INTERLINK COMPUTER SCIENCES INC, 10-K, 1997-09-29

INTERLINK COMPUTER SCIENCES INC
10-K, 1997-09-29
COMPUTER INTEGRATED SYSTEMS DESIGN

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
[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 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-21077

INTERLINK COMPUTER SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 94-2990567
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

47370 FREMONT BOULEVARD
FREMONT, CA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
510-657-9800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the 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 on the closing sale price of the Common Stock on August 31,
1997, as reported on the Nasdaq National Market was approximately $48.7 million.
Shares of Common Stock held by each current executive officer and director and
by each person who is known by the Company to own 5% or more of the outstanding
Common Stock have been excluded from this computation in that such persons may
be deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes.

The number of shares outstanding of the registrant's common stock, par value
$.001 per share, as of August 31, 1997, was 7,565,097.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 1997 Annual Stockholders
Meeting are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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ITEM PAGE

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PART I.
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 24
Item 3. Legal Proceedings................................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.............................. 25

PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................................... 25
Item 6. Selected Financial Data.......................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 28
Item 8. Financial Statements and Supplementary Data...................................... 36
Item 9. Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure.......................................................... 62

PART III.
Item 10. Directors and Executive Officers of the Registrant............................... 62
Item 11. Executive Compensation........................................................... 62
Item 12. Securities Ownership of Certain Beneficial Owners and Management................. 62
Item 13. Certain Relationships and Related Transactions................................... 62

PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 62

SIGNATURE...................................................................................... 68
</TABLE>

ITEM 1. BUSINESS

The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this item under the heading "Risk
Factors."

Interlink Computer Sciences, Inc. ("Interlink" or the "Company") is a
supplier of high-performance solutions for enterprise networked systems
management. Interlink provides software and services which enable customers to
use their IBM and IBM-compatible MVS mainframes as "enterprise servers" in
distributed, heterogeneous client/server network environments. The Company's
products and services enable customers to transport, access and manage
mission-critical data and applications across distributed network environments.
The Company develops and markets network transport products which provide for
enterprise server TCP/IP connectivity, fault tolerance and network file
transfer. Interlink also develops and markets systems management applications
for network security, network backup, archive and restore, distribution of
applications, data and software, network printing and other tools which expand
the functionality of the enterprise server. Total revenues from network
transport products totaled $27 million, $33 million and $36.5 million during
fiscal years 1995, 1996 and

<PAGE>

1997, respectively. Total revenues from the system management applications
totaled $1.0 million and $3.3 million during fiscal years 1996 and 1997,
respectively. On September 18, 1997, the Company acquired the NetLOCK technology
from Hughes Aircraft Company ("Hughes"). NetLOCK is an end-to-end network
security technology that authenticates and encrypts data and helps prevent
security break-ins.

As of June 30, 1997, the Company had approximately 1,330 customers
worldwide. The Company markets and sells its software and services primarily
through its direct sales organization in North America and Europe and, to a
lesser extent, through resellers and international distributors.

INDUSTRY BACKGROUND

Many large organizations depend on centralized mainframe computer
systems to manage mission-critical software applications and to serve as the
repository for essential business data. These systems, along with sophisticated
systems management software, provide highly available computer processing
resources, which are extremely reliable over extended periods of usage, are
scaleable to accommodate a large number of users, and provide for secure
processing and storage of large amounts of data.

Recently, advances in hardware, software and networking technologies
have led to the deployment of client/server systems, in which computing tasks
are distributed throughout a network of computers. Organizations have adopted
client/server networks to obtain the advantages inherent in distributed
computing, such as independent local processing and storage of data, lower
initial cost and efficient use of common software programs.

Organizations are now seeking the technology to integrate mainframe
computers into their client/server networks as "enterprise servers" which, like
other servers on the client/server network, have a specialized purpose and
function. Specifically, the enterprise server and the systems management
applications associated with its use are capable of providing reliable and
efficient systems management, data security, and distribution of data and
applications. Improvements in the cost-effectiveness of mainframe systems have
significantly increased the use of mainframe computers as enterprise servers.

The integration of TCP/IP, an open systems transport protocol, with the
IBM MVS mainframe operating system, enables the connection of centralized
mainframes to distributed client/server networks on a peer-to-peer basis
regardless of the hardware or software used on such networks. Organizations
seeking distributed access to mainframe data, highly reliable computing
resources, and leverage from existing investments in hardware, applications and
training, have seen the integration of the enterprise server into the
client/server network as a necessary evolution. Software applications which
enhance the management of complex computing resources allow client/server
networks to take advantage of the mainframe as an enterprise server. By
recognizing this movement to "network-centric" computing and incorporating
TCP/IP functionality in recent releases of the MVS operating system, IBM has
also acknowledged the emergence of the mainframe as an enterprise server.
Organizations now can take advantage of investments in mainframe computers and
applications by leveraging these investments across the client/server network.

Organizations implementing client/server computing environments which
leverage the benefits of the enterprise server require rapid TCP/IP access and a
new class of software solutions to enable these previously disparate computing
environments to efficiently interoperate. At the network transport level, the
speed, efficiency and reliability of a given transport solution can have a
considerable impact on the effectiveness of the overall computing

<PAGE>

environment, particularly as the volume of data stored and accessed across the
network increases. Organizations which implement high-performance, efficient
network transport solutions are able to lower the computing burden on their
enterprise servers and increase the potential to defer costly hardware upgrades.
At the systems level, the complexity of networks with both centralized and
distributed resources creates the need for robust applications to perform
storage management, software distribution and output management. Customers thus
require both high-performance network transport products and systems management
applications to transport, store and protect critical data and applications.
Furthermore, users require a high level of customer service and support as they
strive to leverage the advantages of both centralized and distributed
architectures in a single seamless network.

THE INTERLINK SOLUTION

Interlink's products enable MVS mainframes to function as enterprise
servers in client/server environments. The Company offers a suite of
high-performance network transport products and systems management applications
which efficiently transport, store and protect the integrity of mission-critical
data and applications. By providing both network transport products and systems
management applications as a single solution, the Company enhances the
customer's ability to manage complex computing resources. The Company believes
its high level of customer service and technical support form a key component of
its enterprise networked systems management solution by addressing the
customer's need to integrate the enterprise server with complex, heterogeneous
client/server networks. With over ten years of experience in the enterprise
networked systems management industry, Interlink provides networking solutions
that build upon its expertise in the integration of the MVS operating system
with TCP/IP and its reputation for high-performance, efficient products.

The Company's principal network transport products, Cisco IOS for S/390
("IOS/390") and TCPaccess, integrate the MVS enterprise server into
client/server networks using open systems TCP/IP protocols. The Company's
systems management applications have been refocused on management and control of
the data center including back-up data from, distribute software to, and allow
printing across the clients and servers on the network, which expands the
functionality of the enterprise server. The Company is also developing the
NetLOCK technology, the end-to-end network security technology it recently
acquired from Hughes.

STRATEGY

Interlink's objective is to become the leading supplier of
high-performance solutions for management and control of the data center. Key
elements of the Company's strategy include:

Expand Functionality of the Enterprise Server. Interlink seeks to
enable customers to leverage the benefits of the enterprise server by
integrating it into client/server networks and by optimizing the utilization of
powerful existing computing resources. The Company's approach to providing
integrated enterprise server-to-network connectivity and systems management
solutions is to develop, market and support a suite of products that
collectively address the needs of the data center, including security,
configuration and administration, problem and performance management,
information management and printing services. To further address the needs of
the enterprise networked systems management market the Company is developing
NetLOCK and intends to continue to upgrade and enhance its existing product
line.

Capitalize on Sales Opportunities. The Company plans to expand its
sales force and dedicate additional resources to capitalize on new sales
opportunities resulting from its acquisition of NetLOCK. The Company intends to
pursue cross-sell opportunities by

<PAGE>

leveraging its existing customer base of approximately 1,075 TCPaccess, 216
HARBOR and 485 DECnet licenses.

Employ Consultative Sales Approach. The Company intends to develop and
maintain strong customer relationships by leveraging the broad range of
expertise of its consultative sales force to address the complexity of network
solutions. This expertise includes knowledge of mainframes, numerous server
operating systems, TCP/IP, security, networking technologies and a variety of
third-party software products. The Company seeks to provide comprehensive
solutions to its customers by examining their current network architectures and
system problems and by configuring solutions that best leverage the use of
enterprise servers and other existing computing resources. The Company believes
that providing a comprehensive solution, using both Interlink and complementary
third-party products, builds long-term customer relationships and facilitates
future add-on sales efforts.

Differentiate Through Superior Customer Support. To support customers
that have implemented complex networks to manage mission-critical applications
and data, the Company provides for local-language customer service and technical
support for both domestic and international customers. This support includes
24-hour, 7 day worldwide telephone support, on-site problem resolution, and
comprehensive consulting and training. The Company believes that this high level
of customer support not only differentiates its solution but also provides
insight into customer needs which influences the Company's future product
development efforts.

Leverage Strategic Relationships. The Company expects to leverage
strategic marketing and development relationships in order to provide a complete
solution to its customers' evolving network systems management needs. The
Company has entered into an alliance with Cisco Systems in January 1997 to
jointly market a software suite that extends multi-protocol networking for MVS
mainframes. In addition, the Company is a member of the IBM S/390 Partners in
Development group, which provides the Company advance notification of
developments in the MVS operating system.

PRODUCTS

The Company's principal software products include network transport
products and systems management applications. The Company's network transport
products provide the communication infrastructure between distributed
client/server networks and the enterprise server. Interlink's systems management
applications allow centralized management of applications and data across
distributed systems. The following table summarizes the Company's software
products and their principal functions:

Product Name Description

Network Transport Products

IOS/390 and TCPaccess Provides TCP/IP networking protocols that
allow MVS mainframes to communicate with
clients and servers.

TCPaccess Fault Tolerant TCPaccess enhanced to provide redundancy
to achieve high levels of reliability in
networks with multiple paths.

<PAGE>

SNS/NFS Allows the enterprise server to act as a
file server in Network File System ("NFS")
environments.

Systems Management Applications

HARBOR Backup Efficiently backs up and restores data on
client/server networks to an enterprise
server.

HARBOR Distribution Manages cataloging, installing, and
up-grading of applications, data files and
software packages across the enterprise.

Enterprise Print Services Manages the printing of enterprise server
applications to network printers.

CICS Programmers Toolkit Simplifies the development of applications
for the CICS on-line transaction
processing environment across TCP/IP
networks.

Network Transport Products

The Company's network transport products, including its IOS/390 and
TCPaccess products, enable peer-to-peer communication and processing between
enterprise servers and heterogeneous network systems. The IOS/390 and TCPaccess
products operate with all IBM System/370 and System/390 and compatible
enterprise servers operating on essentially all MVS operating systems. The
network transport products include a base module and several optional modules.
For the last fiscal year, a typical sale of the Company's network transport
products ranged from $30,000 to $150,000 per enterprise server, based on its
size and customer location.

IOS/390 and TCPaccess. IOS/390 and TCPaccess provides TCP/IP protocols
and common applications such as file transfer, terminal access, electronic mail
and system management. IOS/390 and TCPaccess is manageable from remote Simple
Network Management Protocol ("SNMP") management stations through the SNMP agent
contained in the product.

IOS/390 and TCPaccess includes an Application Programmer Interface
("API") which allows customers to easily write interfaces to applications.

TCPaccess Fault Tolerant. TCPaccess Fault Tolerant helps ensure
continuous operations for mission-critical production environments and allows
user sessions to continue across hardware failures and routing changes by
quickly re-establishing failed connections. This optional product is contained
within IOS/390 and TCPaccess, and is enabled with a software key.

SNS/NFS. SNS/NFS enables LAN clients that support the NFS model to
transparently access the wide variety of file types on the enterprise server.
SNS/NFS gives LAN users the ability to access remote MVS datasets as if they
were local.

Systems Management Applications

<PAGE>

The Company's systems management applications provide centralized
backup, restore, distribution and output management. Following
commercialization, NetLOCK, the end-to-end network security product that
Interlink recently acquired from Hughes, will enhance the Company's systems
management applications product line. For the last fiscal year, a typical
initial sale of the Company's systems management applications ranged from
$15,000 to $75,000, based on the number of servers and clients as well as the
customer's location.

HARBOR Backup. HARBOR Backup provides reliable, centralized backup and
restore for distributed environments. This product efficiently backs up data
stored on clients and servers to the enterprise server. HARBOR Backup features a
file redundancy checker to scan for identical files to avoid duplicative data
movement, a consolidation routine to ensure that a full backup of a server or
client need only be done once, and exclusion rules to eliminate backing up
temporary or system files that would not need to be restored in the event of
loss.

HARBOR Distribution. HARBOR Distribution offers management of
applications, data files and software packages across the enterprise. HARBOR
Distribution enables administrators to catalog, install, upgrade and de-install
applications, data files and software packages for all clients and servers. By
using HARBOR Distribution, customers can eliminate repetitive installation and
upgrade procedures through enterprise level automation. HARBOR Distribution
updates all clients and servers with the most recent application release, before
application processing resumes, and reports the inventory of software for each
client and server on the system. A distributed LAN server can be used to store
files for later delivery to client systems, substantially reducing delivery
times, especially over WANs.

