<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-Q/A

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 

For the period ended SEPTEMBER 30, 1998

                                       OR

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934

COMMISSION FILE NUMBER 0-21402


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

                 WASHINGTON                                    91-1187540
       (State or other jurisdiction of                      (I.R.S. Employer
       incorporation or organization)                     Identification No.)

                             11980 N.E. 24TH STREET
                               BELLEVUE, WA 98005
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                 (425) 827-1112
              (Registrant's telephone number, including area code)

                               11255 KIRKLAND WAY
                               KIRKLAND, WA 98033
                 (Former Address, if changed since last report)


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

                    Yes [X]          No  [ ]

As of November 6, 1998, there were 5,122,553 shares of the Registrant's Common
Stock outstanding.


<PAGE>   2
PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                         INTERLINQ SOFTWARE CORPORATION
                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,        JUNE 30,
                                                                    1998               1998
                                                                 -----------        -----------
                                                                  (restated)        (restated)
                                                                 (unaudited)
<S>                                                              <C>                <C>
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                   $ 5,075,783        $ 7,233,826
     Short-term investments                                        5,481,867          6,673,923
     Accounts receivable, net                                      3,313,519          3,400,194
     Inventory, prepaid expenses and other
       current assets                                                799,552            732,273
                                                                 -----------        -----------
            Total current assets                                  14,670,721         18,040,216
                                                                 -----------        -----------

Property and equipment, at cost                                    6,771,262          6,434,017
     Less accumulated depreciation and amortization                5,686,820          5,434,285
                                                                 -----------        -----------
            Net property and equipment                             1,084,442            999,732
                                                                 -----------        -----------

Capitalized software costs, net                                    4,408,245          4,421,806
Goodwill and other intangible assets, net                          3,028,872          3,198,021
Other assets                                                          98,820            110,102
                                                                 -----------        -----------
                                                                 $23,291,100        $26,769,877
                                                                 ===========        ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                            $   398,983        $   690,138
     Accrued compensation and benefits                             1,086,300          1,745,908
     Other accrued liabilities                                       624,285            670,800
     Purchase consideration payable                                       --          2,600,000
     Customer deposits                                               525,680            374,151
     Deferred software support fees                                4,050,148          3,434,092
                                                                 -----------        -----------
            Total current liabilities                              6,685,396          9,515,089
                                                                 -----------        -----------

NONCURRENT LIABILITIES                                               107,483             99,864

SHAREHOLDERS' EQUITY:
     Common stock                                                     51,218             53,506
     Additional paid-in capital                                    9,197,971         10,442,835
     Retained earnings                                             7,249,032          6,658,583
                                                                 -----------        -----------
            Total shareholders' equity                            16,498,221         17,154,924
                                                                 -----------        -----------
                                                                 $23,291,100        $26,769,877
                                                                 ===========        ===========
</TABLE>



See accompanying notes to condensed financial statements 



                                       2
<PAGE>   3
                         INTERLINQ SOFTWARE CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                   1998              1997
                                                                ----------        ----------
                                                                (restated)
<S>                                                             <C>               <C>       
NET REVENUES:
    Software license fees                                       $3,347,105        $1,546,160
    Software support fees                                        1,981,275         1,693,586
    Other                                                          479,687           402,094
                                                                ----------        ----------
        Total net revenues                                       5,808,067         3,641,840
                                                                ----------        ----------

COST OF REVENUES:
    Software license fees                                          539,834           416,875
    Software support fees                                          638,812           522,587
    Other                                                          262,252           243,570
                                                                ----------        ----------
        Total cost of revenues                                   1,440,898         1,183,032
                                                                ----------        ----------
        Gross profit                                             4,367,169         2,458,808
                                                                ----------        ----------

OPERATING EXPENSES:
    Product development                                            765,812           323,464
    Sales and marketing                                          1,448,622         1,201,060
    General and administrative                                   1,155,191           768,958
    Amortization of goodwill and other intangible assets           214,833                --
                                                                ----------        ----------
        Total operating expenses                                 3,584,458         2,293,482
                                                                ----------        ----------
        Operating income                                           782,711           165,326

Net interest and other income                                      154,507           191,771
                                                                ----------        ----------
    Income before income taxes                                     937,218           357,097
Income tax expense                                                 346,770           147,883
                                                                ==========        ==========
    Net income                                                  $  590,448        $  209,214
                                                                ==========        ==========


Net income per share - basic                                    $      .11        $      .04
Net income per share - diluted                                  $      .11        $      .04

Shares used to calculate net income
    per share - basic                                            5,309,918         5,389,826
Shares used to calculate net income
    per share - diluted                                          5,564,657         5,494,728
</TABLE>



See accompanying notes to condensed financial statements.



