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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002.[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ______.


Commission File Number 0-16376

TIMBERLINE SOFTWARE CORPORATION(Exact name of registrant as specified in its charter)

Oregon(State or other jurisdiction of
incorporation or organization)
93-0748489(I.R.S. Employer
Identification No.)


15195 N.W. Greenbrier Parkway, Beaverton, Oregon 97006-5701

(503) 690-6775(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, without par value
(Title of class)

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]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [ ] No[x]

As of March 19, 2003, 11,797,046 shares of common stock of the registrant
were outstanding.

As of June 30, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $61,365,289.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Proxy Statement dated March 21, 2003, prepared in connection with the Annual Meeting of Shareholders to be held on April 29, 2003 are incorporated by reference into Part III of this Report.



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PART I

Forward-Looking Statements

In this Form 10-K and in the Management's Discussion and Analysis included in Item 7, we have made certain forward-looking statements. The words or phrases "anticipates," "believes," "expects,"  "intends,"  "will continue,"  "estimates,"  "plans,"  "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to vary materially from anticipated results, including, without limitation, delays in new product releases, delays in acceptance of our products in the marketplace, failures by our outside vendors to perform as promised, changes in the software operating systems for which our products are written, increased competition, and changes in general market conditions. These factors are discussed in further detail under "Risks and Uncertainties" in our Management's Discussion and Analysis. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those discussed herein as expected, believed, estimated, intended, or anticipated. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

Item 1.	Business

General

Timberline Software Corporation was incorporated in Oregon in 1979. Originally incorporated under the name Timberline Systems, Inc., we changed our name in 1986. Our corporate headquarters is located in Beaverton, Oregon, and we have a subsidiary office based in Sydney, Australia, for the Asia-Pacific region. Our Website address is www.timberline.com.

We develop, market, and support financial and operations software for the construction and real estate industries. The software is designed to work on stand-alone personal computers or in a network of personal computers or computer workstations. We also provide a range of support services for our clients, including annual maintenance
and support service plans, on-site consulting, classroom training, and annual user conferences.

We operate predominantly within the United States of America, but also license our products in other countries, including Australia and Canada. As of December 31, 2002, we believe that approximately 20,000 clients are using our software products. Of these, nearly 12,000 subscribe to one of our maintenance and support service plans.

Our operations are divided into two main segments:  software products and software services. For additional information about these operating segments, see Note 6 to our consolidated financial statements for the year ended December 31, 2002.



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Software Products

Software license revenue is a major source of our net revenue. In 2002, 2001, and 2000, software license revenue accounted for 36%, 41% and 43% of net revenue for those years, respectively.

Our current software products are designed to operate in Microsoft® Windows® 2000 Professional and Windows XP Professional operating environments for stand-alone personal computers. Timberline's Windows-based software products are also compatible with other Open Database Connectivity (ODBC)-compliant applications. ODBC is a data exchange methodology developed by Microsoft Corporation. Accepted as an industry standard, ODBC allows users to directly access information stored in Timberline data format with other databases, word processing, and spreadsheet programs for greater productivity.

Prior to the introduction of our Windows-based software applications, our product offerings included software that operated in the MS-DOS® operating environment. In 1998, we announced that we would discontinue maintenance of the DOS-based products after 2001. We discontinued maintenance of these software applications in February 2002.

In 2000, we embedded an SQL database engine into our Windows-based software applications. This replaced the proprietary database that we had used in earlier version of our software. We believe this change enabled many of our users, especially those with many concurrent users on the software, to significantly increase their software performance and provide greater integrity of their database.

Timberline has been noted primarily as a provider of Accounting software (composed of construction, property management and service management software) and Estimating software. However, to better respond to the changing needs of our clients who have been asking for an integrated software solution, over the past several years, we have been developing new software and enhancing our current software product offerings to gradually transition from a company that produced separately branded software functions to one that provides a suite of construction and real estate products that spans the entire facility lifecycle. To signify the importance of its direction, Timberline now groups its products and services under the name Timberline® Office.

The facility lifecycle is the evolution of a facility from the time the idea is born to the final disposition of the facility. It begins with the feasibility and design stages and then moves into the engineering, planning and building phases. Once constructed, the facility moves into the phases involving occupation, operations and maintenance. Until recently, our focus has been on providing estimating, accounting and property management products for every phase of the facility lifecycle, other than the feasibility and design phases. With new software products and software product enhancements, we are now moving into those areas and pushing further into the operating phase of the facility lifecycle.

With our transition, some key innovations are taking place. Traditionally, we have focused on individual needs, and the individual's specific function-functions like accounting, estimating, and property management. These strengths remain. Building on our strengths, we have added two key elements.

First, we are enhancing the individual user's ability to connect with other functions. Through fully integrated applications, we are providing a greater ability to share and use common information across functions and departments, both within businesses and with business partners.

Secondly, we have recognized that, while software applications may apply to several industries, each industry nonetheless has specific needs and circumstances. We now acknowledge this uniqueness with our focus on specific industry segments. These segments include commercial and industrial contractors, specialty contractors, electrical and mechanical contractors, residential contractors, real estate managers, real estate developers, owners, and government.



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Our applications fall under the umbrella of Timberline® Office, a collection of fully integrated software. From this software collection, we recommend applications that are most appropriate in meeting the specific needs of each industry segment. In addition, our software collection is divided among product suites that include accounting, estimating, procurement, production management, project management, property management, reporting and other tools, and service management. In turn, each product suite has a corresponding set of applications. Each of these product suites is explained below.

Our Accounting suite was Timberline's first product suite developed for the Windows environment with a Graphical User Interface (GUI). It was released in October 1992. We designed this line of software specifically to handle the accounting and management information needs for medium to large-sized construction companies and for other users with more advanced accounting and management information requirements. We believe we were the first major software company to develop software for construction companies using the advanced capabilities of the Windows operating environment.

We designed our accounting suite around a core set of applications, such as Accounts Payable, Cash Management, General Ledger, Financial Statement Designer, Payroll, and Job Cost. These applications are fully integrated, allowing for data entered into one application to be accessed and entered electronically into another application.

Since the initial release of our Windows-based Accounting products, we have released additional applications to help meet the industry-specific needs of businesses in construction and real estate. These applications include Equipment Cost software in 1995, which is critical to equipment-intensive construction companies, Accounts Receivable and Contracts application in December 1997, and a Billing software application in May 1998.

Our Estimating product suite enables estimators to compile bids on construction projects based on certain parameters such as architectural design, building materials required, and material and labor costs. In 1987, we introduced our collection of integrated estimating software applications, then named Precision Estimating. The collection is currently designed around two core estimating products--Estimating Standard, and Estimating Extended. Estimating Standard, released in 1996, replaced the Company's older entry- and mid-level DOS-based estimating products. Designed specifically for Microsoft Windows, this estimating software allows an estimator to make fast, accurate estimates on software that we believe is fairly easy to learn and to use, while taking advantage of Windows-based technology. Estimating Extended offers a more comprehensive and sophisticated approach to the estimating process, from the first conceptual estimate to the final bill of materials. In September 1997, we released a completely re-designed, Windows-based version of Estimating Extended to replace the older DOS version.

To complement our estimating software products, we also license databases and other software we have developed and those developed by others, which allow estimators to be more productive and to develop more comprehensive estimates. The core estimating product also interfaces with our Job Cost accounting and Project Management applications. Through interfaces we have developed, the core estimating products can be linked to scheduling software developed by Microsoft and Primavera Systems, Inc.

In June 2000, we released Palm Estimating, our first application for hand-held personal digital assistants, or "PDAs."  This application enables estimators to use a PDA to take off key project information at the job site and then synchronize the device with the Company's desktop estimating software to quickly generate a detailed estimate.

In January 2001, we released a conceptual database product that allows quick estimates on new projects using parametric input. In June 2001, we released Model Estimating, which uses detailed databases and simple interview-like questions to create detailed conceptual estimates and various what-if scenarios for facility and financial planning purposes.



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In February 2002, we released our CAD Integrator product. This is the first construction estimating software to incorporate the Industry Foundation Classes (IFC) standard. This standard enables data exchange with any IFC-compliant software application. The CAD Integrator electronically reads the IFC data into our Estimating Extended application and creates a cost estimate very quickly. No manual entry of quantity values or use of a digitizer is required. In November 2001, the Toronto (Canada) Construction Association presented its 2001 Innovative Product/Technology Award to us for the development of CAD Integrator.

In May 2002, we released our Construction Knowledgebase. As the first product of its kind, the Construction Knowledgebase contains pre-built construction models, a comprehensive list of Smart AssembliesTM, and incorporates RSMeans Cost Data content and pricing for more than 700 cities and 20,000 items.

Our Procurement product suite was initially comprised of our Purchasing and Inventory applications, which we released at the end of 1999. In August 2002, we added an important procurement application called Buyout. This application allows companies working with our Estimating application to quickly and accurately turn detailed estimates into Requests for Quotes (RFQs) and purchase orders. Companies are able to take advantage of material and subcontract items in cost estimates to solicit prices from potential suppliers and subcontractors, issue purchase orders

In August 2000, we released our Service Management product suite. These applications, bundled with our current construction accounting applications, allow us to meet the service dispatching needs of specialty contractors, primarily electrical and mechanical contractors.  The specialty contractor area is a significant segment of the construction industry, for which, until the release of the above applications, we were unable to provide a complete accounting solution.

Additionally, in August 2002, we released our Project Management product suite. With the release of our Project Management software application, we are addressing a growing need that our users are requesting - integration of software applications. With Project Management, our clients can now access cost and project information in real time through a central database. This central database eliminates the need for redundant data entry and simplifies the flow of information between Project Management, Accounting, and Estimating.

Data from accounting and estimating applications are required to enable project managers to effectively perform their project management function. However, in many cases, there was not an efficient way of reporting that information to project managers because the accounting, estimating and project management software had little or no integration with each other. There are many vendors who provide software for the construction and real estate industries. However, many vendors supply only accounting software, estimating software, property management or project management software; none provide all four. This results in customers having to manually re-enter accounting and estimating data into their project management software, or rely on a data import tool.

Our Property Management software suite is an accounting and management information system used by managers of residential and commercial properties. In March 1997, we released our main application, Property Management, a lease-based accounting software suite of products that we designed to work on the Microsoft Windows platform. Unlike traditional, tenant-based or unit-based software programs, we designed our software to focus on the lease document, which allows the software to adapt to many various types of lease arrangements. The software helps provide information to property managers regarding revenues and expenses of various properties and generates financial reports about the properties to the various owners, as well as reports containing other tenants and lease information about the properties.



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Since the initial release of our Property Management product suite, we have added additional products to improve its functionality. In September 2001, we released Valuation and Forecasting for property asset managers, real estate firms and facility owners. This software allows companies to model multiple scenarios for their owned or leased-based properties, including valuation, forecasting, lease analysis, investment analysis, and budgeting. Through our integration, clients can exchange their data with our Property Management, General Ledger, and Estimating applications, and with many other Windows-based property management, accounting, or other spreadsheet applications. In July 2002, we released Residential Management, an application specific to the needs of on-site managers, and managers in the home office.

Our Reporting and Other Tools product suite includes Address Book, which we released in August 2002. Address Book pulls together in one location all company-wide contact information for suppliers, subcontractors, and all other business contacts. Other applications in this product suite include applications that retrieve and organize data, such as Inquiry Designer and Report Designer.

Future Software Development

Our goal with Timberline Office is to provide our clients with a fully integrated suite of applications that are backed by world class support. As noted before, our strong Accounting and Estimating applications form the foundation on which we are building our industry-based suite of products. As a further step, we plan to add e-commerce capabilities to our suite of products to provide a fully integrated, collaborative e-commerce solution for companies and organizations in the construction and real estate industries.

We believe the addition of the e-commerce capability to our applications can improve workplace efficiencies. Currently, many companies, especially in the construction industry, rely on paper, facsimile and phone communication in conducting their business. The time and effort required to process, communicate and coordinate these activities is significant. We believe increased productivity and efficiencies can be gained by processing these transactions electronically.

We are currently developing new functionality to our current product suites, which will enable users of our software to conduct business-to-business e-commerce through Internet portals or directly from desktop to desktop. Our users will be able to communicate and share information with existing and future online construction portals, other software systems, or companies that only have an Internet connection. Using eXtensible Markup Language ("XML") and other new technology, our users will be able to send electronic construction documents that mimic their current paper-based documents to their suppliers, partners and other interested parties. They, in turn, will be able to open, edit and re-send these documents back to the originator of the documents, providing all parties with significant processing efficiencies

Support Services

We also generate a significant portion of our net revenue from service fees. Service fees consist primarily of maintenance and support fees, on-site consulting fees, classroom training fees and sales of training materials.

Clients may purchase annual maintenance and support service plans from us. These service plans allow our users to obtain program changes and enhancements to the software as they are released and to obtain telephone access to our technical support department for answering application-related questions. Commencing in 1998, users who are on our maintenance and support service plans also have Internet access to our online support help available through the web site. Through this service, users have a 24-hour-a-day communication and information tool for self-help services, such as downloading latest versions of software, updates and software patches, and access to a knowledge base to obtain answers to most commonly asked questions.