Enterprise Print Services. Enterprise Print Services ("EPS") manages
the printing of enterprise server applications to network printers. Each
printing resource in the enterprise can be utilized from other environments. EPS
resides on the enterprise server, providing bi-directional access from
applications in one environment to printers in the other.

CICS Programmers Toolkit. CICS Programmers Toolkit simplifies the task
of developing applications for the CICS on-line transaction processing
environment that communicate with peer applications in the TCP/IP environment.
Key features of the product include: an easy-to-use API and tools that allow for
more rapid development of applications; efficient operation allowing higher
transaction volumes; and a powerful administrator interface allowing product
configuration, operation and debugging in real-time without adversely affecting
on-line applications.

Other Products

The Company sells a network controller which is the physical hardware
connection between the enterprise server and the network. This product,
manufactured by Bus-Tech, is generally sold with the Company's TCPaccess
products. The list price of the current network controller ranges from $17,000
to $48,000. Sales of network controllers accounted for 15% and 11% of total
revenues in the fiscal years ended June 30, 1996 and 1997, respectively. The
Company's DECnet products provide networking protocols that allow MVS and VM
mainframes to communicate with devices using the DECnet protocol. Although the
Company no longer actively markets this product, the Company derives substantial
maintenance revenues from the DECnet installed customer base. In addition, the
Company has a reseller agreement with Cisco to resell the Cisco 7500 router
family.

SALES, MARKETING AND CUSTOMER SUPPORT

The Company markets and sells its software and services primarily
through its direct

<PAGE>

sales organization and, to a lesser extent, through resellers and international
distributors. The Company intends to develop and maintain strong customer
relations by leveraging the broad range of expertise of its consultative sales
force to address the complexity of network solutions. The Company's large
national and multinational customers require a highly consultative sales
approach and specialized account management due to the technical complexities of
their network environments, their geographically dispersed installations,
systems management needs and centralized decision making processes. The sales
process normally requires a customer trial, which is managed by the Company's
local technical systems engineers to aid the customer in planning and selecting
their enterprise products. The Company believes that its consultative sales
approach provides it with valuable customer feedback which the Company uses to
direct product development. The Company facilitates leasing through various
independent leasing companies for its customers who prefer monthly payment
arrangements, usually over a term of 36 months. As of June 30, 1997, the Company
employed 80 persons in sales, marketing, customer support, and consulting. For
the fiscal years ending June 30, 1996 and 1997, 46% and 50%, respectively, of
the Company's product revenues were derived from international sales and 89% and
83%, respectively, of the Company's product revenues were derived from direct
sales.

Sales

Direct Sales. The Company's sales organization consists of a staff of
software sales professionals based in field sales offices. As of June 30, 1997,
the Company's direct sales force included 20 account executives and 20 technical
pre-sales systems engineers. Field offices are staffed by both sales and
technical pre-sales systems engineers who are located in Atlanta, Chicago,
Dallas, Denver, Iselin, Reston, San Francisco and Washington, D.C. The
international sales organization has offices in Calgary, Koln, London, Madrid,
Paris and Zurich.

Strategic Alliance with Cisco. In January 1997 the Company entered into
a strategic alliance with Cisco Systems, Inc. ("Cisco") pursuant to which Cisco
and the Company agreed to cooperate to develop certain TCP/IP software known as
Cisco IOS for S/390 ("IOS/390"). Although Interlink is an authorized reseller of
the IOS/390 product, which has been available since May 13, 1997, the Company
continues to independently market and sell IOS/390 and TCPaccess. Support for
the IOS/390 sold through Cisco, Cisco's direct sales and reseller channels is
provided by Cisco.

Indirect Distribution Channels. The Company currently has a reseller
relationship with Hitachi Data Systems Corp., which distributes the Company's
products in North America. The Company also sells through international
distributors that provide pre-and post-sale local-language support in Australia,
Belgium, Brazil, Denmark, Finland, Holland, Italy, Japan, Norway, the
Philippines, Singapore, South Africa, Sweden and Venezuela.

Marketing

In support of its direct and indirect sales, the Company conducts
marketing programs to position and promote its products and services. Marketing
personnel engage in a wide variety of activities to support the distribution
channels, including direct mail, advertising, seminars, public relations and
trade shows. In addition, the marketing department also conducts sales and
product training seminars for both the Company's internal sales force and those
of its channel partners. The marketing organization also has a leading role in
product marketing activities, including product management, competitive
positioning and long term product direction.

Customer Support

<PAGE>

For the fiscal years ended June 30, 1996 and 1997, 42% and 37%,
respectively, of the Company's total revenues were derived from maintenance and
consulting. The Company offers an annual maintenance program to its licensees
through its own support organization that includes product updates and
post-sales telephone, electronic mail, Internet and fax hotline support. The
price for annual maintenance for network transport products is typically 15% to
18% of the product price. The price for annual maintenance for HARBOR products
is typically about 12% of the product price. The Company also offers
installation and training services on a fee basis to assist customers in
deploying enterprise wide applications utilizing the Company's products.
Training is offered at the Company's in-house facilities or at the customers'
site. The Company's distributors and resellers also offer first level customer
support to their end users, while relying on the Company for any additional
support as needed. Because the Company's customers depend on the Company's
products to transport, store and protect critical data, the Company believes its
ability to provide a high level of customer service and technical support is
important to its marketing efforts and to the building of long-term customer
relationships.

CUSTOMERS
<TABLE>

As of June 30, 1997, the Company had approximately 1,330 customers,
with no single customer accounting for more than 5% of the Company's net
revenues in any of the last three fiscal years.
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Communications Energy/Utilities Government Services
- -------------- ---------------- ---------- --------
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BellSouth BOC Gases Internal Revenue Svc. Comdisco
Nynex Boston Gas Bureau of Reclamation. Debis (Daimier Benz)
Pacific Telecom British Gas SEC Dun & Bradstreet
Telecom Eirann Florida Power & Light U.S. Dept. of State Lexis-Nexis
Telecomm Italia National Grid U.S. Dept of Justice Reuters
U.S. Sprint National Power U.S. Postal Service
Williams Powergen FBI
Severn Trent Serinf Manufacturing
South Wales Electric Serpro -------------
Consumer/Retail Southern CA Edison Air Prod. & Chemicals
- --------------- Vertix Apple Computers
Argos Health Care Boeing
Estee Lauder ----------- Caterpillar
Federated Systems Financial Services Blue Cross/Blue Shield Consolid. Freightways
Giant Foods ------------------ CHU Nancy Hosp. Gen. Ford
J. Crew Group Alberta Treat.Branches Cox Medical System Mercedes Benz
Johnson & Johnson Banco Imperio Vision Service Plan McDonnel Douglas
Publix SuperMarkets Bank for Int'l Settlem. Otis Elevator
Quaker Oats Bank of Montreal Rolls-Royce
Sara Lee Barclays Insurance Sollac
Sherwin-Williams Commerzbank --------- Sony
Tandy Edward D. Jones Allstate
Mastercard Int'l Abby Life
Republic Natl. Bank Kemper Insurance
SKA Credit Suisse Macif
Wells Fargo NW Mutual Life
Caixa Econ. Fed. State Farm
</TABLE>

TECHNOLOGY

The Company's core technologies are the basis for its enterprise
networked systems

<PAGE>

management products. These technologies allow for the expansion of existing
products and addition of new products to the Company's systems management
architecture.

Network Transport Products

The IOS/390 and TCPaccess product line, the Company's principal network
transport products, was developed within an application architecture consisting
of key components which provide high-performance, efficient operation, rapid
development, reusable code and improved maintainability. These key components
are: (i) TCP/IP Base; (ii) TCP/IP APIs; (iii) TCP/IP Applications; and (iv) IFS
Architecture.

TCP/IP Base. The TCP/IP base technology incorporates a high speed,
efficient transport protocol implementation which allows client/server
applications to communicate using TCP/IP. This software product is a
multi-layered communications module with two basic functions: (i) communicating
via drivers with the LAN controller devices to provide physical network
connectivity; and (ii) implementing protocols to establish interoperability
between TCP/IP environments and the enterprise server. Included within the base
technology are fault tolerant features enabled when the customer purchases
TCPaccess Fault Tolerant. This fault tolerant technology allows TCP/IP to
recover automatically from hardware problems in the network to preserve the
sessions between the enterprise server and remote TCP/IP systems. All portions
of IOS/390 and TCPaccess critical to high performance and efficient operation
are written in assembler language. The base technology was architected and
implemented natively in MVS for the enterprise server environment. Use of
technology porting was minimized to ensure optimum performance and efficiency.
The technology is developed in accordance with Requests for Comments governed by
the Internet Engineering Task Force, and the Company's personnel participate in
the standards development process for key TCP/IP standards.

TCP/IP Application Programming Interfaces. IOS/390 and TCPaccess
contain an API layer to allow independent software vendors ("ISVs") and the
Company's customers to use the TCP/IP technology to develop client/server
applications. A variety of industry standard APIs are provided, including BSD
sockets, X/Open Transport Interface and Sun/ONC RPC/XDR. All of the APIs in
IOS/390 and TCPaccess were architected and designed specifically for the
enterprise server environment to deliver high performance and efficient
operation for ISV and customer applications.

TCP/IP Applications. Certain TCP/IP applications such as file transfer
protocol and tn3270 terminal access are implemented in the same address space as
the TCP/IP base technology. This architecture, in which key servers are in the
same address space, enhances the performance and efficiency of these important
services. The TCP/IP base and application services are implemented as threads
within a multi-threaded environment provided as part of the base connectivity
technology. The use of threading technology provides scalability and permits
large numbers and applications to be supported in IOS/390 and TCPaccess.

IFS Architecture. IFS Architecture ("IFS") is proprietary enterprise
server software that provides for rapid development of systems management
applications within the enterprise server environment. IOS/390 and TCPaccess are
an IFS application. Components of IOS/390 and TCPaccess execute within IFS as
separate processes (e.g., TCP/IP protocol stack, API, domain name resolver, SNMP
agent and others). IFS is written in assembler language for high performance and
low CPU resource usage. Applications developed in IFS can span threads,
processes and address spaces, providing location transparency to developers to
simplify and speed the development of software. IFS also provides common
system-level services for IFS application developers. IFS significantly reduces
the time required to create new IOS/390 and

<PAGE>

TCPaccess applications.

Systems Management Applications

The Company completed its acquisition of the NetLOCK network security
technology on September 18, 1997. The NetLOCK technology represents a class of
security solutions being developed for enterprise-wide, end-to-end protection of
confidential information on the network. The NetLOCK solution enables businesses
to extend their networks to more users over a wide variety of LAN and WAN
technologies and public data network services.

NetLOCK network security software when completed will provide
peer-to-peer, device level authentication; a selection of strong encryption
algorithms (US and International versions); data integrity verification; and
data that is used to identify security attacks. The Company anticipates that the
NetLOCK product line will also deliver a set of features that will simplify
security administration while improving the overall reliability of security
policy implementations. The NetLOCK software is being developed to run on UNIX,
Windows NT, WIN95 and other major platforms, and communicates transparently over
all LANs and WANs using TCP/IP and ultimately on the MVS platform in future
releases.

The HARBOR products were developed within an application architecture
consisting of key components which provide high-performance, efficient
operation, rapid development, reusable code, portable code and improved
maintainability. These key components are: (i) HARBOR Transport Services; (ii)
HARBOR Transport Gateway; (iii) HARBOR Multi-System Platform; (iv) HARBOR Policy
Database; and (v) HARBOR Client User Interface.

HARBOR Transport Services. The HARBOR Transport Services is proprietary
networking middleware software that connects a large variety of clients,
servers, and networks in a customer's distributed system. HARBOR Backup, HARBOR
Distribution, HARBOR Transport Gateway and HARBOR Distributed Storage Server all
make use of HARBOR Transport Services. The technology enables HARBOR developers
to use one programming interface for network access, regardless of the
underlying transport protocol, shielding them from the issues and difficulties
that can be encountered in programming to individual network transport protocol
interfaces. HARBOR Transport Services can automatically recover from network
failures, including retrying operations over an alternate protocol,
transparently to the application. This single networking API, and other APIs
within HARBOR Transport Services, are key to being able to develop portable
networked systems management applications on a variety of common client/server
platforms.

HARBOR Transport Gateway. The HARBOR Transport Gateway is an
application built upon the HARBOR Transport Services which connects a large
variety of clients, servers and networks in a customer's distributed system.
This technology provides transparent conversion between LAN/WAN transport
protocols including TCP/IP, APPC, 3270, IPX/SPX, Asynch and others. The HARBOR
Transport Gateway permits a customer to utilize two or more dissimilar network
transport protocols in their environment, with the gateway performing the
mapping of HARBOR application data streams from one transport to another.

HARBOR Multi-System Platform. The HARBOR Multi-System Platform ("MSP")
is proprietary enterprise server software that permits rapid development of
applications within the HARBOR environment. The HARBOR Backup and HARBOR
Distribution products are MSP applications. Applications developed in MSP can
span threads, processes, address spaces and machines, providing location
transparency to developers to simplify and speed development of

<PAGE>

software. The support within MSP for threading is a key to providing
scalability, performance and efficiency for HARBOR applications. MSP also
provides common system-level services for HARBOR software developers.

