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, 1995.

      [    ]  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. [x]

Issuer's revenues for its most recent fiscal year: $24,819,365

At March 8,  1996,  3,459,061  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 $25,577,128.

                DOCUMENTS INCORPORATED BY REFERENCE

Parts of the  Registrant's  Proxy  Statement  dated March 15, 1996,  prepared in
connection  with the Annual Meeting of Shareholders to be held on April 23, 1996
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,  property  management,  and
architects and engineers  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.  The Company's software operates in Microsoft(R)'s
DOS,  Microsoft's   Windows(R),   and  IBM's  OS/2(R)  operating   environments.
Timberline also provides a range of support  services for users of its software,
including annual  maintenance and support  contracts,  classroom training at its
corporate offices and at various sites throughout the United States, and on-site
training and consulting.

SOFTWARE PRODUCTS
The Company  maintains four software  product lines -  construction  accounting,
estimating, property management, and architects and engineers.

CONSTRUCTION ACCOUNTING
The  construction  accounting  software is composed of two  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.  The other level of software,  Construction Gold (now
called Gold Extended Edition), was released in October 1992, and operates in the
Windows and OS/2  operating  environments.  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
believes  that it is the first major  software  company to develop  software for
construction  companies  utilizing  the  advanced  capabilities  of the OS/2 and
Windows operating environments.

Both 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.  The Construction
Gold  software  has  additional  features and  capabilities  for users with more
complex needs,  including  executive  inquiry and customized  summary  reporting
capabilities.

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

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.   It  is  also  fully  integrated  with  the  Company's  Medallion
collection of accounting  software products.  The Company's  estimating software
product  has  established  itself  as  one of the  leading  estimating  software
packages on the market today.

<PAGE>



Since its introduction,  the Company has interfaced its estimating  product with
other vendors' software in the  computer-aided  drafting ("CAD") field. In 1989,
Timberline  released software that allows a user to compile an estimate directly
from  Autodesk's  AutoCAD(R)  system.  The  estimating  software is also able to
interface  with  scheduling  software  developed by  Microsoft  and by Primavera
Systems(R).

The Company also sells databases and other software developed by other companies
which complement its estimating software products. The Company pays royalties to
these companies based on quantities of the databases and other software sold.

The Company has integrated  its  estimating  software with software of other CAD
developers and other  externally  developed  databases.  The Company  intends to
continue to maintain  and enhance the  estimating  product  line.  In 1994,  the
Company  released a new feature,  called  Modeling,  for its estimating  product
line.  This  application  allows an estimator to make more accurate  preliminary
estimates  and to reduce the amount of time  required to refine the  estimate as
more parameters to the project are added or modified.

Timberline  is also  developing  estimating  software  that will  operate in the
Windows environment. This software is currently scheduled for release in 1996.

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.  The Company's primary software for property managers,  Property
Management Gold, was released in 1988. This software was designed for the medium
to large-sized property management companies.  The software operates in the OS/2
and Windows NT(TM)  operating  environments.  The Company's other major software
for residential property managers,  SitePro, 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 can then
be electronically transferred to the home office for compilation and review with
other managed properties.

During the past  several  years,  the Company has  enhanced the software and has
developed  additional  software to complement the core  applications of Property
Management Gold. Timberline is currently developing applications of the software
that will operate in the Windows operating environment which will take advantage
of the graphical user interface  (GUI)  capabilities  of that  environment.  The
Company  is no  longer  developing  property  management  software  in the  OS/2
environment.

ARCHITECTS AND ENGINEERS
The Company's  architects and engineers software is an accounting and management
information  system  for  architectural  and  engineering  firms.  The  software
provides the basic accounting  information along with the capability to generate
billing information on a project basis.

The software, called AEasy and AEasy Plus, was developed by an outside developer
using the Company's  software standards and tools. The Company pays royalties to
the  developer  based on the  quantity  of  software  sold.  This  software  was
initially released in 1987.

In 1994, the Company released an architects and engineers  software  application
called  TimeTrax which enhances and  streamlines  the process of time entry into
systems  that track  billable  time and labor costs.  The Company is  continuing
development work for its next generation of software for the  architectural  and
engineering firms, which will take advantage of GUI capabilities.


<PAGE>



In 1994,  all  Timberline  software  products  were upgraded to comply with Open
Database Connectivity (ODBC), a data exchange methodology developed by Microsoft
that has been  accepted  as an  industry  standard.  ODBC  allows  customers  to
directly access  information  stored in Timberline data format by using standard
word processing, spreadsheet and database applications.

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.

These service fees have become a significant  percentage of the Company's  total
revenue.   In  1995  and  1994,  service  fees  comprised  44  and  41  percent,
respectively,  of total revenue compared to 23 percent of total revenue in 1988.
The  Company is  committed  to  maintaining  a high level of quality  related to
customer  support  services.  At the end of 1995,  36 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 these 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.  On-site  consulting  fees  are  primarily
generated  from the  Company's  national  accounts  and  other  large  companies
utilizing the Company's software.

