PROPHET 21 INC, 10-K, 1996-09-30

PROPHET 21 INC
10-K, 1996-09-30
COMPUTER INTEGRATED SYSTEMS DESIGN

Previous: AMERICAN RESTAURANT GROUP HOLDINGS INC, 8-K, 1996-09-30

Next: HI SHEAR TECHNOLOGY CORP, DEF 14A, 1996-09-30

<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-K

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

For the fiscal year ended June 30, 1996
Commission File No. 0-23306

PROPHET 21, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 23-2746447
- ----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

19 West College Avenue, Yardley, Pennsylvania 19067
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)

(215) 493-8900
--------------------------------
(Registrant's telephone
number, including area code)

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

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

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

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

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

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

1 of _____ pages
Index to Exhibits at page______
<PAGE>

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes: X No:
--- ---

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

State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $10,462,529 at September 13, 1996 based on the last sales
price on that date.

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 13, 1996:
<TABLE>
<CAPTION>
Class Number of Shares
----- ----------------
<S> <C>
Common Stock, $.01 par value 3,986,500
</TABLE>
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 1996 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.

-2-
<PAGE>

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>

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

2. Properties................................................ 12

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

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

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

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

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

8. Financial Statements and Supplementary Data............... 20

9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 20

PART III 10. Directors and Executive Officers of the Company........... 21

11. Executive Compensation.................................... 21

12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21

13. Certain Relationships and Related Transactions............ 21

PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 22

SIGNATURES............................................................... 23

EXHIBIT INDEX............................................................ 25

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

</TABLE>

-3-
<PAGE>

PART I

ITEM 1. BUSINESS.

GENERAL

Prophet 21, Inc. ("Prophet 21" or the "Company") is a provider of fully
integrated, on-line business management systems developed exclusively for use by
distributors and wholesalers. The Prophet 21 System is an enterprise-wide
solution consisting of business application software, business application
training, consulting, software customization, application hardware, system
installation and implementation services, supported by a dedicated customer
service organization. The Company addresses the automation needs of its
customers through a comprehensive, feature-rich and user-friendly computer
system. The system enhances a customer's efficiency and profitability by
performing critical business functions, including flexible order entry, customer
service, inventory management and control, integrated purchasing, accounting,
general ledger and electronic commerce such as EDI, VMI, and DMI. Prophet 21
offers a total solution for its customers, including system design,
configuration, installation, network communications, training, support and
maintenance.

Prophet 21 markets its products and services to approximately 50,000 of the
roughly 300,000 distributors and wholesalers operating in the United States and,
as of June 30, 1996, had an installed base of 1,613 systems across the United
States and Canada. The Company's customers vary in size from small distributors
and wholesalers with a few users to larger companies with several hundred users
linking multiple geographically dispersed branches. The Company sells the
Prophet 21 System through its 43-person direct sales force located in sales and
service offices throughout the United States to a wide range of industry
segments including industrial, electrical, plumbing, electronic, hardware,
heating and air conditioning, medical and dental, janitorial and general
distribution. The Company believes that one of its competitive advantages is
its accumulated knowledge of the distribution industry gained over twenty-nine
years, which has enabled it to develop an industry-focused solution to satisfy
the needs of its customers.

The Company implemented a strategic decision early in 1992 to move from its
internally developed proprietary hardware system to an open system platform,
based on the UNIX/AIX operating system running on an IBM RISC System/6000
computer. The Company's adoption of an open system solution broadened the
market for the Prophet 21 System, facilitated greater customer acceptance and
allowed successful integration of industry standard third-party software and
hardware. At the end of fiscal 1996, the Company introduced the next generation
of the Prophet 21 System - Prophet 21 Acclaim. Prophet 21 Acclaim combines the
functional strength of the Prophet 21 System with Progress Software's data base
technology to provide distributors additional usability, functionality and
accessibility. Its open system architecture and open system connectivity allows
ease of data base access. Prophet 21 Acclaim began beta testing in the first
quarter of fiscal 1997 and the Company estimates that its new product will be
available

-4-
<PAGE>

for purchase within the second quarter of fiscal 1997. There can be no
assurance, however, that the Company will successfully complete the product
within its estimated time frame, if at all.

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

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

PROPHET 21'S MARKET

Of the roughly 300,000 distributors and wholesalers operating in the United
States and Canada, Prophet 21 markets its products and services to approximately
50,000 businesses in a wide range of industry segments including industrial,
electrical, plumbing, electronic, hardware, heating and air conditioning,
medical and dental, janitorial and general distribution. Distributors and
wholesalers warehouse products and handle the movement of large quantities of
inventory across a wide range of industries and play a critical role in the flow
of goods from manufacturers to retailers and consumers. The Company believes
that distributors and wholesalers increasingly are finding that the changing
business environment dictates the need for automated business management
systems.

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

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

THE PROPHET 21 SYSTEM

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

-5-
<PAGE>

system installation and implementation services. These products are supported by
a dedicated customer service organization. The Company has designed the system
to address the business management automation needs of distributors and
wholesalers of all sizes. Set forth below are several ranges of configurations
of Prophet 21 Systems currently offered by the Company:
<TABLE>
<CAPTION>

APPROXIMATE APPROXIMATE APPROXIMATE BASE
USER BASE MONTHLY MAINTENANCE
CAPACITY PRICE RANGE(1) CONTRACT FEE(1)
- ------------- --------------- --------------------
<S> <C> <C>
8 - 32 $30,000 to $60,000 $400 to $700
32 - 80 $70,000 to $110,000 $800 to $1,400
80 - 128 $115,000 to $145,000 $1,300 to $1,800
128+ $225,000 $2,500+
</TABLE>

- ----------
(1) Actual prices and maintenance fees vary depending upon the size and
features of the system purchased, including optional software products and
hardware components.

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

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

The Prophet 21 System's design facilitates its use by distributors and
wholesalers with multi-branch operations. The system permits distributors and
wholesalers to determine system-wide inventory status instantaneously and to
ship orders expeditiously and efficiently. The Prophet 21 System also allows
for centralized purchasing, inventory control, billing and accounting, thereby
eliminating certain branch-level expenses and permitting goods to be moved
quickly while minimizing inventories. The Company's communications capabilities
include configuration of wide area networks and integration with local area
networks.

The Prophet 21 System is an open system that allows the integration of
third-party software products such as report writers, faxing software, warehouse
automation, forms creation and executive information system. The Company has
successfully developed seamless integration to a number of third-party products.

-6-
<PAGE>

SALES AND MARKETING

The Company sells its products and services through its 43-person direct
sales force located in sales and service offices throughout the United States,
and through its six-person inside sales force operating from the Company's
headquarters. In November 1994, the Company appointed a new Vice President of
Sales who had been the Company's most successful salesperson since 1990. The
field sales force is also supervised by a field manager and three other regional
sales managers who monitor and manage sales performance and assist in sales
activity. The Company's direct sales force focuses on the distribution industry
and understands the specific needs and mission-critical applications of
distributors and wholesalers within targeted industry segments. The Company
believes that it is necessary for a sales representative with a thorough
understanding of the automation needs of the distribution industry to explain
the advantages of a Prophet 21 System and conduct an effective demonstration of
a system before a prospective customer will decide to purchase a system. Sales
presentations are tailored for particular customers and their industry segments.
The Company believes that its direct sales approach leads to long-term
relationships with customers that increase customer satisfaction and provide
opportunities for follow-on sales to its existing customer base. The Company
believes that as the distribution industry continues to evolve and face new
challenges a knowledgeable and solutions oriented sales force should bring great
value to our customers.

