to the increased interest income from the proceeds of the
Initial Public Offering.

Provision for Income Taxes. The provision for income taxes was 38.4% of
income before taxes for the nine months ended December 31, 1997 and for the year
ended December 31, 1998. The Company expects that the income tax provision in
future periods will closely reflect the statutory tax rates. See Note 7 of Notes
to Consolidated Financial Statements.

RESULTS FOR NINE MONTHS ENDED DECEMBER 31, 1997 AND FISCAL YEAR ENDED MARCH
31, 1997

License Fees and Royalty Revenue. As a percentage of total revenue,
license fees and royalty revenue decreased slightly from 51.1% for the fiscal
year ended March 31, 1997 to 50.3% for the nine months ended December 31, 1997.
The decrease as a percentage of total revenue from the nine months ended
December 31, 1997 was the result of the increased efforts in providing support
and professional services to our customers.
20
<PAGE> 23

Services Revenue. As a percentage of total revenue, services revenue
increased from 48.9% for the fiscal year ended March 31, 1997 to 49.7% for the
nine months ended December 31, 1997. The increase in services revenue as a
percentage of total revenue from the nine months ended December 31, 1997 to the
fiscal year ended March 31, 1997 was primarily attributable to increased renewal
rates and the increased focus on providing training and consulting services for
a larger installed customer base.

Cost of License Fees and Royalty Revenue. As a percentage of total
revenue, cost of license fees and royalty revenue decreased from 5.7% for the
fiscal year ended March 31, 1997 to 4.0% for the nine months ended December 31,
1997, respectively. As a percentage of license fees and royalty revenue, cost of
license fees and royalty revenue decreased from 11.2% for the fiscal year ended
March 31, 1997 to 7.8% for the year ended December 31, 1997. The decrease in
percentage of license fees and royalty revenue was primarily due to increased
sales of higher margin Windows-based and multi-user products and the elimination
of license fees attributable to the lower margin MYOB product line. These cost
reductions increased the gross margins on license fees from 88.8% for the fiscal
year ended March 31, 1997 to 92.2% for the nine months ended December 31, 1997.

Cost of Services Revenue. As a percentage of total revenue, cost of
services revenue decreased from 14.4% for the fiscal year ended March 31, 1997
to 12.4% for the nine months ended December 31, 1997. As a percentage of
services revenue, cost of services revenue decreased from 29.4% for the fiscal
year ended March 31, 1997 to 25.0% for the nine months ended December 31, 1997.
The percentage decrease of cost of services was attributable primarily to
increased service revenue provided by the increased number of maintenance and
support customers. The gross margins on services increased from 70.6% for the
fiscal year ended March 31, 1997 to 75.0% for the nine months ended December 31,
1997.

Sales and Marketing. As a percentage of total revenue, sales and marketing
expenses remained relatively constant at 36.4% for the fiscal year ended March
31, 1997 and 36.2% for the nine months ended December 31, 1997.

Research and Development. As a percentage of total revenue, research and
development expenses increased from 15.4% for the fiscal year ended March 31,
1997 to 18.2% for the nine months ended December 31, 1997, respectively. The
increase was primarily due to the enhancing of existing product lines to 32-bit
and expenses incurred in the development of the Best! Imperativ and budget
products.

General and Administrative. As a percentage of total revenue, general and
administrative expenses decreased from 14.0% for the fiscal year ended March 31,
1997 to 13.2% for the nine months ended December 31, 1997. The percentage
decrease in general and administrative expenses for the nine months ended
December 31, 1997 was due primarily to maintaining staffing levels of general
and administrative functions coupled with increased sales volume.

Other Income, Net. Other income (net) was 0.9% of total revenue for the
fiscal year ended March 31, 1997 and 0.7% for the nine months ended December 31,
1997. The interest income increased resulting from investing the proceeds of the
Initial Public Offering for the period ended December 31, 1997, but was offset
by the interest expense attributable to a reduction in the exercise price of a
warrant.

Provision for Income Taxes. The provision for income taxes was 25.0% of
income before taxes for the fiscal year ended March 31, 1997 and 38.4% of income
before taxes for the nine months ended December 31, 1997. For the fiscal year
ended March 31, 1997 the difference between the expected tax provision based on
Federal statutory rates and the effective tax rate resulted principally from tax
benefits relating to a reduction of the valuation allowance against the
Company's deferred tax asset of $1.2 million, based on management's analysis of
current levels of earnings and anticipated operating results.

RESULTS FOR YEARS ENDED DECEMBER 31, 1997 AND 1998

License Fees and Royalty Revenue. License fees and royalty revenue
increased from $23.4 million in the year ended December 31, 1997 to $34.4
million in the year ended December 31, 1998, representing a increase of 47.2%.
As a percentage of total revenue, license fees and royalty revenue decreased
from 50.0% for the year ended December 31, 1997 to 49.6% for the year ended
December 31, 1998. The dollar increase from the year
21
<PAGE> 24

ended December 31, 1997 to the year ended December 31, 1998 was the result of
the increased license fee revenue for both the existing accounting and human
resource products as well as the additional revenue from the Imperativ product
line. The acquisition of HRS in March 1998 also increased the license fee
revenue. The decrease as a percentage of total revenue was the result of the
increased efforts in providing support services to our customers, increased
services provided with our client/server products, and the additional revenue
from the acquired European operations which produce a higher relative percentage
of service revenue.

Services Revenue. Services revenue increased from $23.3 million in the
year ended December 31, 1997 to $34.9 million in the year ended December 31,
1998, representing an increase of 49.7%. As a percentage of total revenue,
services revenue increased from 50.0% to 50.4% for 1997 and 1998, respectively.
The dollar increase in services revenue was primarily due to the increase in
maintenance and support agreements, which resulted from a larger installed base
of customers, and higher average contract value as well as the increased revenue
provided by our acquired European operations. To a lesser extent, the increase
in services revenue was due to the Company's increased focus on providing
training services and other consulting services.

Cost of License Fees and Royalty Revenue. Cost of license fees and royalty
revenue decreased from $2.2 million in the year ended December 31, 1997 to $2.0
million in the year ended December 31, 1998, representing a decrease 11.1%. As a
percentage of license fees and royalty revenue, cost of license fees and royalty
revenue decreased from 9.6% to 5.8% for the year ended December 31, 1997 and
1998, respectively. The decrease in cost of license fees and royalty revenue
from was primarily due to a change in the media on which the Company's products
were delivered from diskettes to lower cost CD-ROMs and other efficiency efforts
resulting in cost reductions.

Cost of Services Revenue. Cost of services revenue increased from $6.1
million in the year ended December 31, 1997 to $11.4 million in the year ended
December 31, 1998, representing an increase of 87.3%. As a percentage of
services revenue, cost of services revenue increased from 26.1% to 32.7% for the
year ended December 31, 1997 and 1998, respectively. The dollar increases in
cost of services revenue were attributable primarily to costs associated with
additional personnel to meet the demands of the increased number of maintenance
and support customers and the ramping up of services, and the increased services
related to the European operations.

Sales and Marketing. Sales and marketing expense increased from $16.8
million in the year ended December 31, 1997 to $24.6 million in the year ended
December 31, 1998, representing an increase of 46.5%. As a percentage of total
revenue, sales and marketing expenses decreased from 36.0% and to 35.5% for the
year ended December 31, 1997 and 1998, respectively. The increases in sales and
marketing expenses were primarily due to the hiring of additional sales and
marketing personnel and the increased marketing efforts with the acquired
European operations. To a lesser extent, advertising and corporate brand
awareness activities related to the new Imperativ products also contributed to
this overall increase.

Research and Development. Research and development expenses increased from
$8.0 million in the year ended December 31, 1997 to $11.2 million in the year
ended December 31, 1998, representing a increase of 39.7%. As a percentage of
total revenue, research and development expenses decreased from 17.1% to 16.1%
for the year ended December 31, 1997 and 1998, respectively. The increase from
the year ended December 31, 1997 to the year ended December 31, 1998, was
primarily due to the enhancing of existing product lines to 32-bit and
client-server versions and the additional expenses incurred to develop the
budget product. The increase was also attributable to the development efforts of
the acquired European operations.

General and Administrative. General and administrative expenses increased
from $6.2 million in the year ended December 31, 1997 to $8.3 million in the
year ended December 31, 1998, representing an increase of 33.8%. As a percentage
of total revenue, general and administrative expenses decreased from 13.2% to
12.0% for the year ended December 31, 1997 and 1998, respectively. The increase
in general and administrative expenses for the year ended December 31, 1998 was
due primarily to the additional staffing of general and administrative functions
required to support growth in the Company's operation. The percentage decrease
is primarily a result of staffing and other costs not increasing at the same
rate as the revenue growth.

22
<PAGE> 25

Write-off of purchased research and development. The write-off is the
result of the purchased research and development associated with the Company's
acquisition of HRS in March 1998 and HRSoft in October 1998. The one time
charges of approximately $4.2 million represents 6.0% of total revenue for the
year ended December 31, 1998.

Amortization of Acquired Intangibles. Amortization of acquired intangibles
relates to the capitalized cost of identifiable intangibles and goodwill
resulting from various acquisitions. Amortization of acquired intangibles was
approximately $882,000 in the year ended December 31, 1998. The acquired
intangibles and goodwill are being amortized over a useful life of three to
seven years. Capitalized costs for intellectual property rights and other
intangibles were fully amortized as of the end of the year ended December 31,
1997.

Other Income (Net). Other income, net was $389,000 for the year ended
December 31, 1997 and $2.3 million for the year ended December 31, 1998. The
increase in other income for the year ended December 31, 1998 was attributable
to the increased interest income from the invested proceeds from the Initial
Public Offering.

Provision for Income Taxes. The provision for income taxes was $1.9
million and $3.5 million for the year ended December 31, 1997 and 1998
respectively, representing 24.4% and 38.4% of income before taxes, respectively.
For the year ended December 31, 1997, the difference between the expected tax
provision based on Federal statutory rates and the effective tax rate resulted
principally from tax benefits relating to a reduction of the valuation allowance
against the Company's deferred tax asset of $2.8 million in 1997, based on
management's analysis of current levels of earnings and anticipated operating
results. The Company expects that the income tax provision in future periods to
closely reflect the statutory tax rates. See Note 7 of Notes to Consolidated
Financial Statements.

YEAR 2000 ISSUES

Certain computer programs were written using two digits rather than four to
define the applicable calendar year. Such programs may recognize a date using
"00" as the year 1900 rather than the year 2000. This is referred to as the
"Year 2000 Issue" or "Y2K Problem".

The Company has established an internal Y2K readiness committee consisting
of at least one member of every functional department. The committee has
developed a Year 2000 readiness plan and will develop contingency plans as the
need arises.

The Company has completed certain internal testing of the file server
versions of its human resources and payroll products, as well as the client
server human resource product and confirmed that they are year 2000 compatible.
ITAA certification (meaning that the Company has been found to meet the
information technology industry's best software development practices for
addressing the Year 2000 issue) has been obtained for the Abra Suite and Best!
Imperativ HRMS products. The Company has further determined that the Abra Tax
File product is not Year 2000 compatible, but it is currently anticipated that
the effort and cost to resolve this issue will be minimal and that a release,
now planned for the third quarter of 1999, will resolve the problem. The DOS
versions of the Abra product lines are not Year 2000 compatible. Existing
customers of these DOS versions have been informed or are in the process of
being informed that the Company will not support the DOS products beyond 1999.
The People Manager HR product is not Year 2000 compatible. This product has been
discontinued and is in the process of being sold to an unrelated third party.
Existing customers of this product are in the process of being informed that the
Company will not support the People Manager product beyond current contract
commitments.

The Company has completed testing of its Windows based FAS products. For
the FAS Windows 95/98, Novell and Microsoft NT-based products and the Best!
Imperativ Asset Accounting product, the only significant date-related
restriction of which the Company is currently aware is that the "placed in
service date" field will not allow new assets to be entered in years beyond the
year 2019. By definition, this restriction will not negatively impact a user of
the existing FAS products for approximately 20 years. The Company's next
generation of FAS Windows products, scheduled for release within the next two to
three years, will not contain this date-related restriction. The DOS versions
and certain Windows 3.1 and 3.11-based products of FAS are
23
<PAGE> 26

not Year 2000 compatible. Existing customers of these versions have been
informed that the Company will not support these products beyond 1999. The
Company is conducting campaigns to convert these customers to its Year 2000
compatible programs.

