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| | OMB APPROVAL
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(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, 2002                                                 
| 
|  |  | OR                                                                                      
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
| 
|  |  | Commission File Number 0-21402                                                          

INTERLINQ Software Corporation(Exact name of registrant as specified in its charter)

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

11980 N.E. 24th Street
Bellevue, WA 98005
(Address of principal executive offices)

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

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.

|     |  |    
|---- |  | ---
|Yesx |  | Noo

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. o

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
24, 2002 as reported on the Nasdaq National Market, was approximately
$29,868,242.

As of September 24, 2002, there were 4,825,241 shares of the registrants
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of INTERLINQ Software Corporations definitive proxy
statement for its special meeting of shareholders to be held on October 14,
2002, which was filed with the Securities and Exchange Commission on September
16, 2002, are incorporated by reference into Part III of this report.





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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | ITEM 1. BUSINESS                                                                             
|                  | ITEM 2. PROPERTIES                                                                           
|                  | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II          
|                  | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|                  | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                  | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                           
|                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                  | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III         
|                  | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                  | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                  | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                  | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV          
|                  | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 3.2      
|EXHIBIT 23.1     
|EXHIBIT 99.1     
|EXHIBIT 99.2     



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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 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, 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, or the Company, is a Washington
corporation incorporated in 1982. 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 and technologies 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®
Loan Management System and MortgageWare®TC, process approximately one in ten
retail residential mortgage loans in the United States, more than any other
system.

On August 6, 2002, the Company announced that it had entered into an
Agreement and Plan of Merger with Harland Financial Solutions, Inc., a wholly
owned subsidiary of John H. Harland Co. John H. Harland Company is a publicly
traded company listed on the New York Stock Exchange under the symbol (NYSE:
JH). If the merger is completed, the Company will become a wholly owned
subsidiary of Harland Financial Solutions, Inc. and the Companys shareholders
will be entitled to receive $6.25 in cash, without interest, in exchange for
each share of the Companys common stock owned. Holders of the Companys stock
options will be entitled to receive $6.25 in cash, without interest, less the
exercise price of the options, for each share of the Companys common stock
represented by the options. Before the Company can complete the merger,
however, the holders of more than 50% of the shares of the Companys common
stock outstanding as of September 6, 2002 must vote to approve and adopt the
merger. Accordingly, the Company has called a special meeting of shareholders
for October 14, 2002 to consider the merger. The





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Company has also filed a proxy statement with
the Securities and Exchange Commission and distributed it to the Companys
shareholders.

The Companys business is currently focused on three main product lines,
including its loan production products, its loan servicing products and its
FlowMan® technology for enterprise application integration and business process
management.

The Companys primary target market includes mortgage lenders with more
than $25 million annual origination volume, the largest 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 500 mortgage
banks, 1,000 mortgage brokers, 700 commercial banks, 1,500 credit unions, 500
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 loan production and loan servicing product lines offer a set
of business solutions that manage the entire life cycle of a residential
mortgage loan, from point of sale through closing and loan servicing. Using
these integrated products, which together comprise the MortgageWare Enterprise
product suite, lenders and servicers can gain greater operational efficiency,
real-time access to data and a cost-effective means for managing and
integrating information. 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.

The Companys flagship products, MortgageWare® Loan Management System and
MortgageWare®TC, are currently being revised to help lenders leverage newer
technologies in their lending operations. The Company expects to deliver
MortgageWareE3, its next-generation Web-based lending platform by the end of
the third quarter of fiscal year 2003 and has already started to pre-sell the
platform within its existing customer base. The Company is also planning to
release another new product, MortgageWare CONNECT, which will work with
existing MortgageWare systems and will be an integral part of MortgageWareE3.
Meanwhile, during the first three quarters of fiscal year 2003, the Company
expects to generate revenue primarily from the sale of its loan servicing
technology to new and existing customers and by sales of MortgageWare®TC,
MortgageWare®TC Workflow Tools, and other related products, primarily to
existing customers. The Company has planned releases of new enhancements to
existing products during fiscal year 2003.

The Company also provides technology for enterprise application
integration and business process management directly to customers and through
third parties. Based on the award-winning FlowMan® technology acquired in June
1998, the software 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 believes that potential customers for FlowMan® include
technology providers in vertical markets that encompass complex,
information-intensive business transactions such as healthcare, insurance,
government, transportation and utilities etc. The Company believes that
software providers in these vertical markets can use FlowMan® as an
integration/process management toolkit or component to enhance their own
products functionality and architecture. The Company also believes that
organizations

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in the financial services industry can use FlowMan® to support
application integration
efforts and the re-engineering of processes across departments and
environments, even without training in the specific underlying technologies.

Strategy

The Companys strategy is to strengthen and leverage its position as a
leading technology provider in the financial services industry. This strategy
includes extending the scope of the Companys easy-to-use, PC-, client-server-
and Web-based offerings to help customers shape their business activities
through the use of technology and information. As the Company is able to
leverage success stories from the use of its FlowMan® technology in the
mortgage industry, it also believes it will be able to move deeper into the
broader financial services market. 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 Business Solutions for Mortgage Lenders and
Servicers

The Company believes its customers require software solutions that are
specifically designed for their business challenges and that are easy to
install, use and support. The Companys strategy is to leverage customer input
to continually refine or revamp its software solutions, and create solutions
that can be integrated with customers other applications 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 and Business Process Management Market

The Company established the enterprise application management business
unit with the goal of increasing distribution of FlowMan® beyond the
MortgageWare product line through original equipment manufacturers
relationships and selective end-user agreements. The Company believes a need
exists in a number of information-intensive vertical markets (such as
healthcare, government, transportation and utilities, etc.) for enterprise
application integration/business process management technology that can be used
to enhance existing and developmental stage software products as well as
proprietary in-house solutions. During fiscal year 2002, the Company began
work to support two key original equipment manufacturers deals with major
technology providers, QuadraMed and XP Systems, a Fiserv unit. These two
technology companies are using FlowMan® to enhance their own product offerings
 QuadraMed provides information management solutions to the health care
industry and XP Systems provides core banking solutions to the credit union
industry. The Companys future financial performance in this area will depend
partly on its ability to move beyond the mortgage lending technology market and
into the broader financial services market. There can be no assurance that the
Companys strategic objectives will succeed or that the market for enterprise
application integration and business process management 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 whom 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 and nurture long-term
customer relationships.

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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,
e-mail 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 ability to respond to
changing customer needs strengthens its recurring revenue opportunities and
decreases the possibility of customer attrition to competitive products.

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 the 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, MortgageWare InfoLINQ®, MortgageWare MarketLINQ®, MortgageWare
InvestorLINQ®, MortgageWare Loan Servicing, MortgageWare Loan Servicing
Gateway® and BuilderBLOCK$®. 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 business process management
capabilities. FlowMan® has been integrated into key areas of the MortgageWare
Enterprise product suite and is also licensed to original equipment
manufacturers and end-user customers.

MortgageWare®TC, MortgageWare®Loan Management System (LMS) and
MortgageWare®TC with Workflow Tools

The Company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 the Companys
FlowMan® technology to enhance loan production with process management
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 Company recently redesigned the architecture of its point-of-sale
system to provide loan officers or brokers with the flexibility to work more
conversationally in front of the borrower. MortgageWare Entre enables these
originators to customize their screen flows, using only the screens necessary
to complete 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 the combination of
MortgageWare Entre and its loan production systems gives mortgage
originators a competitive

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advantage because it can improve communication
between originators in the field and the back-office processing department,
eliminating the potential for error and decreasing the time to close.

Automated Underwriting and Services Interfaces

Both 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. 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®

MortgageWare MarketLINQ® is a 32-bit Windows-based product, 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
the data is entered in-house or by a loan officer in the field. 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.

MortgageWare InvestorLINQ®

MortgageWare InvestorLINQ® is a 32-bit Windows-based product, 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
mainframe-based servicing. In addition, it expands access to loan data and
customer information, improving customer service capabilities and increasing
opportunities for risk management and cross-selling. MortgageWare Loan
Servicing uses a 32-bit Windows client-server architecture and a SQL Server
database.

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.

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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 loan-application data captured in a MORNETPlus 1003
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. 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
technology is composed of an enterprise 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s 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®
offers three-tier architecture for expanded scalability, component object model
(COM) technology, object-oriented methodology and ActiveX® controls. It is
deployable across distributed network environments.

New Products

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 product suite.

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MortgageWare CONNECT

The Company is developing a product for data exchange between MortgageWare
systems and other systems that relies on FlowMan® integration and business
process management technologies. MortgageWare CONNECT will be designed to
work with existing MortgageWare systems and will also be an integral part of
MortgageWareE3, the Companys next-generation lending platform, as part of its
initial release. The product will work in concert with the lending platform to
help lenders integrate electronic third-party services into their lending
processes and drive connectivity across the mortgage supply-chain. The product
is expected to be released for use with existing MortgageWare systems during
the fourth quarter of fiscal year 2003.

MortgageWareE3

The Company continues to re-design its next-generation lending platform to
include all the features and functionality of MortgageWare LMS and
MortgageWare®TC, in a new framework that uses FlowMan® technology and leverages
the Microsoft NET programming model. The Web-based MortgageWareE3 platform
will accommodate both electronic input and manual data entry. It offers a
browser-based, graphical user interface designed to enable rapid navigation
within a loan application. The new platform also incorporates functionality
previously only available from the Company through the separate purchase of
MarketLINQ, InfoLINQ and the MortgageWare External Loan Application Interface.
The platform can also be customized by the organization: users can create new
screens, design business process flows and integrate third-party systems and
technologies into their business processes. The platform will be commercially
released in the third quarter of fiscal year 2003. The Company has already
sold the product into a portion of its customer base and the related revenue
will be recognized upon delivery of the product.

Default-Management Module for MortgageWare Loan Servicing

The Company has signed an agreement to integrate a proven, third-party
default management system into its loan servicing platform. The Company will
private-label the new module, which fills a key functionality gap, for
commercial release during the second quarter of fiscal year 2003. The Company
believes that the product will make the overall system more attractive to
larger loan servicers.

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.

The Company has entered into several strategic alliances with
organizations offering complementary products. 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.

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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.

Other relationships include a reselling agreement with NetUpdate, which
offers Web-based point-of-sale tools to MortgageWare customers, and a
revenue-sharing arrangement with SwiftView for its SwiftSend product, which
enables e-delivery of MortgageWare-produced loan documents.

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.

The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 2002, 47 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 and track software
enhancement requests over the Web to suggest 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 revising its flagship loan production systems and
expects to deliver a replacement for MortgageWare LMS and MortgageWare®TC
during the third quarter of fiscal year 2003.

The Company is organized 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.

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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,
2002, the Company employed one national sales manager, four regional sales
executives charged with generating new business and four regional account
managers selling to current customers based on their changing business needs.
The sales and account executives are located throughout the country and are
each responsible for an assigned geographic territory corresponding to a
quadrant of the country. These personnel are supported by a customer account
services team handling contracts and other administrative details.

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.

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, 2002, this customer base was
composed of approximately 20% mortgage brokers, 12% mortgage banks, 30%
commercial banks, 26% credit unions, 5% savings institutions and 7% specialized
servicing institutions and other organizations. In fiscal year 2002, 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.

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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-, PC-, server- and Web-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 server-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 enterprise application integration/business process management
software market is intensely competitive and subject to rapid change.
Competitors vary in size and in the scope and breadth of the products and
services offered. Some companies are stronger on the integration side and some
focus on the business process management side. Some of these companies offer
tool kits; others offer solutions complete with process templates reflecting
specific vertical market expertise. A number of companies have already
captured significant market share, including IBM, Tibco, webMethods, SeeBeyond
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 1998, the Company
received a patent covering part of the FlowMan® technology, which will expire
in April 2015.

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.

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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. The Company typically has little or
no software backlog. At June 30, 2002, excluding the pre-release orders for
its next-generation platform, MortgageWareE3, 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.

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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 will be well received by its target market or that
others will not successfully develop competing products and services. Each of
these events could have a material adverse effect upon the Companys revenues,
financial condition 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 enterprise
application integration and business process management 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 enterprise application
integration market.

The Companys revenues continue to be tied to the prevailing interest-rate
environment. 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 second half of fiscal year 2001 and throughout fiscal year 2002. 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.

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The Companys common stock is currently listed on the Nasdaq National
Market. To maintain this listing, the Company must continue to satisfy ongoing
listing requirements, including consistently maintaining a minimum of $10
million of shareholders equity beginning November 1, 2002. As of June 30,
2002, the Companys shareholders equity was $7.9 million. The Company is
unlikely to meet the Nasdaq National Market minimum shareholders equity
requirement unless it conducts an equity financing of sufficient size. The
Company may be unable to complete such an equity financing, and even if such a
financing is successfully completed, it will result in significant dilution to
existing shareholders. If the Company fails to satisfy the minimum
shareholders equity requirement, the Nasdaq National Markets alternative
listing standard would require the Company to have a market capitalization of
$50 million (or total assets and total revenue of $50 million each), a public
float of 1.1 million shares having a market value of $15 million and a minimum
bid price of $3 per share. The Company currently does not meet these
alternative requirements, and it is unlikely that it will do so by November 1,
2002. If the Company does not meet the Nasdaq National Market continuing
listing requirements, Nasdaq could initiate delisting procedures at any time
after November 1, 2002. As part of this procedure, the Company believes it
will have an opportunity to present a plan for achieving compliance with the
Nasdaq National Market continuing listing requirements. If necessary, the
Company will present such a plan. If Nasdaq accepts the plan, the Company
would be granted an extension of time to comply. If, however, Nasdaq does not
accept the Companys plan or if the Company fails to meet the listing
requirements within any extension period granted in response to the plan, the
Company would lose its Nasdaq National Market listing. In that event, the
Company would likely seek listing of its common stock on the Nasdaq SmallCap
Market or the Over-the-Counter Bulletin Board, both of which are viewed by many
investors as a less liquid marketplace. Loss of the Companys Nasdaq National
Market listing could make it more difficult for the Company to raise capital or
complete acquisitions and also complicate compliance with state blue sky
laws. In addition, the market price of the Companys common stock could be
adversely affected by the loss of its Nasdaq National Market listing.

Employees

As of June 30, 2002, the Company employed 151 people, including 14 in
sales and marketing, 79 in product development, 33 in customer service and 25
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 June 30,
2002, the executive officers of the Company were as follows:

|                   |  |     |    |          |  |                                                    |  | 
|------------------ |  | --- | -- | -------- |  | -------------------------------------------------- |  | 
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Michael H. Jackman |  |     | 54 |          |  | Chief Executive Officer and President             
|Michael D. Castle  |  |     | 40 |          |  | Chief Financial Officer, Vice President of Finance
|                   |  |     |    |          |  | and Administration and Secretary                  

Michael H. Jackmanwas appointed director, President and Chief Executive
Officer in June 2001. From 1998 to June 2001, 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.