Unfilled  orders for  software  products at December  31, 1995 and 1994 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  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  and architect and
engineer industries.

The Company  believes  that its  emphasis on  producing  high  quality  software
products that are flexible and user-friendly enables the Company to compete

<PAGE>



effectively.  In  addition,  the Company  believes it provides  very  responsive
customer support service to its end users,  which enhances the  marketability of
its products.

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 1995,  over 27 percent of
the Company's  employees  were  directly  associated  with product  development.
Product development expenses were $5,060,000, $4,028,000 and $3,399,000 in 1995,
1994  and  1993,  respectively.  Of  that  total,  $4,149,000,   $3,330,000  and
$2,795,000 were incurred in 1995, 1994 and 1993,  respectively,  on research and
development  on new  software  products.  An  additional  $70,000,  $116,000 and
$105,000, respectively, of product development expenses on new software products
were captitalized in those same years.

EMPLOYEES
At  December  31,  1995,  the  Company  had 300  employees,  of  which  289 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.





<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY

The  Company  leases its  corporate  offices and  regional  sales  offices.  The
Company's  corporate  offices  are  located in a 51,000  square  foot office and
production  facility in Beaverton,  Oregon. This lease is scheduled to expire in
October 1998.  Commencing in 1996, the Company will be leasing additional office
space in Beaverton,  Oregon for its estimating  division offices.  The Company's
regional sales offices are leased under  short-term  lease  arrangements  in the
following metropolitan areas: Los Angeles, CA; Denver, CO; Dallas, TX; New York,
NY; and Concord, NC.


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.



<PAGE>



PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

In May 1995, the Company had a three-for-two common stock split. All information
regarding  common  stock  and  per  share  amounts  in  this  report  have  been
retroactively restated to reflect this change.

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  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.

      1995                    HIGH                  LOW
      -------------------------------------------------
      First quarter         $ 7 1/6               $5 5/6
      Second quarter         10 3/4                5 5/6
      Third quarter          12 1/2                9 1/4
      Fourth quarter         10 1/2                8


      1994                    HIGH                  LOW
      -------------------------------------------------
      First quarter          $ 6 1/6              $4 1/6
      Second quarter           5 1/3               4
      Third quarter            5 1/3               4 1/6
      Fourth quarter           7 2/3               4 2/3

As of March 8, 1996,  there  were 262  shareholders  of  record.  Based upon the
number of requests for the Company's proxy materials for its 1996 annual meeting
of  shareholders,  the  Company  believes  that there were  approximately  1,800
beneficial shareholders as of that date.

In October 1994, the Company  declared its first quarterly cash dividend of $.02
per share and declared quarterly cash dividends totaling $.11 per share in 1995.
The Company  anticipates  declaring and paying  quarterly  cash dividends in the
future.

The Company has been  engaged in a program of  reacquiring  its own common stock
since late 1987.  To date,  the  Company's  Board of  Directors  has  authorized
management to reacquire up to 500,000  shares of the  Company's  common stock on
the open market.  As of December 31, 1995,  the Company had  reacquired  311,750
shares.  The cost of stock  reacquired  by the Company was  $160,000 in 1995 and
$140,000 in 1994. No stock was reacquired by the Company in 1993.



<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

RESULTS OF OPERATIONS

1995 COMPARED TO 1994

NET REVENUE  increased 15 percent to  $24,819,000  in 1995 from  $21,641,000  in
1994.  The two major  components  of net revenue,  computer  software  sales and
service fees, both increased in 1995.  Software sales increased eight percent to
$13,435,000  in 1995  compared  to  $12,463,000  in 1994,  primarily  due to the
continued increase in sales of the Company's  Construction Gold (now called Gold
Extended Edition) accounting software. Gold Extended software sales increased 35
percent and estimating  software sales  increased seven percent in 1995 compared
to 1994. Sales of property management  software decreased  significantly in 1995
compared  to 1994 due to a  reduction  in sales  to  large  property  management
companies. The Company in 1995 continued to reduce sales efforts of its high-end
property  management  software  products while developing a property  management
product for the Windows  environment.  Architects  and engineers  software sales
also decreased in 1995 compared to 1994.

Software sales,  as a percentage of net revenue,  declined in 1995 to 54 percent
compared  to 58  percent  in 1994.  In terms of revenue  mix,  construction  and
estimating  software  sales  represented  86 percent of  software  sales in 1995
compared to 79 percent in 1994.  Property management software sales decreased as
a percentage of software sales to eight percent in 1995 from 13 percent in 1994.
Architects  and engineers  software  sales  decreased to six percent of software
sales in 1995 compared to eight percent in 1994.  International  software  sales
increased  slightly in 1995 to six percent of  software  sales  compared to five
percent in 1994.

Service  fees from  maintenance,  support and  training  increased 24 percent to
$10,927,000  in 1995  compared to  $8,809,000  in 1994.  As a percentage  of net
revenue,  service fees  increased to 44 percent in 1995 from 41 percent in 1994.
The increase in service fees was due  principally to increased  maintenance  and
support fees  resulting  from the Company's  larger  customer  base. The Company
anticipates   that  service  fees  will  continue  to  represent  a  significant
percentage of net revenue.