The Marketing Department is led by a Director of Marketing who was
appointed in September 1994. The Company's strategy is to provide focused
marketing on the industry segments served by the Company, in particular, the
industrial, electrical, plumbing and general distribution industries. The
Company generates leads through telemarketing, direct mail, advertising,
national and regional trade shows and Company-sponsored seminars.

The Company's marketing department has the responsibility of identifying
the market to be served by the Company's products and services. The marketing
department further guides the direction of the Company's products and services.
Information is gathered aggressively by the marketing department from the
Company's customer base and from the distribution market. This data is then
presented for consideration in regard to enhancing current products and for
creating new products.

CUSTOMERS

The Company had, as of June 30, 1996, an installed base of approximately
1,613 systems. The Company's customers vary in size from small distributors or
wholesalers with a few users to larger companies with several hundred users
linking multiple geographically dispersed branches. Currently, approximately
50% of the Company's customers have multiple locations connected by
communications networks. The Company serves a wide range of industry segments,
including industrial, electrical, plumbing, electronic, hardware, heating and
air conditioning, medical and dental, janitorial and general distribution.
During the three fiscal years ended June 30, 1996, no one customer accounted for
10% or more of the Company's revenue.

-7-
<PAGE>

SYSTEMS TRAINING AND TECHNICAL SUPPORT SERVICES

A key element of the Company's business strategy is to provide extensive
training and support to its customers. The Company has established a customer
service and support, and installation organization, consisting of 103 persons,
that provides installation and post-sales support for systems under warranty or
maintenance contract.

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

The Company provides a one-year hardware warranty and a 90-day software
warranty. Ninety days after the sale, customers typically enter into a fee-based
maintenance contract covering software and hardware support. The Company offers
software enhancements at discounted prices to customers who have entered into
maintenance contracts. As of June 30, 1996, approximately 85% of the Company's
customers were covered by maintenance contracts following the initial warranty
period. There can be no assurance, however, that customers will continue to
enter into maintenance contracts at this rate. Maintenance contracts have an
initial term of one year and continue thereafter unless terminated.

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

SOFTWARE DEVELOPMENT

The distribution industry is characterized by changing needs and the
Company's success depends, to a large extent, on its ability to continually
modify and enhance its software to meet such changing needs. The Company places
great emphasis on software development and expects to continue to introduce
modifications or enhancements to its software on a periodic basis. The Company
presently releases a modified or enhanced version of the Prophet 21 Software
approximately every eight to twelve months. The Company identifies customer and
marketplace product needs by direct and frequent interaction with users of the
Prophet 21 System, through customer satisfaction surveys and by following the
trends of the distribution market. In fiscal 1996, the Company released XL8,
the latest version of the Prophet 21 XL Software incorporating many new features
and enhancements. The next update, XL9, is scheduled for release in the second
quarter of fiscal 1997. In addition, the Company develops modifications and
enhancements to its software to address the specific needs of targeted segments
in order to continue to increase the number of features and improve the
applications for such industry

-8-
<PAGE>

segments. Forty-five employees are directly involved in programming and software
development.

At the end of fiscal 1996, the Company introduced the next generation of
the Prophet 21 System - Prophet 21 Acclaim. Prophet 21 Acclaim combines the
functional strength of the Prophet 21 System with Progress Software's data base
technology to provide distributors additional usability, functionality and
accessibility. Its open system architecture and open system connectivity allows
ease of data base access. Prophet 21 Acclaim began beta testing in the first
quarter of fiscal 1997 and the Company estimates that its new product will be
available for purchase within the second quarter of fiscal 1997.

The Company's research and development expenses were approximately $2.6
million, $2.9 million and $2.2 million in the fiscal years ended June 30, 1994,
1995 and 1996, respectively. In 1996, the Company also began capitalizing
certain software development costs which totaled $458,000 during the year.

ASSEMBLY AND SUPPLIERS

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

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

In July 1991, Prophet 21 entered into an Authorized Dealers and Industry
Remarketers Agreement with IBM. The agreement grants to the Company a non-
exclusive right to purchase and license certain hardware products from IBM,
including IBM RISC System/6000 computers, for remarketing by the Company in the
United States. Although the agreement contains no minimum purchase
requirements, the volume of systems purchased by Prophet 21 affects the
percentage discount received by the Company and may be a factor considered by
IBM in connection with Prophet 21's continued authorization as an IBM industry
remarketer. The agreement is subject to annual renewal and may be terminated by
IBM with or without cause on three-months written notice. During the fiscal
years ended June 30, 1995 and 1996, the Company's hardware purchases from IBM
totaled $4.7 million and $5.2 million, respectively.

-9-
<PAGE>

COMPETITION

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

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

INTELLECTUAL PROPERTY

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

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

EMPLOYEES

As of June 30, 1996, the Company employed 235 persons full-time, of whom 58
were engaged in sales and marketing; 103 were engaged in customer service and
support, and installation; 45 were engaged in programming and software
development and quality assurance; and 29 were engaged in finance,
administration and management. In addition, 27 were employed on a part-time
basis (19 of whom were engaged in administrative functions). None of the
Company's employees are covered by collective bargaining agreements. The
Company believes that it has been successful in attracting skilled personnel.
Competition for experienced sales and marketing personnel and software
programmers is intense. The Company's future success will depend in part on its
ability to continue to attract, retain and motivate highly qualified personnel.

-10-
<PAGE>

The Company considers relations with its employees to be excellent. During
fiscal 1996, the Company focused on efficient management of the Company's major
departments. The Company believes that its efforts have produced departmental
structures and better defined goals coupled with decision-making authority
vested in departmental managers and staff employees. In addition, the Company
has implemented improved product and industry education programs and various
incentive compensation programs. As a result of the Company's emphasis on
departmental efficiency and improved quality, the Company was able to reduce the
number of full-time employees from 259 as of June 30, 1994 to 235 at the end of
fiscal 1996.

-11-
<PAGE>

ITEM 2. PROPERTIES.

The Company leases facilities in Yardley, Pennsylvania totaling 60,000
square feet from Dr. John E. Meggitt, the Company's Chairman of the Board and
Mrs. Dorothy M. Meggitt, Secretary. This lease expires on June 30, 1998 and
contains a renewal option for an additional five-year term. The leased space in
Pennsylvania is used for administration, a substantial portion of sales and
marketing, customer service and support, assembly, quality assurance and
software development. The Company also leases sales and service offices in
Atlanta, Boston, Chicago and Seattle.

ITEM 3. LEGAL PROCEEDINGS.

There is no material litigation pending to which the Company is a party or
to which any of its property is subject.

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

Not applicable.