PRODUCT DEVELOPMENT

The Company has made substantial investments in research and
development to produce high-performance network transport products and systems
management applications. As of June 30, 1997, the Company's research and
development and quality assurance organization consisted of 58 employees. The
Company intends to enhance its existing product offerings and to introduce
additional products for the enterprise networked systems management market. The
Company uses standard product development methodologies in the design and
development of its products to ensure efficiency in development and high product
quality. In addition, the Company solicits input from its customers to gain
insight into their specific network requirements, enabling the research and
development staff to enhance existing products and create new products to suit
the market. The Company designs its products to be portable and adaptable to new
client/server hardware and software environments. Interlink uses software
development tools such as configuration management, code testing, and
performance monitoring to aid in this development. The Company out sources its
host computing resource requirements for cost effectiveness and efficiency. To
date, most of the Company's core technologies for its network transport products
and systems management applications have been acquired and have not been
developed internally. While the Company expects that certain of its new products
will be developed internally, the Company may also, based on timing and cost
considerations, acquire technology and products.

The Company has completed the development of TCPaccess Version 4.1,
which supports MVS open edition APIs. The Company intends to develop additional
versions to provide increased performance, efficiency and scalability. In
addition, the Company acquired certain network security technology, known as
NetLOCK, from Hughes on September 18, 1997, and will be developing this
technology for commercialization. There can be no assurance that the Company's
new or enhanced products will be timely developed, or at all, and even if
developed, that such products will achieve market acceptance.

COMPETITION

General. The market in which the Company operates is intensely
competitive and is characterized by extreme price competition and rapid
technological change. The competitive factors influencing the markets for the
Company's products include product performance, price, reliability, features,
scalability, interoperability across multiple platforms, adherence to industry
standards, and the provision of support and maintenance services. The Company
competes with a number of companies, principally IBM, that specialize in one or
more of the Company's product lines, and such competitors may have greater
financial, technical, sales and marketing resources to devote to the
development, promotion and sale of their products, and may have longer operating
histories, greater name recognition, and greater market acceptance for their
products and services compared to those of the Company. There can be no
assurance that the Company's current competitors or any new market entrants will
not develop networked systems management products or other technologies that
offer significant performance, price or other advantages over the Company's
technologies, the occurrence of which would have a material adverse effect on
the Company's business, financial condition and results of operations.

Network Transport Products. The Company sells its IOS/390 and TCPaccess
suite of products principally to customers who have installed IBM mainframes
using the MVS operating

<PAGE>

system. The Company's main competition for its IOS/390 and TCPaccess products is
IBM. IBM sells TCP/IP and associated products for its MVS mainframe systems that
compete directly with the Company's IOS/390 and TCPaccess product line. IBM has
continued to enhance the functionality and performance of its TCP/IP product,
which enhancements may require the Company to update its IOS/390 and TCPaccess
product to remain competitive. There can be no assurance that the Company will
be able to make the improvements in its IOS/390 and TCPaccess products necessary
to remain competitive with IBM or that any such improvements by IBM would not
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition, IBM includes TCP/IP communications software
in a bundle of software provided to purchasers of their OS/390 operating system.
An IBM customer can request to have the IBM TCP/IP product removed from the
software bundle provided by IBM and thereby reduce the purchase price of the
system purchased. The reduction in the purchase price related to the exclusion
of IBM's TCP/IP for MVS product from its software bundle, in certain model
groups, is substantially lower than the price the customer would have to pay to
purchase the Company's corresponding IOS/390 and TCPaccess products. Because in
IBM model groups IBM's TCP/IP product is less expensive to purchase than the
Company's corresponding IOS/390 and TCPaccess products in the same model groups,
there could be substantial erosion of the Company's margins if the Company
reduces the price of its IOS/390 and TCPaccess products in order to compete
against IBM, which erosion would have a material adverse effect on the Company's
business, financial condition and results of operations. Also, IBM could in the
future decide to include its TCP/IP product in the bundle of software provided
to purchasers of its OS/390 operating system without charge. The Company
believes that any reduction in price of the IBM TCP/IP products, or the bundling
of those products without charge in its OS/390 operating system, would require
the Company to either reduce the prices of its IOS/390 and TCPaccess products or
substantially increase sales and marketing expenses, or both, in order to
continue to sell its IOS/390 and TCPaccess products, which actions would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if IBM were to develop or design its OS/390
operating system or other products so that its TCP/IP product cannot be removed,
customers who otherwise would have been inclined to purchase the Company's
IOS/390 and TCPaccess products may not do so, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company derives a substantial portion of its
revenues from maintenance agreements with its IOS/390 and TCPaccess customers.
If the Company sells fewer IOS/390 and TCPaccess products, either due to
competition from IBM or otherwise, the Company's maintenance revenues would be
reduced, which would have a material adverse effect on the Company's business,
financial condition and results of operations. If IBM reduces the combined price
of its TCP/IP products and maintenance, IBM's combined price for its TCP/IP
products and maintenance would be more price competitive with the Company's
product line, and the Company's product and maintenance revenues would be
adversely affected. The Company also competes with IBM and Apertus, in the
network controller market, where the Company resells the network controllers
manufactured by Bus-Tech and the 7500 routers manufactured by Cisco to provide
the hardware connection which links the enterprise server to the client/server
network.

System Management Applications. The primary competitors for the
Company's HARBOR Backup and HARBOR Distributed Storage Server products are IBM,
Innovation Data Processing, Inc., Panorama Software and Storage Technology. The
Company's competition for the HARBOR Distribution product includes IBM and
Novadigm, Inc. ("Novadigm"). IBM is aggressively marketing its ADSM backup
product, which is included in the System View package on IBM's UNIX system, AIX.
There can be no assurance that IBM will not include the ADSM backup products in
a software "bundle" with the sale of its mainframe hardware systems. The
bundling of competing software products with mainframe hardware systems could
have a

<PAGE>

material adverse effect on the Company's business, financial condition and
results of operations. The Company also competes with software vendors who
develop and market products for UNIX and Windows NT operating systems, such as
Microsoft, Computer Associates International, Inc., EMC Corporation,
Hewlett-Packard Company, Legato Systems, Inc. ("Legato"), Novadigm, PLATINUM
Technology, Inc., Seagate, Sterling Software Inc., Sun Microsystems, Inc. and
Veritas Software which are focusing on enterprise systems management
applications. Although the Company has signed a strategic marketing agreement
with Legato, the Company is still a competitor of Legato in the storage
management market. The Company also expects increased competition from vendors
of TCP/IP-to-SNA gateway products, including such companies as, which are
focusing on enterprise systems management applications. Microsoft, Novell, Inc.,
Apertus and CNT/Brixton Systems, Inc. Competition from these companies could
increase due to an expansion of their product lines or a change in their
approaches to enterprise systems management or networking products. The bundling
of network transport software with a network controller by these competitors
could prevent the Company from selling TCPaccess to the customers of these
competitors, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

Upon commercialization of the NetLOCK technology, the Company expects
to compete with network security companies such as McAfee Associates, Inc.,
Security Dynamics Technologies, Inc., Cylink, Time Step, Red Creek
Communications Inc., Pretty Good Privacy, Inc., V-One Technologies, Inc. and
Security First Technologies, Inc. as well as with existing security software
that is already available on existing operating network systems.

Other Factors. The Company's ability to compete successfully depends on
many factors, including the Company's success in developing new products that
implement new technologies, performance, price, product quality, reliability,
success of competitors' products, general economic conditions, and protection of
Interlink products by effective utilization of intellectual property laws. In
particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new products could result in price
reductions which would adversely affect the Company's profitability. There can
be no assurance that the Company's current or other new competitors will not
develop enhancements to, or future generations of, competitive products that
offer superior price or performance features, that the Company will be able to
compete successfully in the future, or that the Company will not be required to
incur substantial additional investment costs in connection with its
engineering, research, development, marketing and customer service efforts in
order to meet any competitive threat. The Company expects competition to
intensify, and increased competitive pressure could cause the Company to lower
prices for its products, or result in reduced profit margins or loss of market
share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company's success and ability to compete is dependent in part upon
its proprietary information. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, software security measures, license
agreements and nondisclosure agreements to protect its proprietary technology
and software products. There can be no assurance, however, that such protection
will be adequate to deter misappropriation, deter unauthorized third parties
from copying aspects of, or otherwise obtaining and using, the Company's
software products and technology without authorization, or that the rights
secured thereby will provide competitive advantages to the Company. In addition,
the Company cannot be certain that others will not develop substantially
equivalent or superseding proprietary technology, or that equivalent products
will not be marketed in competition with the Company's products, thereby
substantially

<PAGE>

reducing the value of the Company's proprietary rights. Furthermore, there can
be no assurance that any confidentiality agreements between the Company and its
employees or any license agreements with its customers will provide meaningful
protection for the Company's proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.

There can be no assurance that others will not independently develop
similar products or duplicate the Company's products. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.

While the Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that the Company will not receive future communications from third parties
asserting that the Company's products infringe, or may infringe, the proprietary
rights of third parties. The Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the event of a successful claim of
product infringement against the Company and failure or inability of the Company
to develop non-infringing technology or license the infringed or similar
technology, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Any such claims could be time consuming, result in costly
litigation, or lead the Company to enter into royalty or licensing agreements
rather than litigating such claims on their merits. Moreover, an adverse outcome
in litigation or similar adversarial proceedings could subject the Company to
significant liabilities to third parties, require expenditure of significant
resources to develop non-infringing technology, require disputed rights to be
licensed from others or require the Company to cease the marketing or use of
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.

EMPLOYEES

As of June 30, 1997, the Company and its subsidiaries employed a total
of 163 persons, of which 56 are in sales and marketing, 58 are in research and
development and quality assurance, 24 are in customer support and 25 are in
finance and administration. Interlink employs 102 persons in the United States,
35 persons in Canada, and 26 persons in Europe. The Company's continued success
will depend on its ability to attract and retain key employees. No employees are
represented by a labor union, and the Company considers its employee relations
to be good.

Risk Factors

<PAGE>

In addition to the other information in this report on Form 10-K, the
following risk factors should be considered carefully in evaluating the Company
and its business:

Dependence on Strategic Relationships

Alliance with Cisco. In January 1997 the Company entered into a
strategic alliance with Cisco pursuant to which Cisco and the Company agreed to
cooperate to develop the IOS/390 product, which has been available since May 13,
1997. Cisco has not guaranteed the Company any minimum sales revenues in
connection with its sales of the IOS/390 product, and there can be no assurance
that the Company will receive any revenues therefrom. In addition, there can be
no assurance that Cisco will participate with the Company in jointly marketing
the IOS/390 product. The joint marketing of these products is currently the only
manner in which these products are being marketed. This is a new marketing
relationship for the Company which previously sold its products through its
direct sales force with distributors. The Company does not know at this time
what effect this marketing relationship will have on the sales cycle and on
obtaining current sales information for planning purposes. In addition, customer
price quotes are managed by Cisco.

The Company has no significant experience working with Cisco, and the
alliance with Cisco is subject to all the risks inherent in such strategic
relationships including the failure of the parties to meet their respective
obligations under the terms of the alliance, the risk of loss of rights to
important intellectual property either jointly developed in connection with the
alliance or otherwise, and the risk of a dispute over key provisions of the
alliance. There can be no assurance that the parties will meet their objectives
under the terms of the alliance. The failure of either the Company or Cisco to
meet their obligations under the terms of the alliance would have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, either Cisco or the Company may terminate the
relationship upon 90 days written notice.

The Company is currently investing, and plans to continue to invest,
significant resources to develop additional strategic relationships, and such
investments could adversely affect the Company's operating margins. The Company
believes that its success in penetrating markets for its products depends in
large part on its ability to maintain these relationships, to cultivate
additional relationships and to cultivate alternative relationships if
distribution channels change. There can be no assurance that any distributor,
system integrator or strategic partner will not discontinue its relationship
with the Company, form competing arrangements with the Company's competitors, or
disrupt the Company's other strategic relationships.

Dependence on Distributors

The Company's sales are primarily made through the Company's direct
sales force and the Company's distributors in some international markets. The
Company is currently investing, and plans to continue to invest, significant
resources to develop new strategic marketing relationships, which investments
could adversely affect the Company's operating margins. The Company believes
that its success in penetrating markets for its products depends in large part
on its ability to maintain its existing marketing and distribution
relationships, to cultivate additional relationships and to cultivate
alternative relationships if distribution channels change. There can be no
assurance that any distributor, systems integrator or strategic partner will not
discontinue its relationship with the Company, for competing arrangements with
the Company's competitors, or dispute the Company's other strategic
relationships.

<PAGE>

The loss of, or a significant reduction in revenues from, the Company's
international distributors through which the Company sells certain of its
products could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, if one of the
Company's distributors declares bankruptcy, becomes insolvent, or is declared
bankrupt before the distributor remits to the Company the payments for the
Company's products, the Company may not be able to obtain the revenues to which
it would be entitled for sales made by such distributor prior to the bankruptcy
or insolvency proceeding. In addition, the Company's distributors generally
offer other products and these distributors may give higher priority to sales of
such other products.

The Company is involved in a commercial dispute and litigation with a
former distributor. Should the distributor prevail on its claims, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Legal Proceedings."

In addition, the Company has received notice of a claim from its
distributor in Denmark. See "Legal Proceedings."

