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

                                FORM 10-KSB

         [x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE  ACT OF 1934
               For the Fiscal Year Ended December 31, 1997.

         [ ]   TRANSITION REPORT UNDER 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
                 (Name of small business issuer in its charter)

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

                           9600 S.W. Nimbus Avenue,
                           Beaverton, Oregon 97008
              (Address of principal executive offices) (Zip code)

                              (503) 626-6775
                         Issuer's telephone number

         Securities registered under Section 12(b) of the Exchange Act: None

         Securities  registered  under  Section  12(g)  of the Exchange Act:

                         Common Stock, without par value
                               (Title of class)

Check  whether the issuer (1) 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 [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will 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-KSB,  or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year: $35,240,078

At March 13,  1998,  7,009,340  shares of common  stock of the  registrant  were
outstanding.  On such date, the aggregate  market value of the voting stock held
by non-affiliates of the registrant was $99,091,266.

                       DOCUMENTS INCORPORATED BY REFERENCE

Parts of the  Registrant's  Proxy  Statement  dated March 20, 1998,  prepared in
connection  with the Annual Meeting of Shareholders to be held on April 28, 1998
are incorporated by reference into Part III of this Report.

Transitional Small Business Disclosure Format (Check one):

Yes [ ]  No [x]



<PAGE>



PART I


Item 1.  Description of Business
--------------------------------

General
-------
Timberline(R)   Software   Corporation  (the  "Company"  or  "Timberline")   was
incorporated  in Oregon in 1979.  The Company  changed its name from  Timberline
Systems, Inc. in 1986.

Timberline develops, markets, and supports accounting and management information
computer  software  primarily  for  the  construction  and  property  management
industries.  The  software is  designed  to work on stand  alone  microcomputers
(commonly  referred  to as  personal  computers  or "PCs")  or in a  network  of
microcomputers.  Timberline also provides a range of support  services for users
of its software,  including annual maintenance and support contracts,  classroom
training at its  corporate  headquarters  and at various  sites  throughout  the
United States, and on-site training and consulting.

Software Products
-----------------
The  Company's  software  operates  primarily  in  Microsoft(R)  Windows(R)  and
Microsoft MS-DOS(R) operating environments.  Timberline's Windows-based software
products   are  also   compatible   with   other  Open   Database   Connectivity
(ODBC)-compliant  applications.  ODBC, a data exchange methodology  developed by
Microsoft  that has been  accepted  as an  industry  standard,  allows  users to
directly  access  information  stored  in  Timberline  data  format  with  other
databases, word processing and spreadsheet programs for greater productivity.

Companies,  like  Timberline,  that develop  computer  software  have received a
significant amount of attention recently as to whether the software they develop
is "year  2000  compliant."  This  issue  has  arisen  due to the fact that many
software programs were designed to make date calculations  based on the last two
digits of the year.  With the year 2000  approaching,  transactions  with  dates
commencing in the year 2000 may be identified as transactions  commencing in the
year  1900,  which may cause  incorrect  calculations  or  processing  failures.
Timberline's  complete  suite of  current  Windows-based  product  is year  2000
compliant,  and modifications to our installed  DOS-based  products are complete
and currently being tested.

The Company  maintains three software  product lines - construction  accounting,
estimating and property management. Prior to October 1996, the Company also sold
software specifically designed for the architects and engineers industry.

Construction Accounting
-----------------------
Timberline's  construction  accounting  software  products are composed of three
different  levels of  software.  The  Medallion(R)  line of  software  was first
released  in  1984  and  operates  only in the DOS  operating  environment.  The
Medallion  line was designed  specifically  for the home  builder/remodeler  and
small to medium-sized general and specialty contractors.

Due to the popularity of the Windows environment and the Company's  introduction
of Gold  Collection(TM)  - Standard  Edition Software in June 1996, as discussed
below, Medallion software sales have decreased significantly and are no longer a
significant source of software sales to the Company.

Gold Collection - Extended  Edition was released in October 1992 and operates in
the  Windows  operating   environment.   This  line  of  software  was  designed
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.   The  Company



                                   2
<PAGE>

believes that it was the first major  software  company to develop  software for
construction  companies  utilizing  the  advanced  capabilities  of the  Windows
operating environment.

In June 1996,  the Company  released Gold  Standard,  an  integrated  accounting
management system for the small to medium-sized construction companies developed
to work with  Microsoft  Windows  95. The  software  was  developed  to give the
Company's  Medallion  users an upgrade path to take  advantage of the technology
that is now available and to address a segment of the construction  market which
needed   an   accounting   and   management   information   system   that   used
state-of-the-art technology,  without the additional advanced features available
in the Gold Extended software products.

All   three   levels   of   software   are   designed   around  a  core  set  of
accounting-oriented  applications  (such as General Ledger,  Job Cost,  Accounts
Payable, Accounts Receivable and Payroll). Additional features were added to the
software to meet the  industry-specific  needs of  construction  companies.  The
various  applications  are fully  integrated  allowing for data entered into one
application to be accessed and entered  electronically into another application.
Gold Standard and Gold Extended have additional  features and  capabilities  for
users with more  complex  needs,  including  executive  inquiry  and  customized
summary reporting capabilities.

An Equipment Cost software application for Gold Extended was released at the end
of 1995 and is also available for Gold Standard. This application is critical to
equipment-intensive   construction   companies.   With  the   release   of  this
application,  Timberline  believes  it  is  able  to  meet  the  accounting  and
management  information needs of the  heavy/highway  segment of the construction
industry.

In December  1997,  the Company  released its Account  Receivable  and Contracts
software  product for its Gold Extended and Standard  product lines. The Company
anticipates  releasing its Billing  software product during the first six months
of 1998. These are applications that the Company's current users and prospective
users have been  requesting  that the Company  develop  since Gold  Extended was
initially  released in 1992. The Company believes that these  applications  will
attract  new users to  Timberline  because  the Company is now able to provide a
more complete accounting and management information solution.

Estimating
----------
Estimating  software  allows  an  estimator  to  compile  a bid on  construction
projects based on certain parameters such as the architectural design,  building
materials required and material and labor costs. In 1987,  Timberline introduced
the  Precision  Collection(R),   a  family  of  integrated  estimating  software
applications.  The Precision  Collection is currently  designed  around two core
estimating  products - Precision  Estimating  - Standard  Edition and  Precision
Estimating - Extended Edition.  Precision Estimating Standard,  released in June
1996,  replaced the  Company's  older entry and mid-level  DOS-based  estimating
products.  Designed  specifically for Microsoft Windows 95 and Microsoft Windows
NT platforms, this estimating software is designed to allow an estimator to make
fast, accurate estimates on software that the Company believes is fairly easy to
learn and to use, while taking advantage of Windows-based technology.  Precision
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, the Company  released a completely  re-designed,
Windows-based  version of Precision Estimating Extended to replace the older DOS
version.  This new group of software  products is fully  interoperable  with the
Precision Standard products.

To complement its estimating software products, the Company also sells databases
and other software it has developed and those  developed by others,  which allow
estimators to be more productive and to develop more comprehensive estimates.


                                    3
<PAGE>


The  core  estimating  product  also  interfaces  with  the  Company's  Job Cost
accounting  application.  Through interfaces  developed by Timberline,  the core
estimating  product can be linked to Autodesk's  AutoCAD(R)  applications and to
scheduling software developed by Microsoft and Primavera Systems, Inc.

Property Management
-------------------
The  Company's  property  management  software is an accounting  and  management
information system used by managers of residential and commercial properties. It
provides  information to the 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 tenant and lease information about
the  properties.  In March 1997,  the Company  released its Gold  Collection for
Property Management. This is lease-based accounting software designed to work on
Microsoft  Windows 95 and Microsoft  Windows NT platforms.  Unlike  traditional,
tenant-based or unit-based software programs,  Timberline's software is designed
to focus on the lease  document  itself,  which  allows the software to adapt to
many various types of lease arrangements.  Prior to the release of this suite of
software  applications,  the  Company's  software  for the  property  management
industry  was  Property  Management  Gold,  which was designed to work on IBM(R)
OS/2(R) and Microsoft  Windows NT  platforms.  The Company no longer offers this
line of  software  to new users  since the  release of the Gold  Collection  for
Property Management.

The Company  also had a DOS-based  software  product  for  residential  property
managers, called SitePro, which was released in 1992. This software was designed
specifically  for on-site  managers of residential  properties to enable them to
track  financial  and  tenant  information.   This  information  could  then  be
electronically  transferred to the home office for  compilation  and review with
other  managed  properties.  In  September  1997,  the Company  entered  into an
agreement with Computer Language  Research,  Inc. ("CLR") to provide a migration
path for users of  SitePro  to CLR's  year  2000-compliant  property  management
software system. As a result,  Timberline no longer  distributes  SitePro to new
users, but will continue to support current SitePro users through 1998.  SitePro
sales have not been a significant source of revenue for the Company.

Architects and Engineers
------------------------
Prior to October  1996,  the Company sold  software  designed  specifically  for
architectural and engineering  firms. The software provided the basic accounting
information  along with the  capability  to generate  billing  information  on a
project basis. Initially released in 1987, the software,  called AEasy and AEasy
Plus,  was  developed  by an  outside  software  developer  using the  Company's
software  standards and tools. The Company paid royalties to the developer based
on the quantity of software sold.

