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                       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, 1997

                                       OR

__ Transition report pursuant to Section 14 or 15(d) of the Securities Exchange
Act of 1934

COMMISSION FILE NUMBER 0-21402


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

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

                               11255 KIRKLAND WAY
                               KIRKLAND, WA 98033
                    (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 report), and (2) has been subject to such filing
requirements for the past 90 days.

                       Yes  X                             No 
                          ----                              ----

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
23, 1997 as reported on the Nasdaq National Market, was approximately
$24,499,000

As of September 23, 1997, there were 5,297,012 shares of the Registrant's Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company's definitive proxy statement for the annual
meeting of shareholders of the Company to be held on November 5, 1997, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 1997 are incorporated by reference into Part III of this report.


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PART I

ITEM 1. BUSINESS

OVERVIEW

   INTERLINQ Software Corporation ("INTERLINQ" or the "Company") works closely
with clients to provide comprehensive systems and business solutions for the
residential mortgage and construction lending industry. The Company offers a
suite of products that together, make up MortgageWare Enterprise ("MW
Enterprise"). MW Enterprise provides a business model for the mortgage lending
industry, based on enterprise-wide solutions for greater operational efficiency,
real-time access to data, and cost-effective means for managing and integrating
information. It is designed to automate and streamline business processes
companywide in order to lower the cost of each loan transaction. Equally
important to the bottom line, an integrated system of reliable information is
created by MW Enterprise for analysis within the company. Data is entered only
once, managed from a central point, and accessible from every desktop via a
browser-based intranet environment. Using this business model, information can
be leveraged to perform a variety of mission-critical applications companywide
-- from matching loan programs to a lender and borrower's needs, to risk
analysis of all loans within an organization.

   MortgageWare products are installed and currently supported by the Company
for approximately 2,000 customers in 7,000 locations.

   INTERLINQ's target market is the approximately 32,500 financial institutions
in the United States. According to Company estimates based on available industry
data, this market is comprised of approximately 20,000 mortgage brokers and
bankers, 6,000 banks, 4,500 credit unions and 2,000 savings institutions.

   The Company expects future revenue growth to come from the sale of mortgage
loan servicing technology as well as from the sale of technology designed to
provide customers with information access and content, complimenting its current
products which address operational efficiency and decrease the costs of each
loan transaction. In the near term, continued penetration of the loan production
market, new penetration of the mortgage loan servicing market, and additional
sales of products and support services to existing customers with its current
products, are expected to provide the majority of the Company's revenue. The
Company has planned releases of new products and upgrades to existing products
scheduled for fiscal 1998.

   There is no assurance that the Company will be successful in attracting new
customers in the loan production and servicing market, or that its existing
customers will continue to purchase the Company's products and support services.
In addition, there is no assurance that the Company's new products and services
will be released in a timely fashion 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, gross margins and
cash flows.

   The Company was incorporated in Washington in 1982. Its principal executive
office is located at 11255 Kirkland Way, Kirkland, Washington 98033 and its
telephone number is (425) 827-1112.



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INTERLINQ'S STRATEGY

   The Company's strategy is to provide easy-to-use, PC-based software solutions
marketed through a direct sales force and to maintain long-term customer
relationships which generate recurring revenue.


     Easy-to-Use Software

     INTERLINQ believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to use and
support. Because the residential mortgage and construction lending processes are
complex and many of these processes are performed by individuals with little
computer experience, the Company's strategy is to provide software solutions
that can be purchased, installed and used without extensive technical knowledge.
In order to provide consistent, high-quality support and service, the Company
does not create customized software. The Company does, however, provide
customized integration of MW Enterprise and has, from time to time, upgraded its
products with certain customers on a "pay for priority" basis. Product upgrades,
nevertheless, often include modifications and enhancements requested by
customers.


     PC Platform

     The Company believes that reductions in the cost of and increases in the
computing power of PCs make its systems increasingly affordable for even small
financial institutions. The Company's software runs on industry-standard PCs and
networks, thereby providing power, flexibility, ease of use and distribution of
workload at a price that the Company believes cannot be matched by minicomputer
or mainframe solutions.


     Direct Sales Force

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


     Long-term Customer Relationships

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



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PRODUCTS AND SERVICES

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

POINT-OF-SALE AND ORIGINATION

Entre                   Allows loan officers to prequalify applicants in the 
                        field through the use of a Windows-based software that
                        runs on a laptop computer

Origination             Allows loan officers to enter loan applications directly
                        into a PC, either in the office or in the field


MORTGAGE LOAN MANAGEMENT SYSTEM (LMS)

Qualifying              Allows quick assessment of a potential borrower's 
                        ability to qualify for a loan.

Processing              Handles loan application data entry, document tracking 
                        and database maintenance

Closing                 Produces closing documents, including jurisdiction-
                        specific promissory notes and mortgages or deeds of
                        trust

Settlement              Enables a lender or settlement agent to manage checking 
                        accounts, print checks and report IRS data

Tracking                Produces management reports designed to meet each 
                        customer's particular needs

MortgageWare for        Provides brokers with a scaled-down version of the 
   Brokers              MortgageWare LMS designed to meet their specific needs 
                        for product and pricing
                      


SECONDARY MARKETING

Secondary Marketing     Allows lenders to evaluate and manage the risk of 
                        selling loans on the secondary market

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


LOAN SERVICING

Loan Servicing          Provides lenders with a complete and cost-effective 
                        Windows-based loan servicing solution

Servicing Gateway       A streamlined version of Loan Servicing designed for 
                        lenders holding loans for sale


CONSTRUCTION LENDING

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


ANALYSIS AND COMMUNICATIONS

InfoLINQ                Provides mortgage lenders with a complete intranet-based
                        environment in which to collect, extract, and distribute
                        business analysis

COMLINQ                 Handles inter-branch electronic communications for 
                        MortgageWare software

MortgageBase            Enables customers to access their MortgageWare database
                        from FoxPro, convert files into an xbase format and
                        print more sophisticated reports

Interfaces              Utilizing our SmartLINQ technology, customers can 
                        interface to other products and systems



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INTERLINQ's believes its strength lies in its ability to provide customers with
an integrated approach to originating, servicing, and analysis of 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 for Brokers, MortgageWare MarketLINQ, MortgageWare Entre,
MortgageWare InfoLINQ, MortgageWare Loan Servicing, MortgageWare Secondary
Marketing, and BuilderBLOCK$. Together, these technology tools enable the
MortgageWare Enterprise business model--a means for greater operational
efficiency enterprise-wide, faster access to information, and cost-effective
management of information content.

     MortgageWare Entre. Provides loan officers or brokers ("Originators") with
tools to tailor loan programs, enabling better customer service and more
expedient completion of each loan application. Designed to improve communication
between Originators in the field and the processing department, MortgageWare
Entre increases accuracy, timeliness, and back-office tracking of each loan. The
Company believes that MortgageWare Entre gives Originators a competitive
advantage by enabling them to quickly prequalify borrowers for purchases and
refinances, show side-by-side comparisons of different loan programs, take the
loan application, give the borrower conditional loan approval on the spot, and
produce professional-looking open-house flyers. Additionally, this
Windows-based system includes a contact manager for efficient follow-up.

     MortgageWare Loan Management System. The core product in the MortgageWare
family, the MortgageWare Loan Management System, is a PC-based system for
residential mortgage loan management, is currently installed in more than 7,000
locations. The latest version of this system has been upgraded to mirror the
enterprise-wide data access enhancements of MortgageWare Entre, the Company's
laptop origination tool, including the ability to order risk grade evaluation
and mortgage insurance through Freddie Mac's Loan Prospector Second Generation,
and the ability to request underwriting directly from Fannie Mae. This version
has also been enhanced to receive tiered pricing from MarketLINQ, so that
lenders can compare actual locked interest rates against rate sheet data. This
"intelligent" system directs and streamlines the flow of work throughout a
company, supporting the transition from individual workflow to an organizational
workflow that boosts efficiency across the entire enterprise.

     MortgageWare Loan Management System is a modular system that addresses
qualifying, point-of-sale origination, processing, closing, settlement, pipeline
tracking and management, and inter-branch electronic communications.
MortgageWare TC, currently under development, is a Web-based, thin-client
version of the MortgageWare Loan Management System. With this technology, the
Company believes lenders will be able to support distributed MortgageWare
throughout a geographically dispersed user community, thereby enhancing
operational efficiency and realizing cost benefits.

   MortgageWare Secondary Marketing. Secondary Marketing refers to managing the
risk of financial loss in the origination and subsequent selling of mortgage
loans. In order to maximize profit from the sale of loans in the secondary
market, an organization's Secondary Marketing Department requires pipeline
information to price loan products and hedge their position. INTERLINQ's
Secondary Marketing product offers lenders the ability to examine in-process
loans to determine how best to meet loan sale commitments the lender may have
made to Fannie Mae, Freddie Mac or other secondary market investors. This
product has a visual spreadsheet-style user interface which is designed to
enhance its ease of use.



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MortgageWare MarketLINQ. A Windows 95-based product, MarketLINQ serves as a
central point of data entry and maintenance for all mortgage loan programs and
rates including tiered pricing, which allows an administrator to electronically
distribute up-to-date information enterprise-wide on demand. This program
ensures that data is entered into the system only one time -- whether it's being
used for in-house purposes (such as determining how many current loans are at
risk of defaulting), or by a loan officer working to obtain the best interest
rate for a borrower. Direct links into Knight-Ridder and Dow Jones Telerate
enables the pricing for loan programs to be efficiently managed and rapidly
recalculated as changes in mortgage pricing occur (often multiple times daily).