                                       3
<PAGE>   4
                         INTERLINQ SOFTWARE CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

   
<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                                  1998                1997
                                                              -----------         -----------
                                                               (restated)
<S>                                                           <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                 $   590,448         $   209,214
      Adjustments to reconcile net income to net cash
        provided by operating activities:
           Depreciation and amortization                          466,391             268,273
           Amortization of capitalized software costs             503,195             355,604
           Change in operating assets and liabilities:
             Accounts receivable                                   86,675             151,824
             Inventory and prepaid expenses                       (67,279)            (50,595)
             Other assets                                          11,282              11,029
             Accounts payable                                    (220,832)            (60,978)
             Accrued compensation and benefits, other
                accrued liabilities and deferred rent            (706,123)           (203,855)
             Customer deposits                                    151,529              78,135
             Deferred software support fees                       578,969             145,765
                                                              -----------         -----------
                Net cash provided by operating                                               
                activities                                      1,394,255             904,416
                                                              -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                           (337,245)           (172,340)
   Capitalized software costs                                    (489,634)           (336,942)
   Proceeds from sales and maturities of short-term
      investments                                               1,192,056              51,176
   Cash paid for acquisition                                   (2,670,323)                 --

                                                              -----------         -----------
                Net cash used in investing activities          (2,305,146)           (458,106)
                                                              -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock                           5,598               2,269
   Repurchase of common stock                                  (1,252,750)           (633,312)
                                                              -----------         -----------
                Net cash used in financing activities          (1,247,152)           (631,043)
                                                              -----------         -----------
                Net decrease in cash and cash                                                  
                equivalents                                    (2,158,043)           (184,733)
   Cash and cash equivalents at beginning of period             7,233,826           7,793,761
                                                              ===========         ===========
   Cash and cash equivalents at end of period                 $ 5,075,783         $ 7,609,028
                                                              ===========         ===========
</TABLE>
    



See accompanying notes to condensed financial statements.



                                       4
<PAGE>   5
                         INTERLINQ Software Corporation
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)

1.    Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.

   
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 1998, are not
necessarily indicative of the results for the year ending June 30, 1999. The
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998, as amended by Form 10-K/A on March 9, 1999.
    

2.    Restatement

   
The management of the Company and the Staff of the Securities and Exchange
Commission have had discussions with respect to the methods used to value
acquired in-process research and development recorded and written off at the
date of acquisition of Logical Software Solutions Corporation (LSS). As a result
of these discussions, the Company has modified the method used to determine the
value of in-process R&D acquired in connection with the Company's June 1998
acquisition of LSS. Initial calculations of the value of the in-process R&D were
based on the cost required to complete the project, the after-tax cash flows
attributable to the project, and selection of an appropriate rate of return to
reflect the risk associated with the project. Revised calculations are based on
adjusted after-tax cash flows that give explicit consideration to the Staff's
views on in-process R&D as set forth in its September 15, 1998 letter to the
AICPA, and the Staff's comments for the Company to consider the stage of
completion of the in-process technology at the date of acquisition. As a result
of this modification the Company decreased the amount of the purchase price
allocated to in-process research and development in the LSS acquisition from
$3,615,304 to $1,349,616. This resulted in a corresponding increase to goodwill,
which is being amortized over its useful life of four years on a straight-line
basis. As a result of the significant decrease in the amount of acquired
in-process research and development, there was also a significant decrease in
the corresponding deferred tax asset. Given this decrease, the Company has
determined that a valuation allowance is no longer necessary.
    



                                       5
<PAGE>   6

The effects of the restatement resulted in the following impact on the Company's
results of operations for the quarter ended September 30, 1998.

<TABLE>
<S>                                                                      <C>
Income before income taxes as previously reported                        $ 1,078,824
Restatement adjustment to record additional goodwill amortization           (141,606)
                                                                         -----------
Income before income taxes as restated                                   $   937,218
                                                                         -----------

Net income as previously reported                                        $   706,630
Restatement adjustment to record additional goodwill amortization
(net of income taxes)                                                       (116,182)
                                                                         -----------
Net income as restated                                                   $   590,448
                                                                         -----------

Net income per basic and diluted share as previously reported            $       .13
Restatement adjustment to record additional goodwill amortization
(net of income taxes)                                                           (.02)
                                                                         -----------
Net income per basic and diluted share as restated                       $       .11
                                                                         -----------
</TABLE>



The effect of the restatement resulted in the following impact on the Company's
financial position at September 30, 1998, and June 30, 1998:


<TABLE>
<CAPTION>
                                                             September 30,       June 30,
                                                                 1998              1998
                                                             -----------        -----------
<S>                                                          <C>                <C>        
 Total assets as previously reported                         $20,816,017        $24,153,189
 Restatement adjustment to reduce in-process R&D, net          2,475,083          2,616,688
                                                             -----------        -----------
 Total assets as restated                                    $23,291,100        $26,769,877
                                                             -----------        -----------

 Total liabilities as previously reported                    $ 6,757,890        $ 9,554,540
 Restatement adjustment to record current
 and deferred tax liability                                       34,989             60,413
                                                             -----------        -----------
Total liabilities as restated                                $ 6,792,879        $ 9,614,953
                                                             -----------        -----------

 Retained earnings as previously reported                    $ 4,808,938        $ 4,102,308
 Restatement adjustment to reduce in-process R&D               2,124,083          2,265,688
 Restatement adjustment for income taxes                         316,011            290,587
                                                             -----------        -----------
 Retained earnings as restated                               $ 7,249,032        $ 6,658,583
                                                             -----------        -----------
</TABLE>


3.    Earnings Per Share

The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS No.
128 requires the presentation of basic earnings per share, and for companies
with complex financial structures, diluted earnings per share. Basic earnings
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period.