In September 1996, the Company sold this software,  its architects and engineers
user base, and other rights and obligations to a non-affiliated,  privately-held
company.  According  to the terms of the  agreement,  the  Company  received  an
initial payment for the items listed above and will receive  royalties on future
service fee revenue and software sales.  The Company  believes that the sale had
no significant effect on its business.

Customer Support Services
-------------------------
Users of the Company's  software may purchase  maintenance and support  services
from the Company. Maintenance contracts allow the user to obtain program changes
and  enhancements  as they are  released.  Support  contracts  allow the user to
obtain  telephone  access  to the  Company's  customer  support  department  for
answering  application-related  questions.  In addition,  users may pay a fee to
attend  classes  on the use of the  Company's  software,  to  obtain  customized
training at the user's place of business and for other consulting services.


                                      4
<PAGE>

These service fees are a significant  percentage of the Company's total revenue.
In  1997,  1996,  and  1995,  service  fees  comprised  44,  45 and 44  percent,
respectively,  of total revenue.  The Company is committed to maintaining a high
level of quality related to customer  support  services.  At the end of 1997, 38
percent of the  Company's  employees  were  directly  associated  with  customer
support.


Sales/Distribution
------------------
The Company licenses its software  products and sells its services  primarily in
the United States.  The Company also licenses its software products into Canada,
Australia,  New  Zealand,  and other  foreign  countries.  Revenue  from foreign
countries  has not been  significant,  comprising  less than 10  percent  of the
Company's total revenue.

Product   distribution   is  primarily   handled  by  value  added  dealers  and
distributors.  The Company also maintains a direct sales force to complement its
dealer  channel  and to  handle  sales to  national  accounts  and  other  large
companies.

Timberline  maintains a telemarketing  staff for selling maintenance and support
service contracts and classroom  training to its user base.  On-site  consulting
fees are  generated  from  requests for services from the users to the Company's
sales and customer support staff.

Unfilled  orders for  software  products at December  31, 1997 and 1996 were not
significant.  The Company typically ships software products within three days of
receipt of the order.

Production
----------
The principal  materials and components used in the Company's  software products
are computer  media and user  manuals.  For each product,  the Company  prepares
masters of the  software  on  computer  diskettes  or  CD-ROM's  and of the user
manuals.  Substantially  all copies of the software and user manuals are made by
outside vendors.  The Company also relies on outside vendors to provide software
assembly and shipping services.

Competition
-----------
The 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 the Company  competes varies from product to product and from
region to region within the United States.  The Company  believes that it is the
major  supplier  of  construction  accounting  and  estimating  software  in the
construction industry and is also one of the leading suppliers of accounting and
management information software in the property management industry. The Company
believes  that  there are  barriers  to entry into its  segment of the  software
market.  First, the  sophisticated  programs it develops require a wide range of
industry knowledge and programming  specialization.  In addition,  the nature of
the  software  requires a company of a certain size  capable of  supporting  the
software,  including  training in a number of geographical  regions,  as well as
providing continuing support, maintenance and upgrades of the software. However,
should a decision be made by the larger, well-known software developers to enter
this segment of the market,  such  competitors  are  considerably  larger,  more
diversified,  and have greater  financial and other  resources and enjoy greater
brand recognition for their products than the Company.

The Company  believes  that its  emphasis on  producing  high  quality  software
products  that are  flexible  and  user-friendly  enables the Company to compete
effectively.  In  addition,  the Company  believes it provides  very  responsive
customer support service to its end users,  which enhances the  marketability of
its products.


                                    5


<PAGE>

Product Protection
------------------
The Company  regards its software as  proprietary  and attempts to protect it by
relying upon copyrights,  trade secret laws, internal  nondisclosure  agreements
and  transferability   restrictions   incorporated  into  its  software  license
agreements. The Company provides its software products under a perpetual paid-up
license  agreement.  Title does not  transfer to the  customer.  Program  source
listings  are  not  released,   which  the  Company  believes  further  protects
unauthorized transfers of the Company's proprietary information,  as well as the
confidentiality  of  the  Company's  trade  secrets.  The  Company  also  uses a
combination of software  programming and hardware devices to protect some of its
products from unauthorized use or duplication.  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 has no patents.  Although  the  Company's  competitive  position  may be
adversely  affected by  unauthorized  use of its  proprietary  information,  the
Company  believes  that the rapid pace of  technological  change in the computer
industry makes intellectual  property  protection of less significance than such
factors  as the  knowledge  and  experience  of  management  personnel  and  the
Company's ability to develop, enhance, support and market its products.

Third parties may 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 divert the efforts of the
Company's technical and management personnel,  whether or not such litigation is
determined in favor of the Company.

Research and Development
------------------------
Timberline  is  continually  in the  process  of  developing  new  software  and
enhancing its existing  software products in order to meet the changing needs of
its current  users and the market  place.  At the end of 1997, 33 percent of the
Company's employees were directly associated with product  development.  Product
development expenses were $7,264,000,  $5,647,000,  and $5,564,000 in 1997, 1996
and 1995, respectively.  Of that total, $6,222,000,  $4,905,000,  and $4,967,000
and were  incurred  in 1997,  1996  and  1995,  respectively,  on  research  and
development on new software products.  An additional $927,000,  $1,127,000,  and
$70,000,  respectively, of product development expenses on new software products
were capitalized in those same years.

Employees
---------
At  December  31,  1997,  the  Company  had 312  employees,  of  which  308 were
full-time.  None of the  employees  are  represented  by  unions,  or subject to
collective  bargaining.  Timberline's business is heavily dependent on retaining
and attracting  highly skilled  employees.  As such, the Company has an employee
benefits  program  that  includes  group  health,  dental,  disability  and life
insurance plans, paid vacations and holidays, leave privileges,  and educational
reimbursement.  The  Company  also has a pension  plan under the  provisions  of
section  401(k) of the  Internal  Revenue Code in which the Company is currently
matching a certain percentage of the employee's contribution to the plan, and an
informal profit sharing plan covering all employees.  Additionally,  the Company
has stock option and stock incentive plans from which it may grant stock options
and incentives to certain key individuals. The Company believes its relationship
with its employees is good.


                                      6

<PAGE>


Item 2.  Description of Property
--------------------------------

The Company  leases its corporate  headquarters  and also leases small  regional
offices for some of its sales and consulting and training service functions. The
Company's main offices are located in a 51,000 square foot office and production
facility in Beaverton,  Oregon.  The lease on this  facility  expires in October
1998. The Company leases 12,000 square feet of additional  office space near its
corporate headquarters. The lease on this office space expires in April 2003.

The Company's regional offices are leased under short-term lease arrangements in
the following  metropolitan areas: Los Angeles,  CA; New York, NY; Concord,  NC;
and Jacksonville, FL.

The Company believes that all of its leased  facilities are modern facilities in
good condition and are adequate for its immediate needs.

During  1997,  the  Company  acquired  land  for the  site of its new  corporate
headquarters  in  Beaverton,  Oregon,  which is  located  close  to its  present
location. The Company has commenced construction of its new headquarters,  which
is expected to be completed  during the fourth quarter of 1998. The new facility
is expected  to be  approximately  89,000  square feet and should be adequate to
meet the Company's needs for the foreseeable future.


Item 3. Legal Proceedings
-------------------------

From time to time,  the  Company is involved  in  litigation  relating to claims
arising out of its  operations in the normal course of business.  As of the date
of this Report,  the Company is not a party to any legal proceedings the adverse
outcome of which would, in management's  opinion, have a material adverse effect
on the Company.


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

None.

                                     7

<PAGE>


PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

In May 1996,  the Company had  three-for-two  common stock  split.  In November,
1997, the Company had a five-for-four  stock split.  All  information  regarding
common  stock and per  share  amounts  in this  Report  have been  retroactively
restated to reflect these changes.

The Company's common stock is traded on the Nasdaq Stock Market under the symbol
TMBS.  The table below shows the high and low sales  prices for 1997 and 1996 as
reported in Nasdaq's monthly Summary of Activity Report. Such quotations reflect
interdealer prices, without retail mark-up,  mark-down or commission and may not
represent actual transactions.

         1997                                High                        Low
         -----------------------------------------------------------------------
         First quarter                   $    8  7/10              $    6    1/5
         Second quarter                       7   3/5                   5    3/5
         Third quarter                       11   4/5                   6    2/5
         Fourth quarter                      19   3/4                  10
         -----------------------------------------------------------------------

         1996                                High                        Low
         -----------------------------------------------------------------------
         First quarter                   $    6                    $    4   4/15
         Second quarter                       9   2/5                   5   7/15
         Third quarter                        8   3/5                   5    4/5
         Fourth quarter                       7   1/2                   6   1/10

As of March 13,  1998,  there were 295  shareholders  of record.  Based upon the
number of requests for the Company's proxy materials for its 1998 annual meeting
of  shareholders,  the  Company  believes  that there were  approximately  4,001
beneficial shareholders as of that date.

In October 1994, the Company  declared its first quarterly cash dividend of $.01
per share and declared cash  dividends  totaling $.12 and $.09 per share in 1997
and 1996,  respectively.  The Company anticipates declaring and paying quarterly
cash dividends in the future.