-12-
<PAGE>

PART II

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

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

The following table sets forth the high and low bid information for the
Common Stock for each of the quarters since the quarter ended September 30, 1994
as reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------- -------- -----
<S> <C> <C>
September 30, 1994 $10.00 $7.500
December 31, 1994 $ 9.00 $3.500
March 31, 1995 $ 5.00 $2.750
June 30, 1995 $ 5.25 $3.500
September 30, 1995 $ 5.25 $4.375
December 31, 1995 $ 5.25 $4.125
March 31, 1996 $ 5.50 $4.375
June 30, 1996 $ 6.50 $4.125
</TABLE>

As of August 31, 1996, the approximate number of holders of record of the
Common Stock was 175 and the approximate number of beneficial holders of the
Common Stock was 974.

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

-13-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data for the five fiscal years ended
June 30, 1996 have been derived from the audited consolidated financial
statements of the Company. The selected consolidated financial data set forth
below should be read in conjunction with, and is qualified in its entirety by,
the Company's audited consolidated financial statements, related notes and "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition," which are included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>

FISCAL YEAR ENDED JUNE 30,
1992 1993 1994(1) 1995 1996
------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
System sales........................... $13,797 $21,688 $27,871 $21,295 $20,905
Service and support.................... 8,105 8,645 9,598 9,948 12,145
------- ------- ------- ------- -------
21,902 30,333 37,469 31,243 33,050
------- ------- ------- ------- -------
Cost of revenue:
System sales........................... 7,945 11,937 14,563 12,610 11,672
Service and support.................... 4,051 4,460 5,275 5,723 6,624
------- ------- ------- ------- -------
11,996 16,397 19,838 18,333 18,296
------- ------- ------- ------- -------
Gross profit......................... 9,906 13,936 17,631 12,910 14,754
------- ------- ------- ------- -------

Operating expenses:
Sales and marketing.................... 6,037 7,350 8,765 8,146 8,346
General and administrative............. 1,653 2,060 2,550 2,251 2,296
Research and development............... 1,640 2,157 2,620 2,907 2,248
Severance expense...................... -- -- -- 378 --
------- ------- ------- ------- -------
Total operating expenses............. 9,330 11,567 13,935 13,682 12,890
------- ------- ------- ------- -------
Operating income (loss).............. 576 2,369 3,696 (772) 1,864
Interest income........................ 108 71 129 374 408
------- ------- ------- ------- -------
Income (loss) before taxes........... 684 2,440 3,825 (398) 2,272
Provision (benefit) for income taxes.... 223 944 1,474 (171) 922
------- ------- ------- ------- -------
Net income (loss).................... $ 461 $ 1,496 $ 2,351 $ (227) $ 1,350
======= ======= ======= ======= =======
Net income (loss) per share............. $ 0.15 $ 0.48 $ 0.69 $ (0.06) $ 0.34
======= ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding............................ 3,111 3,111 3,410 4,002 4,011

BALANCE SHEET DATA
(AT PERIOD END):
Working capital......................... $ 3,158 $ 4,382 $15,222 $15,172 $15,997
Total assets............................ 9,737 12,978 25,157 23,145 25,832
Stockholders' equity.................... 5,180 6,676 17,838 17,631 18,981
- ---------------------
</TABLE>

(1) Includes in general and administrative expenses a compensation expense
of $240,500 resulting from the difference between the exercise price and the
fair market value of the Common Stock underlying the 370,000 stock options
granted in December 1993. Excluding this charge, general and administrative
expenses, operating income, net income and net income per share would have been
$2,309,000, $3,937,000, $2,592,000 and $0.76, respectively.

-14-
<PAGE>

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

GENERAL

The Company was founded in 1967 to provide custom programming services and,
in 1974, it began to design, develop, market and support automated business
management systems for distributors, wholesalers and dealers. The Company's
revenue is derived primarily from the sale of Prophet 21 Systems, maintenance
contracts which provide for software support and equipment maintenance and the
sale of optional software products. Each Prophet 21 System includes the Prophet
21 XL Software, an IBM RISC System/6000 computer, various optional third party
software products and hardware components, training, support and installation.
The Company's cost of revenue consists principally of the costs of hardware
components, customer support, installation and training and, to a lesser extent,
third party software.

The Company introduced in fiscal 1996 its next generation product, Prophet
21 Acclaim, a complete business management system that combines the
functionality of the traditional Prophet 21 System with the technology of
progress software's DBMS. Prophet 21 Acclaim is targeted for sales to new and
current customers. It has been designed so that current customers can move to
this new product while preserving their existing technology infrastructure.
Prophet 21 Acclaim is currently in beta testing, and the Company estimates that
it will be generally released in the second quarter of fiscal 1997.

This annual report contains forward looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such forward looking statements.

-15-
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of revenue, and the percentage change in the dollar amount
of such data compared to the prior comparable period:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE PERCENTAGE INCREASE
------------------------ --------------------
(DECREASE)
----------

FISCAL YEAR ENDED FISCAL FISCAL
JUNE 30, 1995 OVER 1996 OVER
------------------------ FISCAL FISCAL
1994 1995 1996 1994 1995
------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
System sales..................... 74.4% 68.2% 63.3% (23.6)% (1.8)%
Service and support.............. 25.6 31.8 36.7 3.6 22.1
----- ----- -----
100.0 100.0 100.0 (16.6) 5.8
----- ----- -----
Cost of revenue:
System sales..................... 38.9 40.4 35.3 (13.4) (7.4)
Service and support.............. 14.0 18.3 20.0 8.5 15.7
----- ----- -----
52.9 58.7 55.4 (7.6) (0.2)
----- ----- -----
Gross profit................... 47.1 41.3 44.6 (26.8) 14.3
----- ----- -----

Operating expenses:
Sales and marketing.............. 23.4 26.1 25.3 (7.1) 2.5
General and administrative....... 6.8 7.2 6.9 (11.7) 2.0
Research and development......... 7.0 9.3 6.8 11.0 (22.7)
Severance expense................ -- 1.2 -- -- --
---- ---- -----
Total operating expenses....... 37.2 43.8 39.0 (1.8) (5.8)
---- ----- -----
Operating income (loss)........ 9.9 (2.5) 5.6 (120.9) 341.5
Interest income................... 0.3 1.2 1.2 189.9 9.1
Income (loss) before
income taxes.................. 10.2 (1.3) 6.9 (110.4) 670.9
Provision (benefit) for income
taxes............................ 3.9 (0.5) 2.8 (111.6) 639.2
---- ---- -----
Net income (loss)................. 6.3% (0.7)% 4.1% (109.7) 694.7
==== ==== =====
</TABLE>

-16-
<PAGE>

Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995

Revenue. Revenue increased by 5.8%, or $1,807,000, from $31,243,000 in
fiscal 1995 to $33,050,000 in fiscal 1996. System sales revenue decreased by
1.8%, from $21,295,000 in fiscal 1995 to $20,905,000 in fiscal 1996. This
decrease was attributable primarily to the Company's focus on larger system
sales which resulted in increased average price of systems sold but a decrease
in the number of units sold. In addition, the Company continued to experience a
longer sales cycle during fiscal 1996 as a result of its focus on larger system
sales. The decrease in system sales was offset, in part, by an increase in sales
of optional software products. Service and support revenue increased 22.1% from
$9,948,000 in fiscal 1995 to $12,145,000 in fiscal 1996. This increase was
attributable primarily to an increase in the number of users who entered into
maintenance contracts and, to a lesser extent, to the implementation by the
Company of a new maintenance program which offers multiple levels of service at
different prices.