                                       6
<PAGE>   7
The following table reconciles the shares used in calculating basic earnings per
share to the shares used in calculating diluted earnings per share:


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                      SEPTEMBER 30,
                                                 1998             1997
                                              ---------        ---------
<S>                                           <C>              <C>
Weighted average common shares                5,309,918        5,389,826
Dilutive effect of outstanding options          254,739          104,902
                                              ---------        ---------
Weighted average common and
     Common equivalent shares                 5,564,657        5,494,728
                                              =========        =========
</TABLE>


4.    Revenue Recognition

On July 1, 1998, the Company adopted the provisions of Statement of Position
97-2, Software Revenue Recognition ("SOP 97-2"), which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, consulting and implementation
services, or training. Under SOP 97-2, the determination of fair value is based
on objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered. The adoption of SOP 97-2
did not have a material effect on revenue recognition for the quarter ended
September 30, 1998. 

5. Acquisition

On June 30, 1998, the Company acquired Logical Software Solutions Corporation
("LSS"). LSS is an enterprise application integration developer and service
provider. The purchase price consisted of 233,334 shares of common stock valued
at $1,416,338, $3,600,000 in cash, and $378,930 in direct acquisition costs. The
233,334 shares of common stock issued in the acquisition were placed in escrow
and will vest with time over a six-year period (subject to certain accelerated
vesting provisions).

The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of the acquired business and the fair
market values of the acquired assets and assumed liabilities were included in
the Company's financial statements as of the date of acquisition. The purchase
price was allocated to the acquired assets and assumed liabilities based on fair
values.

A portion of the purchase price represents purchased in-process research and
development that has not yet reached technological feasibility and has no
alternative future use. The value assigned to purchased in-process research and
development was determined by identifying research projects in areas for which
technological feasibility has not been established; estimating the costs to
develop the purchased in-process research and development into commercially
viable products; estimating the resulting net cash flows from such projects;
discounting the net cash flows back to the time of acquisition and applying an
attribution rate based on the estimated percent complete.

The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of the quarter ended September 30,
1997, excluding all nonrecurring acquisition-related charges. The table includes
the impact of certain adjustments such as goodwill amortization and related



                                       7
<PAGE>   8
tax effects. The pro forma information is not necessarily indicative of the
combined results that would have occurred had the acquisition been in effect for
the entire period presented, nor is it necessarily indicative of results that
may occur in the future.

<TABLE>
<CAPTION>
                                                Quarter Ended
                                              September 30,1997
                                                -----------
<S>                                           <C>       
Total net revenues                              $3,999,729
Net income                                          84,114
Net income per share - basic and diluted               .01
</TABLE>


6.    New Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company currently has no accumulated other components
of comprehensive income and has not determined the manner in which it will
present the information required by SFAS No. 130 in its annual financial
statements for the year ending June 30, 1999.

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by SFAS No. 131.



                                       8
<PAGE>   9
Item 2.


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL

MORTGAGE TECHNOLOGY: Prior to the mid-1980s, mortgage loans in the United States
were originated in a manual and paper-intensive process. Beginning in the
mid-1980s and running through the mid-1990s, the mortgage lending industry
implemented its first wave of automation with PC-based software solutions for
mortgage originations. During this period of time, the Company experienced rapid
revenue and customer growth by providing its MortgageWare(R) Loan Management
System - designed as a robust, full-featured and cost-effective PC-based
software solution for mortgage originations. This first wave of automation
accelerated and amplified beginning in 1992 as mortgage interest rates reached
historically low levels and mortgage refinance volumes soared. In early 1994,
the Federal Reserve raised interest rates, which immediately caused mortgage
refinance volumes to decline substantially. As a result, lenders found
themselves with excess labor and mortgage processing capacity, and consequently,
the Company believes that the industry was focused more on staff reduction and
cost-cutting, than on adding new automated loan management systems.

    From 1996 through 1998, mortgage-lending rates have reflected a lending
environment that has experienced a high degree of volatility. In spite of this
volatility, the overall lending conditions have been considered favorable for
the borrower compared to most historical measures. The Company believes that
this overall favorable lending environment for mortgage-lending activity is
being driven by an increase in financing of home sales and refinancing of
existing mortgages. During the latter half of fiscal year 1997, the Company
observed a shift in the mortgage origination business, which it attributes to
excess production capacity coupled with a reduced profit margin. Currently, it
appears that most of this excess production capacity has been fulfilled, yet
profit margins in mortgage loan origination continue to be low.

