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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-K/A

(Mark One)

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

     For the fiscal year ended JUNE 30, 1998

                                       OR

[ ]  Transition report pursuant to Section 14 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 Identification No.)
 incorporation or organization)

                             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)
    

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
22, 1998 as reported on the Nasdaq National Market, was approximately
$26,569,000.

As of September 22, 1998, there were 5,121,777 shares of the Registrant's Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE


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Certain portions of the Company's definitive proxy statement for the annual
meeting of shareholders of the Company to be held on November 10, 1998, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 1998 are incorporated by reference into Part III of this report.

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RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION

    This Annual Report on Form 10-K/A amends and supersedes, to the extent set
forth herein, the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998, previously filed on September 28, 1998. The Registrant has
restated certain of its historical fiscal year end audited financial statements
to reflect a change in the method used to value in-process research and
development that was recorded and written off in connection with the
Registrant's acquisition of Logical Software Solutions Corporation on June 30,
1998. The Registrant has also restated the related tax impact of said
acquisition.

    This Annual Report on Form 10-K/A amends Items 6, 7, 8, and 14 of the
Company's Annual Report on Form 10-K previously filed for the year ended June
30, 1998. Except as otherwise noted, information contained in this Annual Report
on Form 10-K/A is as of June 30, 1998.


PART I

ITEM 1. BUSINESS

OVERVIEW

    INTERLINQ Software Corporation ("the Company") was founded in Washington in
1982 and over the last sixteen years has developed, marketed and sold software
for the mortgage lending industry. Through the 1998 fiscal year the Company
concentrated on this industry as a leading business solutions provider to
approximately 2,000 banks, savings institutions, mortgage banks, mortgage
brokers, and credit unions.

    Pursuant to a purchase and sale agreement dated June 30, 1998, the Company
acquired substantially all the assets and business of Logical Software Solutions
Corporation ("LSS"), in a transaction accounted for using the purchase method of
accounting. This acquisition included certain technology including FlowMan
version 3.2 ("FlowMan"). FlowMan is an award-winning enterprise software
application that integrates disparate systems and applications in order to
facilitate ongoing process knowledge management by applying its business process
and rules technology across an entire enterprise. In connection with this
acquisition, the Company formed the Enterprise Technology Division ("ETD") and
reorganized the Company's existing mortgage software business into the Mortgage
Technology Division ("MTD"). The Company intends to continue to develop the
FlowMan product internally and expects to release version 4.0 in the latter half
of fiscal year 1999. The Company expects this version will offer significant
enhancements over the current product and will be capable of integration with
current MortgageWare products.


MORTGAGE TECHNOLOGY DIVISION

    OVERVIEW

    Through its Mortgage Technology Division, the Company works closely with
clients to provide comprehensive software applications and business solutions
for the residential mortgage and construction lending industry. MTD offers a
suite of products, MortgageWare Enterprise, that manages the entire life cycle
of a mortgage loan. MortgageWare Enterprise is designed to provide greater
operational efficiency, real-time access to data, and a cost-effective means for
managing and integrating information. It is designed to allow mortgage lenders
to improve business processes and practices, thereby improving profitability.
MortgageWare




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Enterprise creates an integrated system of reliable information for
business analysis; data is entered only once, managed from a central point, and
accessible from every desktop licensed to utilize MortgageWare Enterprise.
MortgageWare Enterprise can perform a wide variety of mission critical
enterprise tasks, including matching loan programs for lenders and borrowers,
originating and servicing mortgage loans and risk analysis of all loans within
an organization.

    As of June 30, 1998, MortgageWare products had been installed and were
currently supported by the Company for approximately 2,000 financial
institutions.

    The Company's target market is the approximately 34,800 financial
institutions in the United States, Puerto Rico and the Virgin Islands. According
to Company estimates based on available industry data, this market is comprised
of approximately 20,000 mortgage banks and brokers, 9,000 banks, 4,000 credit
unions and 1,800 savings institutions.

    The Company intends to generate future revenue growth within the MTD from
the sale of mortgage loan servicing technology and products designed to provide
customers with better information access and content. This growth is expected to
complement the Company's current products, which address operational efficiency
in order to decrease the cost of the mortgage loan cycle. In the near term,
further penetration of the loan production market and the mortgage loan
servicing market (along with additional sales of products and support services
to existing customers with its current products) is expected to provide the
majority of the Company's revenue. The Company has planned releases of new
products and upgrades to existing products targeted for fiscal 1999. In
addition, the Company plans to integrate the new FlowMan product into
MortgageWare TC and MortgageWare Loan Servicing during the latter half of the
1999 fiscal year.


    STRATEGY

    The Company's strategy with respect to the MTD is to strengthen and leverage
its position as a leading technology provider in the mortgage industry. This
strategy includes extending the scope of the Company's easy-to-use, PC--based
offerings, in order to help customers shape their business activities through
the use of technology and information. The Company is supported in this strategy
by a strong base of recurring revenue from long-term customer relationships and
the activities of a direct sales force.

    Easy-to-Use Software

    The Company believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to use and
support. Because the residential mortgage and construction lending processes are
complex and many of these processes are performed by individuals with little
computer experience. The Company's strategy is to provide software solutions
that can be easily installed and used. In order to provide consistent,
high-quality support and service, the Company does not create customized
software; however, it does provide customized integration of MortgageWare
Enterprise and has, from time to time, upgraded its products with certain
customers on a "pay for priority" basis. Product upgrades, nevertheless, often
include modifications and enhancements requested by customers.

    PC Platform

    The Company believes that reductions in the cost of and increases in the
computing power of PCs make its systems increasingly affordable for all
financial institutions. The Company's





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software runs on industry-standard PCs and networks, thereby providing power,
flexibility, ease of use and distribution of workload at a price that the
Company believes cannot be matched by minicomputer or mainframe solutions. It is
the Company's belief that the underlying trend in computing price to performance
will increasingly favor applications based upon the Windows/Intel environment on
which the Company's products run.

    Direct Sales Force

    The Company believes that industry specific expertise and knowledge are
required to sell its products, and therefore, it employs a direct sales force.
The Company retains sales personnel who it believes are skilled in both
residential mortgage and construction lending, as well as PC-based software
applications. The Company believes that maintaining its own sales force allows
it to develop long-term customer relationships.

    Long-term Customer Relationships

    The Company attempts to build long-term relationships with its customers by
providing them with personal contact from management, training and
implementation, and continuing services (such as consulting, toll-free telephone
support and participation in user groups). The Company regularly uses an outside
research firm to monitor customer satisfaction as well as industry-based survey
research to stay abreast of industry needs. The Company believes that its focus
on the customer and the industry strengthens its recurring revenue opportunities
and decreases the possibility of customer attrition to competitive products by
maintaining its responsiveness to changing customer demands.

    PRODUCTS AND SERVICES

    The Company believes the strength of its MTD lies in its ability to provide
customers with an integrated approach to originating, servicing, and analyzing
loans. The Company offers a variety of products for strategic and tactical
business solutions in the mortgage industry, including the MortgageWare Loan
Management System and MortgageWare(R)TC, MortgageWare for Brokers, MortgageWare
MarketLINQ(R), MortgageWare InvestorLINQ(TM),MortgageWare Entre(TM),
MortgageWare InfoLINQ(TM), MortgageWare Loan Servicing(TM), and
BuilderBLOCK$(TM). Together, these technology tools make up the MortgageWare
Enterprise -- designed to provide a means for greater operational efficiency
enterprise-wide, faster access to information, and cost-effective management of
information content.

The following table briefly describes INTERLINQ's MortgageWare Enterprise
products:

 POINT-OF-SALE AND ORIGINATION
--------------------------------------------------------------------------------
Entre                  Loan officers prequalify applicants in the field through
                       the use of a Windows-based software that runs on a laptop
                       computer
Origination            Loan officers enter loan applications directly into a PC,
                       either in the office or in the field

MORTGAGE LOAN MANAGEMENT SYSTEM (LMS) AND MORTGAGEWARE TC
--------------------------------------------------------------------------------
Qualifying             Allows quick assessment of a potential borrower's ability
                       to qualify for a loan
Processing             Handles loan application data entry, document tracking
                       and database maintenance





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Closing                Produces closing documents, including jurisdiction-
                       specific promissory notes and mortgages or deeds of trust
Settlement             Enables a lender or settlement agent to manage checking
                       accounts, print checks and report IRS data
Tracking               Produces management reports designed to meet each
                       customer's particular needs
MortgageWare for       Provides brokers with a scaled-down version of the
  Brokers              MortgageWare LMS designed to meet their specific needs
                       for product and pricing

SECONDARY MARKETING
--------------------------------------------------------------------------------
MarketLINQ             Serves as a central point of data entry and maintenance
                       for all mortgage loan programs and rates, providing
                       automatic distribution enterprise-wide

LOAN SERVICING
--------------------------------------------------------------------------------
Loan Servicing         Provides lenders with a complete and cost-effective
                       Windows-based loan servicing solution
Servicing Gateway      A streamlined version of Loan Servicing designed for
                       lenders holding loans for sale

CONSTRUCTION LENDING
--------------------------------------------------------------------------------

BuilderBLOCK$          Provides ability to service and report essential
                       components of a construction loan

ANALYSIS AND COMMUNICATIONS
--------------------------------------------------------------------------------
InfoLINQ               Provides mortgage lenders with a complete intranet-based
                       environment in which to collect, extract, and distribute
                       business analysis
COMLINQ                Handles inter-branch electronic communications for
                       MortgageWare software
MortgageBase           Enables customers to access their MortgageWare database
                       from FoxPro, convert files into an xbase format and print
                       more sophisticated reports
Interfaces             Utilizing SmartLINQ technology, customers can interface
                       with other products and systems. Interfaces include
                       Fannie Mae's MortgageLINKS, Fannie Mae's Desk Top,
                       Freddie Mac Loan Underwriter and the M&I interface

    MortgageWare Entre. Provides loan officers or brokers ("Originators") with
tools to tailor loan programs, enabling better customer service and more
expedient completion of each loan application. In order to improve communication
between Originators in the field and the processing department, MortgageWare
Entre is designed to increase accuracy, timeliness, and back-office tracking of
each loan. The Company believes that MortgageWare Entre gives mortgage
originators a competitive advantage by enabling them to quickly prequalify
borrowers for purchases and refinances, show side-by-side comparisons of
different loan programs, take the loan application, give the borrower
conditional loan approval on the spot, and produce professional-looking
open-house flyers. In addition, MortgageWare Entre provides the ability to order
risk grade evaluation and mortgage insurance through Freddie Mac's Loan
Prospector Second Generation, and the ability to request underwriting directly
from Fannie Mae. Additionally, this Windows-based system includes a contact
manager for efficient follow-up.

    MortgageWare TC and MortgageWare Loan Management System. MortgageWare TC and
MortgageWare Loan Management System are modular systems for residential mortgage
loan management that address qualifying, point-of-sale origination, processing,
closing, settlement, pipeline tracking and management, and inter-branch
electronic communications.





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MortgageWare TC, the thin-client version of the MortgageWare Loan Management
System, has been designed to reduce network traffic, improve performance,
simplify hardware requirements and reduce exposure to network-related problems.
These systems can also receive tiered pricing from MarketLINQ, so that lenders
can compare actual locked interest rates against rate sheet data. This
"intelligent" system directs and streamlines the flow of work throughout a
company, supporting the transition from individual workflow to an organizational
workflow that boosts efficiency across the entire enterprise. MortgageWare TC
utilizes a 32-bit Windows client-server architecture.

    MortgageWare MarketLINQ. A Windows--based product, MortgageWare MarketLINQ
serves as a central point of data entry and maintenance for all mortgage loan
programs and rates including tiered pricing, which allows an administrator to
electronically distribute up-to-date information enterprise-wide on demand. This
program ensures that data is entered into the system only one time--whether it's
being used for in-house purposes or by a loan officer working to obtain the best
interest rate for a borrower. Direct links into Knight-Ridder and Dow Jones
Telerate enables the pricing for loan programs to be efficiently managed and
rapidly recalculated as changes in mortgage pricing occur (often multiple times
daily). MortgageWare MarketLINQ utilizes a 32-bit architecture.

    MortgageWare Loan Servicing System. The Company believes that its
MortgageWare Loan Servicing enhances a customer's profitability by offering an
alternative to service bureau and mainframe-based servicing. MortgageWare Loan
servicing is offered at a competitive price that provides true economic benefit
to customers. In addition, it provides the benefit of having full access to the
loan servicing information. This allows loan servicers to gain both a cost and
an information advantage. MortgageWare Loan Servicing utilizes a 32-bit Windows
client-server architecture, coupled with advanced information features that
automate and manage business events for a loan servicer.

    Servicing Gateway. A streamlined version of Loan Servicing, Servicing
Gateway is an abbreviated, low-cost product designed specifically for those
lenders holding loans for sale. Using Servicing Gateway they can collect
payments and account for interest paid without the cost of a full servicing
operation.

    BuilderBLOCK$. For construction lending, BuilderBLOCK$ offers a
Windows-based system that simplifies and streamlines the management of
construction loans. This construction lending product offers an alternative to
manual or spreadsheet calculations. The product enables users to automatically
prepare Forms 1099 and 1098, enter draw requests, track inspections and print
checks. Key features include the automation of IRS reporting for both suppliers
and borrowers; the ability for lenders to compare the percentage of building
completion against the percentage of funds disbursed to date; and the
maintenance of a historical record of all transactions by supplier and
contractor. The system is designed to provide quick and easy entry of inspection
data; one screen captures information for all loans, and the information is then
automatically transferred to each individual loan.

    MortgageWare InfoLINQ. MortgageWare InfoLINQ integrates all of INTERLINQ's
products to create the synergy of the MortgageWare Enterprise business model.
InfoLINQ provides mortgage lenders with an intranet-based environment in which
to collect, extract, and distribute business information. Data for the automated
creation and distribution of real-time business reports and analyses is
accessible to users throughout the enterprise through easy-to-use browser-based
desktops. MortgageWare InfoLINQ utilizes a 32-bit architecture.





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    InfoLINQ allows users to access up-to-date information via a customizable
"desktop" that is similar to a Web site thereby reducing the need to commit
resources towards the collection and analysis of loan data. InfoLINQ
automatically distributes information to each desktop based on what company
information is relevant to each user's job. Information is captured and provided
either on a real-time or a periodic basis, depending on the needs of the users.
Users can tailor their desktops to most efficiently review the information they
want to track, helping them to quickly respond to changes in the market,
optimize profitability and speed the process of researching and analyzing the
entire mortgage business.

