<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D.C. 20549
                             ---------------------
                                   FORM 10-K
                             ---------------------

<Table>
<C>          <S>
(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, 2001



                                   OR




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



</Table>

                         COMMISSION FILE NUMBER 0-21402

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

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

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

                             11980 N.E. 24TH STREET
                               BELLEVUE, WA 98005
                    (Address of principal executive offices)

                                 (425) 827-1112
              (Registrant's telephone number, including area code)

        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 reports), 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 voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on September
17, 2001 as reported on the Nasdaq National Market, was approximately
$9,648,154.

    As of September 17, 2001, there were 4,824,077 shares of the registrant's
common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Certain portions of INTERLINQ Software Corporation's definitive proxy
statement for its annual meeting of shareholders to be held on December 4, 2001,
which will be filed with the Securities and Exchange Commission within 120 days
after June 30, 2001, are incorporated by reference into Part III of this report.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                     PART I

FORWARD-LOOKING STATEMENTS

     The Company's disclosure and analysis in this annual report contain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. When used in
this discussion, the words "looking forward," "expects," "believes," "intends,"
"anticipates," "plans," "projects," "estimates," "cautiously optimistic,"
"future" and similar expressions are intended to identify forward-looking
statements. However, these words are not the exclusive means of identifying such
statements. In addition, any statements that refer to expectations, projections
or other characterization of future events or circumstances are forward-looking
statements, including statements about potential increases or decreases in
future revenues and expenses and statements relating to the potential accounting
charges and cost savings resulting from the restructuring and future financial
results. All such forward-looking statements are based on the opinions or
estimates of management at the time the statements are made and are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
could affect the Company's actual financial results include, but are not limited
to, the Company's ability to deliver its next-generation MortgageWare lending
platform, enhance its loan servicing technology and sustain its current levels
of customer support, failure to realize anticipated cost-savings from the
restructuring on a sustained basis, or at all, and changes in interest rates and
the mortgage industry in general, as well as the "Certain Additional Factors
Affecting Future Results" section included elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Except as required by law, the Company
undertakes no obligation to publicly release 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.

ITEM 1. BUSINESS

                                    OVERVIEW

     INTERLINQ Software Corporation is a Washington corporation ("the Company")
incorporated in 1982 in the state of Washington. The Company is a leading
provider of technology that helps organizations effectively manage complex,
information-intensive business transactions. The Company offers software-based
business solutions to commercial banks, mortgage banks, mortgage brokers, credit
unions and savings institutions, including a number of the top mortgage
originators. The Company's flagship products, MortgageWare(R) Loan Management
System and MortgageWare(R)TC, process approximately one in eight retail
residential mortgage loans, more than any other system.

     The Company also provides Enterprise Application Integration ("EAI")
software solutions directly to customers and through third parties. Based on the
award-winning EAI technology acquired in June of 1998, the Company's FlowMan(R)
software application enables organizations to integrate disparate software
systems and applications and improve overall business processes and practices
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 works closely with clients to provide comprehensive software
applications and business solutions for the residential mortgage and
construction lending industry and offers a suite of products called
MortgageWare(R) Enterprise, which manages the entire life cycle of a mortgage
loan. The 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
their business processes and practices, thereby improving their efficiency and
profitability. The MortgageWare Enterprise product suite creates an integrated
system of reliable information for business analysis; data is entered once,
managed from a central point and is accessible by any licensed user. The product
suite 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's pipeline.

                                        1
<PAGE>   3

     The Company's primary target market includes all mortgage lenders, the
larger mortgage brokerage companies and the specialty servicing institutions in
the United States, Puerto Rico, Guam and the Virgin Islands. According to
Company estimates based on available industry data, this market is composed of
approximately 1,200 mortgage banks, 10,000 mortgage brokers, 4,300 commercial
banks, 1,800 credit unions, 1,300 savings institutions and 1,000 specialty
servicing institutions. More broadly, the Company considers the entire financial
services industry a potential market for its products and services.

     The Company's FlowMan technology further expands the scope of the
Company's potential target markets. While the Company announced in April 2001
that it was prepared to divest the FlowMan assets, INTERLINQ changed its
strategy after the arrival of new President and CEO Michael Jackman. Upon
further assessment, the Company decided to retain the FlowMan technology asset
because of its enormous potential for INTERLINQ both within and outside the
financial services industry. The Company believes that potential target markets
for FlowMan include vertical markets that, like financial services, encompass
complex, information-intensive business transactions (such as healthcare,
insurance, government, transportation and utilities, etc.) as well as the
broader EAI market. The Company believes that software providers in vertical
markets can use FlowMan as an integration/workflow toolkit or component to
enhance their products' functionality and architecture. The Company also
believes that with FlowMan, companies can reuse integration techniques and
processes across departments and environments, and users can implement
application integration and reengineer processes without engineering knowledge
or training in the specific underlying technologies.

     The Company currently has three main product lines including its loan
production products, its loan servicing products and its EAI product. The
Company's flagship products, MortgageWare(R) Loan Management System and
MortgageWare(R)TC, are currently being re-written and the Company expects to
deliver its next-generation loan production product by the end of the 2002
calendar year. When complete, the Company expects that the next-generation loan
production product will provide a platform to generate future revenue growth.
During fiscal year 2002, the Company intends to generate revenue growth
primarily from the sale of mortgage loan servicing technology, MortgageWare TC
with Workflow Tools, an improved suite of Secondary Marketing products and
increased participation in strategic OEM relationships with organizations
offering complementary products. The Company expects these areas of growth to
complement the Company's current products, which address operational efficiency
in order to decrease the time and cost of the mortgage loan cycle. The Company
has planned releases of new enhancements and upgrades to existing products
targeted for fiscal year 2002, including the continued integration of FlowMan
into MortgageWare Loan Servicing(TM), the Company's client-server-based loan
servicing system.

STRATEGY

     The Company's strategy 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 and client-server-based
offerings in order to help customers shape their business activities through the
use of technology and information. The Company believes it 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, Integrated Software

     The Company believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to install,
use and support. The Company's strategy is to provide software solutions that
achieve these goals, are able to be integrated with its customer's other
applications and can be used together for maximum efficiency. In order to
provide consistent, high-quality support and service, the Company generally does
not create customized software; however, it does enhance its products, from time
to time, for certain customers on a "pay for priority" basis. In addition,
modifications and enhancements requested by customers are typically used in
determining content for product upgrades.

   Enterprise Application Integration & Workflow Market

     The Company believes a need exists in a number of information-intensive
vertical markets (such as healthcare, government, transportation and utilities,
etc.) for EAI/workflow technology that can be used to enhance
                                        2
<PAGE>   4

existing and developmental stage software products as well as proprietary
in-house solutions. The broader financial services market is also a target. With
the elimination of the regulatory walls between banks, brokerage and insurance
companies, many financial services firms may need technology to help them
coordinate their product offerings to customers. The Company's future financial
performance will depend in large part on its ability to sell products outside of
the pure mortgage lending technology market and 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 Company's strategic objectives will succeed or that the market for EAI
and workflow software will continue to grow.

   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 residential
mortgage, construction lending and loan servicing, as well as Web- and
client-server-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,
email and Web-based support and participation in user groups). The Company
monitors customer satisfaction and sponsors or purchases 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 that its strength lies in its ability to provide
financial services companies with integrated solutions for originating,
processing, secondary marketing, servicing, and analyzing residential mortgage
loans. The Company offers a variety of products for strategic and tactical
business solutions in the mortgage industry, including MortgageWare Loan
Management System, MortgageWare TC and MortgageWare TC with Workflow Tools, as
well as other products that manage the life cycle of a loan: MortgageWare
Entre(TM), MortgageWare InfoLINQ(R), MortgageWare MarketLINQ(R), MortgageWare
InvestorLINQ(R), MortgageWare Loan Servicing, MortgageWare Loan Servicing
Gateway(R), and BuilderBLOCK$(R). Together, these business solutions make up the
MortgageWare Enterprise -- a product suite that offers a means for greater
operational efficiency enterprise-wide, faster access to information, and
cost-effective management of information content.

     The company also offers FlowMan, a powerful suite of infrastructure tools
for enterprise application integration and enhanced workflow capabilities.
FlowMan has been integrated into key areas of the MortgageWare Enterprise and is
also licensed to OEM and end-user customers.

     MortgageWare TC, MortgageWare Loan Management System (LMS) and MortgageWare
TC with Workflow Tools. INTERLINQ's modular loan production systems accommodate
qualifying, point-of-sale origination, processing, closing, settlement, pipeline
tracking and information management. MortgageWare TC, the thin-client version of
the MortgageWare LMS, has been designed to reduce network traffic, improve
performance, simplify hardware requirements and reduce exposure to
network-related problems. MortgageWare TC uses a 32-bit Windows client-server
architecture. MortgageWare TC with Workflow Tools incorporates INTERLINQ's
FlowMan technology to enhance loan production with advanced workflow
capabilities. The workflow system has been designed to automate complex
processes and help lenders adjust those processes to their resources and needs
in real-time. The system's graphical user interface allows non-technical
managers to design and adjust processes without programming.

     MortgageWare Entre. The recently redeveloped point-of-sale system provides
originating loan officers or brokers with the flexibility to work more
conversationally in front of the borrower. Since MortgageWare Entre

                                        3
<PAGE>   5

enables these originators to customize their screen flows, using only the
screens necessary to complete each loan application, the system enables better
customer service and faster completion of each loan application. These
originators may use the system to quickly pre-qualify borrowers for purchases
and refinances, show side-by-side comparisons of different loan programs and
give the borrower conditional loan approval on the spot. The Company believes
that MortgageWare Entre gives mortgage originators a competitive advantage
because it is designed to increase the accuracy and timeliness of each loan by
improving communication between originators in the field and the back-office
processing department.

     Automated Underwriting and Services Interfaces. The MortgageWare loan
production systems and the MortgageWare Entre point-of-sale solution offer
lenders seamless access to automated underwriting services. Lenders gain the
ability to order risk grade evaluation and mortgage insurance and request
underwriting through Freddie Mac's Loan Prospector, and the ability to request
underwriting directly from Fannie Mae's Desktop Underwriter or its DO/DU on the
Web. Another interface connects the loan production systems and Entre to Fannie
Mae's MORNETPlus Connections Credit Service, which automates the ordering of
credit reports.

     MortgageWare MarketLINQ. A 32-bit 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 once -- whether it is being used for in-house purposes or by a loan
officer working to obtain the best interest rate for a borrower. Since
MarketLINQ delivers pricing into the lender's loan production system, lenders
may compare actual locked interest rates against rate sheet data, to ensure the
uniformity of their loan pricing. With the Pricing Engine option, MarketLINQ
becomes a powerful risk-based pricing engine enabling administrators and
managers connected through their corporate intranet to easily define pricing
offsets and subsidies using virtually any loan criteria.