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Michael D. Castlewas named Chief Financial Officer, Vice President of
Finance and Administration and secretary in March 2002. Previously, he was
executive vice president and chief financial officer of Conversay, a speech
recognition software firm in Redmond, Washington. Mr. Castle has also held
senior financial management positions at Winchester Ammunition and PRIMEX
Technologies, both subsidiaries of Connecticut-based Olin Corporation, a
publicly held firm. (PRIMEX was later purchased by General Dynamics.) Mr.
Castle holds an MBA in finance from Washington State University and a
bachelors degree in economics and accounting from the University of
Washington.




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 2003.




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, 2002.




PART II




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

The Companys common stock has traded on the Nasdaq National Market under
the symbol INLQ since April 27, 1993. As of September 06, 2002 the Company
had 145 shareholders of record and 1,005 beneficial shareholders, 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.

|                                |                |  |      |      |     |  |   |      | 
|------------------------------- | -------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                |                |  | High |      | Low
|                                |                |  |      |      |    
|Fiscal year ended June 30, 2002 |                |  |      |      |     |  |   |     
|                                | Fourth quarter |  | $    | 2.30 |     |  | $ | 1.41 | 
|                                | Third quarter  |  |      | 1.89 |     |  |   | 1.42 | 
|                                | Second quarter |  |      | 2.05 |     |  |   | 1.30 | 
|                                | First quarter  |  |      | 2.25 |     |  |   | 1.85 | 
|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 | 

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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.




ITEM 6. SELECTED FINANCIAL DATA

|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |        |        | 
|----------------------------- | -------------------------------------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------------- | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                              |                                                                |                                                   |                        |        | Twelve Months Ended June 30,
|                              |                                                                |                                                   |                        |        |                             
|                              |                                                                |                                                   |                        |        | 2002                         |        | 2001 |        | 2000   |        | 1999 |        | 1998  
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |       
|Statements of Operations Data |                                                                | (in thousands)                                   
|Net revenues:                 |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Software license fees                                          |                                                   | $                      | 5,134  |                              |        | $    | 4,737  |        |        | $    | 6,934  |        |        | $ | 13,092 |        |        | $ | 9,647  |       
|                              | Software support fees                                          |                                                   |                        | 10,012 |                              |        |      | 9,673  |        |        |      | 9,768  |        |        |   | 8,637  |        |        |   | 6,976  |       
|                              | Other                                                          |                                                   |                        | 1,965  |                              |        |      | 2,204  |        |        |      | 2,209  |        |        |   | 2,702  |        |        |   | 1,723  |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                |                                                   | Total net revenues     |        |                              | 17,111 |      |        |        | 16,614 |      |        |        | 18,911 |   |        |        | 24,431 |   |        |        | 18,346 | 
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|Cost of revenues:             |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Software license fees                                          |                                                   |                        | 2,015  |                              |        |      | 3,016  |        |        |      | 2,245  |        |        |   | 2,506  |        |        |   | 1,778  |       
|                              | Software support fees                                          |                                                   |                        | 1,797  |                              |        |      | 2,220  |        |        |      | 2,600  |        |        |   | 2,731  |        |        |   | 2,445  |       
|                              | Other                                                          |                                                   |                        | 880    |                              |        |      | 1,262  |        |        |      | 1,420  |        |        |   | 1,468  |        |        |   | 859    |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                |                                                   | Total cost of revenues |        |                              | 4,692  |      |        |        | 6,498  |      |        |        | 6,265  |   |        |        | 6,705  |   |        |        | 5,082  | 
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                |                                                   | Gross profit           |        |                              | 12,419 |      |        |        | 10,116 |      |        |        | 12,646 |   |        |        | 17,726 |   |        |        | 13,264 | 
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|Operating expenses:           |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Product development                                            |                                                   |                        | 5,956  |                              |        |      | 4,555  |        |        |      | 4,018  |        |        |   | 3,225  |        |        |   | 1,609  |       
|                              | Sales and marketing                                            |                                                   |                        | 2,952  |                              |        |      | 4,137  |        |        |      | 4,870  |        |        |   | 5,983  |        |        |   | 5,674  |       
|                              | General and administrative                                     |                                                   |                        | 4,857  |                              |        |      | 5,260  |        |        |      | 4,984  |        |        |   | 5,988  |        |        |   | 3,754  |       
|                              | Amortization of goodwill and other
intangible assets           |                                                   |                        |       |                              |        |      | 644    |        |        |      | 859    |        |        |   | 858    |        |        |   |       |       
|                              | Goodwill & capitalized software write-off                      |                                                   |                        | 43     |                              |        |      | 2,353  |        |        |      |       |        |        |   |       |        |        |   |       |       
|                              | Purchase of in-process research &
development                  |                                                   |                        |       |                              |        |      |       |        |        |      |       |        |        |   |       |        |        |   | 1,350  |       
|                              | Restructuring costs                                            |                                                   |                        |       |                              |        |      | 504    |        |        |      |       |        |        |   |       |        |        |   |       |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                | Total operating expenses                          |                        |        | 13,808                       |        |      |        | 17,453 |        |      |        | 14,731 |        |   |        | 16,054 |        |   |        | 12,387 |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                | Operating income (loss)                           |                        |        | (1,389                       | )      |      |        | (7,337 | )      |      |        | (2,085 | )      |   |        | 1,672  |        |   |        | 877    |       
|                              | Net interest income                                            |                                                   |                        | 234    |                              |        |      | 542    |        |        |      | 544    |        |        |   | 545    |        |        |   | 744    |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                | Income (loss) before income tax
expense (benefit) |                        |        | (1,155                       | )      |      |        | (6,795 | )      |      |        | (1,541 | )      |   |        | 2,217  |        |   |        | 1,621  |       
|                              | Income tax expense (benefit)                                   |                                                   |                        |       |                              |        |      | (1,154 | )      |        |      | (539   | )      |        |   | 820    |        |        |   | 616    |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              |                                                                |                                                   | Net income (loss)      |        | $                            | (1,155 | )    |        | $      | (5,641 | )    |        | $      | (1,002 | ) |        | $      | 1,397  |   |        | $      | 1,005  | 
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|Per Share Data:               |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Net income (loss)  basic                                      |                                                   | $                      | (.24   | )                            |        | $    | (1.17  | )      |        | $    | (.20   | )      |        | $ | .27    |        |        | $ | .19    |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Net income (loss)  diluted                                    |                                                   | $                      | (.24   | )                            |        | $    | (1.17  | )      |        | $    | (.20   | )      |        | $ | .25    |        |        | $ | .19    |       
|                              |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Shares used to calculate net income
(loss) per share  basic   |                                                   |                        | 4,824  |                              |        |      | 4,824  |        |        |      | 4,912  |        |        |   | 5,174  |        |        |   | 5,213  |       
|                              | Shares used to calculate net income
(loss) per share  diluted |                                                   |                        | 4,824  |                              |        |      | 4,824  |        |        |      | 4,912  |        |        |   | 5,485  |        |        |   | 5,376  |       
|Balance Sheet Data:           |                                                                |                                                   |                        |        |                              |        |      |        |        |        |      |        |        |        |   |        |        |        |   |       
|                              | Cash, cash equivalents and investments                         |                                                   | $                      | 11,084 |                              |        | $    | 8,889  |        |        | $    | 10,111 |        |        | $ | 11,763 |        |        | $ | 13,908 |       
|                              | Working capital                                                |                                                   |                        | 5,845  |                              |        |      | 4,729  |        |        |      | 6,877  |        |        |   | 8,227  |        |        |   | 8,525  |       
|                              | Total assets                                                   |                                                   |                        | 14,870 |                              |        |      | 15,758 |        |        |      | 22,190 |        |        |   | 25,797 |        |        |   | 26,770 |       
|                              | Total shareholders equity                                     |                                                   |                        | 7,949  |                              |        |      | 9,111  |        |        |      | 14,752 |        |        |   | 17,517 |        |        |   | 17,155 |       

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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 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 its
fiscal year 2001 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.

Flowman®, the Companys enterprise technology product, 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 the core framework for the Companys
next generation web-based MortgageWareE3. It is also currently being
integrated with MortgageWare Loan Servicing. The
Company also plans to continue to

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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 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.

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 2002. 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. Most
recently, the Company believes that the sales of its existing MortgageWare
products have been negatively impacted by the approaching planned release of
MortgageWareE3.

Critical Accounting Policies

Managements discussion and analysis of its financial position and results
of operations are based upon the Companys audited financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these audited financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting
policies and areas that require the most significant judgments and estimates to
be used in the preparation of the audited financial statements are:

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Revenue Recognition

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, 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.

Revenue from software license agreements with original equipment
manufacturers, whereby the Company provides ongoing support over the term
of the contract, is generally recognized ratably over the term of the contract.

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. Technological
feasibility is established after the completion of a working model.
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.

The Companys capitalization and amortization of development costs depend
on the determination of technological feasibility and the recoverability of
those costs in future periods. Changes in estimates surrounding technological
feasibility and the recoverability of capitalized development costs would
likely materially impact the amount of costs capitalized and the period over
which the capitalized costs would be amortized to expense.

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Accounts Receivable

The Company performs a quarterly analysis to determine the appropriate
allowance for doubtful accounts. This analysis includes various analytical
procedures and a review of factors, including specific individual balances
selected from a cross-section of the accounts that comprise total accounts
receivable, our history of collections, as well as the overall economic
environment. The allowance for doubtful accounts is an estimate of the
Companys inability to collect accounts receivable and actual collections may
be different than these estimates. Changes in the estimates may materially
impact the amount of bad debt expense recorded by the Company.

Net Revenues
($ in thousands)

|                      |                    |   |        |        |        |  |      |   |        |   |       |        |  |  |     |     |    |   |       |        | 
|--------------------- | ------------------ | - | ------ | ------ | ------ |  | ---- | - | ------ | - | ----- | ------ |  |  | --- | --- | -- | - | ----- | ------ | 
|                      |                    |   | 2002   |        | Change |  | 2001 |   | Change |   | 2000 
|                      |                    |   |        |        |        |  |      |   |        |   |      
|Software license fees |                    | $ | 5,134  |        |        |  | 8    | % |        | $ | 4,737 |        |  |  | (32 | )%  |    | $ | 6,934 |       
|Software support fees |                    |   | 10,012 |        |        |  | 4    |   |        |   | 9,673 |        |  |  | (1  | )   |    |   | 9,768 |       
|Other                 |                    |   | 1,965  |        |        |  | (11  | ) |        |   | 2,204 |        |  |  |    |     |    |   | 2,209 |       
|                      |                    |   |        |        |        |  |      |   |        |   |       |        |  |  |     |     |    |   |       |       
|                      | Total net revenues |   | $      | 17,111 |        |  |      | 3 | %      |   | $     | 16,614 |  |  |     | (12 | )% |   | $     | 18,911 | 

Software license fees increased by 8% for fiscal year 2002 compared to
fiscal year 2001, and decreased by 32% for fiscal year 2001 compared to fiscal
year 2000. The Company attributes the increase in software license fees for
fiscal year 2002 to stronger sales environment primarily due to lower
mortgage-lending rates and higher refinancing volumes (as previously
discussed). 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 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 beta-version of
its new loan production system by the end of calendar year 2002, with
commercial release of the product scheduled for the first quarter of calendar
year 2003.

Software support fees increased by 4% for fiscal year 2002 compared to
fiscal year 2001, and decreased by 1% for fiscal year 2001 compared to fiscal
year 2000. Software support fees are calculated as a percentage of a
customers software value. The increase for fiscal year 2002 was due mostly to
slightly higher software license fees over the prior year and higher support
fees charged for certain products. 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.

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Other revenues decreased by 11% for fiscal year 2002 compared to fiscal
year 2001, and remained relatively unchanged for fiscal year 2001 compared to
fiscal year 2000. This fiscal year 2002 decrease was primarily due to the
absence of a large custom programming project performed during fiscal year
2001. 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.

Looking forward, the Company is cautiously optimistic that the
mortgage-lending volume will remain relatively strong for the foreseeable
future. 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
delay in software purchases until the new product is released. However, the
Company is committed to driving revenue growth through sales of its loan
servicing and enterprise application integration products. The Company expects
these two offsetting factors to lead to a relatively flat or slightly increased
software license fee revenue for fiscal year 2003, until the release of its
next-generation loan production system. The Company believes higher support
fees in fiscal year 2003 on the Companys loan servicing product will help to
offset the slight decline in the installed base of the Companys software and
as such, the Company believes that software support fees for fiscal year 2003
are likely to remain relatively consistent or increase slightly compared to
those earned in fiscal year 2002. Other revenues are expected to remain
consistent or increase slightly, due to training and implementation related to
the new MortgageWare product, in fiscal year 2003.

Cost of Revenues
($ in thousands)

|                                    |                                  |   |       |       |        |  |      |     |        |   |       |       |   |  |     |    |   |   |       |       |  
|----------------------------------- | -------------------------------- | - | ----- | ----- | ------ |  | ---- | --- | ------ | - | ----- | ----- | - |  | --- | -- | - | - | ----- | ----- | -
|                                    |                                  |   | 2002  |       | Change |  | 2001 |     | Change |   | 2000 
|                                    |                                  |   |       |       |        |  |      |     |        |   |      
|Software license fees               |                                  | $ | 2,015 |       |        |  | (33  | )%  |        | $ | 3,016 |       |   |  | 34  | %  |   | $ | 2,245 |      
|Percentage of software license fees |                                  |   | 39    | %     |        |  |     |     |        |   | 64    | %     |   |  |    |    |   |   | 32    | %    
|Software support fees               |                                  | $ | 1,797 |       |        |  | (19  | )%  |        | $ | 2,220 |       |   |  | (15 | )% |   | $ | 2,600 |      
|Percentage of software support fees |                                  |   | 18    | %     |        |  |     |     |        |   | 23    | %     |   |  |    |    |   |   | 27    | %    
|Other                               |                                  | $ | 880   |       |        |  | (30  | )%  |        | $ | 1,262 |       |   |  | (11 | )% |   | $ | 1,420 |      
|Percentage of other revenues        |                                  |   | 45    | %     |        |  |     |     |        |   | 57    | %     |   |  |    |    |   |   | 64    | %    
|                                    | Total cost of revenues           |   | $     | 4,692 |        |  |      | (28 | )%     |   | $     | 6,498 |   |  |     | 4  | % |   | $     | 6,265 |  
|                                    | Percentage of total net revenues |   |       | 27    | %      |  |      |    |        |   |       | 39    | % |  |     |   |   |   |       | 33    | %

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 license fees decreased to 39% for
fiscal year 2002 compared to 64% for fiscal year 2001 and increased to 64% for
fiscal year 2001 compared to 32% for fiscal year 2000. The decrease for fiscal
year 2002 was primarily due to significantly lower amortization of capitalized
software development costs, combined with slightly higher revenues for the
fiscal year 2002. 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.