   MortgageWare Loan Servicing System. The Company believes that its
MortgageWare Loan Servicing enhances a customer's profitability by moving from
the current "rent model" to a "buy model." An alternative to service bureau and
mainframe-based servicing is offered by the Company. MortgageWare Loan Servicing
was designed to exceed industry standards, while being offered at a highly
competitive price-point for the industry, along with no-charge access to a
customer's servicing information, allowing servicers to gain a cost and
information advantage. MortgageWare Loan Servicing utilizes a 32-bit Windows
client-server architecture, coupled with advanced information features that
automate and manage business events for a loan servicer.

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

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

     MortgageWare InfoLINQ. Introduced in January 1997, MortgageWare InfoLINQ
integrates all of INTERLINQ's products to create the synergy of the MW
Enterprise business model. InfoLINQ provides mortgage lenders one of the first,
complete intranet-based environments in which to collect, extract, and
distribute business information. Data in all operational systems of MW
Enterprise is accessible for the automated creation and distribution of
real-time business reports and analyses through easy-to-use browser-based
desktops, to users throughout the enterprise.

     Rather than committing resources to gathering and crunching of loan data,
InfoLINQ users can access real-time information via a customizable "desktop"
that is similar to a Web site. InfoLINQ automatically distributes information to
each desktop based on what company information is relevant to each user's job.
Users can tailor their desktops to most efficiently review the information they
want to track, helping them to quickly respond to changes in the market, and
optimize profitability. InfoLINQ users can access the MortgageWare database
from


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any location on a PC, to speed the process of researching and analyzing the
entire mortgage business. This means that after mortgage professionals begin to
move a business transaction through the pipeline -- fueled by competitive
decisions based on InfoLINQ's access to real-time information and industry-wide
analysis -- MortgageWare can be called on to move the process through the
pipeline's final stages.

   Other MortgageWare Information Management Tools. INTERLINQ frequently
develops products that it believes speed up the cycle of mortgage loan creation.
Other products the Company offers include:

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

   MortgageWare MultiTrac. Multi-tasking capabilities have been added to
MortgageWare Loan Management System via MultiTrac, providing one of Windows'
main advantages, while retaining MortgageWare functionality.

     New Products Under Development

   MortgageWare TC. A browser-based version of the MortgageWare Loan Management
System scheduled to ship by the end of 1997, is the first mortgage loan
management system to take advantage of the thin-client technology that the
Company believes will become the future industry standard. Not only does an
enhanced graphical interface heighten MortgageWare's ease-of-use, but
thin-client technology also provides cost and efficiency benefits through
central management of technology and upgrades at the server level -- lowering
costs of managing the desktop and the system. In addition, the improved remote
access capabilities allowed with thin-client technology enable lenders to work
effectively over a true wide area network (WAN).

   MortgageWare TC is designed to provide quick and easy access through a Web
browser to MortgageWare's integrated modules for each step in the cycle of
generating and processing a mortgage loan. All of these modules work from a
single database, so information has to be input only once and can be immediately
accessed by any authorized user. The Company believes that these features,
combined with the capabilities of InfoLINQ, facilitate accessing the most
current information possible in a quick and intuitive manner.

   Secondary Marketing for Windows. Secondary Marketing for Windows is being
designed to provide the ability for lenders to automate the process of selling
individual loans on the secondary market to investors such as Fannie Mae,
Freddie Mac and other secondary market investors. This product, which will
interface with other MortgageWare products, is being designed to provide timely
data capture from a customer's branch office to its main secondary marketing
database, eliminating redundant data entry.

     Complementary Products and Services

     INTERLINQ 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.



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

     The Company also sells laser font cartridges and provides laser logo
services. The Company has developed interfaces to Fannie Mae's Mornet product
and Freddie Mac's Midanet product, which facilitate loan delivery once a loan is
closed. In addition, the Company has developed several programs to export
servicing data to loan servicing systems for its customers.

     Customer Service and Support

     INTERLINQ believes that excellent customer service is key to its success
and future growth. For many customers, the MortgageWare product line becomes
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 MortgageWare products under the Company's purchase option
typically purchase an annual support contract. The support fee for customers who
choose INTERLINQ's Partnership Plan or rental option (discussed below) is
included in their monthly charge.

     Regular feedback on the quality of the Company's customer service is an
integral part of its customer service strategy. The Company employs an
independent research firm that calls each customer at least annually to
determine customer satisfaction. The reports are produced monthly and are used
by the Company to monitor its procedures to enhance customer satisfaction. In
addition, certain customers belong to special interest groups that serve as a
resource for product ideas. Currently, there are groups for regulatory
compliance, loan processing, secondary marketing, closing/settlement, portable
origination, software interfaces, government lending, communications, documents
and forms, brokered lending, user interface and training, underwriting, and loan
servicing.

     The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 1997, 38 of its customers were included in the
program. The Major Account Services staff acts as liaison for each major account
customer, following up on issues and setting priorities for system enhancements.
With this program, the Company believes that it can better address the needs of
its largest customers and improve overall service for all its customers.

PRODUCT DEVELOPMENT

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

     The Company has organized its Product Development Department into teams
working on products or closely related groups of products. These teams include
personnel with experience



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in product analysis, software engineering, research and technology, quality
assurance, and product marketing. Their objective is to ensure that all products
meet INTERLINQ's standards. Employees in these teams are selected for their
skills in mortgage lending, software development and marketing.

     INTERLINQ examines new technologies and platforms on an ongoing basis to
determine their potential benefits to customers. The Company currently develops
products using the DOS, Windows NT and Windows 95 operating systems, ODBC
compliant database options (SQL Server(TM) and MS Access(TM)) Web browser-based
interfaces and thin-client technology, and Visual C++ , ACTIVE X programming
tools on a PC network. Currently, the MortgageWare Loan Management System and
Secondary Marketing product run under the DOS operating system and on major PC
networks. A Windows version of Secondary Marketing is planned for fiscal year
1998. Additionally, a thin-client version of the MortgageWare Loan Management
System is scheduled to be released by the end of calendar 1997. The Company's
other products --MortgageWare Entre, Loan Servicing, MarketLINQ, Servicing
Gateway and BuilderBLOCK$--all run under the Windows operating system. The
Company's software is generally written in the C language for speed, reliability
and ease of maintenance. The Company writes screens, reports and documents in a
simple object-oriented language to reduce development time.

SALES AND MARKETING

     The Company employs a direct sales force for all of its markets because it
believes that considerable expertise is required to sell its products and that
strong customer relationships are key to its success. The Company's direct sales
force consists of national sales managers and account/sales executives. These
personnel are supported by sales administration and inside sales
representatives. As of June 30, 1997, the Company employed 17 sales executives
located throughout the country who are each responsible for an assigned
geographic territory. An additional sales representative is exclusively devoted
to sales of INTERLINQ'S servicing products. Sales executives are expected to
maintain relationships with existing customers and are responsible for the
generation of new business and expansion of existing business. Sales
administration representatives handle contracts and other administrative
details, and inside sales representatives qualify sales leads, setting
appointments for account and sales executives, and managing much of the sales
follow-up.

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

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

     Effective October 1, 1995 the Company amended an existing co-marketing
agreement with CMCI Corporation ("CMCI"). The agreement provides for discounted
software sold to credit unions through CMCI and a referral fee paid to CMCI for
software sold to credit unions directly by the Company and adds conditions
allowing for the transfer of CMCI customers to INTERLINQ. The transfer is to
take place by September 30, 1998 at which time the agreement is to expire. The
Company believes that CMCI's familiarity with credit unions provides the



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Company with a strategic advantage in that market. Revenues under the CMCI
arrangement accounted for less than 2% of the Company's net revenues in fiscal
year 1997.

     Licensing Options

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

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

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

     Rental Option. Because customers may not wish to commit to the purchase
option or the Partnership Plan option, the Company created a limited-capacity
version of the MortgageWare LMS software for brokers that is available on a
monthly rental plan. In addition, the Secondary Marketing product is also
available on a monthly rental plan.

CUSTOMERS

     The Company's customer base is geographically diverse and covers a broad
range of sizes and types of financial institutions. MortgageWare products are
installed and currently supported for approximately 2,000 customers in 7,000
locations in all 50 states plus Puerto Rico, Guam, and the U.S. Virgin Islands.
This customer base is currently comprised of approximately 750 mortgage brokers
and bankers, 650 banks, 500 credit unions and 100 savings institutions. In
fiscal year 1997, no single customer accounted for more than 3% of the Company's
net revenues.

COMPETITION

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



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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     INTERLINQ regards its software as proprietary and essential to its
business. The Company relies primarily on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements,
license agreements and other intellectual property protection methods to protect
its proprietary technology. The Company has no patents.

MORTGAGE LENDING REGULATIONS

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

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

MANUFACTURING

     The principal materials used in the Company's products include computer
diskettes and documentation. The manufacturing process includes the development
and testing of software by the Company, plus the production of a master copy for
duplication. The Company contracts with an outside source for all disk
duplication for major product releases and updates. Accompanying documentation,
which is minimal since most documentation is on-line, is created



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by the Company and sent to an outside source to be reproduced. The Company
generally ships products within a few business days after receipt of an order.
Normally the Company has little or no backlog, but has experienced occasional
backlogs. At June 30, 1997, the Company's backlog was not material.

CERTAIN FACTORS

     The Company is unable to accurately estimate unit sales of its products and
the volume of annual support contracts that its customers will purchase due to
the nature of the software markets generally and, in particular, the residential
mortgage lending market. In early 1994, the residential mortgage lending market
experienced a reduction in mortgage refinance volumes due to a sharp rise in
interest rates. The Company experienced a significant decrease in net revenues,
operating income and net income during the fourth quarter of fiscal 1994 which
continued through most of fiscal year 1995. During fiscal years 1997 and 1996,
as a result of the moderate increase in mortgage lending and refinance volumes,
the Company has seen increases in revenues, operating income and net income.