In connection with the  construction of its new corporate  office  headquarters,
the  Company  has  entered  into a loan  agreement  with a bank to  borrow up to
$9,750,000.  As of  December  31,  1997,  there  were no  borrowings  under that
agreement. The loan agreement requires that the Company maintain certain minimum
working  capital and tangible net worth levels,  which could restrict the amount
of retained earnings that are available for payment of dividends. Under the most
restrictive  requirements of the loan agreement,  unrestricted retained earnings
at December 31, 1997, amounted to $1,339,000.


                                      8
<PAGE>


Item 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

Results of Operations
---------------------

1997 Compared to 1996

Net revenue  increased 23 percent to  $35,240,000  in 1997 from  $28,659,000  in
1996.  The two major  components  of net revenue,  computer  software  sales and
service fees,  both increased in 1997.  Software  sales  increased 26 percent to
$18,928,000 in 1997 compared to $14,983,000 in 1996. Software sales increased in
all of the Company's  current product lines.  Construction  Accounting  software
sales  increased 28 percent in 1997 over 1996,  primarily due to the  continuing
increase  in  sales  of Gold  Collection-Extended  Edition,  and  sales  of Gold
Collection-Standard  Edition,  which  was  released  in  June  1996.  Estimating
software  sales  increased  25  percent  due to  increased  sales  of  Precision
Collection-Standard  Edition, which was released in June 1996 and the release of
Precision  Collection-Extended  Edition at the end of September  1997.  Property
Management  software sales  increased 72 percent due to sales of Gold Collection
for Property Management, which was released at the end of March 1997. There were
no Architects & Engineers  software sales in 1997, as that product line was sold
to an unrelated entity in September 1996.

Total software  sales  represented 54 percent of net revenue in 1997 compared to
52  percent  in 1996.  In terms of  revenue  mix,  Construction  Accounting  and
Estimating  sales  represented  92 percent of  software  sales in 1997 and 1996.
Property  Management  software sales represented eight percent of software sales
in 1997  compared  to  five  percent  in  1996.  Architects  &  Engineers  sales
represented  three percent of software sales in 1996.  International  (non-U.S.)
software  sales,  as a percentage of software  sales,  remained  constant at six
percent for 1997 and 1996 and is composed  primarily of sales from Australia and
Canada.  The Company  believes  that  software  sales,  as a  percentage  of net
revenue,  will  continue  at  approximately  the same level in 1998 as it did in
1997.

Going  forward  into  1998,  the  Company  plans  to  combine  its  Construction
Accounting  and Property  Management  product lines into a single product group,
called the Accounting  product group,  to more closely  reflect the way in which
the Company currently manages its operations. The Company operates with two main
product  groups,  Accounting and  Estimating,  and will report its operations on
that basis commencing in 1998.

Service  fees  from  maintenance,   support,  training  and  consulting,   which
represented  44  percent  and 45  percent  of net  revenue  in  1997  and  1996,
respectively,  increased 19 percent to $15,354,000  in 1997 from  $12,956,000 in
1996.  The  increase  in  service  fees was  principally  due to the  continuing
increase in the Company's user base through new product sales.  Maintenance  and
support fees, which accounted for 80 percent of service fees in 1997,  increased
19 percent over 1996 levels.  Consulting  fees increased 32 percent in 1997 over
1996, while training fees remained fairly constant. The Company anticipates that


                                      9

<PAGE>

service fees will continue to represent a  significant,  but not  necessarily an
increasing, percentage of net revenue.

Cost of revenue  consists  primarily  of software  documentation,  assembly  and
shipping  costs,   royalties  paid  to  outside   developers,   amortization  of
capitalized  software  development  costs,  and cost of  facilities  and outside
services for training and  consulting.  Cost of revenue,  as a percentage of net
revenue,  decreased to 10 percent in 1997 from 12 percent in 1996.  The decrease
in this percentage was primarily due to lower  documentation  and assembly costs
associated with software sales and software releases to users on annual software
maintenance contracts.  This decrease was partially offset by an increase in the
amount of amortization  related to capitalized  software  development costs as a
result of major new  products  released in 1996 and 1997.  The Company  believes
that cost of revenue  will remain  relatively  constant as a  percentage  of net
revenue in 1998.

Operating  expenses increased 12 percent to $25,135,000 in 1997 from $22,490,000
in 1996.  The largest  increase came in the area of product  development,  which
increased  29  percent  to  $7,264,000  in 1997 from  $5,647,000  in 1996.  This
increase was primarily due to increased personnel costs, additional personnel to
develop online help and training  materials for the new software products and an
increase  in  outside  developers'  costs.  Additionally,  capitalized  software
development  costs  declined  in 1997  compared  to 1996.  Capitalized  software
development  costs  amounted to $927,000 in 1997 compared to $1,127,000 in 1996.
The Company believes that product development expenses will continue to increase
in the coming year.

Customer  support  expenses  increased  five percent to  $6,744,000 in 1997 from
$6,403,000 in 1996. The slight increase was primarily due to increased personnel
costs and equipment-related  expenses.  The increase in expenses was offset by a
reduction in customer support personnel during the first four months of 1997. As
the  demand for  support  and  consulting  services  increased  during the year,
primarily due to Gold  Extended and Standard  Construction  Accounting  software
sales, the Company found it necessary to increase its customer support personnel
to handle the increased  volume.  The Company believes customer support expenses
in 1998 will increase at a higher rate than it did in 1997,  due primarily to an
expected  continuance  of an  increase  in demand  for  support  and  consulting
services.

Sales and  marketing  expenses  decreased one percent to $6,351,000 in 1997 from
$6,397,000 in 1996. As a percentage of net revenue, sales and marketing expenses
decreased  to 18  percent  in 1997 from 22 percent  in 1996.  The  decrease  was
primarily  due to a decline in the number of sales and  marketing  personnel and
lower  trade  show  expenses.  This  was  partially  offset  by an  increase  in
advertising  costs  and  commissions  to direct  sales  personnel.  The  Company


                                  10
<PAGE>

believes that sales and marketing expenses, as a percentage of net revenue, will
continue at approximately the same level in 1998 as it did in 1997.

General and  administrative  expenses increased 18 percent to $4,776,000 in 1997
from $4,044,000 in 1996. As a percentage of net revenue, these expenses remained
relatively  constant  at  approximately  14 percent  in both 1997 and 1996.  The
increase  in  expenses  was  primarily  due  to an  increase  in  personnel  and
equipment-related  costs,  higher  insurance and outside  service costs,  and an
increase in the provision for doubtful accounts.

1996 Compared to 1995

Net revenue  increased 15 percent to  $28,659,000  in 1996 from  $24,819,000  in
1995.  The two major  components  of net revenue,  computer  software  sales and
service fees,  both increased in 1996.  Software  sales  increased 12 percent to
$14,983,000  in 1996 compared to $13,435,000 in 1995. The increase was primarily
due to the  introduction in mid-year of two new software  products  designed for
Microsoft  Windows 95 and Windows NT. The first,  Gold  Standard,  combined with
continued  strong  sales of Gold  Extended to increase  Construction  Accounting
sales by 24 percent  over 1995.  The  second,  Precision  Standard,  enabled the
Company to achieve a 10 percent increase in sales of Estimating software.  These
increases were offset in part by decreased Property  Management and Architects &
Engineers  software  sales.  The Company  reduced  sales  efforts of its current
Property  Management  software  products while it continued to develop a product
for the  Windows  environment.  This  product was  released  in early 1997.  The
decline in sales of  Architects & Engineers  software was  primarily  due to the
sale of the product line to an unrelated entity in September 1996.

Software sales, as a percentage of net revenue,  declined slightly in 1996 to 52
percent  compared to 54 percent in 1995.  In terms of revenue mix,  Construction
Accounting and Estimating sales represented 92 percent of software sales in 1996
compared to 86 percent in 1995.  Property Management software sales decreased as
a percentage of total software sales to five percent from eight percent in 1995.
Software  sales to  architects  and  engineers  decreased  to three  percent  of
software sales in 1996 compared to six percent in 1995.  International  software
sales,  as a percentage of software sales,  remained  constant at six percent in
1996 and 1995.

Service fees from  maintenance,  support,  training and consulting  increased 19
percent to  $12,956,000 in 1996 compared to $10,927,000 in 1995. As a percentage
of net revenue,  service fees  increased  slightly to 45 percent in 1996 from 44
percent in 1995.  All  categories  of service  fee  revenue  increased  in 1996.
Maintenance and support, which accounted for 79 percent of total service fees in
1996,  grew 15 percent in 1996 over 1995.  The increase was due primarily to the
Company's  growing  customer  base.  Service fees from  training and  consulting
increased 34 percent over 1995.

                                    11
<PAGE>

Cost of revenue as a percentage of net revenue,  increased to 12 percent in 1996
from 11 percent in 1995.  The  increase  was due to a  significant  increase  in
training and  consulting  costs,  partially  offset by lower costs and royalties
associated with software sales.

Operating  expenses increased 13 percent to $22,490,000 in 1996 from $19,895,000
in 1995. The largest  increases were in compensation  costs related to personnel
additions  in the  customer  support and  product  development  areas.  Customer
support  expenses  increased 23 percent to $6,403,000 in 1996 from $5,200,000 in
1995,  primarily  due to additional  personnel  required to handle the increased
demand for telephone  support,  consulting and training services  resulting from
increased sales of the Company's Windows-based software products.