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We also offer consulting services to users who need or request more specialized assistance in the set-up and implementation of our software. In these situations, our professional services group provides such services on-site at the user's offices. Requests for such services are received directly from the client or from referrals from our independent reseller channel. In certain circumstances, we may sub-contract these consulting services to a group of Timberline-certified consultants. This group is composed of independent third party providers who have met or surpassed standards imposed by us of their knowledge of Timberline's software products, industry knowledge, accounting and estimating expertise, communications skills and other relevant factors.

In addition, we also generate fees from training classes to teach users how to efficiently set up and use our software products. The classes are generally held throughout the year at our corporate headquarters or near our offices in the New York and Los Angeles metropolitan areas. Commencing in the latter part of 1998, we curtailed the number of training classes we offered as our independent reseller channel assumed a more active role in providing training classes to users in their own geographic areas. To maintain a high, consistent standard of training to users of Timberline's software and to assist the resellers in conducting training classes, we developed a curriculum of training materials to be used at all Timberline software classes. We generate revenue from the sale of these training materials to our reseller channel.

Service fees are a significant percentage of our total net revenue. In 2002, 2001, and 2000, service fees comprised 62%, 56%, and 54% respectively, of total net revenue. Revenue from our maintenance and support service plans accounted for approximately 86% of our service fee revenue in 2002, 2001 and 2000. We are very committed to maintaining a high level of quality related to our support services. At the end of 2002, 36% of our employees were directly associated with providing client services. In May 2001, our technical support group received Support Center Practices ("SCP") Certification for excellence in providing technical support services to our customers. We believe we are the first estimating and accounting software company to achieve SCP certification. We achieved re-certification in 2002.

Markets

Traditionally, we have focused our sales and marketing efforts primarily toward residential contractors, general contractors, and property managers and developers. However, the introduction of new products in the past three years has enabled us to expand into more phases within the facility lifecycle. Currently, we now produce financial and operations software for commercial and industrial contractors, residential builders, specialty contractors, electrical and mechanical contractors, real estate managers, real estate developers, corporate owners, and government.  This industry coverage will allow us to effectively sell our products and services to a broader range of companies and organizations than we were able to in prior years.

With new products released during the past three years, we can serve the needs of companies who own or manage facilities. The release of Model Estimating and Forecasting software has allowed us to target those companies by helping them with their capital budgeting, forecasting and valuation needs, which is part of the feasibility and design phase of the lifecycle. Our work on developing project management products should also strengthen our presence in the lifecycle's planning and building stages. With the release of our Service Management, Purchasing and Inventory applications, we significantly expanded our target market by including the specialty contractor segment of the construction industry. This allowed us to have better coverage in the building phase of the lifecycle, but also enabled us to provide better solutions in the phases involved with occupation, operations and maintenance.

Sales/Distribution

We license our software products and provide related software services primarily in the United States of America. We also license our software products and provide related services in Canada, Australia, and other foreign countries. Revenue from foreign countries comprised less than 6 % of our total net revenue in 2002, 2001 and 2000.



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Product distribution is primarily handled by value added resellers, who we refer to as solution providers. We also maintain a direct sales force to complement our solution providers and to handle sales to national accounts, other large companies and to our user base.

We also maintain a telemarketing staff for selling maintenance and support service plans and classroom training to our user base. On-site consulting fees are generated from requests for services from users we sell to directly and from our solution providers.

Unfilled orders for software products at December 31, 2002 and 2001 were not significant. We typically ship our software products within three days of receipt of the order.

Production

The principal materials and components used in our software products are computer media and some user documentation. For each product, we prepare masters of the software on CD-ROM's. Substantially all copies of the software are made by outside vendors. We rely on outside vendors to provide other software-related materials and shipping services.

Competition

The software market is highly competitive and subject to change because of the rapid technological changes in the computer and computer software industry. The number of software vendors with which we compete varies from product to product and from region to region within the United States. We believe we are the major supplier of construction accounting and estimating software in the construction industry and one of the leading suppliers of accounting and management information software in the real estate industry. We believe there are barriers to entry into our segment of the software market. First, the sophisticated software applications we develop require a wide range of programming specialization and industry knowledge. In addition, the nature of the software requires a company of a certain size that is able to support the software, including distribution and training capabilities in a number of geographical regions as well as on-going support, maintenance and upgrade of the software. However, should a decision be made by larger, better-known software developers to enter this segment of the market, some such competitors are considerably larger, more diversified, and have greater financial and other resources and enjoy greater brand recognition for their products than we have.

We believe our emphasis on producing high quality software products that are flexible and user-friendly enables us to compete effectively. In addition, as noted above, our technical support group has received SCP certification, which symbolizes excellence in providing service to customers. We believe this also enhances the marketability of our products.

Product Protection

We regard our software as proprietary and attempt to protect it by relying primarily upon copyrights, trade secret laws, internal nondisclosure agreements and transferability restrictions incorporated into our software license agreements. We provide our software products to users under a perpetual paid-up license agreement. Title to the software applications does not transfer to the user. Program source listings are not released, which we believe further protects unauthorized transfers of our proprietary information, as well as the confidentiality of our trade secrets. We also use a combination of software programming and hardware devices to protect some of our products from unauthorized use or duplication. Despite these restrictions, it may be possible for our competitors or users to copy aspects of our software products or to obtain information which we regard as proprietary. Although our competitive position may be adversely affected by unauthorized use of our proprietary information, we believe that the rapid pace of technological change in the computer and computer software industries makes intellectual property protection of less significance than such factors as the knowledge and experience of our management personnel and our ability to develop, enhance, support and market our products.



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Third parties may assert infringement or other claims against us with respect to any of our existing or future software products. Litigation to protect our proprietary information or to determine the validity of any third-party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.

Research and Development

We are continually in the process of developing new software applications and enhancements to our existing software products in order to meet the changing needs of our users and the marketplace. At the end of 2002, 39 % of our employees were directly associated with product development. Product development expenses (in thousands) were $16,450, $16,332 and $13,254 in 2002, 2001 and 2000, respectively. Of that total, $14,784, $14,290 and $11,522 were incurred in 2002, 2001 and 2000, respectively, on research and development on new software products. An additional $2,143, $4,990 and $4,583, respectively, of product development expenses on new software products were capitalized in those same years.

Employees

At December 31, 2002, we had 498 employees, of which 472 were full-time. None of the employees are represented by unions, or subject to collective bargaining. Our business is heavily dependent on retaining and attracting highly skilled employees. Accordingly, we have an employee benefits program that includes group health, dental, vision, disability and life insurance plans, paid vacations and holidays, leave privileges, employee assistance program and educational reimbursement. We also maintain a 401(k) plan, and a profit sharing plan covering all employees. Additionally, we have stock option and stock incentive plans from which we may grant stock options and other stock incentives to our employees. In 2002, 2001 and 2000, we granted stock options to substantially all of our employees. We believe our relationship with our employees is good. In 2002, we were rated by the Oregon Business magazine as one of the best companies to work for in Oregon.

Item 2.  Properties

In October 1998, we moved into our new corporate headquarters located in Beaverton, Oregon. Most of our employees and operations are located in this 89,000 square foot office and production facility, which we constructed on land purchased in 1997.

In July 2000, we entered into a lease for additional office space in close proximity to our corporate headquarters to locate part of our product development group. Under this lease, we are currently leasing about 48,000 square feet. This lease expires in 2011. Commencing in 2002, we subleased about one-half of the space for approximately two years.

We also lease small regional offices under short-term lease arrangements for some of our sales, consulting and training functions in the following metropolitan areas: Los Angeles, CA; New York, NY; Concord, NC; Nashville, TN; and Jacksonville, FL.

In March 2000, we opened up our first regional office outside the United States in Sydney, Australia. We did this to provide better support to our sales channel in that country and to increase our presence in the Asia-Pacific region.

We believe that our corporate headquarters and all of our leased facilities are modern facilities in good condition and are adequate for our immediate needs. Should additional office space be required, we believe we have the ability to construct additional office space on our corporate properties where we currently maintain our corporate headquarters.



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Item 3. Legal Proceedings

From time to time, we are subject to routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. We currently believe that the ultimate amount of liability, if any, for any pending claims will not materially affect our financial position, results of operations or cash flow. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.

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

None.



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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National Market System under the symbol TMBS.  The high and low closing prices are as reported by the Nasdaq National Market System.

2002
      
      2001High
      
      Low
      
      High
      
      LowFirst Quarter
      $
      7.49
      $
      5.90
      $
      5.31
      $
      3.03Second Quarter
      
      7.75
      
      5.44
      
      6.25
      
      2.88Third Quarter
      
      5.36
      
      4.21
      
      6.18
      
      5.00Fourth Quarter
      
      6.00
      
      3.25
      
      6.55
      
      5.20




As of March 10, 2003, we had 300 shareholders of record. Based upon the requests for proxy material for our 2003 annual meeting of shareholders, we believe there were approximately 4,100 beneficial shareholders as of that date. Cash dividends paid in 2002 and 2001 amounted (in thousands) to $1,876 and $1,867, respectively.

Item 6.  Selected Financial Data

(Amounts in thousands, except per share amounts and ratio)

Year ended December 31,2002
      
      2001
      
      2000
      
      1999
      
      1998Net revenue:Software license fees
      $
      22,146
      $
      24,452
      $
      22,950
      $
      29,291
      $
      24,786Service fees
      
      38,049
      
      33,781
      
      28,595
      
      25,673
      
      19,244Other
      
      1,660
      
      1,709
      
      1,861
      
      2,328
      
      1,917Net revenue
      
      61,855
      
      59,942
      
      53,406
      
      57,292
      
      45,947Cost and expenses
      
      59,719
      
      57,912
      
      49,435
      
      41,940
      
      35,172Operating income
      
      2,136
      
      2,030
      
      3,971
      
      15,352
      
      10,775Other income - net
      
      313
      
      432
      
      1,006
      
      749
      
      531Income before income taxes
      
      2,449
      
      2,462
      
      4,977
      
      16,101
      
      11,306Provision for income taxes
      
      692
      
      611
      
      1,646
      
      5,907
      
      4,112Net income
      $
      1,757
      $
      1,851
      $
      3,331
      $
      10,194
      $
      7,194Basic earnings per share
      $
      0.15
      $
      0.16
      $
      0.27
      $
      0.80
      $
      0.58Diluted earnings per share
      $
      0.15
      $
      0.16
      $
      0.26
      $
      0.78
      $
      0.56Cash dividends
      $
      1,876
      $
      1,867
      $
      2,015
      $
      1,675
      $
      1,236Cash dividends per share
      
      0.16
      
      0.16
      
      0.16
      
      0.13
      
      0.10Total assets
      
      53,303
      
      50,745
      
      48,968
      
      50,347
      
      41,549Long-term debt
      
      375
      
      -
      
      -
      
      -
      
      5,417Shareholders' equity
      
      25,244
      
      24,980
      
      25,362
      
      30,167
      
      20,036Working capital
      
      (4,682)
      
      (3,101)
      
      (33)
      
      8,702
      
      5,500Current ratio
      
      0.80
      
      0.85
      
      1.00
      
      1.47
      
      1.37




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

The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto.

About Timberline Software Corporation

We develop, manufacture, and license financial and operations software primarily for the construction and real estate industries. We also provide related services to our users, including annual maintenance and support service plans, on-site consulting services, and training. Approximately twenty thousand companies use one or more of our software products.