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The dollar amount of the cost of software license fees decreased by 33%
from $3.02 million in fiscal year 2001 to $2.02 million in fiscal year 2002.
The decrease for fiscal year 2002 was primarily due to significantly lower
amortization of capitalized software development costs. The amount of
amortization decreased to $1.97 million for fiscal year 2002 compared to $2.94
million for fiscal year 2001. This reduction was due to the Company
writing-off $1.47 million of certain capitalized software development costs
during fiscal year 2001 and to several products becoming fully amortized within
the year. 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 increased in fiscal year 2001 and fiscal year 2002,
increasing the resulting amortization of those costs. The amortization
associated with the MortgageWare Loan Servicing product also increased due to
higher development costs, but was partially 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. Amortization of capitalized software development costs was $1.97
million, $2.94 million and $2.06 million for fiscal years 2002, 2001 and 2000,
respectively. The Company expects the dollar amount of its amortization of
capitalized software development costs to decrease for fiscal year 2003
compared to fiscal year 2002 due primarily to certain products becoming fully
amortized in the past year and in fiscal year 2003.

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 19% for fiscal year 2002
compared to 23% in fiscal year 2001, and decreased to 23% for fiscal year 2001
compared to 27% for fiscal year 2000. The decrease in both fiscal years was
due primarily to the cost of software support fees decreasing compounded in
fiscal year 2002 with increasing support fee revenue. The dollar amount of the
cost of software support fees decreased by $423,000, or 19%, in fiscal year
2002 as compared to fiscal year 2001. 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, telephone, freight and diskette
expenses. 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 combined with other
savings in areas such as travel and telephone expenses. Looking forward, the
Company expects the dollar cost of software support fees to increase based on
anticipated support for the new MortgageWare product to be released later in
fiscal year 2003.

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 45% for fiscal year 2002
compared to 57% for fiscal year 2001, and decreased to 57% for fiscal year 2001
compared to 64% for fiscal year 2000. In fiscal year 2002, the decrease was
primarily due to the reduced headcount costs, related travel and telephone
expenses based on the Company lay-offs in April 2001. The decrease in fiscal
year 2001 was due primarily to overall cost reductions in training and
consulting services, while the other revenues remained unchanged. Looking
forward, the Company expects the cost of other revenues to increase based on
implementation needs and training for the new MortgageWare product to be
released later in fiscal year 2003.

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Operating Expenses
($ in thousands)

|                                                     |  |      |       |        |  |      |     |        |  |      |       |   |  |  |     |    |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | ------ |  | ---- | --- | ------ |  | ---- | ----- | - |  |  | --- | -- |  | - | ----- | -
|                                                     |  | 2002 |       | Change |  | 2001 |     | Change |  | 2000
|                                                     |  |      |       |        |  |      |     |        |  |     
|Product development                                  |  | $    | 5,956 |        |  |      | 31  | %      |  | $    | 4,555 |   |  |  | 13  | %  |  | $ | 4,018 |  
|Percentage of net revenues                           |  |      | 35    | %      |  |      |    |        |  |      | 27    | % |  |  |    |    |  |   | 21    | %
|Sales and marketing                                  |  | $    | 2,952 |        |  |      | (29 | )%     |  | $    | 4,137 |   |  |  | (15 | )% |  | $ | 4,870 |  
|Percentage of net revenues                           |  |      | 17    | %      |  |      |    |        |  |      | 25    | % |  |  |    |    |  |   | 26    | %
|General and administrative                           |  | $    | 4,857 |        |  |      | (8  | )%     |  | $    | 5,260 |   |  |  | 6   | %  |  | $ | 4,984 |  
|Percentage of net revenues                           |  |      | 28    | %      |  |      |    |        |  |      | 32    | % |  |  |    |    |  |   | 26    | %
|Amortization of goodwill and other
intangible assets |  |      |      |        |  |      |    |        |  | $    | 644   |   |  |  | (25 | )% |  | $ | 859   |  
|Percentage of net revenues                           |  |      |      |        |  |      |    |        |  |      | 4     | % |  |  |    |    |  |   | 5     | %
|Goodwill & capitalized software write-off            |  | $    | 43    |        |  |      | (98 | )%     |  | $    | 2,353 |   |  |  |    |    |  |   |      |  
|Percentage of net revenues                           |  |      |      |        |  |      |    |        |  |      | 14    | % |  |  |    |    |  |   |      |  
|Restructuring expenses                               |  |      |      |        |  |      |    |        |  | $    | 504   |   |  |  |    |    |  |   |      |  
|Percentage of net revenues                           |  |      |      |        |  |      |    |        |  |      | 3     | % |  |  |    |    |  |   |      |  

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 35% for fiscal year 2002
compared to 27% for fiscal year 2001, and increased to 27% for fiscal year 2001
compared to 21% for fiscal year 2000. The increase in product development
expenses as a percentage of net revenues for fiscal year 2002 consisted of a
dollar increase of $1.4 million. The dollar increase for fiscal year 2002
consisted of increasing payroll costs for a larger development team, combined
with a significant decrease in the amount of capitalized software development
costs compared with fiscal year 2001. The larger development team was required
due to increasing work on the new MortgageWareE3 project and a major upgrade
release for MortgageWare Entre in fiscal year 2002. Since development on
MortgageWareE3 project has not yet reached technological feasibility for
software capitalization purposes, the capitalized software amount in fiscal
year 2002 was much lower than fiscal year 2001. The increase in product
development expenses as a percentage of net revenues for fiscal year 2001
compared to 2000 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
$6.57 million for fiscal year 2002 compared to $6.30 million in the prior year.
The Company capitalized $728,000, $1.96 million and $2.0 million of product
development expenditures for fiscal years 2002, 2001 and 2000, respectively.
During fiscal year 2002, the Company increased its product development spending
and decreased its capitalization of software development costs due to the life
cycle of products which make-up the majority of the Companys development
efforts. The Company is working mostly on its MortgageWareE3 project which
has not yet reached technological feasibility for capitalization. Looking
forward, the Company believes that product development spending will increase
during fiscal year 2003. In addition, the Company expects the majority of its
product development costs to be related to products that will not meet
capitalization requirements. As such, the Company expects product development
expenses, net of amounts capitalized, to rise during fiscal year 2003.

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 to 17% in fiscal year 2002 compared to 25% for fiscal year 2001, and
decreased to 25% for

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fiscal year 2001 compared to 26% for fiscal year 2000.
The decreases for both fiscal years 2002 and
2001 were due mainly to reduced payroll costs through attrition and the
Companys 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. In fiscal year 2002, the full-year
of reduced expenses combined with an increase in net revenues resulted in the
significant reduction in the percentage of net revenues. For fiscal year 2001,
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 Company expects sales and marketing expenses to increase in fiscal year
2003 based on the commissions and increased marketing efforts for the new
MortgageWare product.

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 lower in
fiscal year 2002, decreasing to 28% compared to 32% for fiscal year 2001.
General and administrative expenses increased to 32% for fiscal year 2001
compared to 26% for fiscal year 2000. The decrease for fiscal year 2002 was
due primarily to the absence of consulting and professional fees incurred
during fiscal year 2001 relating to the evaluation of strategic alternatives
for the Company and increased revenue for the year. 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 Company
expects general and administrative expenses to remain relatively flat on a
dollar basis and improve slightly on a percentage of net revenues basis for
fiscal year 2003 compared to fiscal year 2002.

Included in the category of Goodwill and Capitalized Software Write-off,
the Company wrote-off $43,000 of capitalized software costs for a certain
products in the fourth quarter of fiscal year 2002, based on projected future
revenues of that product. 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 of $881,000, and the write-off of capitalized software
development costs on certain of the Companys products of $1.47 million. Since
the write-off occurred in March 2001, amortization of goodwill and other
intangible assets for fiscal years 2002, 2001 and 2000 were $0, $644,000 and
$859,000, respectively. 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.

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Net Interest Income
($ in thousands)

|                              |  |      |     |        |  |      |   |        |  |      |     |   |  |  |   |  |  |   |     |  
|----------------------------- |  | ---- | --- | ------ |  | ---- | - | ------ |  | ---- | --- | - |  |  | - |  |  | - | --- | -
|                              |  | 2002 |     | Change |  | 2001 |   | Change |  | 2000
|                              |  |      |     |        |  |      |   |        |  |     
|Net interest and other income |  | $    | 234 |        |  |      |  |        |  | $    | 542 |   |  |  |  |  |  | $ | 544 |  
|Percentage of net revenues    |  |      | 1   | %      |  |      |  |        |  |      | 3   | % |  |  |  |  |  |   | 3   | %

Net interest consists of interest earned on the Companys cash and
investment balances. Interest and other income decreased significantly in
fiscal year 2002 due to lower interest rates, which resulted in a lower return
on the Companys investments.

As of June 30, 2002, the Company had no interest-bearing debt outstanding,
and anticipates no new debt financing in the foreseeable future.

Income Tax Expenses (Benefit)
($ in thousands)

|                             |  |      |   |        |  |      |      |        |  |      |        |   |  |  |      |    |  |   |      |  
|---------------------------- |  | ---- | - | ------ |  | ---- | ---- | ------ |  | ---- | ------ | - |  |  | ---- | -- |  | - | ---- | -
|                             |  | 2002 |   | Change |  | 2001 |      | Change |  | 2000
|                             |  |      |   |        |  |      |      |        |  |     
|Income tax expense (benefit) |  |      |  |        |  |      | (100 | )%     |  | $    | (1,154 | ) |  |  | (114 | )% |  | $ | (539 | )
|Effective income tax rate    |  |      |  |        |  |      |     |        |  |      | 17     | % |  |  |     |    |  |   | 35   | %

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
Company did not record any income tax benefit during fiscal year 2002 due to
the evaluation of the likelihood of recoverability of these additional deferred
tax assets. The effective tax rate was lower for fiscal year 2001, compared to
fiscal year 2000, 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 recent and past financial performance, 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 $5.85 million as of June 30, 2002, compared to
$4.73 million as of June 30, 2001. Cash provided by operating activities was
$3.23 million in fiscal year 2002 and $1.19 million in fiscal year 2001.
Principal uses of cash included the net purchases of investments of $3.23
million, the purchase of $297,000 of furniture and equipment and $728,000 of
capitalized software costs.

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 2003.

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The Companys common stock is currently listed on the Nasdaq National
Market. To maintain this listing, the Company must continue to satisfy ongoing
listing requirements, including consistently maintaining a minimum of $10
million of shareholders equity beginning November 1, 2002. As of June 30,
2002, the Companys shareholders equity was $7.9 million. The Company is
unlikely to meet the Nasdaq National Market minimum shareholders equity
requirement unless it conducts an equity financing of sufficient size. The
Company may be unable to complete such an equity financing, and even if such a
financing is successfully completed, it will result in significant dilution to
existing shareholders. If the Company fails to satisfy the minimum
shareholders equity requirement, the Nasdaq National Markets alternative
listing standard would require the Company to have a market capitalization of
$50 million (or total assets and total revenue of $50 million each), a public
float of 1.1 million shares having a market value of $15 million and a minimum
bid price of $3 per share. The Company currently does not meet these
alternative requirements, and it is unlikely that it will do so by November 1,
2002. If the Company does not meet the Nasdaq National Market continuing
listing requirements, Nasdaq could initiate delisting procedures at any time
after November 1, 2002. As part of this procedure, the Company believes it
will have an opportunity to present a plan for achieving compliance with the
Nasdaq National Market continuing listing requirements. If necessary, the
Company will present such a plan. If Nasdaq accepts the plan, the Company
would be granted an extension of time to comply. If, however, Nasdaq does not
accept the Companys plan or if the Company fails to meet the listing
requirements within any extension period granted in response to the plan, the
Company would lose its Nasdaq National Market listing. In that event, the
Company would likely seek listing of its common stock on the Nasdaq SmallCap
Market or the Over-the-Counter Bulletin Board, both of which are viewed by many
investors as a less liquid marketplace. Loss of the Companys Nasdaq National
Market listing could make it more difficult for the Company to raise capital or
complete acquisitions and also complicate compliance with state blue sky
laws. In addition, the market price of the Companys common stock could be
adversely affected by the loss of its Nasdaq National Market listing.

Company Acquisition

On August 6, 2002, the Company announced that it had entered into an
Agreement and Plan of Merger with Harland Financial Solutions, Inc., a wholly
owned subsidiary of John H. Harland Co. John H. Harland Company is a publicly
traded company listed on the New York Stock Exchange under the symbol (NYSE:
JH). If the merger is completed, the Company will become a wholly owned
subsidiary of Harland Financial Solutions, Inc. and the Companys
shareholders will be entitled to receive $6.25 in cash, without interest, in
exchange for each share of the Companys common stock owned. Holders of the
Companys stock options will be entitled to receive $6.25 in cash, without
interest, less the exercise price of the options, for each share of the
Companys common stock represented by the options. Before the Company can
complete the merger, however, the holders of more than 50% of the shares of the
Companys common stock outstanding as of September 6, 2002 must vote to approve
and adopt the merger. Accordingly, the Company has called a special meeting of
shareholders for October 14, 2002 to consider the merger. The Company has also
filed a proxy statement with the Securities and Exchange Commission and
distributed it to the Companys shareholders.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued two new
statements: Statement No. 141, Business Combinationsand Statement No. 142,
Goodwill and Other Intangible Assets.Statement 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. Statement No. 142 will require that goodwill and intangible
assets acquired in a purchase business combination will not be amortized, but
should be tested for impairment at least annually. Statement 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 adoption of Statement No. 141 and 142 did not have an impact
on the Companys financial statements.

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In August 2001, the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. Statement No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The fair value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated over the
life of the asset. The liability is accreted at the end of each period through
charges to operating expense. If the obligation is settled for other than the
carrying amount of the liability, the Company will recognize a gain or loss on
settlement. The Company adopted the provisions of Statement No. 143 on July 1,
2002. The adoption of this statement did not have a material impact on the
Companys financial statements.

In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of, it retains many of the fundamental provisions of that
Statement. Statement No. 144 also supersedes the accounting and reporting
provisions of Accounting Board Principles Opinion No. 30, Reporting the Results
of OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for
the disposal of a segment of a business. However, it retains the requirement
in Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entitythat either has been disposed of (by
sale, abandonment or in a distribution to owners) or is classified as held for
sale. The adoption of Statement No. 144 on July 1, 2002 did not have a
material impact on the Companys financial statements.