Product  development  expenses  increased only one percent to $5,647,000 in 1996
versus  $5,564,000  in  1995,   primarily  due  to  a  significant  increase  in
capitalized software  development costs.  Capitalized software development costs
amounted to $1,127,000 in 1996 compared to $70,000 in 1995. Costs capitalized in
1996  were  related  to the  development  of the  Gold  Construction  Accounting
Standard  and  Precision  Standard  products  released in June 1996 and the Gold
Property  Management  Windows-based  software  released in 1997. These costs are
amortized to cost of revenue over the estimated  life of the software  after the
software  products  have been  released  for  sale.  Without  the  effect of the
capitalization  of these expenses,  product  development  expenses  increased 20
percent to $6,774,000  in 1996 compared to $5,634,000 in 1995.  The increase was
primarily due to expenses  related to both  additional  personnel and the use of
outside software developers to maintain the Company's existing software products
and to develop and test new Windows-based software products.

Sales and marketing expenses increased 23 percent to $6,397,000 in 1996 compared
to  $5,221,000  in 1995,  but as a percentage  of net  revenue,  increased to 22
percent in 1996  compared to 21 percent in 1995.  The increase was primarily due
to  increases in  marketing  personnel  and  advertising  and product  marketing
expenses related to the release of the new  Windows-based  software  products in
June 1996.  General  and  administrative  expenses  increased  three  percent to
$4,044,000 in 1996  compared to  $3,910,000 in 1995,  but as a percentage of net
revenue, declined to 14 percent in 1996 from 16 percent in 1995. The increase in
expenses  was  primarily  due  to  increased  personnel,   equipment  costs  and
professional  services,  offset  in  part by a  decrease  in the  provision  for
doubtful  accounts.  The  provision in 1995  included  the  write-off of a large
receivable from a Canadian company that went bankrupt in that year.


                                   12
<PAGE>


Other Income and Income Taxes

Other income (expense) is composed  primarily of investment income on cash, cash
equivalents,  and temporary investments.  Investment income increased 18 percent
in 1997 compared to 1996 and increased 14 percent in 1996 compared to 1995.  The
increase was primarily due to an increase in investable  funds.  This was offset
in part in 1996 by lower interest rates as the Company  invested more heavily in
debt  securities  that were  exempt  from  federal  income  taxes.  The  Company
anticipates  a decline in other  income in 1998 due to the  expected use of cash
and investment  balances to partially fund the construction of the Company's new
corporate  headquarters,  which is  currently  in  progress  and  expected to be
completed in the latter part of 1998.

Provision  for income  taxes.  The  Company's  effective  income tax rate was 35
percent,  28 percent and 29 percent in 1997,  1996 and 1995,  respectively.  The
lower rates in 1996 and 1995 were primarily due to research and  development tax
credits, which amounted to $326,000 and $231,000 in 1996 and 1995, respectively.
The research and  development  tax credit in 1997 amounted to $251,000,  but did
not have as great of an effect on the  effective  tax rate as in prior years due
to the significant increase in pre-tax income in 1997 compared to 1996 and 1995.
For further  analysis of the provision for income taxes,  see Note 6 of Notes to
Financial Statements. The Company anticipates the effective tax rate for 1998 to
be at or above the 1997 level.

YEAR 2000 COMPLIANT ISSUE

Many  companies  that use and/or  develop  computer  software are addressing the
potential problem that may exist if their software is not "year 2000 compliant."
The potential  problem that exists with some  computer  software is that it will
not process transactions properly for dates commencing in the year 2000. This is
due to the  fact  that  many  software  programs  were  designed  to  make  date
calculations based on the last two digits of the year. As a result, dates in the
year 2000 may be identified as dates in the year 1900, which may cause incorrect
calculations or cause the transaction to not even be processed.

The  Company  has  been  aware  of this  problem  for  many  years  and has been
addressing  it, both for its software that is being  developed for sale to users
and for software used in its own internal  applications.  The Company's complete
suite  of  current   Windows-based   products  is  year  2000   compliant,   and
modifications  to our  installed  DOS-based  products are complete and currently
being tested. As for software that is used in its own internal applications, the
Company has determined that all of its major applications are already, or are in
the process of being,  year 2000  compliant.  The Company  does not believe that
there will be any adverse effect on the Company's financial condition or results
of operations as a result of the year 2000 compliant issue.


                                    13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Net cash  provided by operations  was  $8,686,000 in 1997 compared to $3,644,000
and  $3,449,000  in 1996 and 1995,  respectively.  The  increase in 1997 was due
primarily to the increased  profitability of the Company's  operations.  Working
capital has  increased to  $4,339,000  at December 31, 1997 from  $1,325,000  at
December 31, 1996, primarily due to the increase in cash, cash equivalents,  and
temporary  investments.  This was  partially  offset by  increases  in  accounts
payable,  deferred revenues and accrued employee  expenses,  which are discussed
below. Cash, cash equivalents,  and temporary investments,  which represented 40
percent  of total  assets at  December  31,  1997,  increased  $5,669,000  since
December 31, 1996,  primarily  due to an increase in cash provided by operations
and a  reclassification  of investments  from long-term to short-term.  Prior to
1997,  investments were previously classified in the held-to-maturity  category,
and   accordingly,   many  of  the  investments  were  classified  as  long-term
investments,  based on their maturity date.  However,  the investments have been
transferred into the  available-for-sale  category because these investments may
not be held to maturity.  Accordingly, these investments have been classified as
current assets. Net accounts  receivable at December 31, 1997 increased $609,000
since December 31, 1996. This increase was primarily due to an increase in sales
in the month of December 1997 compared to the same period in 1996.

Net property and equipment and purchased  software  increased  $4,324,000  since
December 31, 1996. Exclusive of depreciation and amortization expense related to
such  assets,  which  amounted to  $1,500,000  in 1997,  property  and  software
additions during 1997 amounted to $5,836,000.  Over $4,643,000 has been expended
to date for the  acquisition of land for the site of the Company's new corporate
headquarters and initial planning, design, excavation and construction costs for
the new headquarters. The remaining costs were primarily for the purchase of new
computer equipment, and the upgrade of the telecommunication system. The Company
has  budgeted  expenditures  for  equipment  and  software in 1998  amounting to
$1,700,000,  which is expected to be funded through  current cash and investment
balances and cash provided by operations.  The construction of the new corporate
headquarters  will  be  funded  through  a  combination  of  existing  cash  and
investment  balances,  and construction  loans. The Company anticipates that the
new corporate  headquarters will be completed during the fourth quarter of 1998.
During 1998 or 1999,  the Company  believes that the  construction  loan will be
converted into a mortgage loan sometime after completion of the project.

Net  capitalized  software  costs  increased  $524,000  since December 31, 1996.
Exclusive of  amortization  of  capitalized  software  costs,  which amounted to
$403,000 in 1997,  capitalized software costs for the year amounted to $927,000.
Capitalized  software  costs were primarily  related to the Gold  Collection for
Property  Management,  released  in  March  1997,  Precision  Extended  software


                                     14
<PAGE>

products  released at the end of September  1997,  Gold Accounts  Receivable and
Contracts  software  products  released  in  December  1997  and a Gold  Billing
software  product to be  released  during the first  part of 1998.  The  Company
expects to capitalize  additional  software  development  costs in 1998,  but it
expects that the amount capitalized will be less than in 1997.

Accounts  payable at December 31, 1997  increased  $676,000  since  December 31,
1996, primarily due to construction costs payable on the Company's new corporate
headquarters.  Income taxes payable increased  $166,000,  primarily due to taxes
owed for 1997.  Deferred revenues increased  $1,541,000 since December 31, 1996,
primarily due to increased billings for annual maintenance and support services.
Revenue from annual  maintenance  and support  service  billings are  recognized
monthly over the terms of the contracts.  Accrued  employee  expenses  increased
$719,000  since  December  31, 1996,  primarily  due to accrued  profit  sharing
expenses.  Deferred  income taxes  increased  $219,000  since December 31, 1996,
primarily due to the  establishment of additional  deferred tax liability on the
increase in net capitalized software costs.

The Company's Board of Directors approved a three-for-two  stock split effective
in May 1996 and a  five-for-four  stock split  effective in November  1997.  All
common  share and per share  amounts have been  restated to reflect  these stock
splits. Total dividends paid in 1997 were $833,000,  or $.12 per share, and were
$625,000,  or $.09 per  share in 1996.  The  Company  plans to  continue  to pay
quarterly cash dividends.

In connection with the  construction of its new corporate  office  headquarters,
the  Company  has  entered  into a loan  agreement  with a bank to  borrow up to
$9,750,000.  As of  December  31,  1997,  there  were no  borrowings  under that
agreement. The loan agreement requires that the Company maintain certain minimum
working  capital and tangible net worth levels,  which could restrict the amount
of retained earnings that are available for payment of dividends. Under the most
restrictive  requirements of the loan agreement,  unrestricted retained earnings
at December 31, 1997, amounted to $1,339,000.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial  Accounting  Standards Board (FASB) issued Statement
of  Financial  Accounting  Standards  (SFAS) No. 130,  "Reporting  Comprehensive
Income," which established standards for reporting  comprehensive income and its
components.  This additional reporting requirement will become effective for the
Company  during  the  year  ending  December  31,  1998.  There  would  not be a
significant difference between net income and comprehensive income for the years
ended December 31, 1997, 1996 and 1995.