    Other MortgageWare Information Management Tools. The Company has developed
and expects to continue to develop products that it believes speed up the cycle
of mortgage loan creation. Other mortgage technology products offered by the
Company include:

    COMLINQ. INTERLINQ's electronic communications system is designed to provide
a fast, yet easy, method of transferring MortgageWare data between headquarters,
branch offices and origination systems.

    MortgageWare MultiTrac. Multi-tasking capabilities have been added to
MortgageWare Loan Management System and MortgageWare TC via MultiTrac, thereby
providing users with the ability to multi-task and access numerous loan
applications without interrupting in-progress activities.

    New Products/Modules Under Development

    MortgageWare InvestorLINQ. InvestorLINQ refers to managing the risk of
financial loss in the origination and subsequent selling of mortgage loans.
InvestorLINQ helps secondary marketing departments maximize profits from the
sale of loans in the secondary market, by providing pipeline information to
price loan products and hedge their position.

    Integration of FlowMan. During fiscal year 1999 the Company plans to
integrate its newly acquired FlowMan technology into MortgageWare TC and
MortgageWare Loan Servicing. This is expected to further broaden the
capabilities and benefits of these packages and further strengthen the
MortgageWare Enterprise.

    Complementary Products and Services

    The Company provides training, implementation services and consulting
services to assist its customers in the use of its software. These services are
typically performed at the customer's location and are tailored to meet the
customer's needs. Customers may also attend regional training seminars or
consult one of the Company's regionally based trainers for individual
assistance.

    Electronic forms and custom electronic documents necessary in the loan
production process are available to customers through a special marketing
agreement with CBF Systems, Inc., VMP Mortgage Forms Division ("VMP"). Under
this agreement, customers are introduced to these products by the Company's
direct sales force. Responsibility for producing, maintaining compliance, and
shipping documents to customers is held by VMP. The Company receives a portion
of the revenue collected by VMP.

    The Company also sells laser fonts and font cartridges and provides laser
logo services. The Company has developed interfaces to Fannie Mae's Mornet
product and Freddie Mac's





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Midanet product, which facilitate loan delivery once a loan is closed. In
addition, the Company has developed several programs to export servicing data to
loan servicing systems for its customers.

    Customer Service and Support

    INTERLINQ believes that excellent customer service is vital to its success
and future growth. For many customers, the MortgageWare Enterprise products
become critical to their daily operations. Accordingly, customers rely on the
Company for continued support and enhancement of its products. Customers who buy
licenses to use the Company's products under its purchase option also purchase
an annual support contract.

    Regular feedback on the quality of customer service is an integral part of
the Company's customer service strategy. The Company employs an independent
research firm that calls each customer at least once a year to determine
customer satisfaction. The reports are used by the Company to monitor its
procedures to enhance customer satisfaction. In addition, the Company has
advisory panels for each of its products. Advisory panels consist of customers
who are chosen to be representative of the Company's diverse, mortgage lending,
customer base. As a subset to the advisory panels, the Company holds annual
focus group meetings to obtain information and feedback on specific
cross-product issues. Currently, there are focus groups for regulatory
compliance, loan processing, secondary marketing, closing/settlement, portable
origination and loan servicing.

    The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 1998, 48 of its customers were included in the
program. The Major Account Services staff acts as liaison for each major account
customer, following up on issues and setting priorities for system enhancements.
With this program, the Company believes that it can better address the needs of
its largest customers and improve overall service for all its customers.

    PRODUCT DEVELOPMENT

    The MortgageWare Enterprise continues to evolve, with input from many
sources, including customers who submit software enhancement request forms
suggesting corrections or enhancements, as well as the advisory panels for each
product. The Company also maintains a database of all product support calls,
which provides feedback to its Product Development Department.

    The Company has organized its Product Development Department into teams
working on products or closely related groups of products. These teams include
personnel with experience in product analysis, software engineering, research
and technology, quality assurance, and product marketing. Their objective is to
ensure that all products meet the Company's standards. Employees on these teams
are selected for their skills in mortgage lending, software development and
marketing.

    The Company examines new technologies and platforms on an ongoing basis to
determine their potential benefits to customers. The Company currently develops
products using Windows NT, Windows 95 and DOS operating systems, ODBC compliant
database options (SQL Server(TM) and MS Access(TM)) Web browser-based interfaces
and thin-client technology, and Visual C++ , ActiveX programming tools on a PC
network. Currently, MortgageWare Loan Management System runs on Windows
platforms and uses licensed technology to run on the





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DOS operating system and on major PC networks. Other products, such as
MortgageWare TC, MortgageWare Entre, MortgageWare Loan Servicing, MortgageWare
MarketLINQ, Servicing Gateway and BuilderBLOCK$ all run under the Windows
operating system.

    During fiscal year 1999, the Company plans to integrate FlowMan into
MortgageWare TC and MortgageWare Loan Servicing. This is expected to further
broaden the capabilities and benefits of these packages and further strengthen
the MortgageWare Enterprise.

    SALES AND MARKETING

    The Company employs a direct sales force in its MTD because it believes that
considerable expertise is required to sell its mortgage technology products and
that strong customer relationships are key to its success. The Company's direct
sales force consists of a national sales manager and sales executives. These
personnel are supported by sales administration and inside sales
representatives. As of June 30, 1998, the Company employed 11 sales executives
and one national sales manager located throughout the country who are each
responsible for an assigned geographic territory. Certain sales representatives
are exclusively devoted to sales of the Company's servicing products. Sales
executives are expected by the Company to maintain relationships with existing
customers and are responsible for the generation of new business and expansion
of existing business. Sales administration representatives handle contracts and
other administrative details, while inside sales representatives qualify sales
leads, setting appointments for sales executives, and managing much of the sales
follow-up.

    Sales leads are generated through various sources, including magazine
advertising, industry databases, trade shows, purchased lists, direct mail,
telemarketing, customer referral and membership in various trade organizations.
The Company tracks lead sources to determine the most cost-effective use of its
promotional budget.

    The Company offers an unconditional, 60-day, money-back guarantee on most of
its mortgage-related software products. To date, it has not experienced
significant returns under this guarantee.

    Licensing Options

    To attract and retain a wide diversity of customers in the residential
mortgage lending industry, the Company has developed three licensing options for
its products:

    Purchase Option. Under this option, customers may purchase a standard
non-exclusive software license to use its products. The Company offers financing
for the purchase option and, for an additional annual fee, provides product
support services. Approximately 95% of the MTD's customers select the purchase
option and the additional support services.

    Partnership Plan Option. Under the Partnership Plan option, customers pay an
initial commitment fee, plus a monthly fee based upon the number of loan
applications entered into the system. The Partnership Plan option includes the
MortgageWare Loan Management System software and software support and is
targeted to customers who are unwilling or unable to make the capital commitment
associated with the purchase option.





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    Rental Option. Because customers may not wish to commit to the purchase
option or the Partnership Plan option, the Company created a limited-capacity
version of the MortgageWare Loan Management System software for brokers that is
available on a monthly rental plan.

    CUSTOMERS

    The Company's mortgage technology customer base is geographically diverse
and covers a broad range of sizes and types of financial institutions.
MortgageWare products are installed and currently supported for approximately
2,000 customers in 50 states plus Puerto Rico, Guam, and the U.S. Virgin
Islands. As of June 30, 1998, this customer base was comprised of approximately
750 mortgage brokers and bankers, 650 banks, 500 credit unions and 100 savings
institutions. In fiscal year 1998, no single customer accounted for more than 4%
of the Company's net revenues.

    COMPETITION

    The market for mortgage-related software products is highly competitive. The
Company competes with software vendors offering integrated financial services
packages, software consultants and value-added resellers who deliver custom or
customized software products, in-house management information services and
programming resources of some of the Company's larger existing and potential
customers, as well as software vendors offering specialized products for the
mortgage lending industry. The Company believes the main competitive factors
include price, operating platform compatibility and customer support. Some
competitive products cost significantly less than MortgageWare software, and
price-sensitive buyers tend to choose these products. Many competitors market
competing products on mainframe, mini-computer and PC platforms with a wide
array of pricing and have significantly greater financial, technical, marketing
and sales resources than the Company; some offer financial services products not
offered by the Company. The Company believes it is the leading provider of
PC-based software for residential mortgage lending solutions.

    In addition to the Company's current competitors, there are many companies
involved in providing software and related services to segments of the financial
services industry other than residential mortgage lending. Because of
similarities both in the customer base and the types of products and services
provided by these other companies compared to those of the Company, these
companies are potential competitors of the Company. There is no assurance that
the Company would be successful in competing against these potential
competitors, should any of them decide to enter the Company's market.

    MORTGAGE LENDING REGULATIONS

    The residential mortgage lending industry is subject to a variety of
government regulations, including the Equal Credit Opportunity Act, the
Truth-in- Lending Act, the Real Estate Settlement Procedures Act and the Home
Mortgage Disclosure Act, which prohibit discrimination and require the
disclosure of certain basic information to borrowers concerning credit terms and
settlement costs. Additionally, there are various federal, state and local laws
and regulations that govern mortgage lending activities, including consumer
protection and usury statutes. Entities engaged in making and selling mortgage
loans are often subject to the rules and regulations of one or more of the
investors, guarantors and insurers of residential mortgage loans, including the
Federal Housing Authority, the Veteran's Administration, Fannie Mae, Freddie Mac
and the Government National Mortgage Association. These agencies regulate the
origination, processing, underwriting, selling, securitizing and servicing of
mortgage





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loans, prohibit discrimination, establish underwriting guidelines, provide for
inspections and appraisals, require credit reports on prospective borrowers and
fix maximum loan amounts and interest rates.

    Failure to comply with these laws and regulations could lead to a lender's
loss of approved status, termination of its servicing contracts without
compensation, demands for indemnification or loan repurchase, class action
lawsuits and administrative enforcement actions. Should loan production
processes or documentation arising from use of the Company's products result in
a customer's violation of such requirements, such customer, or the government
authority whose requirements were not met, might claim that the Company is
responsible, which could have an adverse effect upon the Company and its
reputation in the mortgage lending industry. On October 2, 1995 the Company
entered into an agency and compliance delegate agreement with CBF Systems, Inc,
VMP Mortgage Forms Division (VMP). Under the terms of this agreement VMP assumes
compliance responsibility for all documents sold by and through the Company.


ENTERPRISE TECHNOLOGY DIVISION

    OVERVIEW

    Through its Enterprise Technology Division, the Company intends to enter the
Enterprise Application Integration ("EAI") market by marketing FlowMan through
OEMs, system integrators and third-party application developers. FlowMan is an
award-winning technology that integrates disparate systems and applications in
order to facilitate ongoing process knowledge management, by applying its
business process and rules technology across an entire enterprise. FlowMan is
designed to coordinate the execution and timing of all tasks, events and
decisions for key business processes across legacy systems, enterprise
applications, client-server systems and Internet technologies. The Company
expects sales of FlowMan to begin in the first half of fiscal year 1999.

    The Company's target markets for FlowMan include the EAI market as well as a
variety of vertical markets (such as healthcare, insurance, government,
transportation and utilities, etc.). EAI technologies attempt to integrate
applications at the business process level rather than at the data level. The
Company believes that FlowMan enables reusability of integration techniques and
processes across departments and environments and allows users to implement
application integration and reengineer processes without extensive user
knowledge or training in the specific underlying technologies. The Company also
believes that software providers in vertical markets can use FlowMan as an
integration/workflow toolkit or component to enhance their products'
functionality and architecture.

    STRATEGY

    The Company's strategy with respect to the ETD is to establish FlowMan as a
leading technology in the EAI and workflow market contributing to overall
Company growth and diversification by providing access to markets outside of the
mortgage lending industry. The Company plans to establish partnerships with
industry experts with the required knowledge and skills to compete both as an
enterprise solutions provider within the EAI market and as a leader in certain
vertical markets.

    Enterprise Application Integration & Workflow Market





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<PAGE>   13

    The EAI market is a new and growing marketplace, which according to some
industry analysts could reach $1 billion within a few years. This large, new and
growing marketplace provides the Company access to both a much larger technology
market and business opportunity. In addition, the Company believes a need exists
in numerous vertical markets (such as healthcare, insurance, government,
transportation and utilities, etc.) for an application integration/workflow
technology that can be used to enhance existing and development stage products.
The Company believes that these markets offer a significant business opportunity
for the Company.

    Although demand for EAI software products has grown in recent years, the EAI
market is still an emerging market. The Company's future financial performance
will depend in large part on continued growth in the number of organizations
adopting EAI computing environments and the number of applications developed for
use in those environments. There can be no assurance that the market for EAI
software will continue to grow. If the EAI software market fails to grow or
grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected.

    Indirect Sales Channel

    The Company believes that successful companies in the EAI market will be
those that develop relationships with other experts in the field who have either
specific software and hardware expertise in the EAI market and/or specialized
industry knowledge in particular vertical markets. The Company plans to develop
partnerships with key software and solution providers to jointly offer EAI
solutions or integrated/workflow-enabled products. As such, the marketing and
sales efforts primarily will be made through OEMs, system integrators and
third-party application providers.

    There can be no assurance that the Company will be able to attract OEMs,
system integrators and third-party application providers that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. In addition, the Company
anticipates that its agreements with OEMs, system integrators and third-party
application providers will not be exclusive and many of the Company's OEMs,
system integrators and third-party application providers may carry competing
product lines. Therefore, there can be no assurance that any OEM, system
integrator or third-party application provider will be dependable in
representing the Company's products, and the inability to recruit, or the loss
of important OEMs, system integrators or third-party application providers could
adversely affect the Company's results of operations. In addition, if it is
successful in selling products through these channels, the Company expects that
any material increase in the Company's indirect sales as a percentage of total
revenue will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels.

    PRODUCTS AND SERVICES

    FlowMan

    FlowMan is comprised of an enterprise application framework, engineering
tools and a user interface. The enterprise application framework manages and
controls transactions throughout the enterprise allowing collaboration between
application components. The framework serves as a communication "pipeline"
throughout the enterprise. The framework core elements, the business process
engine, business rules engine and component interface, allow abstraction of





                                                                              13

<PAGE>   14

the process model and business rules from third-party and legacy applications
and technology components such as imaging, forms, DBMS and other products
connected into the FlowMan framework. This tight integration results in one
common enterprise-wide system, protects the organization's technology investment
and removes the need to mandate standard enterprise components in favor of a
best-of-breed approach. FlowMan also provides flexibility through rapid
implementation and modification of the enterprise technology framework.
Applications can be added, removed, or replaced by other application components
in a plug-and-play fashion. The interface layer of the FlowMan framework
provides a means for the easy integration of each component into the overall
enterprise framework allowing interoperability between applications and across
the enterprise.

