Summary of ACTIVANT SOLUTIONS INC /DE/

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition includes the Predecessor Company periods prior to the consummation of the transactions. We refer to the operations of both the Predecessor Company and the Successor Company as ours, unless specifically stated otherwise. You should read the following discussion and analysis in conjunction with our financial statements and related notes included herein. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under "Risk Factors".
On May 2, 2006, Activant Group Inc. (formerly known as Lone Star Holding Corp.), or Activant Group, Lone Star Merger Corp., or Merger Sub, and Activant Solutions Holdings Inc., or Holdings, consummated a merger, whereupon Holdings became wholly owned by Activant Group, which in turn is wholly owned by investment funds affiliated with Hellman & Friedman, Thoma Cressey and JMI Equity, and certain members of our management. Following the merger, on May 2, 2006, Holdings merged with and into Activant Solutions Inc., with Activant Solutions Inc., or the Successor Company, continuing as the surviving corporation and as a wholly-owned subsidiary of Activant Group. These mergers are referred to in this report as the "mergers" and the transactions related to the mergers are referred to collectively in this report as the "transactions." In this report, the terms the "Company", "we", "us" and "our" refer to the combined operations of Activant Solutions Inc. and the Predecessor Company, unless specifically stated otherwise. In our discussion of our results of operations in 2006, we discuss each line item in the statement of operations on a combined Predecessor/Successor basis for comparative purposes. These combined amounts represent the sum of the financial data for the Predecessor Company and us for the period from October 1, 2005 through September 30, 2006. These combined amounts are for informational purposes only. Overview
We are a leading provider of business management solutions to distribution and specialty retail businesses. With over 35 years of operating history, we have developed substantial expertise in serving businesses with complex distribution and retail requirements in three primary vertical markets: hardlines and lumber, wholesale distribution and the automotive parts aftermarket. For reporting purposes, we consider each of these vertical markets separate segments. The segments are determined in accordance with how our management views and evaluates our business and based on the criteria as outlined in the Financial Accounting Standards Board ("FASB") Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. We previously considered our segments along product lines. Effective October 1, 2007, we reorganized our management and business structure along vertical markets. Concurrent with this reorganization, we also revised our methodology for allocating certain infrastructure costs such as facilities, information technology ("IT") support, and telecommunications expense. Accordingly, all prior periods have been reclassified to conform to the current period presentation. See Notes 1 and 13 to our consolidated financial statements for additional information. Because these segments reflect the manner in which our management reviews our business, they necessarily involve judgments that our management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect technologies and applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Recent events, including changes in our senior management, may affect the manner in which we present segments in the future.
Our revenues are primarily derived from customers that operate in three vertical markets - hardlines and lumber, wholesale distribution, and automotive. We also derive revenue from our Productivity Tools business, which we include in Other.
• The hardlines and lumber vertical market consists of independent hardware retailers; home improvement centers; paint, glass and wallpaper stores; farm supply stores; retail nurseries and garden centers; independent lumber and building material dealers; and pharmacies, primarily in the United States. For the year ended September 30, 2008, we generated approximately 35.2% of our total revenues from the hardlines and lumber vertical market.

• The wholesale distribution vertical market consists of distributors of a range of products including electrical supply; plumbing; medical supply; heating and air conditioning; tile; industrial machinery and equipment; industrial supplies; fluid power; janitorial and sanitation products; paper and packaging; and service establishment equipment vendors, primarily in the United States. For the year ended September 30, 2008, we generated approximately 39.7% of our total revenues from the wholesale distribution vertical market.

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• The automotive vertical market consists of customers involved in the manufacture, distribution, sale and installation of new and remanufactured parts used in the maintenance and repair of automobiles and light trucks, and includes manufacturers, warehouse distributors, parts stores, professional installers and several chains in North America and Europe. For the year ended September 30, 2008, we generated approximately 20.3% of our total revenues from the automotive vertical market.

• Other primarily consists of our Productivity Tools business, which is involved with software migration services and application development tools. For the year ended September 30, 2008, we generated approximately 4.8% of our total revenues from other.