                                    15
<PAGE>

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information," which established standards for disclosure
about operating segments in annual financial statements and selected information
about  those  operating  segments  in  interim  financial  statements.  It  also
established  standards  for related  disclosure  about  products  and  services,
geographic  areas, and major  customers.  The new standard will become effective
for the Company for the year ending December 31, 1998. The Company believes that
any segment information required to be disclosed under SFAS No. 131 will provide
expanded  disclosure of operating statement and balance sheet items. The Company
has not yet completed its analysis of the specific  additional  information that
will be required under this new standard.

In October 1997, the American  Institute of Certified Public  Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying  generally  accepted  accounting  principles in recognizing
revenue on software transactions. This SOP will become effective for the Company
during the year ending December 31, 1998. The Company  believes that its current
revenue  recognition  policy  on  software   transactions  is  substantially  in
compliance  with this SOP and that there would not be any material change in its
methodology or the timing of  recognizing  revenue on software  transactions  in
subsequent years as a result of this pronouncement.

FORWARD-LOOKING STATEMENTS

From time to time,  the  Company  or its  representatives  have made or may make
forward-looking   statements,   orally  or  in  writing.   Such  forward-looking
statements  may  be  included  in,  without  limitation,  press  releases,  oral
statements  made with the  approval of an  authorized  executive  officer of the
Company, and filings with the Securities and Exchange  Commission.  The words or
phrases  "anticipates,"  "believes,"  "expects," "will  continue,"  "estimates,"
"projects,"  or similar  expressions  are intended to identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.

The Company's  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, the following: delays in new
product  releases,  delays  in  acceptance  of  the  Company's  products  in the
marketplace,  failures by the Company's  outside vendors to perform as promised,
changes in the software  operating  system for which the Company's  products are
written, or increased competition and changes in general market conditions.


                                      16
<PAGE>


Item 7.  Financial Statements
-----------------------------



                           INDEPENDENT AUDITORS' REPORT
                           ----------------------------


Board of Directors and Shareholders
Timberline Software Corporation
Beaverton, Oregon


We  have  audited  the  accompanying   balance  sheets  of  Timberline  Software
Corporation  as of  December  31, 1997 and 1996 and the  related  statements  of
operations,  shareholders'  equity and cash flows for each of the three years in
the  period  ended  December  31,  1997.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform 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  financial  statements  present  fairly,  in all material
respects,  the  financial  position of  Timberline  Software  Corporation  as of
December 31, 1997 and 1996 and the results of its  operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.




DELOITTE & TOUCHE LLP
Portland, Oregon
January 23, 1998


                                       17

<PAGE>

<TABLE>
<CAPTION>

Balance Sheets

                                                                                     December 31,
                                                                            1997                      1996
====================================================================================================================================
<S>                                                           <C>                       <C>

ASSETS
Current assets:
         Cash and cash equivalents                                      $ 5,050,283               $ 3,128,703
         Temporary investments                                            5,195,332                 1,447,521
         Accounts receivable, less allowance for
             doubtful accounts (1997, $198,968;
               1996, $178,674)                                            4,302,984                 3,693,679
         Other receivables                                                  233,075                   156,839
         Inventories                                                        241,178                   308,751
         Other current assets                                               793,422                   905,545

------------------------------------------------------------------------------------------------------------------------------------
         Total current assets                                            15,816,274                 9,641,038

Property and equipment - net                                              7,484,744                 3,266,616
Capitalized software costs, less accumulated
         amortization (1997, $476,895;
           1996, $544,040)                                                1,634,050                 1,110,023
Purchased software, less accumulated amortization
         (1997, $701,520; 1996, $564,314)                                   708,875                   602,774
Investments                                                                      --                 3,319,147
Other assets                                                                110,344                   102,629

------------------------------------------------------------------------------------------------------------------------------------
                                                                        $25,754,287               $18,042,227
====================================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
         Accounts payable                                               $ 1,439,604               $   763,645
         Accrued commissions/royalties                                      179,806                   193,915
         Income taxes payable                                               166,074                        --
         Deferred revenues                                                7,503,197                 5,962,047
         Accrued employee expenses                                        1,861,582                 1,143,052
         Other current liabilities                                          327,509                   253,627

------------------------------------------------------------------------------------------------------------------------------------
         Total current liabilities                                       11,477,772                 8,316,286
------------------------------------------------------------------------------------------------------------------------------------

Accrued rent expense                                                         45,600                    65,124
Deferred income taxes                                                       965,000                   746,000
Commitments
Shareholders' equity:
         Common stock, no par value Authorized - 8,000,000 shares
         Issued - 1997, 6,978,332 shares; 1996,
             6,831,791 shares                                               372,183                   364,368
         Additional paid in capital                                       2,906,405                 2,282,129
         Unrealized net gain on investments                                  17,043                        --
         Retained earnings                                                9,970,284                 6,268,320

------------------------------------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                      13,265,915                 8,914,817
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $25,754,287               $18,042,227
====================================================================================================================================


See notes to financial statements.
</TABLE>

                                    18
<PAGE>
<TABLE>
<CAPTION>


Statements of Operations

                                                                        Years ended December 31,
                                                                  1997              1996                1995
====================================================================================================================================
<S>                                                          <C>                 <C>                <C>

Net revenue:
         Computer software                                    $18,927,615        $14,983,122        $13,435,099
         Service fees                                          15,353,730         12,955,886         10,927,227
         Other                                                    958,733            720,023            457,039

------------------------------------------------------------------------------------------------------------------------------------
         Net revenue                                           35,240,078         28,659,031         24,819,365
------------------------------------------------------------------------------------------------------------------------------------

Cost and expenses:
         Cost of revenue                                        3,605,168          3,513,987          2,836,423
         Customer support                                       6,744,441          6,402,503          5,200,135
         Product development                                    7,264,227          5,647,251          5,564,245
         Sales and marketing                                    6,350,683          6,396,532          5,220,686
         General and administrative                             4,775,956          4,043,543          3,909,731

------------------------------------------------------------------------------------------------------------------------------------
         Total cost and expenses                               28,740,475         26,003,816         22,731,220
------------------------------------------------------------------------------------------------------------------------------------

Operating income                                                6,499,603          2,655,215          2,088,145
Other income (expense):
         Interest income and other                                487,703            401,333            359,323
         Interest expense                                         (17,060)            (2,925)              (725)

------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                      6,970,246          3,053,623          2,446,743
Provision for income taxes                                      2,435,000            870,000            714,000
------------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $ 4,535,246        $ 2,183,623        $ 1,732,743
====================================================================================================================================
Basic earnings per share                                      $      0.66        $      0.33        $      0.27
====================================================================================================================================
Diluted earnings per share                                    $      0.64        $      0.31        $      0.25
====================================================================================================================================
Dividends per share                                           $      0.12        $      0.09        $      0.06
====================================================================================================================================


See notes to financial statements.
</TABLE>

                                      19
<PAGE>

<TABLE>
<CAPTION>
Statements of Cash Flows

                                                                                 Years ended December 31,
                                                                           1997              1996              1995
====================================================================================================================================
<S>                                                                   <C>               <C>               <C>

Cash flows from operating activities:
Net income                                                             $ 4,535,246       $ 2,183,623       $ 1,732,743
Adjustments to reconcile net income to
  net cash provided by operating activities:
         Depreciation and amortization                                   1,905,856         1,253,780         1,165,932
         Deferred income taxes                                             155,000           420,000            14,000
         Net change in:
          Accounts receivable                                             (609,305)         (507,942)          303,784
          Other receivables                                                (76,236)          (75,814)            3,341
          Inventories                                                       67,573            17,560          (110,656)
          Accounts payable                                                 675,959           201,023           (81,923)
          Accrued commissions/royalties                                    (14,109)          (64,483)           91,855
          Income taxes payable                                             166,074           (79,427)         (509,258)
          Deferred revenues                                              1,541,150           624,074           823,289
          Accrued employee expenses                                        718,530            (5,179)          172,312
          Accrued rent expense                                             (19,524)            8,233           (20,088)
          Other                                                           (360,198)         (331,830)         (136,616)

------------------------------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                       8,686,016         3,643,618         3,448,715
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Payments for property and equipment and
purchased software                                                      (5,246,242)       (2,297,752)         (902,025)
Capitalized software costs                                                (926,706)       (1,126,761)          (69,671)
Proceeds from investments                                                4,115,000         6,250,000         5,000,000
Purchase of investments                                                 (4,516,621)       (7,577,668)       (4,954,718)
Other - net                                                                 11,324            10,300            38,654

------------------------------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                          (6,563,245)       (4,741,881)         (887,760)
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Dividends paid                                                            (833,282)         (625,161)         (377,455)
Common stock issued                                                        632,091           995,594           421,520
Common stock reacquired                                                        ---               ---          (160,098)

------------------------------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing
                  activities                                              (201,191)          370,433          (116,033)
------------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash
  equivalents                                                            1,921,580          (727,830)        2,444,922
Cash and cash equivalents, beginning of
  the year                                                               3,128,703         3,856,533         1,411,611

------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year                             $ 5,050,283       $ 3,128,703       $ 3,856,533
====================================================================================================================================