Notwithstanding the above, there can be no assurances that the Company's
current products do not contain undetected errors or defects associated with
Year 2000 date functions that may materially and/or adversely affect the
Company's financial condition or results of future operations.

The Company has not specifically tested third-party software that is
incorporated into its products but the Company has obtained assurances from its
third-party licensors that the licensed software will not have date-related Year
2000 issues. Despite this, unknown errors in the Company's third-party licensed
software may materially and/or adversely affect the Company.

Some analysts have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company is aware of an
increasing number of lawsuits against other software vendors. Although no
lawsuits have been filed against the Company, the outcome of any such lawsuits
and the impact on the Company cannot be determined at the present time because
of the unique nature of such potential litigation. Furthermore, because it is in
the business of selling software products, the Company's risk of being subjected
to lawsuits relating to Year 2000 issues with its software products is likely to
be greater than that of companies in other non-software related industries.
Because computer systems may involve different hardware, firmware and software
components from different manufacturers, it may be difficult to determine which
component in a computer system may cause a Year 2000 issue. As a result, the
Company may be subjected to Year 2000-related lawsuits independent of whether
its products and services are Year 2000 ready. The outcome of any such lawsuits
and the impact on the Company cannot be determined at this time.

For IT related systems, the Company has completed its assessment and
testing of the Company's mission critical system for its Reston, VA. and St.
Petersburg, FL. locations, namely its AS 400 information management system and
has determined that minimal modifications are required for the system to be Year
2000 compatible. A third party reviewer of the system has recommended certain
additional testing to insure Year 2000 compatibility. Management's expectation
is that the additional testing and modifications will be completed by September
30, 1999. The Virginia and Florida locations utilize the Company's own payroll
and human resource applications which are Year 2000 compatible. Management's
expectation is that the general ledger system and a call center phone system for
the Virginia and Florida locations will be upgraded or replaced with Year 2000
ready systems by September 30, 1999. The cost to upgrade or replace these
systems was previously budgeted for in the Company's 1999 operating plan, and is
not expected to exceed $500,000.

For IT and non-IT systems, a campaign to contact significant suppliers and
vendors of products and services is currently under way with an expected
completion date of March 31, 1999. The Company is and will be placing
significant reliance on these suppliers' and vendors' statements regarding their
Year 2000 readiness. In this regard, the Company faces risks and uncertainties
to the extent that such third parties with whom the Company transacts business
on a worldwide basis do not have business systems or products that comply with
the Year 2000 requirements. Although the Company is currently analyzing the
impact, if any, of the Year 2000 issues surrounding such third party
interactions, failure of any critical technology components to operate properly
in the Year 2000 and beyond may have a material adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems. Contingency plans will be prepared if it is determined that the
compliance objectives will not be met.

Management's assessment to date is that minimal modifications will be
necessary to the Company's IT and non-IT related systems to achieve Year 2000
compatibility. All costs of the above IT and non-IT measures are being funded
out of current operations, but have not been separately accounted for in the
past. Cost of the above measures includes systems software and hardware, outside
contractors, technical support from various internal groups and administrative
costs to manage. The Company's total cost relating to these activities has not
been and is not expected to be material to the overall financial position,
results of operations or cash flows of the Company. However, there can be no
assurance that there will not be a delay in or increased costs associated with
the above measures, or that the Company's significant vendors and suppliers

24
<PAGE> 27

will adequately prepare for the Year 2000 issue. It is possible that any such
delays, increased costs, or supplier failures could have a material adverse
impact on the Company's operations and financial results.

LIQUIDITY AND CAPITAL RESOURCES

The Company primarily funds its operations through cashflow provided by
operations. The Company had cash, cash equivalents and short-term investments of
$46.3 million at December 31, 1998.

For the year ended December 31, 1998, nine months ended December 31, 1997
and fiscal year ended March 31, 1997, net cash provided by operating activities
was $14.8 million, $10.2 million and $12.3 million, respectively. In the year
ended December 31, 1998 and the nine months ended December 31, 1997, net cash
from operating activities was primarily provided by net income and deferred
maintenance and services revenue.

Net cash used in investing activities for the year ended December 31, 1998,
the nine months ended December 31, 1997 and for the fiscal year ended March 31,
1997 was $17.6 million, $13.8 million and $1.1 million respectively. The
increase in cash used for the year ended December 31, 1998 was due to the
acquisition of HRS and certain technological assets of HRSoft, the increase in
expenditures for property and equipment, partially offset by the increase in net
cash flow from the purchase and sale of short-term marketable investments. The
increase for the nine months ended December 31, 1997 was due primarily to
purchases of short-term investments with the proceeds from the Initial Public
Offering. In the year ended December 31, 1998, the nine months ended December
31, 1997 and the fiscal year ended March 31, 1997, cash used in investing
activities for the purchase of property and equipment was $3.9 million, $1.5
million, and $1.3 million respectively. Although the Company does not currently
have any material identifiable commitments for capital expenditures, the Company
expects to continue to invest in the acquisition of property and equipment in
the ordinary course of its business. The Company does not have any material
commitments related to its royalty obligations arising from licenses of certain
products and technologies used in the Company's products.

Net cash used by financing activities was approximately $900,000 for the
year ended December 31, 1998, compared to net cash provided of $23.4 million in
the nine months ended December 31, 1997. The primary source of cashflow for the
nine months ended December 31, 1997 was net proceeds of the Initial Public
Offering partially offset by the use of cash for the payment of dividends. Net
cash used by financing activities for the fiscal year ended March 31, 1997
resulted primarily from dividends paid to shareholders, repayment of long term
debt and the purchase of treasury stock.

The Company believes that the cash generated from operations will be
sufficient to fund its operations for at least the next 12 months.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information".
These statements became effective for the Company's 1998 financial statements
(See footnote 12 in the financial statements).

The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP 97-2, "Software Revenue
Recognition", that is effective for fiscal years beginning after December 15,
1997. The adoption of SOP 97-2 did not have a material impact on the Company.

Effective December 15, 1998, the AICPA has issued a Statement of Position
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with respect
to Certain Transactions". This SOP amends SOP 98-4, "Deferral of Effective Date
of a Provision of SOP 97-2" to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999 and provides additional guidance regarding the accounting
for multiple element software sales. The Company believes the adoption of SOP
98-9 will not have a material impact on the Company.
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<PAGE> 28

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Significant Fluctuations in Quarterly Operating Results. The Company has
experienced, and expects to continue to experience, significant fluctuations in
its quarterly operating results. There can be no assurance that the Company will
be profitable in any particular quarter. The Company's future quarterly
operating results will depend upon a number of factors, including the demand for
its products, the type and level of services purchased by its customers, the mix
of sales through direct and indirect sales channels, the level of product and
price competition that it encounters, the length of its sales cycles, the timing
of larger customer implementations, the timing and success of sales and
marketing programs, particularly direct mail campaigns, the timing and
acceptance of new product introductions and product enhancements by the Company
and its competitors, the timing and amount of the Company's product development
programs, the mix of products and services sold, the timing of new hires, market
acceptance of new products, competitive conditions in the industry and general
economic conditions. The Company's expense levels are based, in significant
part, on anticipated revenue trends. Because a high percentage of these expenses
are relatively fixed in the short term, if revenue levels fall below
expectations, the Company's operating results are likely to be materially and
adversely affected. Historically, the Company's revenues and earnings for the
first calendar quarter have been lower than those for the preceding quarter
because a disproportionate number of customers purchase the Company's products
in the fourth calendar quarter in anticipation of the close of their own fiscal
years and the ensuing tax season. In addition, margins in the first calendar
quarter have historically been lower due to the shipment by the Company of large
numbers of annual software updates in that quarter reflecting regulatory
changes. The Company anticipates that the sales cycle for its enhanced
client/server products, upon their introduction, will generally be longer than
that associated with its current products. Any significant lengthening of the
Company's sales cycle could have a material adverse effect on the Company's
business, operating results and financial condition and, in particular, could
contribute to significant fluctuations in operating results on a quarterly
basis. As a result of these and other factors, the Company's quarterly operating
results are subject to variation, and the Company believes that
quarter-to-quarter comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
In addition, due to all the foregoing factors, the Company's operating results
in future periods may be below the expectations of securities analysts and
investors. In that event, the market price of the Company's Common Stock would
likely be materially adversely affected.

Risks Associated with Sales Channels. To date, the Company has sold its
products and services primarily through a network of value-added resellers,
accounting firms and consultants (together, "Business Partners"), a
direct-response telesales operation, strategic marketing alliances and a direct
sales force focusing on national accounts. The Company's ability to achieve
significant revenue growth in the future will depend, in large part, upon its
ability to establish and maintain relationships with its Business Partners,
strategic alliance partners and national accounts and upon the success of its
direct mail campaigns and telesales efforts. The Company's ability to
successfully market its products, including its enhanced client/server products
under development, will depend on its ability to adapt its sales channels to
address the evolving markets for such products. Failure to do so could have a
material and adverse effect on the Company's business, operating results and
financial condition. See "Business -- Sales and Marketing".

The Company's ability to achieve significant revenue growth in the future
will depend, in part, on its success in recruiting and training sufficient
direct sales personnel and expanding its Business Partner network. Although the
Company is currently investing, and plans to continue to invest, significant
resources to develop and expand its direct sales force and Business Partner
network, the Company has at times experienced and may continue to experience
difficulty in recruiting qualified personnel for its direct sales force and
identifying, certifying, and/or maintaining qualified Business Partners. There
can be no assurance that the Company will be able to maintain or successfully
expand its direct sales force or Business Partner network or that any such
expansion will result in an increase in revenue. Further, there can be no
assurance that a sufficient number of direct sales personnel or Business
Partners will be able to successfully address the client/server market. Any
failure by the Company to expand its direct sales force or its Business Partner
network could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, if the Company is
successful in expanding its direct sales force, there can be no assurance that
its direct sales

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<PAGE> 29

personnel will be successful in increasing the Company's revenue to a sufficient
extent to cover the increased expenses associated with such expansion. The
Company's agreements with its Business Partners generally are nonexclusive and
may be terminated by either party at any time without cause. The Company's
Business Partners are not within the control of the Company, are not obligated
to purchase products from the Company and may also represent or refer product
lines of its competitors. Business Partners' sales tend to fluctuate based on
their implementation schedules and internal resources, which are beyond the
control of the Company. There can be no assurance that these Business Partners
will continue their current relationships with the Company or that they will not
give higher priority to the sale or referral of other products, which could
include products of competitors. A reduction in sales efforts or discontinuance
of sales or referrals of the Company's products by its Business Partners could
lead to reduced sales and could materially adversely affect the Company's
business, operating results and financial condition. The Company expects that
any material increase in the Company's indirect sales as a percentage of total
revenue will materially and adversely affect the Company's average selling
prices and gross margins due to the lower unit prices that the Company receives
through indirect channels.

The Company's strategy of marketing its products directly to end-users and
indirectly through its Business Partners may result in distribution channel
conflicts. The Company's direct sales efforts may compete with those of its
indirect channels and, to the extent more than one Business Partner targets the
same customer, such Business Partners may come into conflict with each other.
There can be no assurance that channel conflict will not adversely affect the
Company's relationships with its customers or Business Partners or its ability
to attract other Business Partners. See "Business -- Sales and Marketing".

Product Concentration; Discontinued Product Lines. The Company currently
derives substantially all of its revenue from its APG and HRPG and related
services. These product lines are expected to continue to account for a
substantial portion of the Company's revenues for the foreseeable future.
Accordingly, the Company's future operating results will depend, in part, on
maintaining and increasing acceptance of these products and related services.
Any factors adversely affecting the pricing of or demand for these products and
services or an increase in competition for such products and services could have
a material adverse effect on the Company's business, operating results and
financial condition. The Company's historical consolidated financial statements
for the applicable periods include results of operations relating to certain
product lines subsequently sold or licensed by the Company. Accordingly, the
Company's historical consolidated financial statements are not indicative of
operating results attributable to the Ongoing Business.