Using a combination of proprietary software and extensive expertise in these vertical markets, we provide complete business management solutions consisting of tailored systems, product support and content and supply chain services designed to meet the unique requirements of our customers. Our fully integrated systems and services include point-of-sale, inventory management, general accounting and enhanced data management that enable our customers to manage their day-to-day operations. Our revenues are derived from the following business management solutions:
• Systems, which is comprised primarily of proprietary software applications; implementation services; training; forms and paper products; and third-party software, hardware and peripherals.

• Services, which is comprised primarily of product support, content, and supply chain services. Product support services are comprised of customer support activities, including hardware, software and network support through our advice line, software updates, preventive and remedial on-site maintenance and depot repair services. Our content services are comprised of proprietary database and data management products such as our comprehensive electronic automotive parts and applications catalog and point-of-sale business analysis data. Supply chain services are comprised of connectivity services, ecommerce, networking and security monitoring management solutions. We generally provide our services on a subscription basis, and accordingly, revenues are generally recurring in nature.

Key Trends
Over the course of the past year, and even more pronounced as we exited the fiscal year, the global economic environment has deteriorated significantly and has evolved into what is commonly called a "global credit crisis." Negative developments include declining values in real estate, restricted criteria for obtaining credit and capital, liquidity concerns over major financial institutions, and recent significant declines and volatility in global financial markets. In response to these unprecedented market conditions, on October 3, 2008, the U.S. enacted the Emergency Economic Stabilization Act of 2008, with an objective to promote the stability of the U.S. financial system. Notwithstanding these measures, consumer confidence in the U.S. as measured by the Conference Board reached an all-time low in October 2008. We believe that the global economic uncertainty and credit crisis have negatively impacted the level of overall spending, including spending in the vertical markets that we serve. While all of our operating segments have been impacted, the most pronounced affect during fiscal year 2008 has been to our hardlines and lumber vertical market which is highly dependent on the residential housing market. In addition to these broader economic impacts, we believe our results have been, and are being impacted by the following:
• Extended sales cycles. As a result of the economic downturn and tightening credit markets, customers and prospective customers remain cautious with new capital investments leading to extended sales cycles. As a result of the slowing economy, in the second and third quarters of fiscal year 2008 (and again subsequent to year-end) our management approved restructuring actions primarily related to eliminating certain employee positions

• Consolidation of our customers' vertical markets. Our customers are undergoing consolidation. When one of our customers acquires a company that does not currently use our systems, we typically benefit from new systems sales and increased services revenues associated with that customer. When a company not currently using our systems acquires one of our customers, we typically lose services revenues. Consolidations are having the most significant impact on the automotive and hardlines and lumber vertical markets.

• Growth in our revenue from the wholesale distribution vertical market. Our systems revenues from the wholesale distribution vertical market has grown at a compound annual growth rate of approximately 128% from fiscal year 2003 through fiscal year 2008, primarily as a result of our acquisitions of Prophet 21 and Eclipse. Increased systems revenues generally result in increased product support revenues in future years as we add new customers and new products. In each of the last three fiscal years, product support revenues have increased as we added several new customers to our product support business and sold additional add-on modules. In fiscal year 2008 we did not have any acquisitions. This coupled with the weaker economic conditions may prevent us from sustaining this level of compounded annual growth rate for future periods.

• Lower systems sales in the hardlines and lumber vertical market. From fiscal year 2003 to fiscal year 2007 our revenues from the hardlines and lumber vertical market grew at a compound annual growth rate of 16%. Much of this growth was fueled by growth in the residential housing market and new store openings with our co-op partners. In fiscal year 2008 hardlines and lumber systems revenue decreased 27% due

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to fewer store openings attributed to the slowdown in retail and residential construction coupled with the completion of one or more of our co-op partner's migration from its legacy systems to our solution.