COST OF REVENUE  primarily  consists of  software  documentation,  assembly  and
shipping  costs,   royalties  paid  to  outside   developers,   amortization  of
capitalized  software  development costs and training and consulting costs. Cost
of revenue, as a percentage of net revenue, decreased to 11 percent in 1995 from
14 percent in 1994. The decrease was due primarily to service fees  representing
a  greater  percentage  of net  revenue  in  1995,  as well as lower  costs  and
royalties associated with software sales.

OPERATING  EXPENSES increased 18 percent to $19,895,000 in 1995 from $16,931,000
in  1994.  The  largest  increases  were in the  customer  support  and  product
development areas,  principally compensation costs related to additional support
and development  personnel.  Customer support  expenses  increased 24 percent to
$5,019,000  in  1995  from  $4,040,000  in  1994,  primarily  due to  additional
personnel  required to handle the increased  demand for support,  consulting and
training services resulting from increased sales of Gold Extended software.  The
Company anticipates continued increases in customer support expenses in order to
meet the  demands  of its  customers  and to  maintain a high  quality  level of
service.

Product  development  expenses  increased 26 percent to  $5,060,000 in 1995 from
$4,028,000 in 1994,  primarily due to additional personnel necessary to maintain
the Company's existing products and to develop and test new software products in
the Windows  environment.  The Company  anticipates  that  eventually all of its
products will operate in the Windows  environment and that additional  personnel
will be required in the product development area in 1996.


<PAGE>



Sales and  marketing  expenses  increased  nine  percent to  $5,969,000  in 1995
compared to  $5,472,000  in 1994.  The increase was  primarily  due to increased
personnel  costs in the sales and  telemarketing  areas.  As a percentage of net
revenue,  sales and  marketing  expenses  declined to 24 percent in 1995 from 25
percent in 1994.  General and  administrative  expenses  increased 13 percent to
$3,847,000 in 1995 from  $3,392,000 in 1994,  but remained at  approximately  16
percent of net revenue in both years.  The increase in dollar amount in 1995 was
due primarily to a $229,000 increase in bad debt expense, most of which resulted
from the  write-off  of a large  amount  owed by a Canadian  customer  that went
bankrupt in 1995.


1994 COMPARED TO 1993

NET REVENUE  increased 19 percent to  $21,641,000  in 1994 from  $18,205,000  in
1993.  Computer software sales and service fees both increased in 1994. Software
sales  increased 13 percent to  $12,463,000  in 1994 compared to  $11,009,000 in
1993,  primarily  due  to  a  significant  increase  in  sales  of  construction
accounting  software,  particularly  the Company's Gold Extended  software.  The
increase  in software  sales was also due to  significantly  increased  sales of
architects  and  engineers  software,  offset  in  part  by  decreased  property
management software sales. The decrease in sales of property management software
was primarily  attributable to a reduction in sales to large property management
companies in 1994 compared to 1993. In 1994,  the Company  reduced sales efforts
related  to  its  high-end  property  management  software  products  while  it
satisfied  existing  customer  commitments  and  continued to develop a property
management product for the graphical user interface (GUI) environment.

Software sales,  as a percentage of net revenue,  declined in 1994 to 58 percent
compared  to 60  percent  in 1993.  In terms of revenue  mix,  construction  and
estimating  software  sales  represented  79 percent of  software  sales in 1994
compared to 74 percent in 1993.  Property management software sales decreased as
a percentage of software sales to 13 percent from 20 percent in 1993. Architects
and engineers  software  sales  increased to eight percent of software  sales in
1994 compared to five percent in 1993. International software sales decreased in
1994 to five  percent  of  software  sales,  compared  to 10  percent  in  1993,
primarily  because of two significant  sales to Canadian  customers in 1993 that
were not repeated in 1994.

Service  fees from  maintenance,  support and  training  increased 27 percent to
$8,809,000  in 1994  compared to  $6,956,000  in 1993.  As a  percentage  of net
revenue,  service fees  increased to 41 percent in 1994 from 38 percent in 1993.
The increase in service fees was due  principally to increased  maintenance  and
support fees  resulting  from the Company's  larger  customer  base, an expanded
number of  training  classes  offered by the Company  and  increased  demand for
on-site consulting services.

COST  OF  REVENUE,  as  a  percentage  of  net  revenue,  remained  constant  at
approximately  14 percent in 1994 and 1993.  Assembly and shipping  costs,  as a
percentage of software  sales,  declined in 1994 compared to 1993 because of the
outsourcing  of these  functions  to a third  party  vendor  in  November  1993.
Royalties and training costs increased in 1994 compared to 1993 due to increases
in software sales.