Dependence on Current Products

During the fiscal years ended June 30, 1996 and 1997, sales of the
network transport products, excluding maintenance and hardware, accounted for
approximately 33% and 37%, and, including related maintenance and hardware,
accounted for approximately 66% and 69%, respectively, of the Company's total
revenues. The Company's operating results have historically been significantly
dependent upon sales of the network transport products. A portion of the
maintenance revenues are from historical customers of the Company's DECnet
product. The Company no longer actively markets the DECnet product, and
maintenance revenues from DECnet customers have declined each year since the
fiscal year ended June 30, 1993, and are expected to continue to decline.

Since its availability on May 13, 1997, the Company has experienced
difficulty in deriving significant revenues from sales by Cisco or the Company
of the IOS/390 product. In addition, the Company has experienced difficulty in
deriving significant revenues from sales of the HARBOR products since the
acquisition of New Era and the HARBOR product line in December 1995. The
Company's operating results are currently dependent upon continued IOS/390
product sales by both Cisco and the Company and upon continued sales of HARBOR
and other third-party products. The failure by either Cisco or the Company to
increase sales levels of the IOS/390 product or the failure by the Company to
maintain sales levels of the HARBOR products could adversely affect the
Company's results of operations.

Reliance on IBM and Emergence of the Mainframe as an Enterprise Server

The Company's current software products are designed for use with IBM
and IBM-compatible mainframe computers. Specifically, these software products
target users of the MVS operating system, the Customer Information Control
System communications subsystem and the IMS and DB2 database management systems.
As a result, future sales of the Company's existing products and associated
recurring maintenance revenues are dependent upon continued use of mainframes
and their related systems software. In addition, because the Company's products
operate in conjunction with IBM systems software, changes to IBM systems
software may require the Company to adapt its products to these changes, and any
inability to do so, or delays in doing so, may adversely affect the Company's
business, financial condition and results of operations. Currently, TCP/IP is
the communications protocol for the Internet and is being adopted by some
organizations as the communications protocol for their client/server local area

<PAGE>

networks and wide area networks. This adoption has allowed IBM MVS mainframe
computers to act as enterprise servers on such networks. The use of mainframes
as enterprise servers is relatively new and still emerging. The Company's future
financial performance will depend in large part on the acceptance and growth in
the market for centralized network management. Adoption of another
communications protocol on client/server networks could make TCP/IP
communication not viable, which would undermine the demand for the Company's
IOS/390 and TCPaccess product, and have a material adverse effect on the
Company's business, financial condition and results of operations.

Competition

General. The market in which the Company operates is intensely
competitive and is characterized by extreme price competition and rapid
technological change. The competitive factors influencing the markets for the
Company's products include product performance, price, reliability, features,
scalability, interoperability across multiple platforms, adherence to industry
standards, and the provision of support and maintenance services. The Company
competes with a number of companies, principally IBM, that specialize in one or
more of the Company's product lines, and such competitors may have greater
financial, technical sales and marketing resources to devote to the development,
promotion and sale of their products, and may have longer operating histories,
greater name recognition, and greater market acceptance for their products and
services compared to those of the Company. There can be no assurance that the
Company's current competitors or any new market entrants will not develop
networked systems management products or other technologies that offer
significant performance, price or other advantages over the Company's
technologies, the occurrence of which would have a material adverse effect on
the Company's business, financial condition and results of operations.

Network Transport Products. The Company historically sold its TCPaccess
suite of products principally to customers who had installed IBM mainframes
using the MVS operating system. The Company and Cisco have begun jointly
marketing with IOS/390 product. The Company's main competition for its IOS/390
and TCPaccess products is IBM. IBM sells TCP/IP and associated products for its
MVS mainframe systems that compete directly with the IOS/390 product. IBM has
continued to enhance the functionality and performance of its TCP/IP product. In
addition, IBM's OS/390 operating system, which includes TCP/IP communications
software in a bundle of software provided to purchasers of OS/390, has been and
is aggressively marketed by IBM, and the Company believes it has lost and may
continue to lose sales of the Company's IOS/390 and TCPaccess products as a
result. IBM has in some cases included and may continue to include its TCP/IP
product in the bundle of software provided to purchasers of its OS/390 operating
system without charge. The Company believes that any general reduction in price
of the IBM TCP/IP products, or the widespread bundling of those products without
charge in its OS/390 operating system, would make marketing of the Company's
IOS/390 and TCPaccess products difficult, which would have a material adverse
effect on the Company's business, financial condition and results of operations.

System Management Applications.

The primary competitors for the expected NetLOCK products based on the
Company's recently acquired end-to-end network security product, is McAfee
Associates, Inc., Security Dynamics Technologies, Inc., Cylink, Time Step, Red
Creek Communications Inc., Pretty Good Privacy, Inc. V-One Technologies, Inc.
and Security First Technologies, Inc. In addition, security products comparable
to NetLOCK are currently available and are already incorporated

<PAGE>

into some operating systems, thereby significantly diminishing the market for
NetLOCK.

The primary competitors for the Company's HARBOR Backup and HARBOR
Distributed Storage Server products are IBM, Innovation Data Processing, Inc.,
Panorama Software and Storage Technology. The Company's competition for the
HARBOR Distribution product includes IBM and Novadigm, Inc. ("Novadigm"). IBM is
aggressively marketing its ADSM backup product, which is included in the System
View package on IBM's UNIX system, AIX. There can be no assurance that IBM will
not include the ADSM backup products in a software "bundle" with the sale of its
mainframe hardware systems. The bundling of competing software products with
mainframe hardware systems could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
competes with a number of software vendors who develop and market products for
UNIX and Windows NT operating systems, such as Microsoft, Computer Associates
International, Inc., EMC Corporation, Hewlett-Packard Company, Legato, Novadigm,
PLATINUM Technology, Inc., Seagate, Sterling Software Inc., Sun Microsystems,
Inc. and Veritas Software. Although the Company has signed a strategic marketing
agreement with Legato, the Company is still a competitor of Legato in the
storage management market. Competition from these companies could increase due
to an expansion of their product lines or a change in their approaches to
enterprise systems management or networking products. The bundling of network
transport software with a network controller by these competitors could prevent
the Company from selling the IOS/390 product to the customers of these
competitors, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

Dependence on Key Personnel

The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified technical, sales, marketing and
managerial personnel. The Company's President and Chief Executive Officer
resigned effective May 22, 1997, and a member of the Company's Board of
Directors became the Company's acting Chief Executive Officer for an interim
period until a new Chief Executive Officer can be identified. In addition, the
Company's Vice President of Worldwide Sales, who tendered his resignation during
the first half of 1997 agreed to remain with the Company until January 1, 1998.
Barbara Booth, Vice President of Research and Development will relocate from the
Company's headquarters to Brea, California to manage the Company's NetLOCK
acquisition. While the Company intends to fill these positions, experienced
executive-level sales, marketing, and research and development

<PAGE>

professionals in the Company's industry are in high demand and may not be
attracted and retained on terms advantageous to the Company. The competition for
qualified personnel in the software industry (including engineers skilled in MVS
operating systems) is intense, and the loss of any such persons, as well as the
failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to continue to attract and retain the qualified personnel necessary for the
development of its business. The Company has employment agreements with certain
executive officers, but such agreements do not ensure their continued service to
the Company or prevent their competition with the Company following a
termination of employment. The Company does not maintain key man life insurance
on the lives of its key employees.

New TCP/IP Products and Rapid Technological Change

The markets for the Company's network transport products and systems
management applications are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and rapid
changes in customer requirements. The Company believes that its future success
will depend upon its ability to develop, manufacture and market products which
meet changing user needs, to continue to enhance its products and to develop and
introduce in a timely manner new products that take advantage of technological
advances, keep pace with emerging industry standards, and address the
increasingly sophisticated needs of its customers. There can be no assurance
whether TCP/IP will continue to be accepted as a communications protocol on
client/server networks. Furthermore, there can be no assurance that the Company
will be successful in acquiring, developing or marketing, on a timely basis,
product enhancements or new products (including the IOS/390 product and
NetLOCK), either independently or with strategic partners, that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of these products, or that any such new products or
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. The Company's failure or inability to adapt its
products to technological changes or to acquire or develop new products
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.

The introduction or announcement of products by the Company or one or
more of its competitors, including, but not limited to IBM, embodying new
technologies, or changes in customer requirements or the emergence of new
industry standards and practices could render the Company's existing products
obsolete and unmarketable. There can be no assurance that the introduction or
announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer purchasing the existing products
of the Company or that the Company will successfully manage the transition from
older products. Such deferment of purchases or inability to manage the
transition of products could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that the Company will successfully identify new product
opportunities, develop and bring to market in a timely manner such new products,
or that products or technologies developed by others will not render the
Company's products or technologies noncompetitive or obsolete.

Product Errors; Product Liability

Software products as complex as those offered and being developed by
the Company often contain undetected errors or failures when first introduced or
as new versions are released. Testing of the Company's products is particularly
challenging because it is difficult to simulate

<PAGE>

the wide variety of computing environments in which the Company's customers may
deploy its products. Accordingly, there can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found after commencement of commercial shipments, resulting in lost revenues,
loss of or delay in market acceptance and negative publicity about the Company
and its products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
in the process of commercializing NetLOCK the Company may detect errors or
failures that delay or prevent commercialization, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's license agreements with customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. The limitation of liability provisions contained in such
license agreements may not be effective under the laws of some jurisdictions,
particularly if the Company in the future relies on "shrink wrap" licenses that
are not signed by licensees. The Company's products are generally used to manage
data critical to organizations, and as a result, the sale and support of
products by the Company may entail the risk of product liability claims. A
successful liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Fluctuations in Operating Results; Absence of Backlog; Seasonality

The Company's operating results have historically been subject to
quarterly fluctuations due to a variety of factors. The Company has typically
sold its products through a trial process to allow customers to evaluate the
effectiveness of the Company's products before determining whether to proceed
with broader deployment of such products. The Company's sales cycle, from the
date the sales agent first contacts a prospective customer to the date a
customer ultimately purchases the Company's product, has typically been three to
six months for the IOS/390 and TCPaccess products and six to nine months for the
HARBOR products. The sales cycle for the IOS/390 product has not been
established due to limited selling and revenue experience with the IOS/390
product, nor has the sales cycle for NetLOCK been established due to its lack of
commercialization. There can be no assurance that customers will purchase the
Company's products after a trial period or that the Company's sales cycle will
not lengthen, exposing it to the possibility of shortfalls in quarterly
revenues, which could have a material adverse effect on the Company's business,
financial condition or results of operations and cause results to vary from
period to period. The Company's operating results may also be affected by the
seasonality on fluctuations of Cisco sales, if any, of the IOS/390 product. The
Company's maintenance revenue is subject to fluctuations depending on the
customers choice in installing IOS/390 systems, which will be supported by
Cisco, rather than TCPaccess which is supported by the Company. The Company's
operating results will also be affected by general economic and other conditions
affecting the timing of customer orders and capital spending, and order
cancellations or rescheduling.

The Company operates with very little backlog and most of its product
revenues in each quarter result from orders closed in that quarter, and a
substantial majority of those orders are completed at the end of that quarter.
The Company establishes its expenditure levels for sales, marketing, product
development and other operating expenses based in large part on its expectations
as to future revenues, and revenue levels below expectations could cause
expenses to be disproportionately high. If revenues fall below expectations in a
particular quarter, operating results and net income are likely to be materially
adversely affected. Any inability of the Company to adjust spending to
compensate for failure to meet sales forecasts or to collect accounts
receivable, or any unexpected increase in product returns or other costs, could
magnify

<PAGE>

the adverse impact of such events on the Company's operating results.

The Company's business has historically experienced and is expected to
continue to experience significant seasonality. The Company has had higher sales
of its software products in the quarters ending in December and June and weaker
sales in the quarters ending in September and March. The decrease in product
revenues in the quarters ending in September is due to the international
customer seasonal buying patterns. The quarters ending in March are historically
weak due to government and large organization annual budgeting cycles. The
impact of IOS/390 revenues, if any, on this pattern is not certain. Due to the
foregoing factors, quarterly revenue and operating results are likely to vary
significantly in the future and period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarters the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.

Integration of Acquisitions; Customer Acceptance and Scalability of New
Products; History of Acquired Technologies

There can be no assurance that the Company will be successful in
integrating the operations and personnel associated with its recent acquisition
of the NetLOCK technology, incorporating the NetLOCK technology into its product
lines, successfully commercializing the NetLOCK technology by the summer of 1998
or at all, deriving significant future sales therefrom, establishing and
maintaining uniform standards, controls, procedures and policies, or overcoming
other problems that may be encountered in connection with the acquisition and
commercialization of such technology. To the extent that the Company is unable
to accomplish the foregoing, the Company's business, financial condition and
results of operations may be materially adversely affected. Further development
of the NetLOCK technology is required, and there can be no assurance that the
Company can successfully develop the NetLOCK technology. In addition, even if
successfully developed there can be no assurance of customer acceptance of the
products.