Results of Operations

(Amounts in thousands, except per share amounts and percentages)

Our results of operations for the years ended December 31, 2002, 2001, and 2000, and the changes on a year-over-year comparison are set forth below:



Year ended December 31,
      
      Increase (Decrease)
      % Increase (Decrease)2002
      
      2001
      
      2000
      
      2002 vs. 2001
      
      2001 vs. 2000
      2002 vs. 2001
      
      2001 vs. 2000Net revenue:Software license fees
      $
      22,146
      $
      24,452
      $
      22,950
      $
      (2,306)
      $
      1,502
      (9.4)
      %
      6.5
      %Service fees
      
      38,049
      
      33,781
      
      28,595
      
      4,268
      
      5,186
      12.6
      
      18.1Other
      
      1,660
      
      1,709
      
      1,861
      
      (49)
      
      (152)
      (2.9)
      
      (8.2)Net
      revenue
      
      61,855
      
      59,942
      
      53,406
      
      1,913
      
      6,536
      3.2
      
      12.2Cost and expenses:Cost of revenue
      
      8,252
      
      6,608
      
      5,994
      
      1,644
      
      614
      24.9
      
      10.2Client services
      
      13,131
      
      14,069
      
      12,459
      
      (938)
      
      1,610
      (6.7)
      
      12.9Product development
      
      16,450
      
      16,332
      
      13,254
      
      118
      
      3,078
      0.7
      
      23.2Sales and marketing
      
      14,103
      
      13,465
      
      11,265
      
      638
      
      2,200
      4.7
      
      19.5General and administrative
      
      7,783
      
      7,438
      
      6,463
      
      345
      
      975
      4.6
      
      15.1Total cost and expenses
      
      59,719
      
      57,912
      
      49,435
      
      1,807
      
      8,477
      3.1
      
      17.1Operating income
      
      2,136
      
      2,030
      
      3,971
      
      106
      
      (1,941)
      5.2
      
      (48.9)Other income
      
      313
      
      432
      
      1,006
      
      (119)
      
      (574)
      (27.5)
      
      (57.1)Income before income taxes
      
      2,449
      
      2,462
      
      4,977
      
      (13)
      
      (2,515)
      (0.5)
      
      (50.5)Provision for income taxes
      
      692
      
      611
      
      1,646
      
      81
      
      (1,035)
      13.3
      
      (62.9)Net income
      $
      1,757
      $
      1,851
      $
      3,331
      $
      (94)
      $
      (1,480)
      (5.1)
      %
      (44.4)
      %




11

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The following table presents our operating statement data expressed as a percentage of net revenue for the years indicated:



Year ended December 31,2002
      2001
      2000Net revenue:Software license fees
      35.8
      %
      40.8
      %
      43.0
      %Service fees
      61.5
      
      56.4
      
      53.5Other
      2.7
      
      2.8
      
      3.5Net revenue
      100.0
      %
      100.0
      %
      100.0
      %Cost and
      expenses:Cost of revenue
      13.4
      
      11.0
      
      11.2Client services
      21.2
      
      23.5
      
      23.4Product development
      26.6
      
      27.2
      
      24.8Sales and marketing
      22.8
      
      22.5
      
      21.1General and administrative
      12.6
      
      12.4
      
      12.1Total cost and expenses
      96.6
      
      96.6
      
      92.6Operating income
      3.4
      
      3.4
      
      7.4Other income
      0.5
      
      0.7
      
      1.9Income before income taxes
      3.9
      
      4.1
      
      9.3Provision for income taxes
      1.1
      
      1.0
      
      3.1Net income
      2.8
      %
      3.1
      %
      6.2
      %




Net Revenue.  Net revenue in 2002 increased over 2001 due to an increase in service fees, which was partially offset by a decrease in software license revenue. Net revenue in 2001 increased 12% over 2000 as we experienced growth in both of the two major components of net revenue - software license revenue and service fees.

Software license revenue in 2002 declined in comparison to 2001 primarily due to the challenging economic environment and uncertainty related to timing of the economic recovery. Because of these factors, we believe some companies delayed their software purchasing decisions and cut back on their technology spending in 2002. Partially offsetting the decrease in software license revenue as a result of the lower demand was additional revenue from new software products and increased revenue from new market segments we have been targeting for growth. In government/owner market segments, we had two significant software orders for our estimating products, for which we did not have similar orders in 2001. In August 2002, we released our Project Management and Buyout applications, which contributed $1,323 in software  orders for the year. Also, software license revenue into the specialty contractor segment grew, primarily as a result of the service management applications we introduced in August 2000. The service management applications contributed in generating software orders totaling $3,001 in 2002 compared to $2,455 in 2001.

Software license revenue in 2001 increased 7% over 2000. While we managed to grow our software revenue in 2001, we believe the terrorist-related events on September 11, 2001, and the uncertainty surrounding the recovery of the U.S. economy caused many prospective buyers to delay their purchasing decision, despite our increased marketing and sales efforts. During the first six months of 2001, software license revenue increased 18% over the first six months of 2000. However, during the last six months of 2001, software license revenue decreased 3% from the comparable period in 2000. Our growth in software license revenue in 2001 was mainly due to the introduction of new software products and our entry into new segments of the construction industry.



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The introduction of service management applications in August 2000 combined with our introduction of Purchasing and Inventory applications at the end of 1999 enabled us to compete effectively in the specialty contractor area. The service management applications contributed in generating software orders totaling $2,455 in 2001 compared to $1,116 in 2000. Also, in June 2001, we introduced our Model Estimating product and new Digitizer product. The modeling application contributed significantly to our ability to effectively sell to the government and owners/facility managers.

We distribute our software products primarily in the United States through a blended sales channel involving third-party resellers (which we refer to as solution providers) and a direct sales group. Our solution providers accounted for 63%, 71%, and 77% of total software license revenue in 2002, 2001, and 2000, respectively, with the remaining percentage coming from our direct sales group. The increase in the percentage of our software license revenue that came from our direct sales group in 2002 was primarily due to two large software licensing arrangements by our direct sales group during the second half of 2002 into the government/owner market.  International software license revenue accounted for 7%, 5%, and 7% of total software license revenue in 2002, 2001, and 2000, respectively. We have no single customer that accounted for more than 10% of our net revenue.

Service fee revenue is comprised primarily of recurring fees from annual maintenance and support service plans and fees for consulting and training. We invoice our users for twelve-month service plans and recognize that revenue ratably over the service plan period. Because revenue from our service plans is generated from our entire customer base and not just from new users added during the year, the revenue from service plans does not necessarily fluctuate correspondingly with the increase or decrease in our yearly software revenue. Revenue from our service plans amounted to $32,930, $29,099, and $24,455 in 2002, 2001, and 2000, respectively. This represents about 86% of our total service fee revenue for those years. Service plan revenue increased 13% in 2002 over 2001, and increased 19% in 2001 over 2000. The increases in revenue from service plans in 2002 and 2001 were both due to an increase in the number of users on a service plan and an increase in prices related to our service plan offerings. Consulting and training revenue increased 9% in 2002 over 2001, and increased 13% in 2001 compared to 2000. The level of consulting and training revenue is closely tied to our U.S. software license revenue. As a percentage of our U.S. software license revenue, consulting and training revenue increased to 25% in 2002 from 20% in 2001, and 19% in 2000.  The increase in this percentage in 2002 is primarily due to an increase in the amount of software revenue generated by our direct sales group, which is the primary source for generating most of our consulting revenue.

Cost of Revenue.  Cost of revenue consists primarily of royalties paid to outside developers, amortization of capitalized software development costs, software documentation, assembly and shipping costs, and outside costs for training and consulting. Cost of revenue increased in both 2002 and 2001 over the previous year in absolute amounts. The increase in 2002 was primarily due to a $932 increase in royalties and an $822 increase in amortization of capitalized software costs and purchased software. The increase in royalties was primarily due to increased royalties associated with an embedded SQL database engine. The increase in amortization of capitalized software costs and purchased software was primarily due to amortization of capitalized software development costs on new products released in 2002, such as our Project Management and Buyout applications. Additionally, we wrote off $300 of unamortized capitalized software costs in June 2002. At that time, it was determined that we could combine the feature set of two of our service products into one code set, thereby saving significant future development costs of maintaining two separate products. The write-off relates to the service product that we no longer offer to our users.

The increase in cost of revenue for 2001 was primarily due to a $428 increase in royalties paid to outside developers on our software products, an $84 increase in costs related to the shipment of software updates to users on service plans and a $45 increase in consulting costs. The increase in royalties was primarily due to increased royalties associated with an embedded SQL database engine. The other two increases were primarily due to volume increases related to the number of customers to which we provide services for service plans or consulting engagements.



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Operating Expenses.

Client services expenses decreased in 2002 compared to 2001 and as a percentage of service fee revenue, declined to 35% from 42% in 2001. The decrease in this area was primarily related to personnel costs as a result of the actions noted above. Although personnel costs decreased $676 from a year ago, the overall quality of service to our users remained at a high level as we increased efficiencies in our call center processes to handle the increase in call volume.

Other reductions in this area were phone costs, which were lower by $173, primarily due to lower phone rates from a new contract with a telecommunication provider, and outside service costs, which were lower by $109 due to a reduction in the amount of outside consulting services for improving our call center processes. The increase in 2001 over 2000 was primarily due to an increase in personnel costs in order to manage and service the increased volume of technical support calls from our user base, as well as improving the quality of support services being provided. The call volume to our client services group increased 18% in 2001 over the previous year. The average number of employees in client services increased 14% to 198 in 2001 from 174 in 2000. The increase in personnel costs accounted for $1,671 of the increase in client services expenses in 2001 over 2000. As a percentage of service fee revenue, client services expenses decreased to 42% in 2001 from 44% in 2000.

Product development expenses represent cost for research and development on new software products as well as enhancements and ongoing updates to our existing software products, less the amount of development costs capitalized with respect to new products. Product development expenses, net of capitalized software development costs, increased slightly in 2002 over 2001. However, excluding the amount of software development costs capitalized, product development expenses decreased $2,729 over the previous year. Of this decrease, $2,172 was due to lower outside service costs, primarily due to lower utilization of contract developers and $685 less in consulting costs associated with the re-engineering of our product development process. We also had a $496 decrease in personnel costs as a result of the reduction in force and the across-the-board wage reduction mentioned above. These reductions were partially offset by an increase in severance costs in 2002 by $152. Comparing 2001 to 2000, product development expenses increased primarily due to an increase in personnel and the additional use of outside contract developers to maintain and enhance our growing number of software products. Cost for personnel and outside contract developers, net of capitalized software development costs, increased $1,875 in 2001 over 2000. Additionally, in 2001, we spent $877 for outside consultants to assist us in re-engineering our product development process.

We believe the amount of development costs to be capitalized in 2003 will be significantly less than the amount capitalized in 2002 and 2001. With the release of our Project Management and Buyout applications in August 2002, we have completed the new products required for the release of Timberline® Office, our fully integrated suite of software products for the markets we serve. We believe the cost reduction measures that took place at the end of 2001 and during 2002 will offset most of the additional expense as a result of capitalizing less development costs in 2003.



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Sales and marketing expenses increased in 2002 over 2001, and as a percentage of net revenue, showed a slight increase. Sales expenses in 2002 increased $968 over 2001, of which $634 was related to personnel costs. We increased our sales staff in 2002 by six and had a $241 increase in commission expense. Most of the increase in commission expense resulted from an increase in software revenue from our direct sales and telesales groups, which increased $1,204, or 22% over the prior year. In addition, travel and phone expenses increased by $102, primarily due to the increase in personnel, and we incurred $183 additional sales-related expenses in Florida, which we now are covering exclusively with our direct sales staff. Partially offsetting the increase in sales expenses was a $330 decrease in marketing expenses in 2002 from 2001. Of this decrease, $246 was due to lower personnel costs as a result of the personnel cost reduction measures mentioned above. We also incurred $235 less in our overall trade show costs as we cut back on the number of trade shows we attend. This was partially offset by $165 in higher commissions to our solution providers related to our service plans billings, which increased 13% in 2002 over 2001.

Comparing 2001 to 2000, sales and marketing expenses both increased over the prior year. Marketing expenses in 2001 increased $1,310 over 2000, primarily due to an increase in our lead development efforts to generate more leads and referrals to our solution provider channel and our direct sales group. As a result, we incurred additional expenses for telemarketing personnel, outside telemarketing services, direct mail campaigns and trade show costs. Marketing expense also increased due to increased commissions paid on service plans.  In 2001, sales expenses increased $890 over the previous year. Most of this increase was attributed to an increase in personnel costs. We added to our direct sales group to increase our ability to sell directly to prospective customers in certain areas within the U.S. and established a telesales group during 2001 to sell additional software applications to our user base. Software revenue from our direct sales and telesales groups increased $1,753, or 34% over the prior year.

General and administrative expenses increased in 2002 over 2001 due to a number of factors: depreciation expense increased $121 primarily due to an increase in internal information system expenditures; insurance expense increased $188 primarily due to general market increases in the insurance industry; legal fees increased $173 primarily due to an increase in new agreements, and contracts and legal costs associated with human resources-related matters; $115 increase in severance costs related to the reduction in force; and investor relations costs increased $63 as a result of being more proactive in making presentations to potential investors and the investment community. These increases were partially offset by a $327 reduction in personnel costs as a result of the cost reduction measures mentioned above. In comparing general and administrative expenses for 2001 to 2000, personnel costs increased $570, depreciation expense increased $118, and outside service costs increased $143, all primarily in the internal information systems area as we significantly expanded our capabilities in this area. Legal fees also increased $129 over the prior year due to an increase in new agreements and contracts.

Other Income.  Other income is primarily composed of interest income on cash and cash equivalents and temporary investments. Other income decreased in 2002 and 2001 compared to the prior year, primarily due to lower interest rates and a decrease in the average amount of cash and temporary investments invested in interest-bearing instruments compared to the prior year.

Provision for Income Taxes.  The Company's effective tax rate was 28%, 25%, and 33% in 2002, 2001, and 2000, respectively. The increase in the effective tax rate in 2002 was primarily due to lower research tax credits. The effective tax rate for 2001 was lower than 2000 primarily due to a decrease in our pre-tax earnings in 2001 and a greater effect of the research tax credit on our effective tax rate. For more information about the provision for income taxes, see Note 5 of Notes to Consolidated Financial Statements.



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Liquidity and Capital Resources

(Amounts in thousands, except per share amounts and percentages)

We meet our liquidity needs through cash generated from operations. Net cash provided by operations was $8,021 in 2002, compared to $7,635 and $8,809 in 2001 and 2000, respectively. The increase in cash provided by operations in 2002 compared to 2001 was primarily due to an increase in the amount of non-cash charges included in our cost and expenses for 2002. The decrease in cash provided by operations in 2001 compared to 2000 was primarily due to the decrease in our profitability in 2001.