     During the quarter ended September 30, 1998, the Company experienced
increased software license fees due to demand for the MortgageWare Enterprise
product suite and the continuing favorable lending environment. The Company
believes that due to extreme competition in the mortgage lending industry and
the related lower profit margins, its customers will continue to shift their
long-term purchasing decisions from solutions that solely increase production
capacity to solutions that will help to reduce unit costs and, consequently,
increase profit margins. During fiscal years 1996 and 1997, the Company sought
to diversify its product offerings by developing an integrated "enterprise"
solution for the mortgage lending industry. The Company believes that this
broader enterprise solution has contributed to the increases in software license
revenues over the last few quarters, and will allow the Company to respond
advantageously to the recent changes in the mortgage lending industry. This
broader product offering is designed to reduce the cost of originating,
processing, and servicing a mortgage, rather than just increasing production
capacity.



                                       9
<PAGE>   10

ENTERPRISE TECHNOLOGY: Pursuant to a purchase and sale agreement dated June 30,
1998, the Company acquired substantially all of the assets and business of
Logical Software Solutions Corporation ("LSS"), in a transaction accounted for
using the purchase method of accounting. This acquisition included the LSS
technology and specifically FlowMan(R) version 3.2. The operations of the
acquired company are included in the Company's financial statements beginning on
June 30, 1998. As a result of this acquisition, the Company formed two operating
divisions - the Mortgage Technology Division ("MTD") and the Enterprise
Technology Division ("ETD").

   The Company has developed a two-prong strategy to leverage the technology
that was obtained in the LSS acquisition. In the first prong, the Company
intends to integrate the FlowMan technology with the Company's MortgageWare
Enterprise product suite. This is expected to further broaden the capabilities
and the appeal of the Mortgage Technology Division's product offerings and
strengthen the commitment of the Company to enterprise solutions. In the second
prong, the Company has entered the enterprise application integration ("EAI")
market by marketing FlowMan on a stand-alone basis, primarily through OEMs,
system integrators, and third-party application developers. The Company believes
that the product can be successfully marketed as an application package in other
vertical markets and as a tool kit for use by other application providers. The
Company believes that the EAI market is in its early stages of development and
will grow significantly over the next few years. This two-prong strategy is
expected to provide growth and diversification for the Company, while allowing
it to continue to expand and excel in its core market of mortgage technology.

NET REVENUES

<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands)                 1998        1997     Change
----------------------------------------------------------
<S>                           <C>         <C>        <C> 
Software license fees         $3,347      $1,546     116%
                                         
Software support fees          1,981       1,694      17%
                                         
Other                            480         402      19%
----------------------------------------------------------
Total net revenues            $5,808      $3,642      59%
----------------------------------------------------------
</TABLE>

Net revenues consist of software license fees, software support fees and other
revenues (which include training, consulting fees, document fees, and other
miscellaneous sales), net of discounts and sales returns.

   Software license fees increased by 116% for the quarter ended September 30,
1998, compared to the quarter ended September 30, 1997. This increase was due
primarily to demand from new and existing customers for the Company's
MortgageWare Enterprise product suite resulting in a combination of a net
increase in sales of MortgageWare TC/MortgageWare Loan Management System (as
lenders added production capacity), an increase in sales of MortgageWare Loan
Servicing and to a lesser extent, increased sales of the Company's other
products.

   Software support fees increased by 17% for the quarter ended September 30,
1998, compared to the quarter ended September 30, 1997. This period-to-period
increase was due primarily to higher software sales volume and a relatively low
customer attrition rate. Due in part to changes, from time to time, in
government regulations relating to documentation required for residential
mortgage lending, the vast majority of the 



                                       10
<PAGE>   11

Company's customers purchase annual software support agreements. Because
software support fees are recognized ratably over the term of the annual support
agreement (while software license fees are recognized on product shipment), the
percentage increase in software support fees compared to software license fees
is not directly proportional. The Company believes software support fees are
likely to continue to increase at a modest rate for the rest of fiscal year
1999.

   Other revenues increased by 19% for the quarter ended September 30, 1998,
compared to the quarter ended September 30, 1997. This increase was due
primarily to an increase in demand for the Company's training services partially
offset by a decrease in consulting services. The Company expects its other
revenues to increase during fiscal year 1999 compared to fiscal year 1998, due
to the related increase in software license fee revenue as well as increased
demand for consulting services associated with implementation of MortgageWare
Loan Servicing and FlowMan.