Supplemental information:
Cash paid during the year for income taxes                             $ 1,674,215       $   544,725       $ 1,059,859
====================================================================================================================================


See notes to financial statements.
</TABLE>

                                     20
<PAGE>

<TABLE>
<CAPTION>

Statements of Shareholders' Equity


                                                                   Additional      Unrealized
                                            Common Stock            Paid In        Net Gain On      Retained
                                    Shares Issued     Amount        Capital        Investments      Earnings           Total
====================================================================================================================================
<S>                                 <C>               <C>       <C>                 <C>              <C>                 <C>

Balances, January 1, 1995             6,410,529   $  341,904     $  897,690        $       --     $ 3,504,457       $ 4,744,051
    Common stock issued                 125,722        6,705        265,415                                             272,120
    Income tax benefit on
        stock options exercised                                     149,400                                             149,400
    Common stock reacquired             (50,679)      (2,703)        (7,508)                         (149,887)         (160,098)
    Dividends declared
        ($.06 per share)                                                                             (377,455)         (377,455)
    Net income for the year                                                                         1,732,743         1,732,743
------------------------------------------------------------------------------------------------------------------------------------

Balances, December 31, 1995           6,485,572      345,906      1,304,997                --       4,709,858         6,360,761
    Common stock issued                 346,219       18,462        840,832                                             859,294
    Income tax benefit on
        stock options exercised                                     136,300                                             136,300
    Dividends declared
        ($.09 per share)                                                                             (625,161)         (625,161)
    Net income for the year                                                                         2,183,623         2,183,623
------------------------------------------------------------------------------------------------------------------------------------

Balances, December 31, 1996           6,831,791      364,368      2,282,129               --        6,268,320         8,914,817
    Common stock issued                 146,541        7,815        364,976                                             372,791
    Income tax benefit on
        stock options exercised                                     259,300                                             259,300
    Unrealized gain on
        investments, net of
        income taxes                                                                  17,043                             17,043
    Dividends declared
        ($.12 per share)                                                                             (833,282)         (833,282)
    Net income for the year                                                                         4,535,246         4,535,246
------------------------------------------------------------------------------------------------------------------------------------

Balances, December 31, 1997           6,978,332   $  372,183     $2,906,405       $   17,043      $ 9,970,284       $13,265,915
====================================================================================================================================

See notes to financial statements.

</TABLE>

                                         21
<PAGE>






                        NOTES TO FINANCIAL STATEMENTS

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  property  management
industries.  The Company sells its products and services  primarily to customers
and to authorized  dealers  throughout the United  States.  Credit is granted to
certain  customers and dealers 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
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect  reported  amounts of assets and liabilities at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

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:  Revenue  from  the  "license  to use"  computer  software
programs is generally recognized at the point of shipment.  Revenue from service
fees is generated  from the sale of computer  software  maintenance  and support
contracts, training classes, consulting and other support services. Revenue from
maintenance  and support  contracts  is  recognized  ratably over the period the
service is provided.  Revenue from other  service fees is recognized at the time
the service is provided.

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 five-year  period.
Costs  capitalized  for the  development  of computer  software were $927,000 in
1997, $1,127,000 in 1996 and $70,000 in 1995.

Amortization   of   capitalized   computer   software   development   costs  was
approximately $403,000 in 1997, $262,000 in 1996, and $304,000 in 1995. Expenses
incurred  on  research  and  development  of  computer  software  products  were
$6,222,000 in 1997, $4,905,000 in 1996 and $4,967,000 in 1995.

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 original  maturity dates of three months
or less.


                                        22

<PAGE>

Investments:  Prior to 1997, temporary  investments  represented debt securities
which had  maturity  dates  ranging  from over  three  months to a year from the
purchase date and  non-current  investments  represented  debt  securities  with
maturity dates over one year from the purchase date. The Company classified both
categories of investments as "held to maturity" and  accordingly  recorded these
investments at amortized cost, which approximated fair value.

During 1997, the Company  transferred  the above  investments  from the "held to
maturity"  category  to  the  "available  for  sale"  category,   because  these
investments  may not be held to  maturity.  The  Company  may use  some of these
investments  to finance a portion of the Company's  new corporate  headquarters,
which is currently under construction,  or for some other purposes as additional
funds are needed. Accordingly, the investments have been recorded at fair value.
The net unrealized  gain or loss on these  investments is included as a separate
component of shareholders' equity.

Inventories:  Inventories  consist  of  marketing  literature  and  of  software
components, primarily software manuals and media ready for assembly. Inventories
are stated at the lower of average cost or market.

Property  and   equipment:   Property  and   equipment  are  recorded  at  cost.
Depreciation  is provided  using the  straight-line  method  over the  estimated
useful lives of the related assets ranging from two to ten 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.

Earnings per share: In February 1997, the Financial  Accounting  Standards Board
(FASB)  issued  Statement  of  Financial  Accounting  Standards  (SFAS) No. 128,
"Earnings  Per  Share,"  which  established  new  standards  for  computing  and
presenting  earnings  per share (EPS) to entities  having  publicly  held common
stock and potential  common  stock.  SFAS No. 128 replaces the  presentation  of
primary  EPS with the dual  presentation  of a basic EPS and  diluted EPS on the
Company's statements of operations and, accordingly,  EPS have been restated for
all years  presented.  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 and warrants outstanding as
if such options and warrants were exercised or converted into common shares. The
Company's  computation of diluted EPS is essentially the same as the computation
of primary EPS, which was presented prior to the adoption of SFAS No. 128.

There were no adjustments to net income in computing  diluted earnings per share
for the years ended December 31, 1997,  1996 and 1995. A  reconciliation  of the


                                    23

<PAGE>

common shares used in the  denominator  for computing  basic and diluted EPS for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>

                                                                    1997             1996             1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>              <C>

Weighted-average shares outstanding, used in
         computing basic EPS                                     6,916,636         6,674,098        6,432,842
Effect of dilutive securities:
         Warrants                                                      ---            18,947          127,471
         Stock options                                             195,402           370,749          239,160
------------------------------------------------------------------------------------------------------------------------------------

Weighted-average shares outstanding, and the
         effect of dilutive securities, used in
         computing diluted EPS                                   7,112,038         7,063,794        6,799,473
====================================================================================================================================
</TABLE>


Recent  accounting  pronouncements:  In June 1997, the FASB issued SFAS No. 130,
"Reporting  Comprehensive  Income,"  which  established  standards for reporting
comprehensive income and its components.  This additional reporting  requirement
will become  effective for the Company during the year ending December 31, 1998.
There would not be a significant difference between net income and comprehensive
income for the years ended December 31, 1997, 1996 and 1995.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information," which established standards for disclosure
about operating segments in annual financial statements and selected information
about  those  operating  segments  in  interim  financial  statements.  It  also
established  standards  for related  disclosure  about  products  and  services,
geographic  areas, and major  customers.  The new standard will become effective
for the Company for the year ending December 31, 1998. The Company believes that
any segment information required to be disclosed under SFAS No. 131 will provide
expanded  disclosure of operating statement and balance sheet items. The Company
has not yet completed its analysis of the specific  additional  information that
will be required under this new standard.

In October 1997, the American  Institute of Certified Public  Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying  generally  accepted  accounting  principles in recognizing
revenue on software transactions. This SOP will become effective for the Company
during the year ending December  31,1998.  The Company believes that its current
revenue  recognition  policy  on  software   transactions  is  substantially  in
compliance  with this SOP and that there would not be any material change in its
methodology or the timing of  recognizing  revenue on software  transactions  in
subsequent years as a result of this pronouncement.

Reclassifications: Certain reclassifications have been made in the 1996 and 1995
financial statements to conform to the 1997 presentation.


                                     24
<PAGE>


NOTE 2  INVESTMENTS:

Investments at December 31, 1997 and 1996 are composed of the following:
<TABLE>
<CAPTION>
                                                                                    Amortized         Fair
                                                                                      Cost            Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>

1997:
Debt securities issued by the U.S. Treasury and
   other U.S. government agencies                                                  $3,581,570       $3,598,868
Debt securities issued by states of the United States
   and political subdivisions of the States                                         1,586,719        1,596,464
------------------------------------------------------------------------------------------------------------------------------------
Total investments                                                                  $5,168,289       $5,195,332
====================================================================================================================================

1997 net unrealized gain on investments                                                             $   27,043
====================================================================================================================================

1996:
Debt securities issued by the U.S. Treasury and
   other U.S. government agencies                                                  $2,547,724       $2,549,213
Debt securities issued by states of the United States
   and political subdivisions of the states                                         2,218,944        2,231,974
------------------------------------------------------------------------------------------------------------------------------------
Total investments                                                                  $4,766,668       $4,781,187
====================================================================================================================================

1996 net unrealized gain on investments                                                             $   14,519
====================================================================================================================================
</TABLE>


NOTE 3  PROPERTY AND EQUIPMENT:

Property  and  equipment  at  December  31,  1997  and 1996 is  composed  of the
following:
<TABLE>
<CAPTION>
                                                                                      1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>             <C>

Land                                                                               $ 2,432,568     $      ---
Tenant Improvements                                                                    545,922        532,002
Furniture and fixtures                                                               1,077,504      1,042,170
Machinery and equipment                                                              6,404,396      5,662,428
Construction in progress                                                             2,210,805            ---

------------------------------------------------------------------------------------------------------------------------------------
Total                                                                               12,671,195      7,236,600
Less accumulated depreciation and amortization                                       5,186,451      3,969,984
------------------------------------------------------------------------------------------------------------------------------------

Property and equipment - net                                                       $ 7,484,744     $3,266,616
====================================================================================================================================

</TABLE>

                                         25
<PAGE>


NOTE 4  CONSTRUCTION LOAN:

In connection with the construction of the Company's new corporate headquarters,
the Company has entered into a construction loan agreement with a bank to borrow
up to  $9,750,000.  Interest  accrues  at the  bank's  prime  interest  rate and
borrowings under this loan agreement are secured with a security interest in the
site of the new corporate headquarters.  Borrowings,  including interest, are to
be repaid by May 1999, with an option to extend the final payment of the loan to
November 1999. The Company also has the option to convert the construction  loan
into a 10-year term loan at the termination date of the construction loan. There
were no borrowings  under this loan  agreement as of December 31, 1997.  The new
headquarters is expected to be completed in the latter part of 1998.