Our financial position continues to be strong. Cash and cash equivalents and temporary investments amounted to $10,339 at December 31, 2002, representing 19% of our total assets. These cash resources increased $574 during 2002, primarily due to an increase in cash provided by operations.

Capital expenditures amounted to $2,782, $2,520, and $3,857 in 2002, 2001, and 2000, respectively. A certain level of capital expenditures is required each year for the purchase of computers for new employees, periodic upgrades of existing computers for employees, expansion of the Company's telecommunication system, and hardware purchases for our internal information system. Additional capital expenditures are spent each year for various special projects. In 2002, we spent $1,047 related to the expansion of our corporate offices. These expenditures enabled us to vest our master development plan of our corporate properties with the local government.  This vesting will allow us to develop the property for future expansion when and if we determine such expansion is warranted.  In 2001, we purchased additional software to expand the capabilities of our internal information system, amounting to $505. In 2000, there were additional capital expenditures for work related to the design of the future development of the Company's corporate properties amounting to $509, and productivity software for our client services group amounting to $276. Capital expenditures were relatively high in 2000 compared to 2002 and 2001, primarily due to the significant amount of new hires in that year, resulting in additional capital expenditures for furniture and computers.

Accounts receivable - net at December 31, 2002, increased 4%, or $240, since the end of 2001 to $6,336. The increase was primarily due to an increase in software and service plans billings during the month of December 2002 compared to the previous December. The accounts with our customers remain very current with DSOs (Days Sales Outstanding) in accounts receivable decreasing to 32 days at the end of 2002 from 35 days at December 31, 2001.

Other receivables decreased $327 during 2002 to $185 at the end of 2002. This decrease was primarily due to the reimbursement of $234 of leasehold-related expenses that was accrued at the end of 2001 and a $45 decrease in accrued interest.

Purchased software represents unamortized costs related to software acquired for resale to our customers. Previously, this amount was included in capitalized software costs, but for better clarity, we have presented these costs separately from capitalized software development costs. Purchased software increased $1,132 to $1,784 at the end of 2002. Most of this increase was due to the acquisition of the Purchasing and Inventory applications that we license to our customers, which we previously were selling through a royalty arrangement. Amortization related to purchased software amounted to $468 in 2002 and $288 in 2001. The amount of unamortized capitalized software development costs at December 31, 2002, increased $691 during 2002, as we capitalized $2,143 of development costs in 2002, primarily related to the Project Management and Buyout applications, which were released in August 2002. Amortization of capitalized software development costs amounted to $1,451 in 2002 and $809 in 2001. Amortization of capitalized software development costs in 2002 included the write-off of $300 related to a product that is no longer being offered to our customers (see our additional comments under "cost of revenue" above). We believe unamortized capitalized software development costs will decrease over the next several years as the amount amortized to cost of revenue should exceed the amount of capitalized software development costs added during this period.



16

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Other assets increased $326, primarily due to prepaid royalties and distribution rights associated with our Residential Management application.

Income taxes payable increased $605 to $882 at December 31, 2002, primarily due to taxes owed for 2002. Long-term debt, including the current portion of long-term debt, amounted to $750 at December 31, 2002. This debt resulted from our acquisition of the Purchasing and Inventory applications in December 2002.

Deferred revenues, which are comprised primarily of billings related to our annual maintenance and support service plans, increased $1,534 during 2002 to $18,388 at December 31, 2002. This increase was primarily due to the year-over-year increase in service plan billings in 2002 compared to 2001. Because billings for these plans generally cover a twelve-month period, practically all of the deferred revenues at the end of 2002 will be recognized as revenue in 2003.

Deferred income taxes (non-current) decreased $330 during 2002, primarily as a result of an increase in the amount of research tax credit carryforwards. For further analysis of our deferred income tax liability, see Note 5 of Notes to Consolidated Financial Statements.

The following table summarizes our contractual obligations as of December 31, 2002:

Contractual Obligations
      
      Total
      
      Less than
      1 year
      
      1 - 3
 years
      
      4 - 5 years
      
      More than 
      5 yearsLong-term debt
      $
      750
      $
      375
      $
      375
      $
      -
      $
      -Operating leases
      
      10,779
      
      1,185
      
      2,379
      
      2,491
      
      4,724Total
      $
      11,529
      $
      1,560
      $
      2,754
      $
      2,491
      $
      4,724




We believe that our current cash balances and temporary investments, along with future cash generated from operations will be sufficient
to meet our short-term operating needs.  Although we do not believe events would occur that would significantly limit our ability to generate cash from operations or require funds in excess of what we have available, should such events occur, we may borrow money against our real properties, seek additional debt or equity financing, or take expense reduction measures to minimize our operating cash flow needs.

We plan to continue to invest significant resources toward product development, which may include internal software development, acquiring new technology or new products that will complement our existing product lines, and other strategic opportunities that arise. Other future cash needs will, or may, include additional investments for equipment for personnel, upgrading and expanding telecommunication and internal information systems, additional expenditures for expansion of the corporate offices, and the payment of cash dividends. We currently pay regular quarterly cash dividends and plan to continue to pay such dividends, consistent with our capital needs, income levels, and long-term dividend policy. Total cash dividends amounted to $1,876, $1,867, and $2,015 in 2002, 2001, and 2000, respectively, or $.16 per share on an annual basis.



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Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite useful lives. Under previous accounting standards, goodwill and intangible assets with indefinite useful lives were assumed to have finite lives and were amortized over a period of time. Under the new standard, these assets are presumed to have indefinite lives, but will be tested annually and adjusted whenever events or circumstances indicate that they have been impaired. We adopted the provisions of SFAS No. 142 on January 1, 2002. It did not have a material impact on our financial position, results of operations, or cash flows.

Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We adopted this pronouncement on January 1, 2003. We do not currently have any retirement obligations with respect to long-lived assets.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This pronouncement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and certain aspects of Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This pronouncement retained the method for recording an impairment of long-lived assets established in SFAS No. 121 and provided further implementation guidance on this matter. We adopted the provisions of SFAS No. 144 on January 1, 2002. It did not have any impact on our financial position, results of operations or cash flows in 2002.

In November 2001, the FASB issued Staff Announcement Topic No. D-103 ("Announcement"), "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." The Announcement stated that reimbursements received for out-of-pocket expenses incurred should be classified as revenue in the statement of operations. We adopted this Announcement on January 1, 2002. Prior to 2002, we recorded reimbursement of out-of-pocket expenses as an offset to those expenses. Commencing in 2002, we classified the reimbursement of out-of-pocket expenses as revenue and the out-of-pocket expenses as cost and expenses. Reclassifications have been made in the consolidated statements of operations for 2001 and 2000 to conform to the 2002 presentation. In comparison to the presentation used prior to 2002, this new classification increased revenue by $2,693, $2,635, and $2,230 for 2002, 2001, and 2000, respectively, and increased total cost and expenses by an equivalent amount for those years. Our adoption of this Announcement had no effect on net income.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This pronouncement generally requires gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. We adopted this pronouncement on January 1, 2003; however the adoption of this pronouncement did not have any material impact on our financial position, results of operations, or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This pronouncement would require the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of such activities include lease termination costs and certain employee severance costs associated with a restructuring, discontinued operations, or plant closing. We adopted the provisions of this pronouncement on a prospective basis commencing January 1, 2003. The impact of this pronouncement on our financial statements will depend on what, if any, exit or disposal activities we may initiate after December 31, 2002.



18

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In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure; an amendment of FASB Statement No. 123." This pronouncement provides alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation as stated in SFAS No. 123, "Accounting for Stock-Based Compensation." It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have not adopted SFAS No. 123 for our accounting of stock-based employee compensation and continue to report on this matter under APB Opinion No. 25, "Accounting for Stock Issued to Employees." We have adopted the applicable annual disclosure requirements commencing with our 2002 financial statements and will adopt the applicable disclosure requirements for interim statements commencing January 1, 2003.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of our financial statements requires
us to select appropriate accounting policies and to continually evaluate such
policies to ensure they remain appropriate based on changing conditions and
circumstances. Our significant accounting policies are described in Note 1 of
Notes to Consolidated Financial Statements. We believe our significant
accounting policies are reasonable and appropriate. The preparation of our
financial statements also requires us to make estimates and assumptions that
affect the reported amounts of our assets, liabilities, revenue, cost and
expenses, and disclosures related to contingencies. We believe our estimates and
assumptions, which are based on historical experience, current conditions, and
other matters of judgment, are reasonable and appropriate. However, actual
results may differ from our estimates.

We believe the following are the critical accounting policies used in the
preparation of our consolidated financial statements.

Revenue recognition. We recognize software license revenue and service
plan revenue in accordance with the provisions of Statement of Position 97-2
(SOP 97-2), "Software Revenue Recognition," issued by the American Institute of
Certified Public Accountants. Our revenue recognition policy also complies with
Staff Accounting Bulletin No. 101 issued by the U.S. Securities and Exchange
Commission. Software license revenue is generally recognized upon shipment,
provided that we have a signed license agreement, the license fee is
determinable, collection is probable, and we have no significant future
obligations to the customer related to the software. Service plans for
maintenance and support of the software generally cover a one-year period and
are billed in advance. Billings for service plans are initially included in
deferred revenues and the revenue from these billings is recognized ratably over
the service plan period. Other service-related revenue is generally recognized
when the services are performed. We also estimate the amount of sales returns
and record that amount as a reduction in revenue.



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Capitalized software development costs and purchased software. At
December 31, 2002, the total amount of unamortized capitalized software costs
and purchased software amounted to $12,543, representing 24% of our total
assets. Purchased software primarily represents the cost of software
applications that were purchased for resale. Capitalized software development
costs represent software development costs incurred on new software products
after technological feasibility has been established. Both purchased software
and capitalized software development costs are amortized to cost of revenue when
the products are released. Judgment is involved in determining when
technological feasibility has occurred and in determining whether our estimate
of the net realizable value associated with each software product exceeds its
unamortized costs. The net realizable value is primarily based on our estimate
of future revenue to be generated from the new products released. Estimating the
amount of future revenue involves the consideration of many subjective factors
and making judgment as to the effect those factors will have on future revenue.
Such factors include the degree to which the product is accepted in the market,
how quickly the revenue will be realized, and technological changes that may
shorten the useful life of the product or render it obsolete. At December 31,
2002, we believe the net realizable value associated with each product exceeded
its unamortized cost. However, should we experience changes in the marketplace
and new technological advances that adversely affects our products, a write-down
of unamortized software development costs may be required. As discussed above in
"cost of revenue," we wrote off costs associated with a product that we no
longer offer to our customers.

Income taxes.

Risks and Uncertainties

From time to time, we may make forward-looking statements as such term is
defined in the Federal securities laws. The following risks and uncertainties,
among others, should be considered in evaluating our forward-looking statements.
Factors that may cause actual results to differ materially from those contained
in such forward-looking statements are as follows:

Competition. The computer software market is highly competitive and
subject to change because of the rapid technological changes in the computer
industry. The number of software vendors with which we compete varies from
product to product and from region to region within the United States. Although
we believe that we are a major supplier of financial and operations software for
the construction and real estate industries and that there are economical and
technological barriers to discourage new specialty software vendors from
entering into our segment of the software market, there can be no assurance that
larger, well-known software developers will not target this segment of the
market. Such competitors are considerably larger, more diversified, have greater
financial and other resources, and may have greater brand recognition for their
products than we currently have.

We must also compete with other larger, well-known software developers for
the hiring and retention of highly qualified technical personnel. As a result,
we may have to expend additional financial resources to hire and retain
qualified technical personnel. If we were not able to secure the services of
employees with the level of technical expertise we require, the development of
new products would likely be delayed and may result in a decrease in the quality
of new software products and enhancements to our existing software products. A
delay in the development, or failure to maintain the quality of new software
products would likely have a material adverse effect on our financial position,
results of operations and cash flows.



20

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Dependence on Microsoft® Operating System; Obsolescence and Technological
Changes. The Company is a specialty software developer, an industry characterized by
rapid technological change. Its software is designed to work with specific
operating systems developed by Microsoft Corporation. If substantial changes are
made to those operating systems or if new operating systems are adopted, the
Company's software may not function properly, necessitating that the Company invest additional
resources to adapt its software to those changes. Also, other operating systems
may be introduced on which the Company's software may not function, which may also cause
additional resources to be expended which would otherwise be devoted to
improving the Company's software or developing new software.

To remain competitive, the Company must continue to make substantial expenditures for
product development. Although the Company plans to continue to enhance its existing
products and to develop new products, the Company's competitors may develop products with
superior capabilities and/or market their products more effectively at lower
prices, by "bundling" their software with other software or through other
methods. The Company believes its existing software products are widely accepted in
its segment of the marketplace. However, a delay in the release of new products or
modifications to existing products, or a delay in the acceptance by the
marketplace of any new products or modifications to existing products, could
similarly delay the recognition of revenue, or have an adverse effect on the
Company's revenue and earnings.