New Products and Rapid Technological Change. The market for business
application software is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the Company's
products are difficult to estimate and the Company's current market position
could be undermined by rapid technological changes and the introduction of new
products and enhancements by new or existing competitors. The Company's growth
and future success will depend, in part, upon its ability to enhance its current
products and introduce new products in order to keep pace with products offered
by the Company's competitors, adapt to technological advancements and changing
industry standards and produce additional functionality to address the
increasingly sophisticated requirements of its customers. The Company currently
has a number of new product development efforts underway, including the
development of enhanced client/server versions of its APG and HRPG products and
the development of a new budgeting software product. The Company's product
development efforts are expected to require substantial additional investment by
the Company. There can be no assurance that the Company will have sufficient
resources to make the necessary investment or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, there
can be no assurance that such products or enhancements will meet the
requirements of the marketplace or achieve market acceptance or that the
Company's customers will migrate to client/server environments at the rate
expected by the Company. If the market for the Company's products shifts rapidly
towards the client/server environment, the absence of enhanced client/server
versions of its APG and HRPG products, or any delay in the commercial
availability or market acceptance of such products, could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company is developing enhanced client/server products to

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<PAGE> 30

operate on corporate Intranets, among other applications, and the success of
these products will depend upon growth in the number of middle market businesses
implementing corporate Intranets. If businesses do not adopt and deploy
corporate Intranets at the rate anticipated by the Company, the Company's
business, operating results and financial condition may be materially and
adversely affected. Any failure by the Company to anticipate or respond
adequately to technological advancements, customer requirements and changing
industry standards, or any significant delays in the development, introduction
or availability of new products or enhancements, could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Product Design and Development".

Product Migration. Prior to fiscal 1994, substantially all of the
Company's revenue from its FAS and Abra products was derived from DOS-based
versions of those products. Since fiscal 1994, when the Company introduced
Windows-based versions of its FAS and Abra products, a significant number of the
Company's DOS installed base of customers for these product lines has migrated
to the Company's Windows-based products. However, there can be no assurance that
in the future a significant percentage of the Company's remaining installed base
of DOS customers will migrate to the Company's Windows-based products. In
particular, the Company believes that smaller customers are less likely to
migrate to the Company's Windows-based products because the cost of migrating is
high relative to their size and because, in many cases, the DOS-based products
adequately meet their needs. The Company has informed all remaining DOS
customers that it will no longer support the DOS versions of the products after
December 1999. If the remaining DOS customers elect not to migrate to the
Company's Windows-based products, the Company's business, operating results and
financial condition would be minimally affected.

Competition. The market for the Company's products is intensely
competitive and rapidly changing. The Company faces different competitors for
each of its product lines. The Company's asset management products compete
principally with products offered by the Bureau of National Affairs, Inc.,
Decision Support Technology, Inc., Creative Solutions and Computer Language
Research, Inc. The Company's Best! Imperativ Asset Accounting product competes
principally with general ledger accounting companies which offer a basic fixed
asset module along with the core accounting systems. The Company's human
resources and payroll management products compete primarily with Spectrum Human
Resource Systems Corporation, Human Resources Microsystems and Ceridian
Corporation (FLX) in the single-user and work group environment, and the
Company's client/server human resources and payroll products compete with
products offered by PeopleSoft, Inc., Ultimate Software Group, Inc., Cyborg,
Inc. and SAP AG in the client/server environment. The Company's human resources
and payroll management products also compete with payroll service bureaus, such
as ADP, Inc. and Paychex, Inc., and with in-house management information systems
staffs. The Company's European products compete primarily with SAP AG,
PeopleSoft GmbH, Oracle GmbH, CGI GmbH, P&I AG, Soft-Research, and Mita4.
Several of the Company's competitors or potential competitors have significantly
greater financial, technical and marketing resources than the Company. Some of
the Company's existing competitors, as well as a number of potential new
competitors, have larger technical staffs, more established and larger sales and
marketing organizations and greater financial resources than the Company. There
can be no assurance that the Company will continue to compete successfully with
its existing competitors or will be able to compete successfully with new
competitors. In addition, there can be no assurance that competitors will not
develop products that are superior to the Company's products or achieve greater
market acceptance. Competitive pressures in the form of aggressive price
competition could also have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future success will
depend significantly upon its ability to increase its share of its target
markets, to maintain and increase its renewal revenues from existing customers
and to sell additional products, product enhancements, maintenance and support
agreements and training and consulting services to existing customers and new
customers. There can be no assurance that the Company will continue to compete
favorably or that competition will not have a material adverse effect on the
Company's business, operating results or financial condition.

Timely Release of Periodic Updates to Reflect Tax Law and Other Regulatory
Changes. The Company's asset, human resources and payroll management software
products are affected by changes in laws and regulations and generally must be
updated annually or periodically to maintain their accuracy and competi-

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<PAGE> 31

tiveness. There can be no assurance that the Company will be able to release
these annual or periodic updates on a timely basis in the future. Failure to do
so could have a material adverse effect on market acceptance of the Company's
products, which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, significant changes in
tax laws and regulations or other regulatory provisions applicable to the
Company's products could require the Company to make a significant investment in
product modifications, which could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- Products and Services" and "Business -- Product Design and
Development."

Product Errors; Product Liability. Software products such as those offered
by the Company typically contain undetected errors or failures when first
introduced or as new versions are released. Testing of the Company's products is
particularly challenging because it is difficult to simulate the wide variety of
computing environments in which the Company's customers may deploy these
products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. Accordingly, there can be no
assurance that such defects, errors or difficulties will not cause delays in
product introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company's products. In addition,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.

Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance of
related services by the Company entails the risk of such claims. Many of the
Company's products and services are used by or performed for customers in
connection with the preparation and filing of tax returns and other regulatory
reports. If any of the Company's products contain errors that produce inaccurate
results upon which users rely, or cause users to misfile or fail to file
required information, the Company could be subject to liability claims from
users which could, in turn, materially adversely affect the Company's business,
operating results and financial condition. The Company attempts to limit its
product liability exposure to users through contractual limitations on
liability, including appropriate disclaimers in its "shrink wrap" license
agreement with end users. The Company's software license agreements generally
provide that the software is provided "as is" without warranty of any kind.
There can be no assurance, however, that the contractual limitations used by the
Company will be enforceable or will provide the Company with adequate protection
against product liability claims. The Company also maintains errors and
omissions insurance. There can be no assurance, however, that such coverage will
be sufficient to cover any claims made in the future, will continue to be
available on reasonable terms, or that the insurer will not disclaim coverage as
to any future claim. A successful claim for product or service liability brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.

Acquisitions. The Company may, from time to time, pursue acquisitions of
businesses, customer bases, products or technologies that complement or expand
its existing business. The Company evaluates potential acquisition opportunities
from time to time, including those that could be material in size and scope.
Acquisitions involve a number of risks, including the diversion of management's
attention from day-to-day operations to the assimilation of the operations and
personnel of the acquired companies and the incorporation of acquired
operations, customer bases, products or technologies. Such acquisitions could
also have adverse short-term effects on the Company's operating results, and
could result in dilutive issuances of equity securities, the incurrence of debt
and the loss of key employees. In addition, many business acquisitions must be
accounted for as purchases and, because most software-related acquisitions
involve the purchase of significant intangible assets, these acquisitions
typically result in substantial amortization charges and charges for acquired
research and development projects, which could have a material adverse effect on
the Company's operating results. There can be no assurance that any such
acquisitions will occur or that, if such acquisitions do occur, the acquired
businesses, customer bases, products or technologies will generate sufficient
revenue to offset the associated costs or effects.

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Protection of Intellectual Property; Risks of Infringement. The Company's
success is heavily dependent upon its proprietary technology. The Company
regards its software as proprietary, and relies primarily on a combination of
trade secret, copyright and trademark law, trade secret, confidentiality
agreements and contractual provisions to protect its proprietary rights. The
Company has no patents or patent applications pending, and existing trade secret
and copyright laws afford only limited protection. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem, particularly in international markets and as a
result of the growing use of the Internet. In selling its products, the Company
relies primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, it is possible that such licenses may be unenforceable under the laws
of certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent, as do the laws of
the United States. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate or that the Company's
competitors will not independently develop products or technologies that are
substantially equivalent or superior to the Company's products or technologies.

International Operations. Although the Company's revenue from
international sales has historically been insignificant, the acquisition of HRS
and investment in S&P AG significantly increases the Company's international
operations. The Company intends to increase its sales and marketing efforts in
other international markets. The Company anticipates that its international
operations will require the Company to recruit and hire a number of new
consulting, sales and marketing and support personnel in countries in which the
Company establishes operations. In addition, the Company has only limited
experience in developing localized versions of its products and in marketing and
distributing its products internationally. The Company's international sales and
marketing efforts will require significant investment by the Company in advance
of anticipated future revenue. There can be no assurance that the Company's
international sales and marketing efforts will be successful or will generate
significant revenue. There are a number of other risks inherent in international
business activities, including costs and risks of localizing products for
foreign countries, unexpected changes in regulatory requirements, tariffs and
other trade barriers, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially adverse tax consequences,
currency fluctuations, difficulties in the repatriation of earnings, the burdens
of complying with a wide variety of foreign laws and exposures to gains and
losses on foreign currency transactions. There can be no assurance that such
factors will not have a material adverse effect on the Company's business,
operating results or financial condition.

Reliance on Microsoft Technologies. The Company's software products are
designed primarily to operate with Microsoft technologies, including Windows NT,
Windows 95, Windows 3.x, SQL Server, Visual FoxPro, Visual Basic and Back
Office. The Company's strategy requires that its products and technology be
compatible with new developments in Microsoft technology. A decreasing portion
of the Company's products are also designed to operate with Microsoft DOS.
Although the Company believes that Microsoft technologies are currently widely
utilized by businesses of all sizes, there can be no assurance that businesses
will continue to adopt such technologies as anticipated, will migrate from older
Microsoft technologies (such as DOS or earlier versions of Windows) to newer
Microsoft technologies or will not adopt alternative technologies that

30
<PAGE> 33

the Company does not support. If businesses do not migrate from older
technologies and adopt the Microsoft technologies with which the Company's
products are compatible, the Company's business, operating results and financial
condition will be materially and adversely affected.

Dependence on Key Personnel. The Company's success depends, in significant
part, upon the continued services of its key technical, marketing, sales and
management personnel and on its ability to continue to attract, motivate and
retain highly qualified employees. The loss of key personnel could have a
material adverse effect on the Company's business, operating results and
financial conditions. The Company does not maintain key person life insurance on
any of its employees. Although the Company has employment agreements with
certain key employees, these employees, like all other employees, may
voluntarily terminate their employment with the Company at any time. Competition
for technical, marketing, sales and management employees is intense and the
process of locating personnel with the combination of skills and attributes
required to execute the Company's strategy can be difficult, time-consuming and
expensive. There can be no assurance that the Company will be successful in
attracting or retaining highly skilled technical, management, sales and
marketing personnel and the failure to attract, hire, assimilate or retain such
personnel could have a material adverse effect on the Company's business,
operating results and financial condition.

Significant Influence by Principal Shareholders, Officers and
Directors. The present directors, executive officers and principal shareholders
of the Company and their affiliates own approximately 27% of the outstanding
Common Stock. As a result, these shareholders will be able to exercise
significant influence over all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.

Possible Volatility of Stock Price. The trading price of the Company's
Common Stock is likely to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the software
industry, changes in financial estimates by securities analysts, general market
conditions and other factors. In addition, the public equity markets have from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the stock of technology companies.
These broad market fluctuations, as well as shortfalls in sales or earnings as
compared with securities analysts' expectations, changes in such analysts'
recommendations or projections and general economic and market conditions, may
materially and adversely affect the market price of the Company's Common Stock.

Anti-takeover Effect of Certain Charter, By-Law and Statutory Provisions;
Possible Issuance of Preferred Stock. The Company's Amended and Restated
Articles of Incorporation and Amended and Restated By-Laws, as well as Virginia
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions allow the
Company to issue without shareholder approval preferred stock having rights
senior to those of the Common Stock. Other provisions impose various procedural
and other requirements that could make it more difficult for shareholders to
effect certain corporate actions. In addition, the Company's Board of Directors
is divided into three classes, each of which will serve for a staggered
three-year term, which may make it more difficult for a third party to gain
control of the Company's Board of Directors.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

The Company is exposed to a certain level of market risk resulting
primarily from changes in domestic interest rates and foreign currency exchange
rates.