    FlowMan has won numerous awards over the past several years, including:

    o   1998 AIIM Process Innovation Award
    o   1998 GIGA Silver Award
    o   1997 GIGA Gold Award
    o   1996 GIGA Merit Award
    o   1995 and 1996 CIPA Winning Solutions Provider

    Complementary Products and Services

    Depending on the sales channel, the Company either provides training and
support to the channel partner or the end user (if it is a direct sale).
Additionally, the Company offers consulting services, which may include a
combination of a workshop to educate the customer on the business process
engine, the physical integration of FlowMan with disparate systems and
applications, and training on the setup and ongoing use of the technology.

    Customer Service and Support

    For many customers, the Company expects that FlowMan will become critical to
their daily operations. Accordingly, customers will rely on the Company for
continued support and enhancement of its products. The Company expects that
customers who buy licenses to use FlowMan products under the Company's purchase
option will typically purchase an annual support contract. Depending on the
sales channel and partner agreement, the support contract is made with the
customer's OEM, system integrator, reseller or directly through the Company.

    PRODUCT DEVELOPMENT

    The Company is committed to enhancing the FlowMan technology to ensure that
it maintains its recognition as a leading, award-winning and innovative
technology. Flowman version 4.0, anticipated for commercial release during the
second half of fiscal year 1999, will offer significant enhancements over
version 3.2, including three-tier architecture for expanded scalability,
Component Object Model (COM) technology, object-oriented methodology and ActiveX
controls. FlowMan version 4.0 will be deployable across distributed network
environments.

    The EAI software market is characterized by rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success in this market will depend upon its ability to enhance
its current products and to develop and introduce new products on a timely





14

<PAGE>   15

basis that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new products or enhancements of existing
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition will be materially adversely affected.

    SALES AND MARKETING

    The Company employs an indirect sales channel with respect to its ETD
because it believes that partnerships with experts and industry leaders will be
necessary to create a leveraged business model.

    Channel development and sales leads are generated through various sources,
including industry databases, trade shows, purchased lists, direct mail,
telemarketing, customer referral and membership in various trade organizations.
The Company tracks lead sources to determine the most cost-effective use of its
promotional budget.

    CUSTOMERS

    The Company currently has 20 end-user installations of FlowMan. This
customer base is industry and geographically diverse including customers in
healthcare, insurance, government, education, transportation and utilities.

    COMPETITION

    The EAI software market is intensely competitive and subject to rapid
change. Competitors vary in size and in the scope and breadth of the products
and services offered. The majority of these companies are interested in
providing specialized services or products to complement true EAI provider's
products. Some suppliers are contending for position as full-fledged EAI
software system providers. These include IBM and New Era of Networks among
others.

    The Company believes the main competitive factors include price, operating
platform compatibility, ease of implementation and use, and customer service.
Some competitive products cost less than the Company's software, and
price-sensitive buyers tend to choose those products.

    Increased competition is likely to result in price reductions and reduced
gross margins, which could materially adversely affect the Company's business,
operating results and financial condition. Many of the Company's current and
potential, competitors have significantly greater financial, technical,
marketing and other resources than the Company; some offer complementary
products not offered by the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than the Company can. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the





                                                                              15
<PAGE>   16

Company will not materially adversely affect its business, operating results and
financial condition.
















16

<PAGE>   17

GENERAL CORPORATE INFORMATION

    INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

    The Company regards its software as proprietary and essential to its
business. The Company relies primarily on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements,
license agreements and other intellectual property protection methods to protect
its proprietary technology. The Company received a patent covering part of the
FlowMan technology in September of 1998, which will expire in April 2015.

    There has been frequent litigation in the computer industry regarding
intellectual property rights. There can be no assurance that third-parties will
not in the future claim infringement by the Company with respect to current or
future products, trademarks or other proprietary rights. Any such claims could
be time-consuming, result in costly litigation, cause diversion of management's
attention, cause product release delays, require the Company to redesign its
products or require the Company to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company, or at all, any of which occurrences could have
a material adverse effect upon the Company's business, financial condition and
results of operations.

    MANUFACTURING

    The principal materials used in the Company's products include computer
diskettes and documentation. The manufacturing process includes the development
and testing of software by the Company, plus the production of a master copy for
duplication. The Company contracts with an outside source for all disk
duplication for major product releases and updates. Accompanying documentation,
which is minimal since most documentation is on-line, is created by the Company
and sent to an outside source to be reproduced. The Company generally ships
products within a few business days after receipt of an order. Normally the
Company has little or no backlog, but has experienced occasional backlogs. At
June 30, 1998, the Company's backlog was not material.

    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 its 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 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





                                                                              17

<PAGE>   18

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 captial and could strain the
Company's management, financial and operational resources. Furthermore, 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. There can be
no 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 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.

    EMPLOYEES

    As of August 31, 1998, the Company employed 154 people, including 36 in
sales and marketing, 53 in product development, 41 in customer service and 24 in
operations. None of the Company's employees is represented by a labor union, and
the Company believes that its relationship with its employees is good.


















18

<PAGE>   19

    EXECUTIVE OFFICERS OF THE REGISTRANT

    The executive officers of the Company, as of September 25, 1998, are as
follows:

<TABLE>
<CAPTION>
          NAME              AGE                           POSITION
-------------------- ------- ---------------------------------------------------------------

<S>                          <C>   <C>
Jiri M. Nechleba             40    President and Chief Executive Officer

Stephen A. Yount             41    Executive Vice President - Enterprise Technology Division,
                                   Chief Financial Officer and Secretary

Patricia R. Graham           45    Executive Vice President, Mortgage Technology Division
</TABLE>

JIRI M. NECHLEBA has been President and Chief Executive Officer since September
11, 1995. From 1993 through August, 1995, he served as Senior Vice President and
General Manager of SolutionWare, a subsidiary of A.C. Nielsen, a division of Dun
& Bradstreet, and a provider of information systems to the consumer packaged
goods industry. From 1985 to 1993, Mr. Nechleba was an independent management
consultant to a variety of industries. Mr. Nechleba holds two Bachelor of
Science degrees from the Massachusetts Institute of Technology.

STEPHEN A. YOUNT has been Executive Vice President - Enterprise Technology
Division, Chief Financial Officer and Secretary of the Company since July 1,
1998. Prior to this position he was the Vice President-Finance, Chief Financial
Officer and Secretary since October 1991. Additionally, upon the resignation of
the Company's President and Chief Executive Officer, Robert M. Delf in January,
1995, Mr. Yount was appointed Interim President by the Board of Directors. He
continued in this capacity until the hiring of Jiri Nechleba as President and
Chief Executive Officer on September 11, 1995. During 1991, Mr. Yount held a
temporary position with PF Industries & Acrotech, Inc., an aerospace company,
where he served as Chief Financial Officer. From 1989 to 1991, Mr. Yount was the
President and Chief Financial Officer of PacSoft Incorporated, a civil
engineering software firm. Mr. Yount earned a CPA certificate in 1982 and holds
a BA in Business Administration from the University of Washington.

PATRICIA R. GRAHAM has been Executive Vice President-Mortgage Technology
Division since July 1, 1998. Prior to her promotion, Ms. Graham was Vice
President - Sales and Marketing since March 25, 1996. From 1990 to 1995, she
served in various capacities with A.C. Nielsen Co., a subsidiary of Dun &
Bradstreet, including executive vice president. From 1981 to 1990 she was
employed by Information Resources, Inc. and departed holding the position of
Senior Vice President. Ms. Graham holds a Masters degree in Political Science
from Rutgers University.





                                                                              19

<PAGE>   20

ITEM 2. PROPERTIES

    The Company is currently subleasing and occupying approximately 46,000
square feet of office space in Kirkland, Washington. This sublease expires in
November 1998 and does not contain a renewal option. The Company has entered
into a seven-year agreement to lease approximately 35,000 square feet of office
space in Bellevue, Washington. The Company believes that its new facilities will
be adequate for its needs through the end of fiscal year 1999.

ITEM 3. LEGAL PROCEEDINGS

    The Company is not party to any litigation that would have a material
adverse effect on the Company or its business.

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

    No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The Common Stock has traded on the Nasdaq National Market under the symbol
INLQ since April 27, 1993. The Company has 2,312 shareholders as of September
22, 1998, based on computations including participants in security positions
listings, as defined by Rule 17Ab-8 of the Exchange Act. Presented below are
quarterly closing stock price ranges as reported on Nasdaq National Market for
the periods indicated.

<TABLE>
<CAPTION>
                                                                   HIGH          LOW
                                                               ------------ ------------
              <S>                                                  <C>          <C> 
              Fiscal year ended June 30, 1998
                  Fourth quarter                                   $7.50        $4.50
                  Third quarter                                     5.50         3.88
                  Second quarter                                    4.75         3.75
                  First quarter                                     4.63         3.50

              Fiscal year ended June 30, 1997
                  Fourth quarter                                   $4.13        $3.63
                  Third quarter                                     6.00         3.75
                  Second quarter                                    5.50         3.50
                  First quarter                                     4.50         3.38
</TABLE>


    The Company has never paid dividends on its Common Stock. The Company
intends to retain future earnings for use in its business and therefore does not
anticipate paying dividends in the foreseeable future. There is no assurance
that the Company will ever pay dividends on its Common Stock.

    On June 30, 1998, the Company issued 233,334 shares of Common Stock in
connection with the acquisition of substantially all the assets and business of
LSS. No underwriters were used and the recipient of the shares of Common Stock
was LSS, which subsequently distributed the shares to its shareholders. The
shares were not registered under the Securities Act of 1933, as amended,
pursuant to the exemption set forth in Section 4(2) thereof. All recipients of
shares of the Company's Common Stock possessed a sufficient level of financial
sophistication and received or had access to information about the Company. The
shares issued in the transactions are subject to restrictions on transfer absent
registration under the





20

<PAGE>   21

Securities Act, and no offers to sell the securities were made by any form of
general solicitation or general advertisement.


ITEM 6.  SELECTED FINANCIAL DATA

   
<TABLE>
<CAPTION>
                                                      
Years Ended June 30,                                      1998       1997       1996        1995        1994
--------------------------------------------------------------------------------------------------------------
(In thousands except per share data)                  (restated)         
<S>                                                   <C>        <C>        <C>         <C>         <C>     
STATEMENTS OF OPERATIONS DATA:
    Net revenues:
        Software license fees                         $  9,647   $  7,055   $  6,232    $  4,314    $ 11,438
        Software support fees                            6,976      6,073      5,773       5,483       4,707
        Other                                            1,723      1,239      1,088       1,196       2,344
                                                    ----------------------------------------------------------
           Total net revenues                           18,346     14,367     13,093      10,993      18,489
                                                    ----------------------------------------------------------
    Cost of revenues:
        Software license fees                            1,778      1,500      1,653       1,424       1,244
        Software support fees                            2,445      1,856      1,678       1,788       2,062
        Other                                              859        683        589         642       1,014
                                                    ----------------------------------------------------------
           Total cost of revenues                        5,082      4,039      3,920       3,854       4,320
                                                    ----------------------------------------------------------
           Gross profit                                 13,264     10,328      9,173       7,139      14,169
                                                    ----------------------------------------------------------
    Operating expenses:
        Product development                              1,609      2,147      2,060       1,123         891
        Sales and marketing                              5,674      4,011      4,230       4,244       5,801
        General and administrative                       3,754      3,152      3,010       3,404       3,278
        Purchase of in-process R&D                       1,350         --         --          --          --
        Other general expenses - nonrecurring               --         --         --         952          --
                                                    ----------------------------------------------------------
           Total operating expenses                     12,387      9,310      9,300       9,723       9,970
                                                    ----------------------------------------------------------
           Operating income (loss)                         877      1,018       (127)     (2,584)      4,199
    Net interest and other income                          744        719        811         676         322
                                                    ----------------------------------------------------------
        Income (loss) before income taxes
           and cumulative effect
           of change in accounting principle             1,621      1,737        684      (1,908)      4,521
    Income taxes                                           616        627        251        (780)      1,532
                                                    ----------------------------------------------------------
        Income (loss) before cumulative effect
           of change in accounting principle             1,005      1,110        433      (1,128)      2,989
    Cumulative effect of change
        in accounting principle                             --         --         --          --        (109)
                                                    ----------------------------------------------------------
           Net income (loss)                          $  1,005   $  1,110   $    433    $ (1,128)   $  2,880
                                                    ==========================================================

PER SHARE DATA:
       Net income (loss) - basic                      $    .19   $    .19    $    .07    $  (.19)    $   .51
                                                    ----------------------------------------------------------
       Net income (loss) - diluted                    $    .19   $    .19    $    .07    $  (.19)    $   .45
                                                    ----------------------------------------------------------
       Shares used to calculate net income (loss) -      5,213      5,707       5,965      5,831       5,635
          basic
       Shares used to calculate net income (loss)
          diluted                                        5,376      5,842       6,171      5,831       6,471

BALANCE SHEET DATA:
    Cash, cash equivalents and investments            $ 13,908   $ 13,831    $ 14,218   $ 14,373    $ 14,585
    Working capital                                      8,525     11,623      12,823     13,638      13,753
    Total assets                                        26,770     21,067      22,321     21,609      23,838
    Total shareholders' equity                          17,155     16,050      17,771     17,338      18,703
</TABLE>
    





                                                                              21

<PAGE>   22


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

RESTATEMENT

    Subsequent to the filing with the Securities and Exchange Commission of its
Annual Report on Form 10-K for the year ended June 30, 1998, the Company's
management, based on discussions with the Staff of the Commission, determined
that issues existed regarding (a) the Company's accounting for its acquisition
of Logical Software Solutions Corporation ("LSS") and specifically the
methodology used to determine the charge for in-process research and development
that the Company recorded on the date of acquisition, and (b) the Company's
accounting for the valuation allowance placed on its deferred tax assets that
resulted from the acquisition of LSS. The intangible assets of LSS included
in-process technology, among other assets, which was related to research and
development that had not reached technological feasibility and for which there
was no alternative future use. Pursuant to applicable accounting pronouncements,
the amount of the purchase price allocated to this technology was expensed. In
previously issued financial statements, the Company recorded a write-off for
in-process research and development of $3,615,304 for the fiscal year ended June
30, 1998. After discussions with the Staff of the Commission, the Company
revised the methodology used to determine the amount of in-process research and
development to conform to the Commission's recent stance on such valuations and
has reduced the amount of the write-off to $1,349,616 with a corresponding
increase to goodwill. The Company also recorded a valuation allowance of
$1,103,913 on its deferred tax assets at June 30, 1998. 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 concluded that a valuation allowance
was no longer necessary. The Company's financial statements have been restated
to reflect such adjustments as described below and in Note 1 of the Notes to
Financial Statements. See also Note 3 - Acquisition and Note 5 - Income Taxes.
The financial statements continue to reflect the operations of LSS beginning on
June 30, 1998.