     MortgageWare InvestorLINQ. A 32-bit Windows-based product, MortgageWare
InvestorLINQ is a complete risk-management and analysis tool. The system helps
lenders accurately measure exposure, decide what and how to sell, make trades,
allocate loans and analyze performance. A pooling module provides easy
allocation of loans to pools and can be used by secondary marketing personnel to
manage the risks inherent with securities trading.

     MortgageWare Loan Servicing. The Company believes that its MortgageWare
Loan Servicing enhances a customer's profitability by offering a cost-effective
alternative to service bureau and mainframe-based servicing. In addition, it
expands access to loan data and customer information, increasing opportunities
for risk management and cross-selling. MortgageWare Loan Servicing uses a 32-bit
Windows client-server architecture, and incorporates advanced features that
automate and manage business events for a loan servicer.

     MortgageWare Loan Servicing Gateway. A streamlined version of MortgageWare
Loan Servicing, Servicing Gateway is a 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 system.

     BuilderBLOCK$. BuilderBLOCK$ offers a 32-bit Windows-based system that
simplifies and streamlines the management of construction loans. The system
automates IRS reporting, tracks inspections and prints checks. The product also
enables users to reduce the risk of construction lending and improve customer
service. The system reduces risk by enabling lenders to monitor loans, handle
draw requests and accurately issue disbursements. Lenders can improve customer
service via quick access to all borrower loan data.

     MortgageWare InfoLINQ. MortgageWare InfoLINQ is an intranet-based
application that enables better business decisions by making it easy to
distribute critical information enterprise-wide. The product can be set up to
automatically collect data from MortgageWare or other systems and transform it
into information ready for analysis. Customized desktop reports can be
distributed even to non-MortgageWare users.

     MortgageWare External Loan-Application Interface. This product imports 1003
data captured in a MORNETPlus Version 3.0 format, translating leads collected by
call centers, Web sites or other loan-origination vehicles into loan
applications ready for processing in MortgageWare. It supports data integrity by
flagging potential errors.

     FlowMan. FlowMan technology enables companies to integrate disparate
applications, including legacy systems, to improve processes and practices
across an enterprise. The technology is composed of an enterprise

                                        4
<PAGE>   6

application framework, engineering tools and a user interface. The enterprise
application framework, which on the client PC may operate as either a Windows
32-bit client-server- or browser-based Web application, serves as a
communication pipeline throughout the enterprise. The framework core elements,
composed of the business process engine, business rules engine and component
interface, allow abstraction of the process model and business rules from
third-party and legacy applications and allow technology components such as
imaging, forms, DBMS and other products to be connected into the FlowMan
framework. This tight integration protects the organization's technology
investment and eliminates 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 enables
easy integration of each application into the overall enterprise framework,
allowing interoperability between disparate systems and across the enterprise.
FlowMan version 4.0 offers three-tier architecture for expanded scalability,
Component Object Model (COM) technology, object-oriented methodology and
ActiveX(R) controls. FlowMan version 4.0 is deployable across distributed
network environments.

   New Products

     Entre 5.0. This latest upgrade to Entre was released during the first half
of fiscal 2001. This product features a new business-object-based architecture,
facilitating improved data handling and a more flexible user interface, refined
export options and expanded options for documents.

     Integration of FlowMan with MortgageWare Loan Servicing. The Company
continues to integrate FlowMan into MortgageWare Loan Servicing. This is
expected to further broaden the capabilities and benefits of MortgageWare Loan
Servicing and further strengthen the MortgageWare Enterprise.

     MortgageWare MarketLINQ(R) Pricing Engine. The Company continues
development of the pricing engine toolkit that allows customers the ability to
maintain and distribute an unlimited number of product offerings across multiple
channels. The pricing engine automatically adjusts pricing based on specific
loan-level criteria, calculating when additional fees or discounts may apply.

   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 VMP Electronic Laser Forms, Inc., a division of CBF Systems, Inc.
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 percentage of the revenue collected by VMP.

     The Company has developed interfaces to Fannie Mae, Freddie Mac and Ginnie
Mae networks to facilitate delivery of closed loans. In addition, the Company
has developed several programs to export servicing data to loan servicing
systems for its customers.

   Customer Service and Support

     The Company believes that excellent customer service is vital to its
success and future growth. For many customers, the MortgageWare Enterprise
products have 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 also purchase an annual
support contract. Customers are required to purchase support contracts to
receive product upgrades and to receive customer support services.

                                        5
<PAGE>   7

     The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 2001, 39 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 Company examines new technologies and platforms on an ongoing basis to
determine their potential benefits to customers.

     The MortgageWare Enterprise product suite continues to evolve based on
input from many sources, including customers who submit software enhancement
request forms suggesting corrections or enhancements. The Company maintains a
database of all product support calls, which provides feedback to its Product
Development department. In addition, the Company maintains a database that is
accessible to registered customers via the Internet that provides product and
troubleshooting information.

     The Company is currently rewriting its flagship loan production systems and
expects to deliver a replacement for MortgageWare LMS and MortgageWare TC by the
end of calendar year 2002.

     The Company has recently organized itself into product-line focused teams
working on products or closely related groups of products. These teams are led
by senior managers with work experience in customer environments directly
related to their respective products. Product line management assumes
responsibility for product-line profitability, as well as product content and
quality. Remaining personnel in these teams typically possess similar
qualifications with additional experience in the systems analysis or quality
assurance disciplines. Engineering and release preparation services are provided
to the product lines through a matrix reporting relationship. Employees on these
teams are selected for their expertise in software architecture, programming
languages, quality assurance automation or technical writing.

     The introduction of products embodying new technologies and the emergence
of new industry standards can render existing products obsolete and
unmarketable. 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, or if the Company is unable to develop appropriate
partnerships to bring this product to market, the Company's business, operating
results and financial condition will be materially adversely affected.

SALES AND MARKETING

     The Company employs a direct sales force because it believes that
considerable expertise is required to sell its mortgage technology products and
that strong customer relationships are key to its success. As of June 30, 2001,
the Company employed one national sales manager and nine sales executives who
are located throughout the country and are each responsible for an assigned
geographic territory. These personnel are supported by license administrators
and inside sales representatives. Certain sales representatives are exclusively
devoted to sales of the Company's servicing products and its EAI product. The
Company expects its sales executives to maintain relationships with existing
customers and to be responsible for the generation of new business and expansion
of existing business. License administration representatives handle contracts
and other administrative details, while inside sales representatives qualify
sales leads, set appointments for sales executives, and manage 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.
                                        6
<PAGE>   8

   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 customers in 50
states plus Puerto Rico and Guam. As of June 30, 2001, this customer base was
composed of approximately 18% mortgage brokers, 29% mortgage banks, 33%
commercial banks, 11% credit unions, 5% savings institutions and 4% specialized
servicing institutions and other organizations. In fiscal year 2001, no single
customer accounted for more than 10% of the Company's net revenues.

   Competition

     The market for mortgage-related software products is highly competitive.
The Company's competitors include: 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; and software vendors and service bureaus (outsourcers)
offering specialized products for the mortgage lending industry.

     The Company believes the main competitive factors include price, features,
functionality and customer support. Some competitive products cost significantly
less than MortgageWare software, and price-sensitive buyers tend to choose these
products. Competitors market competing products on mainframe, mini-computer and
PC-and server-based platforms with a wide array of pricing. Some competitors
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 loan production.

     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 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.

     The EAI and workflow software markets are 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 providers'
products. Some suppliers are contending for position as full-fledged EAI
software system providers. These include IBM, Oracle, BEA Systems and Vitria.

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

                         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. In September of 1998, the Company received a patent
covering part of the FlowMan technology, which will expire in April 2015.

                                        7
<PAGE>   9

     Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy the Company's products or to obtain and
use its proprietary information. Policing unauthorized use of the Company's
products is difficult, and since the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that competitors will
not independently develop similar technology.

     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 or
results of operations.

MANUFACTURING

     The principal materials used in the Company's products include compact
disks (or 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 to duplicate major product releases and updates. Accompanying
documentation in paper form, which is minimal since most documentation is
delivered electronically, 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
software backlog but has experienced occasional software backlogs. At June 30,
2001, the Company's software backlog was insignificant.

MORTGAGE LENDING REGULATIONS

     The residential mortgage lending industry is subject to a variety of
government regulations, including the Fair Credit Reporting 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 Administration, the Department of Veterans Affairs, Fannie Mae,
Freddie Mac and the Government National Mortgage Association. These agencies
regulate the origination, processing, underwriting, selling, securitization and
servicing of mortgage loans, prohibit discrimination, establish underwriting
guidelines, provide for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts.

     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 violating 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, regardless of outcome.

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 or 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
                                        8
<PAGE>   10

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 or results of operations.

     There is no assurance that the Company will be successful achieving its
strategic objectives in maximizing the return on its investment in the FlowMan
technology. In addition, there is no assurance 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 or
results of operations.

     Continued expansion of the Company's operations in the EAI software market
might require significant additional expenses and capital and could strain the
Company's management, financial and operational resources. Furthermore, gross
margins attributable to this business area could be lower than those associated
with the Company's historical business activities. There can be no assurance
that the Company would be able to expand its operations in a cost-effective or
timely manner. Furthermore, any new products launched by the Company that are
not favorably received by consumers could damage the Company's reputation or the
INTERLINQ brand. The lack of market acceptance of such products 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 or results of operations. It
is difficult for the Company 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
year 1994 which continued through most of fiscal year 1995. During fiscal years
1997, 1998 and 1999, in part due to the increase in mortgage lending and
refinance volumes, the Company had increased revenues, operating income and net
income.

     During the fourth quarter of fiscal year 1999 and through December 2000,
mortgage-lending rates began to rise and the mortgage lending and refinance
volumes decreased substantially. As a result, the Company experienced a
significant decrease in net revenues, operating income and net income. Net
revenues began to grow again as interest rates dropped and stayed low during the
third and fourth quarter of fiscal year 2001.There can be no assurance that
mortgage-lending rates will not rise again. A continued high-interest-rate
environment could have a material adverse effect on the Company's revenues,
profitability or financial condition.

     The Company may in the future be party to litigation arising in the course
of business, including claims that the Company allegedly infringes third-party
trademarks and other intellectual property rights. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.

EMPLOYEES

     As of August 31, 2001, the Company employed 146 people, including 22 in
sales and marketing, 65 in product development, 35 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.

EXECUTIVE OFFICERS OF THE REGISTRANT

     As of September 15, 2001, the executive officers of the Company are as
follows:

<Table>
<Caption>
                    Name                       Age                      Position
                    ----                       ---                      --------
<S>                                            <C>    <C>
Michael H. Jackman...........................  53     Chief Executive Officer and President
Alan R. Pickerill............................  35     Chief Financial Officer, Vice President of
                                                      Finance and Secretary
</Table>

     MICHAEL H. JACKMAN was named President and Chief Executive Officer in June
2001. Since 1998, he served as President of Fiserv Corporation's easyLENDER
division. His previous experience includes senior management positions at
Accredited Home Lenders in San Diego, HNC Software in San Diego, and TRW Real
Estate Loan Services in Orange, California, which is now part of First American
Corporation. Mr. Jackman holds a bachelor's

                                        9
<PAGE>   11

degree in electrical engineering from City University of New York and has
written a number of articles and publications.