EMPLOYEES

     As of August 31, 1997, the Company employed 133 people, including 31 in
sales and marketing, 40 in product development, 39 in customer service and 23 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.



                                       12
<PAGE>   13

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, as of September 27, 1997, are as follows:

<TABLE>
<CAPTION>
             NAME                   Age                          Position
-------------------------------    ------     -------------------------------------------------------------
<S>                                  <C>      <C>                 
Jiri M. Nechleba                     39       President and Chief Executive Officer
Stephen A. Yount                     40       Vice President-Finance, Chief Financial Officer and Secretary
Patricia R. Graham                   44       Vice President-Sales and Marketing
David A. Sperline                    48       Vice President-Customer Service

</TABLE>

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

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

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

     DAVID A. SPERLINE has been Vice President-Customer Service of the Company
since January 1992. Mr. Sperline worked briefly as an independent consultant
before joining the Company. From March 1988 to 1991, Mr. Sperline was Director
of Product Quality Assurance at Aldus Corporation, a desk-top publishing
software company. Prior to that, he was Director of Software Development for
Pacer Corporation, a producer of computer hardware and software for movie
theaters. Mr. Sperline holds a BA in Business Administration from the University
of Washington.



                                       13
<PAGE>   14

ITEM 2. PROPERTIES

The Company is currently subleasing and occupying approximately 46,000 square
feet of office space in Kirkland, Washington. This sublease expires in November
1998 and does not contain a renewal option. The Company believes that its
current facilities will be adequate for its needs through the end of fiscal year
1998, as well as the remaining term of the sublease. Because the Company does
not have a renewal option for its current facilities, it anticipates a thorough
evaluation of the available office space near its current headquarters in
Kirkland, Washington. As of September 1997, the vacancy rate has declined for
office space and, accordingly, lease rates have increased substantially in the
geographic area where the Company's headquarters are located. Accordingly, the
Company anticipates a potential substantial increase in its lease rate for its
current facility or another facility when the current sublease expires in
November 1998.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.

                                     PART II

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

   The Common Stock has traded on the Nasdaq National Market under the symbol
INLQ since April 27, 1993. The Company has 2,812 shareholders as of September
23, 1997, based on computations including participants in security positions
listings, as defined by Rule 17Ab-8 of the Exchange Act. Presented below are
quarterly closing stock price ranges as reported on Nasdaq National Market for
the periods indicated.

<TABLE>
<CAPTION>
                                                      HIGH                Low
                                                   ------------        ----------
<S>                                                    <C>                <C> 
Fiscal year ended June 30, 1998
First quarter (through September 23, 1997)             $4.63              $3.50
Fiscal year ended June 30, 1997
Fourth quarter                                         $4.13              $3.63
Third quarter                                           6.00               3.75
Second quarter                                          5.50               3.50
First quarter                                           4.50               3.38
Fiscal year ended June 30, 1996
Fourth quarter                                         $5.50              $3.19
Third quarter                                           3.75               2.88
Second quarter                                          3.50               3.00
First quarter                                           4.13               3.25

</TABLE>

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



                                       14
<PAGE>   15

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Years Ended June 30,                                               1997         1996           1995          1994            1993
------------------------------------------------                 --------     ---------      --------      --------        -------
(In thousands except per share data) 
<S>                                                               <C>           <C>           <C>           <C>            <C>    
STATEMENTS OF OPERATIONS DATA:
     Net revenues:
         Software license fees                                    $ 7,055       $ 6,232       $ 4,314       $11,438        $10,122
         Software support fees                                      6,073         5,773         5,483         4,707          2,824
         Other                                                      1,239         1,088         1,196         2,344          2,086
                                                                 --------     ---------      --------      --------        -------
              Total net revenues                                   14,367        13,093        10,993        18,489         15,032
                                                                 --------     ---------      --------      --------        -------
     Cost of revenues:
         Software license fees                                      1,500         1,653         1,424         1,244          1,188
         Software support fees                                      1,856         1,678         1,788         2,062          1,791
         Other                                                        683           589           642         1,014            943
                                                                 --------     ---------      --------      --------        -------
              Total cost of revenues                                4,039         3,920         3,854         4,320          3,922
                                                                 --------     ---------      --------      --------        -------
              Gross profit                                         10,328         9,173         7,139        14,169         11,110
                                                                 --------     ---------      --------      --------        -------
     Operating expenses:
         Product development                                        2,147         2,060         1,123           891            670
         Sales and marketing                                        4,011         4,230         4,244         5,801          4,366
         General and administrative                                 3,152         3,010         3,404         3,278          2,147
         Other general expenses - nonrecurring                      _____         _____           952         _____          _____
                                                                 --------     ---------      --------      --------        -------
              Total operating expenses                              9,310         9,300         9,723         9,970          7,183
                                                                 --------     ---------      --------      --------        -------
              Operating income (loss)                               1,018         (127)       (2,584)         4,199          3,927
     Net interest and other income (expense)                          719           811           676           322           (98)
                                                                 --------     ---------      --------      --------        -------
         Income (loss) before income taxes,
              extraordinary item and cumulative
              effect of change in accounting principle              1,737           684       (1,908)         4,521          3,829
     Income taxes                                                     627           251         (780)         1,532          1,368
                                                                 --------     ---------      --------      --------        -------
         Income (loss) before extraordinary
              item and cumulative effect of
              change in accounting principle                        1,110           433       (1,128)         2,989          2,461
     Extraordinary item - tax benefit of net
         operating loss carryforwards                               _____         _____         _____         _____            138
     Cumulative effect of change
         in accounting principle                                    _____         _____         _____         (109)          _____
                                                                 --------     ---------      --------      --------        -------
              Net income (loss)                                    $1,110          $433      ($1,128)        $2,880         $2,599
                                                                 ========     =========      ========      ========        =======
PER SHARE DATA:
     Income (loss) before extraordinary
         item and cumulative effect of
         change in accounting principle                              $.19          $.07        ($.19)          $.46           $.47
                                                                 --------     ---------      --------      --------        -------
     Net income (loss)                                               $.19          $.07        ($.19)          $.45           $.50
                                                                 --------     ---------      --------      --------        -------
     Weighted average number of common and
         common equivalent shares outstanding                       5,842         6,171         5,831         6,471          5,241
BALANCE SHEET DATA:
     Cash, cash equivalents and investments                       $13,831       $14,218       $14,373       $14,585        $14,434
     Working capital                                               11,623        12,823        13,638        13,753         13,233
     Total assets                                                  21,067        22,321        21,609        23,838         20,306
     Total shareholders' equity                                    16,050        17,771        17,338        18,703         16,121

</TABLE>



                                       15
<PAGE>   16


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

GENERAL

     Prior to the mid 1980's, mortgage loans in the United States were
originated in a manual and paper-intensive process. Then, beginning in the mid
1980's and running through the mid 1990's, the mortgage lending industry
implemented its first wave of automation with PC-based software solutions for
mortgage originations. During this period of time, the Company experienced rapid
revenue and customer growth by providing its MortgageWare Loan Management System
- a robust, full-featured and cost-effective PC-based software solution. This
first wave of automation was accelerated and amplified from 1992 to early 1994
as mortgage interest rates reached historically low levels and mortgage
refinance volumes soared. Then, in early 1994, the Federal Reserve raised
interest rates. This event immediately caused mortgage refinance volumes to
plummet. As a result, lenders found themselves with excess labor and mortgage
processing capacity. During the remainder of 1994 and for most of 1995, the
Company believes that the industry was focused more on staff reduction, than
adding new automated loan management systems.

     Mortgage lending rates available during the Company's fiscal years 1996 and
1997 reflected a lending environment that experienced a high degree of
volatility. In spite of this volatility, the overall lending conditions have
been considered favorable for the borrower compared to most historical measures.
With this overall favorable lending environment, the Company believes that
mortgage lending activity has increased, driven by an increase in financing of
home sales and refinancing of existing mortgages. However, during the last half
of fiscal year 1997, the Company began to observe a shift in the mortgage
origination business. There appeared to be a trend towards sufficient production
capacity coupled with a reduced profit margin. Although lending activity has
increased, the Company believes that because most mortgage lenders have already
automated their origination operations and have sufficient production capacity,
the Company experienced only a modest increase in software license fees during
fiscal year 1997 compared to fiscal year 1996 for its loan origination software.

     Historically, when mortgage origination volumes increased due to favorable
lending rates, the Company experienced increased software license fees as
lenders increased production capacity. The Company now believes that due to
reduced profit margins, its customers are shifting their purchasing decisions to
solutions that reduce unit costs and accordingly, increase profit margins,
rather than increasing production capacity. During fiscal years 1996 and 1997,
the Company focused its product development effort to provide a more diverse and
integrated "enterprise" solution for the mortgage lending industry. It is the
Company's belief that this broader "enterprise" solution will position the
Company well for this recent change in the mortgage lending industry. This
broader product offering focuses more on reducing the cost of originating,
processing, and servicing a mortgage, than on solely increasing production
capacity.

NET REVENUES

<TABLE>
<CAPTION>
                                                         Increase
(In thousands)            1997      Increase   1996     (Decrease)   1995
--------------            ----      --------   ----     ----------   ----
<S>                     <C>            <C>   <C>            <C>    <C>    
Software license fees   $ 7,055        13%   $ 6,232        44%    $ 4,314
Software support fees     6,073         5%     5,773         5%      5,483
Other                     1,239        14%     1,088        (9)%     1,196
                        -------        --    -------        --     -------
Total net revenues      $14,367        10%   $13,093        19%    $10,993
                        =======        ==    =======        ==     =======
</TABLE>


                                       16
<PAGE>   17

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

     Software license fees increased by 13% for fiscal year 1997 compared to
fiscal year 1996, and increased by 44% for fiscal year 1996 compared to fiscal
year 1995. The increase in software license fees in fiscal year 1997 compared to
fiscal year 1996 was primarily due to a combination of the overall favorable
lending conditions discussed above, which resulted in modest increases in
software license fees for most previously developed products, and software
license fees for three new products: MortgageWare Loan Servicing, MortgageWare
InfoLINQ and MortgageWare MarketLINQ. The increase in software license fees in
fiscal year 1996 compared to fiscal year 1995 was primarily due to a combination
of the overall favorable lending conditions discussed above, which increased
software license fees for previously developed products, and software license
fees for three new products: MortgageWare Entre and interfaces to Freddie Mac's
and Fannie Mae's automated underwriting systems.