Gross Profit. The Company's gross profit increased by 14.3% or $1,844,000,
from $12,910,000 in fiscal 1995 to $14,754,000 in fiscal 1996. Gross profit
margin increased from 41.3% of revenue in fiscal 1995 to 44.6% of revenue in
fiscal 1996. Gross profit from system sales increased by 6.3% or $548,000 from
$8,685,000 in fiscal 1995 to $9,233,000 in fiscal 1996. Gross profit margin
attributable to system sales increased from 40.8% of systems sales revenue in
fiscal 1995 to 44.2% in fiscal 1996. The increases in such gross profit and
gross profit margin were attributable primarily to increased sales volume of
optional Prophet 21 software which, in general, carries higher margins and to a
lesser extent, to the Company's sales focus on larger system sales. Gross
profit from service and support revenue increased by 30.7% or $1,296,000 from
$4,225,000 in fiscal 1995 to $5,521,000 in fiscal 1996. Gross profit margin
attributable to service and support revenue increased from 42.5% of service and
support revenue in fiscal 1995 to 45.5% in fiscal 1996. The increases in such
gross profit and gross profit margin were attributable primarily to an increase
in the number of new users who have entered into the maintenance program and, to
a lesser extent, the implementation by the Company of a new maintenance program
which offers multiple levels of service at different prices, offset in part by a
severance payment of $190,000.

Sales and marketing expenses. Sales and marketing expenses increased by
2.5% or $200,000 from $8,146,000 in fiscal 1995 to $8,346,000 in fiscal 1996,
but decreased as a percentage of revenue from 26.1% to 25.3% respectively.
Sales and marketing expenses increased due to the Company's increased marketing
efforts in direct mail and software catalogue sales and to a lesser extent,
higher salesmen compensation associated with higher sales.

General and administrative expenses. General and administrative expenses
increased by 2.0% or $45,000 from $2,251,000 in fiscal 1995 to $2,296,000 in
fiscal 1996, but decreased as a percentage of revenue from 7.2% to 6.9%,
respectively. The increase in general and administrative expenses was due to
increases in compensation expense.

Research and development expenses. Research and development expenses
decreased by 22.7%, or $659,000, from $2,907,000 in fiscal 1995 to $2,248,000 in
fiscal 1996, and decreased as a percentage of revenue from 9.3% to 6.8%,
respectively. The decrease in research and

-17-
<PAGE>

development expenses was due primarily to a reduction in related salary expenses
and staffing requirements resulting from the Company's creation of new, more
efficient programming tools for use by the Company's programmers, and the
capitalization of certain software development costs.

Income taxes. The Company's effective tax rate was 43.0% and 40.6% in
fiscal 1995 and fiscal 1996, respectively.

Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994

Revenue. Revenue decreased by 16.6%, or $6,226,000, from $37,469,000 in
fiscal 1994 to $31,243,000 in fiscal 1995. System sales revenue decreased by
23.6%, from $27,871,000 in fiscal 1994 to $21,295,000 in fiscal 1995. This
decrease was attributable primarily to decreased sales of Prophet 21 Systems.
The decrease was due primarily to lower unit volume and lower average unit price
during the first half of fiscal 1995 and continued lower unit volume in the
second half of fiscal 1995. The decrease in unit volume in fiscal 1995 as
compared to fiscal 1994 was attributable primarily to the restructuring of the
Company's sales force. To a lesser extent, the decrease also was attributable
to an increase in the sales cycle, during the second half of fiscal 1995, which
resulted from the Company's increased focus on larger system sales. As a result
of the foregoing, the Company hired a new Vice President -- Sales, restructured
its sales force with new leadership, developed a new sales organization plan,
developed an extensive sales training program and revised salesperson
compensation. Service and support revenue increased by 3.6%, from $9,598,000 in
fiscal 1994 to $9,949,000 in fiscal 1995. This increase was attributable
primarily to a price increase for services provided to customers covered by
service contracts and, to a lesser degree, to an increase in the number of
service customers.

Gross Profit. The Company's gross profit decreased by 26.8%, or
$4,721,000, from $17,631,000 in fiscal 1994 to $12,910,000 in fiscal 1995 as a
result of decreased sales volume and lower average unit price. Gross profit
margin decreased from 47.1% of revenue in fiscal 1994 to 41.3% of revenue in
fiscal 1995. Gross profit margin attributable to system sales decreased from
47.7% of system sales revenue in fiscal 1994 to 40.8% in fiscal 1995. The
decrease in such gross profit margin was attributable primarily to the fixed
nature of a substantial portion of the cost of sales and, to a lesser extent, to
a change in the product mix attributable to greater sales of lower margin
hardware and peripherals. Gross profit margin attributable to service and
support revenue decreased from 45.0% of service and support revenue in fiscal
1994 to 42.5% in fiscal 1995. The decrease in such gross profit margin is
attributable primarily to increased payroll expenses and service subcontracting
expenses necessitated by an increase in the number of service contracts, offset
in part, by a price increase for services provided to customers covered under
such contracts.

Sales and marketing expenses. Sales and marketing expenses decreased by
7.1%, or $619,000, from $8,765,000 in fiscal 1994 to $8,146,000 in fiscal 1995,
and increased as a percentage of revenue from 23.4% to 26.1%, respectively.
Sales and marketing expenses decreased in absolute dollars due primarily to
lower salesmen compensation which is based primarily on sales volume. Such
expenses increased as a percentage of revenue as a result of

-18-
<PAGE>

decreased sales volume and the fixed costs associated with the sales
infrastructure, offset in part by a reduction in corresponding salesmen
compensation.

General and administrative expenses. General and administrative expenses
decreased by 11.7%, or $299,000, from $2,550,000 in fiscal 1994 to $2,251,000 in
fiscal 1995, and remained relatively constant as a percentage of revenue. The
decrease in general and administrative expenses was primarily due to
compensation expense of $240,500 incurred in connection with certain stock
option grants in the second quarter of fiscal 1994 and, to a lesser extent, to a
decrease in compensation as a result of voluntary reductions in salary by each
member of the Company's management and reduced payroll expense due to the lay-
off, in January 1995, of twenty-three employees whose positions were no longer
vital to the operation of the Company. Such expenses remained relatively
constant as a percentage of revenue as such payroll reductions were offset by
decreased sales volume.

Research and development expenses. Research and development expenses
increased by 11.0%, or $287,000, from $2,620,000 in fiscal 1994 to $2,907,000 in
fiscal 1995, and increased as a percentage of revenue from 7.0% to 9.3%,
respectively. Research and development expenses increased as a percentage of
revenue as a result of decreased sales volume. The increase in absolute dollars
was due primarily to an increase in salaries due to an increase in programming
staff and management and, to a lesser extent, to an increase in fees paid to
consultants.