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MARKET VALUE AND INTEREST RATE RISK

The Company's exposure to interest rate risk relates primarily to the
Company's investment portfolio. The Company invests its excess cash in
securities classified as cash equivalents or short-term investments. The Company
places its investments with high credit quality issuers and, by policy, limits
the amount of credit exposure to any one issuer. The Company also limits the
maturities of its investments and invests only in investment grade securities.
As stated in its policy, the Company's primary investment goals are the
liquidity, safety and preservation of its invested funds. The Company has not
experienced nor does it expect any material loss with respect to its
investments.

As of December 31, 1998 the Company had invested approximately $29 million
in cash equivalents and $17 million in short term investments. Cash equivalents
have original maturities of 90 days or less and consist primarily of direct
investments in securities of the US government and Government agencies,
municipalities, and corporations or investments in money market funds whose
underlying investments are those of the US government. Excluding money market
funds, most of these instruments carry fixed, contractual rates of interest. The
Company's short-term investments consist primarily of commercial paper,
investments in securities of the US government or government agencies,
municipalities, and corporations, most of which carry fixed rates of contractual
interest. Investments in fixed rate instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates.

The Company believes that its cash equivalents and short term investments
are similar enough to aggregate for purposes of evaluating any potential impact
of an adverse change in interest rates. The weighted average remaining maturity
of the Company's cash equivalents as of December 31, 1998 was less than 30 days.
The weighted average remaining maturity of the Company's short-term investments
at December 31, 1998 was less than 45 days. Because of the short-term nature of
the remaining maturities as of December 31, 1998, the impact of a change in
interest rates or market value would be immaterial.

FOREIGN CURRENCY RISK

The Company operates in regions outside of the US, primarily Germany. Non
US sales and other operating activities are conducted primarily from its German
subsidiary and are typically denominated in the local country currency. As a
result, the Company is primarily exposed to foreign exchange rate fluctuations
as the financial results of its German subsidiary are translated into U.S.
dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. However, through and as of December 31, 1998 the Company's
exposure was not material to the overall financial statements taken as a whole.
The Company has not entered into any foreign currency hedging transactions with
respect to its foreign currency market risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Pursuant to a resolution adopted by the Board of Directors, the Company
announced on December 22, 1997 that it would change the date for the end of its
fiscal year from March 31 to December 31 effective with the then current fiscal
year. The Board made its decision so that the Company's financial reporting
would be more consistent with that of other publicly traded companies and to
simplify communications with investors and shareholders.

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

Not applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers and directors of the Company, and their ages as of
December 31, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James F. Petersen (1)............... 54 Chairman of the Board of Directors
Timothy A. Davenport................ 42 President, Chief Executive Officer and Director
David N. Bosserman.................. 42 Executive Vice President, Chief Financial
Officer and Treasurer
James F. Foster..................... 46 President, Abra Software, Inc.
David L.G. Horn..................... 41 Vice President, Technical Support
Andreas Hoynigg..................... 37 General Manager, Best Software Germany GmbH
Elaine Kelly........................ 35 Vice President, Marketing
Robert H. Skinner................... 47 Senior Vice President, Sales
Herbert R. Brinberg (3)............. 72 Director
Richard A. Lefebvre (1)(2).......... 51 Director
John H. Martinson (1)(2)(3)......... 50 Director
W. Frank King....................... 59 Director
</TABLE>

--------------------
(1) Member of the Compensation Committee

(2) Member of the Option Subcommittee of the Compensation Committee

(3) Member of the Audit Committee

James F. Petersen co-founded the Company in 1982 and has served as the
Company's Chairman of the Board since its inception. He served as President and
Chief Executive Officer of the Company from 1982 to June 1995. Before founding
the Company, Mr. Petersen was Vice President and Treasurer of Aspen Systems
Corporation, an electronic information and publishing company.

Timothy A. Davenport was appointed President, Chief Executive Officer and a
director of the Company in June 1995. From March 1987 to June 1995, Mr.
Davenport served as Vice President, Developer Tools Group, and Vice President,
Graphics Division, for Lotus Development Corporation ("Lotus"), a computer
software company that markets and develops productivity and work group
applications. Prior to joining Lotus, Mr. Davenport was employed from March 1985
to March 1987 as Vice President of Product Marketing for Decision Resources, a
division of Ashton-Tate Corporation, a company that developed business graphics
applications. Mr. Davenport is a director of Axent Technologies, Inc., a
provider of enterprise-wide information security solutions.

David N. Bosserman has served as the Company's Executive Vice President,
Chief Financial Officer and Treasurer since October 1996. Previously, he served
as the Company's Vice President, Corporate Finance from June 1993 to September
1996, and Director, Finance and Operations from May 1992 to May 1993. From
January 1985 to May 1992, Mr. Bosserman served in various positions, leading to
Senior Manager, at Deloitte & Touche.

James F. Foster became President of Abra Software, Inc., a wholly owned
subsidiary of the Company ("Abra Software"), in April 1993. From September 1992
until April 1993, Mr. Foster served as Chief Operating Officer of Abra Software.
Prior to joining Abra Software, Mr. Foster was employed from July 1984 to
September 1992 by Dun & Bradstreet Software Services, Inc., a business
application software provider, where he held a number of positions in the human
resources software area, most recently as Director of Sales and Marketing for
the personal computer human resources division.

David L.G. Horn has served as the Company's Vice President, Technical
Support since December 1997. Previously, he served as the Company's Vice
President, FAS Products Group since joining the Company in

33
<PAGE> 36

October 1995. From February 1984 to October 1995, Mr. Horn was employed by
Hewlett-Packard Co., a manufacturer of electronic products, in various
capacities, most recently as Future Products Manager for its office products
division.

Andreas Hoynigg became General Manager of the European operations in March
1998 when the Company acquired HR Management Software GmbH (HRS). Dr. Hoynigg
purchased HRS in 1990 from an Austrian conglomerate, which started HRS in 1987.
He has served as the president since the purchase. Dr. Hoynigg was previously
employed by EFS where he served as a management consultant.

Elaine Kelly has served as Vice President, Marketing since September 1996.
From October 1993 to September 1996, Ms. Kelly served as a Director of
Marketing. From October 1990 until October 1993, Ms. Kelley served as Marketing
Manager of the Company. From July 1988 to September 1990, Ms. Kelly served as
Manager of Marketing Services for Netron Inc., a Canadian software company.

Robert H. Skinner has served as Senior Vice President, Sales since April
1996. Previously, he served as the Company's Vice President of Sales and
Marketing for FAS from April 1995 to April 1996, and as Director of Sales from
June 1992 to April 1995. From December 1982 to June 1992, Mr. Skinner served as
Vice President of Sales and Marketing for Trinet, Inc., a business information
marketing company.

Herbert R. Brinberg has served as a director of the Company since 1990.
Since 1990, Dr. Brinberg has served as the President of Parnassus Associates
International, a company that assists organizations with information and
technology management. From 1978 to 1990, Dr. Brinberg was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, an international
publishing company. Dr. Brinberg also serves as a director of K&F Industries,
Inc., and Brill Academic Publishers.

Richard A. Lefebvre became a director of the Company in February 1996. From
January 1989 through July 1997, Mr. Lefebvre served as Chairman and Chief
Executive Officer of Axent Technologies, Inc. ("Axent"), a provider of
enterprise-wide information security solutions. From July 1997 through December
1998, Mr. Lefebvre served as Chairman of Axent. Prior to joining Axent, Mr.
Lefebvre was Chief Operating Officer at Sage Software, Inc., a computer software
company, from May 1987 to December 1988. Mr. Lefebvre also is a director of
Axent.

John H. Martinson has served as a director of the Company since 1988. Since
1986, Mr. Martinson has been a general partner of Edison Partners, L.P., which
is the general partner of Edison Venture Fund, L.P. ("Edison"), a venture
capital partnership and a shareholder of the Company. Mr. Martinson is a
director of Dendrite International, Inc. He is also a director and
president-elect of the National Venture Capital Association and a director of
the New Jersey Technology Council.

W. Frank King became a director of the Company in July 1998. From October
1992 through October 1998 he served as the President and Chief Executive Officer
of PSW Technologies, Inc. (formerly a division of Pencom, Inc.), a provider of
software related engineering, development, and support services. From 1988 to
1992, Dr. King served as Senior Vice President of Development for Lotus
Development Corporation, and from 1969 to 1988, Dr. King was employed by IBM
Corporation where his final position was as the Vice President of Development,
Entry System Division. Dr. King also serves as a director of Auspex Systems,
Inc., Cortelco Systems, Inc., Excaliber Technologies Corporation, Natural
Microsystems, Inc., PSW Technologies, Inc. and Systemsoft Corporation.

Officers of the Company serve at the pleasure of the Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

The information that is required by this Item is incorporated by reference
to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1998.

34
<PAGE> 37

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

(a) The following documents are filed as part of this Report:

1. Consolidated Financial Statements. The following consolidated
financial statements of Best Software, Inc. are filed as part of this report.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997......................................... F-2
Consolidated Statements of Operations for the year ended
December 31, 1998 and the nine months ended December 31,
1997 and the fiscal year ended March 31, 1997............. F-3
Consolidated Statements of Shareholders' Equity for the year
ended December 31, 1998 and the nine months ended December
31, 1997 and the fiscal year ended March 31, 1997......... F-4
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and the nine months ended December 31,
1997 and the fiscal year ended March 31, 1997............. F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>

2. Consolidated Financial Statements Schedules.

INDEX TO FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as part of this report and
should be read in conjunction with the Consolidated Financial Statements:

<TABLE>
<S> <C>
Schedule II Valuation and Qualifying Accounts for the year
ended December 31, 1998, the nine months ended December
31, 1997 and the fiscal year ended March 31, 1997......... F-17
</TABLE>

35
<PAGE> 38

3. Exhibits.

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
3.1 Second Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated By-Laws of the Company.
4.1 Specimen certificate for shares of the Company's Common
Stock. (Incorporated by reference to Exhibit 4.1 of Form
S-1) (Registration Statement #333-33275 -- "Form S-1")
10.1 Employee Incentive Stock Option Plan of the Company, as
amended. (Incorporated by reference to Exhibit 10.1 of Form
S-1)
10.2 Amended and Restated 1992 Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 10.2 of Form S-1)
10.3 1997 Employee Stock Purchase Plan of the Company.
(Incorporated by reference to Exhibit 10.3 of Form S-1)
10.4 1997 Stock Incentive Plan of the Company. (Incorporated by
reference to Exhibit 10.4 of Form S-1)
10.5 1997 Director Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 10.5 of Form S-1)
10.6 Loan and Warrant Purchase Agreement dated March 2, 1993 by
and between PNC Capital Corp. and the Company. (Incorporated
by reference to Exhibit 10.6 of Form S-1)
10.6A Amendment No. 1 to the Loan and Warrant Purchase Agreement.
(Incorporated by reference to Exhibit 10.6A of Form S-1)
10.7 Amended and Restated Common Stock Purchase Warrant dated
March 24, 1993 held by PNC Capital Corp. (Incorporated by
reference to Exhibit 10.7 of Form S-1)
10.8 Lease dated March 11, 1993, by and between HEM Corporation
and the Company, as amended. (Incorporated by reference to
Exhibit 10.8 of Form S-1)
10.9 Lease Agreement dated October 28, 1991, by and between
Reston Investment Properties Associates Limited Partnership
and the Company, as amended. (Incorporated by reference to
Exhibit 10.9 of Form S-1)
10.10 Lease dated November 17, 1992 by and between Koger
Management, Inc. and Abra Cadabra Software, Inc., as
amended. (Incorporated by reference to Exhibit 10.10 of Form
S-1)
10.11 Form of Shareholder Warrant. (Incorporated by reference to
Exhibit 10.11 of Form S-1)
10.12 Consolidating Registration Rights Agreement. (Incorporated
by reference to Exhibit 10.12 of Form S-1)
10.12A Form of Letter Agreement between the Company and James F.
Petersen. (Incorporated by reference to Exhibit 10.12A of
Form S-1)
10.13 License Agreement dated May 28, 1996 between Best!Ware, Inc.
and Data-Tech Software Pty. Ltd. (Incorporated by reference
to Exhibit 10.13 of Form S-1)
10.14 Asset Purchase and Transition Agreement dated May 28, 1996
among Best!Ware, Inc. (NJ), Best!Ware, Inc. (VA) and the
Company. (Incorporated by reference to Exhibit 10.14 of Form
S-1)
10.15 Employment Agreement dated May 17, 1995 between the Company
and James F. Petersen. (Incorporated by reference to Exhibit
10.15 of Form S-1)
10.16 Letter dated May 4, 1995, from the Company to Timothy A.
Davenport. (Incorporated by reference to Exhibit 10.16 of
Form S-1)
</TABLE>

36
<PAGE> 39

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.17 Amendments to Warrant by and among PNC Capital Corp and the
Company. (Incorporated by reference to Exhibit 10.17 of Form
S-1)
10.18 Shareholders Voting Agreement. (Incorporated by reference to
Exhibit 10.18 of Form S-1)
10.19* Revised employment agreement dated January 27, 1999 between
the Company and James F. Petersen.
21 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 21 of Form S-1)
23* Consent of Arthur Andersen LLP.
27* Financial Data Schedule.
</TABLE>

- ---------------
* Filed with this Form 10-K

(b) Reports on Form 8-K

None.