     Software support fees increased by 5% for fiscal year 1997 compared to
fiscal year 1996, and by 5% as well, for fiscal year 1996 compared to fiscal
year 1995. These year-to-year increases reflected a combination of a modest
number of new customer additions during fiscal years 1997 and 1996, and, to a
lesser extent, a low, but fairly constant attrition rate in the installed
customer base during both fiscal years. Due in part to changes, from time to
time, in government regulations applicable to documentation required for
residential mortgage lending, the vast majority of the Company's customers
purchase annual software support agreements. However, because software support
fees are recognized ratably over the term of the annual support agreement,
whereas software license fees are recognized on product shipment, the percentage
increase in software support fees compared to software license fees is not
directly proportional. The Company believes software support fees are likely to
continue to increase at a modest rate in fiscal year 1998.

     Other revenues -- training fees, custom document fees, and other
miscellaneous sales -- increased by 14% for fiscal year 1997 compared to fiscal
year 1996, and decreased by 9% for fiscal year 1996 compared to fiscal year
1995. The increase in other revenues in fiscal year 1997 compared to fiscal year
1996, was primarily due to an increase in on-site training fees. This increase
in training fees was primarily due to an increase, beginning in the first
quarter of fiscal year 1997, in the daily fee charged for on-site training.
Additionally, the document fees from the marketing agreement with VMP Electronic
Laser Forms increased substantially in fiscal year 1997 compared to fiscal year
1996. The Company expects these fees to continue to increase in fiscal year
1998. The decrease in other revenues in fiscal year 1996 compared to fiscal year
1995 was primarily due to a decrease in document fees. During the quarter ended
December 31, 1995, the Company announced a marketing agreement with VMP
Electronic Laser Forms to market their comprehensive library of mortgage lending
documents to MortgageWare customers. The transition from the Company offering
its own lending documents to offering this comprehensive library was slower than
anticipated in fiscal year 1996. In addition to the expected increase in revenue
from documents discussed above, the Company also expects an increase in
consulting fees during fiscal year 1998 compared to fiscal year 1997, due to the
Company's recent recognition of demand for its services to assist customers in
effectively implementing and integrating its product suite to reduce the cost of
originating and processing a mortgage loan, as well as providing timely and
relevant information for its customers' decision-makers.



                                       17
<PAGE>   18

     Looking forward, the Company anticipates an increasing contribution to
software license fees, and related increases to software support fees and other
revenues, from its newer products MortgageWare Loan Servicing, MortgageWare
InfoLINQ, and MortgageWare MarketLINQ. As discussed above, the Company believes
the overall lending environment to be favorable as of the end of fiscal year
1997 despite experiencing a high degree of volatility. Nonetheless, there can be
no assurance that mortgage lending rates will not increase or continue to
experience a high amount of volatility. Such increases or continued volatility
could have a material adverse effect on the Company's revenues, profitability,
and financial condition. Even if lending rates stabilize, if such rates are
perceived as being too high, homeowners and potential homeowners may delay
decisions that would otherwise result in mortgage lending transactions. Such
delays may have an adverse effect upon the Company's customers, and upon the
Company and its operations.

COST OF REVENUES

<TABLE>
<CAPTION>
                                                                         Increase                      Increase
(In thousands)                                             1997         (Decrease)         1996        (Decrease)         1995
-------------------------------------                     ------        ----------        ------       ----------        ------
<S>                                                       <C>               <C>           <C>               <C>          <C>   
Software license fees                                     $1,500            (9)%          $1,653            16%          $1,424
Percentage of software license fees                          21%           _____             27%          _____             33%
                                                          ------          ------          ------         ------          ------
Software support fees                                      1,856             11%           1,678           (6)%           1,788
Percentage of software support fees                          31%           _____             29%          _____             33%
                                                          ------          ------          ------         ------          ------
Other                                                        683             16%             589           (8)%             642
Percentage of other revenues                                 55%           _____             54%          _____             54%
                                                          ------          ------          ------         ------          ------
Total cost of revenues                                    $4,039              3%          $3,920             2%          $3,854
Percentage of net revenues                                   28%           _____             30%          _____             35%
                                                          ======          ======          ======         ======          ======
</TABLE>


     Cost of software license fees includes the purchase and duplication of
disks, product documentation, and amortization of capitalized software
development costs. As a percentage of software license fees, cost of software
license fees decreased from 27% to 21% for fiscal year 1997 compared to fiscal
year 1996, and decreased from 33% to 27% for fiscal year 1996 compared to fiscal
year 1995. The decrease for fiscal year 1997 compared to fiscal year 1996 was
primarily due to a combination of software license fees increasing and the cost
of software license fees decreasing. The dollar amount of cost of software
license fees decreased 9% to $1.50 million for fiscal year 1997, compared to
$1.65 million for fiscal year 1996. This decrease was primarily due to a
decrease in amortization of capitalized software development costs associated
with the MortgageWare Loan Management System for DOS that was partially offset
by the introduction of amortization of capitalized software development costs
for MortgageWare Loan Servicing released during the first quarter of fiscal year
1997. Amortization of capitalized software development costs was $1,290,000,
$1,430,000, and $1,250,000 for fiscal years 1997, 1996, and 1995, respectively.
As a result of releasing several new products during fiscal year 1997 that will
have amortization of capitalized software development costs, the Company expects
the dollar amount of its amortization of capitalized software development costs
to increase significantly for fiscal year 1998 compared to fiscal year 1997.

Cost of software support fees includes salaries and other costs related to
providing telephone support, and the purchase, duplication, and shipping of
disks associated with software updates. As a percentage of software support
fees, cost of software support fees 



                                       18
<PAGE>   19

increased from 29% to 31% for fiscal year 1997 compared to fiscal year 1996, and
decreased from 33% to 29% for fiscal year 1996 compared to fiscal year 1995. The
increase in fiscal year 1997 compared to fiscal year 1996 was primarily due to a
higher salary cost and a less efficient ratio of customer support staff to
customers. The decrease in fiscal year 1996 compared to fiscal year 1995 was
primarily due to a more efficient ratio of customer service support staff to
customers. Looking forward, because the level of staffing and customer service
expenses are related to the size of the Company's customer base and the number
of different products offered, the Company expects the dollar cost of software
support fees to increase in accordance with its customer base and expanded
product offering, and to increase as a percentage of software support fees.

     Cost of other revenue includes the purchase and duplication of disks
associated with custom documents, the salaries and reimbursable expenses for the
employees who provide training and consultation services, and the net cost of
the Company's annual MortgageWare software users' group meeting. As a percentage
of other revenue, cost of other revenue increased slightly from 54% to 55% for
fiscal year 1997 compared to fiscal year 1996 and was unchanged at 54% for
fiscal year 1996 compared to fiscal year 1995. The slight increase in fiscal
year 1997 compared to fiscal year 1996 was primarily due to a combination of a
slightly higher payroll cost and increased depreciation from upgrading the
trainers' equipment.

OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                                         Increase                      Increase
(In thousands)                                             1997         (Decrease)        1996         (Decrease)          1995
                                                          ------        ----------       -------       ----------         ------
<S>                                                       <C>                 <C>         <C>                <C>          <C>   
Product development                                       $2,148              4%          $2,060             83%          $1,123
Percentage of net revenues                                   15%           _____             16%           _____             10%
                                                          ------          ------         -------          ------          ------
Sales and marketing                                        4,011            (5)%           4,230              0%           4,244
Percentage of net revenues                                   28%           _____             32%           _____             39%
                                                          ------          ------         -------          ------          ------
General and administrative                                 3,152              5%           3,010           (12)%           3,404
Percentage of net revenues                                   22%           _____             23%           _____             31%
                                                          ------          ------         -------          ------          ------
Other general expenses - nonrecurring                      _____           _____           _____           _____             952
Percentage of net revenues                                 _____           _____           _____           _____              9%
                                                          ------          ------         -------          ------          ------
</TABLE>

     Product development expenses include salaries for software developers and
analysts, facility costs, and expenses associated with computer equipment used
in software development. As a percentage of net revenues, product development
expenses decreased from 16% to 15% for fiscal year 1997 compared to fiscal year
1996, and increased from 10% to 16% for fiscal year 1996 compared to fiscal year
1995. The decrease for fiscal year 1997 compared to fiscal year 1996 is
primarily due to net revenues increasing more than product development expenses.
The increase for fiscal year 1996 compared to fiscal year 1995 is primarily due
to a combination of increased costs associated with the development of new
software products, MortgageWare Entre, MortgageWare Loan Servicing, and
MortgageWare for Windows, and the maturity of MortgageWare for DOS requiring a
greater percentage of development expenditures for maintenance, instead of
enhancement, which is capitalized. The Company capitalized $877,000, $790,000,
and $1,793,000 of development expenditures for fiscal years 1997, 1996, and
1995, respectively. During fiscal year 1997, the Company released three
significant new products, MortgageWare Loan Servicing, MortgageWare InfoLINQ,
and MortgageWare 



                                       19
<PAGE>   20

MarketLINQ. During fiscal year 1998 the Company plans significant enhancements
to these new products as well as significant enhancements to the MortgageWare
Loan Management System and MortgageWare Entre. Accordingly, the Company
anticipates a significant increase in capitalized development expenditures and a
decrease in product development expense for fiscal year 1998.