To date, the Company's core technologies for its principal network
transport products and systems management applications have been acquired and
have not been developed internally. There can be no assurance that the Company
will have the opportunity to successfully acquire or develop new technologies in
the future or that such technology, if acquired, can be successfully integrated
and commercialized by the Company. Specifically, there can be no assurance that
the Company can successfully commercialize NetLOCK by the summer of 1998 or at
all. An inability to acquire, develop or commercialize new technologies would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may also seek to acquire or invest in
businesses, products or technologies that expand, complement or otherwise relate
to the Company's current business or product line. There can be no assurance
that such acquisitions will be successfully or cost-effectively integrated into
the Company's current operations, or that the acquired technologies will provide
the necessary complement to the Company's current products. If the Company
consummates additional acquisitions in the future that must be accounted for
under the purchase method of accounting, such acquisitions would likely increase
the Company's amortization expenses. In addition, any such acquisitions would be
subject to the risks of integration mentioned above. The Company does not
currently have any understandings, commitments or agreements with respect to any
potential acquisition or corporate partnering arrangements, nor is it currently
engaged in any discussions or negotiations with respect to any such transaction.

Reliance on and Risks Associated with International Sales

<PAGE>

During the fiscal years ended June 30, 1996 and 1997, 43% and 45%,
respectively, of the Company's total revenues were derived from sales to
international customers. The Company's international sales have been primarily
to European markets, and sales are generally denominated in local currencies.
The Company expects that international revenue will decline as a percentage of
total revenue but continue to represent a significant portion of its total
revenue. Some of the Company's international subsidiaries have been restructured
to act as resellers of the IOS/390 product. To the extent this restructuring is
unsuccessful, the Company's results of operations could be adversely affected.
Although the Company plans to focus its initial NetLOCK sales efforts on the
U.S. market, the regulatory environment with respect to sales of NetLOCK to
international customers is complex and uncertain. Should the Company wish to
sell NetLOCK internationally it may be unable to do so or may be required to
incur considerable regulatory costs to do so. Sales to international customers
are subject to additional risks including longer receivables collection periods,
greater difficulty in accounts receivable collection, failure of distributors to
report sales of the Company's products, political and economic instability,
nationalization, trade restrictions, the impact of possible recessionary
environments in economies outside the United States, reduced protection for
intellectual property rights in some countries, currency fluctuations and tariff
regulations and requirements for export licenses. There can be no assurance that
foreign intellectual property laws will adequately protect the Company's
intellectual property rights. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.
Substantially all of the Company's distribution and other agreements with
international distributors require any dispute between the Company and any
distributor to be settled by arbitration. Under these agreements, the party
bringing the action, suit or claim is required to conduct the arbitration in the
domicile of the defendant. The result is that, if the Company has a cause of
action against a party, it may not be feasible for the Company to pursue such
action, as arbitration in a foreign country could prove to be excessively costly
and have a less certain outcome depending on the laws and customs in the foreign
country. These international factors could have a material adverse effect on
future sales of the Company's products to international end users and,
consequently, the Company's business, financial condition and results of
operations.

Most of the Company's international sales are denominated in local
currencies. The Company hasn't historically attempted to reduce the risk of
currency fluctuations by hedging except in certain limited circumstances where
the Company has held an account receivable expected to be outstanding for a
period of at least 6 months. The Company may be disadvantaged with respect to
its competitors operating in foreign countries by foreign currency exchange rate
fluctuations that make the Company's products more expensive relative to those
of local competitors. The Company may attempt to reduce these risks by
continuing to hedge in certain limited transactions in the future. Accordingly,
changes in the exchange rates or exchange controls may adversely affect the
Company's results of operations. There can be no assurance that the Company's
current or any future currency exchange strategy will be successful in avoiding
exchange related losses or that any of the factors listed above will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.

Dependence Upon Proprietary Technology; Risk of Third-Party Claims of
Infringement

<PAGE>

from copying aspects of, or otherwise obtaining and using, the Company's
software products and technology without authorization, or that the rights
secured thereby will provide competitive advantages to the Company.

There can be no assurance that others will not independently develop
similar products or duplicate the Company's products. There can be no assurance
that the steps taken by the Company to protect its proprietary technology will
prevent misappropriation of such technology, and such protections may not
preclude competitors from developing products with functionality or features
similar to or superior to the Company's products. A substantial amount of the
Company's sales are in international markets, and the laws of other countries
may afford the Company little or no effective protection of its intellectual
property.

While the Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that the Company will not receive future communications from third parties
asserting that the Company's products infringe, or may infringe, on the
proprietary rights of third parties. The Company was denied a trademark
registration of the name "Interlink" based on the use of similar names by other
companies in the computer industry. The Company expects that software product
developers will be increasingly subject to infringement claims as the number of
products and competitors in the Company's industry segments grow and the
functionality's of products in different industry segments overlap. Any such
claims, with or without merit, could be time consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, an adverse outcome in litigation or similar adversarial
proceedings could subject the Company to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others or require the
Company to cease the marketing or use of certain products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Possible Volatility of Share Price

There can be no assurance that the market price of the Company's Common
Stock will not decline or remain below the initial public offering price. The
trading prices of the Company's Common Stock may be subject to wide fluctuations
in response to a number of factors, including variations in operating results,
alliances, changes in earnings estimates by securities analysts, announcements
of extraordinary events such as litigation, alliances, or acquisitions,
announcements of technological innovations or new products or new contracts by
the Company or its competitors, announcements and reports about the declining
number of mainframe computers shipped, press releases or reports of IBM or other
competitors introducing competitive or substitute products, as well as general
economic, political and market conditions. In addition, the stock market has
from time-to-time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stocks of technology
companies and that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may also adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in

<PAGE>

such litigation could also subject the Company to significant liabilities.

ITEM 2. PROPERTIES

The Company is headquartered in a 24,000 square foot facility in
Fremont, California. The Fremont facility houses the corporate functions,
marketing, research and development, customer support and finance and
administration. Interlink occupies this space under a lease agreement that
expires on December 31, 2000. The Company has a research and development center
in Columbia, Maryland where the IOS/390 and TCPaccess product line is developed,
and in Calgary, Alberta, Canada where the HARBOR products are developed and
supported. The Company's NetLOCK personnel are moving into a 8,522 square foot
facility in Brea, California, for which the Company has signed a lease until
August 31, 2000. The Company leases office space in thirteen locations in the
United States and Europe for use by its regional sales and support staff. The
Company believes that its facilities are adequate to meet its requirements
through the expiration of its leases.

ITEM 3. LEGAL PROCEEDINGS

The Company and the Company's subsidiary in France are involved in a
commercial dispute with a former Italian distributor ("Claimant") of the
Company's TCPaccess products. The former distributor alleged in a letter sent to
the Company that the Company had breached and unlawfully terminated the
agreement pursuant to which the former distributor was appointed a distributor
of the Company's products in Italy and asserted other related claims against the
Company. The letter demanded the former distributor's reinstatement as a
distributor, the execution of a written distribution agreement setting forth the
distribution arrangements between the parties, and compensation in an
unspecified amount to be paid to the former distributor for the harm that it has
suffered. The Company's Canadian subsidiary, New Era Systems Services Ltd., has
also previously used the former distributor as a distributor of the HARBOR
products in Italy pursuant to a separate agreement which was entered into
between the claimant and New Era Systems Services Ltd's Irish subsidiary, Era
Nua Teoranta.

On January 27, 1997 the former distributor initiated a lawsuit in
Milan, Italy against New Era Systems Services Ltd., a Canadian company and
wholly owned subsidiary of the Company, the Company, Interlink France S.A.R.L.,
a French company and wholly owned subsidiary of the Company and the Company's
current distributor in Italy. The litigation is based on the Claimant's
distribution of Company's HARBOR products pursuant to a distributor agreement
with Era Nua Teoranta, which pre-dates the Company's acquisition of New Era
Systems Services Ltd. The Company's distributor relationship with Claimant for
the distribution of the Company's HARBOR products in Italy and Spain has
terminated. This litigation does not involve the Cisco IOS/390 products or the
TCPaccess products. Pursuant to Claimant's court documents, Claimant alleges
damages for breach of contract and related tort claims in the amount of
2,500,000,000 Italian Lira (approximately $1,500,000) and requests that the
defendants pay all expenses resulting from the litigation. Era Nua Teoranta has
filed a lawsuit against the claimant in Ireland for recovery of amounts due on
outstanding invoices and a declaration that the distributor relationship has
terminated.

On March 12, 1997 the former distributor initiated a separate lawsuit
in Alameda County, California against the Company, certain employees of the
Company and the Company's current Italian distributor. The litigation is based
upon alleged actions taken by the Company and certain employees of the Company.
Pursuant to Claimant's complaint, Claimant alleged various tort claims,
including fraud, deceit, and unfair competition, in addition to statutory trade
secret misappropriation, and breach of confidential relationship. Claimant is
requesting that the defendants pay compensatory damages in excess of $2,000,000,
unspecified punitive damages, interest, attorneys' fees, and costs of the
litigation. The Company and the individual defendants moved to stay the lawsuit
on grounds that all claims are subject to arbitration under the terms of the
distributor agreement. The lawsuit was stayed by the Alameda County Superior
Court pending arbitration of the claims. No arbitration has to date been
initiated.

<PAGE>

No provision for any liability that may result upon resolution of these matters
has been made in the financial statements. Should the Company be unsuccessful in
defending any of these claims, the Company's business, financial condition and
results of operations would be materially adversely affected

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

The Company did not submit any matters to vote of security holders
during the fourth quarter of the fiscal year ended June 30, 1997.

PART II

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

The common stock of the Company is traded on the Nasdaq National market under
the symbol INLK. The Company completed its initial public offering and commenced
trading of its common stock on August 15, 1996. The following table sets forth
the quarterly high and low closing sales prices of the Company's common stock
from August 15, 1996 through June 30, 1997. Such prices represent prices between
dealers, do not include retail mark-ups, mark-downs or commissions and may not
represent actual transactions.

High Low
First Quarter*.............................. $10.12 $8.38
Second Quarter.............................. $16.75 $8.63
Third Quarter............................... $17.63 $10.63
Fourth Quarter.............................. $11.13 $5.94

*Commencing August 15, 1996

As of September 15, 1997, there were approximately 238 holders of record of the
Company's common stock. The Company believes that a significant number of
beneficial owners of its Common Stock hold shares in street name.

The Company has never paid a cash dividend on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<PAGE>

The following selected consolidated financial data of the Company should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The consolidated statement
of operations data for the fiscal years ended June 30, 1995, 1996 and 1997 and
the consolidated balance sheet data as of June 30, 1996 and 1997 are derived
from financial statements of the Company that have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are included elsewhere herein. The
consolidated statement of operations data for the fiscal years ended June 30,
1993 and 1994 and the consolidated balance sheet data as of June 30, 1993, 1994
and 1995 are derived from financial statements of the Company audited by Coopers
& Lybrand L.L.P. that are not included herein.

<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------

1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product...................................... $11,914 $12,350 $15,818 $19,670 $24,978
Maintenance and consulting................... 9,271 9,525 11,261 14,332 14,856
----- ----- ------ ------ ------
Total revenues........................... 21,185 21,875 27,079 34,002 39,834
------ ------ ------ ------ ------
Cost of revenues:
Product...................................... 2,679 2,380 3,316 3,413 3.025
Maintenance and consulting................... 1,387 1,430 3,293 4,594 4,712
----- ----- ----- ----- -----
Total cost of revenues................... 4,066 3,810 6,609 8,007 7,737
----- ----- ----- ----- -----
Gross profit..................................... 17,119 18,065 20,470 25,995 32,097
Operating expenses:
Product development.......................... 5,042 6,276 6,245 5,241 7,742
Sales and marketing.......................... 6,638 8,384 10,792 13,316 14,348
General and administrative................... 3,272 2,561 3,329 3,954 4,669
Purchased research and
development and product amortization (1)..... -- -- -- 10,479 575
------ ------ ------ ------ ------
Total operating expenses................. 14,952 17,221 20,366 32,990 27,334
------ ------ ------ ------ ------
Operating income (loss).......................... 2,167 844 104 (6,995) 4,763
Other income..................................... 1,000 -- -- -- --
Interest income (expense), net................... (387) (224) (81) (507) 735
----- --- ---- ---- ---
Income (loss) before
income taxes and extraordinary items........... 2,780 620 23 (7,502) 5,498
Benefit from (provision for) income taxes........ (953) (273) 1,624 (114) (2,138)
----- ----- ----- ----- -------
Income (loss) before
extraordinary items............................. 1,827 347 1,647 (7,616) 3,360
Extraordinary items.............................. 1,075 1,320 -- -- --
----- ----- -- -- --
Net income (loss)................................ $ 2,902 $ 1,667 $ 1,647 $ (7,616) $ 3,360
======= ======= ======= ========= =======
Net income (loss) per share (2).................. $ 1.17 $ 0.44 $ 0.34 $ (2.44) $ 0.44
======= ======= ======= ========= =======
Shares used in per share calculation (2)......... 2,474 3,808 4,814 3,127 7,595
===== ===== ===== ===== =====

JUNE 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)........................ $(2,877) $ 212 $ (183)$ (6,371) $25,355
Total assets..................................... 8,754 15,853 20,000 25,925 48,363
Long-term debt, less current portion............. 5,175 672 368 2,892 802
Total stockholders' equity (deficit)............. (6,915) 996 2,641 (4,585) 28,674
<FN>

(1) A non-recurring charge for purchased research and development of $10.2
million was recorded in the fiscal year ended June 30, 1996 in connection
with the acquisition of New Era.
(2) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net income
(loss) per share.
</FN>
</TABLE>

<PAGE>

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

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Form 10-K.