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of Financial Accounting Standards Board Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, Statement No. 145 rescinds Statement 4, Reporting Gains
and Losses from Extinguishment of Debt. Accordingly, gains or losses from
extinguishment of debt shall not be reported as extraordinary items unless the
extinguishment qualifies as an extraordinary item under the criteria of
Accounting Principles Board Opinion No. 30. Gains or losses from
extinguishment of debt that do not meet the criteria of APB No. 30 should be
reclassified to income from continuing operations in all prior periods
presented. Statement No. 145 is effective for fiscal years beginning after May
15, 2002. The adoption of Statement No. 145 is not expected to have a material
impact on the Companys financial statements.

In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
which addresses accounting for restructuring and similar costs. Statement No.
146 supersedes previous accounting guidance, principally Emerging Issues Task
Force Issue No. 94-3. Statement No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of the commitment to an exit plan. Statement No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, Statement No. 146 may affect the timing of
recognizing future restructuring costs as well as the amounts recognized. The
adoption of this statement is not expected to have a material impact on the
Companys financial statements.

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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.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Supplementary Data

|                                                                                    |  |        |       | 
|----------------------------------------------------------------------------------- |  | ------ | ----- | 
|                                                                                    |  | Page #
|                                                                                    |  |       
|Independent Auditors Report                                                        |  |        | 29    | 
|Balance Sheets as of June 30, 2002 and 2001                                         |  |        | 30    | 
|Statements of Operations for the years ended June 30, 2002, 2001 and 2000           |  |        | 31    | 
|Statements of Shareholders Equity for the years ended June 30, 2002, 2001 and 2000 |  |        | 32    | 
|Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000           |  |        | 33    | 
|Notes to Financial Statements                                                       |  |        | 34-44 | 
|Schedule II  Valuation and Qualifying Accounts                                     |  |        | 56    | 

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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 audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of INTERLINQ Software
Corporation as of June 30, 2002 and 2001, and the results of its operations and
its cash flows for each of the years in the three-year period ended June 30,
2002, 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.

/s/ KPMG LLP

Seattle, Washington

August 9, 2002


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INTERLINQ SOFTWARE CORPORATION

Balance Sheets

|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |           |             | 
|------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | -------------- | ----------- | ---- | --------- | --------- | ----------- | 
|                                                                                                       |                                                                                                                                          |                                            |           | As of June 30,
|                                                                                                       |                                                                                                                                          |                                            |           |               
|                                                                                                       |                                                                                                                                          |                                            |           | 2002           |             | 2001
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |     
|Assets                                                                                                 |                                                                                                                                          |                                            |           |                |             |      |           |          
|Current assets:                                                                                        |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       | Cash and cash equivalents                                                                                                                |                                            | $         | 5,632,705      |             |      | $         | 6,662,984 |            
|                                                                                                       | Investments available-for-sale, at fair value                                                                                            |                                            |           | 413,304        |             |      |           |          |            
|                                                                                                       | Investments held-to-maturity, at amortized cost                                                                                          |                                            |           | 5,038,054      |             |      |           | 2,225,858 |            
|                                                                                                       | Accounts receivable, less allowance for doubtful
accounts of $227,000 in 2002 and $346,000 in 2001                                       |                                            |           | 1,137,628      |             |      |           | 1,379,174 |            
|                                                                                                       | Current deferred tax asset                                                                                                               |                                            |           |               |             |      |           | 119,967   |            
|                                                                                                       | Inventory, prepaid expenses and other current assets                                                                                     |                                            |           | 442,956        |             |      |           | 875,940   |            
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Total current assets                       |           |                | 12,664,647  |      |           |           | 11,263,923  | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|Property and equipment, at cost                                                                        |                                                                                                                                          |                                            | 4,662,559 |                |             |      | 4,365,825 |          
|                                                                                                       | Less accumulated depreciation and amortization                                                                                           |                                            |           | 3,913,926      |             |      |           | 3,124,896 |            
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Net property and equipment                 |           |                | 748,633     |      |           |           | 1,240,929   | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|Capitalized software costs, less accumulated
amortization of $5,445,000 in 2002 and $7,221,000 in
2001 |                                                                                                                                          |                                            | 1,358,241 |                |             |      | 2,639,311 |          
|Noncurrent deferred tax asset                                                                          |                                                                                                                                          |                                            | 29,742    |                |             |      | 545,480   |          
|Other assets                                                                                           |                                                                                                                                          |                                            | 68,282    |                |             |      | 68,284    |          
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Total
assets                               |           |                | $14,869,545 |      |           |           | $15,757,927 | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|Liabilities and Shareholders Equity                                                                   |                                                                                                                                          |                                            |           |                |             |      |           |          
|Current liabilities:                                                                                   |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       | Accounts payable                                                                                                                         |                                            | $         | 522,027        |             |      | $         | 332,686   |            
|                                                                                                       | Accrued compensation and benefits                                                                                                        |                                            |           | 1,041,206      |             |      |           | 1,163,043 |            
|                                                                                                       | Other accrued liabilities                                                                                                                |                                            |           | 303,246        |             |      |           | 83,002    |            
|                                                                                                       | Customer deposits                                                                                                                        |                                            |           | 396,469        |             |      |           | 514,493   |            
|                                                                                                       | Deferred software support fees                                                                                                           |                                            |           | 4,556,366      |             |      |           | 4,441,403 |            
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Total current liabilities                  |           |                | 6,819,314   |      |           |           | 6,534,627   | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|Noncurrent liabilities, excluding current installments                                                 |                                                                                                                                          |                                            | 101,554   |                |             |      | 112,701   |          
|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 4,822,661
shares in 2002 and 4,824,077 shares in 2001 |                                            |           | 48,227         |             |      |           | 48,241    |            
|                                                                                                       | Additional paid-in capital                                                                                                               |                                            |           | 7,642,963      |             |      |           | 7,649,952 |            
|                                                                                                       | Retained earnings                                                                                                                        |                                            |           | 257,487        |             |      |           | 1,412,406 |            
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Total shareholders equity                 |           |                | 7,948,677   |      |           |           | 9,110,599   | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          
|                                                                                                       |                                                                                                                                          | Total
liabilities and shareholders equity |           | $              | 14,869,545  |      |           | $         | 15,757,927  | 
|                                                                                                       |                                                                                                                                          |                                            |           |                |             |      |           |          

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INTERLINQ SOFTWARE CORPORATION

Statement of Operations

|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |   |            |            |  
|----------------------------------------------------- |  | ---------------------------------------------------- | ------------------------ | - | -------------------- | ---------- | ---------- | - | ---------- | ---------- | --------- | - | ---------- | ---------- | -
|                                                      |  |                                                      |                          |   | Years Ended June 30,
|                                                      |  |                                                      |                          |   |                     
|                                                      |  |                                                      |                          |   | 2002                 |            | 2001       |   | 2000      
|                                                      |  |                                                      |                          |   |                      |            |            |   |           
|Net revenues:                                         |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  | Software license fees                                |                          | $ | 5,133,573            |            |            | $ | 4,737,128  |            |           | $ | 6,933,734  |           
|                                                      |  | Software support fees                                |                          |   | 10,011,688           |            |            |   | 9,672,510  |            |           |   | 9,767,879  |           
|                                                      |  | Other                                                |                          |   | 1,965,398            |            |            |   | 2,204,156  |            |           |   | 2,208,881  |           
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  |                                                      | Total net revenues       |   |                      | 17,110,659 |            |   |            | 16,613,794 |           |   |            | 18,910,494 |  
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|Cost of revenues:                                     |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  | Software license fees                                |                          |   | 2,015,070            |            |            |   | 3,016,598  |            |           |   | 2,245,066  |           
|                                                      |  | Software support fees                                |                          |   | 1,796,639            |            |            |   | 2,219,618  |            |           |   | 2,599,919  |           
|                                                      |  | Other                                                |                          |   | 879,851              |            |            |   | 1,261,765  |            |           |   | 1,419,739  |           
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  |                                                      | Total cost of revenues   |   |                      | 4,691,560  |            |   |            | 6,497,981  |           |   |            | 6,264,724  |  
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  |                                                      | Gross profit             |   |                      | 12,419,099 |            |   |            | 10,115,813 |           |   |            | 12,645,770 |  
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|Operating expenses:                                   |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  | Product development                                  |                          |   | 5,956,081            |            |            |   | 4,555,105  |            |           |   | 4,017,697  |           
|                                                      |  | Sales and marketing                                  |                          |   | 2,951,808            |            |            |   | 4,137,057  |            |           |   | 4,870,209  |           
|                                                      |  | General and administrative                           |                          |   | 4,857,690            |            |            |   | 5,259,548  |            |           |   | 4,984,115  |           
|                                                      |  | Amortization of goodwill and other intangible assets |                          |   |                     |            |            |   | 644,490    |            |           |   | 859,320    |           
|                                                      |  | Goodwill & capitalized software write-off            |                          |   | 42,802               |            |            |   | 2,353,264  |            |           |   |           |           
|                                                      |  | Restructuring costs                                  |                          |   |                     |            |            |   | 503,974    |            |           |   |           |           
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  |                                                      | Total operating expenses |   |                      | 13,808,381 |            |   |            | 17,453,438 |           |   |            | 14,731,341 |  
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  |                                                      | Operating loss           |   |                      | (1,389,282 | )          |   |            | (7,337,625 | )         |   |            | (2,085,571 | )
|Net interest income                                   |  |                                                      | 234,363                  |   |                      |            | 542,241    |   |            |            | 544,208   |  
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  | Loss before income tax benefit:                      |                          |   | (1,154,919           | )          |            |   | (6,795,384 | )          |           |   | (1,541,363 | )         
|Income tax benefit                                    |  |                                                      |                         |   |                      |            | (1,154,094 | ) |            |            | (539,158  | )
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|                                                      |  | Net loss                                             |                          | $ | (1,154,919           | )          |            | $ | (5,641,290 | )          |           | $ | (1,002,205 | )         
|                                                      |  |                                                      |                          |   |                      |            |            |   |            |            |           |  
|Net loss per share  basic                            |  | $                                                    | (.24                     | ) |                      | $          | (1.17      | ) |            | $          | (.20      | )
|Net loss per share  diluted                          |  | $                                                    | (.24                     | ) |                      | $          | (1.17      | ) |            | $          | (.20      | )
|Shares used to calculate net loss per share  basic   |  |                                                      | 4,823,985                |   |                      |            | 4,824,077  |   |            |            | 4,912,038 |  
|Shares used to calculate net loss per share  diluted |  |                                                      | 4,823,985                |   |                      |            | 4,824,077  |   |            |            | 4,912,038 |  

See accompanying notes to financial statements

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INTERLINQ SOFTWARE CORPORATION

Statements of Shareholders Equity

|                                                    |  |                                          |        |         |  |            |            |          |  |               |            |       |  |   |            |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | ------- |  | ---------- | ---------- | -------- |  | ------------- | ---------- | ----- |  | - | ---------- | -
|                                                    |  | Years Ended June 30, 2002, 2001 and 2000
|                                                    |  |                                         
|                                                    |  |                                          |        |         |  | Additional |            |          |  |               |            | Total
|                                                    |  |                                          |        |         |  | Paid-in    |            | Retained |  | Shareholders'
|                                                    |  | Common Stock                             |        | Capital |  | Earnings   |            | Equity  
|                                                    |  |                                          |        |         |  |            |            |         
|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  |  
|Issuance of 2,624 shares of common stock            |  |                                          | 26     |         |  |            | 217        |          |  |               |           |       |  |   | 243        |  
|Repurchase of 4,040 shares of common stock          |  |                                          | (40    | )       |  |            | (7,206     | )        |  |               |           |       |  |   | (7,246     | )
|Net loss for the year ended June 30, 2002           |  |                                          |       |         |  |            |           |          |  |               | (1,154,919 | )     |  |   | (1,154,919 | )
|                                                    |  |                                          |        |         |  |            |            |          |  |               |            |       |  |   |            |  
|Balances at June 30, 2002                           |  | $                                        | 48,227 |         |  | $          | 7,642,963  |          |  | $             | 257,487    |       |  | $ | 7,948,677  |  
|                                                    |  |                                          |        |         |  |            |            |          |  |               |            |       |  |   |            |  

See accompanying notes to financial statements.

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INTERLINQ SOFTWARE CORPORATION