• Lower customer retention in our automotive vertical market. Our customer base in the automotive vertical market continues to decline due to the loss of a major customer (General Parts, Inc.) and consolidation of independent automotive store locations. Additionally, as we stop actively developing and selling several of our older systems, especially in our automotive vertical market, we have experienced reduced rates of customer retention. We have developed various upgrade paths for these customers and have undertaken a specific customer services campaign to increase retention rates for customers who elect to continue to operate with our older systems. Despite our efforts, we have experienced year-over-year decreases in our automotive product support revenues and we expect lower levels of customer retention to continue.

Despite the more challenging economic environment, we continued to achieve solid operating results in fiscal year 2008, including an increase of cash provided by operating activities for the year in comparison to the two prior fiscal years. If the macroeconomic environment continues to be weak, however, it will likely have a negative effect on our sales and operating margin growth rates across all segments for at least the first half of fiscal year 2009 that, in turn, impacts our ability to meet certain financial tests under our senior secured credit agreement and the indenture governing our senior subordinated notes. See a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations included in

Part I, "Item 1A- Risk Factors" in this Annual Report on Form 10-K. Acquisitions
Eclipse Distribution Management Solutions. In August 2007, we purchased substantially all of the assets of Eclipse Distribution Management Solutions ("Eclipse") for cash consideration of approximately $101.3 million. Eclipse is a leading enterprise software provider to the wholesale distribution segment and this acquisition strengthens our position with larger wholesale distribution businesses in the electrical and plumbing sub-verticals.
Silk Systems, Inc. In May 2007, we acquired the common stock of Silk Systems, Inc. ("Silk Systems") for a total purchase price of $6.9 million, net of $0.7 million cash received. Silk Systems is one of the leading computer software solutions providers for the Canadian home improvement, wholesale distribution and building materials industries. This acquisition expands our presence and commitment to the Canadian market while building on current technology and service offerings for customers across North America.
Prophet 21, Inc. In September 2005, we acquired all of the outstanding capital stock of Prophet 21, Inc. ("Prophet 21") for cash consideration of $218.2 million. Prophet 21 is a provider of business management solutions to the wholesale distribution vertical market. The integration of Prophet 21 into our operations has significantly enhanced our position and expertise serving the wholesale distribution vertical market and provided additional systems and service offerings for our customers.
The Systems House, Inc. On May 16, 2005, we purchased substantially all of the assets of The Systems House, Inc. Their next generation business management solution, Activant Vision, is designed for warehouse distributors in the automotive parts aftermarket. The total consideration paid for the acquisition was approximately $2.6 million in cash.
Speedware Corporation Inc. In March and April 2005, we acquired the common stock of Speedware Corporation Inc. ("Speedware") for cash consideration of $100.8 million. The Speedware acquisition solidified our position as a provider of business management solutions to the hardlines and lumber vertical market through the addition of over 700 customers in this vertical market. Historical Results of Operations
Year Ended September 30, 2008 Compared to Year Ended September 30, 2007 Total revenues
Our Hardlines and Lumber, Wholesale Distribution and Automotive segments accounted for approximately 35.2%, 39.7% and 20.3%, respectively, of our revenues during the year ended September 30, 2008. This compares to the year ended September 30, 2007, where our Hardlines and Lumber, Wholesale Distribution, and Automotive segments accounted for approximately 42.1%, 30.7% and 21.9%, respectively, of our revenues. See Note 13 to our consolidated financial statements for further information on our segments, including a summary of our segment revenues and contribution margin.

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The following table sets forth, for the periods indicated, our segment revenues by business management solution and the variance thereof:

                                                                   Year Ended September 30,
(in thousands)                                  2007             2008            Variance $          Variance %

Hardlines and Lumber revenues:
Systems                                       $  95,911        $  69,671        $    (26,240 )             (27.4 )%
Services                                         76,272           80,342               4,070                 5.3

Total Hardlines and Lumber revenues           $ 172,183        $ 150,013        $    (22,170 )             (12.9 )%


Wholesale Distribution revenues:
Systems                                       $  55,545        $  73,897        $     18,352                33.0 %
Services                                         70,114           95,414              25,300                36.1

Total Wholesale Distribution revenues         $ 125,659        $ 169,311        $     43,652                34.7 %