   The Company anticipates an increasing contribution to software license fees,
and related increases to software support fees and other revenues, from
MortgageWare Loan Servicing, MortgageWare InfoLINQ, MortgageWare MarketLINQ and
FlowMan. As discussed above, the Company believes the overall-lending
environment to be favorable as of September 30, 1998, despite experiencing a
high degree of volatility. Nonetheless, there can be no assurance that
mortgage-lending rates will not increase or continue to experience a high amount
of volatility. Such increases or continued volatility could have a material
adverse effect on the Company's business, financial condition and results of
operations. Even if lending rates stabilize, if homeowners and potential
homeowners perceive such rates as too high, decisions that would otherwise
result in mortgage lending transactions may be delayed. Such delays may have an
adverse effect on the Company's customers, which could result in an adverse
effect on the Company and its results of operations. In addition, the Company
believes that while the U.S. economy has been generally strong in fiscal year
1998, changes in economic conditions could have a material adverse effect on the
Company's business, financial condition and results of operations.

   The Company has just entered the relatively new EAI market, which is subject
to constant change, and intense competition. In addition, many of the Company's
competitors in this market have longer operating histories, greater name
recognition, and significantly greater financial, technical and marketing
resources than the Company. There is no assurance that the Company's products
will be accepted by the market or that the Company will be competitive within
the market, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

COST OF REVENUES

<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands)                    1998     1997     Change
----------------------------------------------------------
<S>                               <C>      <C>      <C>
Software license fees             $540     $417       29%
                                                  
Percentage of software                            
  license fees                     16%      27%   
----------------------------------------------------------
Software support fees             $639     $523       22%
                                                  
Percentage of software                            
   support fees                    32%      31%   
----------------------------------------------------------
Other                            $262     $244         7%
</TABLE>




                                       11
<PAGE>   12
<TABLE>
<S>                               <C>      <C>      <C>
Percentage of other                55%    61%
-------------------------------------------------------
Total cost of revenues         $1,441  $1,183       22%

Percentage of net revenues         25%     32%
-------------------------------------------------------
</TABLE>

Cost of software license fees primarily consists of the amortization of
capitalized software development costs and, to a lesser extent, the purchase and
duplication of disks and product documentation. As a percentage of software
license fees, cost of software license fees decreased to 16% for the quarter
ended September 30, 1998, compared to 27% for the quarter ended September 30,
1997. This decrease was primarily due to software license fees increasing at a
substantially higher rate than the cost of software license fees that contain
the relatively fixed component of amortization of capitalized software
development costs. Amortization of capitalized software development costs
increased to $503,000 in the quarter ended September 30, 1998, compared to
$356,000 for the same quarter in the previous year. The Company expects the
dollar amount of its amortization of capitalized software development costs to
increase for the remainder of fiscal year 1999.

   Cost of software support fees includes salaries and other costs related to
providing telephone support, and the purchase, duplication and shipping of disks
associated with software updates. As a percentage of software support fees, cost
of software support fees increased to 32% for the quarter ended September 30,
1998, compared to 31% for the quarter ended September 30, 1997. This increase
was primarily due to increased payroll costs for the customer support group. The
Company expects the dollar cost of software support fees to increase due to the
increased staffing that will be required to support a higher installed base of
the Company's products and in order to support the FlowMan product. The Company
also expects that these factors will lead to a modest increase in the ratio of
the cost of software support fees to software support fees.

   Cost of other revenue includes the salaries and reimbursable expenses for the
employees who provide training and consulting services, the purchase and
duplication of disks associated with custom documents, and the net cost of the
Company's annual MortgageWare software users' group meeting. As a percentage of
other revenue, cost of other revenue decreased to 55% for the quarter ended
September 30, 1998, compared to 61% for the quarter ended September 30, 1997.
This decrease was primarily due to a change in the mix of other revenues and the
associated costs.

OPERATING EXPENSES

<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands)                       1998        1997    Change
---------------------------------------------------------------
<S>                                <C>         <C>       <C> 
Product development                  $766        $323      137%

Percentage of net revenues             13%          9%
---------------------------------------------------------------
Sales & marketing                  $1,449      $1,201       21%

Percentage of net revenues             25%         33%
---------------------------------------------------------------
General & administrative           $1,155        $769       50%

Percentage of net revenues             20%         21%
---------------------------------------------------------------
Amortization of goodwill
   and other intangible assets       $215          --       nm

Percentage of net revenues              4%         --
---------------------------------------------------------------
</TABLE>


Product development expenses include salaries for software developers and
analysts, facility costs and expenses associated with computer equipment used in
software development, net of costs capitalized. As a percentage of net revenues,
product development expenses 



                                       12
<PAGE>   13

increased to 13% for the quarter ended September 30, 1998 compared to 9% for the
quarter ended September 30, 1997. Approximately 50% of the increase in product
development expenses of $443,000 was due to increased costs associated with
FlowMan development efforts, while the remainder of the increase resulted from
increased headcount, salaries and bonuses related to the Company's other product
development efforts (due in part to the tight market for technical skills) .
These increases were offset somewhat by an increase in the amount of capitalized
software development costs. The Company capitalized $490,000 and $337,000 of
development expenditures for the quarters ended September 30, 1998, and 1997,
respectively. As a result of development expenses associated with FlowMan 4.0,
the integration of FlowMan with the Company's existing products, as well as
normal enhancements to existing products, the Company expects overall
development spending to continue to increase during the 1999 fiscal year. No
development costs related to FlowMan 4.0 will be capitalized until the product
reaches technological feasibility; the Company therefore expects the amount of
software development costs that are capitalized to increase slightly or remain
flat until that time.