Substantial Dependence on Single Industry.

Product Protection. The Company regards its software as proprietary and attempts to
protect it by relying upon copyrights, trade secrets, internal nondisclosure
agreements, and transferability restrictions incorporated into its software
license agreements. The Company believes the risk of unauthorized transfers of
the Company's proprietary information is reduced because program source listings are not
released to third parties. Despite these restrictions, it may be possible for
competitors or users to copy aspects of the Company's products or to obtain information
which the Company regards as proprietary. The Company's competitive position could be adversely
affected by unauthorized use of its proprietary information. Third parties may
also assert infringement or other claims against the Company with respect to any existing
or future products. Litigation to protect the Company's proprietary information or to
determine the validity of any third-party claims could result in significant
expense to the Company and, whether or not such litigation is determined in the
Company's favor,
divert the efforts of the Company's technical and management personnel from further
development and support of the Company's software products.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risks for changes in interest rates is primarily
related to our cash and temporary cash investments balances. We do not have any
derivative instruments. We mitigate some of the risk related to changes in
interest rates by investing in high-quality debt instruments in accordance with
our investment policy. We believe that our exposure to changes in interest rates
is not material to our operating results or cash flows.

We have a subsidiary company in Australia, which exposes us to foreign
currency fluctuations. However, due to the size of its operations, we believe
the market risks related to foreign currency fluctuations are not material to
our operating results or cash flows.



21

---



Item 8. Financial Statements and Supplementary Data

The financial statements required pursuant to this item are included in Item
15 of this Annual Report on Form 10-K.

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

None.



22

---



PART III

Item 10. Directors and Executive Officers of the Registrant

The information called for by this item is included under the caption,
"Agenda Item 1. Election of Directors," contained in our definitive proxy
statement for the annual meeting of shareholders to be held on April 29, 2003,
and is hereby incorporated by reference.

Item 11. Executive Compensation

The information called for by this item is included under the caption,
"Executive Compensation" within "Agenda Item 1. Election of Directors" contained
in our definitive proxy statement for the annual meeting of shareholders to be
held on April 29, 2003, and is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

The information called for by this item is included under the captions,
"Equity Compensation Plan Information" and "Stock Ownership of Management and
Certain Beneficial Owners and Management" contained in our definitive proxy
statement for the annual meeting of shareholders to be held on April 29, 2003,
and is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions

None.



23

---



PART IV

Item 14. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of
this report. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission's rules and forms.

Subsequent to the date of this evaluation, there have not been any
significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect our internal controls.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

a (1). Financial Statements

The following consolidated financial statements of Timberline Software
Corporation are filed as part of this report:

PAGEConsolidated
      Statements of Operations for the years ended December 31,
      2002, 2001, and 2000
      F-1Consolidated
      Balance Sheets at December 31, 2002 and 2001
      F-2Consolidated
      Statements of Cash Flows for the years ended December 31,
      2002, 2001, and 2000
      F-3Consolidated
      Statements of Shareholders' Equity for the years ended
      December 31, 2002, 2001, and 2000
      F-4Notes to
      Consolidated Financial Statements
      F-5Independent
      Auditors' Report
      F-18


a (2). Financial
      Statement Schedules

|Schedule II - Valuation and qualifying accountsSchedules not listed
      above have been omitted because they are not applicable or are not
      required or the information required to be set forth in the schedules is
      included in the consolidated financial statements or related notes. | F-19
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----

a (3). Exhibits

| | Articles of
      Incorporation and Bylaws
| | ------------------------------------------
| | 3.1                                       



24

---



| | 3.2                | Amended and Restated Bylaws
    (Incorporated by reference to Exhibit 3(ii) of Quarterly Report on Form
    10-QSB for the three months ended March 31, 1997)                                                                                                                                    
| | ------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Material Contracts
| | *10.1              | 1987 Non-Qualified Stock Option
    Plan (Incorporated by reference to Exhibit 10.1 of Annual Report on Form
    10-K for the year ended December 31, 1990)                                                                                                                                      
| | *10.1(a)           | Amendment No. 1 to 1987
    Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit
    10.1(a) of Form 10-KSB for the year ended December 31, 1995)                                                                                                                               
| | *10.2              | 1989 Non-Qualified Stock Option
    Plan (Incorporated by reference to Exhibit 10.2 of Annual Report on Form
    10-K for the year ended December 31, 1990)                                                                                                                                      
| | *10.2(a)           | Amendment No. 1 to 1989
    Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit
    10.2(a) of Form 10-KSB for the year ended December 31, 1995)                                                                                                                               
| | 10.3               | Form of Indemnification
    Agreement and signature pages for all indemnitees (Incorporated by reference
    to Exhibit 10.3 of Annual Report on Form 10-K for the year ended December
    31, 1990 and Exhibit 10 of Quarterly Report on Form 10-Q for the three
    months ended June 30, 2001)
| | *10.4              | 1993 Stock Incentive Plan
    (Incorporated by reference to Exhibit 10 of Quarterly Report on Form 10-Q
    for the three months ended June 30, 1993)                                                                                                                                            
| | *10.5              | 1998 Stock Incentive Plan, as
    amended, effective April 28, 1998 (Incorporated by reference to Exhibit
    10.11 of Form 10-K for the year ended December 31, 1998)                                                                                                                           
| | *10.6              | 2000 Stock Incentive Plan, as
    amended (Incorporated by reference to the registration statement on Form S-8
    (Commission File No. 333-39424) as filed on June 16, 2000)                                                                                                                    
| | *10.7              | Amended and restated Key
    Executive Retention Agreement dated as of July 16, 2002 between Registrant
    and Curtis L. Peltz (Incorporated by reference to Exhibit 10.1 of Quarterly
    Report on Form 10-Q for the three months ended September 30, 2002)                                   
| | *10.8              | Form of Key Executive Retention
    Agreement dated as of July 16, 2002 between Registrant and certain Senior
    Management (Incorporated by reference to Exhibit 10.2 of Quarterly Report on
    Form 10-Q for the three months ended September 30, 2002)                                      
| | *10.9              | Timberline Software Corporation
    Target Achievement Plan for 2003                                                                                                                                                                                                                             
| | 99.1               | Certification of the Chief
    Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   
| | 99.2               | Certification of the Chief
    Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   



25

---



| | Consents
| | --------
| | 23      
| |         

b. Reports on Form 8-K

| | On October 16, 2002, we filed
      a Form 8-K pursuant to Item 9. Regulation FD Disclosure, attaching our
      press release regarding summary financial results for the quarter ended
      September 30, 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26

---



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.

TIMBERLINE SOFTWARE CORPORATION

By:
      /s/ Carl C. Asai
      Carl C. Asai
      Senior Vice President - Finance
      Date: March 27, 2003




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.

By:
      /s/  Curtis L.
      Peltz
      Curtis L. Peltz
      President, Chief Executive Officer and Director
      Date: March 27, 2003By:
      /s/ Carl C. Asai
      Carl C. Asai
      Senior Vice President - Finance and 
      Chief Financial Officer
      Date: March 27, 2003By:
      /s/ James A.
      Meyer
      James A. Meyer
      Chairman of the Board of Directors
      Date: March 27, 2003By:
      /s/  Thomas P.
      Cox
      Thomas P. Cox
      Director
      Date: March 27, 2003By:
      /s/  Donald L. Tisdel
      Donald L. Tisdel
      Director
      Date: March 27, 2003




27

---



CERTIFICATION OF THE ANNUAL REPORT AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Curtis L. Peltz, certify that:

1. I have reviewed this annual report on Form 10-K of Timberline Software
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
    material information relating to the registrant, including its consolidated
    subsidiary, is made known to us by others within those entities,
    particularly during the period in which this annual report is being
    prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
    and procedures as of a date within 90 days prior to the filing date of this
    annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
    effectiveness of the disclosure controls and procedures based on our
    evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
    controls which could adversely affect the registrant's ability to record,
    process, summarize and report financial data and have identified for the
    registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
    employees who have a significant role in the registrant's internal controls;
    and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|Date: March 27, 2003 | /s/ Curtis L.
    PeltzCurtis L. Peltz
    President and Chief Executive Officer
|-------------------- | --------------------------------------------------------------------------------



28

---



CERTIFICATION OF THE ANNUAL REPORT AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Carl C. Asai, certify that:

1. I have reviewed this annual report on Form 10-K of Timberline Software
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
    material information relating to the registrant, including its consolidated
    subsidiary, is made known to us by others within those entities,
    particularly during the period in which this annual report is being
    prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
    and procedures as of a date within 90 days prior to the filing date of this
    annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
    effectiveness of the disclosure controls and procedures based on our
    evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
    controls which could adversely affect the registrant's ability to record,
    process, summarize and report financial data and have identified for the
    registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
    employees who have a significant role in the registrant's internal controls;
    and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|Date: March 27, 2003 | /s/ Carl C. Asai
    Carl C. Asai, Sr. Vice President,
    Finance (Chief Financial Officer)
|-------------------- | --------------------------------------------------------------------------------------------



29

---



TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share amounts)



Year ended December 31,2002
      
      2001
      
      2000Net
      revenue:Software license
      fees
      $
      22,146
      $
      24,452
      $
      22,950Service fees
      
      38,049
      
      33,781
      
      28,595Other
      
      1,660
      
      1,709
      
      1,861Net revenue
      
      61,855
      
      59,942
      
      53,406Cost
      and expenses:Cost of revenue
      
      8,252
      
      6,608
      
      5,994Client services
      
      13,131
      
      14,069
      
      12,459Product
      development
      
      16,450
      
      16,332
      
      13,254Sales and
      marketing
      
      14,103
      
      13,465
      
      11,265General and administrative
      
      7,783
      
      7,438
      
      6,463Total cost and expenses
      
      59,719
      
      57,912
      
      49,435Operating income
      
      2,136
      
      2,030
      
      3,971Other income (expense):Interest income
      
      265
      
      497
      
      1,029Interest expense
      
      (12)
      
      (20)
      
      (11)Other
      
      60
      
      (45)
      
      (12)Income before income taxes
      
      2,449
      
      2,462
      
      4,977Provision for income taxes
      
      692
      
      611
      
      1,646Net income
      $
      1,757
      $
      1,851
      $
      3,331Basic earnings per share
      $
      0.15
      $
      0.16
      $
      0.27Diluted earnings per share
      $
      0.15
      $
      0.16
      $
      0.26




See notes to consolidated financial statements.



F-1

---



TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS(Amounts in thousands)

December 31,2002
      2001AssetsCurrent assets:Cash and cash
      equivalents
      $
      8,301
      $
      5,414Temporary
      investments
      
      2,038
      
      4,351Accounts
      receivable, less allowance fordoubtful
      accounts (2002 - $117; 2001 - $131)
      
      6,336
      
      6,096Other
      receivables
      
      185
      
      512Inventories
      
      194
      
      241Other current assets
      
      1,819
      
      1,542Total current assets
      
      18,873
      
      18,156Property and equipment - net
      
      21,202
      
      21,510Capitalized software costs, less accumulatedamortization
      (2002, $2,314; 2001, $1,287)
      
      10,759
      
      10,068Purchased software, less accumulated amortization(2002, $416;
      2001, $498)
      
      1,784
      
      652Other assets
      
      685
      
      359Total assets
      $
      53,303
      
      50,745Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable
      $
      1,169
      $
      1,101Deferred
      revenues
      
      18,388
      
      16,854Accrued employee
      expenses
      
      1,036
      
      1,322Accrued
      commission/royalties
      
      1,276
      
      1,230Income taxes
      payable
      
      882
      
      277Other current
      liabilities
      
      429
      
      473Current portion of long-term debt
      
      375
      
      -Total current liabilities
      
      23,555
      
      21,257Accrued rent expense
      
      508
      
      557Deferred income taxes
      
      3,621
      
      3,951Long-term debt
      
      375
      
      -CommitmentsShareholders' equity:Common stock, no par valueAuthorized -
      20,000 sharesIssued - 2002,
      11,778; 2001, 11,673 shares
      
      353
      
      350Additional paid in capital
      
      5,786
      
      5,378Accumulated other comprehensive income
      
      27
      
      55Retained earnings
      
      19,078
      
      19,197Total shareholders' equity
      
      25,244
      
      24,980Total liabilities and shareholders' equity
      $
      53,303
      $
      50,745




See notes to consolidated financial statements.