     ALAN R. PICKERILL has over 13 years of finance and financial management
experience. He started with the Company in 1998 as controller, was later
promoted to Director of Finance, became Vice President of Finance in January
2000 and was named Chief Financial Officer in January 2001. Previously, he was a
divisional controller at Mosaix, a software developer, and an audit manager at
accounting firm Deloitte & Touche. Mr. Pickerill holds a Bachelor of Arts degree
in Business Administration from the University of Washington. He earned his CPA
certificate in 1990.

ITEM 2.   PROPERTIES

     The Company is currently leasing and occupying approximately 35,000 square
feet of office space in Bellevue, Washington. This lease expires in November
2005 and contains two consecutive renewal options for five years each. The
Company believes that its current facilities will be adequate for its needs
through the end of fiscal year 2002.

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not aware of any pending legal proceedings against it that,
individually or in the aggregate, would have a material adverse effect on its
business, operating results, or financial condition.

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 the fiscal year ending June 30, 2001.

                                    PART II

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

     The Common Stock has traded on the Nasdaq National Market under the symbol
"INLQ" since April 27, 1993. The Company has 1,179 beneficial shareholders as of
September 10, 2001, based on computations including participants in security
positions listings, as defined by Rule 17Ad-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, 2001
    Fourth quarter..........................................  $ 2.50       $ 1.44
    Third quarter...........................................    2.72         1.56
    Second quarter..........................................    3.75         2.03
    First quarter...........................................    4.25         2.06
Fiscal year ended June 30, 2000
    Fourth quarter..........................................  $ 5.13       $ 2.19
    Third quarter...........................................    5.38         3.88
    Second quarter..........................................    4.75         3.25
    First quarter...........................................    7.25         3.75
</Table>

     The Company has never paid dividends on its common stock. The Company
currently intends to retain future earnings for use in its business and
therefore does not currently anticipate paying dividends in the foreseeable
future.

                                        10
<PAGE>   12

ITEM 6. SELECTED FINANCIAL DATA

                            SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                                     Years Ended June 30,
                                                   ---------------------------------------------------------
                                                     2001        2000        1999        1998        1997
                                                     ----        ----        ----        ----        ----
                                                             (In thousands except per share data)
<S>                                                <C>         <C>         <C>         <C>         <C>
Statements of Operations Data:
    Net revenues:
         Software license fees...................   $ 4,737     $ 6,934     $13,092     $ 9,647     $ 7,055
         Software support fees...................     9,673       9,768       8,637       6,976       6,073
         Other...................................     2,204       2,209       2,702       1,723       1,239
                                                   ---------------------------------------------------------
             Total net revenues..................    16,614      18,911      24,431      18,346      14,367
                                                   ---------------------------------------------------------
    Cost of revenues:
         Software license fees...................     3,016       2,245       2,506       1,778       1,500
         Software support fees...................     2,220       2,600       2,731       2,445       1,856
         Other...................................     1,262       1,420       1,468         859         683
                                                   ---------------------------------------------------------
             Total cost of revenues..............     6,498       6,265       6,705       5,082       4,039
                                                   ---------------------------------------------------------
             Gross profit........................    10,116      12,646      17,726      13,264      10,328
                                                   ---------------------------------------------------------
    Operating expenses:
         Product development.....................     4,555       4,018       3,225       1,609       2,147
         Sales and marketing.....................     4,137       4,870       5,983       5,674       4,011
         General and administrative..............     5,260       4,984       5,988       3,754       3,152
         Amortization of goodwill and other
           intangible assets.....................       644         859         858          --          --
         Goodwill & capitalization of software
           write-off.............................     2,353          --          --          --          --
         Purchase of in-process research &
           development...........................        --          --          --       1,350          --
         Restructuring costs.....................       504          --          --          --          --
                                                   ---------------------------------------------------------
             Total operating expenses............    17,453      14,731      16,054      12,387       9,310
                                                   ---------------------------------------------------------
             Operating income (loss).............    (7,337)     (2,085)      1,672         877       1,018
    Net interest and other income................       542         544         545         744         719
                                                   ---------------------------------------------------------
         Income (loss) before income tax expense
           (benefit).............................    (6,795)     (1,541)      2,217       1,621       1,737
                                                   ---------------------------------------------------------
    Income tax expense (benefit).................    (1,154)       (539)        820         616         627
                                                   ---------------------------------------------------------
         Net income (loss).......................   $(5,641)    $(1,002)    $ 1,397     $ 1,005     $ 1,110
                                                   =========================================================
Per Share Data:
    Net income (loss) -- basic...................   $ (1.17)    $  (.20)    $   .27     $   .19     $   .19
                                                   ---------------------------------------------------------
    Net income (loss) -- diluted.................   $ (1.17)    $  (.20)    $   .25     $   .19     $   .19
                                                   ---------------------------------------------------------
    Shares used to calculate net income (loss)
      per share -- basic.........................     4,824       4,912       5,174       5,213       5,707
    Shares used to calculate net income (loss)
      per share -- diluted.......................     4,824       4,912       5,485       5,376       5,842

Balance Sheet Data:
    Cash, cash equivalents and investments.......   $ 8,889     $10,111     $11,763     $13,908     $13,831
    Working capital..............................     4,729       6,877       8,227       8,525      11,623
    Total assets.................................    15,758      22,190      25,797      26,770      21,067
    Total shareholders' equity...................     9,111      14,752      17,517      17,155      16,050
</Table>

                                        11
<PAGE>   13

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

FORWARD-LOOKING STATEMENTS

     The Company's disclosure and analysis in this annual report contain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. When used in
this discussion, the words "looking forward," "expects," "believes," "intends,"
"anticipates," "plans," "projects," "estimates," "cautiously optimistic,"
"future" and similar expressions are intended to identify forward-looking
statements. However, these words are not the exclusive means of identifying such
statements. In addition, any statements that refer to expectations, projections
or other characterization of future events or circumstances are forward-looking
statements, including statements about potential increases or decreases in
future revenues and expenses and statements relating to the potential accounting
charges and cost savings resulting from the restructuring and future financial
results. All such forward-looking statements are based on the opinions or
estimates of management at the time the statements are made and are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
could affect the Company's actual financial results include, but are not limited
to, the Company's ability to deliver its next-generation MortgageWare lending
platform, enhance its loan servicing technology and sustain its current levels
of customer support, failure to realize anticipated cost-savings from the
restructuring on a sustained basis, or at all, and changes in interest rates and
the mortgage industry in general, as well as the "Certain Additional Factors
Affecting Future Results" section included elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Except as required by law, the Company
undertakes no obligation to publicly release 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.

                                  INTRODUCTION

OVERVIEW

     INTERLINQ Software Corporation, established in 1982, provides software
technology for organizations in the mortgage-lending marketplace. Customers
include banks, savings institutions, mortgage banks, mortgage brokers and credit
unions, including a number of the top 100 mortgage originators. Mortgage lenders
began automating the process of originating, processing and closing mortgage
loans in the mid-1980s, during which time the Company introduced its flagship
product MortgageWare LMS. Since then, the Company has introduced a number of
additional products to manage a loan through its entire life cycle, including
MortgageWare Loan Servicing which is used to service mortgage loans after
closing and funding. Generally, when interest rates are low and mortgage volumes
are high, customers and prospective customers purchase more automation
infrastructure. On the other hand, when interest rates are high and mortgage
volumes are low, customers and prospective customers slow down or stop
purchasing automation infrastructure. As a result, the Company's financial
results have historically followed the cyclical nature of the mortgage-lending
industry.

     During the fiscal year ended June 30, 2001, the Company had several
significant events as follows:

     - The Company's revenues declined substantially from those earned in the
       prior fiscal year.

     - The Company engaged US Bancorp Piper Jaffray to assist in a search for a
       strategic partner or acquirer. This project was halted in April 2001.

     - The Company announced the resignation of Jiri Nechleba as its president
       and chief executive officer and the subsequent hiring of Michael Jackman
       to replace Mr. Nechleba.

     - The Company wrote-off $881,000 of the remaining goodwill associated with
       its acquisition of Logical Software Solutions in June of 1998.

     - The Company wrote-down $1.5 million of certain capitalized software
       development costs that were determined to have suffered an impairment of
       value.

                                        12
<PAGE>   14

     - The Company reduced its workforce by approximately 19% through attrition
       and lay-offs. This restructuring resulted in a restructuring charge of
       $504,000.

These events had certain impacts on the company's financial results for fiscal
year 2001, which are discussed in more detail below.

     The Company's enterprise technology product (FlowMan) is a business
solution designed to provide a process-centered enterprise application
integration framework. The Company is striving to maximize the return of its
investment in the FlowMan technology within its MortgageWare Enterprise product
suite and the financial services industry. FlowMan has been integrated with
MortgageWare TC and is currently being integrated with MortgageWare Loan
Servicing. The Company is committed to using the FlowMan technology as the core
framework of its next generation loan management system. The Company also plans
to continue to license this technology to other software providers in vertical
markets both inside and outside of the financial services industry.

     The Company believes that over the course of the last decade mortgage
lenders have purchased technological infrastructure in order to improve their
profit margins as well as to increase their production capacity in times of high
mortgage origination volume. In 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. The product suite
developed by the Company was designed to provide customers with a platform that
would help them reduce their unit costs and, accordingly, increase their profit
margins. The Company believes that in the long term, mortgage lenders will need
to continue to focus their purchasing decisions on solutions that reduce unit
costs and, accordingly, increase profit margins.

     The Company is currently migrating the Company's MortgageWare lending
system to a new architectural platform to upgrade the graphical user interface
and the database structure. This project is expected to result in a new product
that offers a commercially competitive loan production system on a
technologically advanced platform. The Company expects that existing customers
will benefit from the Company's efforts to ensure the new product's
compatibility with other products in the MortgageWare Enterprise product suite
and its similarity to previous versions of the loan management system. The
intent is to leverage its customer's investments in user training, business
process definition, hardware and operating system software. We expect that this
will shorten the adoption curve and reduce the expense typically associated with
major application conversion efforts.