Statements of Cash Flows

|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |           |            |            |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | --------- | -------------------- | ---------- | ---------- | --------- | -------- | ---------- | ---------- | --------- | ---------- | ---------- | -
|                                                                                |                                                                  |                                                                 |                                                     |           | Years Ended June 30,
|                                                                                |                                                                  |                                                                 |                                                     |           |                     
|                                                                                |                                                                  |                                                                 |                                                     |           | 2002                 |            | 2001       |           | 2000    
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |         
|Cash flows from operating activities:                                           |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Net loss                                                                        |                                                                  | $                                                               | (1,154,919                                          | )         |                      | $          | (5,641,290 | )         |          | $          | (1,002,205 | )        
|Adjustments to reconcile net loss to net cash provided by
operating activities: |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|                                                                                | Depreciation and amortization of property and equipment          |                                                                 |                                                     | 789,030   |                      |            |            | 904,997   |          |            |            | 814,228   |           
|                                                                                | Amortization of capitalized software costs                       |                                                                 |                                                     | 1,966,760 |                      |            |            | 2,941,122 |          |            |            | 2,059,717 |           
|                                                                                | Amortization of goodwill & other intangible assets               |                                                                 |                                                     |          |                      |            |            | 644,490   |          |            |            | 859,320   |           
|                                                                                | Goodwill & capitalized software write-off                        |                                                                 |                                                     | 42,802    |                      |            |            | 2,353,263 |          |            |            |          |           
|                                                                                | Allowance for doubtful accounts                                  |                                                                 |                                                     | (119,000  | )                    |            |            | 124,000   |          |            |            | (100,000  | )         
|                                                                                | Deferred income tax expense (benefit)                            |                                                                 |                                                     | 635,705   |                      |            |            | (661,402  | )        |            |            | 369,998   |           
|                                                                                | Tax benefit realized upon exercise of stock options              |                                                                 |                                                     |          |                      |            |            |          |          |            |            | 102,894   |           
|                                                                                | Change in operating assets and liabilities (net of
acquisition): |                                                                 |                                                     |           |                      |            |            |           |          |            |            |           |           
|                                                                                |                                                                  | Accounts receivable                                             |                                                     |           | 360,546              |            |            |           | 479,494  |            |            |           | 1,880,778  |           
|                                                                                |                                                                  | Inventory, prepaid expenses, and other current assets           |                                                     |           | 432,984              |            |            |           | 416,813  |            |            |           | (696,474   | )         
|                                                                                |                                                                  | Other assets                                                    |                                                     |           | 2                    |            |            |           |         |            |            |           | (15,684    | )         
|                                                                                |                                                                  | Accounts payable                                                |                                                     |           | 189,341              |            |            |           | (226,653 | )          |            |           | 118,377    |           
|                                                                                |                                                                  | Accrued compensation and benefits and other accrued
liabilities |                                                     |           | 87,260               |            |            |           | 250,581  |            |            |           | (1,205,967 | )         
|                                                                                |                                                                  | Customer deposits                                               |                                                     |           | (118,024             | )          |            |           | (305,619 | )          |            |           | (145,092   | )         
|                                                                                |                                                                  | Deferred software support fees                                  |                                                     |           | 114,963              |            |            |           | (90,309  | )          |            |           | (27,885    | )         
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|                                                                                |                                                                  |                                                                 | Net cash provided by operating activities           |           |                      | 3,227,450  |            |           |          | 1,189,487  |            |           |            | 3,012,005  |  
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Cash flows from investing activities:                                           |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Purchases of property and equipment                                             |                                                                  |                                                                 | (296,734                                            | )         |                      |            | (453,240   | )         |          |            | (802,772   | )        
|Capitalized software costs                                                      |                                                                  |                                                                 | (728,492                                            | )         |                      |            | (1,958,363 | )         |          |            | (1,995,234 | )        
|Purchase of investments                                                         |                                                                  |                                                                 | (5,373,360                                          | )         |                      |            | (7,053,106 | )         |          |            | (2,737,851 | )        
|Proceeds
from sales and maturities of investments                               |                                                                  |                                                                 | 2,147,860                                           |           |                      |            | 7,184,290  |           |          |            | 6,255,027  |          
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|                                                                                |                                                                  |                                                                 | Net cash provided by (used in) investing activities |           |                      | (4,250,726 | )          |           |          | (2,280,419 | )          |           |            | 719,170    |  
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Cash flows from financing activities:                                           |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Proceeds from issuance of common stock                                          |                                                                  |                                                                 | 243                                                 |           |                      |            |           |           |          |            | 308,336    |          
|Repurchase of common stock                                                      |                                                                  |                                                                 | (7,246                                              | )         |                      |            |           |           |          |            | (2,174,225 | )        
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|                                                                                |                                                                  |                                                                 | Net cash used in financing activities               |           |                      | (7,003     | )          |           |          |           |            |           |            | (1,865,889 | )
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|                                                                                |                                                                  |                                                                 | Net increase (decrease) in cash & cash equivalents  |           |                      | (1,030,279 | )          |           |          | (1,090,932 | )          |           |            | 1,865,286  |  
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Cash and cash equivalents at beginning of year                                  |                                                                  |                                                                 | 6,662,984                                           |           |                      |            | 7,753,916  |           |          |            | 5,888,630  |          
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Cash and cash equivalents at end of year                                        |                                                                  | $                                                               | 5,632,705                                           |           |                      | $          | 6,662,984  |           |          | $          | 7,753,916  |          
|                                                                                |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Supplemental disclosure of cash flow information:                               |                                                                  |                                                                 |                                                     |           |                      |            |            |           |          |            |            |          
|Net cash paid (received) during the year for income taxes                       |                                                                  | $                                                               | (1,338,739                                          | )         |                      | $          | (848,424   | )         |          | $          | 59,134     |          

See accompanying notes to financial statements

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Notes to Financial Statements
June 30, 2002, 2001 and 2000

(1) Description of Business and Summary of Significant Accounting Policies

(a)  Description of Business

INTERLINQ Software Corporation, or the 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 date of three
months or less, 3,500,000 and 5,000,000, respectively, were considered to be cash equivalents. At June 30, 2002 and
2001, consisted primarily of commercial paper.

(c)  Investments

Investments at June 30, 2002 and 2001 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, 2002 and 2001, 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 investment-grade corporate debt
securities and have contractual maturities of less than one year. Investments
available-for-sale at June 30, 2002 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).

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(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 life of the assets or the respective lease term if
shorter.

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.

In June 2002, the Company determined that the net realizable value of
certain of its products was less than the capitalized software assets
associated with these products and wrote-off these costs in the amount of
$43,000.

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

During fiscal year 2001, the Company evaluated the net realizable value of
the goodwill and other intangible assets acquired from its June 30, 1998
acquisition of Logical Software Solutions and determined that the carrying
value of the assets could not be recovered through undiscounted future net
operating cashflows. The Company wrote-off the unamortized balance and
recorded a non-cash charge of $881,000. Goodwill and other intangible assets
were amortized over their estimated useful lives ranging from three to four
years.

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(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, 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,
collectability 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.

Revenue from software license agreements with original equipment
manufacturers (OEM), whereby the Company provides ongoing support over the term
of the contract, is generally recognized ratably over the term of the contract.

(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.

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(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 a valuation allowance 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.

Options to purchase shares of common stock were not included in the
diluted loss per share computation for fiscal years 2002, 2001 and 2000 as the
inclusion of these options would be anti-dilutive. The shares of stock
excluded from the computations are as follows:

|                |  |      |            |      |  |      |            |  |  |   |            | 
|--------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                |  | 2002 |            | 2001 |  | 2000
|                |  |      |            |      |  |     
|Shares excluded |  |      | 928,000    |      |  |      | 1,250,000  |  |  |   | 1,098,000  | 
|Exercise price  |  | $    | 1.48-$7.38 |      |  | $    | 0.15-$8.38 |  |  | $ | 0.10-$8.38 | 

(m)  Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.

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(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, 2002,
2001 and 2000.

(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 assets or
liabilities in the financial statements. The adoption of SFAS 133 on July 1,
2002 did not have a material effect on the 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 required 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 requires that goodwill will not be amortized, but should be tested for
impairment at least annually. SFAS No. 142 was adopted on July 1, 2002. The
adoption of SFAS 141 and SFAS 142 did not have a material effect on the
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:

|                       |  |      |           |      |  |   |           | 
|---------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                       |  | 2002 |           | 2001
|                       |  |      |           |     
|Leasehold improvements |  | $    | 603,980   |      |  | $ | 600,593   | 
|Furniture and fixtures |  |      | 139,846   |      |  |   | 133,708   | 
|Computer equipment     |  |      | 3,602,717 |      |  |   | 3,341,013 | 
|Office equipment       |  |      | 316,016   |      |  |   | 290,511   | 
|                       |  |      |           |      |  |   |           | 
|                       |  | $    | 4,662,559 |      |  | $ | 4,365,825 | 

(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, 2002 and 2001, are $98,991 and $108,175,
respectively, in deferred rent related to the Companys current premises.

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

|                     |  |                        |           | 
|-------------------- |  | ---------------------- | --------- | 
|Year ending June 30: |  | Minimum lease payments
|                     |  |                       
|2003                 |  | $                      | 732,573   | 
|2004                 |  |                        | 748,133   | 
|2005                 |  |                        | 765,793   | 
|Thereafter           |  |                        | 257,227   | 
|                     |  |                        |           | 
|                     |  | $                      | 2,503,726 | 
|                     |  |                        |           | 

Total rent expense amounted to $1,009,633, $964,081 and $987,572, for the
years ended June 30, 2002, 2001 and 2000, respectively.

(b)  401(k) Plan

The Company sponsors a 401(k) plan that covers substantially all
employees. At its own discretion, the Company may make contributions to the
plan based on a percentage of participants contributions. The Company made
contributions of $173,858, $218,070 and $236,643 for the years ended June 30,
2002, 2001 and 2000, respectively. The Company has no other postemployment or
postretirement benefit plans.

(4) Income Taxes

Components of income taxes are summarized as follows:

|                                                    |         |                |   |          |          |      |            |          |          |   |          |          |            |  
|--------------------------------------------------- | ------- | -------------- | - | -------- | -------- | ---- | ---------- | -------- | -------- | - | -------- | -------- | ---------- | -
|                                                    |         |                |   | 2002     |          | 2001 |            | 2000    
|                                                    |         |                |   |          |          |      |            |         
|Current:                                            |         |                |   |          |          |      |            |          |          |   |          |         
|                                                    | Federal |                | $ | (588,120 | )        |      | $          | (468,057 | )        |   | $        | (929,019 | )         
|                                                    | State   |                |   | (47,585  | )        |      |            | (24,635  | )        |   |          | (83,031  | )         
|                                                    |         |                |   |          |          |      |            |          |          |   |          |         
|                                                    |         | Total current  |   |          | (635,705 | )    |            |          | (492,692 | ) |          |          | (1,012,050 | )
|Deferred:                                           |         |                |   |          |          |      |            |          |          |   |          |         
|                                                    | Federal |                |   | 588,120  |          |      |            | (620,250 | )        |   |          | 357,110  |           
|                                                    | State   |                |   | 47,585   |          |      |            | (41,152  | )        |   |          | 12,888   |           
|                                                    |         |                |   |          |          |      |            |          |          |   |          |         
|                                                    |         | Total deferred |   |          | 635,705  |      |            |          | (661,402 | ) |          |          | 369,998    |  
|Charge in lieu of taxes from employee
stock options |         |                |  |          |          |      |           |          |          |   | 102,894  |         
|                                                    |         |                |   |          |          |      |            |          |          |   |          |         
|                                                    |         | $              |  |          |          | $    | (1,154,094 | )        |          | $ | (539,158 | )       
|                                                    |         |                |   |          |          |      |            |          |          |   |          |         

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:

|                                                                        |  |      |          |      |  |      |            |   |  |   |          |  
|----------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                        |  | 2002 |          | 2001 |  | 2000
|                                                                        |  |      |          |      |  |     
|Computed expected tax expense (benefit)                               |  | $    | (392,672 | )    |  | $    | (2,310,431 | ) |  | $ | (524,063 | )
|Valuation allowance                                                     |  |      | 452,616  |      |  |      | 1,234,946  |   |  |   |         |  
|State income taxes, net effect of
federal income taxes, and other items |  |      | (59,944  | )    |  |      | (79,609    | ) |  |   | (15,095  | )
|                                                                        |  |      |          |      |  |      |            |   |  |   |          |  
|                                                                        |  | $    |         |      |  | $    | (1,154,094 | ) |  | $ | (539,158 | )
|                                                                        |  |      |          |      |  |      |            |   |  |   |          |  

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

|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |           |       | 
|----------------------------------------------- | ------------------------------------------- | ---------------------- | ---------- | --------- | ------ | ---- | ---------- | --------- | ------- |  | ---------- | --------- | ----- | 
|                                                |                                             |                        |            | 2002      |        | 2001 |            | 2000     
|                                                |                                             |                        |            |           |        |      |            |          
|Deferred tax assets:                            |                                             |                        |            |           |        |      |            |           |         |  |            |          
|                                                | Net operating loss carry forward            |                        | $          |          |        |      | $          | 799,897   |         |  | $          |          |      
|                                                | Allowance for doubtful accounts receivable  |                        |            | 118,265   |        |      |            | 142,201   |         |  | $          | 83,885    |      
|                                                | Deferred software support fees              |                        |            | 129,439   |        |      |            | 135,543   |         |  |            | 106,568   |      
|                                                | Accrued liabilities                         |                        |            | 350,834   |        |      |            | 247,433   |         |  |            | 232,254   |      
|                                                | Property and equipment                      |                        |            | 461,569   |        |      |            | 306,865   |         |  |            | 295,514   |      
|                                                | Goodwill                                    |                        |            | 729,741   |        |      |            | 805,062   |         |  |            | 477,768   |      
|                                                | Purchased in-process research & development |                        |            | 333,806   |        |      |            | 367,096   |         |  |            | 432,777   |      
|                                                | Research credit                             |                        |            | 55,054    |        |      |            |          |         |  |            |          |      
|                                                | Other                                       |                        |            | 6,377     |        |      |            |          |         |  |            |          |      
|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |          
|                                                | Total deferred tax assets                   |                        |            | 2,185,085 |        |      |            | 2,804,097 |         |  |            | 1,628,766 |      
|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |          
|Valuation allowance                             |                                             |                        | (1,687,562 | )         |        |      | (1,234,946 | )         |         |  |           |          
|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |          
|                                                | Total                                       |                        |            | 497,523   |        |      |            | 1,569,151 |         |  |            | 1,628,766 |      
|Deferred tax liabilities  capitalized software |                                             |                        | (467,780   | )         |        |      | (903,704   | )         |         |  | (1,624,766 | )        
|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |          
|                                                |                                             | Net deferred tax asset |            | $         | 29,742 |      |            | $         | 665,447 |  |            | $         | 4,000 | 
|                                                |                                             |                        |            |           |        |      |            |           |         |  |            |          

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. Since the Company has incurred
net losses for three consecutive years, the Company recorded a valuation
allowance of $1,687,562 on its net deferred tax assets.

At June 30, 2002 and 2001, the Company had income tax
receivables of $0 and $491,652, respectively.