F-2

---



TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)

Year ended December 31,2002
      
      2001
      
      2000Cash
      flows from operating activities:Net
      income
      $
      1,757
      $
      1,851
      $
      3,331Adjustments to reconcile net income to netcash
      provided by operating activities:Depreciation and amortization
      
      5,051
      
      3,928
      
      3,499Deferred income taxes
      
      (250)
      
      624
      
      1,452Tax
      benefit on exercise of stock options
      
      150
      
      59
      
      189Net
      change in:Accounts
      receivable
      
      (240)
      
      (913)
      
      (158)Other
      receivables
      
      327
      
      906
      
      (1,045)Inventories
      
      47
      
      34
      
      (54)Accounts payable
      
      68
      
      (431)
      
      668Deferred
      revenues
      
      1,534
      
      1,439
      
      1,690Accrued employee
      expenses
      
      (286)
      
      (508)
      
      (354)Accrued
      commissions/royalties
      
      46
      
      269
      
      187Income taxes
      payable
      
      605
      
      241
      
      (431)Accrued rent
      expense
      
      (49)
      
      264
      
      263Other
      
      (739)
      
      (128)
      
      (428)Net cash provided by operating activities
      
      8,021
      
      7,635
      
      8,809Cash
      flows from investing activities:Payments for property and equipment
      
      (2,782)
      
      (2,520)
      
      (3,857)Capitalized software costs
      
      (2,143)
      
      (4,990)
      
      (4,583)Purchased software costs
      
      (850)
      
      -
      
      (600)Proceeds from temporary investments
      
      3,250
      
      6,000
      
      4,650Purchase of temporary investments
      
      (998)
      
      (2,012)
      
      (40)Other - net
      
      4
      
      8
      
      14Net cash used in investing activities
      
      (3,519)
      
      (3,514)
      
      (4,416)Cash
      flows from financing activities:Cash
      dividends
      
      (1,876)
      
      (1,867)
      
      (2,015)Proceeds from issuance of common stock
      
      261
      
      89
      
      206Common stock repurchased
      
      -
      
      (549)
      
      (6,606)Net cash used in financing activities
      
      (1,615)
      
      (2,327)
      
      (8,415)Net
      increase (decrease) in cash and cash equivalents
      
      2,887
      
      1,794
      
      (4,022)Cash and cash equivalents, beginning of the
      year
      
      5,414
      
      3,620
      
      7,642Cash and cash equivalents, end of the year
      $
      8,301
      $
      5,414
      $
      3,620Supplemental information:Cash
      paid (received) during the year for income taxes
      $
      247
      $
      (1,184)
      $
      1,318Cash
      paid for interest
      
      12
      
      20
      
      11Non-cash financing of purchased software
      
      750
      
      -
      
      -




See notes to consolidated financial statements.



F-3

---



TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Amounts in thousands, except per share amounts)

AdditionalPaid In
      Capital
      
      Accumulated
      OtherComprehensive
      Income (Loss)
      
      Retained
      Earnings
      
      TotalCommon
      
      StockShares 
      Issued
      
      AmountBalances, January 1, 2000
      12,822
      $
      385
      $
      5,405
      $
      (70)
      $
      24,447
      $
      30,167Components of comprehensive income:Net
      income for the year
      
      
      
      
      
      
      
      
      3,331
      
      3,331Unrealized gain on investments(net of income
      taxes of $45)
      
      
      
      
      
      
      72
      
      
      
      72Unrealized gain on foreigncurrency
      translation (net ofincome taxes of
      $0)
      
      
      
      
      
      
      18
      
      
      
      18Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      3,421Common stock issued
      82
      
      2
      
      204
      
      
      
      
      
      206Income tax benefit on stock optionsexercised
      
      
      
      
      189
      
      
      
      
      
      189Common stock repurchased
      (1,131)
      
      (34)
      
      (501)
      
      
      
      (6,071)
      
      (6,606)Cash dividends ($.16 per share)
      
      
      
      
      
      
      
      
      (2,015)
      
      (2,015)Balances, December 31, 2000
      11,773
      
      353
      
      5,297
      
      20
      
      19,692
      
      25,362Components of comprehensive income:Net
      income for the year
      
      
      
      
      
      
      
      
      1,851
      
      1,851Unrealized gain on investments(net of income
      taxes of $38)
      
      
      
      
      
      
      56
      
      
      
      56Unrealized loss on foreigncurrency
      translation (net ofincome taxes of
      $0)
      
      
      
      
      
      
      (21)
      
      
      
      (21)Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      1,886Common stock issued
      46
      
      1
      
      88
      
      
      
      
      
      89Income tax benefit on stock optionsexercised
      
      
      
      
      59
      
      
      
      
      
      59Common stock repurchased
      (146)
      
      (4)
      
      (66)
      
      
      
      (479)
      
      (549)Cash dividends ($.16 per share)
      
      
      
      
      
      
      
      
      (1,867)
      
      (1,867)Balances, December 31, 2001
      11,673
      
      350
      
      5,378
      
      55
      
      19,197
      
      24,980Components of comprehensive income:Net income for the year
      
      
      
      
      
      
      
      
      1,757
      
      1,757Unrealized loss on investments(net of
      income tax benefit of $25)
      
      
      
      
      
      
      (36)
      
      
      
      (36)Unrealized gain on foreigncurrency
      translation (net ofincome taxes
      of $0)
      
      
      
      
      
      
      8
      
      
      
      8Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      1,729Common stock issued
      105
      
      3
      
      258
      
      
      
      
      
      261Income tax benefit on stock optionsexercised
      
      
      
      
      150
      
      
      
      
      
      150Cash dividends ($.16 per share)
      
      
      
      
      
      
      
      
      (1,876)
      
      (1,876)Balances, December 31, 2002
      11,778
      $
      353
      $
      5,786
      $
      27
      $
      19,078
      $
      25,244




See notes to consolidated financial statements.



F-4

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



NOTE 1 Summary of significant accounting policies and line of business

Line of business and credit risks: The Company develops and markets
computer software programs primarily for the construction and real estate
industries. The Company sells its products and services primarily to customers
and to authorized resellers (Timberline solution providers) throughout the
United States. Credit is granted to certain customers and Timberline solution
providers generally without collateral. An allowance for doubtful accounts is
provided based on historical experience and anticipated losses.

Use of estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue, cost and
expenses during the reporting period. Actual results could differ from those
estimates.

Consolidated financial statements: The accompanying financial statements
include the accounts of the Company as well as its wholly owned subsidiary,
which was opened in Australia during March 2000. The functional currency of the
subsidiary is Australian dollars. Gains and losses resulting from foreign
currency translation are recorded as other comprehensive income and accumulated
as a separate component of shareholders' equity. All significant intercompany
balances and transactions are eliminated in consolidation.

Financial instruments: The carrying amount reported in the balance sheet
for cash and cash equivalents, temporary investments, accounts receivable,
accounts payable, and other current assets and liabilities approximates fair
value because of the immediate or short-term maturity of these financial
instruments.

Revenue recognition: The Company generates revenue primarily from two
sources - software licensing arrangements, and service fees. Software license
revenue is generated from licensing the rights to use the Company's software
products. Service fees are generated from billings for annual service plans for
maintenance and support for the Company's software, and consulting and training
services on its software products.

The Company recognizes revenue in accordance with the provisions of Statement
of Position 97-2 (SOP 97-2), "Software Revenue Recognition," issued by the
American Institute of Certified Public Accountants and the related
interpretations and amendments. Software license revenue is generally recognized
upon shipment, provided the Company has a signed license agreement, the license
fee is fixed or determinable, collection is probable, and there are no
significant future obligations to the customer related to the software. Revenue
from billings for annual service plans is recognized ratably over the service
plan period. Revenue from consulting and training services is generally
recognized when the services are performed. A provision for returns is estimated
and shown as a reduction in revenue.

Software development costs: Costs of developing computer software are
capitalized when technological feasibility has been established for the computer
software product. These costs are amortized over a two- to four-year period.
Costs capitalized for the development of computer software were $2,143 in 2002,
$4,990 in 2001, and $4,583 in 2000. Amortization of capitalized computer
software development costs was $1,451 in 2002, $809 in 2001, and $884 in 2000.
Expenses incurred on research and development of computer software products were
$14,784 in 2002, $14,290 in 2001, and $11,522 in 2000.



F-5

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



Purchased software: Purchased software primarily represents costs related
to software acquired for resale to customers and are amortized over a four-year
period. Costs for purchased software were $1,600 in 2002, $0 in 2001, and $600
in 2000. Amortization of purchased software was $468 in 2002, $288 in 2001, and
$187 in 2000.

Cash and cash equivalents: Cash and cash equivalents include cash on
hand, cash deposited with banks and financial institutions, money market funds,
and highly liquid debt instruments purchased with maturity dates of three months
or less at the date of acquisition.

Temporary investments: Temporary investments represent debt securities
that have maturity dates over three months from the purchase date. The Company
has classified these investments as "available for sale" because the Company may
decide not to hold these investments to maturity. Accordingly, the investments
have been recorded at fair value. The unrealized gain or loss on these
investments, net of income taxes, is reported as accumulated other comprehensive
income (loss) within the shareholders' equity section of the balance sheet.

Inventories: Inventories consist of marketing literature and of software
components. Inventories are stated at the lower of average cost or market.

Property and equipment: Property and equipment are recorded at cost.
Depreciation on furniture and equipment is provided using the straight-line
method over the estimated useful lives of the related assets ranging from two to
ten years. The building is being depreciated on a straight-line basis over forty
years.

Accrued rent expense: Rent expense on operating leases with scheduled
rent increases is recognized on a straight-line basis over the lease term.
Accrued rent expense represents the excess of rent charged to expense over the
amount of scheduled rent paid.

Income taxes: Deferred tax assets and liabilities are established based
on the temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. These assets and liabilities are recorded at the enacted tax rates
expected to be in effect when they are realized or settled.

Stock options: At December 31, 2002, the Company has five stock-based
employee compensation plans, which are described more fully in Note 4. The
Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. No stock-based
employee cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based compensation," to stock-based employee
compensation.



F-6

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



Year Ended December 31,2002
      
      2001
      
      2000Net income, as reported
      $
      1,757
      $
      1,851
      $
      3,331Less total stock-based employee compensation
      expense determined under fair- 
      value-based method for all awards, net of related tax effects
      
      1,249
      
      1,793
      
      1,798Net income, pro forma
      $
      508
      $
      58
      $
      1,533Earnings per share:Basic - as reported
      $
      0.15
      $
      0.16
      $
      0.27Basic - pro forma
      
      0.04
      
      -
      
      0.13Diluted - as reported
      
      0.15
      
      0.16
      
      0.26Diluted - pro forma
      
      0.04
      
      -
      
      0.12




The pro forma amounts do not consider the effect of options granted prior to
1995 that vest in subsequent years. The pro forma amounts may also not be
indicative of the effects on reported net income for future years, due to the
effect of options vesting over a period of years and the awarding of stock
compensation awards in future years.

Earnings per share (EPS): The Company computes basic EPS by dividing net
income by the weighted-average number of common shares outstanding and diluted
EPS by dividing net income by the sum of the weighted-average number of common
shares outstanding and the dilutive effect of stock options outstanding as if
such options were exercised or converted into common shares.

A reconciliation of the common shares used in the denominator for computing
basic and diluted EPS for the years ended December 31, 2002, 2001, and 2000 is
as follows:



2002
      2001
      2000Weighted-average shares outstanding,used in
      computing basic EPS
      11,731
      11,672
      12,563Effect of dilutive stock options
      278
      243
      219Weighted-average shares outstanding, and the
      effectof dilutive stock options, used in computing diluted EPS
      12,009
      11,915
      12,782




F-7

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



Reclassifications: Certain reclassifications have been made in the 2001
and 2000 financial statements to conform to the 2002 presentation.

Recent accounting pronouncements: In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill and intangible assets
with indefinite useful lives. Under previous accounting standards, goodwill and
intangible assets with indefinite useful lives were assumed to have finite lives
and were amortized over a period of time. Under the new standard, these assets
are presumed to have indefinite lives, but will be tested annually and adjusted
whenever events or circumstances indicate that they have been impaired. The
Company adopted the provisions of SFAS No. 142 on January 1, 2002. It did not
have a material impact on the Company's financial position, results of
operations or cash flows.

Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company adopted this
pronouncement on January 1, 2003. The Company does not currently have any
retirement obligations with respect to long-lived assets.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." This pronouncement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and certain aspects of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This pronouncement retained the method for recording
an impairment of long-lived assets established in SFAS No. 121 and provided
further implementation guidance on this matter. The Company adopted the
provisions of SFAS No. 144 on January 1, 2002. It did not have any impact on the
Company's financial position, results of operations or cash flows.

In November 2001, the FASB issued Staff Announcement Topic No. D-103
("Announcement"), "Income Statement Characterization of Reimbursements Received
for "Out-of-Pocket" Expenses Incurred." The Announcement stated that
reimbursements received for out-of-pocket expenses incurred should be classified
as revenue in the statement of operations. This Announcement
was adopted by the Company on January 1, 2002. Prior to 2002, the Company recorded reimbursement of
out-of-pocket expenses as an offset to those expenses. Commencing in 2002, the
Company classified the reimbursement of out-of-pocket expenses as revenue and
the out-of-pocket expenses as cost and expenses. Reclassifications have been
made in the consolidated statements of operations for 2001 and 2000 to conform
to the 2002 presentation. In comparison to the presentation used prior to 2002,
this new classification increased revenue by $2,693, $2,635, and $2,230 for
2002, 2001, and 2000, respectively, and increased total cost and expenses by an
equivalent amount for those years. The adoption of this Announcement had no
effect on the Company's net income.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This pronouncement generally requires gains and losses on
extinguishment of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. Extraordinary treatment will be required for certain extinguishments as
provided in APB Opinion No. 30. The Company adopted this pronouncement on
January 1, 2003; however the adoption of this pronouncement did not have any
material impact on its financial position, results of operations, or cash flows.