37
<PAGE> 40

SIGNATURES

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

BEST SOFTWARE, INC.

Dated: March 23, 1999
By: /s/ TIMOTHY A. DAVENPORT
------------------------------------
Timothy A. Davenport,
President and Chief Executive
Officer

SIGNATURES

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ JAMES F. PETERSEN Chairman of the Board and March 23, 1999
- ------------------------------------------------ Director
JAMES F. PETERSEN

/s/ TIMOTHY A. DAVENPORT President and Chief Executive March 23, 1999
- ------------------------------------------------ Officer and Director (Principal
TIMOTHY A. DAVENPORT Executive Officer)

/s/ DAVID N. BOSSERMAN Executive Vice President, Chief March 23, 1999
- ------------------------------------------------ Financial Officer and Treasurer
DAVID N. BOSSERMAN (Principal Financial and
Accounting Officer)

/s/ HERBERT R. BRINBERG Director March 23, 1999
- ------------------------------------------------
HERBERT R. BRINBERG

/s/ JOHN H. MARTINSON Director March 23, 1999
- ------------------------------------------------
JOHN H. MARTINSON

/s/ RICHARD LEFEBVRE Director March 23, 1999
- ------------------------------------------------
RICHARD LEFEBVRE

/s/ W. FRANK KING Director March 23, 1999
- ------------------------------------------------
W. FRANK KING
</TABLE>

38
<PAGE> 41

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Best Software, Inc.:

We have audited the accompanying consolidated balance sheets of Best
Software, Inc. and subsidiaries as of December 31, 1998 and December 31, 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year ended December 31, 1998, nine month period ended
December 31, 1997, and the year ended March 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Best Software, Inc. and
subsidiaries as of December 31, 1998 and December 31, 1997, and the results of
their operations and their cash flows for the year ended December 31, 1998, the
nine month period ended December 31, 1997, and the year ended March 31, 1997 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
January 21, 1999

F-1
<PAGE> 42

BEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $29,549 $33,164
Short-term investments................................. 16,731 12,268
Accounts receivable, net of allowance ($938 and $991,
respectively)......................................... 8,198 4,661
Inventory.............................................. 138 280
Prepaid expenses and other current assets.............. 2,390 1,419
Deferred tax asset..................................... 602 700
------- -------
Total............................................. 57,608 52,492
------- -------
Property and equipment, net............................ 4,333 2,182
Deferred tax asset..................................... 4,521 2,300
Acquired intangibles, net.............................. 7,178 --
Other assets........................................... 930 36
------- -------
Total............................................. $74,570 $57,010
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 6,299 $ 4,118
Accrued expenses....................................... 7,956 6,257
Notes payable.......................................... 139 650
Deferred maintenance and service revenue............... 19,350 14,918
------- -------
Total............................................. 33,744 25,943
------- -------
Notes payable, net of current portion.................. 125 --
Deferred maintenance and service revenue............... 616 1,313
------- -------
Total liabilities................................. 34,485 27,256
------- -------
Commitments and contingencies (Notes 7, 8 and 9)
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized,
none issued.......................................... -- --
Common stock, no par value; 40,000,000 shares
authorized; 11,687,676 and 10,913,385 issued and
outstanding, respectively............................. 38,079 33,604
Additional paid-in capital............................. 1,281 1,000
Deferred compensation.................................. (95) (124)
Accumulated other comprehensive income................. (77) --
Accumulated earnings (deficit)......................... 897 (4,726)
------- -------
Total shareholders' equity........................ 40,085 29,754
------- -------
Total............................................. $74,570 $57,010
======= =======
</TABLE>

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

F-2
<PAGE> 43

BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revenue:
License fees and royalty............................. $34,406 $18,384 $20,161
Services............................................. 34,924 18,157 19,323
------- ------- -------
Total........................................... 69,330 36,541 39,484
------- ------- -------
Cost of revenue:
License fees and royalty............................. 1,997 1,443 2,251
Services............................................. 11,425 4,537 5,675
------- ------- -------
Total........................................... 13,422 5,980 7,926
------- ------- -------
Gross margin.............................................. 55,908 30,561 31,558
------- ------- -------
Operating expenses:
Sales and marketing.................................. 24,604 13,247 14,355
Research and development............................. 11,157 6,650 6,089
General and administrative........................... 8,295 4,808 5,554
Write-off of purchased research and development...... 4,170 -- --
Amortization of acquired intangibles................. 882 -- --
------- ------- -------
Total........................................... 49,108 24,705 25,998
------- ------- -------
Operating income.......................................... 6,800 5,856 5,560
Interest income, net................................. 2,323 263 351
------- ------- -------
Income before income taxes................................ 9,123 6,119 5,911
Income tax provision...................................... 3,500 2,350 1,475
------- ------- -------
Net income................................................ $ 5,623 $ 3,769 $ 4,436
======= ======= =======
Basic net income per share................................ $ 0.49 $ 0.45 $ 0.67
======= ======= =======
Diluted net income per share.............................. $ 0.46 $ 0.38 $ 0.54
======= ======= =======
Basic weighted average shares outstanding................. 11,455 8,445 6,581
======= ======= =======
Diluted weighted average shares outstanding............... 12,180 9,809 8,263
======= ======= =======
</TABLE>

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

F-3
<PAGE> 44

BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDERS' (DEFICIT) EQUITY
REDEEMABLE ---------------------------------------------------------------
COMMON ACCUMULATED
REDEEMABLE STOCK NUMBER OF ADDITIONAL OTHER
PREFERRED PURCHASE COMMON COMMON PAID-IN DEFERRED COMPREHENSIVE
STOCK WARRANTS SHARES STOCK CAPITAL COMPENSATION INCOME
---------- ---------- --------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996............ $ 500 $ 295 6,529 $ 200 $ 749 $ (77) $ --
Exercise of stock options
including tax benefit........... -- -- 758 512 560 -- --
Compensation associated with stock
options......................... -- -- -- -- -- 7 --
Purchase and retirement of
treasury stock.................. -- -- (311) (270) (1,011) -- --
Exercise of common stock purchase
warrants........................ -- (5) 3 13 -- -- --
Cancellation of stock options..... -- -- -- -- (70) 70 --
Payment of dividend............... -- -- -- -- -- -- --
Redemption value of warrants in
excess of carrying value........ -- 137 -- -- -- -- --
Modification of warrants.......... -- 215 -- -- -- -- --
Net income...................... -- -- -- -- -- -- --
----- ----- ------ ------- ------ ----- ----
Comprehensive income............
Balance, March 31, 1997............ 500 642 6,979 455 228 -- --
Exercise of stock options
including tax benefit........... -- -- 681 358 773 -- --
Purchase and retirement of
treasury stock.................. -- -- (235) (186) (784) -- --
Payment of dividend............... -- -- -- -- -- -- --
Issuance of shares of common stock
in an Initial Public Offering... -- -- 2,750 32,247 -- -- --
Issuance of shares of common stock
for conversion of preferred
stock........................... (500) -- 625 500 -- -- --
Exercise of common stock purchase
warrants........................ -- (796) 104 160 645 -- --
Redemption value of warrants in
excess of carrying value........ -- 68 -- -- -- -- --
Compensation associated with stock
options......................... -- -- -- -- 138 (138) --
Amortization of deferred
compensation.................... -- -- -- -- -- 14 --
Modification of warrant........... -- 86 -- -- -- -- --
Issuance of stock under Employee
Stock Purchase Plan............. -- -- 9 70 -- -- --
Net income...................... -- -- -- -- -- -- --
----- ----- ------ ------- ------ ----- ----
Comprehensive income............
Balance, December 31, 1997......... -- -- 10,913 33,604 1,000 (124) --
Exercise of stock options
including tax benefit........... -- -- 223 554 671 -- --
Purchase and retirement of
treasury stock.................. -- -- (32) (15) (410) -- --
Repayment of short-swing profits
pursuant to Sec 16(b) of the
1934 Act........................ -- -- -- -- 22 -- --
Exercise of common stock purchase
warrants........................ -- -- 317 -- -- -- --
Issuance of stock upon acquisition
of HR Management Software
GmbH............................ -- -- 240 3,630 -- -- --
Amortization of deferred
compensation.................... -- -- -- -- (2) 29 --
Issuance of stock under Employee
Stock Purchase Plan............. -- -- 27 306 -- -- --
Net income...................... -- -- -- -- -- -- --
Other comprehensive
income --Foreign currency
translation adjustment.......... -- -- -- -- -- -- (77)
Comprehensive income.............. -- -- -- -- -- -- --
----- ----- ------ ------- ------ ----- ----
Balance, December 31, 1998......... $ -- $ -- 11,688 $38,079 $1,281 $ (95) $(77)
===== ===== ====== ======= ====== ===== ====

<CAPTION>
SHAREHOLDERS' (DEFICIT) EQUITY
-------------------------------------

ACCUMULATED
(DEFICIT) COMPREHENSIVE
EQUITY TOTAL INCOME
----------- ------- -------------
<S> <C> <C> <C>
Balance, March 31, 1996............ $(1,570) $ (698)
Exercise of stock options
including tax benefit........... -- 1,072
Compensation associated with stock
options......................... -- 7
Purchase and retirement of
treasury stock.................. -- (1,281)
Exercise of common stock purchase
warrants........................ -- 13
Cancellation of stock options..... -- --
Payment of dividend............... (3,556) (3,556)
Redemption value of warrants in
excess of carrying value........ (137) (137)
Modification of warrants.......... -- --
Net income...................... 4,436 4,436 $4,436
------- ------- ------
Comprehensive income............ $4,436
======
Balance, March 31, 1997............ (827) (144)
Exercise of stock options
including tax benefit........... -- 1,131
Purchase and retirement of
treasury stock.................. (35) (1,005)
Payment of dividend............... (7,565) (7,565)
Issuance of shares of common stock
in an Initial Public Offering... -- 32,247
Issuance of shares of common stock
for conversion of preferred
stock........................... -- 500
Exercise of common stock purchase
warrants........................ -- 805
Redemption value of warrants in
excess of carrying value........ (68) (68)
Compensation associated with stock
options......................... -- --
Amortization of deferred
compensation.................... -- 14
Modification of warrant........... -- --
Issuance of stock under Employee
Stock Purchase Plan............. -- 70
Net income...................... 3,769 3,769 $3,769
------- ------- ------
Comprehensive income............ $3,769
======
Balance, December 31, 1997......... (4,726) 29,754
Exercise of stock options
including tax benefit........... -- 1,225
Purchase and retirement of
treasury stock.................. -- (425)
Repayment of short-swing profits
pursuant to Sec 16(b) of the
1934 Act........................ -- 22
Exercise of common stock purchase
warrants........................ -- --
Issuance of stock upon acquisition
of HR Management Software
GmbH............................ -- 3,630
Amortization of deferred
compensation.................... -- 27
Issuance of stock under Employee
Stock Purchase Plan............. -- 306
Net income...................... 5,623 5,623 $5,623
Other comprehensive
income --Foreign currency
translation adjustment.......... -- (77) (77)
------
Comprehensive income.............. -- -- $5,546
------- ------- ======
Balance, December 31, 1998......... $ 897 $40,085
======= =======
</TABLE>