Automotive revenues:
Systems                                       $  15,137        $  15,084        $        (53 )              (0.4 )%
Services                                         74,656           71,336              (3,320 )              (4.4 )

Total Automotive revenues                     $  89,793        $  86,420        $     (3,373 )              (3.8 )%


Other revenues:
Systems                                       $  14,766        $  14,585        $       (181 )              (1.2 )%
Services                                          6,721            6,040                (681 )             (10.1 )

Total Other revenues                          $  21,487        $  20,625        $       (862 )              (4.0 )%


Total revenues:
Systems                                       $ 181,359        $ 173,237        $     (8,122 )              (4.5 )%
Services                                        227,763          253,132              25,369                11.1

Total revenues                                $ 409,122        $ 426,369        $     17,247                 4.2 %

Total revenues for the year ended September 30, 2008 increased by $17.2 million, or 4.2%, compared to the year ended September 30, 2007. The increase in revenues over the comparable year ago period primarily reflects increased sales in our systems and services revenues in Wholesale Distribution as a result of our acquisition of Eclipse in August 2007, and increased services revenue in Hardlines and Lumber, partially offset by declines in systems revenues in Hardlines and Lumber, declines in services revenue in Automotive and declines in Other revenues.
• Hardlines and Lumber revenues - Hardlines and Lumber revenues decreased by $22.2 million, or 12.9%. The systems revenue decrease was attributed to a reduction in the volume of new system sales and the decrease in the sale of additional products and modules, primarily as a result of our co-op partners opening fewer new stores and customers exhibiting caution on making capital expenditures both due to the weak economy and a slowing retail environment. These decreases in systems revenue were partially offset by systems revenue attributable to the acquisition of Silk Systems. Services revenue increased primarily due to the Silk Systems acquisition as well as price increases for support services.

• Wholesale Distribution revenues - Wholesale Distribution revenues increased by $43.7 million, or 34.7%. The systems revenue increase was substantially attributable to the Eclipse acquisition, partially offset by a reduction in the volume of new systems and the sale of additional products and modules due to the weak economy. Services revenue increased primarily as a result of services revenue related to the Eclipse acquisition and price increases for support services.

• Automotive revenues - Automotive revenues decreased by $3.4 million, or 3.8%. Systems revenue were slightly lower as a result of selling less hardware in the year ended September 30, 2008 compared to the same period a year ago as many customers had upgraded hardware in the prior year. Services revenue decreased primarily as a result of the known attrition of a major customer, General Parts Inc., and reductions in the customer base.

• Other revenues - Other revenues decreased $0.9 million, or 4.0%, driven by lower systems sales as a result of a slow down in planned migrations due to Hewlett-Packard's announcement to continue to support one of its legacy systems through 2010 as well as lower network installation service revenue from the installation of third party hardware.

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Total cost of revenues and gross margins as a percentage of revenues The following table sets forth, for the periods indicated, our gross margin as a percentage of revenues:

                                                Year Ended September 30,
             (in thousands)                 2007          2008        Variance
             Cost of systems revenues    $  99,290     $  95,350     $ (3,940 )
             Systems gross margins            45.3 %        45.0 %

             Cost of services revenues   $  83,821     $  92,260     $  8,439
             Services gross margins           63.2 %        63.6 %

             Total cost of revenues      $ 183,111     $ 187,610     $  4,499
             Total gross margins              55.2 %        56.0 %

• Cost of systems revenues and systems gross margins - Cost of systems revenues consists primarily of direct costs of software duplication, our logistics organization, cost of hardware, salary costs of professional services and installation headcount, royalty payments, and allocations of overhead expenses, including facility and IT costs.

Cost of systems revenues decreased by $3.9 million primarily as a result of lower direct costs associated with lower systems revenues in Hardlines and Lumber and Other (primarily Productivity Tools) partially offset by $9.0 million in costs attributable to the acquisition of Eclipse and Silk Systems. System gross margins decreased by 0.3 percentage points in the year ended September 30, 2008 from the comparable period in 2007. The decrease is primarily attributable to lower gross margins in Hardlines and Lumber as a result of lower systems sales, the impact of relatively fixed costs on a lower revenue base, as well as reductions in average selling prices in the segment partially offset by a greater percentage of systems revenue derived from higher margin products in Wholesale Distribution and in Other (primarily Productivity Tools business) as a result of lower outside services costs.