     During the fiscal year ended June 30, 1999, the Company experienced record
software license fees due to the success of INTERLINQ products in a record
mortgage-lending marketplace. Near the end of the 1999 fiscal year, mortgage
interest rates began to rise. As a result, the Company began to observe a
softening in the sales environment driven by reduced mortgage origination
volumes as well as by uncertainties related to Year 2000 issues. This
environment continued through fiscal year 2000 and fiscal year 2001 as
mortgage-lending volumes were down through December 2000. Mortgage lending
volumes began increasing in January 2001, and compared to most historical
volumes have remained high through the end of fiscal year 2001. This increase in
lending volume has led to certain customers purchasing additional capacity, but
the Company has not yet seen its customers adding large-scale capacity. The
Company believes that this is due in part to its customers' caution about the
lending environment and in part to uncertainty about the Company's development
plans and schedules.

NET REVENUES

<Table>
<Caption>
                                             2001        Change        2000        Change        1999
                                             ----        ------        ----        ------        ----
                                                                  (In thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
Software license fees....................  $   4,737        (32)%    $   6,934        (47)%    $  13,092
Software support fees....................      9,673         (1)%        9,768         13 %        8,637
Other....................................      2,204           --        2,209        (18)%        2,702
                                           ---------    ---------    ---------    ---------    ---------
      Total net revenues.................  $  16,614        (12)%    $  18,911        (23)%    $  24,431
                                           =========    =========    =========    =========    =========
</Table>

     Software license fees decreased by 32% for fiscal year 2001 compared to
fiscal year 2000, and decreased by 47% for fiscal year 2000 compared to fiscal
year 1999. The Company attributes the decrease in software license fees for
fiscal year 2001 to uncertainty surrounding the future of the Company and the
market's perception of the Company's current product offering as well as a slow
lending environment during the first half of the fiscal year. During fiscal year
2001, the Company announced that it had retained an investment banker to assist
in a

                                        13
<PAGE>   15

search for a strategic partner or acquirer. This project was halted in April
2001. In addition, the Company believes its sales suffered as a result of the
perception that the Company's flagship products, MortgageWare Loan Management
System and MortgageWare TC, although acknowledged to be comprehensive and
reliable, employ an older underlying technology. The Company is currently
re-writing this product and expects to deliver a new loan production system by
the end of calendar year 2002. The decrease in software license fees for fiscal
year 2000 was due primarily to a softened sales environment caused by increasing
interest rates and concerns over the change to the year 2000.

     Software support fees decreased by 1% for fiscal year 2001 compared to
fiscal year 2000, and increased by 13% for fiscal year 2000 compared to fiscal
year 1999. Software support fees are calculated as a percentage of a customer's
software value. The decrease for fiscal year 2001 was due to a decrease in the
cumulative installed base of the Company's software, which was offset somewhat
by higher support fees charged for certain products. The reduction in the
installed base of the Company's software is primarily due to an increase in
customer deactivations and a decrease in recent software license fees, as
previously discussed. Software is deactivated by customers who (a) need to
reduce the number of licensed users or licensed loan capacity due to a change in
business conditions, (b) are acquired by other mortgage lenders using
competitive lending technology, (c) decide to switch to a competitive mortgage
lending product or (d) are going out of business. The increase for fiscal year
2000 was primarily a result of the record software license fee revenue earned by
the Company in fiscal year 1999 combined with increases in support fees on
certain of the Company's products.

     Other revenues remained relatively unchanged for fiscal year 2001 compared
to fiscal year 2000, and decreased by 18% for fiscal year 2000 compared to
fiscal year 1999. Custom programming revenues for fiscal year 2001 were greater
than in fiscal year 2000 but were offset by lower training revenue and document
referral fees (associated with lower software license fees for fiscal year
2001). The decrease in other revenues in fiscal year 2000 compared to fiscal
year 1999 was due primarily to the related decrease in software license fee
revenue discussed above. This included reductions in training revenue and
consulting revenue offset slightly by an increase in document referral fees.

     Looking forward, the Company is cautiously optimistic that the relatively
strong mortgage-lending volume will remain for the foreseeable future. In
addition, the Company is committed to driving revenue growth through sales of
its other loan production, loan servicing and enterprise application integration
products. The Company expects these two factors to lead to a slight increase of
software license fee revenue for fiscal year 2002. However, the Company believes
that certain customers may have concerns about the Company's development
schedule for its next-generation loan production system, which may cause a
downward pressure on revenue generation through a reduction of recurring support
fees, or cause customers to delay purchasing software until the new product is
released. The Company believes higher support fees in fiscal year 2002 on the
Company's loan servicing product will help to offset the decline in the
installed base of the Company's software and as such, the Company believes that
software support fees for fiscal year 2002 are likely to remain relatively
consistent or decline slightly compared to those earned in fiscal year 2001.
Other revenues are expected to remain consistent or increase slightly in fiscal
year 2002.

COST OF REVENUES

<Table>
<Caption>
                                             2001        Change        2000        Change        1999
                                             ----        ------        ----        ------        ----
                                                                  (In thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
Software license fees....................  $   3,016         34 %    $   2,245        (10)%    $   2,506
Percentage of software license fees......        64%           --          32%           --          19%

Software support fees....................      2,220        (15)%        2,600         (5)%        2,731
Percentage of software support fees......        23%           --          27%           --          32%

Other....................................      1,262        (11)%        1,420         (3)%        1,468
Percentage of other revenues.............        57%           --          64%           --          54%

TOTAL COST OF REVENUES...................  $   6,498          4 %    $   6,265         (7)%    $   6,705
PERCENTAGE OF TOTAL NET REVENUES.........        39%           --          33%           --          27%
</Table>

     Cost of software license fees consists primarily of the amortization of
capitalized software development costs and, to a lesser extent, commissions and
royalties paid to third parties for certain interface products, the purchase and
duplication of disks and product documentation. As a percentage of software
license fees, cost of software

                                        14
<PAGE>   16

license fees increased to 64% for fiscal year 2001 compared to 32% for fiscal
year 2000 and increased to 32% for fiscal year 2000 compared to 19% for fiscal
year 1999. The increase for fiscal year 2001 compared to fiscal year 2000 was
primarily due to the substantial decrease in software license fee revenue
described above combined with a substantial increase in the amortization of
capitalized software development costs. The increases in amortization were due
to the shortened estimated useful lives of certain products along with the fact
that the Company began to amortize costs associated with certain purchased
technology and new products released during fiscal year 2001. The increase for
fiscal year 2000 compared to fiscal year 1999 was primarily due to the
substantial decrease in software license fee revenue described above coupled
with a slight decrease in the amortization of capitalized software development
costs.

     The dollar amount of the cost of software license fees increased by 34%
from $2.25 million in fiscal year 2000 to $3.02 million in fiscal year 2001.
This increase was due primarily to higher amortization of capitalized software
development costs for three products. The development costs for MortgageWare
Entre have increased over the past two years and the resulting amortization of
those costs has also increased. The amortization associated with the
MortgageWare Loan Servicing product also increased due to higher development
costs, but was offset by the write-off of a portion of previously capitalized
software development costs in March 2001. Also, certain previously purchased
technology was amortized beginning in July 2000 through March 2001 when the
remainder of those capitalized costs were written-off. The dollar amount of the
cost of software license fees decreased by 10% from $2.51 million in fiscal year
1999 to $2.25 million in fiscal year 2000. This dollar decrease was primarily
the result of a portion of purchased code used in the Company's MortgageWare
Entre product becoming fully amortized at the end of fiscal year 1999 resulting
in reduced amortization expense in fiscal year 2000. Amortization of capitalized
software development costs was $2.94 million, $2.06 million and $2.20 million
for fiscal years 2001, 2000 and 1999, respectively. The Company expects the
dollar amount of its amortization of capitalized software development costs to
decrease for fiscal year 2002 compared to fiscal year 2001 due primarily to the
$1.47 million write-off of capitalized software development costs in the final
four months of fiscal year 2001.

     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, the
cost of software support fees decreased to 23% for fiscal year 2001 compared to
27% in fiscal year 2000, and decreased to 27% for fiscal year 2000 compared to
32% for fiscal year 1999. The decrease in both fiscal years was due primarily to
the cost of software support fees decreasing (compounded in fiscal year 2000
with increasing support fee revenue). The dollar amount of the cost of software
support fees decreased by $380,000, or 15%, in fiscal year 2001 as compared to
fiscal year 2000. This decrease was primarily the result of reduced headcount in
the company's customer support group combined with other savings in areas such
as travel and telephone expenses. Software support fee revenue increased by 13%
in fiscal year 2000, while the dollar amount of the cost of software support
fees remained relatively flat, decreasing by 5% compared to fiscal year 1999.
Looking forward, the Company expects the dollar cost of software support fees to
remain relatively flat or decrease slightly in fiscal year 2002.

     Cost of other revenues consists primarily of the salaries and
non-reimbursable expenses for the employees who provide training, custom
programming, data conversions and consulting services. As a percentage of other
revenues, cost of other revenues decreased to 57% for fiscal year 2001 compared
to 64% for fiscal year 2000, and increased to 64% for fiscal year 2000 compared
to 54% for fiscal year 1999. The decrease in fiscal year 2001 was due primarily
to overall cost reductions in training and consulting services, while the other
revenues remained unchanged. In fiscal year 2000, the increase was primarily due
to the substantial decrease in other revenues earned. Looking forward, the
Company expects the cost of other revenues to stabilize somewhat and increase
only in the event that other revenues increase.

                                        15
<PAGE>   17

OPERATING EXPENSES

<Table>
<Caption>
                                                 2001       Change      2000       Change      1999
                                                 ----       ------      ----       ------      ----
                                                                   (In thousands)
<S>                                            <C>          <C>       <C>          <C>       <C>
Product development..........................  $   4,555      13%     $   4,018      25%     $   3,225
Percentage of net revenues...................        27%       --           21%       --           13%

Sales and marketing..........................      4,137    (15)%         4,870    (19)%         5,983
Percentage of net revenues...................        25%       --           26%       --           24%

General and administrative...................      5,260       6%         4,984    (17)%         5,988
Percentage of net revenues...................        32%       --           26%       --           25%

Amortization of goodwill and other intangible
  assets.....................................        644    (25)%     $     859       --     $     858
Percentage of net revenues...................         4%       --            5%       --            4%

Goodwill & capitalized software write-off....      2,353       --            --       --            --
Percentage of net revenues...................        14%       --            --       --            --

Restructuring expenses.......................  $     504       --            --       --            --
Percentage of net revenues...................         3%       --            --       --            --
</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 increased to 27% for fiscal year 2001 compared to
21% for fiscal year 2000, and increased to 21% for fiscal year 2000 compared to
13% for fiscal year 1999. The increase in product development expenses as a
percentage of net revenues for fiscal year 2001 consisted of a dollar increase
of $537,000 combined with the 12% decrease in net revenues discussed above. The
dollar increase for fiscal year 2001 consisted of increasing payroll costs for a
larger development team, combined with a decrease in the amount of capitalized
software development costs compared with fiscal year 2000. Total product
development spending was $6.30 million for fiscal year 2001 compared to $5.89
million in the prior year. The increase in product development expenses as a
percentage of net revenues for fiscal year 2000 consisted of a dollar increase
of $793,000, combined with the substantial decrease in net revenues discussed
above. The dollar increase was due primarily to increasing payroll and related
expenses associated with a tight labor market, combined with a decrease in the
amount of product development expenses that were capitalized. The Company
capitalized $1.96 million, $2.00 million and $2.12 million of product
development expenditures for fiscal years 2001, 2000 and 1999, respectively.
Looking forward, the Company believes that product development spending will
increase slightly during fiscal year 2002. In addition, the Company expects the
majority of its product development costs to be related to products that will
not meet capitalization requirements for the foreseeable future. As such, the
Company expects product development expenses, net of amounts capitalized, to
rise during fiscal year 2002.