OPERATING  EXPENSES increased 15 percent to $16,931,000 in 1994 from $14,732,000
in  1993.  The  largest  increases  were in the  customer  support  and  product
development areas,  principally compensation costs related to additional support
and development  personnel.  Customer support  expenses  increased 16 percent to
$4,040,000  in  1994  from  $3,486,000  in  1993,  primarily  due to  additional
personnel  required to handle the increased  demand for support,  consulting and
training services resulting from increased sales of Gold Extended software.

Product  development  expenses  increased 18 percent to  $4,028,000 in 1994 from
$3,399,000 in 1993, primarily due to additional personnel necessary to

<PAGE>



maintain the  Company's  existing  products and to develop and test new software
products in the Windows  environment.  Additional  personnel were also needed in
1994 to meet the Company's software  development  schedule due to the complexity
involved in developing and testing Windows-based software products.

Sales and marketing expenses increased 12 percent to $5,472,000 in 1994 compared
to $4,906,000 in 1993, but declined to 25 percent of net revenue in 1994 from 27
percent of net revenue in 1993. The decrease in sales and marketing  expenses as
a percentage of net revenue reflects  relatively constant sales expenses in 1994
and 1993. General and administrative expenses increased 15 percent to $3,392,000
in 1994 from  $2,941,000  in 1993,  but remained at 16 percent of net revenue in
both years. The increase in dollar amount in 1994 was due primarily to increased
personnel costs required to manage the continued growth in net revenue.


OTHER INCOME AND INCOME TAXES

OTHER INCOME (EXPENSE) is composed  primarily of investment income on cash, cash
equivalents  and temporary cash  investments.  Investment  income  increased 109
percent in 1995 compared to 1994 due to increased  investable  funds provided by
operations. Investment income in 1994 increased 146 percent compared to 1993 due
to increased investable funds provided by operations,  higher interest rates and
management's  decision to lengthen  maturities on temporary cash  investments to
achieve higher returns.

PROVISION FOR INCOME TAXES. The Company's  effective tax rate was 29 percent, 39
percent and 35 percent in 1995, 1994 and 1993,  respectively.  The lower rate in
1995  was due  primarily  to  research  and  development  tax  credits  totaling
$231,000,  of which $150,000 were made available from prior years as a result of
a recent change in tax  regulations.  For further  analysis of the provision for
income taxes, see Note 4 of Notes to Financial Statements.


LIQUIDITY AND CAPITAL RESOURCES

In 1995, net cash provided by operations  was $3,449,000  compared to $4,168,000
and $1,977,000 in 1994 and 1993, respectively.  The decrease in 1995 compared to
1994 was  primarily  due to income tax payments  made in 1995 for 1994 taxes and
1995 estimated  taxes.  Working capital  increased to $3,894,000 at December 31,
1995 from $2,070,000 at December 31, 1994, primarily as a result of the increase
in cash  and  cash  equivalents.  Cash,  cash  equivalents  and  temporary  cash
investments,  which represented  approximately 51 percent of the Company's total
assets at December 31, 1995,  increased  $2,400,000  since the end of 1994.  Net
accounts  receivable at the end of 1995  decreased  $304,000 from the prior year
end primarily due to a $209,000 write-off with respect to a bankrupt customer.

Net property and equipment and purchased software remained  relatively  constant
in 1995 compared to 1994 as dispositions,  depreciation and amortization  offset
equipment  purchases and tenant improvement  additions.  The Company anticipates
that capital  expenditures in 1996 will be approximately  $1,300,000,  primarily
for new telecommunications  equipment and for new computer equipment for product
development,  customer support and the Company's internal management information
system.  Net capitalized  software costs decreased $235,000 at December 31, 1995
compared to December 31, 1994, as the  amortization  of  previously  capitalized
software costs exceeded the amount of costs capitalized in 1995.

Accrued  income  taxes  decreased  $509,000  at December  31,  1995  compared to
December  31, 1994 as a result of the payment of federal  income  taxes owed for
1994 and estimated  income tax payments for 1995.  Deferred  revenues  increased
$823,000 in 1995 primarily due to increased  billings for annual maintenance and
support  service  contracts.  Revenue from these billings is recognized  monthly
over the term of the contracts. Accrued employee expenses increased

<PAGE>



$172,000 at December 31, 1995 compared to December 31, 1994  primarily due to an
increase in the amount owed to the  Company's  401(k) plan for its 1995 matching
contribution and an increase in accrued sales commissions.

The Company  repurchased  27,000  shares of its common stock  during  1995.  The
Company's  Board  of  Directors  has  authorized  management  to  repurchase  an
additional  188,250  shares on the open  market.  The Company  expects  that any
repurchase  of shares  will be  funded by cash  generated  from  operations  and
existing cash balances.

In April 1995, the Company's Board of Directors  approved a three-for-two  stock
split  effective in May 1995. A cash dividend of $.03 per share had been paid in
the first  quarter of 1995 prior to the split.  That dividend rate was continued
on a post-split  basis for the next three quarterly  dividends.  Total dividends
for 1995  amounted to $377,000.  The Company  plans to continue to pay quarterly
cash dividends.