The loan agreement  requires that the Company  maintain  certain minimum working
capital and tangible net worth levels.  As of December 31, 1997, the Company had
unrestricted retained earnings of $1,339,000 after meeting these requirements.

NOTE 5  COMMON STOCK:

In April 1996 and 1995, the Company's Board of Directors approved  three-for-two
stock splits, effective in May 1996 and 1995, respectively. In October 1997, the
Company's Board of Directors approved a five-for-four stock split,  effective in
November  1997.  All prior  common  stock and per share data  amounts  have been
retroactively adjusted to reflect these changes.

In March 1994,  the Company  issued  warrants to purchase  281,250 shares of its
common stock at $3.733 per share to a large national  account as part of a joint
marketing agreement to promote the Company's software products.  In 1996, all of
those warrants were exercised.

As of December 31, 1997, the Company has three 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 632,813  shares of common stock.  Options may not be
granted under the 1987 plan and the 1989 plan after 1997 and 1999, respectively.
As of December 31, 1997, 190,623 shares are reserved under these plans, of which
there are 190,005 options outstanding.

In 1993,  the Company's  shareholders  approved an incentive  stock plan for the
main  purpose of  retaining  and  attracting  the  services of selected  Company
directors,  officers,  employees  and  non-employees.  The plan provides for the
granting of various stock options, stock appreciation rights, and stock bonuses.
As of December  31, 1997,  only  non-qualified  stock  options have been granted
under this plan.  Awards  under this plan may not be granted  after 2003.  As of
December 31, 1997,  483,993  shares are reserved under this plan, of which there
are  436,856  options  outstanding.  All  of the  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,


                                     26

<PAGE>

the  non-qualified  stock options granted generally have an exercise price equal
to the  market  price of the  Company's  common  stock on the date of grant.  20
percent of the options granted vest at the date of the grant to the optionee and
an additional 20 percent vest each year  thereafter  until the options are fully
vested. The options expire 10 years after the date of grant.

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting  for  Stock-Based  Compensation,"  which  encouraged  (but  did  not
require) that  stock-based  compensation  cost be recognized and measured by the
fair value of the equity  instrument  awarded.  The  Company  did not change its
method of accounting for its stock-based compensation plans and will continue to
apply Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued
to  Employees,"  and related  interpretations  in  accounting  for these  plans.
Accordingly,  no  compensation  cost has been  recognized for these plans in the
financial  statements.  If compensation cost on stock options granted after 1994
under  these  plans had been  determined  based on the fair value of the options
granted as of the grant date in a method  consistent with that described in SFAS
No. 123, the Company's net income and diluted earnings per share would have been
reduced to the pro forma amounts  indicated  below for the years ended  December
31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>


                                                              1997            1996            1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>            <C>

Net income, as reported                                    $4,535,000      $2,184,000      $1,733,000
Net income, pro forma                                       4,214,000       2,018,000       1,627,000

Diluted earnings per share, as reported                          0.64           0.31             0.25
Diluted earnings per share, pro forma                            0.59           0.29             0.24


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.

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 1997, 1996 and 1995:

                                                              1997            1996            1995
------------------------------------------------------------------------------------------------------------------------------------
Annual dividend yield                                         1.1%            1.4%            1.4%
Risk-free interest rate per annum                             6.2%            6.4%            5.9%
Expected annual volatility                                   87.4%           87.9%           87.9%
Expected lives of options (years)                             7.0             7.0             7.0

</TABLE>


                                     27

<PAGE>


A summary of the status of the  Company's  stock option plans as of December 31,
1997,  1996 and 1995,  and  changes  during the years  ending on those  dates is
presented below:
<TABLE>
<CAPTION>

                                           1997                 1996                 1995
                                    ------------------- -------------------- ---------------------

                                             Weighted-            Weighted-           Weighted-
                                              Average              Average              Average
                                             Exercise             Exercise            Exercise
                                    Shares    Price     Shares     Price     Shares     Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>       <C>        <C>      <C>         <C>

Outstanding at
     beginning of year             609,179   $3.418    633,586    $3.056    576,865    $2.231
Granted                            183,662    9.106     49,750     6.927    204,382     4.804
Exercised                         (146,541)   2.544    (64,969)    2.452   (125,722)    2.164
Forfeited                          (19,439)   5.799     (9,188)    4.114    (21,939)    2.756
------------------------------------------------------------------------------------------------------------------------------------

Outstanding at
     beginning of year             626,861   $5.218    609,179    $3.418    633,586    $3.056
====================================================================================================================================


Options exercisable
     at year-end                   382,568             404,586              369,254

Weighted-average
     fair value of
     options granted              $  6.694            $  4.999             $  3.449
     during the year
</TABLE>


The following table summarizes  information about stock options  outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>

                                   Outstanding                            Exercisable
                      -----------------------------------------  ----------------------------------
                                   Weighted-
                                     Average
                                    Remaining       Weighted-                     Weighted-
                                   Contractual       Average                       Average
   Range of           Number of       Life           Exercise     Number of        Exercise
Exercise Prices        Options      (years)           Price        Options          Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>             <C>           <C>            <C>            <C>

$1.644 -  2.667        243,386        4.52          $ 2.320        238,885        $ 2.315
 4.733 -  6.700        273,313        8.34            5.334        118,801          5.074
 7.400 - 12.125        110,162        9.70           11.330         24,882         10.981
------------------------------------------------------------------------------------------------------------------------------------

$1.644 - 12.125        626,861        7.10          $ 5.218        382,568        $ 3.736
====================================================================================================================================

</TABLE>


NOTE 6  INCOME TAXES:

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying amount of assets and  liabilities  for financial  reporting
purposes  and the  amounts  used for  income  tax  purposes.  The tax  effect of
significant  items  comprising  the  Company's  net deferred tax liability as of
December 31, 1997 and 1996 are as follows:


                                       28
<PAGE>

<TABLE>
<CAPTION>


                                                                       1997                       1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                        <C>

Deferred tax liabilities:
Property and equipment                                              $  335,000                 $  339,000
Capitalized software cost                                              637,000                    433,000
Maintenance costs                                                       70,000                    102,000
Other                                                                   24,000                     13,000

------------------------------------------------------------------------------------------------------------------------------------
                                                                     1,066,000                    887,000
------------------------------------------------------------------------------------------------------------------------------------

Deferred tax assets:
Allowance for doubtful accounts                                         77,000                     70,000
Employee expenses not currently deductible                              40,000                     36,000
Accrued rent expense                                                    18,000                     25,000
Other                                                                   36,000                     26,000

------------------------------------------------------------------------------------------------------------------------------------
                                                                       171,000                    157,000
------------------------------------------------------------------------------------------------------------------------------------

Net deferred tax liability                                          $  895,000                 $  730,000
====================================================================================================================================


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

Deferred income taxes                                               $  965,000                $  746,000
Deferred tax assets included in other current
     assets                                                            (70,000)                  (16,000)
------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability                                          $  895,000                $  730,000
====================================================================================================================================

The provision for income taxes is composed of the following:

                                                     1997                  1996                   1995
------------------------------------------------------------------------------------------------------------------------------------
Current:
     Federal                                      $1,949,000           $  350,000             $  575,000
     State                                           331,000              100,000                125,000
Deferred:
     Federal                                         125,000              338,000                 12,000
     State                                            30,000               82,000                  2,000

------------------------------------------------------------------------------------------------------------------------------------
Total                                             $2,435,000           $  870,000             $  714,000
====================================================================================================================================


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

                                                     1997                  1996                   1995
------------------------------------------------------------------------------------------------------------------------------------
Income taxes based on federal
     statutory rate                               $2,370,000           $1,038,000             $  832,000
State tax, net of federal tax
     benefit                                         230,000              112,000                 84,000
Research and development credits                    (251,000)            (326,000)              (231,000)
Other                                                 86,000               46,000                 29,000

------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes                        $2,435,000           $  870,000             $  714,000
====================================================================================================================================
</TABLE>


                                      29
<PAGE>

Research and  development  credits in 1996 and 1995 include  additional  amounts
which have been made  available  from prior years as a result of a change in tax
regulations. This reduced the Company's provision for income taxes for the years
ended December 31, 1996 and 1995, by $180,000 and $150,000 respectively.