     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 include advertising, direct marketing and trade show
expenses. As a percentage of net revenues, sales and marketing expenses
decreased slightly to 25% in fiscal year 2001 compared to 26% for fiscal year
2000, and increased to 26% for fiscal year 2000 compared to 24% for fiscal year
1999. The decrease for fiscal year 2001 was due mainly to reduced payroll costs
through attrition and the Company restructuring in April 2001. Also, sales
travel and spending for advertising were reduced significantly due to a decision
to use more cost-effective sales and marketing tactics. The percentage reduction
in sales and marketing expenses generally followed the percentage reduction in
total net revenues, therefore, the percentage of expenses to net revenues
remained relatively unchanged from the prior year. The percentage increase for
fiscal year 2000 resulted primarily from net revenues decreasing at a faster
rate than sales and marketing expenses. Sales and marketing expenses decreased
on a dollar basis by $1.11 million, due primarily to lower commissions
associated with the lower sales volume. In addition, the sales and marketing
group successfully controlled other headcount costs and certain other direct
expenses during a time of reduced activity. The Company expects sales and
marketing expenses to remain relatively flat on a dollar basis and improve
slightly on a percentage of revenue basis for fiscal year 2002 compared to
fiscal year 2001.

     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 were higher in
fiscal year 2001, increasing to 32% compared to 26% for fiscal year 2000.
General and

                                        16
<PAGE>   18

administrative expenses increased to 26% for fiscal year 2000 compared to 25%
for fiscal year 1999. The increase for fiscal year 2001 was attributable to
higher payroll costs, professional fees associated with strategic projects and
executive recruiting fees. These expenses were combined with a significant
decrease in net revenues, resulting in a higher percentage of net revenue than
in fiscal year 2000. The percentage increase for fiscal year 2000 was due
primarily to net revenues decreasing at a faster rate than general and
administrative expenses. During fiscal year 1999, the Company incurred
approximately $1.36 million of expenses associated with the proposed
recapitalization of the Company that was terminated in June, 1999. This was the
primary reason for the dollar increase in general and administrative expenses in
fiscal year 1999 and the subsequent decrease in fiscal year 2000. The Company
expects general and administrative expenses to decrease on a dollar basis and
improve slightly on a percentage of net revenues basis for fiscal year 2002
compared to fiscal year 2001.

     Purchase of in-process research & development represented a one-time charge
incurred by the Company upon the acquisition of Logical Software Solutions
Corporation on June 30, 1998. Amortization of goodwill and other intangible
assets resulting from this acquisition continued through March, 2001 when the
remaining $881,000 was written-off as discussed below. Amortization for this
acquisition did not change in fiscal year 2000 compared to fiscal year 1999.

     The Company incurred a $2.35 million non-cash charge for the write-off of
goodwill and the write-down of some capitalized software development costs in
March, 2001. This write-off consisted of the remaining goodwill and intangible
assets associated with the Logical Software Solutions Corporation acquisition
(as previously discussed) of $881,000, and the write-off of capitalized software
development costs on certain of the Company's products of $1.47 million. During
the third quarter ended March 31, 2001, the Company determined that purchased
software intended to be an integral part of the development of its new products
no longer had value for that purpose, and that there was not a viable future
alternative use. Accordingly, the Company wrote-off the remaining $509,000
balance of this asset. In addition, the Company determined that the net
realizable value of certain of its products was less than the capitalized
software assets associated with these products. Hence, the Company reduced the
capitalized software assets for these products and recorded non-cash charges
totaling $963,000. The Company evaluates the net realizable value of its
intangible assets and capitalized software development costs on a periodic basis
and makes adjustments to these assets as necessary.

     During the fourth quarter of fiscal year 2001, the Company incurred
restructuring expenses of $504,000 associated with staff reduction and the
resignation of its president and CEO. This charge consisted primarily of
severance, continued health care benefits and outplacement services for affected
employees.

NET INTEREST AND OTHER INCOME

<Table>
<Caption>
                                                          2001    Change    2000    Change    1999
                                                          ----    ------    ----    ------    ----
                                                                       (In thousands)
<S>                                                       <C>     <C>       <C>     <C>       <C>
Net interest and other income...........................  $542      --      $544      --      $545
Percentage of net revenues..............................    3%      --        3%      --        2%
</Table>

     Interest and other income consists primarily of interest earned on the
Company's cash and investment balances. Interest and other income remained
fairly consistent during the past three fiscal years.

     As of June 30, 2001, the Company had no interest-bearing debt outstanding,
and anticipates no new debt financing in the foreseeable future. Accordingly,
the Company expects net interest and other income for the foreseeable future to
reflect net interest income.

INCOME TAX EXPENSE (BENEFIT)

<Table>
<Caption>
                                                       2001      Change    2000     Change    1999
                                                       ----      ------    ----     ------    ----
                                                                     (In thousands)
<S>                                                   <C>        <C>       <C>      <C>       <C>
Income tax expense (benefit)........................  $(1,154)    (114)%   $(539)    (166)%   $820
Effective income tax rate...........................      17%       --       35%       --      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 (loss) for financial statement and tax purposes. The

                                        17
<PAGE>   19

effective tax rate was lower for fiscal year 2001 as a result of the valuation
allowance on the deferred tax assets. The Company records a valuation allowance
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Looking forward, the Company does not
expect to record a tax benefit until it believes it can recover the related
deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

     Working capital, which consists principally of cash, cash equivalents and
short-term investments, was $4.73 million as of June 30, 2001, compared to $6.88
million as of June 30, 2000. Cash provided by operating activities was $1.19
million in fiscal year 2001. Principal uses of cash included the purchase of
$453,000 of furniture and equipment and $1.96 million of capitalized software
costs. The Company's capital expenditures for fixed assets for fiscal years 2001
and 2000 were $453,000 and $803,000, respectively.

     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 2002.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued. SFAS 133 established standards for the accounting and reporting of
derivative instruments and hedging activities and requires that derivative
financial instruments, including certain derivative instruments embedded in
other contracts, be measured at fair value and recognized as assets or
liabilities in the financial statements. The Company adopted SFAS 133 during the
three months ended March 31, 2001. The adoption of SFAS 133 did not have a
material effect on the consolidated financial position or results of operations
of the Company.

     In July 2001, the Financial Accounting Standards Board issued two new
statements: SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 will require business combinations entered
into after June 30, 2001 to be accounted for using the purchase method of
accounting. Specifically identifiable intangible assets acquired, other than
goodwill, will be amortized over their estimated useful economic life. SFAS No.
142 will require that goodwill will not be amortized, but should be tested for
impairment at least annually. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and applies to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. The
Company does not expect the adoption of SFAS 141 and SFAS 142 to have a material
effect on the consolidated financial position or results of operations of the
Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company does not use derivative financial instruments in its investment
portfolio. Its financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable and accounts
payable. The Company's exposure to market risk for changes in interest rates
relates primarily to its short-term investments and short-term obligations,
thus, fluctuations in interest rates would not have a material impact on the
fair value of these securities.

                                        18
<PAGE>   20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

              INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<Table>
<Caption>
                                                              Page
                                                                #
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................     20
Balance Sheets as of June 30, 2001 and 2000.................     21
Statements of Operations for the years ended June 30, 2001,
  2000 and 1999.............................................     22
Statements of Shareholders' Equity for the years ended June
  30, 2001, 2000 and 1999...................................     23
Statements of Cash Flows for the years ended June 30, 2001,
  2000 and 1999.............................................     24
Notes to Financial Statements...............................  25-34
Schedule II -- Valuation and Qualifying Accounts............     37
</Table>

                                        19
<PAGE>   21

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
INTERLINQ Software Corporation:

     We have audited the accompanying financial statements 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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, 2001 and 2000, and the results of its operations and
its cash flows for each of the years in the three-year period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States of America. 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.

KPMG LLP
Seattle, Washington
August 3, 2001

                                        20
<PAGE>   22

                                 BALANCE SHEETS

                                     ASSETS

<Table>
<Caption>
                                                                         As of June 30,
                                                              ------------------------------------
                                                                    2001                2000
                                                                    ----                ----
<S>                                                           <C>                 <C>
Current assets:
    Cash and cash equivalents...............................      $  6,662,984        $  7,753,916
    Investments available-for-sale, at fair value...........                --           1,602,932
    Investments held-to-maturity, at amortized cost.........         2,225,858             754,110
    Accounts receivable, less allowance for doubtful
      accounts of $346,000 in 2001 and $222,000 in 2000.....         1,379,174           1,982,668
    Current deferred tax asset..............................           119,967             422,707
    Inventory, prepaid expenses and other current assets....           875,940           1,292,753
                                                                ----------------------------------
           Total current assets.............................        11,263,923          13,809,086
                                                                ----------------------------------
Property and equipment, at cost.............................         4,365,825           7,379,228
    Less accumulated depreciation and amortization..........         3,124,896           5,686,542
                                                                ----------------------------------
           Net property and equipment.......................         1,240,929           1,692,686
                                                                ----------------------------------
Capitalized software costs, less accumulated amortization of
  $7,221,000 in 2001 and $6,697,000 in 2000.................         2,639,311           5,094,766
Goodwill and other intangible assets, less accumulated
  amortization of $0 in 2001 and $1,718,000 in 2000.........                --           1,525,057
Noncurrent deferred tax asset...............................           545,480                  --
Other assets................................................            68,284              68,284
                                                                ----------------------------------
                                                                  $ 15,757,927        $ 22,189,879
                                                              ====================================

                               LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable........................................      $    332,686        $    559,339
    Accrued compensation and benefits.......................         1,163,043             897,367
    Other accrued liabilities...............................            83,002             124,038
    Customer deposits.......................................           514,493             820,112
    Deferred software support fees..........................         4,441,403           4,531,712
                                                                ----------------------------------
           Total current liabilities........................         6,534,627           6,932,568
                                                                ----------------------------------
Noncurrent liabilities, excluding current installments......           112,701              86,760
Noncurrent deferred tax liability...........................                --             418,662
Shareholders' equity:
    Preferred stock, $.01 par value. Authorized 5,000,000
      shares; no shares issued and outstanding..............                --                  --
    Common stock, $.01 par value. Authorized 30,000,000
      shares; issued and outstanding 4,824,077 shares in
      2001 and 2000.........................................            48,241              48,241
    Additional paid-in capital..............................         7,649,952           7,649,952
    Retained earnings.......................................         1,412,406           7,053,696
                                                                ----------------------------------
         Total shareholders' equity.........................         9,110,599          14,751,889
                                                                ----------------------------------

Commitments and contingencies...............................                --                  --
                                                                  $ 15,757,927        $ 22,189,879
                                                              ====================================
</Table>

See accompanying notes to financial statements.