The Company has a $1,000,000  line of credit for working  capital  purposes that
expires May 1, 1996. At December 31, 1995 there were no  outstanding  borrowings
under the line of credit.  No borrowings  under this line of credit are expected
in 1996.


<PAGE>




ITEM 7.  FINANCIAL STATEMENTS


                                                           Page
                                                           ----

Independent Auditors' Report                                13
Balance Sheets, December 31, 1995 and 1994                  14
Statements of Operations for the years ended
      December 31, 1995, 1994 and 1993                      15
Statements of Cash Flows for the years ended
      December 31, 1995, 1994 and 1993                      16
Statements of Shareholders' Equity for the years ended
      December 31, 1995, 1994 and 1993                      17
Notes to Financial Statements                               18


<PAGE>



                          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, 1995 and 1994 and the  related  statements  of
operations,  shareholders'  equity and cash flows for each of the three years in
the  period  ended  December  31,  1995.  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, 1995 and 1994 and the results of its  operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.




/s/Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Portland, Oregon
January 25, 1996



<PAGE>


<TABLE>
<CAPTION>

                                 BALANCE SHEETS

                                                                            December 31,
                                                                      1995            1994
------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>

Assets
Current assets:
    Cash and cash equivalents                                     $ 3,856,533       $ 1,411,611
    Temporary cash investments                                      3,439,000         3,484,282
    Accounts receivable, less allowance for doubtful accounts
        (1995, $225,909; 1994, $251,982)                            3,185,737         3,489,521
    Other receivables                                                  81,025            84,366
    Inventories                                                       326,311           215,655
    Other current assets                                              614,190           515,819
------------------------------------------------------------------------------------------------
    Total current assets                                           11,502,796         9,201,254
------------------------------------------------------------------------------------------------
Property and equipment:
    Tenant improvements                                               341,265           322,869
    Furniture and fixtures                                            852,046           821,025
    Machinery and equipment                                         4,544,945         4,248,677
-----------------------------------------------------------------------------------------------
                                                                    5,738,256         5,392,571
    Less accumulated depreciation and amortization                  3,374,494         3,039,283
-----------------------------------------------------------------------------------------------
    Property and equipment - net                                    2,363,762         2,353,288
-----------------------------------------------------------------------------------------------
Capitalized software costs, less accumulated amortization
    (1995, $342,674; 1994, $262,908)                                  245,669           480,272
Purchased software, less accumulated amortization
    (1995, $450,082; 1994, $344,784)                                  176,151           189,629
Other assets                                                           96,510           126,054
-----------------------------------------------------------------------------------------------
                                                                  $14,384,888       $12,350,497
===============================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
    Accounts payable                                              $   562,622       $   644,545
    Accrued commissions/royalties                                     258,398           166,543
    Accrued income taxes                                               79,427           588,685
    Deferred revenues                                               5,337,973         4,514,684
    Accrued employee expenses                                       1,148,231           975,919
    Other current liabilities                                         222,585           241,091
-----------------------------------------------------------------------------------------------
    Total current liabilities                                       7,609,236         7,131,467
-----------------------------------------------------------------------------------------------
Accrued rent expense                                                   56,891            76,979
Deferred income taxes                                                 358,000           398,000
Commitments
Shareholders' equity:
    Common stock, without par value
    Authorized - 8,000,000 shares
    Issued - 1995, 3,459,061 shares; 1994, 3,419,040 shares           345,906           341,904
    Additional paid in capital                                      1,304,997           897,690
    Retained earnings                                               4,709,858         3,504,457
-----------------------------------------------------------------------------------------------
    Total shareholders' equity                                      6,360,761         4,744,051
-----------------------------------------------------------------------------------------------
                                                                  $14,384,888       $12,350,497
===============================================================================================

</TABLE>

See notes to financial statements.



<PAGE>



STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                                  Years Ended December 31,
                                                         1995            1994            1993
------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>

Net revenue:
    Computer software                               $ 13,435,099    $ 12,462,576    $ 11,008,953
    Service fees                                      10,927,227       8,809,483       6,955,921
    Other                                                457,039         368,787         239,819
------------------------------------------------------------------------------------------------
    Net revenue                                       24,819,365      21,640,846      18,204,693
------------------------------------------------------------------------------------------------
Cost and expenses:
    Cost of revenue                                    2,836,423       2,934,875       2,592,056
    Customer support                                   5,018,657       4,039,596       3,485,649
    Product development                                5,060,385       4,027,529       3,399,315
    Sales and marketing                                5,968,992       5,472,294       4,906,467
    General and administrative                         3,846,763       3,391,589       2,940,510
------------------------------------------------------------------------------------------------
    Total cost and expenses                           22,731,220      19,865,883      17,323,997
------------------------------------------------------------------------------------------------
Operating income                                       2,088,145       1,774,963         880,696
Other income (expense):
    Interest income and other                            359,323         173,659          69,796
    Interest expense                                        (725)         (3,171)           (439)
------------------------------------------------------------------------------------------------
Income before income taxes                             2,446,743       1,945,451         950,053
Provision for income taxes                               714,000         751,000         330,000
------------------------------------------------------------------------------------------------
Net income                                          $  1,732,743    $  1,194,451    $    620,053
================================================================================================
Earnings per share (based on average of
    3,626,385 shares in 1995; 3,500,709 shares
    In 1994; 3,436,778 shares in 1993)              $       0.48    $       0.34    $       0.18
================================================================================================
Dividends per share                                 $       0.11    $       0.02    $         --
================================================================================================

</TABLE>

See notes to financial statements.