GENERAL

    MORTGAGE TECHNOLOGY

    Prior to the mid-1980s, mortgage loans in the United States were originated
in a manual and paper-intensive process. Then, 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 - a
robust, full-featured and cost-effective PC-based software solution. This first
wave of automation was accelerated and amplified from 1992 to early 1994 as
mortgage interest rates reached historically low levels and mortgage refinance
volumes soared. Then, in early 1994, the Federal Reserve raised interest rates,
which immediately caused mortgage refinance volumes to plummet. As a result,
lenders found themselves with excess labor and mortgage processing capacity.
During the remainder of 1994 and for most of 1995, the Company believes that the
industry was focused more on staff reduction than adding new automated loan
management systems.

    Beginning in fiscal year 1996, and continuing into fiscal years 1997 and
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





22

<PAGE>   23

for the borrower compared to most historical measures. With this overall
favorable lending environment, mortgage lending activity has increased, driven
by an increase in financing of home sales and refinancing of existing mortgages.
During the last half of fiscal year 1997, the Company began to observe a shift
in the mortgage origination business. There appeared to be excess production
capacity coupled with a reduced profit margin. Over the 1998 fiscal year, it
appears that most of this excess production capacity has been fulfilled, yet
profit margins continue to be low.

    During the fiscal year ended June 30, 1998, the Company experienced
increased license fees due to a combination of lenders once again needing
additional production capacity and the immediate acceptance of MortgageWare(R)TC
by existing and new customers. Looking forward, the Company believes that due to
continued lower profit margins, its customers are shifting their long-term
purchasing decisions to solutions that reduce unit costs and, accordingly,
increase profit margins, rather than solely increasing production capacity.
During fiscal years 1996 and 1997, the Company focused its product development
effort to provide a more diverse and integrated "enterprise" solution for the
mortgage lending industry. It is the Company's belief that this broader
enterprise solution has positioned the Company well for this recent change in
the mortgage lending industry and has contributed to the increases in software
license revenues. This broader product offering focuses more on reducing the
cost of originating, processing, and servicing a mortgage, than on solely
increasing production capacity.


    ENTERPRISE TECHNOLOGY

    Pursuant to a purchase and sale agreement dated June 30, 1998, the Company
acquired substantially all the assets and business of Logical Software Solutions
Corporation ("LSS"), in a transaction accounted for using the purchase method of
accounting. This acquisition included LSS's existing product, FlowMan(R) version
3.2, and LSS's product under development, FlowMan version 4.0. Since this
transaction was consummated on the last day of the 1998 fiscal year and was
accounted for using the purchase method of accounting, the operations of the
acquired company are included beginning on June 30, 1998. As a result of the
purchase, the Company recorded a charge of $1,349,616 for the purchase of
in-process research and development. This acquisition resulted in the formation
of two INTERLINQ divisions - the Mortgage Technology Division ("MTD") and the
Enterprise Technology Division ("ETD").

    The Company has a two-prong strategy with regard to this acquisition. In the
first prong, the Company intends to integrate the FlowMan product with the
Company's MortgageWare(R) Enterprise product suite. This is expected to further
broaden the Mortgage Technology Division's product offering and strengthen the
commitment of the Company to enterprise solutions. In the second prong, the
Company intends to enter 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 sold as an application package into other vertical markets
and as a toolkit for use by other application providers. The Company believes
that the EAI marketplace is in its early stages and will grow significantly over
the next few years. This two-prong strategy is intended to provide growth and
diversification for INTERLINQ, while allowing the Company to continue to expand
and excel in its core market of mortgage technology.


NET REVENUES                                                                  23

<PAGE>   24

<TABLE>
<CAPTION>
===============================================================================================
(In thousands)                                 1998   Increase      1997   Increase      1996
-----------------------------------------------------------------------------------------------
<S>                                         <C>            <C>   <C>            <C>   <C>    
Software license fees                       $ 9,647        37%   $ 7,055        13%   $ 6,232
Software support fees                         6,976        15%     6,073         5%     5,773

Other                                         1,723        39%     1,239        14%     1,088
                                          -----------------------------------------------------
Total net revenues                          $18,346        28%   $14,367        10%   $13,093
===============================================================================================
</TABLE>

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

    Software license fees increased by 37% for fiscal year 1998 compared to
fiscal year 1997, and increased by 13% for fiscal year 1997 compared to fiscal
year 1996. The increase in software license fees in fiscal year 1998 compared to
fiscal year 1997 was primarily due to a combination of the overall favorable
lending conditions discussed above as well as sales of the Company's newer
products which make up the MortgageWare Enterprise. The Company continued to
experience increasing sales of its flagship product MortgageWare Loan Management
System, as well as the new thin client version, MortgageWare TC (released in
fiscal year 1998). In addition, sales volume increased for products such as
MortgageWare Loan Servicing, MortgageWare InfoLINQ(TM), and MortgageWare
MarketLINQ(TM), all of which were released during fiscal year 1997. In addition,
sales of MortgageWare Entre(TM) (released in fiscal year 1996) continued to
increase. The increase in software license fees in fiscal year 1997 compared to
fiscal year 1996 was primarily due to a combination of the overall favorable
lending conditions discussed above, which increased software license fees for
previously developed products, and software license fees for products released
in that year.

    Software support fees increased by 15% for fiscal year 1998 compared to
fiscal year 1997, and by 5% for fiscal year 1997 compared to fiscal year 1996.
These year-to-year increases reflected a combination of a modest number of new
customer additions and an increase in the volume of software licenses sold to
new and existing customers, offset slightly by a low but fairly constant
attrition rate in the installed customer base. Due in part to changes, from time
to time, in government regulations applicable to documentation required for
residential mortgage lending, the vast majority of the Company's customers
purchase annual software support agreements. However, because software support
fees are recognized ratably over the term of the annual support agreement,
whereas 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 that due to higher expected software
license fees and higher support fees charged on MortgageWare TC and MortgageWare
Loan Servicing, that software support fees are likely to continue to increase at
a modest rate in fiscal year 1999.

    Other revenues increased by 39% for fiscal year 1998 compared to fiscal year
1997, and by 14% for fiscal year 1997 compared to fiscal year 1996. The increase
in other revenues in fiscal year 1998 compared to fiscal year 1997 was primarily
due to increases in training revenues and consulting fees. The Company sold two
significant consulting engagements during the 1998 fiscal year, which accounted
for the majority of the consulting revenue. The increase in other revenues in
fiscal year 1997 compared to fiscal year 1996 was primarily due to an increase
in on-site training fees. This increase in training fees was primarily due to an
increase, beginning in the first quarter of fiscal year 1997, in the daily fee
charged for on-site training. Additionally, the document fees from the marketing
agreement with VMP Electronic Laser Forms increased





24

<PAGE>   25

substantially in fiscal year 1997 compared to fiscal year 1996. Because training
is usually purchased with the Company's software, the Company expects training
fees to increase as software license fees increase (although not
proportionately). Additionally, the Company expects consulting fees to increase
during fiscal year 1999 due primarily to increases in demand for MortgageWare
Loan Servicing (which can require higher levels of customization and
implementation services than the Company's other mortgage technology products)
and the expected customization and implementation services that will be sold
with FlowMan.

    Looking forward, the Company anticipates an increasing contribution to
software license fees, and related increases to software support fees and other
revenues, from its newer products, MortgageWare Loan Servicing, MortgageWare
InfoLINQ, and MortgageWare MarketLINQ. The Company also anticipates a
contribution to software license fees, and related increases to software support
fees and other revenues, from FlowMan, acquired through the LSS acquisition as
discussed above. Since the acquisition of LSS was made at the end of the fiscal
year, there were no sales of this product or revenues recorded in the Company's
statement of operations for fiscal year 1998. The Company believes that sales of
FlowMan will begin in the first half of fiscal year 1999; however, as the
Company will be spending significant resources developing an indirect sales
channel for FlowMan, the majority of the sales will occur in the latter half of
fiscal year 1999. As discussed above, the Company believes the overall lending
environment to be favorable as of the end of fiscal year 1998. Nonetheless,
there can be no assurance that mortgage lending rates will not increase or
experience a high degree of volatility. Such increases or volatility could have
a material adverse effect on the Company's revenues, profitability, and
financial condition. Even if lending rates stabilize, if such rates are
perceived as being too high, homeowners and potential homeowners may delay
decisions that would otherwise result in mortgage lending transactions. Such
delays may have an adverse effect upon the Company's customers, and upon the
Company and its operations. The Company is just entering the EAI marketplace,
which is a relatively new, constantly changing and intensely competitive market.
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 revenues, profitability and financial condition.
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 revenues, profitability and financial condition.

COST OF REVENUES

<TABLE>
<CAPTION>
=============================================================================================
                                                                        Increase
(In thousands)                               1998    Increase    1997   (Decrease)    1996
---------------------------------------------------------------------------------------------
<S>                                         <C>           <C>   <C>           <C>    <C>   
Software license fees                       $1,778        19%   $1,500        (9)%   $1,653
Percentage of software license fees             18%       --        21%       --         27%
---------------------------------------------------------------------------------------------

Software support fees                        2,445        32%    1,856        11%     1,678
Percentage of software support fees             35%       --        31%       --         29%
---------------------------------------------------------------------------------------------

Other                                          859        26%      683        16%       589
Percentage of other revenues                    50%       --        55%       --         54%
---------------------------------------------------------------------------------------------

Total cost of revenues                      $5,082        26%   $4,039         3%    $3,920
Percentage of total net revenues                28%       --        28%       --         30%
=============================================================================================
</TABLE>





                                                                              25

<PAGE>   26

    Cost of software license fees consists primarily 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 18% for fiscal year
1998 compared to 21% for fiscal year 1997 and decreased to 21% for fiscal year
1997 compared to 27% for fiscal year 1996. The decrease for fiscal year 1998
compared to fiscal year 1997 was due primarily to revenues increasing at a rate
substantially faster than cost of software license fees. The decrease for fiscal
year 1997 compared to fiscal year 1996 was primarily due to a combination of
software license fees increasing and the cost of software license fees
decreasing. The dollar amount of the cost of software license fees increased by
19% from $1.50 million in fiscal year 1997 to $1.78 million in fiscal year 1998.
This dollar increase was primarily the result of higher amortization of
capitalized software development costs for MortgageWare Loan Servicing and
MortgageWare Entre, offset by a decrease in amortization for MortgageWare Loan
Management System. The dollar amount of cost of software license fees decreased
9% to $1.50 million for fiscal year 1997, compared to $1.65 million for fiscal
year 1996. This decrease was primarily due to a decrease in amortization of
capitalized software development costs associated with the MortgageWare Loan
Management System, that was partially offset by the introduction of amortization
of capitalized software development costs for MortgageWare Loan Servicing
released during the first quarter of fiscal year 1997. Amortization of
capitalized software development costs was $1,560,000, $1,290,000 and $1,430,000
for fiscal years 1998, 1997 and 1996, respectively. The Company expects the
dollar amount of its amortization of capitalized software development costs to
continue to increase for fiscal year 1999 compared to fiscal year 1998 primarily
due to the stage of development and the timing of release of several of the
Company's products.

    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 35% for fiscal year 1998
compared to 31% for fiscal year 1997, and increased to 31% for fiscal year 1997
compared to 29% for fiscal year 1996. These year-to-year increases were
primarily due to a higher salary cost and a less efficient ratio of customer
support staff to customers as well as an increase in other direct cost of
support expenses associated with supporting a higher software license volume.
Looking forward, 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 revenues 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 revenues, cost of other revenues decreased to 50% for fiscal year 1998
compared to 55% for fiscal year 1997, and increased slightly to 55% for fiscal
year 1997 compared to 54% for fiscal year 1996. The improvement in 1998 compared
to 1997 was due primarily to higher gross profit earned on training and
consulting services. The slight increase in fiscal year 1997 compared to fiscal
year 1996 was primarily due to a combination of a slightly higher payroll cost
and increased depreciation from upgrading the trainers' equipment. Looking
forward, the Company expects the cost of other revenues to increase as the
revenues for customization and implementation fees increase. Additional





26

<PAGE>   27

headcount and contract labor will be required both for customization and
implementation services on MTD and ETD projects.

OPERATING EXPENSES

   
<TABLE>
<CAPTION>
=============================================================================================
                                                      Increase            Increase
(In thousands)                               1998     (Decrease)  1997    (Decrease)   1996
---------------------------------------------------------------------------------------------
<S>                                         <C>          <C>     <C>          <C>     <C>   
Product development                         $1,609       (25)%   $2,147         4%    $2,060
Percentage of net revenues                       9%       --         15%       --         16%
---------------------------------------------------------------------------------------------

Sales and marketing                          5,674        41%     4,011        (5)%    4,230
Percentage of net revenues                      31%       --         28%       --         32%
---------------------------------------------------------------------------------------------

General and administrative                   3,754        19%     3,152         5%     3,010
Percentage of net revenues                      20%       --         22%       --         23%
---------------------------------------------------------------------------------------------
Purchase of in-process R&D                   1,350        --         --        --         --
Percentage of net revenues                       7%       --         --        --         --
=============================================================================================
</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 decreased to 9% for fiscal year 1998 compared to
15% for fiscal year 1997, and decreased to 15% for fiscal year 1997 compared to
16% for fiscal year 1996. The decrease for 1998 consisted of a dollar decrease
of $539,000, which was due primarily to an increase in the costs of software
development which were capitalized, offset somewhat by increases in headcount
and the related salary expenses. The percentage decrease for fiscal year 1997
compared to fiscal year 1996 was primarily due to net revenues increasing more
than product development expenses. The Company capitalized $1,846,000, $877,000
and $790,000 of product development expenditures for fiscal years 1998, 1997 and
1996, respectively. The increase in capitalized product development expenses
during fiscal year 1998 compared to fiscal year 1997 was due primarily to the
fact that the Company had no significant capitalized costs for MortgageWare TC,
MortgageWare Entre, and MortgageWare MarketLINQ during the 1997 fiscal year, but
capitalized $750,000 of costs related to these products in fiscal year 1998.
These costs related to the development of significant enhancements to these
products during the year. During fiscal year 1999, the Company plans additional
enhancements to these products as well as significant enhancements to FlowMan
associated with the planned release of FlowMan 4.0. Accordingly, the Company
anticipates an increase in the dollar value of capitalized development
expenditures and an increase in the dollar value of product development expenses
for fiscal year 1999.