In connection with the acquisition of LSS, the Company acquired in-process
research and development related to the development of FlowMan 4.0. The Company
incurred approximately $150,000 of development costs during the quarter ended
September 30, 1998 and currently estimates the costs to complete the project to
be approximately $750,000. These costs are higher than the original estimate of
$200,000, as the Company has experienced unforeseen technical complexities and
other project management issues. The project is currently expected to be
completed during the fourth quarter of fiscal 1999.

At the time of the acquisition of LSS, revenues attributable to FlowMan 4.0 were
projected for purposes of valuing the acquired in-process R&D. The Company
continues to believe that FlowMan 4.0 will produce substantial revenues upon
successful completion. The Company originally expected to market both FlowMan
3.2 and 4.0 through its existing direct sales force and indirect distribution
channels. The Company now believes that a majority of sales will come through
indirect channels that need to be developed. The increased need to develop
indirect distribution channels and the one quarter delay in the expected
completion date of FlowMan 4.0 from the third quarter to the fourth quarter of
fiscal 1999 have affected the amount and timing of projected revenues. As a
result, current projected annual revenue ranges from $0.3 million to $6.5
million, as compared to the original projected annual revenue ranges of $1.0
million to $10.3 million.

   
Though the Company currently expects that the acquired in process technology
will be successfully developed, there can be no assurance that commercial or
technical viability of the product will be achieved. If the project is not
successfully developed, the Company may not realize the value assigned to the
in-process R&D project. In addition, the value of other acquired intangible
assets may also become impaired. Ongoing operations and financial results for
acquired businesses and the Company are subject to a variety of factors which
may or may not have been known or estimable at the time of such acquisition, and
the estimates discussed above are subject to change.
    




                                       13
<PAGE>   14

   Sales and marketing expenses consist primarily of salaries, sales
commissions, travel and facility costs for the Company's sales and marketing
personnel, and, to a lesser extent, advertising, trade shows and other
promotional activities. As a percentage of net revenues, sales and marketing
expenses decreased to 25% for the quarter ended September 30, 1998, compared to
33% for the quarter ended September 30, 1997. This percentage change was
primarily due to revenues increasing at a faster rate than sales and marketing
expenses. The increase in sales and marketing expenses was $248,000, which was
due primarily to increased commissions, salaries, and bonuses related to the
increase in sales volume and to a lesser extent for the sales and marketing
efforts of FlowMan. Such increases were offset slightly by reduced advertising
and promotional activity expenses. The Company expects sales and marketing
expenses to continue to increase on a dollar basis but to remain relatively
consistent on a percentage of revenue basis for the rest of fiscal year 1999,
since many sales and marketing expenses fluctuate with revenue.

   General and administrative expenses include costs associated with finance,
accounting, purchasing, order fulfillment, administration and facilities. As a
percentage of net revenues, general and administrative expenses decreased to 20%
for the quarter ended September 30, 1998, compared to 21% for the quarter ended
September 30, 1997. This was due primarily to net revenues increasing at a
higher rate than general and administrative expenses. The increase in general
and administrative expenses was $386,000 which was due primarily to increases in
headcount, salaries and bonuses of the Company's general and administrative
department, increased bad debt provisions associated with a significantly higher
sales volume, and other additional infrastructure expenses. As a percentage of
net revenues, the Company expects general and administrative expenses to remain
relatively consistent for the remainder of fiscal year 1999.

   Amortization of goodwill and other intangible assets consists of the
straight-line amortization of assets obtained by the Company as a result of its
acquisition of LSS on June 30, 1998. These assets include workforce-in-place,
customer lists, tradename, noncompete and employment agreements and goodwill,
which are being amortized over their estimated useful lives of three to four
years.

NET INTEREST AND OTHER INCOME

<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands)                     1998     1997     Change
-----------------------------------------------------------
<S>                                <C>      <C>      <C>
Net interest and other
    income                         $155     $192      (19%)
Percentage of net revenues            3%       5%
-----------------------------------------------------------
</TABLE>

Interest income was $157,000 and $198,000 for the quarters ended September 30,
1998, and 1997, respectively. The decrease in interest income was due primarily
to the reduction in cash and investments resulting from the cash outlay made by
the Company for the purchase of Logical Software Solutions Corporation, offset
slightly by cash generated during the quarter by operations.

   As of September 30, 1998, the Company had no interest-bearing debt
outstanding, and anticipates no new debt financing in the foreseeable future.
Accordingly, the Company expects net interest and other income for the
foreseeable future to reflect net interest income.





                                       14
<PAGE>   15

INCOME TAXES

<TABLE>
<CAPTION>
Three months ended September 30,
 (In thousands)                     1998      1997      Change
--------------------------------------------------------------
<S>                                 <C>       <C>       <C> 
 Income taxes                       $347      $148       134%

 Effective tax rate                   37%       41%
--------------------------------------------------------------
</TABLE>


Income taxes include federal and state income taxes currently payable and
deferred taxes arising from temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.