F-8

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This pronouncement would require the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of such activities include lease termination costs and certain employee
severance costs associated with a restructuring, discontinued operation, or
plant closing. The Company adopted the provisions of this pronouncement on a
prospective basis commencing January 1, 2003. The impact of this pronouncement
on the Company's financial statements will depend on what, if any, exit or disposal
activities the Company may initiate after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure; an amendment of FASB Statement No.
123." This pronouncement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation as stated in SFAS No. 123, "Accounting for Stock-Based
Compensation." It also amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has not adopted SFAS
No. 123 for its accounting of stock-based employee compensation and continues to
report on this matter under APB Opinion No. 25. The Company has adopted the
applicable annual disclosure requirements commencing with its 2002 financial
statements and will adopt the applicable disclosure requirements for interim
statements commencing January 1, 2003.





F-9

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



NOTE 2 Temporary investments



Temporary investments at December 31, 2002 and 2001, are composed of the
following:



Amortized Cost
      
      Fair Value2002:Debt
      securities issued by the U.S. Treasuryand other U.S. government agencies
      $
      2,002
      $
      2,038Net unrealized appreciation on investments
      
      
      $
      362001:Debt
      securities issued by the U.S. Treasuryand other U.S. government agencies
      $
      4,254
      $
      4,351Net unrealized appreciation on investments
      
      
      $
      97




NOTE 3 Property and equipment

Property and equipment at December 31, 2002 and 2001, is composed of the
following:



2002
      
      2001Land
      $
      2,433
      $
      2,433Building
      
      13,449
      
      13,449Tenant improvements
      
      166
      
      226Furniture and fixtures
      
      2,340
      
      2,330Machinery and equipment
      
      14,553
      
      13,442Capital projects in progress
      
      1,884
      
      810Total
      
      34,825
      
      32,690Less accumulated depreciation and
      amortization
      
      13,623
      
      11,180Property and equipment - net
      $
      21,202
      $
      21,510




F-10

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



NOTE 4 Common stock

As of December 31, 2002, the Company has five stock-based compensation plans.
Two nearly identical plans, adopted in 1987 and 1989, are non-qualified stock
option plans for its officers and key employees. Under these plans, the Company
may grant options for up to 1,125 shares of common stock. Options could not be
granted under the 1987 plan and the 1989 plan after 1997 and 1999, respectively.
As of December 31, 2002, 81 shares are reserved under these plans, of which
there are 81options outstanding.

In 1993, 1998, and 2000, the Company's shareholders approved incentive stock
plans for the main purpose of retaining and attracting the services of Company
directors, officers, employees, and non-employees. Although these plans provide
for the granting of various stock options, stock appreciation rights, and stock
bonuses, the Company currently plans to grant only non-qualified stock options.
Stock options under the 1993, 1998, and 2000 plans may not be granted after the
years 2003, 2008, and 2010, respectively. As of December 31, 2002, 2,845 shares
are reserved under these plans, of which there are 2,505 options outstanding.

All of the above plans are administered by a committee of the Company's Board
of Directors, which determines the terms and conditions of the various grants
awarded under these plans. Under these plans, the non-qualified stock options
have an exercise price equal to the market price of the Company's common stock
on the date of grant. The options vest ratably over a four or five-year period
and expire 10 years after the date of grant.



F-11

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



A summary of the status of the Company's stock option plans as of December
31, 2002, 2001, and 2000, and changes during the years ending on those dates is
presented below:



2002
      2001
      2000Shares
      
      Weighted-
      Average
      Exercise
      Price
      Shares
      
      Weighted-
      Average
      Exercise
      Price
      Shares
      
      Weighted- Average
 Exercise 
      PriceOutstanding atbeginning of
      year
      2,519
      $
      6.056
      2,070
      $
      6.864
      1,228
      
      6.131Granted
      456
      
      6.687
      692
      
      3.506
      1,121
      
      7.664Exercised
      (105)
      
      2.496
      (46)
      
      1.954
      (82)
      
      2.523Forfeited
      (284)
      
      6.667
      (197)
      
      6.559
      (197)
      
      8.643Outstanding at end of year
      2,586
      $
      6.245
      2,519
      $
      6.056
      2,070
      $
      6.864Options exercisableat year-end
      1,268
      
      
      986
      
      
      652Weighted-average fair valueof options
      grantedduring the year
      
      $
      3.511
      
      $
      1.937
      
      $
      4.272




The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001, and 2000:



2002
      2001
      2000Annual dividend yield
      2.8
      %
      2.5
      %
      2.0
      %Risk-free interest rate per
      annum
      4.7
      %
      4.8
      %
      6.1
      %Expected annual volatility
      65.4
      %
      67.1
      %
      71.2
      %Expected lives of options
      (years)
      7.0
      
      7.0
      
      7.0




F-12

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



The following table summarizes information about stock options outstanding
and exercisable at December 31, 2002:

Outstanding
      
      ExercisableRange of Exercise Prices
      Number of Options
      Weighted-Average
      Remaining
      Contractual Life
      (years)
      
      Weighted-
      Average
      Exercise Price
      
      Number
      of Options
      
      Weighted-
      Average
      Exercise Price$
      1.25
      -
      4.94
      836
      5.9
      $
      3.079
      
      452
      $
      2.9085.00
      -
      9.98
      1,690
      7.3
      
      7.602
      
      771
      
      8.00310.05
      -
      15.38
      60
      6.1
      
      12.135
      
      45
      
      12.087$
      1.25
      -
      15.38
      2,586
      6.8
      $
      6.245
      
      1,268
      $
      6.330




NOTE 5 Income taxes

The provision for income taxes is composed of the following:

2002
      
      2001
      
      2000Current:Federal
      $
      719
      $
      (241)
      $
      121State
      
      198
      
      207
      
      56Foreign
      
      25
      
      21
      
      17Deferred:Federal
      
      (192)
      
      695
      
      1,190State
      
      (58)
      
      (71)
      
      262Total
      
      $
      692
      $
      611
      $
      1,646




A reconciliation of the difference between the provision for income taxes and
the income taxes computed at the federal statutory rate is summarized below:



2002
      
      2001
      
      2000Income taxes based on federal statutory rate
      
      $
      833
      $
      837
      $
      1,692State tax, net
      of federal tax benefit
      
      
      92
      
      90
      
      211Research and
      development credits
      
      
      (359)
      
      (513)
      
      (417)Non-deductible
      expenses for tax purposes
      
      
      120
      
      171
      
      133Other
      
      
      6
      
      26
      
      27Provision for income taxes
      
      $
      692
      $
      611
      $
      1,646




F-13

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



The tax effects of significant items comprising the Company's net deferred
tax liability as of December 31, 2002 and 2001 are as follows:

2002
      
      2001Deferred tax liabilities:Property and
      equipment
      $
      952
      $
      1,038Capitalized
      software costs
      
      4,250
      
      3,991Maintenance
      costs
      
      66
      
      65Other
      
      101
      
      69Deferred tax liabilities
      
      5,369
      
      5,163Deferred tax assets:Allowance for
      doubtful accounts
      
      46
      
      51Expenses not
      currently deductible
      
      144
      
      141Accrued rent
      expense
      
      198
      
      217Research and
      development tax credit carryforward
      
      1,444
      
      813Other
      
      41
      
      108Deferred tax assets
      
      1,873
      
      1,330Net deferred tax liability
      $
      3,496
      $
      3,833




The net deferred tax liability is classified in the balance sheet as follows:



2002
      
      2001Deferred income taxes
      
      $
      3,621
      $
      3,951Deferred tax assets included in other current
      assets
      
      
      (125)
      
      (118)Net deferred tax liability
      
      $
      3,496
      $
      3,833




F-14

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



NOTE 6 Business segment information

The Company's operations are divided into two operating segments: software
products and software services. Software products encompass software product
revenue across all of the Company's product lines. Software services encompass
fees for all services after the software is sold, such as annual maintenance and
technical support service plans, consulting, and training services. The Company
accounts for revenue and cost of revenue on these two operating segments, and
tracks specifically identifiable expenses related to the generation of revenue
for each of those segments. There are no intersegment transactions. These
segments are managed separately because of different revenue and marketing
strategies and different strategic planning processes.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note 1. The Company evaluates
its performance in each segment based on its operating contribution, which
includes revenue, cost, and expenses that can be specifically identified with
each segment. Product development and general and administrative expenses are
not allocated to the segments for determining its operating contribution because
such an allocation would be based on subjective factors. The Company also does
not allocate assets by segment in evaluating the performance of each segment.
Information about each operating segment and a reconciliation of operating
contribution to operating income is as follows for the years ended December 31,
2002, 2001, and 2000:

2002
      
      2001
      
      2000Net
      revenue:Software
      products
      $
      22,146
      $
      24,452
      $
      22,950Services
      
      38,049
      
      33,781
      
      28,595Other
      
      1,660
      
      1,709
      
      1,861Net revenue
      $
      61,855
      $
      59,942
      $
      53,406Operating contribution:Software
      products
      $
      7,131
      $
      10,201
      $
      11,345Services
      
      17,773
      
      14,886
      
      11,415Other revenue,
      net of cost
      
      1,465
      
      713
      
      928Product
      development expenses
      
      (16,450)
      
      (16,332)
      
      (13,254)General and administrative expenses
      
      (7,783)
      
      (7,438)
      
      (6,463)Operating income
      $
      2,136
      $
      2,030
      $
      3,971




F-15

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



The Company operates primarily in the United States. In terms of net revenue,
more than 94 percent of its net revenue in 2002, 2001, and 2000 was generated
from customers located in the United States. No revenue from customers located
in any one foreign country accounted for more than three percent of the
Company's net revenue during those years.

NOTE 7 Long-term debt

The Company incurred long-term debt in the amount of $750 in 2002 associated
with the acquisition of purchased software. Interest will accrue at the rate of
5.75% per annum. Two principal payments of $375 each are due in December 2003
and December 2004.

NOTE 8 Commitments

The Company leases some equipment and office facilities under noncancelable
operating leases. Its major lease commitment relates to a lease entered into in
2000 and expiring in 2011 for additional office space for expansion of its
corporate offices.

Total rent expense under operating leases, net of sublease rental income, was
$1,300, $1,192, and $537 in 2002, 2001, and 2000, respectively. Future minimum
rental payments under these leases as of December 31, 2002, are as follows:

Year ending
      December 31,2003
      $
      1,1852004
      
      1,1882005
      
      1,1912006
      
      1,2272007
      
      1,264Thereafter
      
      4,724Total
      $
      10,779




Future minimum rental payments shown above have not been reduced by future
minimum sublease rental income of $347 from a noncancelable sublease.



F-16

---



TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except per share amounts and percentages)



NOTE 9 Employee benefit plan



The Company has a retirement plan, under the provisions of Section 401(k) of
the Internal Revenue Code, covering substantially all employees. Under the terms
of the plan, employees may make contributions computed on a percentage of pay.
The Company may match employee contributions up to a set percentage of pay. The
Company may, at its discretion, make an additional year-end contribution out of
profits. The Company did not make any matching contributions under the plan in
2002 or 2001. Contributions by the Company were $689 in 2000.



NOTE 10 Quarterly financial information (unaudited)



Net Revenue
      
      Gross Profit(1)
      
      Net Income (Loss)
      
      Basic Earnings (Loss) per
      Share
      
      Diluted Earnings (Loss) per
      Share20021st quarter
      $
      14,343
      $
      12,598
      $
      222
      $
      0.02
      $
      0.022nd quarter
      
      14,109
      
      12,067
      
      (317)
      
      (0.03)
      
      (0.03)3rd quarter
      
      15,689
      
      13,778
      
      327
      
      0.03
      
      0.034th
      quarter(2)
      
      17,714
      
      15,160
      
      1,525
      
      0.13
      
      0.1320011st quarter
      $
      14,942
      $
      13,200
      $
      594
      $
      0.05
      $
      0.052nd quarter
      
      14,756
      
      13,353
      
      424
      
      0.04
      
      0.043rd quarter
      
      14,757
      
      13,289
      
      119
      
      0.01
      
      0.014th quarter(2)
      
      15,487
      
      13,492
      
      714
      
      0.06
      
      0.06




1. Gross profit represents net revenue less cost of revenue.
2. Historically, the fourth quarter of the year has been the Company's
  strongest revenue quarter of the year. However, there are no assurances that
  this trend will continue in the future. For the fourth quarter of 2001, the
  effective tax rate was 15% compared to an effective income tax rate of 25% for
  the year ended December 31, 2001. The Company's provision for income taxes for
  the first nine months of 2001 was based on an estimated effective tax rate
  that was higher than the actual effective rate for the entire year.
  Accordingly, an adjustment was made to the provision for income taxes in the
  fourth quarter to reflect the lower tax rate. This adjustment increased net
  income in the fourth quarter of 2001 by approximately $.01 per diluted share.