OVERVIEW

The Company offers a suite of high-performance, network transport products and
systems management applications which efficiently transport, store and protect
the integrity of mission-critical data and applications. The Company was
incorporated in December 1985 and initially focused its products and development
on providing interoperability between IBM mainframes and DECnet network
environments. In 1990, the Company acquired the core technology of its TCPaccess
suite of products. In December 1995 the Company acquired New Era Systems
Services Ltd. ("New Era"), the developer of the HARBOR products, a software
product line providing enterprise systems management applications for
client/server networks. This transaction was accounted for as a purchase (See
Note 2 to Consolidated Financial Statements). Prior to the acquisition, the
Company distributed the HARBOR products in certain countries in Europe for more
than one year. New Era is a wholly-owned subsidiary headquartered in Calgary,
Alberta.

In January 1997 the Company entered into a strategic alliance with Cisco
pursuant to which Cisco and the Company agreed to cooperate to develop certain
TCP/IP software known as IOS/390. Although Interlink is an authorized reseller
of the IOS/390 product, which has been available since May 13, 1997, the Company
continues to independently market and sell IOS/390 and TCPaccess. Support for
the IOS/390 sold through Cisco, Cisco's direct sales and reseller channels is
provided by Cisco.

The Company has no significant experience working with Cisco, and the alliance
with Cisco is subject to all the risks inherent in such strategic relationships
including the failure of the parties to meet their respective obligations under
the terms of the alliance, the risk of loss of rights to important intellectual
property either jointly developed in connection with the alliance or otherwise,
and the risk of a dispute over key provisions of the alliance. There can be no
assurance that the parties will meet their objectives under the terms of the
alliance. The failure of either the Company or Cisco to meet their obligations
under the terms of the alliance would have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
either Cisco or the Company may terminate the relationship upon 90 days written
notice.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenues, certain
consolidated statement of operations data for the periods indicated:

YEAR ENDED JUNE 30,

<PAGE>

1995 1996 1997
---- ---- ----
Revenues:
Product............................................ 58.4% 57.9% 62.7%
Maintenance and consulting......................... 41.6 42.1 37.3
---- ---- ----
Total revenues................................. 100.0 100.0 00.0
----- ----- ----
Cost of revenues:
Product............................................ 12.2 10.0 7.6
Maintenance and consulting......................... 12.2 13.5 11.8
---- ---- ----
Total cost of revenues......................... 24.4 23.5 19.4
---- ---- ----
Gross profit............................................ 75.6 76.5 80.6
Operating expenses:
Product development................................ 23.0 15.4 19.4
Sales and marketing................................ 39.9 39.2 36.0
General and administrative......................... 12.3 11.6 11.7
Purchased research and development and product
amortization ...................................... -- 30.8 1.5
-- ---- ---
Total operating expenses....................... 75.2 97.0 68.6
---- ---- ----
Operating income (loss)................................. 0.4 (20.5) 12.0
Interest income (expense), net.......................... (0.3) (1.5) 1.8
----- ----- ---
Income (loss) before income taxes....................... 0.1 (22.0) 13.8
Benefit from (provision for) income taxes............... 6.0 (0.4) (5.4)
--- ----- -----
Net income (loss)....................................... 6.1% (22.4)% 8.4%
==== ======= ====
Cost of sales as a percentage of the related revenues:
Product............................................ 21.0% 17.4% 12.1%
Maintenance and consulting......................... 29.2 32.1 31.7%

FISCAL YEARS ENDED JUNE 30, 1996 AND 1997

As a result of the acquisition of New Era in December 1995, the Company's
operating results for the fiscal years ended June 30, 1996 and 1997 are not
directly comparable due to New Era being included for approximately 6 months of
fiscal 1996 results of operations versus the full fiscal year of 1997.

Revenues
Total revenues were $34.0 million and $39.8 million for the fiscal years ended
June 30, 1996 and 1997, respectively, representing an increase of 17%. Product
sales were $19.7 million and $25.0 million for the fiscal years ended June 30,
1996 and 1997, respectively, representing an increase of 27%. This increase was
primarily due to a $3.4 million increase (of which $1.7 million were from
prepaid license fees from Cisco) in network transport product license fees and
associated hardware sales as well as the increase in HARBOR products from $1.0
million in fiscal 1996 to $3.3 million in fiscal 1997, partially offset by a
decrease in third party software sales over fiscal 1996. Maintenance and
consulting revenues were $14.3 million and $14.9 million for the fiscal years
ended June 30, 1996 and 1997, respectively, representing an increase of 4%,
resulting principally from an increase in the number of customers purchasing
maintenance agreements.

<PAGE>

Cost of Revenues
Product. Cost of revenues from product sales consists primarily of hardware,
product media, documentation and packaging costs. Cost of revenues for product
sales was $3.4 million and $3.0 million, representing 17% and 12% of total
product revenues for the fiscal years ended June 30, 1996 and 1997,
respectively. This percentage decrease was due to higher systems management
sales in fiscal year 1997, which have a high gross margin, and a reduction in
third-party product revenue in fiscal year 1997 compared to fiscal year 1996,
which carry higher product costs as a percentage of their respective revenue
items.

Maintenance and Consulting. Cost of revenues from maintenance and consulting
consists primarily of personnel related costs incurred in providing telephone
support and software updates. Cost of revenues from maintenance and consulting
was $4.6 million and $4.7 million, representing 32% of total maintenance and
consulting revenues for the fiscal years ended June 30, 1996 and 1997,
respectively.

Operating Expenses
Total operating expenses were $33.0 million and $27.3 million, representing 97%
and 69% of total revenues for the fiscal years ended June 30, 1996 and 1997,
respectively. Excluding the charge for purchased research and development
related to the New Era acquisition, the operating expenses for the fiscal year
ended June 30, 1996 were $22.8 million representing 67% of total revenues.

Product Development. Product development expenses consist primarily of personnel
related costs. Product development expenses were $5.2 million and $7.7 million,
representing 15% and 19% of total revenues for the fiscal years ended June 30,
1996 and 1997, respectively. The increase in product development expenses
resulted from the acquisition of Harbor and development efforts expended for
IOS/390. The Company believes that research and development expenses will
increase in absolute dollars in the future primarily due to the expansion of the
Company's product line as a result of the acquisition of New Era, alliance with
Cisco to further develop IOS/390, development efforts to bring the recently
purchased NetLOCK technology to market (See Note 11 to Consolidated Financial
Statements) and other anticipated product development efforts

The Company anticipates the development and commercialization of the NetLOCK
product will not be completed until summer of 1998. Prior to the acquisition of
the NetLOCK technology, Hughes expended in excess of $10 million on research and
development related to the NetLOCK technology. The Company will not present
audited financial statements of the NetLOCK development efforts as the Hughes
NetLOCK activities were not a business, but rather a discrete development
project for which no customer base existed or revenue had been recorded. The
Company expects to incur expenditures ranging from $2.5 million to $3.5 million
to complete the technology through the summer of 1998.

<PAGE>

commercializing the NetLOCK technology by the summer of 1998 or at all, deriving
significant future sales therefrom, establishing and maintaining uniform
standards, controls, procedures and policies, or overcoming other problems that
may be encountered in connection with the acquisition and commercialization of
such technology. To the extent that the Company is unable to accomplish the
foregoing, the Company's business, financial condition and results of operations
may be materially adversely affected. Further development of the NetLOCK
technology is required, and there can be no assurance that the Company can
successfully develop the NetLOCK technology. In addition, there can be no
assurance that the product can be developed within the range of costs estimated
by the Company, and even if successfully developed there can be no assurance of
customer acceptance of the products.

Product development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have not
been significant in recent periods.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing personnel, the fixed costs of worldwide
field offices, and promotional costs. The Company sells through its direct sales
force, resellers and distributors. The direct channel produced 88% and 83% of
product revenues for the fiscal years ended June 30, 1996 and 1997,
respectively, and is also the major component of sales channel costs.

Sales and marketing expenses were $13.3 million and $14.3 million, representing
39% and 36% of total revenues for the fiscal years ended June 30, 1996 and 1997,
respectively. The increase in absolute dollars was a result of marketing program
costs and the New Era acquisition. The Company believes that sales and marketing
expenses will increase in absolute dollars as the Company continues to expand
its sales force for both HARBOR and IOS/390 and launch new corporate marketing
programs.

General and Administrative. General and administrative expenses include
personnel and other costs of the finance, human resources and administrative
departments of the Company, and includes gains and losses on foreign currency
exchange. General and administrative expenses were $4.0 million and $4.7
million, representing 12% of total revenues in each of the fiscal years ended
June 30, 1996 and 1997. The increase in dollar amounts for general and
administrative is attributable to the increased headcount required to support
the Company's expansion.

Purchased Research and Development and Product Amortization. Purchased research
and development expense incurred in connection with the New Era acquisition was
approximately $10.2 million, representing 30% of total revenues for the fiscal
year ended June 30, 1996. In addition, approximately $321,000 and $575,000 of
product

<PAGE>

amortization resulting from such acquisition was included in the fiscal years
ended June 30, 1996 and 1997. See Note 2 of Notes to Consolidated Financial
Statements.

Interest (Income) Expense, net. Net interest (income) expense was $507,000 and
$(735,000) for the fiscal years ended June 30, 1996 and 1997, respectively. The
decrease was due the Company paying off its bank borrowings in 1996 and earning
interest income on its cash proceeds from the initial public offering and equity
purchase from Cisco in August and December 1996, respectively.

Benefit from (Provision for) Income Taxes. The income tax provision for the
fiscal year ended June 30, 1996 was $114,000. The effective tax rate for the
fiscal year ended June 30, 1996 before income taxes and excluding the write-off
of purchased research and development and the benefit relating to the
recognition of the Company's deferred tax asset was approximately 39%. The
income tax provision for the fiscal year ended June 30, 1997 was $2.1 million
which represented an effective tax rate of approximately 39%.

FISCAL YEARS ENDED JUNE 30, 1995 AND 1996

As a result of the acquisition of New Era in December 1995, the Company's
operating results for the years ended June 30, 1995 and 1996 are not directly
comparable. The results of the Company's operations for fiscal 1996 are not
representative of the combined anticipated results of operations of the Company
and New Era.

Revenues
Total revenues were $27.1 million and $34.0 million for the fiscal years ended
June 30, 1995 and 1996, respectively, representing an increase of 26%. Product
sales were $15.8 million and $19.7 million for the fiscal years ended June 30,
1995 and 1996, respectively, representing an increase of 24%. This increase was
primarily due to a $2.5 million increase over fiscal 1995 in TCPaccess license
fees and associated hardware sales as well as the addition of six months of
revenues from HARBOR products of $1.0 million. Maintenance and consulting
revenues were $11.3 million and $14.3 million for the fiscal years ended June
30, 1995 and 1996, respectively, representing an increase of 27%, resulting
principally from an increase in the number of customers purchasing maintenance
agreements.

Cost of Revenues
Product. Cost of revenues from product sales consists primarily of hardware,
product media, documentation and packaging costs. Cost of revenues for product
sales was $3.3 million and $3.4 million, representing 21% and 17% of total
product revenues for the fiscal years ended June 30, 1995 and 1996,
respectively. This percentage decrease was due to a reduction in third-party
product revenue and a decline in hardware revenue, which carry higher product
costs as a percentage of their respective revenue items offset somewhat by a
provision for excess and obsolete inventory of $28,000 for certain hardware
components with decreasing sales.

Maintenance and Consulting. Cost of revenues from maintenance and consulting
consists primarily of personnel related costs incurred in providing telephone
support and software

<PAGE>

updates. Cost of revenues from maintenance and consulting was $3.3 million and
$4.6 million, representing 29% and 32% of total maintenance and consulting
revenues for the fiscal years ended June 30, 1995 and 1996, respectively. This
increase, as a percentage of related revenues, was due to added headcount in the
worldwide customer support department required to keep pace with the increased
product sales from period to period and outsourcing of support and maintenance
obligations from the Company's Swiss subsidiary.

Operating Expenses
Total operating expenses were $20.4 million and $33.0 million, representing 75%
and 97% of total revenues for the fiscal years ended June 30, 1995 and 1996,
respectively. Excluding the charge for purchased research and development
related to the New Era acquisition, the operating expenses for the fiscal year
ended June 30, 1996 were $22.8 million representing 67% of total revenues.

Product Development. Product development expenses consist primarily of personnel
related costs. Product development expenses were $6.2 million and $5.2 million,
representing 23% and 15% of total revenues for the fiscal years ended June 30,
1995 and 1996, respectively. The reduction in product development expenses
resulted from the cancellation in March 1995 of a significant product
development program.

Sales and Marketing. The Company sells through its direct sales force, resellers
and distributors. The direct channel produced 88% and 86% of product revenues
for the fiscal years ended June 30, 1995 and 1996, respectively, and is also the
major component of sales channel costs.

Sales and marketing expenses were $10.8 million and $13.3 million, representing
40% and 39% of total revenues for the fiscal years ended June 30, 1995 and 1996,
respectively. The increase in absolute dollars was a result of higher commission
rates, marketing program costs and the New Era acquisition. The Company believes
that sales and marketing expenses will increase in absolute dollars as the
Company continues to expand its sales force for both HARBOR and TCPaccess and
launch new corporate marketing programs.