Severance expense. Severance expenses were due to a charge to compensation
expense in the amount of $378,000 made in connection with the resignation of the
Company's Vice President -- sales and marketing in August 1994.

Income taxes. The Company's effective tax rate was 38.5% and 43.0% in
fiscal 1994 and fiscal 1995, respectively.

BACKLOG

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

LIQUIDITY AND CAPITAL RESOURCES

In March 1994, the Company completed an initial public offering of
1,500,000 shares of its Common Stock for $10.00 per share, of which 1,000,000
shares were issued and sold by the Company and an aggregate of 500,000 shares
were sold by certain stockholders of the Company. The net proceeds to the
company from the offering were approximately $8,811,000. The Company did not
receive any of the proceeds from the sale of shares by the selling stockholders.

Since its inception, the Company has funded its operations from cash
generated by operations and available cash. Cash used by operations was
$1,535,000 for fiscal year ended

-19-
<PAGE>

June 30, 1994. The Company's cash flow from operations was $1,184,000 and
$1,263,000 for the fiscal years ended June 30, 1995 and 1996, respectively.

The Company's working capital was $15,222,000, $15,172,000 and $15,997,000
at june 30, 1994, 1995 and 1996, respectively.

The Company invested $1,230,000, $876,000 and $1,069,000 in capital
equipment and leasehold improvements in fiscal 1994, 1995 and 1996,
respectively. There are no other material commitments for capital expenditures
currently outstanding.

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

The Company believes that available funds and the cash flow expected to be
generated from operations will be adequate to satisfy its current and planned
operations for at least the next 24 months.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

Not applicable.

-20-
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1996 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.

ITEM 11. EXECUTIVE COMPENSATION.

The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1996 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.

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

The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1996
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1996 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

-21-
<PAGE>

PART IV
<TABLE>
<S> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) (1) Financial Statements.

Reference is made to the index to Financial Statements and Schedules on Page F-1.

(a) (2) Financial Statement Schedules.

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

(a) (3) Exhibits.

Reference is made to the Index to Exhibits on Page 25.

(b) Reports on Form 8-K.

No reports on Form 8-K have been filed during the fiscal year ended June 30, 1996.
</TABLE>

-22-
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 27th day of
September, 1996.

PROPHET 21, INC.

BY: /s/ Charles L. Boyle, III
--------------------------------------
CHARLES L. BOYLE, III, PRESIDENT
AND CHIEF EXECUTIVE OFFICER

-23-
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles L. Boyle, III PRESIDENT, CHIEF EXECUTIVE SEPTEMBER 27, 1996
- ----------------------------- OFFICER AND DIRECTOR
CHARLES L. BOYLE, III (PRINCIPAL EXECUTIVE
OFFICER)

/s/ Thomas Giuliani CHIEF FINANCIAL OFFICER SEPTEMBER 27, 1996
- ----------------------------- AND TREASURER (PRINCIPAL
THOMAS GIULIANI FINANCIAL AND ACCOUNTING
OFFICER)

/s/ John E. Meggitt CHAIRMAN OF THE BOARD AND SEPTEMBER 27, 1996
- ----------------------------- DIRECTOR
JOHN E. MEGGITT, PH.D.

/s/ Dorothy M. Meggit SECRETARY AND DIRECTOR SEPTEMBER 27, 1996
- -----------------------------
DOROTHY M. MEGGITT

/s/ Louis J. Cissone DIRECTOR SEPTEMBER 27, 1996
- -----------------------------
LOUIS J. CISSONE

/s/ Mark A. Timmerman DIRECTOR SEPTEMBER 16, 1996
- -----------------------------
MARK A. TIMMERMAN
</TABLE>

-24-
<PAGE>

EXHIBIT INDEX

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

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

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

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

10.1* Employment Agreement dated as of July 1, 1993 between the Company
and John E. Meggitt. (Incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 (File Number
33-74276) which became effective on March 10, 1994.) Employment
Agreement amended by amendments to Employment Agreement dated
January 26, 1995 and February 3, 1995, such amendments filed
herewith.

10.2* Employment Agreement dated as of July 1, 1993 between the Company
and Charles L. Boyle, III. (Incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10, 1994.)
Employment Agreement amended by Amendments to Employment
Agreement dated January 27, 1995 and April 20, 1995, such
amendments filed herewith.

10.3* Employment Agreement dated as of July 1, 1993 between the Company
and Neil Jaffe. (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File Number 33-
74276), which became effective on March 10, 1994.) Employment
Agreement amended by Amendments to Employment Agreement dated
January 26, 1995 and April 20, 1995, such amendments filed
herewith.

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

-25-
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- --------- ----------------------
<S> <C>
10.5* Indemnification Agreement dated as of December 6, 1993 between the
Company and Dorothy M. Meggitt. (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(File Number 33-74276) which became effective on March 10, 1994.)

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

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

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

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

10.10 Lease dated July 1, 1993 by and between John E. Meggitt and
Dorothy M. Meggitt as Landlord, and the Company, as Tenant.
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File Number 33-74276) which
became effective on March 10, 1994.)

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

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

10.13 International Business Machines Corporation Agreement for
Authorized Dealers and Industry Remarketers, as amended, with
exhibits. (Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (File Number 33-
74276) which became effective on March 10, 1994.)
</TABLE>
-26-

<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- --------- ----------------------
<S> <C>
10.14 Progress Software Value Added Reseller Agreement. (Incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement
on Form S-1 (File Number 33-74276) which became effective on March
10, 1994.)

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

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

10.17* Indemnification Agreement dated as of September 24, 1996 between
the Company and Thomas M. Giuliani, such agreement filed herewith.

21 List of subsidiaries of the Company. (Incorporated by reference to
Exhibit 21 to the Company's Registration Statement on Form S-1
(File Number 33-74276) which became effective on March 10, 1994.)
</TABLE>
- -----------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.

-27-

<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL DATA
AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................. F-2

Consolidated Balance Sheets as of June 30, 1995
and 1996.......................................................... F-3

Consolidated Statements of Operations for the years ended
June 30, 1994, 1995 and 1996...................................... F-4

Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1994, 1995 and 1996.......................... F-5

Consolidated Statements of Cash Flows for the years ended
June 30, 1994, 1995 and 1996...................................... F-6

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

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

Schedule II........................................................ S-2
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Prophet 21,
Inc. and Subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prophet 21,
Inc. and Subsidiaries as of June 30, 1996 and 1995 and the consolidated results
of their operations and their cash flows for each of the three years ended June
30, 1996, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 23, 1996