    Sales and marketing expenses include salaries, sales commissions, travel,
and facility costs for the Company's sales and marketing personnel. Sales and
marketing expenses also includes advertising, telemarketing and trade shows. As
a percentage of net revenues, sales and marketing expenses increased to 31% for
fiscal year 1998 compared to 28% for fiscal year 1997, and decreased to 28% for
fiscal year 1997 compared to 32% for fiscal year 1996. The increase for fiscal
year 1998 represented a dollar increase of $1,663,000, which was due primarily
to higher salaries and related payroll taxes, recruiting costs and commissions
associated with a higher performing direct sales force. These expenses increased
with the increases in revenue as discussed above (although not in direct
proportion). In addition, the Company incurred increases in advertising, sales
promotion and public relations, as well as travel and related direct costs of
sales efforts in order to promote new products and the





                                                                              27
<PAGE>   28

MortgageWare Enterprise offering. The decrease in dollars and percentage for
fiscal year 1997 compared to fiscal year 1996 was primarily due to revenue
increasing and sales and marketing expenses decreasing. The decrease in sales
and marketing expenses was primarily due to the elimination of outsourced
telemarketing fees during the quarter ended March 31, 1996. The Company expects
sales and marketing expenses to increase on a dollar basis but to remain
relatively consistent on a percentage of revenue basis for fiscal year 1999
compared to fiscal year 1998. This will be primarily due to the completion of
the ramp-up in the sales and marketing department which occurred in fiscal year
1998 and additional expenses that are expected for the launch of the Enterprise
Technology Division's sales efforts.

    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 fiscal year 1998 compared to 22% for fiscal year 1997, and to 22% for fiscal
year 1997 compared to 23% for fiscal year 1996. The decrease for both fiscal
years was primarily due to revenue increasing at a faster rate than general and
administrative expenses. The Company expects general and administrative expenses
on a dollar basis to increase for fiscal year 1999 compared to fiscal year 1998,
but hold relatively steady as a percentage of net revenues.

    Purchase of in-process R&D represents a one-time charge incurred by the
Company upon the acquisition of LSS (as discussed above). This amount represents
the estimated fair value of the purchased in-process R&D based upon risk
adjusted estimated net cash flows related to the incomplete research and
development projects. The Company believes that the technology obtained in this
acquisition requires significant further development so that it may be
successfully integrated with the existing MortgageWare products and so that it
may successfully compete in the Enterprise Application Integration market.
Therefore, $1,349,616 of the purchase price was recorded as in-process R&D and
expensed on the date of acquisition as the in-process technology had not yet
reached technological feasibility and had no alternative future uses. LSS's
FlowMan 4.0 product was under development at the time of the acquisition. This
project encompassed significantly enhancing and adding features and
functionality to the existing FlowMan 3.2 product. The Company estimates that
this product was 43% complete on the date of acquisition and the costs to
complete the project are expected to be approximately $200,000 in fiscal 1999.
The Company expects to complete the project and begin to generate revenues from
sales of FlowMan 4.0 in the third quarter of fiscal 1999 and expects the version
4.0 technology to have a life of four years. The nature of the efforts required
to develop the acquired in-process technology into a commercially viable product
principally relates to the completion of all designing, coding, debugging, alpha
and beta testing activities necessary to establish that the product can be
produced to meet its design requirements, including functions, features and
technical performance requirements. 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.

    The value assigned to purchased in-process R&D was determined by estimating
the resulting net cash flows from the project and discounting the net cash flows
to their present values. Net cash flow estimates included projected revenues
associated with FlowMan 4.0, cost of goods sold and sales, marketing and general
and administrative expenses and taxes forecasted based on the Company's
estimates of market potential and the costs required to successfully develop and
market the resulting product. In addition, net cash flow estimates were adjusted
to allow for fair return on working capital and fixed assets, charges for
technology leverage from the FlowMan 3.2 product and return on other
intangibles. These projections





28

<PAGE>   29

represent the Company's best estimate of the amount and timing of net cash flows
related to the FlowMan 4.0 project and are not intended to represent expected
results as measured under generally accepted accounting principles.

    During a four year projection period (spanning five fiscal years), revenue
attributable to FlowMan 4.0 was assumed to increase 287% in the second fiscal
year (the first full year of product sales), 34% in the third fiscal year,
remain flat in the fourth fiscal year and then decline 90% in the fifth fiscal
year (a partial year). The projection period specifically assumes that the
version 4.0 technology will reach maturity in the third fiscal year at which
point the Company expects to release and begin to earn revenues on newer
versions of the technology. The four-year projection period spans five of the
Company's fiscal years beginning in fiscal year 1999, during which the Company
projected annual revenues of $2.0 million, $7.7 million, $10.3 million, $10.3
million, and $1.0 million, respectively. These projections were based on growth
rates expected to be achieved by marketing FlowMan 4.0 in the enterprise
application integration market as well as integrating FlowMan 4.0 with the
Company's mortgage technology products and marketing the integrated product to
the Company's existing customer base.

    Under the cash flow model used to calculate the in-process R&D value,
projected annual gross profit margins were projected at 78% in the first year,
77% in the second year and 76% for the remaining life of the technology. The
gross profit projections assumed annual growth rates that approximate the growth
of revenue.

    Operating expenses utilized in the projections were estimated based on the
estimated resources required to develop the required sales and distribution
channels, to provide administrative support for sales of the product and to
provide an appropriate level of maintenance engineering. As a percentage of
projected revenue, sales and marketing expenses over the five fiscal years
included in the projections represented 39%, 26%, 21%, 18% and 18% of total
revenues, respectively. As a percentage of projected revenue, general and
administrative expenses over the five fiscal years included in the projections
represented, 10%, 6%, 4%, 4% and 4% of total revenues, respectively. As a
percentage of projected revenue, maintenance engineering expenses over the five
fiscal years included in the projections represented 11%, 5%, 4%, 3% and 3% of
total revenues, respectively.

    The projections also included contributory asset charges including those for
capital assets, the FlowMan tradename, and the core technology. As a percentage
of projected revenue, these contributory asset charges over the five fiscal
years included in the projections represented 9%, 8%, 8%, 9% and 23% of total
revenues, respectively. The large increase in the fifth fiscal year is due
primarily to projected revenue decreasing substantially faster than the
contributory asset charges.

      Incremental net operating income after charges for contributory assets was
projected at $0.04 million in the first fiscal year (a partial year), $1.3
million in the second fiscal year, $2.2 million in the third fiscal year, $2.5
million in the fourth fiscal year and $.09 million in the fifth fiscal year (a
partial year). Net operating income is projected to increase at a faster rate
than revenues as the Company expects to spend a higher percentage of revenues on
sales and marketing, and general and administrative costs in the first two
projection periods than in the remaining projection periods.

    An after-tax discount rate of 33% was used to discount the net cash flows to
their present value. This discount rate represents a premium to the Company's
cost of capital and was determined based upon the Company's assessment of the
risk in completing the project. The





                                                                              29

<PAGE>   30

Company has not had any debt financing for seven years, but believes its
weighted-average cost of capital approximates the prime lending rate.

    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. No assurance can be
given that actual revenues and operating profit attributable to the acquired
in-process R&D will not deviate from the projections used to value such
technology. 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.

NET INTEREST AND OTHER INCOME (EXPENSE)

   
<TABLE>
<CAPTION>
=========================================================================================
(In thousands)                                 1998   Increase  1997  (Decrease)   1996
-----------------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>       <C>     <C>   
Net interest and other income (expense)        $744       4%     $719     (11)%   $811
Percentage of net revenues                       4%      --        5%      --       6%
=========================================================================================
</TABLE>
    

    Interest income was $766,000, $747,000 and $801,000, for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. Interest income remained
relatively consistent from 1997 to 1998 due primarily to stable to slightly
decreasing interest rates combined with a slightly increasing average portfolio
balance during the 1998 fiscal year. The decrease for fiscal year 1997 was
primarily due to a combination of a slightly lower average portfolio balance and
a lower average rate of return on the portfolio.

    As of June 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 (expense) for the foreseeable
future to reflect net interest income.

INCOME TAXES

   
<TABLE>
<CAPTION>
=========================================================================================
(In thousands)                               1998     Decrease  1997   Increase    1996
-----------------------------------------------------------------------------------------
<S>                                          <C>        <C>     <C>       <C>     <C> 
Income taxes                                 $616       (2)%    $627      151%    $251
Effective income tax rate                      38%      --        36%      --       37%
=========================================================================================
</TABLE>
    

    The provision for income taxes includes federal and state income taxes
currently payable, and deferred taxes arising from temporary differences in
determining income for financial statement and tax purposes. The effective tax
rate has been relatively consistent over the past three fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

    Working capital, which consists principally of cash, cash equivalents and
short-term investments, was $8,525,000 as of June 30, 1998, compared to
$11,623,000 at June 30, 1997. Cash and cash equivalents decreased by $560,000
for fiscal year 1998. Cash and cash equivalents provided by operating activities
was $5,092,000 in fiscal year 1998. Principal uses of cash and cash equivalents
included the repurchase of $1,362,000 of Company common stock, the cash outlay
of $1,267,000 for the purchase of LSS (an additional $2,600,000 was paid on July
1, 1998), the purchase of $572,000 of furniture and equipment, and $1,846,000 of
capitalized software costs.





30

<PAGE>   31

    The Company's capital expenditures for fiscal years 1998 and 1997 were
$572,000 and $547,000, respectively. The Company expects to spend about
$1,100,000 in fiscal year 1999. The Company's current facility lease expires in
November of 1998 and the Company has negotiated a seven-year lease for a new
facility. Net occupancy costs are not expected to change materially as a result
of this move; however, the Company anticipates that approximately $300,000 of
tenant improvement costs will be incurred.

    Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products; 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 customers and vendors.

    (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. Certain of these systems have
    already been made Year 2000-ready, while others are scheduled for purchase
    and/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
    their 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 ready for the Year 2000, which
    could have material adverse effects. 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 strides have
    been made to make the products ready for the Year 2000. The following
    products have been made ready and have been subjected to testing for the
    Year 2000: MortgageWare Loan Servicing, MortgageWare Loan Management System,
    MortgageWare TC, MortgageWare Entre and MortgageWare MarketLINQ. In addition
    to internal testing, the Company has published recommendations





                                                                              31

<PAGE>   32

    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 ready and are currently being tested for the Year 2000: MortgageWare
    InfoLINQ, MortgageWare InvestorLINQ, BuilderBlock$TM and FlowMan version
    3.2. After subjecting these products to testing, the Company plans to
    publish 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 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 its products will be ready for the Year
    2000 by the end of the 1999 fiscal year and that no material costs will
    remain at that time. However, there are no assurances that there are not
    undetected errors in the Company's products relating to the Year 2000 that
    may result in material additional cost or liabilities, the magnitude of
    which cannot be predicted, which could have a material adverse effect on the
    Company. In addition, the Company believes that the purchasing patterns of
    customers and potential customers may be affected by Year 2000 issues in a
    variety of ways. Some customers may defer purchasing the Company's products
    because they are diverting resources to address their own Year 2000 issues.
    However, 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 ready for the Year 2000.

    (iii) The Company's Customers and Vendors

        The Company has identified third-party vendors upon which it places
    significant reliance and plans to ascertain their readiness for the Year
    2000 during the 1999 fiscal year. The Company believes that although prudent
    measures are required in this area, it is unable to reasonably or accurately
    predict the impact to the Company if certain customers or vendors are not
    made ready for the Year 2000. 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.

NEW ACCOUNTING STANDARDS

    In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, Software Revenue Recognition, which supersedes SOP 91-1. This SOP
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and is effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company does
not expect the impact of adoption of SOP 97-2 to be material.

    In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
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





32

<PAGE>   33

has not determined the manner in which it will present the information required
by SFAS No. 130.

    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 that 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.

FORWARD-LOOKING STATEMENTS

    When used in this discussion, the words "believes," "anticipates,"
"expects," "intends," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. 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.













                                                                              33

<PAGE>   34

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   
<TABLE>
<CAPTION>
                                                                                              Page #
                                                                                             --------
<S>                                                                                            <C>
Independent Auditors' Report                                                                     33

Balance Sheets as of June 30, 1998 (restated) and 1997                                           34

Statements of Operations for the years ended June 30, 1998 (restated), 1997 and 1996             35

Statements of Shareholders' Equity for the years ended June 30, 1998 (restated),1997 and 1996    36

Statements of Cash Flows for the years ended June 30, 1998 (restated), 1997 and 1996             37

Notes to Financial Statements                                                                  38 - 47

Schedule II - Valuation and Qualifying Accounts                                                  50
</TABLE>
    












34

<PAGE>   35


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


The Board of Directors and Shareholders
INTERLINQ Software Corporation:


We have audited the accompanying financial statements (as restated as of and for
the year ended June 30, 1998) of INTERLINQ Software Corporation as listed in the
accompanying index. In connection with our audits of these financial statements,
we have also audited the financial statement schedule as listed in the
accompanying index. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with 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, the financial statements referred to above present fairly, in
all material respects, the financial position of INTERLINQ Software Corporation
as of June 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



/s/  KPMG LLP


Seattle, Washington
July 30, 1998, except for notes 1(q), 3 and 5, which are as of March 8, 1999








                                                                              35


<PAGE>   36

                                INTERLINQ SOFTWARE CORPORATION
                                        BALANCE SHEETS

<TABLE>
<CAPTION>
As of June 30,                                                   1998           1997
-----------------------------------------------------------------------------------------
ASSETS                                                       (RESTATED)
<S>                                                          <C>            <C>        
Current assets:
    Cash and cash equivalents                                $ 7,233,826    $ 7,793,761
    Investments available-for-sale, at fair value              3,406,389      4,024,651
    Investments held-to-maturity, at amortized cost            3,267,534      2,012,894
    Accounts receivable, less allowance for doubtful
       accounts of $255,900 in 1998 and $176,000 in 1997       3,400,194      1,602,220
    Inventory                                                     39,556         55,246
    Prepaid expenses                                             341,717        408,909
    Deferred income taxes                                        351,000        267,660
                                                           ------------------------------
               Total current assets                           18,040,216     16,165,341
                                                           ------------------------------

Property and equipment, at cost                                6,434,017      5,836,895
    Less accumulated depreciation and amortization             5,434,285      4,364,628
                                                           ------------------------------
               Net property and equipment                        999,732      1,472,267
                                                           ------------------------------
Capitalized software costs, less accumulated amortization
    of $2,438,852 in 1998 and $1,718,683 in 1997               4,421,806      3,358,016
Goodwill and other intangible assets, net                      3,198,021             --
Other assets                                                     110,102         70,899
                                                           ------------------------------
                                                             $26,769,877    $21,066,523
                                                           ==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                         $   690,138    $   235,895
    Accrued compensation and benefits                          1,745,908        555,402
    Other accrued liabilities                                    670,800        498,276
    Purchase consideration payable                             2,600,000             --
    Customer deposits                                            374,151        199,636
    Deferred software support fees                             3,434,092      3,052,822
                                                           ------------------------------
               Total current liabilities                       9,515,089      4,542,031
                                                           ------------------------------

Noncurrent liabilities, excluding current installments:
    Deferred rent and other lease obligations                         --        160,443
    Deferred software support fees                                14,864          6,746
    Deferred income taxes                                         85,000        306,950
                                                           ------------------------------
               Total noncurrent liabilities                       99,864        474,139
                                                           ------------------------------
Shareholders' equity:
    Series A convertible preferred stock, $.01 par value. 
       Authorized 5,000,000 shares; no shares issued and
       outstanding in 1998 and 1997                                   --             --
    Common stock, $.01 par value.  Authorized 30,000,000
       shares; issued and outstanding 5,350,559 shares in
       1998 and 5,416,512 shares in 1997                          53,506         54,165
    Additional paid-in capital                                10,442,835     10,343,087
    Retained earnings                                          6,658,583      5,653,101
                                                           ------------------------------
               Total shareholders' equity                     17,154,924     16,050,353
Commitments
                                                           ------------------------------
                                                             $26,769,877    $21,066,523
                                                           ==============================
</TABLE>


See accompanying notes to financial statements.