   The effective tax rate was lower during the quarter ended September 30, 1998,
compared to the quarter ended September 30, 1997, due primarily to approximately
$15,000 of additional income tax expense recognized during the quarter ended
September 30, 1997, for an IRS tax audit.

LIQUIDITY AND CAPITAL RESOURCES

   Working capital, which consists principally of cash, cash equivalents and
short-term investments was $7,985,000 as of September 30, 1998, compared to
$8,525,000 at June 30, 1998. Cash and cash equivalents decreased by $2,158,000
for the quarter ended September 30, 1998. Additions to cash and cash equivalents
included $1,394,000 provided by operations and $1,192,000 from sales of and
maturities in short-term investments. Principal uses of cash and cash
equivalents included $2,670,000 for the acquisition of LSS, $1,253,000 for the
repurchase of common stock, $490,000 of capitalized software costs, and the
purchase of $337,000 of property and equipment.

   The Company expects to spend approximately $1,300,000 for capital
expenditures during the fiscal year ending June 30, 1999. The Company's current
facility lease expires in November, 1998, and the Company has negotiated a
seven-year lease for a new facility. Net occupancy costs are not expected to
increase significantly as a result of this move; however, the Company is
committed to spending approximately $500,000 on tenant improvement costs related
to this move. In addition, the Company purchased approximately $220,000 of fixed
assets for use in the new facility during the quarter ended June 30, 1998.

   Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products (including FlowMan version 4.0); financing anticipated growth; the
possible acquisition of other software products, technologies and businesses;
and the possible repurchase of the Company's common stock. The Company believes
that its existing cash, cash equivalents, short-term investments, and cash
generated by operations will be sufficient to satisfy its currently anticipated
cash requirements for fiscal year 1999.

YEAR 2000

   The Year 2000 problem arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results.

   The Company has initiated efforts to mitigate the impact of the Year 2000
problem on three levels: (i) the products that the Company uses internally to
conduct its business, (ii) the products that it sells, and (iii) the Year 2000
readiness of the Company's vendors.



                                       15
<PAGE>   16


(i)  Internal Products

   The Company has taken an inventory of all software and hardware systems used
internally to conduct its ongoing business. These systems include client/server
systems, LAN systems, PC systems and related software, security systems and
voice mail systems. The Company has been notified by its vendors that certain of
these systems are currently Year 2000-ready, while other systems are scheduled
for purchase or update during the 1999 fiscal year. The Company has not
performed significant testing to confirm Year 2000 readiness on any of these
systems, but intends to do so during the 1999 fiscal year. Based on the
inventory of these internal systems, the Company does not believe the cost of
addressing Year 2000 readiness will be material. The Company believes that
significant record-keeping and operational deficiencies could occur should the
Company's internal products not be made Year 2000-ready, which could have
material adverse effects on the Company's business, financial condition and
results of operations. The Company has no contingency plans in place should this
occur.

   (ii) The Company's Products

   The products that the Company sells in the operation of its business have
reached varying degrees of Year 2000 readiness. All of the products have been
evaluated for the Year 2000 problem and significant steps have been taken to
make the products Year 2000-ready. The following products have been made Year
2000-ready and have been subjected to testing for the Year 2000 problem:
MortgageWare Loan Servicing, MortgageWare Loan Management System, MortgageWare
TC, MortgageWare Entre and MortgageWare MarketLINQ. In addition to internal
testing, the Company has published recommendations to its customers with regards
to the testing that they should be performing in-house to ensure Year 2000
readiness. The following products have been made Year 2000-ready and are
currently being tested for the Year 2000 problem: MortgageWare InfoLINQ,
MortgageWare InvestorLINQ, BuilderBlock$(TM) and FlowMan version 3.2. After
subjecting these products to testing, the Company intends to publish
recommendations to its customers on in-house testing that they should be
performing to ensure Year 2000 readiness. The following products have not been
made Year 2000-ready: MortgageBase and Secondary Marketing for DOS. The Company
has announced discontinuation of these products and is not currently selling
them. Customers who use these products can (at their own discretion) upgrade to
current products sold by the Company that are Year 2000-ready.

   The Company believes that all of the products it currently sells will be Year
2000-ready by the end of the 1999 fiscal year and that no material costs will
remain at that time. However, there can be no assurances that the Company's
products do not contain undetected errors relating to the Year 2000 problem that
may result in material additional cost or liabilities of unknown magnitude,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company believes that the
purchasing patterns of customers and potential customers may be affected by the
Year 2000 problem in a 



                                       16
<PAGE>   17

variety of ways. Some customers may defer purchasing the Company's products
because they will be diverting resources to address their own Year 2000
problems. In contrast, other customers may accelerate their decisions to
purchase the Company's products to replace non-Year 2000-ready applications. The
Company believes that it is not possible to predict the overall impact of these
decisions. The Company has no contingency plan should the Company be unable to
make all of its products Year 2000-ready.