<PAGE>



STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                  Years Ended December 31,
                                                         1995            1994            1993
-------------------------------------------------------------------------------------------------
<S>                                                  <C>             <C>             <C>

Cash flows from operating activities:
Net income                                           $ 1,732,743     $ 1,194,451     $   620,053
Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                      1,165,932       1,085,634         932,223
    Deferred income taxes                                 14,000           9,000         125,000
    Accrued rent expense                                 (20,088)        (20,088)         (7,244)
    Net change in:
        Accounts receivable                              303,784         (75,699)     (1,363,893)
        Other receivables                                  3,341         147,837        (191,537)
        Inventories                                     (110,656)        (28,364)        249,483
        Accounts payable                                 (81,923)       (151,097)        552,489
        Accrued commissions/royalties                     91,855          (6,717)        (24,428)
        Accrued income taxes                            (509,258)        375,284         185,664
        Deferred revenues                                823,289       1,211,892         602,063
        Accrued employee expenses                        172,312         360,117         270,886
        Other                                           (136,616)         65,613          26,290
------------------------------------------------------------------------------------------------
    Net cash provided by operating activities          3,448,715       4,167,863       1,977,049
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment                     (902,025)     (1,328,408)       (797,614)
Capitalized software costs                               (69,671)       (178,217)       (513,203)
Proceeds from temporary cash investments               5,000,000
Purchase of temporary cash investments                (4,954,718)     (3,484,282)
Other - net                                               38,654         (26,813)          4,712
------------------------------------------------------------------------------------------------
    Net cash used in investing activities               (887,760)     (5,017,720)     (1,306,105)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid                                          (377,455)        (68,363)
Common stock issued                                      421,520         133,360          96,583
Common stock reacquired                                 (160,098)       (140,000)
------------------------------------------------------------------------------------------------
    Net cash provided by (used in) financing activities (116,033)        (75,003)         96,583
------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents   2,444,922        (924,860)        767,527
Cash and cash equivalents, beginning of the year       1,411,611       2,336,471       1,568,944
------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year           $ 3,856,533     $ 1,411,611     $ 2,336,471
================================================================================================
Supplemental information:
Cash paid during the year for income taxes           $ 1,059,859     $   356,416     $   126,336
================================================================================================

</TABLE>

See notes to financial statements.


<PAGE>



STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                            Additional
                                         Common Stock         Paid In      Retained
                                 Shares Issued    Amount      Capital      Earnings      Total
------------------------------------------------------------------------------------------------
<S>                              <C>           <C>          <C>          <C>          <C>

Balances, January 1, 1993         3,394,290    $  339,429   $  681,044   $1,887,494   $2,907,967
    Common stock issued              24,450         2,445       94,138                    96,583
    Net income for the year                                                 620,053      620,053
------------------------------------------------------------------------------------------------
Balances, December 31, 1993       3,418,740       341,874      775,182    2,507,547    3,624,603
    Common stock issued              30,300         3,030      130,330                   133,360
    Common stock reacquired         (30,000)       (3,000)      (7,822)    (129,178)    (140,000)
    Dividends declared
        ($.02 per share)                                                    (68,363)     (68,363)
    Net income for the year                                               1,194,451    1,194,451
------------------------------------------------------------------------------------------------
Balances, December 31, 1994       3,419,040       341,904      897,690    3,504,457    4,744,051
    Common stock issued              67,050         6,705      414,815                   421,520
    Common stock reacquired         (27,029)       (2,703)      (7,508)    (149,887)    (160,098)
    Dividends declared
        ($.11 per share)                                                   (377,455)    (377,455)
    Net income for the year                                               1,732,743    1,732,743
------------------------------------------------------------------------------------------------
Balances, December 31, 1995       3,459,061    $  345,906   $1,304,997   $4,709,858   $6,360,761
================================================================================================
</TABLE>


See notes to financial statements.



<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
credit losses 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 cash  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  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. The Company also capitalizes costs incurred in connection with
perfecting  its  rights  to sell  certain  software  products.  These  costs are
amortized over a two- to five-year period. Costs capitalized for the development
of computer  software  were $70,000 in 1995,  $116,000 in 1994,  and $105,000 in
1993.  Costs incurred and  capitalized in perfecting its rights to software were
$62,000 in 1994 and $408,000 in 1993.

Amortization of capitalized  computer software development costs was $304,000 in
1995,  $367,000 in 1994, and $365,000 in 1993. Expenses incurred on research and
development of computer software products were $4,149,000 in 1995, $3,330,000 in
1994, and $2,795,000 in 1993.