36

<PAGE>   37


                         INTERLINQ SOFTWARE CORPORATION
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
Years Ended June 30,                                       1998            1997            1996
-----------------------------------------------------------------------------------------------------
                                                        (RESTATED)
<S>                                                    <C>             <C>             <C>         
Net revenues:
    Software license fees                              $  9,646,819    $  7,055,457    $  6,232,011
    Software support fees                                 6,975,959       6,072,544       5,772,791
    Other                                                 1,723,615       1,239,045       1,087,613
                                                     ------------------------------------------------
        Total net revenues                               18,346,393      14,367,046      13,092,415
                                                     ------------------------------------------------
Cost of revenues:
    Software license fees                                 1,778,263       1,499,645       1,652,627
    Software support fees                                 2,445,025       1,856,486       1,678,255
    Other                                                   859,269         682,666         588,987
                                                     ------------------------------------------------
        Total cost of revenues                            5,082,557       4,038,797       3,919,869
                                                     ------------------------------------------------
        Gross profit                                     13,263,836      10,328,249       9,172,546
                                                     ------------------------------------------------
Operating expenses:
    Product development                                   1,608,840       2,147,546       2,060,427
    Sales and marketing                                   5,674,475       4,011,440       4,229,994
    General and administrative                            3,754,222       3,151,761       3,010,223
    Purchase of in-process research and development       1,349,616              --              --
                                                     ------------------------------------------------
        Total operating expenses                         12,387,153       9,310,747       9,300,644
                                                     ------------------------------------------------
        Operating income (loss)                             876,683       1,017,502        (128,098)
Net interest and other income                               744,865         719,275         811,272
                                                     ------------------------------------------------
    Income  before income tax expense                     1,621,548       1,736,777         683,174
Income tax expense                                          616,066         626,900         250,398
                                                     ------------------------------------------------
    Net income                                         $  1,005,482    $  1,109,877    $    432,776
                                                     ================================================
Net income  per share - basic and diluted              $        .19    $        .19    $        .07

Shares used to calculate net income
       per share - basic                                  5,213,217       5,707,374       5,964,877
Shares used to calculate net income
       per share - diluted                                5,375,882       5,841,764       6,171,210
</TABLE>


See accompanying notes to financial statements.





                                                                              37

<PAGE>   38


                         INTERLINQ SOFTWARE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                 Total
                                                 Common        Additional        Retained     Shareholders'
Years Ended June 30, 1998, 1997 and 1996          Stock     Paid-in Capital      Earnings        Equity
-------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>              <C>             <C>         
Balances at June 30, 1995                       $  59,680     $ 13,167,991     $  4,110,448    $ 17,338,119
Issuance of 170,550 shares of common
   stock                                            1,706          214,487               --         216,193
Tax benefit realized upon exercise of
   stock options                                       --           96,651               --          96,651
Repurchase of 100,000 shares of common
   stock                                           (1,000)        (311,500)              --        (312,500)
Net income for the year ended June 30,
   1996                                                --               --          432,776         432,776
-------------------------------------------------------------------------------------------------------------
Balances at June 30, 1996                          60,386       13,167,629        4,543,224      17,771,239
Issuance of 19,962 shares of common stock             199           17,321               --          17,520
Tax benefit realized upon exercise of
   stock options                                       --           10,967               --          10,967
Repurchase of 642,000 shares of common
   stock                                           (6,420)      (2,852,830)              --      (2,859,250)
Net income for the year ended June 30,
   1997                                                --               --        1,109,877       1,109,877
-------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997                          54,165       10,343,087        5,653,101      16,050,353
Issuance of 251,447 shares of common
   stock                                            2,515        1,444,882               --       1,447,397
Tax benefit realized upon exercise of
   stock options                                       --           13,793               --          13,793
Repurchase of 317,400 shares of common
   stock                                           (3,174)      (1,358,927)              --      (1,362,101)
Net income for the year ended June 30,
   1998 (restated)                                     --               --        1,005,482       1,005,482
                                            -----------------------------------------------------------------
Balances at June 30, 1998 (restated)            $  53,506     $ 10,442,835     $  6,658,583    $ 17,154,924
                                            =================================================================
</TABLE>


See accompanying notes to financial statements.





38

<PAGE>   39


                         INTERLINQ SOFTWARE CORPORATION
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Years Ended June 30,                                                   1998           1997           1996
---------------------------------------------------------------------------------------------------------------
                                                                    (RESTATED)
<S>                                                                <C>            <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                         $  1,005,482   $  1,109,877   $    432,776
Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization of property and                      1,094,884      1,111,438      1,014,452
   equipment
   Amortization of capitalized software costs                         1,559,201      1,287,881      1,430,111
   Gain on disposition of equipment                                          --             --         (1,473)
   Purchase of in-process research and development                    1,349,616             --             -- 
   Deferred income tax benefit                                         (305,290)        (2,217)      (156,727)
   Tax benefit realized upon exercise of stock options                   13,793         10,967         96,651
   Change in certain assets and liabilities (net of acquisition):
     Accounts receivable                                             (1,505,816)       369,287       (745,365)
     Income taxes refundable                                                 --             --        987,429
     Inventory and prepaid expenses                                      82,882        (60,485)       (88,508)
     Other assets                                                       (39,203)       (44,878)         9,613
     Accounts payable                                                    99,527         77,669         34,971
     Accrued compensation and benefits, other accrued
       liabilities and deferred rent and other lease obligations      1,172,553         47,235         51,136
     Customer deposits                                                  174,515       (164,067)       256,613
     Deferred software support fees                                     389,388        411,835         93,400
                                                                 --------------------------------------------
        Net cash provided by operating activities                     5,091,532      4,154,542      3,415,079
                                                                 --------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                    (571,646)      (547,059)      (689,857)
Capitalized software costs                                           (1,845,881)      (877,334)      (789,792)
Purchase of source code                                                     --_       (275,000)    (2,000,000)
Purchases of investments                                             (7,402,921)   (14,511,012)   (18,734,310)
Proceeds from sales and maturities of investments                     6,766,543     16,180,313     12,498,246
Proceeds from sale of equipment                                              --             --          5,435
Cash paid for acquisition                                            (1,266,520)            --             --
                                                                 --------------------------------------------
        Net cash used in investing activities                        (4,320,425)       (30,092)    (9,710,278)
                                                                 --------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock                                   31,059         17,520        216,193
Repurchase of common stock                                           (1,362,101)    (2,859,250)      (312,500)
                                                                 --------------------------------------------
        Net cash used in financing activities                        (1,331,042)    (2,841,730)       (96,307)
                                                                 --------------------------------------------
        Net increase (decrease) in cash & cash equivalents             (559,935)     1,282,720     (6,391,506)
                                                                 --------------------------------------------
Cash and cash equivalents at beginning of year                        7,793,761      6,511,041     12,902,547
                                                                 --------------------------------------------
Cash and cash equivalents at end of year                           $  7,233,826   $  7,793,761   $  6,511,041
                                                                 ============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Net cash paid (received) during the year for income taxes          $    703,816   $    615,891   $   (691,880)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
Acquisition effected through issuance of common stock and
   purchase consideration payable                                  $  4,016,338             --             --
</TABLE>


See accompanying notes to financial statements.





                                                                              39

<PAGE>   40


                         INTERLINQ SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1998 AND 1997

 (1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a)  DESCRIPTION OF BUSINESS

           INTERLINQ Software Corporation ("Company") provides technology that
           helps organizations effectively manage complex, information-intensive
           business transactions. The Company's mortgage technology division
           provides business solutions to banks, savings institutions, mortgage
           banks, mortgage brokers, and credit unions. This division's product
           line encompasses all major components of the mortgage loan production
           process, secondary marketing activities, mortgage loan servicing, and
           construction loan servicing. The Company's enterprise technology
           division provides application integration/workflow solutions that
           integrate disparate systems and applications to route information and
           processes seamlessly across an entire enterprise. These solutions
           coordinate activities across legacy systems, enterprise applications,
           databases and Internet technologies.

           The Company sells its products through a direct sales force,
           third-party application developers, OEMs and system integrators.

      (b)  CASH EQUIVALENTS

           All highly liquid investments purchased with a maturity of three
           months or less are considered to be cash equivalents.

      (c)  INVESTMENTS

           Investments at June 30, 1998 and 1997 consist of investment-grade,
           interest-bearing corporate debt securities and money market auction
           preferred securities.

           The Company classifies investment securities as either
           available-for-sale or held-to-maturity depending upon its intentions
           at the time the securities are acquired. Investments
           available-for-sale are carried at fair value, with any unrealized
           holding gains and losses reported as a separate component of
           shareholders' equity. Investments held-to-maturity are carried at
           amortized cost.

           At June 30, 1998 and 1997, the fair value of all securities
           approximated amortized cost and there were no material unrealized
           holding gains or losses.

           Investments held-to-maturity have contractual maturities of less than
           one year. Investments available-for-sale include approximately
           $3,400,000 and $2,100,000 of money market auction preferred
           securities as of June 30, 1998 and 1997, respectively. These money
           market auction preferred securities are perpetual preferred stocks
           with floating rate dividends that are reset every 49 days. These
           investments are designed to minimize principal risk and to trade at
           par without principal volatility. The remaining investments available
           for sale are corporate debt securities and have contractual
           maturities of less than one year.

      (d)  INVENTORY

           Inventory is stated at the lower of cost (first-in, first-out) or
           replacement market.

      (e)  PROPERTY AND EQUIPMENT

           Depreciation and amortization of property and equipment are provided
           on the straight-line method over the estimated useful lives of the
           assets or respective lease terms if shorter.





40

<PAGE>   41

           Management periodically evaluates property and equipment for
           impairment whenever events or circumstances indicate that the
           carrying amount may not be recoverable.

      (f)  PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS

           Software development costs incurred in conjunction with product
           development are charged to product development expense in the period
           the cost is incurred until technological feasibility is established.
           Thereafter, all software product development costs are capitalized
           and reported at the lower of unamortized cost or net realizable
           value. Software costs incurred in conjunction with acquisition of
           technologically feasible products developed externally are
           capitalized and reported at the lower of unamortized cost or net
           realizable value.

           Amortization of capitalized software costs begins when the related
           software is available for general release to customers and is
           provided for each software product based on the greater of (i) the
           ratio of current gross revenues to total current and anticipated
           future gross revenues for the related software or (ii) the
           straight-line method over two to five years, based on the remaining
           economic life of the software.

           The estimates of anticipated future gross revenues and remaining
           economic life of the Company's products are subject to risks inherent
           in the software industry, such as changes in technology and customer
           perceptions. Management regularly reviews these estimates and makes
           adjustments as appropriate.

      (g)  GOODWILL AND OTHER INTANGIBLE ASSETS

           Goodwill represents the excess of the cost of Logical Software
           Solutions Corporation ("LSS") - acquired on June 30, 1998, - over the
           fair value of tangible and identifiable intangible assets at the date
           of acquisition. Other intangible assets include the value of
           workforce-in-place, customer list, tradename, and noncompete and
           employment agreements acquired in connection with the acquisition of
           LSS. Goodwill and other intangible assets will be amortized over
           their estimated useful lives ranging from three to four years.
           Management will evaluate goodwill and other intangible assets for
           impairment whenever events or circumstances indicate that the
           carrying amount may not be recoverable.


      (h)  REVENUE RECOGNITION

           Net revenues consist of software license fees, software support fees,
           and other revenues.

           Software license fees are earned under three different types of
           licensing agreements. Under the purchase option, a one-time license
           fee is recognized when the goods are shipped if no significant
           obligations remain on the part of the Company, and collection of any
           resulting receivables is deemed probable. Under the Partnership Plan
           option, revenues are recognized each month based on the monthly
           volume of loan transactions processed by the customer using the
           Company's software. Under the software rental option, revenues are
           recognized each month based on the monthly license fee.

           Software support fees relate only to licensing agreements under the
           purchase option and are charged separately, on an annual or quarterly
           basis, and are recognized over the life of the related service
           contracts. Deferred software support fees represent fees charged to
           customers but not yet recognized as revenue.

           Other revenues include training fees, consultation services, and
           custom document fees. These revenues are recognized when the related
           service is completed or when the goods are shipped, as applicable.





                                                                              41

<PAGE>   42

      (i)  COST OF REVENUES

           Cost of software license fees includes costs related to sales of
           licenses such as disks and supplies, amortization of capitalized
           software costs and other direct costs. Cost of software support fees
           includes salaries and other costs related to providing telephone
           support and the costs of disks and supplies related to product
           enhancements provided under support contracts. Cost of other revenues
           includes direct costs related to training, consultation services,
           custom document fees and other revenue.

      (j)  STOCK-BASED COMPENSATION

           The Company accounts for its stock option plans using the intrinsic
           value method. As such, compensation expense is recorded if, on the
           date of grant, the current market price of the underlying stock
           exceeded the exercise price.