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

F-4
<PAGE> 45

BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ---------
<S> <C> <C> <C>
Net income................................................. $ 5,623 $ 3,769 $ 4,436
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................... 2,972 1,091 1,288
Compensation associated with stock options............ 27 14 7
Write-off of purchased research and development....... 4,170 -- --
Modification of warrants and amortization of debt
discount............................................ -- 86 215
Tax benefit from option exercises..................... 671 773 560
Deferred tax asset.................................... (2,123) (200) (500)
(Increase) decrease in assets:
Accounts receivable.............................. (2,005) (2,536) 1,912
Inventory........................................ 153 (97) 381
Prepaid expenses and other assets................ (820) (541) (245)
Increase in liabilities:
Accounts payable and accrued expenses............ 2,927 3,855 1,329
Deferred maintenance and service revenue......... 3,156 3,943 2,891
-------- -------- -------
Net cash provided by operating activities... 14,751 10,157 12,274
-------- -------- -------
Cash flows from investing activities:
Net proceeds from sale of property and equipment...... -- -- 185
Purchases of property and equipment................... (3,888) (1,499) (1,296)
Purchase of short-term investments.................... (50,538) (12,268) --
Sales of short-term investments....................... 46,074 -- --
Acquisition of HR Management Software, GmbH, net of
cash acquired....................................... (6,800) -- --
Acquisition of HRSoft, Inc............................ (1,800) -- --
Investment in S&P AG.................................. (598) -- --
-------- -------- -------
Net cash used in investing activities....... (17,550) (13,767) (1,111)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from initial public offering............. -- 32,247 --
Repayment of notes payable............................ (1,348) (650) (1,500)
Cash dividends paid to shareholders................... -- (7,565) (3,556)
Proceeds from exercise of stock options and
warrants............................................ 882 436 520
Purchase and retirement of treasury stock............. (425) (1,005) (1,282)
Principal payments under capital lease obligations.... -- (54) (85)
-------- -------- -------
Net cash (used in) provided by financing
activities................................ (891) 23,409 (5,903)
-------- -------- -------
Effect of exchange rate changes............................ 75 -- --
Net (decrease) increase in cash and cash equivalents....... (3,615) 19,799 5,260
Cash and cash equivalents, beginning of period............. 33,164 13,365 8,105
-------- -------- -------
Cash and cash equivalents, end of period................... $ 29,549 $ 33,164 $13,365
======== ======== =======
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes.......................................... $ 4,547 $ 1,675 $ 1,800
Interest.............................................. $ 90 $ 500 $ 160
Non-cash financing activities:
Conversion of 625,005 shares of Preferred Stock into
Common Stock........................................ $ -- $ 500 $ --
Receipt of Common Stock to repay Notes Receivable..... $ -- $ 900 $ --
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
240,000 Shares issued to HR Management Software
GmbH................................................ $ 3,630 $ -- $ --
</TABLE>

The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 46

BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Best Software, Inc. is a leader in corporate resource management software,
helping organizations to better manage their people, assets, and budgeting
processes.

The market for business application software is competitive and
characterized by ongoing technological advances. The success of the Best
Software, Inc.'s future results of operations are dependent upon, among other
things, its ability to adapt to technological developments and changing industry
standards.

Effective October 3, 1997 Best Software, Inc. sold 2,750,000 shares of
common stock at an offering price of $13.00 per share (the "Initial Public
Offering"). This transaction generated approximately $32 million of net
proceeds.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION -- The financial statements include the
accounts of Best Software, Inc. and its wholly owned subsidiaries. Best
Software, Inc. and its wholly owned subsidiaries are referred to as the
"Company". Intercompany accounts and transactions have been eliminated in
consolidation.

REVENUE RECOGNITION -- Revenue from software product licenses is recognized
upon shipment of the product, net of provisions for returns and allowances,
provided that no significant vendor obligations remain and that collection of
the resulting receivable is probable.

For products with free trial periods, revenue is recognized upon expiration
of the trial period and acceptance of the product by the customer. Revenue from
software support agreements is recognized ratably over the term of the
agreement, which is generally one year. Revenue from services, such as training
and consulting, is recognized as the services are provided. Revenue from the
Company's royalty license is recognized ratably within each year of the term of
the license agreement, based on specified annual royalty payments.

The Company adopted the American Institute of Certified Public Accountants
(the "AICPA") Statement of Position (the "SOP") SOP 97-2, "Software Revenue
Recognition" in 1998. The adoption of SOP 97-2 did not have an impact on the
Company.

In December 1998, the AICPA issued Statement of Position SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions". This SOP amends SOP 98-4, "Deferral of Effective Date of a
Provision of SOP 97-2" to extend the deferral of the application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
SOP 98-9 also amends certain provisions of SOP 97-2 regarding the accounting for
software arrangements that include multiple software and service elements. The
Company believes the adoption of SOP 98-9 will not have a material impact on the
Company.

COST OF REVENUE -- Direct product costs and royalties paid by the Company
based on contractual agreements are included in cost of license fees and royalty
revenue. Cost of services revenue includes direct costs, costs of updates,
employee compensation and benefits, telephone charges and other costs related to
providing such services.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS -- Cash and cash
equivalents include highly liquid investments with original maturity dates of
three months or less and are stated at amounts which approximate fair value,
based on quoted market prices. The Company accounts for its cash equivalents and
short-term investments under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Management determines the appropriate

F-6
<PAGE> 47
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
classification at the time of purchase and reevaluates such designations as of
each balance sheet date. Short-term investments are considered to be
held-to-maturity securities and are carried at the lower of amortized cost or
market. The Company's short-term investments include securities of U.S.
Government agencies, municipalities and corporations.

INVENTORY -- Inventory, consisting of software media, manuals and related
packaging materials, is stated at the lower of cost, determined on the first-in,
first-out ("FIFO") basis, or market.

PROPERTY AND EQUIPMENT -- Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
primarily from three to five years. Leasehold improvements are amortized over
the shorter of the useful life of the asset or the lease term.

ACQUIRED INTANGIBLES -- Acquired intangibles include identifiable
intangibles resulting from acquisitions such as completed technology, customer
base and value assigned to the acquired companies work force. These intangibles
are amortized over their determined useful lives, which range from three to
seven years. Acquired intangibles also include goodwill resulting from
acquisitions, which is being amortized over an economic life of seven years.

SOFTWARE DEVELOPMENT COSTS -- The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". Costs incurred prior to the establishment of technological
feasibility are expensed as incurred and reflected as research and development
costs in the accompanying statements of operations.

There were no software development costs capitalized in the year ended
December 31, 1998, the nine-month period ended December 31, 1997 or the fiscal
year ended March 31, 1997. During these periods, the time between the
establishment of technological feasibility and general release was very short.
Consequently, costs otherwise capitalizable after technological feasibility were
expensed as they were insignificant.

COMPREHENSIVE INCOME -- The Company accounts for comprehensive income as
prescribed by SFAS No. 130, "Reporting Comprehensive Income". Comprehensive
income is the total of net income plus all changes in equity during the period
except those resulting from investment by owners and distribution to owners. The
Company's comprehensive income includes net income and cumulative adjustments in
foreign currency translations.

FOREIGN CURRENCY TRANSLATION -- In general, the functional currency of a
foreign operation is deemed to be the local country's currency. Consequently,
assets and liabilities of operations outside the United States are translated
into United States dollars using the exchange rate in effect at the balance
sheet date. Revenue and expense accounts for these operations are translated
using the average exchange rate during the period. The effects of foreign
currency translation adjustments are included as a separate component of
shareholders' equity as accumulated other comprehensive income.

INCOME TAXES -- The Company accounts for income taxes using the liability
method as prescribed by SFAS No. 109, "Accounting for Income Taxes".

CREDIT RISK -- Accounts receivable consist of geographically dispersed
customers and include allowances to record receivables at their estimated net
realizable value. The Company maintains its cash, cash equivalents and
short-term investments with high quality financial institutions or investment
banks. Cash equivalents consist principally of U.S. government securities,
commercial paper and money market funds that invest in government securities.

BASIC AND DILUTED NET INCOME PER SHARE -- In March 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share". SFAS No.
128 is effective for financial statements issued after December 15, 1997, and
requires dual presentation of basic and diluted earnings per share and
restatement of

F-7
<PAGE> 48
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
all previously reported earnings per share data. Basic earnings per share
includes no dilution and is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted income per share includes the potential dilution that could
occur if the potentially dilutive securities like options or warrants were
exercised or converted into common stock.

In February 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 98 on computation of earnings per share. SAB 98
replaces SAB 83 which previously required that all common stock, options and
warrants issued within one year of an Initial Public Offering be included in the
calculation of earnings per share as if outstanding for all periods presented.
Under SAB 98, only issuances of common stock, options and warrants issued for
nominal consideration in periods preceding an Initial Public Offering are
required to be included in the calculation of earnings per share as if they were
outstanding for all periods presented. In the periods preceding the Company's
Initial Public Offering the Company had no issuances of common stock, options or
warrants for nominal consideration.

Earnings per share for all periods presented has been restated to comply
with SFAS No. 128 and SAB No. 98.

FISCAL YEAR END CHANGE -- In December of 1997, the Company changed its
fiscal year end from a March 31 to a December 31 year-end. The transition period
between the Company's old and new fiscal year end was the nine month period
ended December 31, 1997. Currently, the Company's fiscal year runs from January
1 through December 31. Selected results for the corresponding nine-month period
in 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1996
(UNAUDITED)
-------------
<S> <C>
Revenue..................................................... $29,318
Gross margin................................................ 23,760
Operating expenses.......................................... 19,724
Operating income............................................ 4,036
Net income before income taxes.............................. 4,262
Income tax provision........................................ (1,930)
Net income.................................................. 2,332
</TABLE>

IMPAIRMENT OF LONG-LIVED ASSETS -- The Company complies with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The Company reviews its long-lived assets, which consist
primarily of property and equipment and acquired intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value. There were
no impairment charges associated with long-lived assets for the year ended
December 31, 1998, the nine months ended December 31, 1997 or the fiscal year
ended March 31, 1997.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of current
assets and current liabilities in the accompanying financial statements
approximate fair value due to their short term nature. The fair value of the
notes payable approximates their carrying value at December 31, 1998.

STOCK SPLIT AND INCREASE IN AUTHORIZED SHARES -- In August 1997, the Board
of Directors approved a three-for-two stock split and, subject to shareholders'
approval increased the authorized capital stock of the Company to consist of
40,000,000 shares of common stock, no par value, and 1,000,000 shares of
preferred

F-8
<PAGE> 49
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
stock, $0.01 par value per share. All share and per-share amounts in the
accompanying financial statements have been restated to reflect the stock split
and the increase in authorized shares.

On September 11, 1997, the shareholders approved the increase in authorized
shares.

2. SALE OF ASSETS

Effective May 29, 1996, the Company licensed its small business accounting
product line in return for royalties, payable over a four-year license period.
Royalty income of approximately $2.0 million, $1.0 million and $644,000 was
recognized from this agreement and is reflected in license fees and royalty in
the accompanying statement of operations during the year ended December 31,
1998, the nine months ended December 31, 1997, and the fiscal year ended March
31, 1997 respectively. In March 1999, the purchaser of the Company's small
business accounting product line exercised its option to acquire ownership of
the product which required all outstanding royalties to become due immediately.
The Company agreed to accept $1.8 million in cash and a non-interest bearing
note due in December 1999 for the balance. The Company does not anticipate
generating any additional revenue from this product after collecting on the note
receivable.