(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 loss would have changed
to the pro forma amounts indicated below:

|                   |                                 |  |      |            |      |  |      |            |   |  |   |            |  
|------------------ | ------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                   |                                 |  | 2002 |            | 2001 |  | 2000
|                   |                                 |  |      |            |      |  |     
|Net loss:          |                                 |  |      |            |      |  |      |            |   |  |   |           
|                   | As reported                     |  | $    | (1,154,919 | )    |  | $    | (5,641,290 | ) |  | $ | (1,002,205 | )
|                   | Pro forma                       |  |      | (1,530,275 | )    |  |      | (6,236,061 | ) |  |   | (1,406,794 | )
|Per share amounts: |                                 |  |      |            |      |  |      |            |   |  |   |           
|                   | As reported  basic and diluted |  | $    | (.24       | )    |  | $    | (1.17      | ) |  | $ | (.20       | )
|                   | Pro forma  basic and diluted   |  |      | (.32       | )    |  |      | (1.29      | ) |  |   | (.29       | )

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The per share weighted-average fair value of stock options granted during
the years ended June 30, 2002, 2001 and 2000 was $1.07, $1.44 and $3.53,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:

|                        |  |         |      |         |  |         |      |   |  |  |      |  
|----------------------- |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                        |  | 2002    |      | 2001    |  | 2000   
|                        |  |         |      |         |  |        
|Expected dividend yield |  |         | 0.0  | %       |  |         | 0.0  | % |  |  | 0.0  | %
|Risk-free interest rate |  |         | 3.82 | %       |  |         | 5.07 | % |  |  | 6.74 | %
|Expected volatility     |  |         | 71   | %       |  |         | 62   | % |  |  | 65   | %
|Expected life           |  | 5 years |      | 5 years |  | 5 years

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 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:

|                          |                                             |  |           |          |      |  |                     |         |           |  |           |          |   |  |         |         |   |   |      |      | 
|------------------------- | ------------------------------------------- |  | --------- | -------- | ---- |  | ------------------- | ------- | --------- |  | --------- | -------- | - |  | ------- | ------- | - | - | ---- | ---- | 
|                          |                                             |  |           |          |      |  | Outstanding Options
|                          |                                             |  |           |          |      |  |                    
|                          |                                             |  |           |          |      |  | Number of Shares    |         | Weighted 
|                          |                                             |  | Options   |          |      |  | Average            
|                          |                                             |  | Available |          | 1985 |  | 1993                |         | Directors |  | Exercise 
|                          |                                             |  | for Grant |          | Plan |  | Plan                |         | Plan      |  | Price    
|                          |                                             |  |           |          |      |  |                     |         |           |  |          
|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 |     
|                          | Options granted                             |  |           | (227,500 | )    |  |                     |        |           |  |           | 167,500  |   |  |         | 60,000  |   |   |      | 1.74 | 
|                          | Options exercised                           |  |           |         |      |  |                     | (1,624  | )         |  |           |         |   |  |         |        |   |   |      | .15  | 
|                          | Options canceled                            |  |           | 547,180  |      |  |                     |        |           |  |           | (508,180 | ) |  |         | (39,000 | ) |   |      | 4.53 | 
|                          | Options expired                             |  |           |         |      |  |                     | (1,000  | )         |  |           |         |   |  |         |        |   |   |      | 2.50 | 
|                          |                                             |  |           |          |      |  |                     |         |           |  |           |          |   |  |         |         |   |   |      |     
|Balances at June 30, 2002 |                                             |  | 580,455   |          |      |  | 200                 |         |           |  | 790,296   |          |   |  | 137,500 |         |   |   | 3.07 |     

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Additional information regarding options outstanding as of June 30, 2002
is as follows:

|               |              |             |             |              |                     |          |                     |             |           |          |           |      |      |      |         |        |           |         |      |      |      |      | 
|-------------- | ------------ | ----------- | ----------- | ------------ | ------------------- | -------- | ------------------- | ----------- | --------- | -------- | --------- | ---- | ---- | ---- | ------- | ------ | --------- | ------- | ---- | ---- | ---- | ---- | 
|               |              |             |             |              | Options Outstanding |          |                    
|               |              |             |             |              |                     |          | Options Exercisable
|               |              |             |             |              |                     |          |                     |             | Weighted- |          |           |      |      |      |        
|               |              |             |             |              |                     |          |                     |             | Average   |          | Weighted- |      |      |      |         |        | Weighted-
|               |              |             |             |              |                     |          |                     |             | Remaining |          | Average   |      |      |      |         |        | Average  
|Range of       |              | Number      |             | Contractual  |                     | Exercise |                     | Number      |           | Exercise
|Exercise Price |              | Outstanding |             | Life (Years) |                     | Price    |                     | Exercisable |           | Price   
|               |              |             |             |              |                     |          |                     |             |           |         
|               | $1.475-1.750 |             |             | 417,500      |                     |          |                     | 9.21        |           |          | $         | 1.69 |      |      |         | 98,750 |           |         | $    | 1.74 |     
|               |              | 1.980-3.140 |             |              | 181,400             |          |                     |             | 8.22      |          |           |      | 2.22 |      |         |        | 71,275    |         |      |      | 2.36 |     
|3.4375-4.53125 |              |             | 150,265     |              |                     |          | 4.14                |             |           |          | 4.07      |      |      |      | 142,897 |        |           |         | 4.09 |     
|               |              |             | 4.63-7.375  |              |                     | 178,831  |                     |             |           | 5.77     |           |      |      | 6.31 |         |        |           | 152,276 |      |      |      | 6.28 | 
|               |              |             |             |              |                     |          |                     |             |           |          |           |      |      |      |         |        |           |         |      |      |      |     
|               |              |             | 1.475-7.375 |              |                     | 927,996  |                     |             |           | 7.54     |           |      |      | 3.07 |         |        |           | 465,198 |      |      |      | 4.04 | 
|               |              |             |             |              |                     |          |                     |             |           |          |           |      |      |      |         |        |           |         |      |      |      |     

(6) 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.

(7) Segment Information

The operating segments reported below are the segments of the Company for
which separate financial information is available and for which operating
profit and loss amounts are 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 three
principal businesses and, therefore, three reportable business segments: Loan Production, Loan
Servicing and Enterprise Application Integration. Prior to July 1, 2001, the
Company had two reportable business segments: Mortgage Technology Division and
Enterprise Technology Division. The information for 2001 has been restated
into the new business segments.

The Companys Loan Production division provides business solutions to
banks, savings institutions, mortgage banks, mortgage brokers and credit
unions. This divisions product line addresses all major components of the
mortgage loan production process and secondary marketing activities.

The Companys Loan Servicing division provides mortgage-loan and
construction-loan servicing solutions to banks, savings institutions, mortgage
banks, credit unions and specialty servicers, which include subprime loan
servicers, manufactured-home loan servicers, as well as state and city housing
authorities.

The Companys Enterprise Application Integration division provides
technology for Business Process Management directly to customers, including
financial services institutions, and through third parties. Based on the
award-winning FlowMan® technology acquired in June 1998, the software enables
organizations to integrate disparate software systems and applications and
improve overall business processes and practices across an entire enterprise.

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The operating segment information for fiscal years ended June 30, 2002 and
2001 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):

|      |                                           |  |            |        |           |  |             |        |       |  |            |        |   |  |   |        |  
|----- | ----------------------------------------- |  | ---------- | ------ | --------- |  | ----------- | ------ | ----- |  | ---------- | ------ | - |  | - | ------ | -
|      |                                           |  |            |        |           |  |             |        |       |  | Enterprise |        |   |  |  
|      |                                           |  | Loan       |        | Loan      |  | Application |        |       |  |           
|      |                                           |  | Production |        | Servicing |  | Integration |        | Total
|      |                                           |  |            |        |           |  |             |        |      
|2002: |                                           |  |            |        |           |  |             |        |       |  |            |        |   |  |   |       
|      | Net revenue                               |  | $          | 13,752 |           |  | $           | 2,892  |       |  | $          | 467    |   |  | $ | 17,111 |  
|      | Depreciation and amortization             |  |            | 2,043  |           |  |             | 592    |       |  |            | 121    |   |  |   | 2,756  |  
|      | Goodwill & capitalized software
write-off |  |            | 43     |           |  |             |       |       |  |            |       |   |  |   | 43     |  
|      | Income (loss) before income taxes         |  |            | 1,019  |           |  |             | (1,237 | )     |  |            | (937   | ) |  |   | (1,155 | )
|      | Capital expenditures                      |  |            | 285    |           |  |             | 4      |       |  |            | 8      |   |  |   | 297    |  
|2001: |                                           |  |            |        |           |  |             |        |       |  |            |        |   |  |   |       
|      | Net revenue                               |  |            | 14,137 |           |  |             | 2,389  |       |  |            | 88     |   |  |   | 16,614 |  
|      | Depreciation and amortization             |  |            | 2,648  |           |  |             | 910    |       |  |            | 933    |   |  |   | 4,491  |  
|      | Goodwill & capitalized software
write-off |  |            | 932    |           |  |             | 540    |       |  |            | 881    |   |  |   | 2,353  |  
|      | Loss before income taxes                  |  |            | (1,792 | )         |  |             | (2,180 | )     |  |            | (2,823 | ) |  |   | (6,795 | )
|      | Capital expenditures                      |  |            | 421    |           |  |             | 8      |       |  |            | 24     |   |  |   | 453    |  

(8) Technology License

On May 12, 1999, the Company entered into a license agreement with CBF
Systems, Inc., 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 Systems, Inc. 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.

(9) Quarterly Financial Data (Unaudited)

The following table summarizes the unaudited statements of operations for
each quarter of fiscal year 2002 and 2001 (in thousands, except per share
amounts):

|      |                                         |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|----- | --------------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|      |                                         |  | First |        | Second |  | Third |        | Fourth
|      |                                         |  |       |        |        |  |       |        |       
|2002: |                                         |  |       |        |        |  |       |        |        |  |   |        |   |  |   |       
|      | Net revenues                            |  | $     | 4,087  |        |  | $     | 4,335  |        |  | $ | 4,235  |   |  | $ | 4,454  |  
|      | Gross profit                            |  |       | 2,859  |        |  |       | 3,113  |        |  |   | 3,103  |   |  |   | 3,344  |  
|      | Operating loss                          |  |       | (262   | )      |  |       | (389   | )      |  |   | (395   | ) |  |   | (343   | )
|      | Net loss                                |  |       | (176   | )      |  |       | (336   | )      |  |   | (355   | ) |  |   | (288   | )
|      | Net loss per share  basic and diluted* |  | $     | (.04   | )      |  | $     | (.07   | )      |  | $ | (.07   | ) |  | $ | (.06   | )
|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 and diluted* |  | $     | (.19   | )      |  | $     | (.15   | )      |  | $ | (.63   | ) |  | $ | (.19   | )



---

|* |  | Net loss per common share  basic and diluted may not add to net loss
per common share for the year due to rounding.
|- |  | --------------------------------------------------------------------------------------------------------------------

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(10) 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.

(11) 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 was paid in fiscal year 2002.

(12) Company Acquisition

On August 6, 2002, the Company announced that it had entered into an
Agreement and Plan of Merger with Harland Financial Solutions, Inc., a wholly
owned subsidiary of John H. Harland Company. John H. Harland Company is a
publicly traded company listed on the New York Stock Exchange under the symbol
JH. If the merger is completed, the Company will become a wholly owned
subsidiary of Harland Financial Solutions, Inc. and the Companys shareholders
will be entitled to receive $6.25 in cash, without interest, in exchange for
each share of the Companys common stock owned. Holders of the Companys stock
options will receive $6.25 in cash, without interest, less the exercise price
of the options, for each share of common stock represented by the options.
Before the Company can complete the merger, however, the holders of more than
50% of the shares of the Companys common stock outstanding as of September 6,
2002 must vote to approve and adopt the merger. Accordingly, the Company has
called a special meeting of shareholders for October 14, 2002 to consider the
merger and has filed a proxy statement with the Securities and Exchange
Commission and distributed the same to the Companys shareholders.

(13) NASDAQ Listing

The Companys common stock is currently listed on the Nasdaq National
Market. To maintain this listing, the Company must continue to satisfy ongoing
listing requirements, including consistently maintaining a minimum of $10
million of shareholders equity beginning November 1, 2002. As of June 30,
2002, the Companys shareholders equity was $7.9 million. The Company is
unlikely to meet the Nasdaq National Market minimum shareholders equity
requirement unless it conducts an equity financing of sufficient size. The
Company may be unable to complete such an equity financing, and even if such a
financing is successfully completed, it will result in significant dilution to
existing shareholders. If the Company fails to satisfy the minimum
shareholders equity requirement, the Nasdaq National Markets alternative
listing standard would require the Company to have a market capitalization of
$50 million (or total assets and total revenue of $50 million each), a public
float of 1.1 million shares having a market value of $15 million and a minimum
bid price of $3 per share. The Company currently does not meet these
alternative requirements, and it is unlikely that it will do so by November 1,
2002. If the Company does not meet the Nasdaq National Market continuing
listing requirements, Nasdaq could initiate delisting procedures at any time
after November 1, 2002. As part of this procedure, the Company believes it
will have an opportunity to present a plan for achieving compliance with the
Nasdaq National Market continuing listing requirements. If necessary, the
Company will present such a plan. If Nasdaq accepts the plan, the Company
would be granted an extension of time to comply. If, however, Nasdaq does not
accept the Companys plan or if the Company fails to meet the listing
requirements within any extension period granted in response to the plan, the
Company would lose its Nasdaq National Market listing. In that event, the
Company would likely seek listing of its common stock on the Nasdaq SmallCap
Market or the Over-the-Counter Bulletin Board, both of which are viewed by many
investors as a less liquid marketplace. Loss of the Companys Nasdaq National
Market listing could make it more difficult for the Company to raise capital or
complete acquisitions and also complicate compliance with state blue sky
laws. In addition, the market price of the Companys common stock could be
adversely affected by the loss of its Nasdaq National Market listing.

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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

Board of Directors

The Companys Board of Directors (the Board) currently consists of five
directors and is divided into two classes, with each director serving a
two-year term. In accordance with the provisions of the Companys Restated
Articles of Incorporation and Restated Bylaws, two directors presently serve in
Class 1 and three directors presently serve in Class 2. In the event the
Companys shareholders do not approve the merger with Harland Financial
Solutions, Inc., Class 1 directors will stand for reelection at the Companys
2002 annual meeting of shareholders.

Information as to each is given below. Unless otherwise indicated, the
nominees have been engaged in the same principal occupation for the past five
years. Directors ages are as of June 30, 2002.

Class 1 Directors

|                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Robert J. Gallagher
Director
Age 46 |  | Mr. Gallagher has served as a director of the Company
since 1994. In January 2001, Mr. Gallagher was named
Chairman of the Board of the Company and from April
through June 2001 was the Companys interim President
and Chief Executive Officer. Since 1997, Mr. Gallagher
has been an independent consultant. From 1987 to 1997,
Mr. Gallagher served as an executive officer with North
American Mortgage Company, a California mortgage banking
company, including Senior Vice President and Chief
Financial Officer and Executive Vice President and Chief
Administrative Officer.
|                                   
|George S. Sarlo
Director
Age 64     |  | Mr. Sarlo has served as a director of the Company since
November 1999. Mr. Sarlo has been a partner in the
Walden Group of Venture Capital Funds since 1974. Mr.
Sarlo is a member of the Board of Directors of Invivo
Corporation, a member of the University of California
San Francisco Foundation and a trustee of the San
Francisco Conservatory of Music. He is also a director
of the International Rescue Committee, Interplast, Inc.
and the Joint Distribution Committee. He is president
of the Sarlo family foundation.                                                    
|                                   
|Class 2 Directors                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                   
|Michael H. Jackman
Director
Age 54  |  | Mr. Jackman was appointed director, President and Chief
Executive Officer in June 2001. From 1998 to June 2001,
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.                                                                                                                                                          

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|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Theodore M. Wight
Director
Age 59 |  | Mr. Wight has served as a director of the Company since
1985. Since 1994, Mr. Wight has been general partner of
Pacific Northwest Partners SBIC, L.P., a venture capital
firm. Mr. Wight has also served as a general partner of
Walden Investors since 1983. Mr. Wight is a member of
the Board of Directors of RehabCare Group, Inc., Pets
Choice, Inc., Health Force Partners, Inc., Verus, Inc.
and Landmark Group, Inc.                                                                                                                                 
|                                 
|Michael G. Meade
Director
Age 52  |  | Michael G. Meade was appointed a director by the Board in
October 2001, to fill the vacancy left as a result of the
resignation of Robert W. ORear. Mr. Meade is Mortgage
Guaranty Insurance Corporations (MGIC) Senior Vice
President and Chief Information Officer. He is also the
executive vice president and Chief Information Officer
overseeing the operations of MGICs eMagic.com company.
He has been with MGIC since 1983 in a variety of
positions. Prior to joining MGIC, Mr. Meade was the
systems development officer with Verex Corporation.