NOTE 7  COMMITMENTS:

The Company  leases its  corporate  headquarters  under a  non-cancelable  lease
expiring  in 1998.  The lease  provides  for  payment by the Company of property
taxes,  maintenance  and other  operating  costs.  The Company has the option of
renewing the lease for two  additional  five-year  terms.  In 1996,  the Company
commenced a lease on  additional  office space for  expansion  of its  corporate
offices. This lease expires in 2003. The Company also leases equipment and other
office  facilities under  non-cancelable  operating  leases.  Total rent expense
under these leases was $986,000,  $884,000 and $711,000 in 1997,  1996 and 1995,
respectively.

Future  minimum  rentals  under these  leases as of December  31,  1997,  are as
follows:

                  Year ending December 31,
                              1998                            $  771,000
                              1999                               269,000
                              2000                               245,000
                              2001                               216,000
                              2001                               208,000
                              Thereafter                          52,000

--------------------------------------------------------------------------------
         Total                                                $1,761,000
--------------------------------------------------------------------------------

Future minimum rental payments have not been reduced by future minimum  sublease
rental income of $926,000 from a non-cancelable sublease.

The Company has entered into an agreement for  construction of its new corporate
headquarters. Total cost of the new headquarters is estimated at $12,300,000, of
which $2,211,000 has been expended as of December 31, 1997.

NOTE 8  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.  Contributions  by the  Company  under the plan were  $393,000 in 1997,
$376,000 in 1996 and $304,000 in 1995.


                                      30

<PAGE>


NOTE 9  QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>

                                                                                  Basic        Diluted
                             Net                Cost and          Net            Earnings    Earnings per
                           Revenue              Expenses         Income          per Share     Share
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                 <C>             <C>              <C>          <C>

1997
1st quarter                $ 7,507,695         $ 7,101,066    $  331,895         $  .05      $  .05
2nd quarter                  8,224,968           6,752,511       982,860            .14         .14
3rd quarter                  8,795,292           7,158,371     1,237,286            .18         .17
4th quarter                 10,712,123           7,728,527     1,983,205            .28         .28

1996
1st quarter                $ 6,678,197         $ 6,034,417    $  452,858         $  .07      $  .07
2nd quarter                  6,813,126           6,031,586       542,550            .08         .08
3rd quarter                  6,945,025           6,710,977       338,015            .05         .05
4th quarter                  8,222,683           7,226,836       850,200            .12         .12

</TABLE>


                                       31
<PAGE>


Item 8.  Changes In and Disagreements With Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure
--------------------


None.


                                       32
<PAGE>


PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
--------------------------------------------------------------------------------
With Section 16(a) of the Exchange Act
--------------------------------------

There is hereby  incorporated  by reference the  information  under the captions
"Election of Directors"  and  "Compliance  with Section 16(a) of the  Securities
Exchange Act" in the Company's  definitive  Proxy  Statement  filed  pursuant to
Regulation 14A with the Securities and Exchange Commission on or about March 20,
1998.


Item 10.  Executive Compensation
--------------------------------

There is hereby  incorporated  by reference  the  information  under the caption
"Executive  Compensation"  in the Company's  definitive  Proxy  Statement  filed
pursuant to Regulation  14A with the  Securities  and Exchange  Commission on or
about March 20, 1998.


Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

There is hereby  incorporated  by reference  the  information  under the caption
"Voting  Securities and Principal  Holders Thereof" in the Company's  definitive
Proxy  Statement  filed  pursuant  to  Regulation  14A with the  Securities  and
Exchange Commission on or about March 20, 1998.


Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

None.


                                     33
<PAGE>


Item 13.  Exhibits and Reports on Form 8-K
------------------------------------------

       a.        Exhibits

         Articles of Incorporation and Bylaws
         ------------------------------------
         3(i)       - Amended and Restated Articles of Incorporation
                      (Incorporated by reference to Exhibit 3.1 of Annual Report
                      on Form 10-K for the year ended December 31, 1990)

         3(ii)      - 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)

       * 10.4       - Timberline Employees' Retirement Plan (Incorporated by
                      reference to Exhibit 10.4 of Annual Report on Form 10-K
                      for the year ended December 31, 1990)

       * 10.5       - First and Second amendments to Timberline  Software
                      Corporation  Employees'  Retirement Plan  (Incorporated by
                      reference  to Exhibit  10.5 of Annual  Report on Form 10-K
                      for the year ended December 31, 1992)

       * 10.5(a)    - Article A - Appendix to Basic Plan Document of Timberline
                      Software Corporation Employees' Retirement Plan
                      (Incorporated by reference to Exhibit 10.5(a) of Annual
                      Report on Form 10-KSB for the year ended December 31,
                      1994)

       * 10.5(b)    - Article B - Appendix to Basic Plan Document of Timberline
                      Software Corporation Employees' Retirement Plan
                      (Incorporated by reference to Exhibit 10.5(b) of Annual
                      Report on Form 10-KSB for the year ended December 31,
                      1995)


                                        34
<PAGE>

       * 10.5(c)    - Third Amendment to Timberline Software Corporation
                      Employees' Retirement Plan (Incorporated by reference to
                      Exhibit 10.1(c) of Form 10-KSB for the year ended
                      December 31, 1995)

       * 10.5(d)    - Fourth Amendment to Timberline Software Corporation
                      Employees' Retirement Plan

       * 10.6       - 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)

         10.7       - Warrant Agreement by and between the Company and
                      McDonald's Corporation dated as of March 10, 1994
                      (Incorporated by reference to Exhibit 10.1 of Quarterly
                      Report on Form 10-QSB for the three months ended
                      June 30, 1994)

         10.8       - Construction Loan Agreement dated as of December 1, 1997
                      between the Company and Pacific One Bank

         10.9       - Deed of Trust, Line of Credit Instrument dated as of
                      December 1, 1997 between the Company and Pacific One Bank

         10.10      - Promissory Note in the amount of $9,750,000.00 dated as of
                      December 1, 1997

                      * Management contract or compensatory plan or arrangement

         Consents
         --------

         23         - Independent Auditors' Consent

         Miscellaneous

         27.1       - Financial Data Schedule for the year ended December 31,
                      1997

         27.2       - Financial Data Schedule for the three, six and nine months
                      ended March 31, 1997, June 30, 1997, and September 30,
                      1997, respectively, and for the year ended December 31,
                      1996

         27.3       - Financial Data Schedule for the three, six and nine months
                      ended March 31, 1996, June 30, 1996, and September 30,
                      1996, respectively, and for the year ended December 31,
                      1995

       b.            Reports on Form 8-K

         No  reports  on Form 8-K were  filed  during  the  three  months  ended
         December 31, 1997.


                                        35

<PAGE>


Signatures

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

TIMBERLINE SOFTWARE CORPORATION

by       /s/ Thomas P. Cox                                   3/18/98
       ---------------------------------           ----------------------------
       Thomas P. Cox                                Date
       Senior Vice President-Finance

In accordance  with 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.

/s/ John Gorman                                              3/18/98
----------------------------------------           -----------------------------
John Gorman                                         Date
Chief Executive Officer and
Chairman of the Board of Directors

/s/ Curtis L. Peltz                                          3/18/98
----------------------------------------           -----------------------------
Curtis L. Peltz                                     Date
President, Chief Operating Officer
and Director

/s/ Thomas P. Cox                                            3/18/98
----------------------------------------           -----------------------------
Thomas P. Cox                                       Date
Senior Vice President-Finance
Chief Financial Officer

/s/ Leslie F. Clarke, II                                     3/18/98
----------------------------------------           -----------------------------
Leslie F. Clarke, II                                Date
Executive Vice President, Director

/s/ James A. Meyer                                           3/18/98
----------------------------------------           -----------------------------
James A. Meyer                                      Date
Director

/s/ Donald L. Tisdel                                         3/18/98
----------------------------------------           -----------------------------
Donald L. Tisdel                                    Date
Director

/s/ Carl C. Asai                                             3/18/98
----------------------------------------           -----------------------------
Carl C. Asai                                        Date
Controller



<PAGE>


                         TIMBERLINE SOFTWARE CORPORATION
                         -------------------------------
                   FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 1997
                   --------------------------------------------
                                 EXHIBIT INDEX*
                                 --------------


         10.5(d)    - Fourth Amendment to Timberline Software Corporation
                      Employees' Retirement Plan

         10.8       - Construction Loan Agreement dated as of December 1, 1997
                      between the Company and Pacific One Bank

         10.9       - Deed of Trust, Line of Credit Instrument dated as of
                      December 1, 1997 between the Company and Pacific One Bank

         10.10      - Promissory Note in the amount of $9,750,000.00 dated as of
                      December 1, 1997


    Consents
    --------

         23         - Independent Auditors' Consent

    Miscellaneous
    -------------

         27.1       - Financial Data Schedule for the year ended December 31,
                      1997

         27.2       - Financial Data Schedule for the three, six and nine months
                      ended March 31, 1997, June 30, 1997, and September 30,
                      1997, respectively, and for the year ended December 31,
                      1996

         27.3       - Financial Data Schedule for the three, six and nine months
                      ended March 31, 1996, June 30, 1996, and September 30,
                      1996, respectively, and for the year ended December 31,
                      1995


* See item 13(a) of this  Annual  Report for a list of all  exhibits,  including
those incorporated by reference.