<PAGE>   1

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                  --------------------------------------------

                                   FORM 10-QSB

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 1996        COMMISSION FILE NUMBER  1-13524

                                 TIMELINE, INC.

        (Exact name of small business issuer as specified in its charter)

               WASHINGTON                                 91-1590734
     (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)

                        3055 112TH AVENUE N.E., STE. 106
                               BELLEVUE, WA 98004
                    (Address of principal executive offices)

                                 (206) 822-3140
                           (Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

<TABLE>
<CAPTION>
                                                  OUTSTANDING AT
              CLASS                              NOVEMBER 8, 1996
<S>                                                 <C>      
Common Stock, $.01 Par Value                        3,047,519
</TABLE>

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<PAGE>   2


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                 TIMELINE, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                September 30,      March 31,
                                                                   1996              1996
                             ASSETS                             (unaudited)        (audited)
                                                                -----------       -----------
<S>                                                             <C>               <C>        
CURRENT ASSETS:
Cash & cash equivalents                                         $   354,763       $   284,542
Short-term investments                                                   --           107,174
Accounts receivable, net of
     allowance of $45,418 and $69,601                             1,449,778         1,181,322
Prepaid expenses and other                                          284,227           295,126
                                                                -----------       -----------
          Total current assets                                    2,088,768         1,868,164
PROPERTY AND EQUIPMENT, net of accumulated
     depreciation of $1,370,454 and $1,245,908                      851,489           853,174
CAPITALIZED SOFTWARE COSTS, net of accumulated
     amortization of $335,730 and $251,777                          678,546           210,040
OTHER ASSETS                                                         81,380            86,447
                                                                -----------       -----------
          Total assets                                          $ 3,700,183       $ 3,017,825
                                                                ===========       ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                $   225,865       $   422,534
Accrued expenses                                                    284,879           280,914
Deferred revenue                                                    429,637           431,503
Current portion of long-term debt                                   225,000           125,000
Current portion of obligations under capital leases                  54,094            64,511
                                                                -----------       -----------
     Total current liabilities                                    1,219,475         1,324,462
LONG TERM DEBT, net of current portion                              552,083           375,000
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion              6,072            38,204
                                                                -----------       -----------
     Total liabilities                                            1,777,630         1,737,666
                                                                -----------       -----------
STOCKHOLDERS' EQUITY:
Common stock                                                         31,424            26,146
Additional paid-in capital                                        9,229,887         6,843,166
Deferred compensation                                              (470,018)         (500,000)
Foreign currency adjustment                                           3,034                --
Accumulated deficit                                              (6,871,774)       (5,089,153)
                                                                -----------       -----------
     Total stockholders' equity                                   1,922,553         1,280,159
                                                                -----------       -----------
     Total liabilities and stockholders' equity                 $ 3,700,183       $ 3,017,825
                                                                ===========       ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       2
<PAGE>   3

                                 TIMELINE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 Three months                         Six months
                                                    ended                               ended
                                        September 30,     September 30,     September 30,     September 30,
                                           1996               1995              1996             1995
                                        (unaudited)       (unaudited)       (unaudited)       (unaudited)
                                        -----------       -----------       -----------       -----------
<S>                                     <C>               <C>               <C>               <C>        
REVENUES:
Software license                        $   215,686       $   672,806       $   990,574       $ 1,387,002
Maintenance                                 236,146           192,498           413,101           431,191
Consulting                                  810,242           536,529         1,338,062           889,650
Other                                        40,841             7,500            40,841            15,000
                                        -----------       -----------       -----------       -----------
     Total revenues                       1,302,915         1,409,333         2,782,578         2,722,843
COST OF REVENUES                            534,384           384,348           950,736           678,582
                                        -----------       -----------       -----------       -----------
     Gross profit                           768,531         1,024,985         1,831,842         2,044,261
                                        -----------       -----------       -----------       -----------
OPERATING EXPENSES:
Sales and marketing                         840,585           366,445         1,711,445           738,542
General and administrative                  513,417           352,063           912,507           754,666
Research and development                    482,816           185,035           819,339           325,324
Depreciation                                 63,000            34,926           125,353            63,514
                                        -----------       -----------       -----------       -----------
     Total operating expenses             1,899,818           938,469         3,568,644         1,882,046
     (Loss) income from operations       (1,131,287)           86,516        (1,736,802)          162,215
OTHER INCOME (EXPENSE):
Interest income                               8,375            38,667            13,579            75,196
Interest expense and other                  (28,578)           (3,486)          (59,398)           (7,699)
                                        -----------       -----------       -----------       -----------
     Total other income (expense)           (20,203)           35,181           (45,819)           67,497
                                        -----------       -----------       -----------       -----------
     Net loss                           $(1,151,490)      $   121,697       $(1,782,621)      $   229,712
                                        ===========       ===========       ===========       ===========
NET LOSS PER COMMON SHARE               $     (0.38)      $      0.05       $     (0.62)      $      0.09
                                        ===========       ===========       ===========       ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING                        3,040,906         2,519,376         2,867,063         2,519,376
                                        ===========       ===========       ===========       ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>   4