General and Administrative. General and administrative expenses were $3.3
million and $4.0 million, representing 12% of total revenues in each of the
fiscal years ended June 30, 1995 and 1996. The increase in dollar amounts for
general and administrative is attributable to the increased headcount required
to support the Company's expansion and a provision of $215,000 for doubtful
accounts. The increase in the allowance for doubtful accounts was the result of
an increase in accounts receivable and was based on management's judgment
relating to collectability of such accounts.

<PAGE>

from such acquisition was included in the fiscal year ended June 30, 1996. See
Note 2 of Notes to Consolidated Financial Statements.

Interest Expense, net. Net interest expense was $81,000 and $507,000 for the
fiscal years ended June 30, 1995 and 1996, respectively. The increase was due
primarily to bank borrowings related to the New Era acquisition.

Benefit from (Provision for) Income Taxes. The income tax benefit for the fiscal
year ended June 30, 1995 was $1.6 million, with a net tax provision of $114,000
recorded for the fiscal year ended June 30, 1996. The effective tax rate for the
fiscal year ended June 30, 1996 before income taxes and excluding the write-off
of purchased research and development and the benefit relating to the
recognition of the Company's deferred tax asset was approximately 39%.

Quarterly Results
<TABLE>
The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended June 30, 1997. This data has been
derived from unaudited consolidated financial statements that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Company's audited consolidated financial statements and
notes thereto. The Company believes that results of operations for the interim
periods are not necessarily indicative of the results to be expected for any
future period.
<CAPTION>
Three Months Ended
Sept. 30,Dec. 31, March 31, June 30, Sept. 30,Dec. 31,March 31, June 30,
1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 3,034 $ 4,880 $5,282 $6,474 $4,832 $ 5,960 $ 7,546 $ 6,640
Maintenance and consulting 3,531 3,284 3,691 3,826 3,893 3,673 3,611 3,679
----- ----- ----- ----- ----- ----- ----- -----
Total revenues..... 6,565 8,164 8,973 10,300 8,725 9,633 11,157 10,319
----- ----- ----- ------ ----- ----- ------ ------

Cost of revenues:
Product................ 640 1,002 641 1,130 685 678 564 1,098
Maintenance and consulting 1,067 1,081 1,171 1,275 1,237 1,209 1,139 1,127
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 1,707 2,083 1,812 2,405 1,922 1,887 1,703 2,225
----- ----- ----- ----- ----- ----- ----- -----

Gross profit............... 4,858 6,081 7,161 7,895 6,803 7,746 9,454 8,094
Operating expenses:
Product development.... 1,124 1,170 1,487 1,460 1,901 1,969 1,957 1,915
Sales and marketing.... 2,505 3,033 3,422 4,356 3,064 3,194 4,142 3,948
General and administrative 833 955 1,202 964 912 1,107 1,301 1,349
Purchased research and
development and
product amortization -- 10,158 160 161 162 139 127 147
-- ------ --- --- --- --- --- ---
Total operating
expenses........... 4,462 15,316 6,271 6,941 6,039 6,409 7,527 7,359
----- ------ ----- ----- ----- ----- ----- -----
Operating income (loss).... 396 (9,235) 890 954 764 1,337 1,927 735
Interest income (expense) net 21 20 (261) (287) (56) 144 256 391
-- -- ----- ----- ---- --- --- ---
Income (loss) before provision
for income taxes....... 417 (9,215) 629 667 708 1,481 2,183 1,126
Benefit from (provision for)
income taxes........... (163) 554 (245) (260) (269) (578) (851) (439)
----- --- ----- ----- ----- ----- ----- ----
Net income (loss).......... $ 254 $ (8,661) $ 384 $ 407 $ 439 $ 903 $ 1,332 $ 687
===== ======== ===== ===== ===== ===== ======= =====

<PAGE>

Net income (loss) per share $0.05 $ (2.77) $0.08 $0.08 $ .07 $ .12 $ .16 $ .08
===== ======== ===== ===== ===== ===== ====== =====
Shares used in per share
calculation............ 4,829 3,125 5,016 5,161 6,147 7,671 8,331 8,158
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Liquidity and Capital Resources

Working capital increased at June 30, 1997 over that at June 30, 1996 primarily
due to the proceeds from the initial public offering, proceeds from the equity
investment from Cisco and net income.

For the fiscal year ended June 30, 1997, net cash provided by operating
activities resulted primarily from net income, depreciation and amortization,
and an increase in accrued liabilities, partially offset by an increase in
deferred income taxes, an increase in accounts receivable, and a decrease in
accounts payable. For the fiscal year ended June 30, 1996, net cash provided by
operations resulted primarily from a write-off of purchased research and
development, depreciation and amortization and an increase in deferred
maintenance and product revenue, partially offset by a net loss, increase in
deferred income taxes and an increase in accounts receivable.

For the fiscal year ended June 30, 1997, the Company's investing activities have
consisted primarily of purchases of property and equipment. For the fiscal year
ended June 30, 1996, the Company's investing activities consisted primarily of
the acquisition of New Era and the redemption of available-for-sale securities.

Net cash provided by financing activities for the fiscal year ended June 30,
1997 consisted primarily of proceeds from the initial public offering and the
equity investment by Cisco, partially offset by payments on the Company's bank
line of credit and notes payable. For the fiscal year ended June 30, 1996, the
Company's financing activities consisted of proceeds from a term loan and bank
line of credit and payments on bank line of credit.

At June 30, 1997, the Company had $28.1 million in cash and cash equivalents and
$25.4 million in working capital. The Company had $9.8 million in accounts
receivable, net of allowance for doubtful accounts, and $8.9 million of unearned
revenues, the majority of which are expected to be earned over the 12 month
period following June 30, 1997.

The Company believes that its current cash balance and its cash flow from
operations, if any, will be sufficient to meet its anticipated working capital
and capital expenditure requirements for at least the next 12 months.

<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

PAGE

Report of Independent Accountants......................................... 37
Consolidated Balance Sheets as of June 30, 1996 and 1997.................. 38
Consolidated Statements of Operations for the years ended June 30, 1995,
1996 and 1997...................................................... 39
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1995, 1996 and 1997................................. 40
Consolidated Statements of Cash Flows for the years ended June 30, 1995,
1996 and 1997...................................................... 41
Notes to Consolidated Financial Statements................................ 42

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Interlink Computer Sciences, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Interlink
Computer Sciences, Inc. and Subsidiaries as of June 30, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 consolidated financial position of Interlink Computer
Sciences, Inc. and Subsidiaries as of June 30, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Jose, California
July 21, 1997, except for Note 5, "Contingencies", for which the date is August
28, 1997 and Note 11 for which the date is September 18, 1997

<PAGE>

<TABLE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>

June 30,
--------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 6,121 $ 28,106
Accounts receivable, net of allowance for doubtful
accounts of $542 in 1996 and $623 in 1997........ 9,445 9,752
Inventories............................................ 700 674
Prepaid expenses and other current assets.............. 2,876 3,332
----- -----
Total current assets............................. 19,142 41,864
Property and equipment, net................................... 1,281 1,676
Purchased software products................................... 2,893 2,062
Other assets ................................................. 2,609 2,761
----- -----
Total assets..................................... $ 25,925 $ 48,363
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit.................................... $ 5,000 $ 0
Current portion of long-term debt...................... 3,100 314
Accounts payable....................................... 2,662 1,421
Accrued liabilities.................................... 6,630 7,286
Deferred maintenance and product revenue............... 8,121 7,488
----- -----
Total current liabilities........................ 25,513 16,509
Long-term debt, less current portion................... 2,892 802
Deferred maintenance revenue........................... 1,056 1,403
Other liabilities...................................... 1,049 975
----- ---
Total liabilities................................ 30,510 19,689
-------- --------
Commitments and contingencies (Note 5).
Preferred stock, no par value in 1996 and $0.001 in 1997:
Authorized: 2,625,000 shares in 1996 and 5,000,000
shares in 1997
Issued and outstanding: 1,230,000 shares in 1996 and
no shares in 1997................................ 6,310
Common stock, no par value in 1996 and $0.001 in 1997:........
Authorized: 15,000,000 shares in 1996 and 20,000,000
shares in 1997.........................................
Issued and outstanding: 2,483,000 shares in 1996 and...
7,548,000 shares in 1997......................... 14,602 7
Additional paid-in capital............................. 50,814
Cumulative translation adjustment...................... (581) (591)
Accumulated deficit.................................... (24,916) (21,556)
-------- --------
Total stockholders' equity (deficit)............. (4,585) 28,674
------- ------
Total liabilities and stockholders' equity (deficit) $ 25,925 $ 48,363
======== =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Year ended June 30,
-------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product................................................. $ 15,818 $ 19,670 $ 24,978
Maintenance and consulting.............................. 11,261 14,332 14,856
------ ------ ------
Total revenues................................... 27,079 34,002 39,834
------ ------ ------
Cost of revenues:
Product................................................. 3,316 3,413 3,025
Maintenance and consulting.............................. 3,293 4,594 4,712
----- ----- -----
Total cost of revenues........................... 6,609 8,007 7,737
----- ----- -----
Gross profit ................................................. 20,470 25,995 32,097
------ ------ ------
Operating expenses:
Product development..................................... 6,245 5,241 7,742
Sales and marketing..................................... 10,792 13,316 14,348
General and administrative.............................. 3,329 3,954 4,669
Purchased research and development and product amortization 10,479 575
------ ------ ---
Total operating expenses......................... 20,366 32,990 27,334
------ ------ ------
Operating income (loss)........................................ 104 (6,995) 4,763
Interest and other income...................................... 172 194 1,202
Interest expense............................................... (253) (701) (467)
----- ----- -----
Income (loss) before provision income taxes and................ 23 (7,502) 5,498
Benefit from (provision for) income taxes...................... 1,624 (114) (2,138)
----- ---- ------
Net income (loss).............................................. $ 1,647 ($ 7,616) $ 3,360
======== ========= =======
Net income (loss) per share.................................... $ 0.34 $ (2.44) $ 0.44
======== ========= =======
Shares used in per share calculation........................... 4,814 3,127 7,595
===== ===== =====
<FN>

The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<CAPTION>

PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
--------------- -------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
------ ------ ------ ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1994 ...................... 1,230 $ 6,310 2,385 $ 14,095 $-- $ (462) $(18,947) $ 996
Issuance of common stock for
acquisition of Lennox and Partner GmbH ... -- -- 42 46 -- -- -- 46
Issuance of common stock ................. -- -- 5 5 -- -- -- 5
Exercise of stock options .................... -- -- 27 21 -- -- -- 21
Translation adjustment ....................... -- -- -- -- -- (74) -- (74)
Net income ................................... -- -- -- -- -- -- 1,647 1,647
----- ----- ----- -------- ------- ------ ------ ------
Balances, June 30, 1995 ...................... 1,230 6,310 2,459 14,167 -- (536) (17,300) 2,641
Issuance of common stock for
acquisition of Lennox and Partner GmbH ... -- -- 6 19 -- -- -- 19
Exercise of stock options ................ -- -- 18 16 -- -- -- 16
Issuance of common stock warrants ........ -- -- -- 400 -- -- -- 400
Translation adjustment ................... -- -- -- -- -- (45) -- (45)
Net loss ................................. -- -- -- -- -- -- (7,616) (7,616)
----- ----- ----- -------- ------- ------ ------ ------
Balances, June 30, 1996 ...................... 1,230 6,310 2,483 14,602 -- (581) (24,916) (4,585)
Issuance of common stock:
Upon exercise of stock options ........ -- -- 394 365 -- -- -- 365
Under Employee stock purchase plan .... -- -- 62 397 -- -- -- 397
From public offerings, net of ......... -- -- 2,530 22,148 -- -- -- 22,148
issuance costs of $3.2 million
From private offerings, net of ........ -- -- 622 6,814 -- -- -- 6,814
issuance costs of $28,000
Conversion of Preferred Stock to
Common Stock ............................ (1,230) (6,310) 1,230 6,310 -- -- -- --
Tax benefit from Employee stock
transactions ............................ -- -- -- 185 -- -- -- 185
Net exercise of warrants ................ -- -- 227 -- -- -- -- --
Reincorporation into Delaware
corporation ............................. -- -- -- (50,814) 50,814 -- -- 0
Translation adjustment .................. -- -- -- -- -- (10) -- (10)
Net income .............................. -- -- -- -- -- -- 3,360 3,360
----- ----- ----- -------- ------- ------ ------ ------
Balances, June 30, 1997 ..................... -- -- 7,548 $ 7 $50,814 $ (591) $(21,556) $ 28,674
===== ===== ===== ======== ======== ======= ========= ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>