• Cost of services revenues and services gross margins - Cost of services revenues primarily consist of material and direct labor associated with our advice line, material, labor and production costs associated with our automotive catalog and allocations of overhead expenses, including facility and IT costs. Generally, our services revenues have a higher gross margin than our systems revenues.

Cost of services revenues increased by $8.4 million primarily as a result of $8.1 million of costs associated with the acquisition of Eclipse and Silk Systems. Services gross margins increased by 0.4 percentage points in the year ended September 30, 2008 from the comparable period in 2007. The increase in margins is primarily attributable to higher margin services revenues from the acquisition of Eclipse and Silk Systems as well as the full year impact of increases in the support customer base and price increases for customer support on a relatively fixed cost structure.

Total operating expenses
The following table sets forth, for the periods indicated, operating expenses and the variance thereof:

                                                  Year Ended September 30,
  (in thousands)                    2007          2008         Variance $       Variance %

  Sales and marketing             $  64,473     $  64,039     $       (434 )           (0.7 )%
  Product development                40,652        44,258            3,606              8.9 %
  General and administrative         27,732        31,517            3,785             13.6 %
  Depreciation and amortization      29,735        37,254            7,519             25.3 %
  Acquisition related costs             531         1,056              525             98.9 %
  Restructuring costs                 1,109         2,272            1,163            104.9 %

  Total operating expenses        $ 164,232     $ 180,396     $     16,164              9.8 %

Total operating expenses increased by $16.2 million, or 9.8%, for the year ended September 30, 2008 compared to the year ended September 30, 2007. The increase was driven primarily by virtually all major expense categories (except sales and marketing) increasing at rates greater than overall revenue growth, as well as increased acquisition related costs and fiscal year 2008 restructuring activities.
• Sales and marketing - Sales and marketing expense consists primarily of salaries and commissions for our sales force, stock-based compensation expense, marketing expenses and an allocation of overhead expenses including facilities and IT costs.

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Sales and marketing expenses decreased by $0.4 million, or 0.7%, for the year ended September 30, 2008 compared to the year ended September 30, 2007. The decrease was primarily a result of $4.2 million of lower commissions, travel and bad debt expense in our pre-acquisition business partially offset by $3.4 million of expenses associated with the acquisitions of Eclipse and Silk Systems.

• Product development - Product development expense consists primarily of salaries, stock-based compensation expense, outside services and an allocation of overhead expenses, including facilities and IT costs. Product development expense increased $3.6 million, or 8.9%, for the year ended September 30, 2008 compared to the year ended September 30, 2007. This increase was primarily the result of increased expenses of $6.7 million related to the Eclipse and Silk Systems acquisitions, which were partially offset by $1.4 million of lower compensation expense, $1.3 million lower third-party service costs and lower software development expenses of $1.1 million as a result of more of these costs being capitalized.

• General and administrative - General and administrative expense primarily consists of salaries and bonuses; stock-based compensation expense; facility costs; finance, human resource and legal services; IT support and telecommunication costs. General and administrative expenses increased by $3.8 million, or 13.6%, for the year ended September 30, 2008 compared to the year ended September 30, 2007. The increase is primarily due to $3.9 million of costs related to strategic initiatives offset by $0.5 million lower compensation expense and $0.6 million lower stock-based compensation expense.

• Depreciation and amortization - Depreciation and amortization expense consists of depreciation of our fixed assets and amortization of our intangible assets. Depreciation and amortization is not allocated to our segments. Depreciation and amortization expense was $37.3 million for the year ended September 30, 2008 compared to $29.7 million for the year ended September 30, 2007. The increase resulted primarily from the amortization of the additional $38.6 million of intangible assets associated with the . . .