F-2
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS

Current assets
Cash and cash equivalents.................. $ 7,064 $ 2,860
Marketable securities...................... 2,008 5,795
Accounts receivable, net of allowance
for doubtful accounts of $205
and $209, respectively.................... 9,982 12,029
Inventories................................. 972 1,546
Prepaid and other current assets............ 660 618
------- -------
Total current assets..................... 20,686 22,848
Equipment and improvements, net............. 2,255 2,242
Deferred income taxes....................... 169 19
Software development costs.................. -- 458
Other assets................................ 35 265
------- -------
Total assets............................. $23,145 $25,832
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable........................... $ 2,466 $ 2,922
Accrued expenses and other liabilities..... 825 957
Commissions payable........................ 257 381
Taxes payable.............................. 310 391
Profit sharing plan contribution payable... 25 250
Deferred income............................ 1,631 1,950
------- -------
Total current liabilities................ 5,514 6,851
------- -------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock--$0.01 par value,
1,500,000 shares authorized; no
shares issued or outstanding............... -- --
Common stock--$0.01 par value,
10,000,000 shares authorized; 4,002,500
shares issued and outstanding.............. 40 40
Additional paid-in capital................. 8,821 8,821
Retained earnings.......................... 8,770 10,120
------- -------
Total stockholders' equity............... 17,631 18,981
------- -------
Total liabilities and
stockholders' equity.................... $23,145 $25,832
======= =======
</TABLE>

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

F-3
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
-------- --------- -------
<S> <C> <C> <C>
Revenue:
System sales........................... $27,871 $21,295 $20,905
Service and support.................... 9,598 9,948 12,145
------- ------- -------
37,469 31,243 33,050
------- ------- -------
Cost of revenue:
System sales........................... 14,563 12,610 11,672
Service and support.................... 5,275 5,723 6,624
------- ------- -------
19,838 18,333 18,296
------- ------- -------
Gross profit........................... 17,631 12,910 14,754
------- ------- -------

Operating expenses:
Sales and marketing.................... 8,765 8,146 8,346
General and administrative............. 2,550 2,251 2,296
Research and development............... 2,620 2,907 2,248
Severance expense...................... -- 378 --
------- ------- -------
13,935 13,682 12,890
------- ------- -------
Operating income (loss)........... 3,696 (772) 1,864
Interest income.......................... 129 374 408
------- ------- -------
Income (loss) before taxes............... 3,825 (398) 2,272
Provision (benefit) for income taxes..... 1,474 (171) 922
------- ------- -------
Net income (loss)........................ $ 2,351 $ (227) $ 1,350
======= ======= =======
Net income (loss) per share.............. $ 0.69 $ (0.06) $ 0.34
======= ======= =======
Weighted average common and common
equivalent shares outstanding........... 3,410 4,002 4,011
======= ======= =======
</TABLE>

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

F-4
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- --------- --------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993.................. 3,000 $30 -- $ 6,646 $ 6,676
Issuance of common stock
in connection with initial
public offering........................ 1,000 10 8,801 8,811
Net income.............................. 2,351 2,351
----- --- ------ ------- -------
Balance, June 30, 1994.................. 4,000 40 8,801 8,997 17,838
Issuance of common stock in
connection with exercise
of stock options....................... 2 20 20
Net loss................................ (227) (227)
----- --- ------ ------- -------
Balance, June 30, 1995.................. 4,002 40 8,821 8,770 17,631
Net income.............................. 1,350 1,350
----- --- ------ ------- -------
Balance, June 30, 1996 4,002 $40 $8,821 $10,120 $18,981
===== === ====== ======= =======
</TABLE>

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

F-5
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>

YEAR ENDED JUNE 30,
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ 2,351 $ (227) $ 1,350
------- ------ -------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization.................................. 989 1,160 1,006
Gain on sale of equipment...................................... (8) (5) --
Provision for losses on accounts receivable.................... 210 110 247
Deferred taxes................................................. (73) (44) 150
Decreases (increases) in operating assets:
Accounts receivable............................................ (5,536) 1,756 (2,294)
Inventories.................................................... 48 124 (574)
Prepaid expenses and other assets.............................. (533) 115 41
Increases (decreases) in operating liabilities:
Accounts payable............................................... 127 (605) 456
Accrued expenses............................................... 781 (318) 337
Income taxes payable........................................... (7) (652) --
Profit sharing plan contribution payable....................... 37 (452) 225
Deferred income................................................ 79 222 319
------- ------ -------
Total adjustments.............................................. (3,886) 1,411 (87)
------- ------ -------
Net cash provided (used) by operating activities................. (1,535) 1,184 1,263
------- ------ -------
Cash flows from investing activities:
Cash purchases of equipment.................................... (1,230) (876) (1,069)
Software development costs..................................... -- -- (458)
Purchase of marketable securities.............................. (7,884) -- (9,160)
Maturity of marketable securities.............................. -- 5,797 5,450
Other Assets................................................... -- -- (230)
------- ------ -------
Net cash (used) provided by investing activities................. (9,114) 4,921 (5,467)
------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of offering costs......................................... 8,811 -- --
Stock options exercised........................................ -- 20 --
------- ------ -------
Net cash provided by financing activities........................ 8,811 20 (4,204)
------- ------ -------
Net increase (decrease) in cash and cash equivalents............. (1,838) 6,125
Cash and cash equivalents at beginning of period................. 2,777 939 7,064
------- ------ -------
Cash and cash equivalents at end of period....................... $ 939 $7,064 $ 2,860
======= ====== =======
Supplemental cash flow disclosures:
Income taxes paid.............................................. $ 1,593 $ 826 $ 847
======= ====== =======
</TABLE>

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

F-6
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation:

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

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

Cash and Cash Equivalents:

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

Marketable Securities:

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

Inventories:

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

Equipment and Improvements:

Equipment and improvements are recorded at cost and are depreciated using
the straight line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
remaining lease term. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the

F-7
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

accounts and any resulting gain or loss is reflected in the income statement for
the period. The cost of maintenance and repairs is charged to expense as
incurred, whereas significant renewals and betterments are capitalized.

Revenue Recognition:

Revenue is recorded by the Company when products are shipped to the
customer at which time the cost of installation and other obligations associated
with the sale are accrued. Maintenance revenues from hardware and software
support fees are recognized ratably over the contract period.

Warranty:

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

Capitalized Software:

During fiscal year 1996, the Company capitalized software development costs
associated with a new product pursuant to Statement of Financial Accounting
Standards Board ("SFAS") No. 86. Such costs have been capitalized only after
technological feasibility has been demonstrated. Such capitalized amounts will
be amortized commencing with product introduction on a straight-line basis
utilizing the estimated economic life of three years. Amortization of
capitalized software development costs will be charged to cost of sales. At
June 30, 1996, the Company had capitalized $458 of software development costs,
none of which had been amortized. All other research and development costs have
been expensed.

Income Taxes:

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

Net Income Per Share:

Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin Topic 4-D, all
Common Stock options granted by the Company during the twelve months preceding
the Company's initial public offering date have been included in the calculation
of weighted average shares outstanding as if they were

F-8
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

outstanding for all periods presented, using the treasury stock method at the
public offering price of $10.00 per share.