     Sales and marketing expenses include salaries, sales commissions, travel,
and facility costs for the Company's sales and marketing personnel. Sales and
marketing expenses also includes advertising, telemarketing, and trade shows. As
a percentage of net revenues, sales and marketing expenses decreased from 32% to
28% for fiscal year 1997 compared to fiscal year 1996 and decreased from 39% to
32% for fiscal year 1996 compared to fiscal year 1995. The decrease for fiscal
year 1997 compared to fiscal year 1996 was primarily due to revenue increasing
and sales and marketing expenses decreasing. The decrease in sales and marketing
expenses was primarily due to the elimination of outsourced telemarketing fees
during the quarter ended March 31, 1996. The decrease, as a percentage of
revenues, for fiscal year 1996 compared to fiscal year 1995 was primarily due to
the benefit of expense and staff reduction measures during the quarters ended
September 30, 1995 and December 31, 1995, and to revenue increasing faster than
sales and marketing expenses, which was somewhat offset by increased sales
commission expense. The Company expects sales and marketing expenses to increase
both on a dollar basis and as a percentage of revenue for fiscal year 1998
compared to fiscal year 1997, due to substantial marketing, promotional, and
sales efforts planned to increase sales of the new products released during
fiscal year 1997.

     General and administrative expenses include costs associated with finance,
accounting, purchasing, order fulfillment, administration and facilities, as
well as the amortization of certain LoanStar Systems assets, subsequent to their
acquisition during the quarter ended March 31, 1994, and discontinuing with the
write-off of their remaining net book value during the quarter ended March 31,
1995, as discussed below. As a percentage of net revenues, general and
administrative expenses decreased from 23% to 22% for fiscal 1997 compared to
fiscal year 1996, and decreased from 31% to 23% for fiscal year 1996 compared to
fiscal year 1995. The decrease for fiscal year 1997 compared to fiscal year 1996
was primarily due to revenue increasing more than general and administrative
expense. The decrease for fiscal year 1996 compared to fiscal year 1995 is
primarily due to a combination of the elimination of the ongoing amortization of
certain LoanStar Systems assets subsequent to their write-off during the quarter
ended March 31, 1995, a lower bad debt provision and reduced professional
services expense. The Company expects general and administrative expenses on a
dollar basis to increase somewhat for fiscal year 1998 compared to fiscal year
1997, but hold steady or decrease slightly as a percentage of net revenues.

     Other general expenses - nonrecurring, consists of the write-off of
capitalized software costs associated with purchased software code originally
intended for use in the development of one of the Company's new products
($391,000) during the quarter ended June 30, 1995, the write-off of the
remaining net book value of the acquired assets of LoanStar Systems, Inc.
($331,000), and costs associated with departed executives ($230,000) during the
quarter ended March 31, 1995.



                                       20
<PAGE>   21

NET INTEREST AND OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
(In thousands)                               1997          Decrease          1996         Increase          1995
----------------------------------------    ------        ----------        -----        ---------          -----
<S>                                          <C>            <C>              <C>             <C>            <C> 
Net interest and other income (expense)      $719           (11)%            $811            20%            $676
Percentage of net revenues                     5%            --                6%            --               6%
</TABLE>

     Interest income was $747,000, $801,000, and $728,000 for the fiscal years
ended June 30, 1997, 1996, and 1995, respectively. The decrease for fiscal year
1997 was primarily due to a combination of a slightly lower average portfolio
balance and a lower average rate of return on the portfolio. The increase for
fiscal year 1996 was primarily due to earning a higher average interest rate on
the investment portfolio.

     As of June 30, 1997, the Company had no interest-bearing debt outstanding,
and anticipates no new debt financing in the foreseeable future. Accordingly,
the Company expects net interest and other income (expense) for the foreseeable
future to reflect net interest income.


INCOME TAXES
<TABLE>
<CAPTION>
                                                                     
(In thousands)                       1997         Increase           1996        Increase         1995
--------------------------         ------         --------          ------       ---------       -------
<S>                                  <C>             <C>             <C>                          <C>   
Income taxes                         $627            151%            $250            n/m          $(779)
Effective income tax rate             36%             --              37%             --           (41)%

</TABLE>

     The provision for income taxes includes federal and state income taxes
currently payable, and deferred taxes arising from temporary differences in
determining income for financial statement and tax purposes. The effective
income tax rate for fiscal year 1995 reflects a higher benefit due to certain
tax-free interest income combined with a net loss.

LIQUIDITY AND CAPITAL RESOURCES

     Working capital, which consists principally of cash, cash equivalents, and
short-term investments, was $11,623,000 as of June 30, 1997, compared to
$12,823,000 at June 30, 1996. Cash and cash equivalents increased by $1,283,000
for fiscal year 1997. There was $4,155,000 added to cash and cash equivalents by
operating activities. Principal uses of cash and cash equivalents included the
repurchase of $2,859,000 of Company common stock, the purchase of $547,000 of
furniture and equipment, and $877,000 of capitalized software costs.

     The Company's capital expenditures for fiscal years 1997 and 1996 were
$547,000 and $690,000, respectively. Although the Company currently has no
material commitment for additional capital expenditures, it expects to spend
approximately $500,000 during the fiscal year ending 1998, primarily for
computer software and hardware, furniture, and fixtures. The Company expects
these additional capital expenditures to be funded through cash from operations.

     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; and the possible acquisition of other
software products, technologies and



                                       21
<PAGE>   22

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 1998.

FORWARD-LOOKING STATEMENTS

     When used in this discussion, the words "believes," "anticipates," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.



                                       22
<PAGE>   23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                              Page #
                                                                                        ------------------
<S>                                                                                             <C>
Independent Auditors' Report                                                                    24
Balance Sheets as of June 30, 1997 and 1996                                                     25
Statements of Operations for the years ended June 30, 1997, 1996 and 1995                       26
Statements of Shareholders' Equity for the years ended June 30, 1997,1996 and 1995              27
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995                       28
Notes to Financial Statements                                                                29 - 36
Schedule II - Valuation and Qualifying Accounts                                                 39

</TABLE>



                                       23
<PAGE>   24

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of INTERLINQ Software Corporation
as of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.


/s/  KPMG Peat Marwick LLP


Seattle, Washington
August 1, 1997



                                       24
<PAGE>   25

                         INTERLINQ SOFTWARE CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
As of June 30,                                                            1997         1996
                                                                      -----------   -----------
<S>                                                                   <C>           <C>        
ASSETS
Current assets:
       Cash and cash equivalents                                      $ 7,793,761   $ 6,511,041
       Investments available-for-sale, at fair value                    4,024,651     3,909,917
       Investments held-to-maturity, at amortized cost                  2,012,894     3,796,929
       Accounts receivable, less allowance for doubtful accounts of     
         $176,000 in 1997 and $187,007 in 1996                          1,602,220     1,971,507 
       Inventory                                                           55,246        72,644
       Prepaid expenses                                                   408,909       331,026
       Deferred income taxes                                              267,660       172,041
                                                                      -----------   -----------
                  Total current assets                                 16,165,341    16,765,105
                                                                      -----------   -----------

Property and equipment, at cost                                         5,836,895     5,289,836
       Less accumulated depreciation and amortization                   4,364,628     3,253,190
                                                                      -----------   -----------
                  Net property and equipment                            1,472,267     2,036,646
                                                                      -----------   -----------
Capitalized software costs, less accumulated amortization of          
     $1,718,683 in 1997 and $1,509,305 in 1996                          3,358,016     3,493,563
Other assets                                                               70,899        26,021
                                                                      -----------   -----------
                                                                      $21,066,523   $22,321,335
                                                                      ===========   ============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
       Accounts payable                                               $   235,895   $   158,226
       Accrued compensation and benefits                                  555,402       402,701
       Other accrued liabilities                                          498,276       380,435
       Customer deposits                                                  199,636       363,703
       Deferred software support fees                                   3,052,822     2,637,500
                                                                      -----------   -----------
                  Total current liabilities                             4,542,031     3,942,565
                                                                      -----------   -----------

Noncurrent liabilities, excluding current installments:
       Deferred rent and other lease obligations                          160,443       383,750
       Deferred software support fees                                       6,746        10,233
       Deferred income taxes                                              306,950       213,548
                                                                      -----------   -----------
                  Total noncurrent liabilities                            474,139       607,531
                                                                      -----------   -----------
Shareholders' equity:
       Series A convertible preferred stock, $.01 par value                    --            --
       Authorized 5,000,000 shares; no shares issued and
         outstanding in 1997 and 1996                                          --            --
       Common stock, $.01 par value.  Authorized 30,000,000           
         shares; issued and outstanding 5,416,512 shares in 1997
         and 6,038,550 shares in 1996                                      54,165        60,386
       Additional paid-in capital                                      10,343,087    13,167,629
       Retained earnings                                                5,653,101     4,543,224
                                                                      -----------   -----------
                  Total shareholders' equity                           16,050,353    17,771,239
Commitments
                                                                      -----------   -----------
                                                                      $21,066,523   $22,321,335
                                                                      ===========   ============
</TABLE>

See accompanying notes to financial statements.