Executive Officers of the Registrant

As of June 30, 2002, the executive officers of the Company were as
follows:

|                   |  |     |    |          |  |                                                                                    
|------------------ |  | --- | -- | -------- |  | -----------------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Michael H. Jackman |  |     | 54 |          |  | Chief Executive Officer and President                                              
|Michael D. Castle  |  |     | 40 |          |  | Chief Financial Officer, Vice President of Finance
and Administration and Secretary

Michael H. Jackmanwas appointed director, President and Chief Executive
Officer in June 2001. From 1998 to June 2001, 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.

Michael D. Castlewas named Chief Financial Officer, Vice President of
Finance and Administration and Secretary in March 2002. Previously, he was
Executive Vice President and Chief Financial Officer of Conversay, a speech
recognition software firm in Redmond, Washington. Mr. Castle has also held
senior financial management positions at Winchester Ammunition and PRIMEX
Technologies, both subsidiaries of Connecticut-based Olin Corporation, a
publicly held firm. (PRIMEX was later purchased by General Dynamics.) Mr.
Castle holds an MBA in finance from Washington State University and a
bachelors degree in economics and accounting from the University of
Washington.

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Section 16(a) Beneficial Ownership Reporting Compliance

The Company believes that all of its officers, directors or beneficial
owners of more than 10% of the outstanding shares of the Companys common stock
filed all reports as required by the Securities and Exchange Commission rules
promulgated under Section 16 of the Securities Exchange Act of 1934, with the
exception of Michael D. Castle, Chief Financial Officer, Vice President of
Finance and Administration and Secretary, whose initial holding statement was
not filed with the Securities and Exchange Commission in a timely manner.




ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the annual and long-term compensation of
the Companys named executive officers during the fiscal year ended June 30,
2002. All numbers are rounded to the nearest dollar or whole share.

|                            |                                                  |      |                     |        |        |          |         |            |  |                 |        |   |  |  |              |         |           |   |         |       | 
|--------------------------- | ------------------------------------------------ | ---- | ------------------- | ------ | ------ | -------- | ------- | ---------- |  | --------------- | ------ | - |  |  | ------------ | ------- | --------- | - | ------- | ----- | 
|                            |                                                  |      |                     |        |        |          |         |            |  |                 |        |   |  |  | Long-Term    |         |           |   |        
|                            |                                                  |      |                     |        |        |          |         |            |  |                 |        |   |  |  | Compensation |         |           |   |        
|                            |                                                  |      | Annual Compensation |        | Awards |          |         |            | 
|                            |                                                  |      |                     |        |        |          |         |            | 
|                            |                                                  |      |                     |        |        |          |         |            |  |                 |        |   |  |  | Securities   |         |           |   |        
|                            |                                                  |      |                     |        |        |          |         |            |  |                 |        |   |  |  | Underlying   |         | All Other
|Name and Principal Position |                                                  | Year |                     | Salary |        | Bonus(1) |         | Options(2) |  | Compensation(3)
|                            |                                                  |      |                     |        |        |          |         |            |  |                
|Michael H. Jackman (4)      |                                                  |      | 2002                |        |        | $        | 274,173 |            |  | $               | 75,000 |   |  |  |             |         |           | $ | 154,164 |      
|                            | President and Chief Executive Officer            |      |                     | 2001   |        |          |         | 13,450     |  |                 |        |  |  |  |              | 275,000 |           |   |         | 4,615 | 
|                            |                                                  |      | 2000                |        |        |          |        |            |  |                 |       |   |  |  |             |         |           |   |        |      
|                           
|Robert J. Gallagher (5)     |                                                  |      | 2002                |        |        |          | 45,500  |            |  |                 |       |   |  |  | 7,500        |         |           |   | 2,000   |      
|                            | Interim President and Chief Executive Officer    |      |                     | 2001   |        |          |         | 90,875     |  |                 |        |  |  |  |              | 57,500  |           |   |         | 2,000 | 
|                            |                                                  |      | 2000                |        |        |          |        |            |  |                 |       |   |  |  | 7,500        |         |           |   | 4,000   |      
|                           
|Michael D. Castle (6)       |                                                  |      | 2002                |        |        |          | 39,942  |            |  |                 | 11,625 |   |  |  | 62,500       |         |           |   | 1,198   |      
|                            | Vice President Finance & Administration          |      |                     | 2001   |        |          |         |           |  |                 |        |  |  |  |              |        |           |   |         |      | 
|                            | Chief Financial Officer and Secretary            |      |                     | 2000   |        |          |         |           |  |                 |        |  |  |  |              |        |           |   |         |      | 
|                           
|Mark D. Johnston (7)        |                                                  |      | 2002                |        |        |          | 87,692  |            |  |                 | 12,500 |   |  |  | 25,000       |         |           |   | 16,766  |      
|                            | Vice President  Sales and Marketing             |      |                     | 2001   |        |          |         |           |  |                 |        |  |  |  |              |        |           |   |         |      | 
|                            |                                                  |      | 2000                |        |        |          |        |            |  |                 |       |   |  |  |             |         |           |   |        |      
|                           
|Darren G. Selvage (8)       |                                                  |      | 2002                |        |        |          | 112,644 |            |  |                 |       |   |  |  | 9,000        |         |           |   | 7,743   |      
|                            | Vice President  Release Quality                 |      |                     | 2001   |        |          |         | 108,846    |  |                 |        |  |  |  |              |        |           |   |         | 4,888 | 
|                            |                                                  |      | 2000                |        |        |          | 103,846 |            |  |                 | 21,500 |   |  |  |             |         |           |   | 3,005   |      
|                           
|Eric S. Setz (9)            |                                                  |      | 2002                |        |        |          | 103,028 |            |  |                 |       |   |  |  |             |         |           |   | 3,091   |      
|                            | Vice President  Information Systems             |      |                     | 2001   |        |          |         | 95,566     |  |                 |        |  |  |  |              | 2,000   |           |   |         | 2,652 | 
|                            |                                                  |      | 2000                |        |        |          | 95,882  |            |  |                 | 7,610  |   |  |  | 1,750        |         |           |   | 2,876   |      
|                           
|Alan R. Pickerill (10)      |                                                  |      | 2002                |        |        |          | 132,346 |            |  |                 |       |   |  |  |             |         |           |   | 2,885   |      
|                            | (former) Vice President Finance &
Administration |      |                     | 2001   |        |          |         | 114,269    |  |                 |        |  |  |  |              |        |           |   |         | 3,140 | 
|                            | Chief Financial Officer and Secretary            |      |                     | 2000   |        |          |         | 87,834     |  |                 |        |  |  |  |              | 26,400  |           |   |         | 2,602 | 

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---

|(1)  |  | Annual bonus compensation is based on performance in the year shown, but
is determined and paid during the following year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | The number of securities reported in the Securities Underlying Options
column for each named executive officer is the number of shares of the
Companys common stock subject to options held by each officer. The
options granted may consist of non-qualified or incentive stock options,
or any combination of the two, that vest in yearly increments over a
four-year period. The option exercise price is determined by the
Companys Board of Directors on the date of grant and is equal to the
fair market value of the underlying common stock on the date of grant.
In the event of a merger or reorganization of the Company, outstanding
options not already exercisable will generally become fully vested and
exercisable upon the completion of a merger or reorganization.
|    
|    
|    
|    
|(3)  |  | Amounts reported in the All Other Compensation column include the sums
of the values of (a) Company contributions to the Companys 401(k) plan,
(b) relocation expenses and (c) monthly housing allowances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|    
|    
|    
|(4)  |  | Mr. Jackman joined the Company as President and Chief Executive Officer
in June 2001. The amount disclosed for fiscal year 2001 is the
year-to-date total for Mr. Jackman from the time of his arrival through
the end of the fiscal year. All other compensation amount reported for
2002 includes $4,035 for Company matching contributions to his 401(k),
$88,975 for relocation expenses and an aggregate of $61,154 for housing
allowances.                                                                                                                                                                                                                                                                                                                                          
|    
|    
|    
|    
|(5)  |  | Mr. Gallagher was the interim President and Chief Executive Officer from
April 3, 2001 to June 6, 2001 and is currently the Companys Chairman of
the Board of Directors. Mr. Gallaghers 2002 salary represents payment
for services provided from January 2001 through the end of the 2001
fiscal year and throughout fiscal year 2002. The All Other Compensation
amount reported for 2002 represents $2,000 for services as a director.                                                                                                                                                                                                                                                                                                                                               
|    
|    
|    
|    
|(6)  |  | Mr. Castle joined the Company as Chief Financial Officer, Vice President
of Finance and Administration and Secretary in March 2002. The amount
disclosed for fiscal year 2002 is the year-to-date total for Mr. Castle
from the time of his arrival through the end of the fiscal year. The All
Other Compensation amount reported for 2002 represents $1,198 for Company
matching contributions to his 401(k).                                                                                                                                                                                                                                                                                                                                                                           
|    
|    
|    
|    
|(7)  |  | Mr. Johnston joined the Company as Vice President of Sales and Marketing
in October 2001. Mr. Johnston departed the Company in September 2002.
The amount disclosed for fiscal year 2002 is the year-to-date total for
Mr. Johnston from the time of his arrival through the end of the fiscal
year. The All Other Compensation amount reported for 2002 includes
$1,869 for Company matching contributions to his 401(k) and an aggregate
of $14,897 for housing allowances.                                                                                                                                                                                                                                                                                                             
|    
|    
|    
|    
|(8)  |  | Mr. Selvage joined the Company in March 1986 and became a Vice President
in July 1998. The All Other Compensation amount reported for 2002
includes $3,506 for Company matching contributions to his 401(k) and
$4,237 for accrued vacation pay out in fiscal year 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|    
|    
|    
|(9)  |  | Mr. Setz joined the Company in November 1997 and became Vice President
of Information Systems in November 2001. The other compensation amount
disclosed includes the total amount of his Company matching contributions
to his 401(k). The All Other Compensation amount reported for 2002
represents $3,091 for Company matching contributions to his 401(k).                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(10) |  | Mr. Pickerill departed the Company in March 2002. The All Other
Compensation amount reported for 2002 represents $2,885 for Company
matching contributions to his 401(k).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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Option Grants in Last Fiscal Year

The following table sets forth certain information concerning options
granted to the Companys named executive officers during the fiscal year ended
June 30, 2002.

|                   |  |            |        |              |  |                |      |            |  |    |      |     |  |                              |          |  |  |                            |        |  |  |   |         | 
|------------------ |  | ---------- | ------ | ------------ |  | -------------- | ---- | ---------- |  | -- | ---- | --- |  | ---------------------------- | -------- |  |  | -------------------------- | ------ |  |  | - | ------- | 
|                   |  |            |        |              |  |                |      |            |  |    |      |     |  |                              |          |  |  | Potential Realizable Value
|                   |  | Number of  |        | % of Total   |  |                |      |            |  |    |      |     |  | at Assumed Annual Rates of  
|                   |  | Securities |        | Options      |  |                |      |            |  |    |      |     |  | Stock Price Appreciation for
|                   |  | Underlying |        | Granted to   |  |                |      |            |  |    |      |     |  | Option Term(2)              
|                   |  | Options    |        | Employees in |  | Exercise Price |      | Expiration |  |   
|Name               |  | Granted(#) |        | Fiscal Year  |  | ($/share)(1)   |      | Date       |  | 5% |      | 10%
|                   |  |            |        |              |  |                |      |            |  |    |      |    
|Michael H. Jackman |  |            |       |              |  |                |     |            |  |    |     |     |  |                              |         |  |  |                            |       |  |  |   |        | 
|Michael D. Castle  |  |            | 62,500 | (3)          |  |                | 37.3 | %          |  | $  | 1.62 |     |  |                              | 4/11/12  |  |  | $                          | 63,676 |  |  | $ | 161,366 | 
|Mark D. Johnston   |  |            | 25,000 | (4)          |  |                | 14.9 | %          |  | $  | 1.98 |     |  |                              | 10/12/11 |  |  | $                          | 31,130 |  |  | $ | 78,890  | 
|Darren G. Selvage  |  |            |       |              |  |                |     |            |  |    |     |     |  |                              |         |  |  |                            |       |  |  |   |        | 
|Eric S. Setz       |  |            |       |              |  |                |     |            |  |    |     |     |  |                              |         |  |  |                            |       |  |  |   |        | 
|Alan R. Pickerill  |  |            |       |              |  |                |     |            |  |    |     |     |  |                              |         |  |  |                            |       |  |  |   |        | 



---

|(1) |  | The option exercise price, as determined by the Board, is equal to the
fair market value of the underlying common stock on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates required by applicable regulations of the Securities
and Exchange Commission and, therefore, are not intended to forecast
possible future appreciation, if any, of the common stock price. The
calculations assume that all of the options are exercised at the end of
their respective ten-year terms. Actual gains, if any, on the stock
option exercises depend on the future performance of common stock and
overall market conditions, as well as the holders continued employment
through the vesting period. The amounts reflected in this table may not
be achieved.
|   
|   
|   
|   
|(3) |  | The options granted consist of a combination of non-qualified and
incentive stock options that vest in yearly increments over a four-year
period, becoming fully vested on April 11, 2006. Options not already
exercisable generally become fully vested and exercisable upon mergers or
reorganizations pursuant to the Companys 1993 Option Plan. Each option
has a term of ten years.                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(4) |  | The options granted consist of incentive stock options that vest
annually over a four-year period, becoming fully vested on October 12,
2005. Options not already exercisable generally become fully vested and
exercisable upon mergers or reorganizations pursuant to the Companys
1993 Option Plan. Each option has a term of ten years.                                                                                                                                                                                                                                                                                                                               

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Aggregated Option Exercises and Fiscal Year-End Option Values

The following table sets forth certain information concerning the exercise
of options to purchase the Companys common stock granted in fiscal 2001 and
prior years under the 1993 Option Plan and the 1985 Option Plan to the
Companys named executive officers and stock options held by them as of June
30, 2002.

|                      |  |                                 |        |                                   |  |                |         |                  |  |  |   |  |  |  |   | 
|--------------------- |  | ------------------------------- | ------ | --------------------------------- |  | -------------- | ------- | ---------------- |  |  | - |  |  |  | - | 
|                      |  | Number of Securities Underlying |        |                                   |  |                |         |                  |  | 
|                      |  | Unexercised Options Held at     |        | Value of Unexercised In-the-Money
|                      |  | June 30, 2002 (#)               |        | Options at June 30, 2002 ($)     
|                      |  |                                 |        |                                  
|Name                  |  | Exercisable                     |        | Unexercisable                     |  | Exercisable(1) |         | Unexercisable(1)
|                      |  |                                 |        |                                   |  |                |         |                 
|Michael H. Jackman    |  |                                 | 68,750 |                                   |  |                | 206,250 |                  |  |  |  |  |  |  |  | 
|Michael D. Castle     |  |                                 |       |                                   |  |                | 62,500  |                  |  |  |  |  |  |  |  | 
|Mark D. Johnston      |  |                                 |       |                                   |  |                | 25,000  |                  |  |  |  |  |  |  |  | 
|Darren G. Selvage     |  |                                 | 43,750 |                                   |  |                | 2,250   |                  |  |  |  |  |  |  |  | 
|Eric S. Setz          |  |                                 | 3,063  |                                   |  |                | 1,937   |                  |  |  |  |  |  |  |  | 
|Alan R. Pickerill (2) |  |                                 |       |                                   |  |                |        |                  |  |  |  |  |  |  |  | 



---

|(1) |  | This amount represents the aggregate number of in-the-money options
multiplied by the difference between the closing price of the common
stock on the Nasdaq National Market on June 28, 2002 ($1.45) and the
exercise prices of the relevant options. All outstanding options had
exercise prices greater than the closing price on June 28, 2002,
therefore there were no in-the-money options at that time.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Mr. Pickerill departed the Company in March 2002, therefore his options
were cancelled prior to the end of the fiscal year.                                                                                                                                                                                                                                                                                   

Directors Fees

The Company pays each director $1,000 in cash compensation for each
attendance at each Board meeting, and reimburses directors for their
out-of-pocket expenses incurred for attendance at Board meetings.