3. ACQUISITIONS

In March 1998, the Company acquired HR Management Software GmbH (HRS), a
provider of human resource software in the European marketplace. The acquisition
price was approximately $10.4 million consisting of $6.4 million in cash,
240,000 shares of Common Stock, and out-of-pocket acquisition costs of
approximately $400,000. The closing occurred on March 31, 1998, therefore, the
results of operations of HRS are included beginning April 1, 1998. The
acquisition was accounted for as a purchase and the Company recorded a charge of
approximately $3.9 million in the first quarter of 1998 to in-process research
and development. The purchase price was allocated as follows:

<TABLE>
<S> <C>
Accounts receivable......................................... $ 2,200,000
Other tangible assets....................................... 500,000
Existing products and technology............................ 793,000
Other intangibles........................................... 276,000
Goodwill.................................................... 5,515,000
Charge for in-process research and development.............. 3,850,000
Liabilities assumed......................................... (2,700,000)
-----------
$10,434,000
===========
</TABLE>

The existing technology, acquired work force, and goodwill are being
amortized over the expected economic useful lives, which range from three to
seven years.

The following consolidated proforma information assumes the HRS acquisition
occurred on January 1, 1997 (In thousands, except per share data):

<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $70,782 $52,083
Income (loss) from operations before income taxes........... 8,532 (7,844)
Net income (loss)........................................... 5,282 (3,761)
Earnings (loss) per share................................... $ .43 $ (.37)
</TABLE>

In October 1998, the Company acquired certain technological assets of
HRSoft, Inc, a provider of human resource software. The acquisition price was
for approximately $1.8 million in cash including out-of-pocket

F-9
<PAGE> 50
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

3. ACQUISITIONS -- (CONTINUED)
acquisition costs of approximately $200,000. The acquisition was accounted for
as a purchase and the Company recorded a charge of approximately $320,000 in the
fourth quarter of 1998 to in-process research and development. The remainder of
the purchase price was allocated to existing products and goodwill in the
amounts of $410,000 and $1.07 million, respectively. These amounts are being
amortized over periods ranging from four to seven years.

In December 1998, the Company invested in S&P AG, a provider of payroll
software in the European marketplace. The investment was approximately $600,000
in cash for a 25% ownership interest. The investment is included in non-current
other assets and is being accounted for under the equity method of accounting.

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Equipment and computer software............................. $ 6,347 $ 4,665
Furniture and fixtures...................................... 1,621 989
Leasehold improvements...................................... 1,281 767
Accumulated depreciation and amortization................... (4,916) (4,239)
------- -------
Total.................................................. $ 4,333 $ 2,182
======= =======
</TABLE>

5. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Compensation and benefits................................... $5,528 $4,221
Taxes, other than income.................................... 616 465
Royalties payable........................................... 197 299
Other....................................................... 1,615 1,272
------ ------
$7,956 $6,257
====== ======
</TABLE>

F-10
<PAGE> 51
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

6. INCOME TAXES

The provision for income taxes is summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ---------
<S> <C> <C> <C>
Current:
Federal.......................................... $4,820 $1,870 $ 1,745
State............................................ 803 280 230
------ ------ -------
5,623 2,150 1,975
------ ------ -------
Deferred:
Federal.......................................... (1,700) 400 620
State............................................ (343) 100 80
------ ------ -------
(2,043) 500 700
------ ------ -------
Decrease in valuation allowance.................... (80) (300) (1,200)
------ ------ -------
$3,500 $2,350 $ 1,475
====== ====== =======
</TABLE>

Significant components of the Company's deferred tax assets consist of the
following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Foreign net operating loss carryforwards.................... $ 833 $ 500
Intangible assets........................................... 3,611 2,400
Depreciable assets.......................................... 361 330
Other....................................................... 1,138 670
------ ------
Total deferred tax assets.............................. 5,943 3,900
Valuation allowance.................................... (820) (900)
------ ------
Net deferred tax asset............................ $5,123 $3,000
====== ======
</TABLE>

During the fiscal year ended December 31, 1998, the nine month transition
period ended December 31, 1997 and fiscal year ended March 31, 1997 the
valuation allowance for deferred tax assets decreased by approximately $80,000,
$300,000, and $1.2 million, respectively. This was the result of the Company's
reevaluation of its future forecasted taxable income. The remaining valuation
allowance relates to certain foreign net operating loss carryforwards as to
which the Company is unable to make a judgment about the likelihood of
realization. The Company believes it is more likely than not that all of the
recorded net deferred tax asset will be realized.

F-11
<PAGE> 52
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

6. INCOME TAXES -- (CONTINUED)
The differences between the expected tax provision based on the federal
income statutory rate and the actual provision for the year ended December 31,
1998, the nine months ended December 31, 1997 and the fiscal year ended March
31, 1997:

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ---------
<S> <C> <C> <C>
Federal statutory rate............................. 34.0% 34.0% 34.0%
State income taxes................................. 5.0 6.0 5.0
Change in valuation allowance...................... (1.0) (5.0) (22.9)
Research and development credits................... (2.5) -- --
Foreign operating losses not deductible in U.S..... 1.5 -- 5.0
Other nondeductible items.......................... 1.0 3.0 3.9
---- ---- -----
38.0% 38.0% 25.0%
==== ==== =====
</TABLE>

7. STOCK OPTION AND PURCHASE PLANS

The Company has a nonqualified stock option plan for key employees. As of
December 31, 1998 and 1997, a total of 52,000 and 135,500 shares of common
stock, respectively, have been reserved for issuance under this plan. Options
are exercisable for a period of one to ten years from the date of grant.

In November 1992, the Company adopted a second stock option plan. A maximum
of 1,875,000 shares of common stock may be granted as either incentive stock
options or nonqualified options. As of December 31, 1998 and 1997, a total of
711,043 and 859,153 shares of common stock, respectively, have been reserved for
issuance under this plan. Options are exercisable for a period of one to ten
years from the date of grant.

In August 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 Incentive Plan"). The Company has reserved 1,500,000 shares of
common stock for issuance under the 1997 Incentive Plan. The 1997 Incentive Plan
provides that a variety of awards, including stock options, stock appreciation
rights and restricted and unrestricted stock grants, may be made to the
Company's employees, officers, consultants and advisors who are expected to
contribute to the Company's future growth and success. As of December 31, 1998,
510,500 options have been granted under this Plan.

In August 1997, the Board of Directors adopted the Company's 1997 Director
Stock Option Plan (the "Director Plan") to provide for the grant of
non-statutory stock options to outside directors. All options granted under the
Director Plan will have an exercise price equal to the fair market value of the
common stock on the date of grant. The Company has reserved 150,000 shares for
issuance under the Director Plan. As of December 31, 1998, 66,250 options have
been granted under the Director Plan.

Any difference between the fair market value of the stock and the option
price at the date of grant is recorded as compensation expense over the vesting
period, which is generally 60 months. For options granted prior to June 30,
1997, fair value was determined by independent appraisal. In July 1997, the
Company granted options to purchase 114,150 shares of common stock at an
exercise price of $8.00 per share. In connection with these grants, the Company
recorded deferred compensation of approximately $138,000 in the quarter ended
September 30, 1997, which is being amortized ratably over the option vesting
period of five

F-12
<PAGE> 53
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

7. STOCK OPTION AND PURCHASE PLANS -- (CONTINUED)
years. As of December 31, 1998 and 1997, aggregate options available for future
grant under the combined plans were 1,073,250 and 2,154,035, respectively.
Option activity is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
PRICE PER EXPIRATION EXERCISE
OPTIONS SHARE DATE PRICE
--------- -------------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding at March 31,
1996................................ 2,120,175 $ 0.07-$3.33 1999-2005 $ 1.15
Granted............................. 301,425 3.50-3.83 3.67
Canceled............................ (130,890) 2.00-3.83 2.91
Exercised........................... (758,072) 0.07-3.33 0.67
---------
Options outstanding at March 31,
1997................................ 1,532,638 0.07-3.83 1999-2006 1.74
Granted............................. 427,105 3.83-13.125 10.23
Canceled............................ (23,700) 3.50-8.00 4.67
Exercised........................... (681,690) 0.07-3.50 0.52
---------
Options outstanding at December 31,
1997................................ 1,254,353 0.33-13.125 1999-2007 5.24
Granted............................. 329,800 12.875-23.625 19.69
Canceled............................ (30,045) 2.333-23.625 8.14
Exercised........................... (221,865) .333-13.000 2.50
---------
Options outstanding at December 31,
1998................................ 1,332,243 $ 0.333-23.625 1999-2008 $ 9.20
=========
</TABLE>

As of December 31, 1998 and 1997, options to purchase 374,008 and 357,680
shares of common stock were exercisable with a weighted average exercise price
of $4.13 and $2.09, respectively. The weighted-average remaining contractual
life of options outstanding at December 31, 1998 and 1997, was 6.89 and 6.78
years, respectively.

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in August 1997. A total of 250,000
shares of common stock have been reserved for issuance under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions at a price equal to 85 percent of the lower of the fair
market value of the common stock on the first day of the offering period or the
last day of the offering period. As of December 31, 1998, 35,826 shares of
common stock were issued under the Purchase Plan.

The Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", effective for the Company's March 31,
1997 financial statements. The Company applies Accounting Principles Boards
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at the date of the grant (i.e. the difference between the exercise price
and the fair value of the Company's stock). Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under

F-13
<PAGE> 54
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

7. STOCK OPTION AND PURCHASE PLANS -- (CONTINUED)
those plans consistent with the method of SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ---------
<S> <C> <C> <C>
Net income, as reported............................ $5,623 $3,769 $4,436
Pro-forma.......................................... $4,466 $3,369 $4,304
Basic earnings per share, as reported.............. $ 0.49 $ 0.45 $ 0.67
Pro-forma.......................................... $ 0.39 $ 0.40 $ 0.65
Diluted earnings per share, as reported............ $ 0.46 $ 0.38 $ 0.54
Pro-forma.......................................... $ 0.37 $ 0.34 $ 0.52
</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes method with no dividend yield and the following assumptions:

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1997
------------ ------------ ---------
<S> <C> <C> <C>
Expected life (in years)........................... 6 6 6
Expected volatility................................ 75% 50% 0.00%
Risk free interest rate............................ 5.00% 6.00% 6.00%
</TABLE>

The Company implemented SFAS No. 128, "Earnings Per Share". In accordance
with SFAS No. 128, basic net income per share and diluted net income per share
can be reconciled as indicated below (in thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997
--------------------------- --------------------------- ---------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common
shareholders............. $5,623 11,455 $0.49 $3,769 8,445 $0.45 $4,436 6,581 $0.67
Effect of dilutive securities
Preferred stock............ -- -- -- 416 -- 625
Options and warrants....... -- 725 -- 948 -- 1,057
------ ------ ------ ----- ------ -----
Diluted net income per share:
Income available to common
shareholders............. $5,623 12,180 $0.46 $3,769 9,809 $0.38 $4,436 8,263 $0.54
====== ====== ====== ===== ====== =====
</TABLE>

Options to purchase 259,700 shares of common stock at $10.25 and above per
share were outstanding in the nine month period ended December 31, 1997, but
were not included in the computation of diluted net income per share, because
the options' exercise price was greater than the market price of the common
shares at December 31, 1997.

8. REDEEMABLE SECURITIES

REDEEMABLE CONVERTIBLE CLASS A PREFERRED STOCK

Upon the closing of the Company's Initial Public Offering of common stock,
the preferred stock automatically converted to common stock.