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.

TEMPORARY CASH INVESTMENTS:  Temporary cash investments  represent investment in
debt securities which are not classified as cash equivalents. In accordance with
Statement of Financial  Accounting  Standards No. 115,  "Accounting  for Certain
Investments in Debt and Equity  Securities,"  the Company has  classified  these
securities,   which  mature  in  one  year  or  less,  as  "held  to  maturity."
Accordingly,  temporary  cash  investments  are recorded at amortized cost which
approximates fair value.

INVENTORIES:  Inventories  consist  of  marketing  literature  and  of  software
components,  primarily  software  manuals  and  diskettes  ready  for  assembly.
Inventories are stated at 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.




<PAGE>



NOTES TO FINANCIAL STATEMENTS (continued)

EARNINGS PER SHARE:  Earnings per share are based on the weighted average number
of common shares outstanding during the period, after adjusting for the dilutive
effect of outstanding stock options and warrants.

NOTE 2.  Short-term borrowings:

The  Company  has an  unsecured  line  of  credit  with a bank to  borrow  up to
$1,000,000. The line of credit expires May 1996 and borrowings under the line of
credit  accrue  interest at the bank's prime rate (8.50% at December 31,  1995).
There were no  short-term  borrowings  under the line of credit  during  1995 or
1994.

NOTE 3.  Common stock:

In April 1995, the Company's Board of Directors approved a three-for-two  common
stock split  effective in May 1995. All prior common stock and per share amounts
have been retroactively adjusted to reflect this change.

The Company has  non-qualified  stock option plans  adopted in 1987 and 1989 for
its officers and key employees.  In 1993, the Company's  shareholders approved a
stock  incentive  option plan for the purpose of retaining  and  attracting  the
services of selected Company  directors,  officers,  employees and nonemployees.
This plan provides for the granting of various stock options, stock appreciation
rights,  stock  bonuses  and the sale of  common  stock.  All of the  plans  are
administered  by a committee of the  Company's  Board of Directors who determine
the terms and conditions of the various  grants  awarded under the plans.  As of
December 31, 1995, only stock options have been granted under these plans.

In March 1994,  the Company  issued  warrants to purchase  150,000 shares of its
common stock at $4.67 per share to a large  national  account as part of a joint
marketing  agreement to promote the Company's software products.  These warrants
are exercisable from March 1996 through March 2001.

As of December 31, 1995, the Company has reserved 623,160 shares of common stock
for these stock options and warrants.  Information with respect to stock options
and warrants is as follows:

<TABLE>
<CAPTION>



                                                        Shares Under             Option/Warrants
                                                       Option/Warrants              Price Range
-------------------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>

Outstanding at January 1, 1993                             254,400               $ 3.083 - 5.833
Granted                                                    128,400                 4.167 - 4.667
Exercised                                                  (24,450)                3.083 - 3.920
Cancelled                                                  (24,300)                3.500 - 4.500
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1993                           334,050                 3.083 - 5.833
Granted                                                    178,500                 4.667 - 6.000
Exercised                                                  (30,300)                3.083 - 4.293
Cancelled                                                  (24,600)                3.500 - 5.087
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994                           457,650                 3.083 - 6.000
Granted                                                    109,000                 8.875 - 9.375
Exercised                                                  (67,050)                3.083 - 6.000
Cancelled                                                  (11,700)                4.167 - 6.000
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995                           487,900               $ 3.083 - 9.375
================================================================================================
Exercisable at December 31, 1995                           196,940               $ 3.083 - 9.375
================================================================================================

</TABLE>




<PAGE>



NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 4.  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, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>

                                                                       1995              1994
-----------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
Deferred tax liabilities:
Property and equipment                                              $ 288,000         $ 251,000
Capitalized software costs                                             96,000           187,000
Maintenance costs                                                      78,000            37,000
Other                                                                   4,000             4,000
-----------------------------------------------------------------------------------------------
                                                                      466,000           479,000
-----------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts                                        88,000            98,000
Employee expenses not currently deductible                             26,000            33,000
Accrued rent expenses                                                  22,000            30,000
Other                                                                  20,000            22,000
-----------------------------------------------------------------------------------------------
                                                                      156,000           183,000
-----------------------------------------------------------------------------------------------
Net deferred tax liability                                          $ 310,000         $ 296,000
===============================================================================================
The net deferred tax liability is classified in the balance sheet as follows:
Deferred income taxes                                               $ 358,000         $ 398,000
Deferred tax assets included in other current assets                  (48,000)         (102,000)
-----------------------------------------------------------------------------------------------
Net deferred tax liability                                          $ 310,000         $ 296,000
===============================================================================================

The provision for income taxes is composed of the following:

                                                    1995               1994              1993
-----------------------------------------------------------------------------------------------
Current:
   Federal                                       $ 575,000          $ 592,000         $ 163,000
   State                                           125,000            150,000            42,000
Deferred                                            14,000              9,000           125,000
-----------------------------------------------------------------------------------------------
Total                                            $ 714,000          $ 751,000         $ 330,000
===============================================================================================