      (k)  INCOME TAXES

           The Company records income taxes under the asset and liability
           method, whereby deferred tax assets and liabilities are recognized
           for the future tax consequences attributable to differences between
           the financial statement carrying amounts of existing assets and
           liabilities and their respective tax bases, and operating loss and
           tax credit carryforwards. Deferred tax assets and liabilities are
           measured using enacted tax rates expected to apply to taxable income
           in the years in which those temporary differences are expected to be
           recovered or settled. The effect on deferred tax assets and
           liabilities of a change in tax rates is recognized in income in the
           period that includes the enactment date. Management evaluates the
           need to establish valuation allowances for deferred tax assets based
           upon the amount of existing temporary differences, the period in
           which they are expected to be recovered, and expected levels of
           taxable income.

      (l)  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.

           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>
                                                                   1998       1997      1996
                                                              -----------------------------------
           <S>                                                  <C>        <C>        <C>      
           Shares used to calculate basic earnings per share    5,213,217  5,707,374  5,964,877
           Dilutive effect of outstanding stock options           162,665    134,390    206,333
                                                              -----------------------------------
           Shares used to calculate diluted earnings per share  5,375,882  5,841,764  6,171,210
                                                              ===================================
</TABLE>

      (m)  USE OF ESTIMATES

           The preparation of financial statements in conformity with generally
           accepted accounting principles requires management to make estimates
           and assumptions that affect the reported amounts of assets and
           liabilities and disclosure of contingent 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.





42

<PAGE>   43

      (n)  CONCENTRATION OF MARKET RISK

           The Company markets a substantial portion of its products to
           businesses involved in the residential loan production process.
           Changes in mortgage lending rates and other economic factors could
           affect the economic stability of these businesses and their ability,
           as a group, to purchase the Company's products. As a result, the
           Company's success in marketing its products may fluctuate in
           accordance with these economic factors.

      (o)  RECLASSIFICATIONS

           Certain reclassifications have been made to the prior period
           financial statements to conform with the current year presentation.

      (p)  NEW ACCOUNTING STANDARDS

           In October 1997, the Accounting Standards Executive Committee of the
           American Institute of Certified Public Accountants issued Statement
           of Position ("SOP") 97-2, Software Revenue Recognition, which
           supersedes SOP 91-1. This SOP provides guidance on applying generally
           accepted accounting principles in recognizing revenue on software
           transactions and is effective for transactions entered into in fiscal
           years beginning after December 15, 1997. The Company does not expect
           the impact of adoption of SOP 97-2 to be material.

           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 has not
           determined the manner in which it will present the information
           required by SFAS No. 130.

           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.

      (q)  RESTATEMENT OF FINANCIAL STATEMENTS

           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 LSS. As a result of
           these discussions, the Company has modified the method used to value
           in-process R&D in connection with the Company's 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 has 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 will be amortized over its
           estimated 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





                                                                              43

<PAGE>   44

           significant decrease in the corresponding deferred tax asset. Given
           this decrease, the Company has determined that a valuation allowance
           is no longer necessary. This resulted in a decrease in income tax
           expense from $906,653 to $616,066 with a related increase in net
           deferred tax assets.












44

<PAGE>   45


           The effects of the restatement resulted in the following impact on
           the Company's results of operations for the year ended June 30, 1998
           and its financial position at June 30, 1998.

<TABLE>
           <S>                                                                         <C>         
           Results of operations:
                    Loss before income tax expense as previously reported              $  (644,140)
                    Restatement adjustment to reduce in-process R&D                      2,265,688
                                                                                     ------------- 
                    Income before income tax expense as restated                       $ 1,621,548
                                                                                     ------------- 
                    Net loss as previously reported                                    $(1,550,793)
                    Restatement adjustment to reduce in-process R&D                      2,265,688
                    Restatement adjustment to eliminate valuation allowance on
                      Deferred tax assets                                                  290,587
                                                                                     ------------- 
                    Net income as restated                                             $ 1,005,482
                                                                                     ------------- 
                    Net loss per basic and diluted share as previously reported        $      (.30)
                    Restatement adjustment to reduce in-process R&D                            .43
                    Restatement adjustment to eliminate valuation allowance on
                      Deferred tax assets                                                      .06
                                                                                     ------------- 
                    Net income per basic and diluted share as restated                 $       .19
                                                                                     ------------- 

           Financial position:
                    Goodwill and other intangible assets as previously reported        $   932,333
                    Restatement adjustment to reduce in-process R&D                      2,265,688
                                                                                     ------------- 
                    Goodwill and other intangible assets as restated                   $ 3,198,021
                                                                                     ------------- 

                    Net deferred tax asset as previously reported                      $        --
                    Restatement adjustment to eliminate valuation allowance on
                      deferred tax assets                                                  266,000
                                                                                     ------------- 
                    Net deferred tax asset as restated                                 $   266,000
                                                                                     ------------- 

                    Other accrued liabilities as previously reported                   $   695,387
                    Restatement adjustment to eliminate valuation allowance on
                      deferred tax assets                                                  (24,587)
                                                                                     ------------- 
                    Other accrued liabilities as restated                              $   670,800
                                                                                     ------------- 

                    Retained earnings as previously reported                           $ 4,102,308
                    Restatement adjustment to reduce in-process R&D                      2,265,688
                    Restatement adjustment to eliminate valuation allowance on
                      deferred tax assets                                                  290,587
                                                                                     ------------- 
                    Retained earnings as restated                                      $ 6,658,583
                                                                                     ------------- 
</TABLE>


 (2)  PROPERTY AND EQUIPMENT

      Major classes of property and equipment as of June 30 are as follows:

<TABLE>
<CAPTION>
                                                 1998          1997
                                            ----------------------------
                    <S>                       <C>           <C>       
                    Leasehold improvements    $1,502,722    $1,501,349
                    Furniture and fixtures     1,082,467     1,044,088
                    Computer equipment         3,475,017     2,919,194
                    Office equipment             373,811       372,264
                                            ----------------------------
                                              $6,434,017    $5,836,895
                                            ============================
</TABLE>





                                                                              45

<PAGE>   46

 (3)  ACQUISITION

      On June 30, 1998, the Company entered into a purchase and sale agreement
      to acquire Logical Software Solutions Corporation. 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, cash of
      $3,600,000, and direct acquisition costs of $378,930. 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. Vesting of the shares will be
      accelerated if annual performance goals to be determined by mutual
      agreement among the Company and the former LSS shareholders are met. If
      all performance goals are met, the shares will fully vest in three years.
      The specific performance goals have not yet been determined. On June 30,
      1998, the Company paid $1,000,000 in cash and recorded the remaining
      balance of the cash purchase price as purchase consideration payable.
      Direct acquisition costs which were unpaid at June 30, 1998, are recorded
      as accounts payable.

      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 as follows:

<TABLE>
       <S>                                                   <C>        
       Accounts receivable                                   $   292,158
       Property and equipment                                     50,733
       Workforce-in-place                                        142,149
       Customer list                                             171,691
       Tradename                                                 213,632
       Noncompete and employment agreements                      263,172
       Goodwill                                                2,407,377
       Capitalized software                                      777,110
       In-process research and development                     1,349,616
       Accounts payable and accrued liabilities                 (272,370)
                                                           ---------------
                                                             $ 5,395,268
                                                           ===============
</TABLE>

      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 1998 and 1997 fiscal
      year, excluding all nonrecurring acquisition-related charges. The table
      includes the impact of certain adjustments such as goodwill amortization
      and related 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 periods presented, nor is it
      necessarily indicative of results that may occur in the future.


<TABLE>
<CAPTION>
                                                      1998          1997
                                                ------------------------------
      <S>                                         <C>            <C>        
      Total net revenues                          $19,477,617    $16,234,949
      Net income                                    1,041,241        916,814
      Net income per share - basic and diluted            .19            .15
</TABLE>





46

<PAGE>   47

(4)   COMMITMENTS

      (a)  LEASES

           In March 1994, the Company moved into its current premises, which it
           leases under a noncancelable operating lease expiring in November
           1998. In April 1998, the Company signed a noncancelable operating
           lease for new premises to commence in November 1998. This lease will
           expire in October 2005. The Company charges the total of the
           scheduled lease payments to rent expense using the straight-line
           method over the life of the lease.

           The Company also holds a lease for previous premises which remains in
           effect until October 1998. The Company negotiated a sublease to
           another tenant for the remaining lease term beginning in March 1994.
           Included in deferred rent payable and other lease obligations is $0
           and $142,568, which represents the Company's remaining obligation
           under this lease, net of amounts to be received under the sublease at
           June 30, 1998 and 1997, respectively. Accrued liabilities at June 30,
           1998 and 1997, include $160,443 and $223,307, respectively,
           representing the current portion of deferred rent payable.

           Future minimum lease payments under noncancelable operating leases
           are as follows:


<TABLE>
<CAPTION>
                                                  Minimum lease payments
                                                  ----------------------
                Year ending June 30:
                <S>                                      <C>      
                      1999                               $ 757,377
                      2000                                 670,113
                      2001                                 691,873
                      2002                                 711,993
                      2003                                 730,473
                      Thereafter                         1,771,153
                                                      --------------
                                                        $5,332,982
                                                      ==============
</TABLE>

           Total rent expense amounted to $384,481, $379,994, and $381,447 for
           the years ended June 30, 1998, 1997, and 1996, respectively.

      (b)  401(k) PLAN

           The Company sponsors a 401(k) plan that covers substantially all
           employees. At its own discretion, the Company may make contributions
           to the plan based on a percentage of participants' contributions. The
           Company made contributions of $114,552 for the year ended June 30,
           1998. No contributions were made for the years ended June 30, 1997 or
           1996. The Company has no other postemployment or postretirement
           benefit plans.


 (5)  INCOME TAXES

      Components of income taxes are summarized as follows:

<TABLE>
<CAPTION>
                                                1998         1997          1996
                                           -----------------------------------------
            <S>                              <C>           <C>           <C>      
            Current:
                Federal                      $ 830,022     $ 580,601     $ 291,906
                State                           77,541        37,549        18,568
                                           -----------------------------------------
                           Total current       907,563       618,150       310,474
                                           -----------------------------------------
            Deferred:
                Federal                       (277,958)       (2,032)     (151,137)
                State                          (27,332)         (185)       (5,590)
                                           -----------------------------------------
                           Total deferred     (305,290)       (2,217)     (156,727)
                                           -----------------------------------------
            Charge in lieu of taxes from
                employee stock options          13,793        10,967        96,651
                                           -----------------------------------------
                                             $ 616,066     $ 626,900     $ 250,398
                                           =========================================
</TABLE>





                                                                              47

<PAGE>   48
   
      Income tax expense differs from "expected" income tax expense (computed by
      applying the U.S. Federal income tax rate of 34%) as follows:
    

<TABLE>
<CAPTION>
                                                    1998        1997        1996
                                                ------------------------------------
            <S>                                   <C>         <C>         <C>     
            Computed "expected" tax expense       $551,326    $590,504    $232,279

            State income taxes, net of federal
                benefit and other items             64,740      36,396      18,119
                                                ------------------------------------
                                                  $616,066    $626,900    $250,398
                                                ====================================
</TABLE>

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                     1998           1997
                                                               ------------------------------
            <S>                                                  <C>             <C>        
            Deferred tax assets:
                Allowance for doubtful accounts receivable       $    94,683     $    62,112
                Deferred software support fees                       120,201          59,254
                Deferred rent                                         48,894         110,646
                Accrued expenses                                      87,222          78,775
                Property and equipment                               638,866         461,183
                Purchased in-process R&D                             499,749              --
                                                               ------------------------------
                Total deferred tax assets                          1,489,615         771,970
                                                               ------------------------------
            Deferred tax liabilities - capitalized software       (1,223,615)       (811,260)
                                                               ------------------------------
                           Net deferred tax asset (liability)    $   266,000     $   (39,290)
                                                               ==============================
</TABLE>

 (6)  SHAREHOLDERS' EQUITY

      (a)  PREFERRED STOCK

           Preferred stock authorized consists of 5,000,000 shares of Series A
           preferred stock. The Series A preferred stock is convertible at any
           time into two times the number of shares of common stock and has the
           same voting rights as its common stock equivalent. However, Series A
           preferred stock has preferential treatment with respect to any
           payment of dividends and any distributions of assets upon
           liquidation.

      (b)  STOCK OPTION PLANS

           The Company has three stock option plans: the 1985 Restated Stock
           Option Plan ("1985 Plan"), the 1993 Stock Option Plan ("1993 Plan")
           and the 1993 Stock Option Plan for Nonemployee Directors ("Directors
           Plan"). The Company accounts for its option plans in accordance with
           the provisions of Accounting Principles Board Opinion No. 25 and no
           compensation cost has been recognized related to its stock options.
           Had the Company determined compensation cost based on the fair value
           at the grant date for its stock options under SFAS No. 123,
           Accounting for Stock-Based Compensation (SFAS No. 123), the Company's
           net income would have changed to the pro forma amounts indicated
           below:

<TABLE>
<CAPTION>
                                                     1998            1997         1996
                                                  -----------    -----------    ---------
            <S>                                   <C>            <C>            <C>      
            Net income:
                As reported                       $ 1,005,482    $ 1,109,877    $ 432,776
                Pro forma                             582,061        821,572      265,341
</TABLE>




48

<PAGE>   49

<TABLE>
                <S>                               <C>       <C>       <C>      
                Basic and Diluted per share as    $ .19     $ .19     $ .07
                reported
                Basic and Diluted per share       $ .11     $ .14     $ .04
                pro forma
</TABLE>

           Pro forma net income and net income per share reflect only options
           granted in the years ended June 30, 1998, 1997, and 1996. Therefore,
           the full impact of calculating compensation cost for stock options
           under SFAS No. 123 is not reflected in the pro forma net income and
           net income per share amounts presented above because compensation
           cost is reflected over the options' vesting period and compensation
           cost for options granted prior to July 1, 1995, is not considered.

           The per share weighted-average fair value of stock options granted
           during the years ended June 30, 1998, 1997 and 1996 was $2.71, $3.28
           and $2.05, respectively, on the date of grant using the Black Scholes
           option-pricing model with the following weighted-average assumptions:
           1998 - expected dividend yield of 0.0%, risk-free interest rate of
           5.36%, expected volatility of 65%, and an expected life of 5 years;
           1997 - expected dividend yield of 0.0%, risk-free interest rate of
           6.02%, expected volatility of 65%, and an expected life of 5 years;
           1996 - expected dividend yield of 0.0%, risk-free interest rate of
           5.11%, expected volatility of 65%, and an expected life of 5 years.