                                       25
<PAGE>   26

                         INTERLINQ SOFTWARE CORPORATION
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
Years Ended June 30,                                         1997           1996            1995
                                                         ------------   ------------     -----------
<S>                                                      <C>            <C>             <C>         
Net revenues:
     Software license fees                               $  7,055,457   $  6,232,011    $  4,314,189
     Software support fees                                  6,072,544      5,772,791       5,482,938
     Other                                                  1,239,045      1,087,613       1,196,321
                                                         ------------   ------------     -----------
         Total net revenues                                14,367,046     13,092,415      10,993,448
                                                         ------------   ------------     -----------
Cost of revenues:
     Software license fees                                  1,499,645      1,652,627       1,423,772
     Software support fees                                  1,856,486      1,678,255       1,788,177
     Other                                                    682,666        588,987         641,700
                                                         ------------   ------------     -----------
         Total cost of revenues                             4,038,797      3,919,869       3,853,649
                                                         ------------   ------------     -----------
         Gross profit                                      10,328,249      9,172,546       7,139,799
                                                         ------------   ------------     -----------
Operating expenses:
     Product development                                    2,147,546      2,060,427       1,123,093
     Sales and marketing                                    4,011,440      4,229,994       4,244,444
     General and administrative                             3,151,761      3,010,223       3,403,827
     Other general expenses - nonrecurring                       --             --           952,043
                                                         ------------   ------------     -----------
         Total operating expenses                           9,310,747      9,300,644       9,723,407
                                                         ------------   ------------     -----------
         Operating income (loss)                            1,017,502       (128,098)     (2,583,608)
Net interest and other income                                 719,275        811,272         675,786
                                                         ------------   ------------     -----------
     Income (loss) before income tax expense (benefit)      1,736,777        683,174      (1,907,822)
Income tax expense (benefit)                                  626,900        250,398        (779,326)
                                                         ------------   ------------     -----------
     Net income (loss)                                   $  1,109,877   $    432,776    $ (1,128,496)
                                                         ============   ============    ============


Net income (loss) per share                              $        .19   $        .07    $       (.19)
Weighted average number of common and common
     equivalent shares outstanding                          5,841,764      6,171,210       5,830,842

</TABLE>

See accompanying notes to financial statements.



                                       26
<PAGE>   27


                         INTERLINQ SOFTWARE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                                Total
                                                            Common          Additional       Retained        Shareholders'
Years Ended June 30, 1997, 1996, 1995                        Stock        Paid-in Capital    Earnings            Equity
-------------------------------------                       -------       ---------------   -----------       -----------
<S>                                                         <C>            <C>               <C>              <C>        
Balances at June 30, 1994                                   $57,937        $13,406,325       $5,238,944       $18,703,206
Issuance of 313,790 shares of common
   stock                                                      3,138             41,042            --               44,180
Tax benefit realized upon exercise of stock
   options                                                      --             366,604            --              366,604
Repurchase of 139,500 shares of common
   stock                                                     (1,395)          (645,980)           --             (647,375)
Net loss for the year ended June 30, 1995                      --                --          (1,128,496)       (1,128,496)
                                                            -------         ----------      -----------       -----------
Balances at June 30, 1995                                    59,680         13,167,991        4,110,448        17,338,119
Issuance of 170,550 shares of common
   stock                                                      1,706            214,487             --             216,193
Tax benefit realized upon exercise of stock
   options                                                     --               96,651             --              96,651
Repurchase of 100,000 shares of common
   stock                                                    (1,000)          (311,500)             --            (312,500)
Net income for the year ended June 30,
   1996                                                        --                --             432,776           432,776
                                                            -------         ----------      -----------       -----------
Balances at June 30, 1996                                    60,386         13,167,629        4,543,224        17,771,239
Issuance of 19,962 shares of common
   stock                                                        199             17,321             --              17,520
Tax benefit realized upon exercise of stock
   options                                                     --               10,967             --              10,967
Repurchase of 642,000 shares of common 
   stock                                                    (6,420)         (2,852,830)            --          (2,859,250)
Net income for the year ended June 30,
   1997                                                        --                --           1,109,877         1,109,877
                                                            -------        -----------      -----------       -----------
Balances at June 30, 1997                                   $54,165        $10,343,087       $5,653,101       $16,050,353
                                                            =======        ===========      ===========       ===========

</TABLE>


See accompanying notes to financial statements.


                                       27
<PAGE>   28


                         INTERLINQ SOFTWARE CORPORATION
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Years Ended June 30,                                                 1997           1996             1995
--------------------                                             ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                $  1,109,877    $    432,776    $ (1,128,496)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
   Depreciation and amortization of property and equipment          1,111,438       1,014,452       1,180,679
   Amortization of capitalized software costs                       1,287,881       1,430,111       1,249,849
   Write-off of purchased software                                       --              --           391,518
   Amortization of other assets                                          --              --           221,073
   Write-off of LoanStar acquisition costs                               --              --           330,817
   Loss (gain) on disposition of equipment                               --          (1,473)            4,041
   Deferred income tax expense (benefit)                               (2,217)       (156,727)         31,388
   Tax benefit realized upon exercise of stock options                 10,967          96,651         366,604
   Change in certain assets and liabilities:
      Accounts receivable                                             369,287        (745,365)      1,047,738
      Income taxes refundable                                            --           987,429        (603,346)
      Inventory and prepaid expenses                                  (60,485)        (88,508)         79,859
      Other assets                                                    (44,878)          9,613         128,924
      Accounts payable                                                 77,669          34,971        (230,958)
      Accrued compensation and benefits, other accrued
       liabilities and deferred rent and other lease obligations       47,235          51,136          45,445
      Customer deposits                                              (164,067)        256,613        (167,983)
      Deferred software support fees                                  411,835          93,400        (430,452)
                                                                 ------------    ------------    ------------
         Net cash provided by operating activities                  4,154,542       3,415,079       2,516,700
                                                                 ------------    ------------    ------------
 CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment                                 (547,059)       (689,857)       (338,381)
 Capitalized software costs                                          (877,334)       (789,792)     (1,793,182)
 Purchase of source code                                             (275,000)     (2,000,000)          --
 Purchases of investments                                         (14,511,012)    (18,734,310)     (4,496,002)
 Proceeds from sales and maturities of investments                 16,180,313      12,498,246      10,671,287
 Proceeds from sale of equipment                                        --              5,435           6,865
                                                                 ------------    ------------    ------------
         Net cash provided by (used in) investing activities          (30,092)     (9,710,278)      4,050,587
                                                                 ------------    ------------    ------------
 CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                                17,520         216,193          44,180
 Repurchase of common stock                                        (2,859,250)       (312,500)       (647,375)
                                                                 ------------    ------------    ------------
         Net cash used in financing activities                     (2,841,730)        (96,307)       (603,195)
                                                                 ------------    ------------    ------------
         Net increase (decrease) in cash & cash equivalents         1,282,720      (6,391,506)      5,964,092
                                                                 ------------    ------------    ------------
 Cash and cash equivalents at beginning of year                     6,511,041      12,902,547       6,938,455
                                                                 ------------    ------------    ------------
 Cash and cash equivalents at end of year                        $  7,793,761    $  6,511,041    $ 12,902,547
                                                                 ============    ============    ============
Supplemental disclosure of cash flow information - net cash
   paid (received) during the year for income taxes              $    615,891    $   (691,880)   $   (623,362)
See accompanying notes to financial statements 

</TABLE>



                                       28
<PAGE>   29

                         INTERLINQ SOFTWARE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996

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

       (a)    DESCRIPTION OF BUSINESS

              INTERLINQ Software Corporation (Company) develops, markets, and
              supports personal computer ("PC")-based software products, both
              stand-alone and networked, for mortgage brokers and bankers,
              banks, credit unions, and savings institutions located primarily
              throughout the United States. Credit is extended to such customers
              in the Company's normal course of business. 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's business
              strategy is to provide easy-to-use, PC-based software solutions
              marketed through a direct sales force and to maintain long-term
              customer relationships which generate recurring revenues.

       (b)    CASH EQUIVALENTS

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

       (c)    INVESTMENTS

              Investments at June 30, 1997 and 1996 consist principally of
              investment-grade, interest-bearing securities.

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

              At June 30, 1997 and 1996, the fair value of all securities
              approximated amortized cost and there were no material unrealized
              holding gains or losses.

              Investments held-to-maturity have contractual maturities of less
              than one year. Investments available-for-sale have contractual
              maturities ranging from two years to thirty-two years and carry
              adjustable rates of interest with periodic reset dates.

       (d)    INVENTORY

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

       (e)    PROPERTY AND EQUIPMENT

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

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

       (f)    PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS

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



                                       29
<PAGE>   30

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

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

       (g)    REVENUE RECOGNITION

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

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

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

              Other revenues include training fees and custom document fees.
              Training fees are recognized when related training is completed.
              Custom document fees are recognized when the goods are shipped.

       (h)    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, depreciation of hardware under the Partnership
              Plan, 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, custom
              document fees and other revenue.

       (i)    STOCK-BASED COMPENSATION

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

       (j)    INCOME TAXES

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



                                       30
<PAGE>   31

       (k)    EARNINGS PER SHARE

              Earnings per share amounts are based on the weighted average
              number of common and dilutive common equivalent shares outstanding
              assuming exercise of all common stock options using the treasury
              stock method. For the year ended June 30, 1995, earnings per share
              amounts are based on weighted average shares outstanding only,
              since using the treasury stock method would be antidilutive in
              periods where the Company has a net loss.

       (l)    USE OF ESTIMATES

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the reported amounts of
              assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the financial statements and the
              reported amounts of revenues and expenses during the reporting
              period. Actual results could differ from those estimates.

       (m)    CONCENTRATION OF MARKET RISK

              The Company markets its products primarily 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.

       (n)    RECLASSIFICATIONS

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

       (o)    NEW ACCOUNTING STANDARD

              In February 1997, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards (SFAS) No. 128,
              Earnings Per Share. SFAS No. 128 establishes standards for the
              computation, presentation, and disclosure of earnings per share
              (EPS), replacing the presentation of currently required Primary
              EPS with a presentation of Basic EPS. It also requires dual
              presentation of Basic EPS and Diluted EPS on the face of the
              income statement for entities with complex capital structures.
              Basic EPS excludes all dilution, while Diluted EPS reflects the
              potential dilution that could occur from the exercise or
              conversion of securities into common stock or from other contracts
              to issue common stock. SFAS No. 128 is effective for financial
              statements for periods ending after December 15, 1997, including
              interim periods, and earlier application is not permitted. When
              adopted, the Company will be required to restate its EPS data for
              all prior periods presented. The Company is in the process of
              evaluating this statement and its impact on the Company's reported
              EPS amounts.