</TABLE>



<PAGE>



NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 4.  Income taxes (continued):

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

<TABLE>
<CAPTION>


                                                    1995               1994              1993
-------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>               <C>
Income taxes based on federal statutory rate       $ 832,000         $ 661,000         $ 323,000
State tax, net of federal tax benefit                 84,000            97,000            54,000
Research and development credits                    (231,000)          (22,000)          (36,000)
Other                                                 29,000            15,000           (11,000)
------------------------------------------------------------------------------------------------
Provision for income taxes                         $ 714,000         $ 751,000         $ 330,000
================================================================================================

</TABLE>

Research and development  credits in 1995 include  additional amounts which have
been made  available  from  prior  years as a result  of a recent  change in tax
regulations.  This reduced the Company's provision for income taxes for the year
ended December 31, 1995, by $150,000, or $.04 per share.


NOTE 5.  Commitments:

The Company leases its corporate offices under a noncancelable 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.  The Company also leases equipment
and other office facilities under  noncancelable  operating  leases.  Total rent
expense under these leases was $711,000,  $685,000,  and $632,000 in 1995, 1994,
and 1993, respectively.

Future  minimum  rentals  under  these  leases as of  December  31,  1995 are as
follows:


Years ending December 31,

   1996            $  752,000
   1997               799,000
   1998               676,000
   1999               208,000
   2000               195,000
   Thereafter         452,000
-----------------------------
Total              $3,082,000
=============================


NOTE 6.  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  $304,000 in 1995,
$223,000 in 1994 and $186,000 in 1993.




<PAGE>



NOTE 7.  Quarterly financial information (unaudited):

<TABLE>
<CAPTION>

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

1995
  1st quarter                     $ 5,893,559      $ 5,598,792      $  233,580         $ .07
  2nd quarter                       5,971,222        5,610,434         287,863           .08
  3rd quarter                       5,766,128        5,426,971         294,045           .08
  4th quarter                       7,188,456        6,095,023         917,255(1)        .25

1994
  1st quarter                     $ 4,682,989      $ 4,657,647      $   44,270         $ .01
  2nd quarter                       4,901,163        4,642,104         179,373           .05
  3rd quarter                       5,491,851        5,017,047         312,079           .09
  4th quarter                       6,564,843        5,549,085         658,729           .19

</TABLE>


(1) In the fourth  quarter  1995,  the Company  benefitted  from a change in tax
regulations which allowed additional research and development credits from prior
years.  This  decreased  income tax  expense and  increased  net income for this
quarter by $150,000, or $.04 per share.


<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE


None.



<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 15,
1996.


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 15, 1996.


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 15, 1996.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

<PAGE>




ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

                                                                           Page
                                                                           ----
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 3.2 of Annual  Report on Form 10-K for the
             year ended  December 31, 1990)

    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        28

  *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       35

   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, 1994)

  *10.5(c)   - Third Amendment to Timberline Software Corporation
             Employees' Retirement Plan                                      42

  *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)

            * Management contract or compensatory plan or arrangement

    CONSENTS

    23       - Independent Auditors' Consent                                 45

    MISCELLANEOUS

    27       - Financial Data Schedule                                       46

b. Reports on Form 8-K

   No reports on Form 8-K were filed during the three months ended December 31,
1995.


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                                    3/26/96
     ---------------------------------             ------------------------
     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                                      3/26/96
--------------------------------------             ------------------------
John Gorman                                                 Date
President, Chief Executive Officer and
Chairman of the Board of Directors

      /s/ Thomas P. Cox                                    3/26/96
--------------------------------------             ------------------------
Thomas P. Cox                                               Date
Senior Vice President-Finance
Chief Financial Officer

      /s/ Leslie F. Clark, II                              3/26/96
--------------------------------------             ------------------------
Leslie F. Clarke, II                                        Date
Executive Vice President, Director

      /s/ James A. Meyer                                   3/26/96
--------------------------------------             ------------------------
James A. Meyer                                              Date
Director

      /s/ Donald L. Tisdel                                 3/26/96
--------------------------------------             ------------------------
Donald L. Tisdel                                            Date
Director

     /s/ Carl C. Asai                                      3/26/96
--------------------------------------             ------------------------
Carl C. Asai                                                Date
Controller

<PAGE>
                        TIMBERLINE SOFTWARE CORPORATION
                 FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 1995
                                 EXHIBIT INDEX
                                 -------------

                                                                           Page
                                                                           ----

    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 3.2 of Annual  Report on Form 10-K for the
             year ended  December 31, 1990)

    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        28

  *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       35

   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, 1994)

  *10.5(c)   - Third Amendment to Timberline Software Corporation
             Employees' Retirement Plan                                      42

  *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)

            * Management contract or compensatory plan or arrangement

    CONSENTS

    23       - Independent Auditors' Consent                                 45

    MISCELLANEOUS

    27       - Financial Data Schedule                                       46