2. INVENTORIES:

A summary of the major components of inventories are as follows:
<TABLE>
<CAPTION>

JUNE 30,
--------------------
1995 1996
---- ----
<S> <C> <C>
Finished goods.......................... $ 886 $1,412
Used equipment inventory................ 86 134
------ ------
$ 972 $1,546
====== ======
</TABLE>

3. EQUIPMENT AND IMPROVEMENTS:

A summary of the major components of equipment and improvements are as follows:
<TABLE>
<CAPTION>
June 30,
----------------
1995 1996
------ ------
<S> <C> <C>
Equipment.................................. $2,152 $2,347
Computer systems........................... 2,303 2,840
Furniture and fixtures..................... 661 716
Leasehold improvements..................... 363 429
------ ------
5,479 6,332
Accumulated depreciation
and amortization.......................... 3,224 4,090
------ ------
$2,255 $2,242
====== ======
</TABLE>

Depreciation and amortization expense of $989, $1,160 and $1,006 was
charged to operations for the years ending June 30, 1994, 1995 and 1996,
respectively.

F-9
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

4. Leasing Arrangements:

The Company leases certain facilities and equipment under various operating
lease agreements with initial terms ranging from one to five years. Future
minimum payments under noncancelable operating leases at June 30, 1996 are:
<TABLE>
<CAPTION>
Fiscal Year Related Party Third Party Total
- -------------- ------------- ----------- -----

<S> <C> <C> <C>
1997.............. $403 $81 $484
1998.............. 418 50 468
1999.............. -- 26 26
Thereafter........ -- -- --
---- --- ----
$821 $85 $906
==== === ====
</TABLE>

Rent expense, including related party transactions, for the years ended
June 30, 1994, 1995 and 1996 was $551, $556 and $535, respectively.

5. RELATED PARTY TRANSACTIONS:

The Company rents office space from its principal stockholders under lease
terms expiring on June 30, 1998. The lease agreement includes a five-year
renewal provision at the Company's option. Rent expense under the lease for the
years ended June 30, 1994, 1995 and 1996 was $409, $423 and $438, respectively.

F-10
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

6. Income Taxes:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1994 1995 1996
-------- -------- -----
<S> <C> <C> <C>
Federal:
Current.................................. $1,288 $ (147) $ 675
Deferred................................. (46) (33) 113
------ ------ -----
1,242 (180) 788
------ ------ -----
State:
Current.................................. 259 (160) 60
Deferred................................. (27) (11) 37
------ ------ -----
232 (171) 97
------ ------ -----
Foreign:
Current.................................. -- 20 37
------ ------ -----

Valuation allowance:...................... -- 160 --
------ ------ -----
$1,474 $ (171) $ 922
====== ====== =====
</TABLE>

Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current
depending on the classification of the assets and liabilities to which they
relate. The sources of the timing differences reported are primarily due to
different depreciation methods, bad debts expense and the use of the uniform
capitalization method for inventory.

The provision for income taxes differs from the amount computed using the
statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------

1994 1995 1996
------ ----- -----
<S> <C> <C> <C>
Statutory tax rate................................... 34% (34)% 34%
State taxes, net of Federal benefit.................. 4 -- 3
Tax credits.......................................... (2) (15) --
Non-deductible expense............................... 2 4 2
Other................................................ 1 2 2
---- ---- ----
39% (43)% 41%
==== ==== ====
</TABLE>

F-11
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

6. INCOME TAXES (CONTINUED):

Effective July 1, 1993, the Company implemented FAS 109. Under the
provisions of FAS 109 the Company elected not to restate prior years and has
determined that the cumulative effect of the change in accounting for income
taxes was not material.

Deferred income taxes reflect the tax impact of temporary differences
between the assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Amounts giving rise to
deferred income taxes are as follows:
<TABLE>
<CAPTION>

JUNE 30,
----------------
1995 1996
----------------
<S> <C> <C>
Non current deferred tax asset:
Allowance for doubtful accounts...................... $ 83 $ 85
Accrued vacation..................................... 48 56
Inventory capitalization............................. 20 31
Net operating loss carrybacks........................ 160 --
Depreciation......................................... 18 32
----- -----
329 204

Non current deferred tax liability:
Depreciation........................................ -- 185

Valuation allowance.................................. (160) --
----- -----
Total............................................... $ 169 $ 19
===== =====
</TABLE>

7. Concentration of Credit Risk:

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

F-12
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

8. EMPLOYEE BENEFIT PLANS:

The Company has a qualified profit sharing plan covering employees who meet
certain eligibility requirements. Contributions are at the discretion of the
Board of Directors, and may not exceed the maximum amount allowable for federal
income tax deduction. Contributions to the Company's qualified profit sharing
plan for the years ended June 30, 1994, 1995 and 1996 were $115, $0 and $0,
respectively.

On October 1, 1993, the Company implemented a 401(k) Retirement Savings
Plan. The Company's contribution is at the discretion of management and, for
the years ended June 30, 1994, 1995 and 1996 were $340, $0 and $250,
respectively.

9. COMMITMENTS AND CONTINGENCIES:

The Company has entered into employment agreements with certain key
employees. Such agreements, which have been revised from time to time, provide
for annual salary of $405.

10. STOCKHOLDERS' EQUITY:

Preferred Stock

The Company has an authorized class of 1,500,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine.

Stock Option Plan

Under the Company's 1993 Stock Plan (the "Plan"), the Company has reserved
600,000 shares of common stock for issuance of both incentive and non-qualified
options. Options to purchase 370,000 shares were granted during fiscal 1994 at
an exercise price of $7.00 per share and were fully vested. Accordingly,
general and administrative expenses for the fiscal year ended June 30, 1994
include a compensation expense of $240,500 resulting from the difference on the
grant date between the exercise price and the fair market value of the Common
Stock underlying such options.

Under the Plan, options to purchase shares of Common Stock may be granted
to key employees and consultants. The Plan provides that the exercise price of
incentive options shall not be less than the fair market value of the shares on
the date of the grant, that the exercise price of non-qualified options shall
not be less than 75% of the fair market value of the shares on the date of grant
and, in either case, that no portion of such options may be exercised beyond ten
years from the date of grant.

F-13
<PAGE>

PROPHET 21, INC, AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

10. Stockholders' Equity (continued):

A summary of changes in Common Stock options during 1995 and 1996 follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
- ---------------------------------------------------------------------
<S> <C> <C>
Options outstanding at June 30, 1993 0 $0.00
Granted 370,000 $7.00
- ---------------------------------------------------------------------
Options outstanding at June 30, 1994 370,000 $7.00
Granted 113,200 $4.125 to $7.00
Canceled (5,800) $5.00
Exercised (2,500) $7.00
- ---------------------------------------------------------------------
Options outstanding at June 30, 1995 474,900 $4.125 to $7.00
Granted 105,000 $4.50 to $4.80
Canceled (7,400) $5.00
- ---------------------------------------------------------------------
Options outstanding at June 30, 1996 572,500 $4.125 to $7.00
=====================================================================
Options exercisable at June 30,
1994 123,333 $7.00
1995 305,000 $4.125 to $7.00
1996 454,900 $4.125 to $7.00
=====================================================================
</TABLE>

11. SEVERANCE EXPENSES:

In August 1994, the Company accepted the resignation of the vice president
of sales and marketing. In connection with this resignation, the Company
recorded a severance charge of $378. In June 1996, the Company accepted the
resignation of the vice president of customer services. In connection with this
resignation, the Company recorded a severance charge, included in cost of
revenue of $190.