F-14
<PAGE> 55
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

8. REDEEMABLE SECURITIES -- (CONTINUED)
REDEEMABLE COMMON STOCK WARRANTS

In connection with a subordinated debt financing, the Company issued a
warrant to purchase 472,500 common shares at $2.67 per share. The warrant
provides for adjustment of the warrant exercise price and/or the number of
shares issuable upon the exercise of the warrant in the event of dilutive
issuances of equity securities and have certain registration rights with respect
to shares issued in connection with the exercise or conversion of the warrants.
In addition, had the Company not consummated its Initial Public Offering, the
warrant holder also would have had the right, after March 1998 (or upon a merger
or sale of a substantial portion of the Company's assets), to require the
Company to purchase all or a portion of the common stock issuable upon the
exercise of the warrant or actually issued pursuant to the warrant in 1997 (the
"put right"). These rights expired upon the consummation of the Company's
Initial Public Offering. In 1997 the purchase price, or put value, would have
been the value of the common stock at the time of redemption or, in the case of
a redemption of the warrant, the value of the common stock less the warrant
exercise price. The estimated redemption value of the warrant was accreted over
the period to the earliest redemption date (March 1998). During the nine months
ended December 31, 1997 and the fiscal year ended March 31, 1997, the exercise
price of the warrant was reduced to $2.03 and $2.21, respectively, in exchange
for the waiver of certain compliance provisions. The value of the reduction in
the exercise of the warrant price of $86,000 and $215,000 was recorded as
interest expense in the nine months ended December 31, 1997 and the twelve
months ended March 31, 1997, respectively. During 1997, the holder elected to
partially exercise the warrant of 119,204 shares of Common Stock in a cashless
exercise transaction. As a result of this transaction, the holder of the warrant
received 100,599 shares of Common Stock and 353,296 warrants remained
exercisable. In April 1998 the holder exercised the remaining 353,296 warrants
in a cashless exercise transaction resulting in the issuance of 317,000 shares
of Common Stock.

During 1994, the Company issued warrants to purchase 8,415 shares of Common
Stock at $0.07 per share. The warrants were redeemable at $2.05 per share of
Common Stock and have been recorded at their redemption price. During the nine
months ended December 31, 1997 and the fiscal year ended March 31, 1997,
warrants to purchase 2,910 and 2,625 shares of Common Stock were redeemed,
respectively. The remaining warrants and put right expired upon the Initial
Public Offering.

DIVIDENDS

The Company paid dividends of $3,556,264 and $7,565,114 ($0.455 and $0.915
per share) on February 28, 1997 and June 27, 1997, for shareholders of record as
of February 20, 1997 and June 27, 1997, respectively.

9. COMMITMENTS

The Company leases office space and office equipment under noncancelable
operating leases expiring through July 2003. Total rent expense for the year
ended December 31, 1998, the nine months ended December 31, 1997 and the fiscal
year ended March 31, 1997 was approximately $1,588,000, $945,000, and
$1,290,000, respectively.

F-15
<PAGE> 56
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

9. COMMITMENTS -- (CONTINUED)
Future minimum lease payments as of December 31, due under these leases are
as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999........................................................ $1,823
2000........................................................ 2,011
2001........................................................ 2,083
2002........................................................ 1,591
2003........................................................ 255
------
$7,763
======
</TABLE>

The Company does not have any material commitments related to its royalty
obligations.

10. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Retirement Savings Plan (the "Plan") for the
benefit of all employees who meet certain eligibility requirements. The Company
will make a matching contribution in an amount equal to $0.50 for each $1.00
contributed by an employee up to a maximum of 2% of the participant's
compensation as defined in the Plan. Company contributions made to the Plan for
the year ended December 31, 1998, the nine months ended December 31, 1997 and
the fiscal year ended March 31, 1997 were approximately $261,000, $164,000, and
$159,000, respectively.

The Company also has a profit sharing plan for the benefit of all employees
who meet certain eligibility requirements. Contributions are made at the Board
of Directors' discretion and are contingent upon the Company meeting established
revenue and profit goals. The Company may make quarterly profit sharing
distributions of up to 2% of eligible quarterly compensation to qualifying
individuals' retirement accounts. Company contributions made to the Plan for the
year ended December 31, 1998, the nine months ended December 31, 1997 and the
fiscal year ended March 31, 1997 were approximately $310,000, $185,000, and
$160,000, respectively.

11. SEGMENT REPORTING

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
statements. Operating segments are defined as components of an enterprise about
which separate financial information is available that is regularly evaluated by
the chief operating decision maker of decision making group, in deciding how to
allocate resources and in assessing performance.

INDUSTRY SEGMENTS

Best Software, Inc. has three reportable segments: accounting (APG), human
resources (HRPG), and European operations. They are strategic business units
that offer different products and services or serve different geographic
markets. They are managed separately as each business requires different
technology, domain expertise, marketing strategy and knowledge, and level of
services. The APG produces software to manage fixed assets, including
depreciation calculations, maintaining detailed historical data, inventory of
assets across the enterprise and preparing management and tax reports. This
segment also provides various levels of support, implementation, training and
consulting services for its customers. This segment is also developing a product
to automate the corporate budgeting process. The HRPG produces software to
provide a comprehensive solution for the management of human resources and
payroll functions. The Company's

F-16
<PAGE> 57
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

11. SEGMENT REPORTING -- (CONTINUED)
human resources products integrate human resource, payroll, recruitment and
training data into a single database. The segment also provides various levels
of support, implementation, training and consulting services for its customers.
The European operations provide human resource software products to European
customers. These products are separate and distinct from those sold by HRPG and
are only sold in Europe. The segment also provides various levels of support,
implementation, training and consulting services for its customers.

The chief operating decision maker reviews profit (loss) for each
reportable segment exclusive of the write-off of any purchased research and
development, amortization of acquired intangibles, interest and taxes. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies stated in Note 1 above. The Company
did not have any customer which provides 10% or more of any segment's revenue.
That portion of cash equivalents, short-term investments and related interest
income, that are not identifiable with a particular segment are included in
"Unallocated Corporate". Other products group includes information of certain
other segments that do not meet the quantitative thresholds, including results
of product sales from Canadian operations and certain royalty revenues.

<TABLE>
<CAPTION>
OTHER
TOTAL PRODUCTS UNALLOCATED RECONCILING
APG HRPG DOMESTIC EUROPEAN GROUP CORPORATE ITEMS TOTAL
------- ------- -------- -------- -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenue...................... $37,014 $26,487 $63,501 $ 5,202 $ 627 $ -- $ -- $69,330
------- ------- ------- ------- ------- ------- ------- -------
Segment operating income
(loss), exclusive of
write-off of purchased
research and development
and amortization of
acquired intangibles....... $13,294 $ 4,737 $18,031 $ (441) $ (804) $(4,934) $ -- $11,852
Write-off of purchased
research and development... -- (320) (320) (3,850) -- -- -- (4,170)
------- ------- ------- -------
Amortization of acquired
intangibles................ -- (64) (64) (818) -- -- -- (882)
------- ------- ------- -------
Segment operating
income(loss)............... $13,294 $ 4,353 $17,647 $(5,109) $ (804) $(4,934) $ -- $ 6,800
Segment assets............... $43,121 $17,688 $60,809 $ 1,956 $(1,826) $18,178 $(4,547) $74,570
Long lived assets............ $ 5,086 $ 6,179 $ 83 $ 163 -- $11,511

NINE MONTHS ENDED DECEMBER
31, 1997:
Revenue...................... $22,005 $14,239 $36,244 $ -- $ 297 $ -- $ -- $36,541
------- ------- ------- ------- ------- ------- ------- -------
Segment operating income
(loss)..................... $ 6,821 $ 2,189 $ 9,010 $ -- $ (644) $(2,510) $ -- $ 5,856
------- ------- ------- ------- ------- ------- ------- -------
Segment assets............... $30,242 $12,572 $42,814 $ -- $(1,084) $15,280 $ -- $57,010
------- ------- ------- ------- ------- ------- ------- -------
Long lived assets............ $ 2,109 $ -- $ 38 $ 35 $ 2,182

YEAR ENDED MARCH 31, 1997:
Revenue...................... $24,311 $15,132 $39,443 $ -- $ 41 $ -- $ -- $39,484
------- ------- ------- ------- ------- ------- ------- -------
Segment operating income
(loss)..................... $ 6,821 $ 2,972 $ 9,793 $ -- $ (658) $(3,575) $ -- $ 5,560
------- ------- ------- ------- ------- ------- ------- -------
Segment assets............... $22,197 $ 7,512 $29,709 $ -- $ (535) $(8,014) $ -- $21,160
------- ------- ------- ------- ------- ------- ------- -------
Long lived assets............ $ 1,687 $ -- $ 57 $ 30 $ -- $ 1,774
</TABLE>

F-17
<PAGE> 58
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 -- (CONTINUED)

12. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly supplemental consolidated financial information for
the fiscal years ended December 31, 1998 and 1997 are as follows (in thousands,
except per share data):

QUARTERS ENDING THROUGH DECEMBER 31, 1998

The following information has been restated to reflect adjustments to the
write off of purchased research and development and related amortization, from
that previously reported in the Company's 10-Qs as of March 31, June 30 and
September 30, 1998:

<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue................................... $13,698 $16,253 $18,002 $21,377
Operating (loss) income................... (1,266) 2,147 2,535 3,384
Net (loss) income......................... (402) 1,665 1,941 2,419
Dilutive net (loss) income per share...... $ (.04) $ .14 $ .16 $ .20
Shares used in per share computation...... 10,981 12,249 12,284 12,370
</TABLE>

QUARTERS ENDING THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue.................................. $10,166 $10,646 $11,825 $14,070
Operating income......................... 1,524 867 1,698 3,291
Net income............................... 2,104 349 1,095 2,325
Dilutive net income per share............ $ .25 $ .04 $ .12 $ .20
Shares used in per share computation..... 8,356 8,624 8,848 11,751
</TABLE>

F-18
<PAGE> 59

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Best Software, Inc.:

We have audited in accordance with generally accepted auditing standards
the financial statements of Best Software, Inc. included in this Form 10-K and
have issued our report thereon dated January 21, 1999. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index is the responsibility of the Company's
management and is presented for the purposes of complying with the Securities
and Exchange Commission's rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states, in all material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
January 21, 1999

F-19
<PAGE> 60

SCHEDULE II

BEST SOFTWARE, INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED MARCH 31, 1997,
THE NINE MONTHS ENDED DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED TO
REVENUE
BEGINNING AND ENDING
BALANCE DEDUCTIONS(1) EXPENSE BALANCE
--------- ------------- ---------- -------
<S> <C> <C> <C> <C>
March 31, 1997
Allowance for accounts receivable.............. $1,507 $ (866) $ 191 $832
December 31, 1997
Allowance for accounts receivable.............. $ 832 $ (456) $ 615 $991
December 31, 1998
Allowance for accounts receivable.............. $ 991 $(1,242) $1,189 $938
</TABLE>

- ---------------
(1) Represents product returns, trade receivables written off, and credits
applied.

F-20

<PAGE> 1

EXHIBIT 10.19
January 27, 1999

Mr. James F. Petersen
9706 Carmel Court
Bethesda, MD 20817

Dear Jim:

This letter is intended to document our agreement to amend the Employment
Agreement between you and Best Software, Inc., dated May 17, 1995 (the
"Agreement") effective as of February 1, 1999, as detailed below.

1. Section 3.1 of the Agreement is deleted and replaced with the following:

Salary. The Company shall pay the Employee, in installments not less
than monthly, an annual base salary of $120,000.00. Such salary shall
be subject to upward adjustment thereafter as determined by the Board,
in its sole discretion, consistent with the annual average rate of
upward adjustment of base salary levels of senior executive employees
of the Company.

2. The second paragraph of Section 2 is deleted.

Except as expressly modified by this letter, all of the terms and
conditions of the Agreement shall remain in full force and effect.

In order for these modifications to become effective, please sign and date
both copies of this letter where indicated and then return one fully executed
copy to me.

Very truly yours,

Timothy A. Davenport
President and Chief Executive Officer

SEEN AND AGREED TO:

- ---------------------------------------
James F. Petersen

F-21

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
S-8 Registration Statement File No. 333-43473.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 23, 1999

F-22

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 29,549
<SECURITIES> 16,731
<RECEIVABLES> 9,136
<ALLOWANCES> 938
<INVENTORY> 138
<CURRENT-ASSETS> 57,608
<PP&E> 9,249
<DEPRECIATION> 4,916
<TOTAL-ASSETS> 74,570
<CURRENT-LIABILITIES> 33,744
<BONDS> 0
0
0
<COMMON> 38,079
<OTHER-SE> 2,006
<TOTAL-LIABILITY-AND-EQUITY> 74,570
<SALES> 69,330
<TOTAL-REVENUES> 69,330
<CGS> 13,422
<TOTAL-COSTS> 13,422
<OTHER-EXPENSES> 49,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,123
<INCOME-TAX> (3,500)
<INCOME-CONTINUING> 5,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,623
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.46

</TABLE>