                                        21
<PAGE>   23

                            STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                     Years Ended June 30,
                                                   --------------------------------------------------------
                                                         2001                2000                1999
                                                         ----                ----                ----
<S>                                                <C>                 <C>                 <C>
Net revenues:
    Software license fees........................  $      4,737,128    $      6,933,734    $     13,091,646
    Software support fees........................         9,672,510           9,767,879           8,637,227
    Other........................................         2,204,156           2,208,881           2,702,338
                                                   --------------------------------------------------------
           Total net revenues....................        16,613,794          18,910,494          24,431,211
                                                   --------------------------------------------------------
Cost of revenues:
    Software license fees........................         3,016,598           2,245,066           2,506,509
    Software support fees........................         2,219,618           2,599,919           2,730,637
    Other........................................         1,261,765           1,419,739           1,468,295
                                                   --------------------------------------------------------
           Total cost of revenues................         6,497,981           6,264,724           6,705,441
                                                   --------------------------------------------------------
           Gross profit..........................        10,115,813          12,645,770          17,725,770
                                                   --------------------------------------------------------
Operating expenses:
    Product development..........................         4,555,105           4,017,697           3,225,035
    Sales and marketing..........................         4,137,057           4,870,209           5,982,424
    General and administrative...................         5,259,548           4,984,115           5,988,056
    Amortization of goodwill and other intangible
      assets.....................................           644,490             859,320             858,348
    Goodwill & capitalized software write-off....         2,353,264                  --                  --
    Restructuring costs..........................           503,974                  --                  --
                                                   --------------------------------------------------------
           Total operating expenses..............        17,453,438          14,731,341          16,053,863
                                                   --------------------------------------------------------
           Operating income (loss)...............        (7,337,625)         (2,085,571)          1,671,907
Net interest and other income....................           542,241             544,208             545,522
                                                   --------------------------------------------------------
    Income (loss) before income tax expense
      (benefit)..................................        (6,795,384)         (1,541,363)          2,217,429
Income tax expense (benefit).....................        (1,154,094)           (539,158)            820,111
                                                   --------------------------------------------------------
    Net income (loss)............................  $     (5,641,290)   $     (1,002,205)   $      1,397,318
                                                   ========================================================

Net income (loss) per share -- basic.............  $          (1.17)   $           (.20)   $            .27
Net income (loss) per share -- diluted...........  $          (1.17)   $           (.20)   $            .25

Shares used to calculate net income (loss) per
  share -- basic.................................         4,824,077           4,912,038           5,174,341
Shares used to calculate net income (loss) per
  share -- diluted...............................         4,824,077           4,912,038           5,484,565
</Table>

See accompanying notes to financial statements.

                                        22
<PAGE>   24

                       STATEMENTS OF SHAREHOLDERS' EQUITY

<Table>
<Caption>
                                                        Years Ended June 30, 2001, 2000 and 1999
                                        -------------------------------------------------------------------------
                                                              Additional                              Total
                                                               Paid-in            Retained        Shareholders'
                                          Common Stock         Capital            Earnings            Equity
                                          ------------        ----------          --------        -------------
<S>                                     <C>                <C>                <C>                <C>
Balances at June 30, 1998.............  $         53,506   $     10,442,835   $      6,658,583   $     17,154,924
Issuance of 80,089 shares of common
  stock...............................               800            113,585                 --            114,385
Tax benefit realized upon exercise of
  stock options.......................                --            103,212                 --            103,212
Repurchase of 250,000 shares of common
  stock...............................            (2,500)        (1,250,250)                --         (1,252,750)
Net income for the year ended June 30,
  1999................................                --                 --          1,397,318          1,397,318
                                        -------------------------------------------------------------------------
Balances at June 30, 1999.............            51,806          9,409,382          8,055,901         17,517,089
Issuance of 117,529 shares of common
  stock...............................             1,175            307,161                 --            308,336
Tax benefit realized upon exercise of
  stock options.......................                --            102,894                 --            102,894
Repurchase of 474,100 shares of common
  stock...............................            (4,740)        (2,169,485)                --         (2,174,225)
Net loss for the year ended June 30,
  2000................................                --                 --         (1,002,205)        (1,002,205)
                                        -------------------------------------------------------------------------
Balances at June 30, 2000.............            48,241          7,649,952          7,053,696         14,751,889
Net loss for the year ended June 30,
  2001................................                --                 --         (5,641,290)        (5,641,290)
                                        -------------------------------------------------------------------------
Balances at June 30, 2001.............  $         48,241   $      7,649,952   $      1,412,406   $      9,110,599
                                        =========================================================================
</Table>

See accompanying notes to financial statements.

                                        23
<PAGE>   25

                            STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                  Years Ended June 30,
                                                        -----------------------------------------
                                                           2001           2000           1999
                                                           ----           ----           ----
<S>                                                     <C>            <C>            <C>
Cash flows from operating activities:
Net income (loss).....................................  $(5,641,290)   $(1,002,205)   $ 1,397,318
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
    Depreciation and amortization of property and
      equipment.......................................      904,997        814,228        939,051
    Amortization of capitalized software costs........    2,941,122      2,059,717      2,198,092
    Amortization of goodwill & other intangible
      assets..........................................      644,490        859,320        858,348
    Goodwill & capitalized software write-off.........    2,353,263             --             --
    Deferred income tax expense (benefit).............     (661,402)       369,998       (108,000)
    Tax benefit realized upon exercise of stock
      options.........................................           --        102,894        103,212
    Change in operating assets and liabilities (net of
      acquisition):
         Accounts receivable..........................      603,494      1,780,778       (363,252)
         Inventory, prepaid expenses, and other
           current assets.............................      416,813       (696,474)       (93,735)
         Other assets.................................           --        (15,684)        21,188
         Accounts payable.............................     (226,653)       118,377       (136,796)
         Accrued compensation and benefits and other
           accrued liabilities........................      250,581     (1,205,967)      (202,440)
         Customer deposits............................     (305,619)      (145,092)       591,053
         Deferred software support fees...............      (90,309)       (27,885)     1,080,801
                                                        -----------------------------------------
           Net cash provided by operating
             activities...............................    1,189,487      3,012,005      6,284,840
                                                        -----------------------------------------
Cash flows from investing activities:
Purchases of property and equipment...................     (453,240)      (802,772)    (1,643,461)
Capitalized software costs............................   (1,958,363)    (1,995,234)    (2,123,035)
Purchase of source code and third-party technology....           --             --       (812,500)
Purchases of investments..............................   (7,053,106)    (2,737,851)    (3,295,774)
Proceeds from sales and maturities of investments.....    7,184,290      6,255,027      4,095,479
Cash paid for acquisition.............................           --             --     (2,712,380)
                                                        -----------------------------------------
      Net cash provided by (used in) investing
         activities...................................   (2,280,419)       719,170     (6,491,671)
                                                        -----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock................           --        308,336        114,385
Repurchase of common stock............................           --     (2,174,225)    (1,252,750)
                                                        -----------------------------------------
      Net cash used in financing activities...........           --     (1,865,889)    (1,138,365)
                                                        -----------------------------------------
      Net increase (decrease) in cash & cash
         equivalents..................................   (1,090,932)     1,865,286     (1,345,196)
                                                        -----------------------------------------
Cash and cash equivalents at beginning of year........    7,753,916      5,888,630      7,233,826
                                                        -----------------------------------------
Cash and cash equivalents at end of year..............  $ 6,662,984    $ 7,753,916    $ 5,888,630
                                                        =========================================
Supplemental disclosure of cash flow information:
Net cash paid (received) during the year for income
  taxes...............................................  $  (848,424)   $    59,134    $ 1,298,750
</Table>

See accompanying notes to financial statements.

                                        24
<PAGE>   26

                         NOTES TO FINANCIAL STATEMENTS
                          JUNE 30, 2001, 2000 AND 1999

(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 provides business solutions to banks, savings
institutions, mortgage banks, mortgage brokers, credit unions and other
financial services providers. The Company'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 also 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 primarily through a direct sales force.

   (b) Cash Equivalents

     All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents. At June 30, 2001 and 2000, cash
equivalents consisted primarily of commercial paper and were $5,000,000 and
$5,900,000, respectively.

   (c) Investments

     Investments at June 30, 2001 and 2000 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 other
comprehensive income, net of income taxes. Investments held-to-maturity are
carried at amortized cost.

     At June 30, 2001 and 2000, the fair value of all securities approximated
amortized cost and there were no material unrealized holding gains or losses.

     Investments held-to-maturity consist of high quality corporate debt
securities and have contractual maturities of less than one year. Investments
available-for-sale at June 30, 2000 consist of money market auction preferred
securities. 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 trade at par
without principal volatility.

   (d) Inventory

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

   (e) Property and Equipment

     Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is on the straight-line method over the two to seven year
estimated useful lives of the assets or respective lease terms if shorter.

                                        25
<PAGE>   27
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

     Management periodically evaluates property and equipment for impairment
whenever events or circumstances indicate that the carrying amount may not be
recoverable. The amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired asset.

   (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 costs are 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 the
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.

     During the third quarter ended March 31, 2001, the Company determined that
purchased software intended to be an integral part of the development of its new
products no longer had value for that purpose, and that there was not a viable
future alternative use. Accordingly, the Company wrote-off the remaining balance
of this asset ($509,000). In addition, the Company determined that the net
realizable value of certain of its products was less than the capitalized
software assets associated with these products. The Company wrote-down the
assets during the third quarter and recorded a non-cash charge of $963,000

   (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 non-compete and employment agreements acquired in connection with
the acquisition of LSS. Goodwill and other intangible assets are amortized over
their estimated useful lives ranging from three to four years. The
recoverability of goodwill and other intangible assets is determined by
assessing whether the amortization of the assets balances over their remaining
life can be recovered through undiscounted future net operating cash flows of
the Company. If it is determined that the goodwill and other intangible asset
balances cannot be recovered through undiscounted future net operating cash
flows, the amount of impairment is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average
borrowing rate.

     During fiscal year 2001, the Company evaluated the net realizable value of
the goodwill and other intangible assets and determined that the carrying value
of the assets could not be recovered. The Company wrote-off the unamortized
balance and recorded a non-cash charge of $881,000.