12. SUBSEQUENT EVENT:

In August 1996, the Company's Board approved a resolution to repurchase up
to 400,000 shares of its Common Stock in open market purchases.

F-14
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

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

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

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 23, 1996

S-1
<PAGE>

SCHEDULE II

PROPHET 21, INC.

Schedule II - Valuation and Qualifying Accounts

Allowance for Doubtful Accounts
<TABLE>
<CAPTION>

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

<S> <C> <C> <C> <C>
1994.......... 200,000 209,975 181,713 228,262
1995.......... 228,262 107,373 130,635 205,000
1996.......... 205,000 247,337 242,940 209,397

</TABLE>

S-2

<PAGE>

EXHIBIT 10.17

PROPHET 21, INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement ("Agreement") is made as of September 24,
1996, by and between Prophet 21, Inc. a Delaware corporation (the "Company"),
and Thomas Giuliani ("Indemnitee").

WHEREAS, Indemnitee is an officer of the Company and performs a valuable
service in such capacity for the Company;

WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining
liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;

WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;

WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other
directors, officers, employees, agents and fiduciaries of the Company may not be
willing to continue to serve in such capacities without additional protection;
and

WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company as a
director, wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.

NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

1. Indemnification.
----------------

(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of
<PAGE>

the Company, or is or was serving at the request of the Company as a director,
officer, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action or inaction on
the part of Indemnitee while serving in such capacity (hereinafter an
"Indemnifiable Event") against any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than thirty (30) days after written demand by Indemnitee therefor is
presented to the Company.

(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section l(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section l(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the

-2-
<PAGE>

legal or factual bases therefor, and the Company hereby consents to service of
process and to appear in any such proceeding. Any determination by the Reviewing
Party otherwise shall be conclusive and binding on the Company and Indemnitee.

(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
the Company shall seek legal advice only from Independent Legal Counsel (as
defined in Section 10(d) hereof) selected by Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld). Such counsel,
among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of the Independent Legal Counsel referred to above and to fully indemnify such
counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.

(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.

2. Expenses; Indemnification Procedure.
-----------------------------------

(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
(5) days after written demand by Indemnitee therefor to the Company.

(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.

-3-
<PAGE>

(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or without court approval) or
conviction, or upon a plea of nolo contendere, or its equivalent, shall not
---------------
create a presumption that Indemnitee did not meet any particular standard of
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law. In addition, neither the
failure of the Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by the Reviewing Party that Indemnitee has
not met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law, shall
be a defense to Indemnitee's claim or create a presumption that Indemnitee has
not met any particular standard of conduct or did not have any particular
belief. In connection with any determination by the Reviewing Party or otherwise
as to whether the Indemnitee is entitled to be indemnified hereunder, the burden
of proof shall be on the Company to establish that Indemnitee is not so
entitled.

(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.

(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any action, suit, proceeding, inquiry
or investigation, the Company, if appropriate, shall be entitled to assume the
defense of such action, suit, proceeding, inquiry or investigation with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same action, suit,
proceeding, inquiry or investigation; provided that, (i) Indemnitee shall have
the right to employ Indemnitee's counsel in any such action, suit, proceeding,
inquiry or investigation at Indemnitee's expense and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
action, suit, proceeding, inquiry or investigation, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.

-4-
<PAGE>

3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------

(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.

(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity.

4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any action, suit,
proceeding, inquiry or investigation made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.

5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses in the investigation, defense, appeal or settlement of any
civil or criminal action, suit, proceeding, inquiry or investigation, but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.

6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.

-5-
<PAGE>

7. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.

8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:

(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law.

(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except (i) with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such suit, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.

(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or

(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale or, sale and
purchase, by Indemnitee of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor statute.

9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within

-6-
<PAGE>

such two-year period; provided, however, that if any shorter period of
-------- -------
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.

10. Construction of Certain Phrases.
-------------------------------

(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.

(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee, agent or fiduciary of the Company
which imposes duties on, or involves services by, such director, officer,
employee, agent or fiduciary with respect to an employee benefit plan, its
participants or its beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.

(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a

-7-
<PAGE>

merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all of the Company's assets.

(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).

(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.

(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.

11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.

12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or of any other enterprise at the Company's request.

13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses

-8-
<PAGE>

incurred by Indemnitee with respect to such action, regardless of whether
Indemnitee is ultimately successful in such action, and shall be entitled to the
advancement of Expenses with respect to such action, unless as a part of such
action the court of competent jurisdiction over such action determines that each
of the material assertions made by Indemnitee as a basis for such action were
not made in good faith or were frivolous. In the event of an action instituted
by or in the name of the Company under this Agreement to enforce or interpret
any of the terms of this Agreement, Indemnitee shall be entitled to be paid all
Expenses incurred by Indemnitee in defense of such action (including costs and
expenses incurred with respect to Indemnitee's counterclaims and cross-claims
made in such action), and shall be entitled to the advancement Expenses with
respect to such action, unless as a part of such action the court having
jurisdiction over such action determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.

14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.

15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.

16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.

17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.

-9-
<PAGE>

18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.

19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.

20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.

21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.

* * * * * * *

-10-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

PROPHET 21, INC.

By: /s/ Charles L. Boyle, III
--------------------------------

Title: President and CEO
-----------------------------
19 W. College Ave.
-----------------------------------
Yardley, PA 19067
-----------------------------------
(address)

AGREED TO AND ACCEPTED

INDEMNITEE:

/s/ Thomas Giuliani
- -----------------------------
(signature)

Thomas Giuliani
- -----------------------------
(name of Indemnitee)

19 W. College Ave.
- -----------------------------
Yardley, PA 19067
- -----------------------------
(address)

-11-

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1996
<PERIOD-START> JUL-01-1994 JUL-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1996
<CASH> 7,064 2,860
<SECURITIES> 2,008 5,795
<RECEIVABLES> 10,187 12,238
<ALLOWANCES> (205) (209)
<INVENTORY> 972 1,546
<CURRENT-ASSETS> 20,686 22,848
<PP&E> 2,255 2,242
<DEPRECIATION> (1,160) (1,006)
<TOTAL-ASSETS> 23,145 25,832
<CURRENT-LIABILITIES> 5,514 6,851
<BONDS> 0 0
0 0
0 0
<COMMON> 40 40
<OTHER-SE> 17,591 18,941
<TOTAL-LIABILITY-AND-EQUITY> 23,145 25,832
<SALES> 31,243 33,050
<TOTAL-REVENUES> 31,243 33,050
<CGS> 18,333 18,296
<TOTAL-COSTS> 18,333 18,296
<OTHER-EXPENSES> 13,682 12,890
<LOSS-PROVISION> (772) 1,864
<INTEREST-EXPENSE> (374) (408)
<INCOME-PRETAX> (398) 2,272
<INCOME-TAX> (171) 922
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (227) 1,350
<EPS-PRIMARY> (0.06) 0.34
<EPS-DILUTED> (0.06) 0.34

</TABLE>