(2)    PROPERTY AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                                               1997              1996
                                                            ----------        ----------
<S>                                                         <C>               <C>       
        Leasehold improvements                              $1,501,349        $1,501,349
        Furniture and fixtures                               1,044,088         1,016,490
        Computer equipment                                   2,919,194         2,399,733
        Office equipment                                       372,264           372,264
                                                            ----------        ----------
                                                            $5,836,895        $5,289,836
                                                            ==========        ==========
</TABLE>




                                       31
<PAGE>   32

(3)    OTHER GENERAL EXPENSES -- NONRECURRING

       Other general expenses -- nonrecurring represents three separate charges
       recorded in 1995 consisting of the write off of unamortized intangible
       assets acquired in 1994, the write off of certain capitalized software
       costs, and costs associated with the 1995 departure of two executives, as
       more fully described below.

       In March 1994, the Company signed an agreement to acquire certain assets
       of LoanStar Systems (LoanStar), a provider of loan processing software
       located in California. The purchase agreement included a noncompete
       agreement, the source code of LoanStar's software, and a list of active
       LoanStar customers. The cost of the assets acquired was $649,510.
       Amortization of the cost of these assets amounted to $221,073 for the
       year ended June 30, 1995, and is included in general and administrative
       expense. During the year ended June 30, 1995, the level of conversions of
       LoanStar customers to the Company's software was significantly below
       management's expectations. As a result, the Company determined that the
       LoanStar assets had no continuing value and wrote off the remaining net
       book value of $330,817 at March 31, 1995.

       Other general expenses -- nonrecurring also includes $391,518
       representing primarily the cost of purchased software acquired in a prior
       year. The software was previously intended for use in one of the
       Company's products. In connection with management's ongoing review of its
       development plans and consideration of alternative future uses of the
       acquired software, the Company determined that this software was of no
       further value in the ongoing development of the Company's product and
       charged off such capitalized costs during the fourth quarter of 1995.

       During the third quarter of 1995, the Company incurred $229,708 of costs
       in connection with the departure of its President and Chief Executive
       Officer and its Vice President of Product Development.

(4)    COMMITMENTS

       (a)    LEASES

              In March 1994, the Company moved into its current premises which
              it leases under a noncancelable operating lease expiring in
              November 1998. The total of the scheduled lease payments is being
              charged to expense on the straight-line method over the life of
              the lease. The lease for the Company's previous premises, into
              which the Company moved in October 1992, remains in effect until
              its expiration in October 1998. The Company negotiated a sublease
              to another tenant for the remaining lease term beginning in March
              1994. Included in deferred rent payable and other lease
              obligations is $142,568 and $322,978 which represents the
              Company's remaining obligation under this lease, net of amounts to
              be received under the sublease at June 30, 1997 and 1996,
              respectively. Accrued liabilities at June 30, 1997 and 1996
              include $223,307 and $67,842, respectively, representing the
              current portion of deferred rent payable.

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

<TABLE>
<CAPTION>
                                                                                 Net
                                          Minimum                              minimum
                                           lease              Sublease          lease
                                          payments            receipts         payments
                                          ---------           ---------       ---------
          <S>  <C>                        <C>               <C>              <C>    
          Year ending June 30:
               1998                         874,974            (248,598)        626,376
               1999                         327,020              (5,257)        321,763
                                          ---------           ---------       ---------
                                          1,201,994            (253,855)        948,139
                                          =========           =========       =========
</TABLE>

              Total rent expense amounted to $379,994, $381,447 and $382,505 for
              the years ended June 30, 1997, 1996, and 1995, respectively.




                                       32
<PAGE>   33

       (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. No contributions were made for the years ended June
              30, 1997, 1996 and 1995. The Company has no other postemployment
              or postretirement benefit plans.

(5)    INCOME TAXES

       Components of income taxes are summarized as follows:

              <TABLE>                                                          
              <CAPTION>                                                        
                                                         1997           1996           1995      
                                                      -----------    -----------    -----------  
              <S>                                     <C>            <C>            <C>          
              Current:                                                                           
                     Federal                          $   580,601    $   291,906    $(1,173,047) 
                     State                                 37,549         18,568         (4,271) 
                                                      -----------    -----------    -----------  
                                Total current             618,150        310,474     (1,177,318) 
                                                      -----------    -----------    -----------  
              Deferred:                                                    
                     Federal                               (2,032)      (151,137)        31,741  
                     State                                   (185)        (5,590)          (353) 
                                                      -----------    -----------    -----------  
                                Total deferred             (2,217)      (156,727)        31,388
                                                      -----------    -----------    -----------  
              Charge in lieu of taxes from employee       
                   stock options                           10,967         96,651        366,604    
                                                      -----------    -----------    -----------  
                                                      $   626,900    $   250,398    $  (779,326) 
                                                      ===========    ===========    ===========  
                                                                            
              </TABLE>                                                      
              
       Income tax expense (benefit) differs from "expected" income tax expense
       (benefit) (computed by applying the U.S. Federal income tax rate of 34%)
       as follows:

              <TABLE>                                                       
              <CAPTION>                                                     
                                                     1997        1996         1995          
                                                   ---------   ---------    ---------       
              <S>                                  <C>         <C>          <C>             
              Computed "expected" tax expense      $ 590,504   $ 232,279    $(648,659)      
                   (benefit)                                                                
              Tax exempt interest                       --          (574)    (129,196)      
              State income taxes, net of Federal      24,660       8,565       (3,052)      
                   benefit                                                                  
              Other                                   11,736      10,128        1,581       
                                                   ---------   ---------    ---------       
                                                   $ 626,900   $ 250,398    $(779,326)      
                                                   ---------   ---------    ---------       
              </TABLE>                                                      
                                                                            
              
       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                       1997        1996
                                                                    ---------    ---------
<S>                                                                 <C>          <C>      
                Deferred tax assets:
                       Allowance for doubtful accounts receivable   $  62,112    $  65,776
                       Deferred software support fees                  59,254       36,662
                       Deferred rent                                  110,646      131,580
                       Accrued expenses                                78,775       69,603
                       Property and equipment                         461,183      299,324
                                                                    ---------    ---------
                                  Total deferred tax assets           771,970      602,945
                Deferred tax liabilities - capitalized software      (811,260)    (644,452)
                                                                    ---------    ---------
                                  Net deferred tax liability        $ (39,290)   $ (41,507)
                                                                    =========    =========
</TABLE>



                                       33
<PAGE>   34

(6)    SHAREHOLDERS' EQUITY

       (a)    PREFERRED STOCK

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

       (b)    STOCK OPTION PLANS

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

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

                  Net income per share:
                      As reported                                   $  .19          $  .07
                      Pro forma                                     $  .14          $  .04
</TABLE>


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

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

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

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



                                       34
<PAGE>   35

(b)          STOCK OPTION PLANS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                       Outstanding options
                                                           --------------------------------------------
                                                              Number of shares                 Weighted
                                              Options      -------------------------------      average
                                             available     1985         1993     Directors     exercise
                                             for grant     Plan         Plan       Plan         price
                                             ---------    --------    --------    --------    ---------
<S>                                           <C>         <C>          <C>         <C>       <C>     
                Balances at June 30, 1994      308,392     661,208      54,608      12,000    $   1.30
                Options granted               (276,900)         --     214,900      62,000        4.00
                Options exercised                   --    (313,790)         --          --         .14
                Options canceled               104,547     (17,150)   (104,547)         --        4.72
                                              --------    --------    --------    --------    
                Balances at June 30, 1995      136,039     330,268     164,961      74,000        2.52
                Increase in shares reserved    
                  under 1993 Plan              600,000          --          --          --          --
                Options granted               (472,275)         --     417,275      55,000        3.45
                Options exercised                   --    (164,050)     (6,500)         --        1.27
                Options canceled               118,774      (3,800)    (68,774)    (50,000)       3.84
                                              --------    --------    --------    --------
                Balances at June 30, 1996      382,538     162,418     506,962      79,000        3.17
                Increase in shares reserved    
                  under Directors Plan         140,000          --          --          --          --
                Options granted               (228,180)         --     219,180       9,000        5.46
                Options exercised                   --     (19,650)       (312)         --         .88
                Options canceled                59,476     (19,150)    (37,476)    (22,000)       4.11

                                              --------    --------    --------    --------
                Balances at June 30, 1997      353,834     123,618     688,354      66,000        3.73
                                              ========    ========    ========    ========
</TABLE>


              Additional information regarding options outstanding as of June
30, 1997 is as follows:

<TABLE>
<CAPTION>
                          Options outstanding                                                   Options exercisable
        --------------------------------------------------------------------------         ----------------------------------
                                                    Weighted-
                                                     average             Weighted-                                 Weighted-
                                                    remaining            average                                    average
           Range of               Number            contractual          exercise               Number              exercise
        exercise prices          outstanding        life (yrs)            price                exercisable           price
        ---------------          -----------        ---------           --------               -----------         ---------
        <S>                      <C>                <C>                 <C>                    <C>                 <C>   
        $  .100 - .500              98,918               3.83             $  .37                  98,918             $  .37
           2.500-3.875             530,976               8.25               3.41                 173,960               3.30
           4.031-5.844             217,278               9.19               5.56                  32,828               4.48
           7.000-8.375              30,800               6.30               7.27                  26,066               7.30
        ---------------          ---------          ---------           --------               ---------           ---------
          $ .100-8.375             877,972               7.92              $3.73                 331,772              $2.86
        ---------------          ---------          ---------           --------               ---------           ---------
</TABLE>

(7)    NET INTEREST AND OTHER INCOME (EXPENSE)

       Net interest and other income (expense) consist of:

<TABLE>
<CAPTION>
                                     1997         1996          1995
                                   ---------    ---------    ---------
                <S>                <C>            <C>          <C>    
                Interest income    $ 746,712      801,434      728,457
                Interest expense     (27,713)     (27,579)     (26,566)
                Other, net               276       37,417      (26,105)
                                   ---------    ---------    ---------
                                   $ 719,275    $ 811,272    $ 675,786
                                   =========    =========    =========

</TABLE>



                                       35
<PAGE>   36


(8)    FINANCIAL INSTRUMENTS

       The Company's financial instruments consist primarily of investments,
       accounts receivable, accounts payable, and accrued liabilities. The
       financial instruments have a short term until maturity or settlement in
       cash and, therefore, the carrying value approximates fair value.