           The 1985 and 1993 Plans provide for both incentive stock options and
           other stock options that may be issued to attract and retain the
           services of employees. The incentive stock options vest over a
           four-year period and may be exercised during continued employment or
           within one month of terminating employment for the 1985 Plan and
           within three months for the 1993 Plan. All options expire ten years
           from the date of grant. The 1985 Plan has been suspended in regard to
           future grants, and stock options are currently granted pursuant to
           the 1993 Plan. The Company has authorized 900,000 shares of common
           stock to be reserved for grants pursuant to the 1993 Plan.

           The Directors Plan provides for stock options that may be issued to
           attract and retain services of the members of the Board of Directors
           who are not otherwise employees of the Company. The stock options
           vest six months from the date of grant and may be exercised during
           the director's term or within three months of the date the option
           holder ceases to be a director. All options expire five years from
           the date of grant. The Company has authorized 215,000 shares of
           common stock to be reserved for grants pursuant to the Directors
           Plan.

           A summary of stock option activity under the stock option plan
           follows:

<TABLE>
<CAPTION>
                                                                       Outstanding options
                                                      ------------------------------------------------
                                                                 Number of shares            Weighted
                                           Options    ------------------------------------   average
                                          Available      1985         1993      Directors    Exercise
                                          For grant      Plan         Plan         Plan       Price
                                        ---------------------------------------------------------------
           <S>                             <C>          <C>          <C>          <C>        <C>     
           Balances at June 30, 1995       136,039      330,268      164,961      74,000     $   2.52
           Increase in shares reserved
              under 1993 Plan              600,000           --           --          --        --
           Options granted                (472,275)          --      417,275      55,000         3.45
           Options exercised                    --     (164,050)      (6,500)         --         1.27
           Options canceled                118,774       (3,800)     (68,774)    (50,000)        3.84
                                         -----------------------------------------------
           Balances at June 30, 1996       382,538      162,418      506,962      79,000         3.17
           Increase in shares reserved
              under Directors Plan         140,000           --           --          --        --
           Options granted                (228,180)          --      219,180       9,000         5.46
           Options exercised                    --      (19,650)        (312)         --          .88
</TABLE>





                                                                              49
<PAGE>   50

<TABLE>
           <S>                             <C>          <C>          <C>          <C>        <C>     
           Options canceled                 59,476      (19,150)     (37,476)    (22,000)        4.11
                                         -----------------------------------------------
           Balances at June 30, 1997       353,834      123,618      688,354      66,000         3.73
           Options granted                (220,100)          --      197,600      22,500         4.57
           Options exercised                    --      (13,300)      (4,813)         --         1.71
           Options canceled                 48,118         (800)     (45,118)     (3,000)        5.42
                                         -----------------------------------------------
           Balances at June 30, 1998       181,852      109,518      836,023      85,500     $   3.87
                                         ===============================================
</TABLE>

           Additional information regarding options outstanding as of June 30,
           1998 is as follows:

<TABLE>
<CAPTION>
                                        Options outstanding                   Options exercisable
                                --------------------------------------    ---------------------------
                                                 Weighted-
                                                  Average    Weighted-                     Weighted-
                                                 Remaining    Average                       Average
                 Range of           Number      Contractual   Exercise        Number        Exercise
              Exercise prices    Outstanding    Life (years)    Price       Exercisable      Price
            -----------------------------------------------------------------------------------------
                <S>                <C>             <C>          <C>          <C>             <C> 
                $.100 - .500        90,018          2.81         $.39         90,018          $.39
                 2.500-3.875       513,235          7.27         3.41        265,526          3.36
                 3.969-5.844       398,205          8.90         5.01         95,680          4.92
                 6.938-8.375        29,583          6.82         7.09         20,333          7.15
            -----------------------------------------------------------------------------------------
                $ .100-8.375     1,031,041          7.50        $3.87        471,557         $3.27
            =========================================================================================
</TABLE>


 (7)  NET INTEREST AND OTHER INCOME (EXPENSE)

      Net interest and other income (expense) consist of:

<TABLE>
<CAPTION>
                                                      1998       1997        1996
                                                  ----------------------------------
                     <S>                            <C>        <C>         <C>     
                     Interest income                $765,792   $746,712    $801,434
                     Interest expense               (21,623)   (27,713)    (27,579)
                     Other, net                          696        276      37,417
                                                  ----------------------------------
                                                    $744,865   $719,275    $811,272
                                                  =========== ========== ===========
</TABLE>

 (8)  FINANCIAL INSTRUMENTS

      The Company's financial instruments consist primarily of investments,
      accounts receivable, accounts payable and accrued liabilities. The
      financial instruments have a short term until maturity or settlement in
      cash and, therefore, the carrying value approximates fair value. Credit is
      extended to customers based on an evaluation of their financial condition
      and no collateral is required. The Company performs ongoing credit
      evaluations of its customers and maintains allowances for possible credit
      losses.

  (9)   QUARTERLY FINANCIAL DATA (UNAUDITED)

      The following table summarizes the unaudited statements of operations for
      each quarter of fiscal 1998 and 1997 (in thousands, except per share
      amounts):

<TABLE>
<CAPTION>
                                                               First    Second    Third     Fourth
                                                            -----------------------------------------
           <S>                                                <C>       <C>       <C>       <C>    
           1998
           Net revenues                                       $3,642    $4,369    $4,787    $ 5,549
           Gross profit                                        2,459     3,158     3,455      4,192
           Operating income (loss)                               165       382       648       (318)
           Net income (loss)                                     209       357       520        (81)
           Net income (loss) per share - basic and diluted    $  .04    $  .07    $  .10    ($  .02)
</TABLE>






50
<PAGE>   51

<TABLE>
           <S>                                                <C>       <C>       <C>       <C>    
           1997
           Net revenues                                       $3,579    $3,516    $3,534    $ 3,738
           Gross profit                                        2,620     2,530     2,509      2,669
           Operating income                                      318       246        86        368
           Net income                                            326       271       161        352
           Net income per share - basic and diluted           $  .05    $  .05    $  .03    $   .06
</TABLE>

      In the fourth quarter of 1998 the Company recorded a one-time charge of
      $1,349,616 related to its acquisition of LSS (in-process research and
      development).









                                                                              51


<PAGE>   52


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

    None.

PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Incorporated by reference to the information under the captions "Election of
Directors," "Continuing Class II Directors, Terms Expiring in 1999," "Nominees
for Election as Class I Directors, Terms Expiring in 2000," "Directors' Fees,"
and "Filing of Forms Pursuant to Section 16 of the Securities Exchange Act of
1934" in the Company's Proxy Statement relating to its 1998 Annual Meeting of
Shareholders (the "Proxy Statement"). Certain information regarding the
executive officers of the Company is set forth in Part I.

ITEM 11.  EXECUTIVE COMPENSATION

    Incorporated by reference to the information under the captions "Directors
Fees," "Compensation of Officers," and "Employment Contracts, Termination of
Employment and Change of Control Arrangements" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Incorporated by reference to the information under the caption "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    None.

PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K

    (A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:

    1.         FINANCIAL STATEMENTS

        The Financial Statements, Notes thereto, and Independent Auditor's
    Report are included in Part II, Item 8 of this Report.

    2.         FINANCIAL STATEMENT SCHEDULES

        The following documents are filed as part of this report and should be
    read in conjunction with the Financial Statements of INTERLINQ Software
    Corporation.

           Schedule II - Valuation and Qualifying Accounts for the years ended
           June 30, 1998, 1997, and 1996


        Schedules not listed above have been omitted because they are not
    applicable or are not required or the information required to be set forth
    therein is included in the Financial Statements or Notes thereto.





52


<PAGE>   53


      3.   EXHIBITS.

      The Exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedules are filed as part of, or
incorporated by reference into, this report.

<TABLE>
<CAPTION>
   Exhibit
   Number                                     Description
   -------                                    -----------
<S>           <C>
  2.1(6)      Asset Purchase Agreement, dated June 30, 1998, between INTERLINQ Software
              Corporation, Logical Software Solutions Corporation and Mary Collier, Michael
              Bennett and Keith Bluford
  3.1(1)      Restated Articles of Incorporation of INTERLINQ Software Corporation
  3.2(1)      Restated Bylaws of INTERLINQ Software Corporation
 10.1(1)(2)   1985 Restated Stock Option Plan
 10.2(1)(2)   1993 Stock Option Plan
 10.3(1)(2)   Stock Option Plan for Non-Employee Directors, as amended
 10.4(1)      Amended and Restated Registration Rights Agreement between
              INTERLINQ Software Corporation and the partners listed on Schedule
              A thereto dated as of March 12, 1993
 10.6(1)      Office Lease between Yarrow Bay Office III Limited Partnership and
              INTERLINQ Software Corporation dated as of July 31, 1992
 10.8(1)      Form of Indemnification Agreement for Directors and Officers 10.10(3)
              Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI
              Corporation dated as of July 1, 1993
 10.12(4)     Office sublease between Halliburton Company and INTERLINQ Software
              Corporation dated January 21, 1994
 10.15(2)(5)  Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
 10.16(5)     Appointment of Licensing Agent and Compliance Delegate Agreement between VMP's
              Electronic Laser Forms, Inc. A division of CBF Systems, Inc. And INTERLINQ
              Software Corporation dated October 2, 1995
 10.17(5)     Amendment of Co-marketing Agreement between INTERLINQ Software
              Corporation and CMCI Corporation dated October 1, 1995
 10.18(7)     Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated
              as of April 23, 1998
 23.1         Consent of KPMG LLP
 27.1         Financial data schedule
</TABLE>

(1)     Incorporated by reference to the Company's Registration Statement on
        Form S-1, as amended (Registration No. 33-59502) filed with the
        Securities and Exchange Commission on March 15, 1993, as same exhibit
        number.
(2)     Management contract or compensatory plan or arrangement.
(3)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1993, as same exhibit number.
        Confidential treatment has been requested as to portions of this
        document.
(4)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1994, as same exhibit number.
(5)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1996, as same exhibit number.
(6)     Incorporated by reference to the Company's Current Report on Form 8-K,
        dated June 30, 1998, as same exhibit number.
(7)     Previously filed.

(b)   REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 1998

           The Company filed a Current Report on Form 8-K, dated June 30, 1998,
to report the acquisition of Logical Software Solutions Corporation ("LSS"). The
Company filed a Current





                                                                              53
<PAGE>   54

Report on Form 8-K/A, dated June 30, 1998, to report financial statements and
pro forma financial information relating to the acquisition of LSS.








54




<PAGE>   55

                                                                     SCHEDULE II

                         INTERLINQ SOFTWARE CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS

                    Years ended June 30, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                      Additions
                                             --------------------------
                                 Balance at    Charged to   Charged to
                                 beginning      costs and     other                    Balance at
        Description               of year       expenses     accounts    Deductions   end of year
----------------------------- ------------- -------------- ------------- ------------ -------------
<S>                               <C>            <C>                      <C>             <C>     
Allowances for doubtful
    accounts:

Year ended June 30, 1998:

    Accounts receivable           $176,000       $451,000        --       $(371,100)      $255,900

Year ended June 30, 1997:

    Accounts receivable            187,007        396,986        --        (407,993)       176,000

Year ended June 30, 1996:

    Accounts receivable            152,287        331,224        --        (296,504)       187,007
</TABLE>






















                                                                              55


<PAGE>   56


                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 , the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 9th day of March, 1999.


                         INTERLINQ SOFTWARE CORPORATION


                                       By:    /s/ JIRI M. NECHLEBA
                                          --------------------------------------
                                           Jiri Nechleba
                                           President and Chief Executive Officer


<TABLE>
<CAPTION>
             Signature                                         Title
             ---------                                         -----
<S>                                           <C>
/s/  JIRI M. NECHLEBA                         Chairman of the Board, President and Chief
-----------------------------------           Executive Officer
Jiri M. Nechleba                              (Principal Executive Officer)


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


                                              Director
-----------------------------------
Robert W. O'Rear


/s/  THEODORE M. WIGHT                        Director
-----------------------------------
Theodore M. Wight


/s/  ROBERT J. GALLAGHER                      Director
-----------------------------------
Robert J. Gallagher
</TABLE>








56


<PAGE>   57

                         INTERLINQ SOFTWARE CORPORATION

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
   Exhibit
   Number                                     Description
   -------                                    -----------
<S>           <C>
 2.1(6)       Asset Purchase Agreement, dated June 30, 1998, between INTERLINQ Software
              Corporation, Logical Software Solutions Corporation and Mary Collier, Michael
              Bennett and Keith Bluford
 3.1(1)       Restated Articles of Incorporation of INTERLINQ Software Corporation
 3.2(1)       Restated Bylaws of INTERLINQ Software Corporation
10.1(1)(2)    1985 Restated Stock Option Plan
10.2(1)(2)    1993 Stock Option Plan
10.3(1)(2)    Stock Option Plan for Non-Employee Directors, as amended
10.4(1)       Amended and Restated Registration Rights Agreement between
              INTERLINQ Software Corporation and the partners listed on Schedule
              A thereto dated as of March 12, 1993
10.6(1)       Office Lease between Yarrow Bay Office III Limited Partnership and
              INTERLINQ Software Corporation dated as of July 31, 1992
10.8(1)       Form of Indemnification Agreement for Directors and Officers
10.10(3)      Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI
              Corporation dated as of July 1, 1993
10.12(4)      Office sublease between Halliburton Company and INTERLINQ Software
              Corporation dated January 21, 1994
10.15(2)(5)   Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
10.16(5)      Appointment of Licensing Agent and Compliance Delegate Agreement between VMP's
              Electronic Laser Forms, Inc. A division of CBF Systems, Inc. And INTERLINQ
              Software Corporation dated October 2, 1995
10.17(5)      Amendment of Co-marketing Agreement between INTERLINQ Software
              Corporation and CMCI Corporation dated October 1, 1995
10.18(7)      Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated
              as of April 23, 1998
23.1          Consent of KPMG LLP
27.1          Financial data schedule
</TABLE>

(1)     Incorporated by reference to the Company's Registration Statement on
        Form S-1, as amended (Registration No. 33-59502) filed with the
        Securities and Exchange Commission on March 15, 1993, as same exhibit
        number.
(2)     Management contract or compensatory plan or arrangement.
(3)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1993, as same exhibit number.
        Confidential treatment has been requested as to portions of this
        document.
(4)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1994, as same exhibit number.
(5)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1996, as same exhibit number.
(6)     Incorporated by reference to the Company's Current Report on Form 8-K,
        dated June 30, 1998, as same exhibit number.
(7)     Previously filed.




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