The Companys Stock Option Plan for Non-Employee Directors, or the
Directors Plan, provides for the automatic grant of nonqualified stock options
at an exercise price equal to the fair market value on the date of grant. Each
non-employee director elected or appointed receives an initial grant of an
option to purchase 10,000 shares upon becoming a director. Each continuing
director receives an annual grant of an option to purchase 7,500 shares
immediately following each Annual Meeting of Shareholders. Options granted
under the Directors Plan vest in full six months after the date of grant.
Options granted under the Directors Plan expire five years after the date of
grant or, if earlier, three months after the optionees termination of service
with the Company or one year after the optionees death or disability.

Employment Contracts, Termination or Employment and Change in Control
Arrangements

The Company entered into an employment agreement with Mr. Jackman as of
May 30, 2001. The agreement specifies that, in the event Mr. Jackman is
terminated in certain circumstances, he would be paid one years salary as
severance following termination.

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##### Table of Contents



Compensation Committee Report on Executive Compensation

The Compensation Committee of the Board for fiscal year 2001 consisted of
four members of the Board, three of whom are non-employee directors of the
Company. Mr. Gallagher is the fourth member of the Compensation Committee and
was employed by the Company during the fiscal year for services rendered
between January 2001 and the end of the fiscal year. Mr. Gallagher abstained
from any committee matters pertaining to his compensation. The Compensation
Committee is responsible for reviewing and approving base salaries for all
executive officers, the level of participation in the executive bonus program,
the company-wide profit sharing plan and any changes to these plans. The
Compensation Committee also administers the 1993 Option Plan and 1985 Option
Plan. Decisions made by the Compensation Committee relating to compensation of
executive officers are reviewed by the full Board.

Executive Compensation Policies and Performance Measures

The Companys executive compensation policies have been developed to meet
the following objectives:



| |  |  | Attract and retain key executives critical to the Companys
long-term success;                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reward key executives for their contributions to the
executive team in the development and successful execution of
product, marketing, sales and business strategies; and
|
| |  |  | Motivate key executives to make decisions and take actions
that increase the value of the common stock over the long term.                                               

The Committee uses a combination of cash- and equity-based programs to
compensate key executives.

Cash-Based Compensation

Base salaries for all executive officers are reviewed periodically. In
evaluating executive salaries, the Compensation Committee uses certain
independent information sources as available, as well as the recommendations of
the Chief Executive Officer. Additionally, salaries are based upon a review of
the officers contribution to the team in accomplishing certain short- and
long-term objectives as determined from time to time by the compensation
committee.

The executive officers are also eligible to receive incentive compensation
based on achievement of certain performance criteria established periodically
during the year. Mark Johnston was
paid a cash bonus of $12,500 during fiscal year 2002 for the achievement of
revenue targets in the second quarter and Michael Castle was paid a cash bonus
of $11,625 as recommended by the CEO for Mr. Castles performance and
contributions in the fourth quarter of the fiscal year.

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Equity-Based Compensation

The Company provides its executive officers with long-term incentives
through its 1993 Option Plan. The primary objective of this plan is to provide
an incentive for the executives to make decisions and take actions which
maximize long-term shareholder value. The plan design promotes this long-term
focus using vesting periods. Options currently vest in either four or five
equal annual installments beginning one year from date of grant. The
Compensation Committee reviews and approves all grants made under the plan.
The Compensation Committee generally grants executive officers options upon
hire and additional grants are reviewed annually. The number of new grants
each year for both the executive officers and the rest of the Companys
employees is based primarily on position in the Company, past performance,
anticipated future contributions and prior option grants. For fiscal year
2002, the Compensation Committee granted options to purchase 62,500 shares of
common stock to Michael D. Castle and 25,000 shares to Mark D. Johnston.

Chief Executive Officer Compensation

The compensation for the Chief Executive Officer is reviewed and approved
by the Compensation Committee and is based upon the criteria set forth under
the discussion of executive compensation above. In accordance with his
employment agreement, Mr. Jackman was paid a guaranteed bonus of $75,000 for
fiscal year 2002.

Compensation Committee

Robert J. Gallagher

George S. Sarlo

Theodore M. Wight

Michael G. Meade

Performance Graph

The following graph compares the cumulative total return to shareholders
of the common stock with the cumulative total return of the Standard and Poors
500 Stock Index (S & P 500 Index) and the Standard and Poors Information
Technology Index (S & P Information Technology Index) for the period
beginning on June 30, 1997, and ending on June 30, 2002.

The graph assumes $100 was invested on June 30, 1996 in the Companys
common stock, S & P 500 Index and the S & P Information Technology Index, with
all dividends reinvested. Stock price performance shown above for the common
stock is historical and not necessarily indicative of future price performance.

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(PERFORMANCE GRAPH)



---

|* |  | The S & P Information Technology Index has been in existence since
January 2002. The data presented prior to that date is represented by
the S & P Computers (Software & Services) Index which terminated in
January 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in the sections entitled
Security Ownership of Directors and Executive Officers and Security
Ownership of More than 5% Shareholders in the Companys Proxy Statement filed
September 16, 2002 in connection with its Special Meeting of Shareholders to be
held October 14, 2002 and is incorporated herein by reference.

Changes in Control

On August 6, 2002, the Company announced that it had entered into an
Agreement and Plan of Merger with Harland Financial Solutions, Inc., a wholly
owned subsidiary of John H. Harland Company. John H. Harland Company is a
publicly traded company listed on the New York Stock Exchange under the symbol
JH. If the merger is completed, the Company will become a wholly owned
subsidiary of Harland Financial Solutions, Inc. and the Companys shareholders
will be entitled to receive $6.25 in cash, without interest, in exchange for
each share of the Companys common stock owned. Holders of the Companys stock
options will be entitled to receive $6.25 in cash, without interest, less the
exercise price of the options, for each share of the Companys common stock
represented by the options. Before

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the Company can complete the merger, however, the holders of more than 50%
of the shares of the Companys common stock outstanding as of September 6, 2002
must vote to approve and adopt the merger. Accordingly, the Company has called
a special meeting of shareholders for October 14, 2002 to consider the merger
and has filed a proxy statement with the Securities and Exchange Commission and
distributed the same to the Companys shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.




ITEM 14. CONTROLS AND PROCEDURES

Not applicable.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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 the Company.

Schedule II  Valuation and Qualifying Accounts for the years ended June
30, 2002, 2001 and 2000.

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.

3. Exhibits

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.

|            |  |                                                                     
|----------- |  | --------------------------------------------------------------------
|Exhibit     |  |                                                                     
|Number      |  | Description                                                         
|            |  |                                                                     
|3.1 (1)     |  | Restated Articles of Incorporation of INTERLINQ Software Corporation
|3.2         |  | Restated and Amended Bylaws of INTERLINQ Software Corporation       
|10.1 (1)(2) |  | 1985 Restated Stock Option Plan                                     
|10.2 (1)(2) |  | 1993 Stock Option Plan                                              

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|            |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit     |  |                                                                                                                                                                     
|Number      |  | Description                                                                                                                                                         
|            |  |                                                                                                                                                                     
|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                                                                                                        
|10.6 (3)    |  | Office Lease between Pine Forest Co. and INTERLINQ Software
Corporation dated as of April 23, 1998                                                                  
|10.7 (4)    |  | Licensing agreement for RAKIS Software between CBF Systems, Inc.
and INTERLINQ Software Corporation dated May 12, 1999                                              
|10.8 (5)    |  | Michael H. Jackman Employment Agreement                                                                                                                             
|10.9 (6)    |  | Agreement and Plan of Merger among Harland Financial Solutions,
Inc., Harland Acquisition Corporation and INTERLINQ Software
Corporation, dated as of August 5, 2002
|23.1        |  | Consent of independent auditor                                                                                                                                      
|99.1        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                              
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                              



---

|(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 DEF14A Proxy Statement on September 16, 2002.                                                                                                                                               

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

None.

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Schedule II: Valuation and Qualifying Accounts

Years ended June 30, 2002, 2001 and 2000

|                                  |                     |         |            |              |            |          |           |            |  |             |  |   |            |  |   |          |   |  |   |         | 
|--------------------------------- | ------------------- | ------- | ---------- | ------------ | ---------- | -------- | --------- | ---------- |  | ----------- |  | - | ---------- |  | - | -------- | - |  | - | ------- | 
|                                  |                     |         |            |              |            |          | Additions |            |  |             |  |   |            |  |  
|                                  |                     |         |            |              |            |          |           |            |  |             |  |   |            |  |  
|                                  |                     |         | Balance at |              | Charged to |          | Charged   |            |  |             |  |   |            |  |  
|                                  |                     |         | beginning  |              | costs      |          | to other  |            |  |             |  |   | Balance at
|Description                       |                     | of year |            | and expenses |            | accounts |           | Deductions |  | end of year
|                                  |                     |         |            |              |            |          |           |            |  |            
|Allowances for doubtful
Accounts: |                     |         |            |              |            |          |           |            |  |             |  |   |            |  |   |          |   |  |   |        
|Year ended June 30, 2002:         |                     |         |            |              |            |          |           |            |  |             |  |   |            |  |   |          |   |  |   |        
|                                  | Accounts receivable |         | $          | 346,000      |            |          | $         | 261,000    |  |             |  |  |            |  | $ | (380,000 | ) |  | $ | 227,000 | 
|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 | 

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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
Bellevue, State of Washington, on the 27th day of September 2002.

| |                                                          |                       
| | -------------------------------------------------------- | ----------------------
| | INTERLINQ Software Corporation                          
|
| | By:                                                      | /s/ Michael H. Jackman
| |                                                         
| | Michael H. Jackman
President and Chief Executive Officer

|                                             |  |                                                                                                     
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Signature                                    |  | Title                                                                                               
|                                             |  |                                                                                                     
|                                            
|/s/ MICHAEL H. JACKMAN

Michael H. Jackman   |  | President and Chief Executive Officer
(Principal Executive Officer)                                 
|                                            
|/s/ MICHAEL D. CASTLE

Michael D. Castle     |  | Vice President of Finance and
Administration, Secretary
(Principal Financial and Accounting Officer)
|                                            
|/s/ ROBERT J. GALLAGHER

Robert J. Gallagher |  | Chairman of the Board                                                                               
|                                            
|/s/ MICHAEL G. MEADE

Michael G. Meade       |  | Director                                                                                            
|                                            
|/s/ GEORGE SARLO

George Sarlo               |  | Director                                                                                            
|                                            
|/s/ THEODORE M. WRIGHT

Theodore M. Wight    |  | Director                                                                                            

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Certifications

I, Michael H. Jackman, President and Chief Executive Officer of Interlinq
Software Corporation (the Company), certify that:

1. I have reviewed this annual report on Form 10-K of the Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

|                         |  |                                                         
|------------------------ |  | --------------------------------------------------------
|                         |  | /s/ Michael H. Jackman                                  
|                         |  |                                                         
|Date: September 27, 2002 |  | Michael H. Jackman
President and Chief Executive Officer

I, Michael D. Castle, Chief Financial Officer of Interlinq Software
Corporation (the Company), certify that:

1. I have reviewed this annual report on Form 10-K of the Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

|                         |  |                                          
|------------------------ |  | -----------------------------------------
|                         |  | /s/ Michael D. Castle                    
|                         |  |                                          
|Date: September 27, 2002 |  | Michael D. Castle
Chief Financial Officer

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##### Table of Contents






INDEX TO EXHIBITS

|            |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit     |  |                                                                                                                                                                     
|Number      |  | Description                                                                                                                                                         
|            |  |                                                                                                                                                                     
|3.1 (1)     |  | Restated Articles of Incorporation of INTERLINQ Software Corporation                                                                                                
|3.2         |  | Restated and Amended 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                                                                                                        
|10.6 (3)    |  | Office Lease between Pine Forest Co. and INTERLINQ Software
Corporation dated as of April 23, 1998                                                                  
|10.7 (4)    |  | Licensing agreement for RAKIS Software between CBF Systems, Inc.
and INTERLINQ Software Corporation dated May 12, 1999                                              
|10.8 (5)    |  | Michael H. Jackman Employment Agreement                                                                                                                             
|10.9 (6)    |  | Agreement and Plan of Merger among Harland Financial Solutions,
Inc., Harland Acquisition Corporation and INTERLINQ Software
Corporation, dated as of August 5, 2002
|23.1        |  | Consent of independent auditor                                                                                                                                      
|99.1        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                              
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                              



---

|(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 DEF14A Proxy Statement on September 16, 2002.                                                                                                                                               

-59-