(9)    ACQUISITION OF PRODUCT SOURCE CODE

       On April 4, 1995, the Company entered into a marketing agreement with
       Tuttle & Co. (Tuttle), a California limited partnership to market and
       support its software product, Loan Officer Plus (LOP) for Windows. LOP is
       designed for use on laptop computers and enables loan officers to
       prequalify applications and originate loans in the field. The agreement
       provided that the Company pay Tuttle a license fee for each unit of LOP
       that it sold and certain amounts received by the Company for product
       support. In return, Tuttle provided all regulatory and regular
       enhancements of LOP to the Company.

       Pursuant to their right to terminate the marketing agreement for
       convenience, Tuttle delivered to the Company a notice of termination
       dated September 1, 1995. On October 31, 1995, the effective date of
       termination, the Company received a nonexclusive, perpetual license for
       the LOP source code in exchange for $2 million. With this license, the
       Company received the right to continue to market, develop, and support
       the LOP source code, with no further compensation to Tuttle. The Company
       currently markets this source code under the name MortgageWare Entre.

(10)   QUARTERLY FINANCIAL DATA (UNAUDITED)

       The following table summarizes the unaudited statements of operations for
       each quarter of fiscal 1997 and 1996 (in thousands, except per share
       amounts):


       <TABLE>                                    
       <CAPTION>                               
                                            First             Second             Third             Fourth    
                                         ---------         ---------          ---------         ---------    
       <S>                                  <C>               <C>                <C>               <C>       
       1997                                                                                                  
       Net revenues                         $3,579            $3,516             $3,534            $3,738    
       Gross profit                          2,620             2,530              2,509             2,669    
       Operating income                        318               246                 86               368    
       Net earnings                            326               271                161               352    
       Earnings per share                   $  .05            $  .05             $  .03            $  .06    

       1996                                                                                                  
       Net revenues                         $2,954            $3,109             $3,345            $3,684    
       Gross profit                          1,980             2,113              2,450             2,629    
       Operating income (loss)                (369)             (311)               180               372    
       Net earnings (loss)                    (104)              (76)               242               371    
       Earnings (loss) per share            $ (.02)           $ (.01)            $  .04            $  .06    
                                                                           
       </TABLE>                                                            
       



                                       36
<PAGE>   37

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

       None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   Incorporated by reference to the information under the captions "Election of
Directors," "Continuing Class I Directors, Terms Expiring in 1998," "Nominees
for Election as Class II Directors, Terms Expiring in 1999," "Directors' Fees,"
and "Filing of Forms Pursuant to Section 16 of the Securities Exchange Act of
1934" in the Company's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders (the "Proxy Statement"). Certain information regarding the
executive officers of the Company is set forth in Part I.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       None.

                                     PART IV

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

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

     1. FINANCIAL STATEMENTS

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

     2. FINANCIAL STATEMENT SCHEDULES

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

              Schedule II - Valuation and Qualifying Accounts for the years
              ended June 30, 1997, 1996, and 1995

   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.



                                       37
<PAGE>   38

     3. EXHIBITS.

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

<TABLE>
<CAPTION>

    Exhibit
    Number                                                    Description
    ------                                                    -----------

<S>               <C>                                                  
    3.1(1)        Restated Articles of Incorporation of INTERLINQ Software Corporation
    3.2(1)        Restated Bylaws of INTERLINQ Software Corporation
  10.1(1)(2)      1985 Restated Stock Option Plan
  10.2(1)(2)      1993 Stock Option Plan
  10.3(1)(2)      Stock Option Plan for Non-Employee Directors, as amended
    10.4(1)       Amended and Restated Registration Rights Agreement between
                  INTERLINQ Software Corporation and the partners listed on
                  Schedule A thereto dated as of March 12, 1993
    10.6(1)       Office Lease between Yarrow Bay Office III Limited Partnership
                  and INTERLINQ Software Corporation dated as of July 31, 1992
    10.7(1)       Forms Remarketing Agreement between INTERLINQ Software Corporation and Great
                  Lakes Business Forms, Inc. Dated as of April 10, 1989
    10.8(1)       Form of Indemnification Agreement for Directors and Officers
   10.10(3)       Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI
                  Corporation dated as of July 1, 1993
   10.12(4)       Office sublease between Halliburton Company and INTERLINQ
                  Software Corporation dated January 21, 1994
  10.15(2)(5)     Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
   10.16(5)       Appointment of Licensing Agent and Compliance Delegate Agreement between VMP's
                  Electronic Laser Forms, Inc. A division of CBF Systems, Inc. And INTERLINQ Software
                  Corporation dated October 2, 1995
   10.17(5)       Amendment of Co-marketing Agreement between INTERLINQ Software
                  Corporation and CMCI Corporation dated October 1, 1995
     23.1         Consent of KPMG Peat Marwick LLP
     27.1         Financial data schedule

</TABLE>

(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-1, as amended (Registration No. 33-59502) filed with the
         Securities and Exchange Commission on March 15, 1993, as same exhibit
         number.

(2)      Management contract or compensatory plan or arrangement.

(3)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1993, as same exhibit number.
         Confidential treatment has been requested as to portions of this
         document.

(4)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994, as same exhibit number.

(5)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1996, as same exhibit number.

(6)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarterly period ended September 30, 1995, as same exhibit
         number. Confidential treatment has been requested as to portions of
         this document.




(B)    REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 1997

              None



                                       38
<PAGE>   39

                                                                     Schedule II

                         INTERLINQ SOFTWARE CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS

                    Years ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                  Additions
                                            ----------------------
                            Balance at      Charged to  Charged to
                           beginning of      costs and   other                       Balance at
      Description             year           expenses    accounts     Deductions     end of year
      -----------          ------------     ----------  ----------    ----------     -----------    
<S>                         <C>             <C>         <C>           <C>            <C>           
Allowances for doubtful
     accounts:
Year ended June 30, 1997:
Accounts receivable         $ 187,007       $ 396,986       --        $(407,993)      $ 176,000     
                                                                                               
Year ended June 30, 1996:                                                                          
Accounts receivable           152,287         331,224       --         (296,504)        187,007     
                                                                                                   
Year ended June 30, 1995:                                                                          
Accounts receivable           403,341         704,618       --         (955,672)        152,287     
</TABLE>



                                       39
<PAGE>   40

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 26th day of September, 1997.


                         INTERLINQ SOFTWARE CORPORATION


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


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

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

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

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

/s/      ROBERT J. GALLAGHER                         Director
-------------------------------
Robert J. Gallagher

</TABLE>


                                       40
<PAGE>   41

                         INTERLINQ SOFTWARE CORPORATION

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

   Exhibit #                           Description
------------      ------------------------------------------------------------------------------------
<S>             <C>                                                                               
    3.1(1)      Restated Articles of Incorporation of INTERLINQ Software Corporation
    3.2(1)      Restated Bylaws of INTERLINQ Software Corporation
   10.1(1)(2)   1985 Restated Stock Option Plan
   10.2(1)(2)   1993 Stock Option Plan
   10.3(1)(2)   Stock Option Plan for Non-Employee Directors, as amended
   10.4(1)      Amended and Restated Registration Rights Agreement between
                INTERLINQ Software Corporation and the partners listed on
                Schedule A thereto dated as of March 12, 1993
   10.6(1)      Office Lease between Yarrow Bay Office III Limited Partnership
                and INTERLINQ Software Corporation dated as of July 31, 1992
   10.7(1)      Forms Remarketing Agreement between INTERLINQ Software Corporation and Great
                Lakes Business Forms, Inc. Dated as of April 10, 1989
   10.8(1)      Form of Indemnification Agreement for Directors and Officers
   10.10(3)     Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI
                Corporation dated as of July 1, 1993
   10.12(4)     Office sublease between Halliburton Company and INTERLINQ
                Software Corporation dated January 21, 1994
   10.15(2)(5)  Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
   10.16(5)     Appointment of Licensing Agent and Compliance Delegate Agreement between VMP's
                Electronic Laser Forms, Inc. A division of CBF Systems, Inc. And INTERLINQ Software
                Corporation dated October 2, 1995
   10.17(5)     Amendment of Co-marketing Agreement between INTERLINQ Software
                Corporation and CMCI Corporation dated October 1, 1995
   23.1         Consent of KPMG Peat Marwick LLP
   27.1         Financial data schedule

</TABLE>
----------------------
(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-1, as amended (Registration No. 33-59502) filed with the
         Securities and Exchange Commission on March 15, 1993, as same exhibit
         number.

(2)      Management contract or compensatory plan or arrangement.

(3)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1993, as same exhibit number.
         Confidential treatment has been requested as to portions of this
         document.

(4)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994, as same exhibit number.

(5)      Incorporated by reference to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1996, as same exhibit number.

(6)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarterly period ended September 30, 1995, as same exhibit
         number. Confidential treatment has been requested as to portions of
         this document.



                                       41