   (h) Revenue Recognition

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

     The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), which
provides specific industry guidance and stipulates that revenue recognized from
software arrangements is to be allocated to each element of the arrangement
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support,
                                        26
<PAGE>   28
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

consulting and implementation services, or training. Under SOP 97-2, the
determination of fair value is based on objective evidence that is specific to
the vendor. If such evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until such time
that evidence of fair value does exist or until all elements of the arrangement
are delivered. Revenue is recognized when persuasive evidence of an arrangement
exists and delivery has occurred, provided the fee is fixed and determinable,
collectibility is probable and the arrangement does not require significant
customization of the software.

     Software support fees 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.

   (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 employee stock-based compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" ("APB 25"), and related
interpretations. As such, compensation expense related to employee stock options
granted under fixed plans is recorded only if, on the date of grant, the fair
value of the underlying stock exceeds the exercise price. The Company provides
pro forma net income disclosures for employee stock options grants as if the
fair-value based method of accounting provided by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") had been applied to these transactions.

   (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 for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply 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 (loss) Per Share

     Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period.

                                        27
<PAGE>   29
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

     The following table reconciles the shares used in calculating basic
earnings (loss) per share to the shares used in calculating diluted earnings
(loss) per share:

<Table>
<Caption>
                                              2001                2000                1999
                                              ----                ----                ----
<S>                                     <C>                 <C>                 <C>
Shares used to calculate basic
  earnings (loss) per share...........     4,824,077           4,912,038           5,174,341
Dilutive effect of outstanding stock
  options.............................            --                  --             310,224
                                           ---------           ---------           ---------
Shares used to calculate diluted
  earnings (loss) per share...........     4,824,077           4,912,038           5,484,565
                                           =========           =========           =========
</Table>

     Options to purchase shares of common stock were not included in the diluted
earnings (loss) per share computation for fiscal years 2001 and 2000 as the
inclusion of these options would be anti-dilutive. Options to purchase common
stock where the exercise price exceeded the average market price were excluded
from the computations in 2001, 2000, and 1999 as the inclusion of these options
would be anti-dilutive. The shares of stock excluded from the computations are
as follows:

<Table>
<Caption>
                                              2001                2000                1999
                                              ----                ----                ----
<S>                                     <C>                 <C>                 <C>
Shares excluded.......................     1,250,000           1,098,000             23,000
Exercise price........................   $0.15 - $8.38       $0.10 - $8.38       $6.94 - $8.38
</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.

   (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) Comprehensive Income

     Comprehensive income measures all changes in equity of an enterprise that
do not result from transactions with owners. The Company has no other components
of comprehensive income for the fiscal years ended June 30, 2001, 2000 and 1999.

   (q) New Accounting Pronouncements

     In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued. SFAS 133 established standards for the accounting and reporting of
derivative instruments and hedging activities and requires that derivative
financial instruments, including certain derivative instruments embedded in
other contracts, be measured at fair value and recognized as

                                        28
<PAGE>   30
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

assets or liabilities in the financial statements. The Company adopted SFAS 133
during the three months ended March 31, 2001. The adoption of SFAS 133 did not
have a material effect on the consolidated financial position or results of
operations of the Company.

     In July 2001, the Financial Accounting Standards Board issued two new
statements: SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 will require business combinations entered
into after June 30, 2001 to be accounted for using the purchase method of
accounting. Specifically identifiable intangible assets acquired, other than
goodwill, will be amortized over their estimated useful economic life. SFAS No.
142 will require that goodwill will not be amortized, but should be tested for
impairment at least annually. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and applies to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. The
Company does not expect the adoption of SFAS 141 and SFAS 142 to have a material
effect on the consolidated financial position or results of operations of the
Company.

(2)  PROPERTY AND EQUIPMENT

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

<Table>
<Caption>
                                                          2001                2000
                                                          ----                ----
<S>                                                 <C>                 <C>
Leasehold improvements............................  $        600,593    $        600,086
Furniture and fixtures............................           133,708           1,135,256
Computer equipment................................         3,341,013           4,984,468
Office equipment..................................           290,511             659,418
                                                    ----------------    ----------------
                                                    $      4,365,825    $      7,379,228
                                                    ================    ================
</Table>

(3)  COMMITMENTS

   (a) Leases

     The Company leases its current premises under a noncancelable operating
lease, which commenced in November 1998 and expires 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. Included in other noncurrent
liabilities at June 30, 2001 and 2000, is $108,175 and $83,407, respectively, in
deferred rent related to the Company's current premises.

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

<Table>
<Caption>
                                                               Minimum lease
                                                                  payments
                                                               -------------
<S>                                                           <C>
Year ending June 30:
2002........................................................           746,703
2003........................................................           743,183
2004........................................................           749,026
2005........................................................           765,793
Thereafter..................................................           257,227
                                                              ----------------
                                                              $      3,261,932
                                                              ================
</Table>

     Total rent expense amounted to $964,081, $987,572, and $767,328, for the
years ended June 30, 2001, 2000, and 1999, respectively.

                                        29
<PAGE>   31
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

   (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
$218,070, $236,643, and $192,821 for the years ended June 30, 2001, 2000 and
1999, respectively. The Company has no other postemployment or postretirement
benefit plans.

(4)  INCOME TAXES

     Components of income taxes are summarized as follows:

<Table>
<Caption>
                                              2001                2000                1999
                                              ----                ----                ----
<S>                                     <C>                 <C>                 <C>
Current:
    Federal...........................  $       (468,057)   $       (929,019)   $        744,611
    State.............................           (24,635)            (83,031)             80,288
                                        ----------------    ----------------    ----------------
           Total current..............          (492,692)         (1,012,050)            824,899
                                        ----------------    ----------------    ----------------
Deferred:
    Federal...........................          (620,250)            357,110             (94,188)
    State.............................           (41,152)             12,888             (13,812)
                                        ----------------    ----------------    ----------------
           Total deferred.............          (661,402)            369,998            (108,000)
                                        ----------------    ----------------    ----------------
Charge in lieu of taxes from employee
  stock options.......................                --             102,894             103,212
                                        ----------------    ----------------    ----------------
                                        $     (1,154,094)   $       (539,158)   $        820,111
                                        ================    ================    ================
</Table>

     Income tax expense (benefit) differs from "expected" income tax expense
(benefit) (computed by applying the U.S. federal income tax rate of 34%) as
follows:

<Table>
<Caption>
                                              2001                2000                1999
                                              ----                ----                ----
<S>                                     <C>                 <C>                 <C>
Computed "expected" tax expense
  (benefit)...........................  $     (2,310,431)   $       (524,063)   $        753,926
Valuation allowance...................         1,234,946                  --                  --
State income taxes, net effect of
  federal income taxes, and other
  items...............................           (79,609)            (15,095)             66,185
                                        ----------------    ----------------    ----------------
                                        $     (1,154,094)   $       (539,158)   $        820,111
                                        ================    ================    ================
</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>
                                                         2001                2000                1999
                                                         ----                ----                ----
<S>                                                <C>                 <C>                 <C>
Deferred tax assets:
    Net operating loss carryforward..............  $        799,897    $             --    $             --
    Allowance for doubtful accounts receivable...           142,201              83,885             119,140
    Deferred software support fees...............           135,543             106,568              87,702
    Accrued liabilities..........................           247,433             232,254             130,887
    Property and equipment.......................           306,865             295,514             739,408
    Goodwill.....................................           805,062             477,768             238,704
    Purchased in-process research &
      development................................           367,096             432,777             466,068
                                                   ----------------    ----------------    ----------------
    Total deferred tax assets....................         2,804,097           1,628,766           1,781,909
                                                   ----------------    ----------------    ----------------
Valuation allowance..............................        (1,234,946)                 --                  --
                                                   ----------------    ----------------    ----------------
    Total........................................         1,569,151           1,628,766           1,781,909
Deferred tax liabilities -- capitalized
  software.......................................          (903,704)         (1,624,766)         (1,407,909)
                                                   ----------------    ----------------    ----------------
           Net deferred tax asset................  $        665,447    $          4,000    $        374,000
                                                   ================    ================    ================
</Table>

                                        30
<PAGE>   32
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. During fiscal year 2001, the Company's
losses exceeded the amount recoverable for tax carryback. Since the Company has
been recording losses for two consecutive years, the Company also recorded a
valuation allowance of $1,234,946 on its net deferred tax assets.

     At June 30, 2001 and 2000, the Company had income tax receivables of
$491,652 and $867,723, respectively, which are included in other current assets.
Additionally, on June 30, 2001 the Company had a net operating loss carryforward
for federal income tax purposes of approximately $2,352,000, which expires in
2021.

(5)  SHAREHOLDERS' EQUITY

   (a)  Preferred Stock

     Preferred stock authorized consists of 5,000,000 shares, none of which is
issued or outstanding.

   (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 APB 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 123, the Company's net income (loss) would have
changed to the pro forma amounts indicated below:

<Table>
<Caption>
                                                            2001              2000              1999
                                                            ----              ----              ----
<S>                                                    <C>               <C>               <C>
Net income (loss):
    As reported......................................  $   (5,641,290)   $   (1,002,205)   $    1,397,318
    Pro forma........................................      (6,236,061)       (1,406,794)          802,196
Per share amounts:
    As reported -- basic.............................  $        (1.17)   $         (.20)   $          .27
    As reported -- diluted...........................           (1.17)             (.20)              .25
    Pro forma -- basic...............................           (1.29)             (.29)              .16
    Pro forma -- diluted.............................           (1.29)             (.29)              .15
</Table>

     The per share weighted-average fair value of stock options granted during
the years ended June 30, 2001, 2000, and 1999 was $1.44, $3.53, and $3.58,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:

<Table>
<Caption>
                                                               2001       2000       1999
                                                               ----       ----       ----
<S>                                                           <C>        <C>        <C>
Expected dividend yield.....................................     0.0%       0.0%       0.0%
Risk-free interest rate.....................................    5.07%      6.74%      4.54%
Expected volatility.........................................      62%        65%        65%
Expected life...............................................  5 years    5 years    5 years
</Table>

     The 1985 and 1993 Plans provide for both incentive and non-qualified stock
options to be granted 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 1,400,000 shares of common stock to be reserved for
grants pursuant to the 1993 Plan.