F-17

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INDEPENDENT AUDITORS' REPORT





Board of Directors and Shareholders
Timberline Software Corporation
Beaverton, Oregon



We have audited the accompanying consolidated balance sheets of Timberline
Software Corporation and subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in Item 15 of Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Timberline Software Corporation and
subsidiary as of December 31, 2002 and 2001 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.



/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP
Portland, Oregon
January 28, 2003





F-18

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TIMBERLINE SOFTWARE CORPORATIONSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)FOR
      THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000Column A
      Column B
      Column C - Additions
      Column D
      Column EBalance atBeginning of Period
      Charged tocost and
      expenses
      Charged toother accounts -
      describe
      Deductions -
      describe (1)
      Balance at
      end of periodDescriptionYear ended
      December 31, 2002Deducted from
      asset accounts:Allowance for doubtful accounts
      $131
      
      
      (14)
      $117Year ended
      December 31, 2001Deducted from
      asset accounts:Allowance for doubtful accounts
      $138
      
      
      (7)
      $131Year ended
      December 31, 2000Deducted from
      asset accounts:Allowance for doubtful accounts
      $143
      
      
      (5)
      $138(1)
      uncollectible accounts, net of recoveries




F-19

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TIMBERLINE SOFTWARE CORPORATION



FORM 10-K FOR YEAR ENDED DECEMBER 31, 2002



EXHIBIT INDEX*





Material Contracts10.9
      Timberline Software
      Corporation Target Achievement Plan for 200399.1
      Certification of the Chief
      Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 200299.2
      Certification of the Chief
      Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002Consents23
      Independent Auditors' Consent*
      See Item 15(a)(3)
      of this Report for a list of all exhibits, including those incorporated by
      reference.




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Exhibit 10.9



Timberline Software Corporation

Establishment of the Target Achievement Plan and Goals for
2003



Pursuant to the 2003 Target Achievement Plan ("Plan"), the Board of Directors
adopted the following resolution establishing that all participants will have
100% of their award tied to the Corporate Performance Factor and establishing
that performance goal. In accordance with the Plan, participants have been
assigned a Guideline Award by the plan administrator ranging from a high of 40%
to a low of 5% of their annual salary. The weighted average Guideline Award was
approximately 7.6% based upon the participants as of the end of February 2003.
These participants had a total annual salary of approximately $24 million.



Board Resolution



RESOLVED, that the 2003 Target Achievement Plan is hereby adopted. For
    the 2003 Plan year, all company participants will have 100% of their award
    tied to the Corporate Performance Factor, which shall be measured solely by
    the company's Net Operating Income with a goal of approximately $9.1 million
    prior to the TAP expense. If the company achieves a minimum of 75% of the
    corporate performance goal, participants will be entitled to 50% of their
    Guideline Award and upon achieving 167% of the corporate performance goal,
    participants will be entitled to 200% of the Guideline Award. Guideline
    Awards will be prorated for achievements between the minimum and maximum
    corporate performance goals.



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|TIMBERLINE SOFTWARE
      CORPORATION
      2003
      TARGET ACHIEVEMENT PLANJanuary 2003
|------------------------------------------------------------------------------------------





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Timberline Software Corporation

2003 Target Achievement Plan



I. Purpose

The Target Achievement Plan (TAP) was developed to promote a shared sense of
responsibility among employees for the company's growth and financial success.
TAP is intended to motivate and reward plan participants for performance that
contributes to the company's overall success and prosperity.

II. Participation

In order to participate in TAP, an employee of must meet all of the
following criteria:

- Be a regular full time or part time employee scheduled to work more than
  20 hours per week of Timberline Software Corporation or its affiliates or
  subsidiaries;
- Be employed in a bonus eligible position for a minimum of three months
  during the plan year; and
- Be approved for participation by the CEO and, in the case of senior
  managers, the Board of Directors.

Employees in sales positions who participate in a sales commission or
business development plan are not eligible to participate in TAP.

III. Definitions

The following terms, when used in this plan document, shall have the meanings
defined below unless otherwise required by the context of the plan.

Business Unit:
      A separate revenue or cost
      center (e.g. Engineering).CEO:
      The Chief Executive Officer of
      the company.Company:
      Timberline Software
      Corporation.Guideline Award:
      The award to be paid to a plan
      participant if the total of all performance factors at the end of the plan
      year equals 100%. Guideline awards are expressed as a percentage of annual
      salary.Net Profit:
      Net income computed on a GAAP
      basis.Operating Profit:
      Net revenue less cost and
      expenses computed on a GAAP basis.Plan Administrator:
      Timberline Software
      Corporation's CEO in conjunction with the VP of Human Resources.Plan Participant:
      An employee of the company or
      its affiliates or subsidiaries, approved for participation in this plan by
      the CEO and/or the Board of Directors. Employees who participate in TAP
      are not eligible to participate in any other formal bonus, commission, or
      business development plans.




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|Plan Year:   | January 1, 2003 through December
    31, 2003.                                     
|------------ | -----------------------------------------------------------------------------------
|Termination: | Cessation of employment for any
    reason except retirement, death, or disability.



IV. Plan Philosophy

Each participant's base pay is intended to provide compensation at or near
competitive base salary levels. TAP represents at-risk pay and is
intended to provide incentive for a participant to earn additional compensation
during the plan year based upon performance against pre-established objectives.
Corporate and/or business unit performance objectives are set to focus attention
on achieving quantitative or qualitative goals. Individual objectives are
established to focus attention on technical accomplishments, project management,
or productivity improvements beyond the normal scope of the job.



V. Awards

Each plan participant will be assigned a Guideline Award, by the Plan
Administrator, based on the level of his or her position and the impact the
position can have on the financial success of the Company. Guideline Awards are
intended to be paid if performance meets the applicable objectives established
for Participants for the year. Guideline Awards are expressed as a percentage of
base salary; therefore, actual awards will vary in direct proportion with the
actual salary paid to each Participant during the plan year. Maximum awards
under this plan are limited to 200% of the Guideline Award.



VI. Performance Criteria

Awards are based on a combination of one to three major components of
performance. The weighting of the components must total 100%.

- Corporate

- Business Unit

- Individual



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VII. Establishing Targets

Performance targets and objectives are set for each performance component for
each Plan Year. Generally, targets/objectives are established by the beginning
of the Plan Year, but in no case later than the end of the first quarter of the
Plan Year. The Plan Administrator in conjunction with the Board of Directors
will establish performance targets for the Company and Business Units. The Board
must approve the corporate performance targets and any targets/objectives
pertaining to the CEO. Corporate and Business Unit targets will be expressed in
annual terms.

Individual performance targets/objectives normally will be developed prior to
the beginning of the Plan Year in a meeting between the Participant and his or
her respective senior manager. An individual plan normally will contain no more
than three specific individual performance objectives. Established objectives
must be reviewed and approved by the Plan Administrator.



VIII. Performance Determination

Corporate Performance Factor (CPF) and Business Unit Performance Factor (BPF):
The company's CFO will compare actual corporate performance and actual business
unit performance against the pre-established targets and calculate the resulting
performance factors. These results then will be submitted to the Plan
Administrator and the Board of Directors for approval. The year-end CPF and BPF
will be calculated within 60 days following the end of the Plan Year.

Individual Performance Factor (IPF): Each participant's manager will
evaluate the participant's performance against any pre-established individual
performance objectives agreed upon at the beginning of the year. The evaluations
must be documented and submitted to the Plan Administrator no later than 30 days
following the end of the Plan Year.

Performance Notes:

1. If the performance factor for the corporate (CPF) component is less than
  75%, no awards will be paid to any participants.
2. If the performance factor for any single component is less than 75%, no
  award will be granted for that component.
3. If the performance factor is less than 75% for any single component or
  combined components weighted 50% or more for any individual participant, no
  TAP award will be paid to that participant.



IX. Award Distribution

Awards are paid once a year based on the sum of the Corporate, Business Unit,
and Individual component awards applicable to each Participant. In order to
receive an award, a Participant must be actively employed by the company through
the end of the plan year. Any award paid will be tied to actual salary paid
during the relevant time period. Salary will include all base pay actually paid
to the participant but will exclude any allowances, overtime, or other bonus
payments. Year-end awards normally will be distributed within sixty (60) days
after the end of the Plan Year.



---



X. Example Award

The following example is provided for illustrative purposes only. TAP
awards are based on the sum of applicable corporate, business unit, and
individual component awards.



Assumptions Used:

Participant Salary Paid in Plan Year = $50,000

Guideline Award = 20%

Maximum Award (200% of Guideline) = 40%

Performance Components & Weighting =

50% Corporate Performance

50% Business Unit Performance

0% Individual Performance

Performance
      Ratings (Factors):
      Year End:Corporate Performance Factor (CPF)
      = 120%Business Unit Performance
      Factor (BPF)
      = 90%Individual Performance Factor
      (IPF)
      = n/a




Year End Award:

Salary paid in Plan Year = $50,000

Corporate = $50,000 x 20% x 50% x 120% (CPF for Yr.) = $6,000

Business Unit = $50,000 x 20% x 50% x 90%(BPF for Yr.) = $4,500

Total Year End Award = $10,500





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XI. Plan Administration and Authorities

Responsibility for the overall administration of the Plan rests with the CEO
of Timberline Software Corporation with support and assistance from outside
resources as deemed necessary.

TAP awards are not earned until they are approved by the Plan Administrator
and the Board of Directors and are paid.

The addition of mid-year Participants to the Plan must be documented and
approved by the Plan Administrator. Partial year Participants may be eligible
for an award provided they are incumbents in bonus eligible positions for at
least three months prior to the end of Plan Year. Any partial (mid-year)
participation will be paid on a pro rata basis at year-end.

A Participant may receive a pro rata share of an award if he or she leaves
the company during the year due to retirement or extended disability. In such an
event, the participant must have been in a bonus eligible position for at least
three months.

All pro rata awards will be determined by using the salary actually paid to
the Participant during the portion of the Plan Year he or she was a Participant.

Award distributions not already paid will be forfeited if the Participant's
employment is terminated at any time during the plan year for any reason other
than retirement or disability.

If during a Plan Year a Participant is promoted, demoted, or changes job
responsibilities, his or her Guideline Award percentage will be re-evaluated. If
a change is warranted, it will be effective on the date of the job change for
the balance of the Plan Year. If for any other reason the Guideline Award
percentage changes, it will be effective at the beginning of the next Plan Year.

To provide for those unusual occasions when business achievement is realized
through little or no effort on the part of TAP participants, the company
reserves the right to declare such business a "windfall." Windfall business is
subjected to special treatment. Such treatment will be handled at the sole
discretion of the CEO and the Board of Directors.

Adjustments to performance factors may be made to provide for circumstances
where performance targets are not achieved due to factors beyond the control of
participants. Such treatment will be handled at the sole discretion of CEO and
the Board of Directors.

This plan is not a contract of employment. It creates no rights for the
Participant to continue employment with the company for any length of time, nor
does it create any rights for the participant or any obligations on the part of
the Company, other than those set forth herein.

All awards are subject to the final approval of the Board of Directors of
Timberline Software Corporation. The CEO shall have the authority to act as the
final arbiter of any appeals, disputes, or interpretations emanating from this
Plan except in matters related to his own participation. All decisions, actions
or interpretations by the CEO shall be final and conclusive and binding on all
parties. The Board of Directors shall arbitrate any disputes related to the
CEO's participation.

The Company reserves the right, in its sole discretion, to continue, amend,
modify, or terminate the plan at any time.



---



Exhibit 99.1



CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Timberline Software Corporation (the
"Company") on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Curtis
L. Peltz, President, Chief Executive Officer and Director of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

> (1) The Report fully complies with the requirements of section 13(a) or
>   15(d) of the Securities Exchange Act of 1934; and
>   (2) The information contained in the Report fairly presents, in all
>   material respects, the financial condition and result of operations of the
>   Company.



/s/ Curtis L. PeltzCurtis L. Peltz
President and Chief Executive Officer

March 27, 2003



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Exhibit 99.2



CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TO 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Timberline Software Corporation (the
"Company") on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Carl C.
Asai, Sr. Vice President, Finance (Chief Financial Officer) of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

> (1) The Report fully complies with the requirements of section 13(a) or
>   15(d) of the Securities Exchange Act of 1934; and
>   (2) The information contained in the Report fairly presents, in all
>   material respects, the financial condition and result of operations of the
>   Company.



/s/ Carl C. Asai
Carl C. Asai
Sr. Vice President, Finance
(Chief Financial Officer)



March 27, 2003



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EXHIBIT 23



Independent Auditors' Consent



Board of Directors and Shareholders of Timberline Software Corporation
Beaverton, Oregon



We consent to the incorporation by reference in Registration Statements Nos.
33-46716, 33-69820, 333-77135, and 333-39424 on Form S-8 of our report dated
January 28, 2003 appearing in this Annual Report on Form 10-K of Timberline
Software Corporation for the year ended December 31, 2002.





/s/ DELOITTE & TOUCHE LLP



DELOITTE & TOUCHE LLP
Portland, Oregon
March 26, 2003



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