                                 TIMELINE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                                               1996              1995
                                                            (unaudited)       (unaudited)
                                                            -----------       -----------
<S>                                                         <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net cash used in operations                            $(1,950,452)      $  (438,291)
                                                            -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment                       (123,668)         (144,471)
     Capitalized software costs                                (552,459)               --
     Sales of short-term investments                            107,174           190,000
                                                            -----------       -----------
             Net cash used in investing activities             (568,953)           45,529
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from notes payable                                350,000                --
     Borrowings under line of credit                                 --            80,000
     Payments on notes payable                                  (72,917)               --
     Payments on capital lease obligations                      (42,549)          (32,415)
     Proceeds from secondary public offering                  2,553,425                --
     Costs of secondary public offering                        (201,367)               --
                                                            -----------       -----------
             Net cash provided by financing activities        2,586,592            47,585
EFFECT OF EXCHANGE RATE CHANGES ON CASH                           3,034                --
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                   70,221          (345,177)
CASH AND CASH EQUIVALENTS, beginning of period
                                                                284,542           387,382
                                                            -----------       -----------
CASH AND CASH EQUIVALENTS, end of period                    $   354,763       $    42,205
                                                            ===========       ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
     Cash paid during the period for -
                          Interest                          $    48,938       $     7,699
                          Taxes                                      --                --
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>   5

                                 TIMELINE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                               SEPTEMBER 30, 1996

1. INTERIM FINANCIAL STATEMENTS

The accompanying consolidated financial statements of Timeline, Inc. and
subsidiary (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the six month period
ended September 30, 1996 are not necessarily indicative of future financial
results.

Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-QSB.
Accordingly, these financial statements should be read in conjunction with the
Company's annual financial statements for the year ended March 31, 1996,
previously reported.

Capitalized Software Costs

During the six months ended September 30, 1996 and 1995, the Company capitalized
$552,459 and $0, respectively, of software development costs related to its MV
Analyst and MV Server products. Amortization expense on capitalized software
costs for these same periods was $83,953 and $44,153, respectively.

Net Loss per Common and Common Equivalent Shares

For the six months ended September 30, 1996, net loss per common and common
equivalent share was based on the weighted average number of common shares
outstanding during each period. Common stock equivalents include shares issuable
upon the exercise of outstanding stock options or warrants. These shares are not
included in the computation of net loss per share because the effect of
including such shares would be antidilutive.

2. SHAREHOLDERS' EQUITY

Changes in shareholders' equity for the period from March 31, 1996 to September
30, 1996 were as follows:

<TABLE>
<S>                                                                 <C>        
         Shareholders' equity, March 31, 1996                       $ 1,280,159
         Issuance of common stock                                     2,553,425
         Issuance costs                                                (201,367)
         Amortization of deferred compensation                           29,982
         Exercise of stock options                                       39,941
         Net loss                                                    (1,782,621)
         Foreign currency translation adjustment                          3,034
                                                                    -----------
         Shareholders' equity, September 30, 1996                   $ 1,922,553
                                                                    ===========
</TABLE>

                                       5
<PAGE>   6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

RESULTS OF OPERATIONS

REVENUES

<TABLE>
<CAPTION>
                                    Three Months Ended                  Six Months Ended
                                       September 30,                      September 30,
                                     1996       1995       Change       1996       1995       Change
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                   <C>        <C>        <C>        <C>        <C>          <C>  
Software license                      216        673        (68%)        991      1,387        (29%)
Maintenance                           236        192         23%         413        431         (4%)
Consulting                            810        537         51%       1,338        890         50%
Other                                  41          7        486%          41         15        173%
                                    ----------------                   ----------------
Revenues                            1,303      1,409         (8)%      2,783      2,723          2%
------------------------------------------------------------------------------------------------------
</TABLE>