     The Directors Plan provides for stock options that may be granted 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

                                        31
<PAGE>   33
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

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 plans 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, 1998...........      181,852        108,918        833,623         85,500    $    3.87
Increase in shares reserved under
  1993 Plan.........................      250,000             --             --             --           --
Options granted.....................     (139,800)            --        117,300         22,500         6.12
Options exercised...................           --        (63,744)       (13,345)        (3,000)        1.43
Options canceled....................       51,944         (2,400)       (46,544)        (3,000)        5.05
                                      -----------    -----------    -----------    -----------
Balances at June 30, 1999...........      343,996         42,774        891,034        102,000         4.29
Increase in shares reserved under
  1993 Plan.........................      250,000             --             --             --           --
Options granted.....................     (338,700)            --        306,200         32,500         5.81
Options exercised...................           --        (38,750)       (78,779)            --         2.62
Options canceled....................      159,117             --       (150,117)        (9,000)        5.65
                                      -----------    -----------    -----------    -----------
Balances at June 30, 2000...........      414,413          4,024        968,338        125,500         4.75
Options granted.....................     (393,500)                      363,500         30,000         1.97
Options exercised...................           --             --             --             --           --
Options canceled....................      239,862         (1,200)      (200,862)       (39,000)        4.39
                                      -----------    -----------    -----------    -----------
Balances at June 30, 2001...........      260,775          2,824      1,130,976        116,500         3.94
</Table>

     Additional information regarding options outstanding as of June 30, 2001 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>
 $ .150-1.750          276,624       9.86         $1.74            1,624     $ .15
  2.250-3.563          418,875       5.41          3.24          332,441      3.44
  3.969-5.844          285,315       5.38          4.81          239,726      4.87
  6.125-8.375          269,486       7.16          6.37          155,643      6.38
                  ------------                              ------------
   .150-8.375        1,250,300       6.76          3.94          729,434      4.53
                  ------------                              ------------
</Table>

(6)   NET INTEREST AND OTHER INCOME

     Net interest and other income consist of:

<Table>
<Caption>
                                                    2001            2000            1999
                                                    ----            ----            ----
<S>                                             <C>             <C>             <C>
Interest income...............................  $    542,241    $    544,208    $    535,025
Interest expense..............................            --              --          (2,384)
Other, net....................................            --              --          12,881
                                                ------------    ------------    ------------
                                                $    542,241    $    544,208    $    545,522
                                                ============    ============    ============
</Table>

                                        32
<PAGE>   34
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

(7)   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 with the Company generally requiring a down payment of 50% of the
total purchase price for new customers. No additional collateral is required.
The Company performs credit evaluations of its customers on an as needed basis
and maintains an allowance for possible credit losses.

(8)   SEGMENT INFORMATION

     The operating segments reported below are the segments of the Company for
which separate financial information has been requested and for which operating
profit and loss amounts have been evaluated and used by the chief operating
decision maker for making operating decisions, assessing performance and
deciding on how to effectively allocate resources. The Company has had two
principal businesses and, therefore, two reportable business segments: Mortgage
Technology Division ("MTD") and Enterprise Technology Division ("ETD").

     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 management.

     The Company's Enterprise Technology Division was created on June 30, 1998,
when the Company acquired Logical Software Solutions Corporation. This 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 operating segment information for fiscal years ended June 30, 2001 and
2000 have been reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information".

     The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, as well as other non-financial
criteria. The accounting policies of the reportable segments are substantially
the same as those described in the summary of significant accounting policies.

     Information by operating segment is set forth below (in thousands):

<Table>
<Caption>
                                                                 MTD          ETD         Total
                                                                 ---          ---         -----
<S>                                                           <C>          <C>          <C>
2001:
Net revenue.................................................  $  16,526    $      88    $  16,614
Depreciation and amortization...............................      3,558          933        4,491
Operating income (loss) before income tax expense
  (benefit).................................................     (3,972)      (2,823)      (6,795)
Capital expenditures........................................        429           24          453
Identifiable assets.........................................     14,580        1,178       15,758

2000:
Net revenue.................................................     18,883           27       18,910
Depreciation and amortization...............................      2,596        1,137        3,733
Operating income (loss) before income taxes.................      1,097       (2,638)      (1,541)
Capital expenditures........................................        766           37          803
Identifiable assets.........................................     19,183        3,007       22,190
</Table>

                                        33
<PAGE>   35
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                          JUNE 30, 2001, 2000 AND 1999

(9) TECHNOLOGY LICENSE

     On May 12, 1999, the Company entered into a license agreement with CBF
Systems, Inc. ("CBF"), to license printing technology for integration with
certain of the Company's products. The Company paid an initial license fee of
$812,500 in June 1999, and was obligated to pay a periodic royalty to CBF of up
to 2% of software license fee revenue for products sold with the integrated
technology. The integration of this technology was never completed and the
Company wrote-off the remaining balance of this asset in March 2001, which is
included as part of the goodwill and capitalized software write-off.

(10) QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following table summarizes the unaudited statements of operations for
each quarter of fiscal year 2001 and 2000 (in thousands, except per share
amounts):

<Table>
<Caption>
                                                         First       Second        Third       Fourth
                                                         -----       ------        -----       ------
<S>                                                    <C>          <C>          <C>          <C>
2001
Net revenues.........................................  $   3,847    $   4,118    $   4,274    $   4,375
Gross profit.........................................      2,120        2,362        2,620        3,014
Operating loss.......................................     (1,654)      (1,292)      (3,361)      (1,031)
Net loss.............................................       (939)        (720)      (3,048)        (934)
Net loss per share -- basic..........................  $    (.19)   $    (.15)   $    (.63)   $    (.19)
Net loss per share -- diluted........................  $    (.19)   $    (.15)   $    (.63)   $    (.19)

2000
Net revenues.........................................  $   4,867    $   4,713    $   4,606    $   4,724
Gross profit.........................................      3,268        3,130        3,136        3,112
Operating loss.......................................       (399)        (525)        (585)        (577)
Net loss.............................................       (163)        (254)        (286)        (299)
Net loss per share -- basic..........................  $    (.03)   $    (.05)   $    (.06)   $    (.06)
Net loss per share -- diluted........................  $    (.03)   $    (.05)   $    (.06)   $    (.06)
</Table>

(11) LEGAL PROCEEDINGS

     In the ordinary course of business, the Company is subject to legal
proceedings and claims including, contract-related claims and claims of alleged
infringement of third-party patents, trademarks and other intellectual property
rights. These claims, even if not meritorious, could force the Company to spend
significant financial and managerial resources. The Company is currently not
aware of any claims that it believes will have, individually or in aggregate, a
material adverse effect on its business, prospects, financial condition or
results of operations.

(12) COMPANY RESTRUCTURING

     In April 2001, the Company restructured its operations and reduced its
workforce in all departments by 19% representing 35 positions. At the same time,
the Company's president and CEO resigned his position with the Company. The
Company incurred a charge of $504,000 as a result of the restructuring,
representing primarily severance, medical and outplacement benefits for the
affected employees. The accrued balance payable at June 30, 2001, was $159,000,
which is expected to be paid in fiscal year 2002.

                                        34
<PAGE>   36

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

     The information required by this item is incorporated by reference to the
information under the captions "Election of Directors," "Continuing Class I
Directors, Terms Expiring in 2002," "Nominees for Election as Class II
Directors, Terms Expiring in 2003," "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 2001 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

     The information required by this item is incorporated by reference to the
information under the captions "Directors' Fees," "Compensation of Executive
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

     The information required by this item is 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, 2001, 2000 and 1999

     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.

                                        35
<PAGE>   37

      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>
     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
    10.5(1)     Form of Indemnification Agreement for Directors and Officers
    10.7(2)(3)  Letter dated August 25, 1995 regarding Jiri Nechleba
                Compensatory Arrangement
    10.8(3)     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
    10.10(4)    Office Lease between Pine Forest Co. and INTERLINQ Software
                Corporation dated as of April 23, 1998
    10.11(5)    Licensing agreement for RAKIS Software between CBF Systems,
                Inc. and INTERLINQ Software Corporation dated May 12, 1999
    10.12(6)    Jiri Nechleba Termination Agreement
    10.13       Michael H. Jackman Employment Agreement
    23.1        Consent of independent auditor
</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, 1996, as same exhibit number.

(4) Previously filed with Form 10-K for the year ended June 30, 1998.

(5) Previously filed with Form 10-K for the year ended June 30, 1999.

(6) Previously filed with Form 10-Q for the quarter ended March 31, 2001.

     (b) Reports on Form 8-K During the Fourth Quarter Ended June 30, 2001

     None.

                                        36
<PAGE>   38

                 SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999

<Table>
<Caption>
                                                       Additions
                                              ----------------------------
                               Balance at      Charged to      Charged to
                              beginning of     costs and         other                         Balance at
        Description               year          expenses        accounts       Deductions     end of year
        -----------           ------------     ----------      ----------      ----------     -----------
<S>                           <C>             <C>             <C>             <C>             <C>
Allowances for doubtful
  Accounts:
Year ended June 30, 2001:
    Accounts receivable.....  $    222,000    $    638,000              --    $   (514,000)   $    346,000
Year ended June 30, 2000:
    Accounts receivable.....       322,000         438,000              --        (538,000)        222,000
Year ended June 30, 1999:
    Accounts receivable.....       256,000         326,000              --        (260,000)        322,000
</Table>

                                        37
<PAGE>   39

                                   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 18th day of September 2001.

                                           INTERLINQ Software Corporation

                                           By: /s/ MICHAEL H. JACKMAN
                                             -----------------------------------
                                             Michael H. Jackman
                                             President and Chief Executive
                                               Officer

<Table>
<Caption>
                      Signature                                               Title
                      ---------                                               -----
<S>                                                      <C>

/s/ MICHAEL H. JACKMAN                                   President and Chief Executive Officer
-----------------------------------------------------    (Principal Executive Officer)
Michael H. Jackman

/s/ ALAN R. PICKERILL                                    Vice President of Finance, Secretary
-----------------------------------------------------    (Principal Financial and Accounting Officer)
Alan R. Pickerill

/s/ ROBERT J. GALLAGHER                                  Chairman of the Board
-----------------------------------------------------
Robert J. Gallagher

/s/ ROBERT W. O'REAR                                     Director
-----------------------------------------------------
Robert W. O'Rear

/s/ GEORGE SARLO                                         Director
-----------------------------------------------------
George Sarlo

/s/ THEODORE M. WRIGHT                                   Director
-----------------------------------------------------
Theodore M. Wight
</Table>

                                        38
<PAGE>   40

                               INDEX TO EXHIBITS

<Table>
<Caption>
  Exhibit
     #                               Description
  -------    ------------------------------------------------------------
<C>          <S>
 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
10.5(1)      Form of Indemnification Agreement for Directors and Officers
10.7(2)(3)   Letter dated August 25, 1995 regarding Jiri Nechleba
             Compensatory Arrangement
10.8(3)      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
10.10(4)     Office Lease between Pine Forest Co. and INTERLINQ Software
             Corporation dated as of April 23, 1998
10.11(5)     Licensing agreement for RAKIS Software between CBF Systems,
             Inc. and INTERLINQ Software Corporation dated May 12, 1999
10.12(6)     Jiri Nechleba Termination Agreement
10.13        Michael H. Jackman Employment Agreement
23.1         Consent of independent auditor
</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, 1996, as same exhibit number.

(4) Previously filed with Form 10-K for the year ended June 30, 1998.

(5) Previously filed with Form 10-K for the year ended June 30, 1999.

(6) Previously filed with Form 10-Q for the quarter ended March 31, 2001.

                                        39