   (iii) The Company's Vendors

   The Company has identified third-party vendors upon which it places
significant reliance and plans to ascertain their readiness for the Year 2000
problem during the 1999 fiscal year. Although, the Company believes it is
prudent to assess its vendors' Year-2000 readiness, it is unable to accurately
predict the impact to the Company if certain vendors are not Year 2000-ready.
Significant disruption in the businesses of the Company's customers and
third-party vendors may have material adverse effects on the Company's business,
financial condition and results of operations.

FORWARD-LOOKING STATEMENTS

   The matters described herein contain forward-looking statements which involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance, or achievements of the Company or industry trends to
differ materially from those expressed or implied by such forward looking
statements. When used in this discussion, the words "believes", "anticipates",
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events. The
discussion and analysis herein should be read in conjunction with the Risk
Factors and other information contained in the Company's Annual Report of Form
10-K for the year ended June 30, 1998, and "Certain Additional Factors Affecting
Future Results" below.

CERTAIN ADDITIONAL FACTORS AFFECTING FUTURE RESULTS

    There is no assurance that the Company will be successful in attracting new
customers in the mortgage technology market, or that its existing customers will
continue to purchase its products and support services. In addition, there is no
assurance that the Company's new mortgage technology products and services will
be released in a timely fashion and that, if and when released, new products or
services or its efforts to integrate the FlowMan product, into its existing
mortgage software products will be well received by its target market or that
others will not successfully develop competing products and services. Each of
these events could have a material adverse effect upon the Company's revenues,
financial condition, and results of operations.

   There is no assurance that the Company will be successful in attracting new
customers in the EAI market, or that its existing customers will



                                       17
<PAGE>   18


continue to purchase its products and support services. In addition, there is no
assurance that FlowMan 4.0 will be released in a timely fashion or that, if and
when released, it will be well received by its target market or that others will
not successfully develop competing products and services. Each of these events
could have a material adverse effect upon the Company's revenues, financial
condition, and results of operations.

   Expansion of the Company's operations in the EAI software market will require
significant additional expenses and capital and could strain the Company's
management, financial and operational resources. There can be no assurance that
the Company's experience and leadership in the mortgage-related software market
will benefit the Company as it enters new markets, and gross margins
attributable to new business areas may be lower than those associated with the
Company's existing business activities. Nor can there be assurance that the
Company will be able to expand its operations in a cost-effective or timely
manner. Furthermore, any new business launched by the Company that is not
favorably received by consumers could damage the Company's reputation or the
INTERLINQ brand. The lack of market acceptance of such efforts or the Company's
inability to generate satisfactory revenues from such expanded services or
products to offset their cost could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.

   The Company is unable to accurately estimate unit sales of its products and
the volume of annual support contracts that its customers will purchase due in
general to the nature of the software markets, and specifically to the cyclical
and volatile nature of the residential mortgage lending market, and the
development stage of the EAI market. In early 1994, the residential mortgage
lending market experienced a reduction in mortgage refinance volumes due to a
rise in interest rates. The Company experienced a significant decrease in net
revenues, operating income and net income during the fourth quarter of fiscal
1994, which continued through most of fiscal year 1995. During the quarter ended
September 30, 1998, and in fiscal years 1998 and 1997, in part due to the
increase in mortgage lending and refinance volumes, the Company has seen
increases in revenues, operating income and net income.

NEW ACCOUNTING STANDARDS

    On July 1, 1998, the Company adopted the provisions of Statement of Position
97-2, Software Revenue Recognition ("SOP 97-2"), which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, consulting and implementation
services, or training. Under SOP 97-2, the determination of fair value is based
on objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered. The adoption of SOP 97-2
did not have a material effect on revenue recognition for the quarter ended
September 30, 1998.



                                       18
<PAGE>   19
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company currently has no other components of
comprehensive income and has not determined the manner in which it will present
the information required by SFAS No. 130 in its annual financial statements for
the year ending June 30, 1999.

   In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by SFAS No. 131.



                                       19
<PAGE>   20


PART II.  OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

        (a)   EXHIBITS

              27 Financial Data Schedule

        (b)   REPORTS ON FORM 8-K

              None


                                       20
<PAGE>   21


SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



DATED:  March 9, 1999



                                  INTERLINQ SOFTWARE CORPORATION
                                  (Registrant)



                                  /s/ Stephen A. Yount
                                  --------------------------------------------
                                  Stephen A. Yount
                                  Executive Vice President and Chief Financial
                                  Officer
                                  (Principal Financial and Accounting Officer)



                                       21
<PAGE>   22

                                 Exhibit Index

<TABLE>
<CAPTION>
     EXHIBIT NUMBER                   TITLE
     --------------                   -----
<S>                          <C>
           27                FINANCIAL DATA SCHEDULE
</TABLE>



                                       22