The minimal decrease in net sales for the three months and minimal increase in
net sales for the six months ended September 30, 1996 over the same period
ending September 30, 1995, was attributable to a decrease in new license fees in
the second fiscal quarter of 1997 of $457 compared to the prior year period.
This decrease in new license revenue, management believes, is not reflective of
a weakness in the market in general, but is due to the failure of the US sales
team in meeting their objectives. Management believes this was caused by a
number of factors including the resignation of Timeline's Vice President of US
sales on July 31, 1996, the failure to close agreements with prospects by the
end of the quarter, and the diversion of time and effort to enroll potential
distributors of Timeline software which did not come to fruition until the
subsequent quarter. Management believes new license revenue will return to a
level approximating the level experienced in the first fiscal quarter of 1997
during subsequent quarters. European software license revenue generated in
fiscal 1997 was a positive addition as there was not a European office in
comparable periods of fiscal 1996.

Both consulting revenue and other revenue increased for the three and six months
periods ended September 30, 1996. This reflects additional work performed on the
continued installations of Timeline software and a significant contribution from
development work performed under contract with Microsoft Corporation.

Maintenance revenue increased 23% during the second quarter of fiscal 1997 as
compared to the same period of fiscal 1996. This is due to maintenance revenue
now being generated on contracts with users of MV Analyst(TM) and MV Server(TM)
which offset the expected continuing weakness in renewals of maintenance on the
Company's Digital-based software. The increase represents a reversal of a trend
of decreasing maintenance revenue over the last several years. Management
believes this positive trend will likely continue as maintenance revenue on its
MV Analyst(TM) and MV Server(TM) products offsets continued declines in the
Company's maintenance from its Digital installed base.

                                       6
<PAGE>   7

GROSS MARGIN

<TABLE>
<CAPTION>
                                     Three Months Ended                  Six Months Ended
                                       September 30,                       September 30,
                                      1996      1995          Change     1996        1995        Change
-------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                   <C>       <C>           <C>        <C>         <C>          <C>  
Gross profit                          769       1,025         (25%)      1,832       2,044        (10%)
Percentage of revenues                 59%         73%                      66%         75%
-------------------------------------------------------------------------------------------------------
</TABLE>

The Company's gross margin varies in part depending upon the mix of
higher-margin software licenses and consulting and maintenance revenue which is
labor intensive. The decrease in gross margin between the three months ended
September 30, 1996 and 1995 of 25% is due primarily to lower software license
revenues in the 1996 period.

SALES AND MARKETING

<TABLE>
<CAPTION>
                                      Three Months Ended                 Six Months Ended
                                        September 30,                      September 30,
                                      1996        1995        Change    1996          1995    Change
----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                   <C>         <C>         <C>       <C>           <C>        <C> 
Sales and marketing                   841         366         130%      1,711         739        132%
Percentage of revenues                 65%         26%                     61%         27%
----------------------------------------------------------------------------------------------------
</TABLE>

Sales and marketing expenses during the six months ended September 30, 1996,
increased 132% to $1,711 from $739 in the six month period ended September 30,
1995. This increase is due to the Company increasing the number of personnel in
these areas in an effort to increase direct sales. The increase is also due to
the Company's European office in England not being open in the six month period
ended September 30, 1995, therefore there were no expenses of this new office in
that period. The Company has shifted its emphasis from primarily direct sales to
combining this with channel sales through its new distribution partners. Due to
this move and the third quarter reduction in personnel in certain direct sales,
telemarketing, marketing and trade show support, the Company anticipates these
costs will be reduced in the future. The Company does anticipate increasing its
sales force in England.

In early September, the Company's introduction of a universal filter into its
desktop MV Analyst(TM) product has led to agreement in principal with several US
accounting vendors to distribute the product through the distributors' sales
force. While considerable joint sales activities will be involved initially to
train the distributors' sales forces and prove the value to their end users, the
goal is to mature these distributors into unassisted sales outlets.

                                       7
<PAGE>   8

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                    Three Months Ended            Six Months Ended
                                      September 30,                 September 30,
                                    1996      1995       Change   1996      1995   Change
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                 <C>       <C>        <C>      <C>       <C>       <C>
General & administrative            513       352        46%      913       755       21%
Percentage of net sales              39%       25%                 33%       28%
-----------------------------------------------------------------------------------------
</TABLE>

General and administrative expenses for the six month period ended September 30,
1996, have increased 21%, to $913, over the comparable period last year of $755.
The increase is primarily due to the addition of administrative personnel in the
Company due to the growth of its development, sales and consulting departments.
Also, in the six months ended September 30, 1996 compared to the same period in
the prior year, the Company had office space in Chicago and London and increased
office space in its Bellevue location, which contributed to higher expense. The
Company anticipates these costs to remain stable in the near future.

RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>
                                   Three Months Ended            Six Months Ended
                                     September 30,                 September 30,
                                    1996      1995      Change    1996      1995   Change
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                 <C>       <C>       <C>       <C>       <C>      <C> 
Research & development              483       185       161%      819       325      152%
Percentage of revenue                37%       13%                 29%       12%
-----------------------------------------------------------------------------------------
</TABLE>

Research and development expenses for the six months ended September 30, 1996,
increased $494, or 152% over the same period in the prior year. These increases
are attributable to increased development of the Company's desktop product, MV
Analyst(TM), and the filters associated with the Small Business Financial
Manager. The development of MV Analyst(TM) was commenced after the second
quarter of fiscal 1996, and as such, no expenses related to its development were
incurred in the six months ended September 30, 1995.

MV Analyst(TM) allows the Company to license a solution for financial reporting
on smaller data-sets of data from accounting systems without the need for MV
Server(TM). MV Server(TM) will remain a requirement for higher volumes of data
and to undertake certain processing of data such as consolidations, foreign
currency conversations, and allocations. When MV Server(TM) is required, MV
Analyst(TM) serves as the user interface on the desktop to display the results
of processing occurring on the MV Server(TM).

                                       8
<PAGE>   9

The newly introduced capability to market MV Analyst(TM) as a stand alone
product allows the Company to market to a much broader range of users at a lower
price. The Company believes MV Analyst(TM) as a stand alone product will be the
main attraction to potential distributors who require a more moderately priced
solution for use by departmental and smaller volume users.

Management anticipates the level of research and development expenses will
decrease in future quarters due to the fact initial product releases have
occurred. This trend could reverse if certain development contracts for third
parties are obtained or in conjunction with meeting the needs of distributors
where management deems it is warranted by product demand.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents, and marketable securities decreased from
$391,716 at March 31, 1996 to $354,763 at September 30, 1996. The Company had
net working capital (excluding deferred revenue) of $1,298,930 at September 30,
1996.

The Company anticipates cash from operations and existing working capital will
be adequate to fund operations in the near term. However, it is imperative the
Company return to profitability or secure additional debt or equity financing
through public or private arrangements, with corporate collaborators, or other
sources. The Company is pursuing strategic alliances to facilitate the
distribution of its products and raise additional financing. Adequate financing
may not be available when needed or on terms acceptable to the Company.

When used in this report on Form 10-QSB, words such as "anticipates,"
"expects," and similar expressions are intended to identify forward looking
statements. Such statements are subject to risk, uncertainties and assumptions.
For example, adequate financing, as needed to fund the Company's operations,
may not be available or on terms acceptable to the Company. Similarly, sales
revenues may not meet management's expectations in the near term. These and
other circumstances and events, including some of which the Company may be
unable to anticipate, may cause actual results to vary materially from those
anticipated or expected.

                                       9
<PAGE>   10

                          PART II. - OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

              None

ITEM 2.       CHANGES IN SECURITIES

              None

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

              None

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

              At the Company's Annual Meeting of Shareholders held on July 15,
              1996, the director nominee was duly elected.

ITEM 5.       OTHER INFORMATION

              None

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              27.1    Financial Data Schedule

         (b)  No reports on Form 8-K were filed during the three months ended
              September 30, 1996.

                                       10
<PAGE>   11

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   Timeline, Inc.
                                   (Registrant)

Date:  November 13, 1996          By:  /s/ CHARLES R. OSENBAUGH
                                           Charles R. Osenbaugh
                                           Executive Vice President/
                                           Chief Financial Officer


                                   Signed on behalf of registrant and as
                                   principal financial officer.

                                       11
<PAGE>   12

                                 EXHIBITS INDEX

<TABLE>
<CAPTION>
          EXHIBIT                                                    SEQUENTIALLY
          NUMBER            DESCRIPTION                            NUMBERED PAGE
          ------            -----------                            -------------
          <S>               <C>                                          <C>
           27.1             Financial Data Schedule                      13
</TABLE>

                                       12