<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS
<TABLE>

<CAPTION>
Year ended June 30,
---------- -------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 1,647 (7,616) $ 3,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchased research and development ................... -- 10,158
Depreciation and amortization ........................ 1,032 1,477 2,032
Loss (gain) or disposal of property and equipment .... 42 -- (9)
Provision for excess and obsolete inventory
and net realizable value ......................... 369 28 129
Provision for doubtful accounts ...................... 67 215 172
Exchange loss (gain) ................................. (406) 130 310
Deferred income taxes ................................ (2,011) (1,203) (543)
Changes in operating assets and liabilities:
Accounts receivable .............................. (787) (744) (847)
Inventories ...................................... 61 (45) (97)
Prepaid expenses and other assets ................ 58 (16) (414)
Accounts payable ................................. 128 (92) (1,207)
Accrued liabilities .............................. 411 (424) 789
Deferred maintenance and product revenue ......... 1,626 1,969 (34)
Other liabilities ................................ -- 278 223
-------- -------- --------
Net cash provided by operating
activities ................................... 2,237 4,115 3,864
-------- -------- --------
Cash flows from investing activities:
Acquisition of New Era, net of cash acquired .................. -- (10,168) --
Proceeds from sale of available-for-sale securities ........... -- 2,525 --
Acquisition of property and equipment ......................... (43) (384) (1,151)
Capitalization of software development costs .................. (30) (90) (349)
Purchase of available-for-sale securities ..................... (2,475) -- --
Acquisition of Lennox and Partner GmbH ........................ (63) -- --
-------- -------- --------
Net cash used in investing activities ............ (2,611) (8,117) (1,500)
-------- -------- --------
Cash flows from financing activities:
Proceeds from term loan ....................................... -- 3,000 --
Proceeds from bank line of credit ............................. -- 5,000
Payments on notes payable and other ........................... (1,226) (630) (4,929)
Payments on bank line of credit ............................... (200) (1,300) (5,000)
Proceeds from issuance of preferred and common stock, net ..... 21 36 29,909
-------- -------- --------
Net cash provided by (used in) financing
activities ....................................... (1,405) 6,106 19,980
-------- -------- --------

Net increase (decrease) in cash and cash
equivalents .................................. (1,779) 2,104 22,344

Effect of exchange rate changes on cash ............................ 189 (131) (359)
Cash and cash equivalents, beginning of period ..................... 5,738 4,148 6,121
-------- -------- --------
Cash and cash equivalents, end of period........................... $ 4,148 $ 6,121 $ 28,106
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF OPERATIONS
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interlink Computer Sciences, Inc. (the "Company") is a supplier of
high-performance solutions for enterprise networked systems management.
Interlink provides software and services which enable customers to use their IBM
and IBM-compatible MVS mainframes as "enterprise servers" in distributed,
heterogeneous client/server network environments. The Company markets and sells
its software products and services primarily through its direct sales
organization and to a lesser extent, through international resellers and
distributors to domestic and international customers, including original
equipment manufacturers. The Company's network transport products which include
the IOS/390, TCPaccess, TCPaccess Fault Tolerance and SNS/NFS products, has
generated substantially all of the Company's product and maintenance and
consulting revenues. Total revenues from network transport products totaled $27
million, $33 million and $36.5 million during fiscal years 1995, 1996 and 1997,
respectively. Total revenues from the system management applications totaled
$1.0 million and $3.3 million during fiscal years 1996 and 1997, respectively.
Therefore, the Company's operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of the network
transport products. The life cycles of the Company's products are difficult to
estimate due in part to the effect of future product enhancements and
competition. A decline in demand for the Company's products as a result of
competition, technological change or other factors would have a material adverse
affect on the Company's business, financial condition and result of operations.

In January 1997 the Company entered into a strategic alliance with Cisco
Systems, Inc.("Cisco") pursuant to which Cisco and the Company agreed to
cooperate to develop certain TCP/IP software known as IOS/390. Although
Interlink is an authorized reseller of the IOS/390 product, which has been
available since May 13, 1997, the Company continues to independently market and
sell IOS/390 and TCPaccess. Support for the IOS/390 sold through Cisco, Cisco's
direct sales and reseller channels is provided by Cisco.

The Company has no significant experience working with Cisco, and the alliance
with Cisco is subject to all the risks inherent in such strategic relationships
including the failure of the parties to meet their respective obligations under
the terms of the alliance, the risk of loss of rights to important intellectual
property either jointly developed in connection with the alliance or otherwise,
and the risk of a dispute over key provisions of the alliance. There can be no
assurance that the parties will meet their objectives under the terms of the
alliance. The failure of either the Company or Cisco to meet their obligations
under the terms of the alliance would have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
either Cisco or the Company may terminate the relationship upon 90 days written
notice

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

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after intercompany balances and transactions have
been eliminated.

FINANCIAL INSTRUMENTS

Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less at the date of purchase. Cash equivalents
present insignificant risk of changes in value because of interest rate changes.
The Company maintains its cash balances with high credit quality financial
institutions and has not experienced any material losses relating to any
investment instruments.

The amounts reported for cash equivalents, receivables and other financial
instruments are considered to approximate fair values based upon comparable
market information available at the respective balance sheet dates. Financial
instruments that potentially subject the Company to concentrations of credit
risks comprise, principally cash and cash equivalents, trade accounts
receivable, and long-term debt. The Company invests its excess cash primarily in
commercial paper and treasury notes that mature within one year. The carrying
value of the Company's long-term debt approximates fair value as the interest
rates are variable or the debt has been discounted at current interest rates.

CONCENTRATIONS

At June 30, 1996 and 1997, approximately 39%, and 9%, respectively, of the
Company's cash and cash equivalents are invested in Europe with the remaining
amounts invested primarily in the United States and Canada.

At June 30, 1996 and 1997, approximately 51% of the Company's trade accounts
receivable are due from customers in Europe with the remaining receivables due
from customers primarily in the United States and Canada. The Company performs
ongoing evaluations of its customers' financial condition and does not require
collateral. The Company maintains allowances for potential credit losses and
such losses have been within management's expectations.

Network access from the enterprise server to the network via the Company's
TCPaccess and IOS/390 products require a network controller or a Channel
Interface Processor (CIP), which the Company sells to its customers. The
Company's principal network controller is supplied by one company. The CIPs are
supplied by Cisco. Sales of network controllers and to a lesser extent,
commission from CIPs have accounted for

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

substantially all of the Company's hardware revenues to date. Total hardware
revenues have accounted for 19% and 14% of product revenues in fiscal years
1996, and 1997, respectively. In addition, the Company also relies upon this
company and Cisco for network controller and CIP replacement parts. If the
Company were unable to purchase an adequate supply of such sole-sourced products
on a timely basis, the Company could be required to design a comparable product,
qualify and develop an alternative source, or redesign its products based upon
different components. Furthermore, IBM could use its position as a supplier of
network controllers and similar products to gain a competitive advantage over
the Company. To date, the Company has not experienced difficulty or significant
delay in obtaining any such sole-source products. However, there can be no
assurance that the Company will not face such difficulties or delays in the
future. An inability of the Company or its customers to obtain such sole-sourced
controllers or similar products could significantly delay shipment of products,
which could have a material adverse effect on the Company's business, financial
condition and results of operation.

GOODWILL

Goodwill is amortized on a straight line basis over four years and is stated net
of accumulated amortization of $165,000 and $248,000 at June 30, 1996 and 1997,
respectively.

INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Inventories are principally comprised of finished goods at
June 30, 1996 and 1997.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated using the
straight-line basis over estimated useful lives of three to five years.
Leasehold improvements and property under capital leases are amortized using a
straight-line basis over the shorter of their estimated useful lives or the
terms of the leases. Upon disposal, assets and related accumulated depreciation
are removed from the accounts and the related gain or loss is included in
operations.

REVENUE RECOGNITION

Product Revenues

Product revenues are recognized after shipment of the product, completion of a
trial period, if any, and receipt of a signed contract, if remaining obligations
are insignificant, collection of the resulting receivable is probable and
product returns are reasonably

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

estimable. Provisions for estimated product returns, warranty costs and
insignificant vendor obligations are recorded at the time products are shipped.

Maintenance and Consulting Revenues

Maintenance and consulting revenues consist of maintenance and renewal fees for
providing product updates, technical support and related services for software
products, and training and consulting services fees. The Company unbundles a
portion of its initial product license revenues related to software maintenance
revenues based upon the amount charged for such services when they are sold
separately. Unbundled software maintenance revenues and revenues from separately
sold maintenance contracts are recognized ratably over the related service
period. Consulting services revenues from contracts are generally recognized on
the percentage-of-completion method. Training fees are recognized as the related
services are performed.

PRODUCT DEVELOPMENT COSTS

Costs related to the conceptual formulation and design of software products are
expensed as product development while costs incurred subsequent to establishing
technological feasibility of software products are capitalized, if material,
until general release of the product. Generally, technological feasibility is
established when the software module performs its primary functions described in
its original specifications, contains convenience features required for it to be
usable in a production environment and is completely documented. Amortization of
capitalized software costs, which begins when products are available for general
release to customers, is provided on a product-by-product basis at the greater
of the amount computed using the ratio of current revenues to the total current
and anticipated revenues or the straight-line basis over two years. During
fiscal years 1995, 1996 and 1997 capitalized software amortization was $259,000,
$32,000 and $225,000, respectively.

ADVERTISING EXPENSE

Advertising costs are expensed when incurred. In fiscal years 1995, 1996 and
1997 advertising expense was $277,000, $691,000 and $236,000, respectively.

INCOME TAXES

The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current laws and rates in effect.

FOREIGN CURRENCY TRANSLATION

The functional currency for the majority of the Company's foreign operations
is the applicable local currency. The translation from the applicable foreign
currency to U.S.

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using the
weighted average exchange rate during the period. Adjustments resulting from
such translation are reflected as a separate component of stockholders' equity.
Gains or losses resulting from foreign currency transactions are included in the
results of operations.

COMPUTATION OF NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive. Dilutive common equivalent shares consist of
the incremental common shares issuable upon conversion of convertible preferred
stock (using the "if converted" method) and stock options and warrants, using
the modified treasury stock method in fiscal 1995 and 1996 and the treasury
stock method in fiscal 1997. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common and common equivalent shares issued by
the Company during the twelve months preceding the initial filing of the
Company's initial public offering, using the modified treasury stock method and
the public offering price per share, have been included in the calculation of
net income (loss) per share for all periods presented.

RECENT PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earning Per Share, Which
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 requires restatement of all prior-period earnings per share data
presented after the effective date. FAS 128 is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.

In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of
an Enterprise and Related Information. This statement establishes standards for
disclosure

<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

about operating segments in annual financial statements and selected information
in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. The new standard
becomes effective for fiscal years beginning after December 15, 1997, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard. The Company is evaluating the requirements
of SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.

2. ACQUISITIONS:

LENNOX AND PARTNER GMBH

During fiscal year 1995, the Company purchased all of the capital stock of
Lennox and Partner GmbH ("Lennox") in exchange for 42,000 shares of the
Company's common stock and cash of $63,000. Under the terms of the purchase
agreement, the Company was obligated to make future cash payments to the sellers
and to issue up to 6,000 additional shares of the Company's common stock to
certain Lennox sellers, who after the acquisition became employees of the
Company, contingent upon cumulative profitability of the subsidiary. The
acquisition was accounted for as a purchase transaction and the results of
operations of Lennox were included with those of the Company after July 1, 1994,
the date the acquisition was consummated. During 1995, the Company paid and
expensed $60,000 related to the cumulative profitability requirements and
recorded goodwill of $330,000 related to the transaction. In December 1995, the
cumulative profitability requirements specified in the purchase agreement were
met and the Company recorded an expense totaling $216,000 related to both cash
payments totaling $197,000 and the issuance of 6,000 shares of the Company's
common stock with a fair value of $3.20 per share.

NEW ERA SYSTEMS SERVICES LTD.

Effective December 29, 1995, the Company acquired all of the outstanding stock
of New Era Systems Services Ltd. ("New Era"), a Canadian company that develops,
markets and supports storage management and software distribution products. In
the transaction, the Company paid cash of approximately $11,000,000 and issued
fully exercisable warrants to purchase 350,000 shares of its common stock at
$3.20 per share with a fair value of $315,000 (see Note 6). In addition, in
conjunction with the acquisition, the Company issued non- interest bearing notes
payable to the shareholders of New Era aggregating approximately $1,300,000, net
of discounts for imputed interest of $133,000 (see Note 4). These amounts
resulted in a purchase price for New Era of $13,001,000 including accruals for
direct acquisition costs and severance costs and certain duplicate facilities
related to the planned closure of New Era's European subsidiary, all totaling
approximately $500,000. At June 30, 1997, the majority of these accrued costs
have been

<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expended. The acquisition has been accounted for as a purchase transaction and
the results of operations of New Era have been included with those of the
Company since December 29, 1995, the date the acquisition was consummated.

The fair market value of the assets acquired from New Era, which was determined
through established valuation techniques used in the software industry, and a
summary of the consideration exchanged for these assets is as follows (in
thousands):

Total purchase price................................................... $13,001
=======

Assets acquired:
Tangible assets, primarily cash, accounts receivable,
property and equipment............................................ 3,117
Purchased software products....................................... 3,199
Purchased research and development................................ 10,158
Liabilities assumed ................................................... (3,473)
-------
$13,001
=======

The amount allocated to purchased software products, for which technological
feasibility had been established at the acquisition date, is being amortized on
a straight line basis over five years. At each balance sheet date, the Company
estimates the net future cash flows from its purchased software products. If
such net future cash flows are less than the net book value of the purchased
software products, the Company will reduce such net book value to the fair value
of the software products which is generally the present value of estimated
expected future cash flows using an appropriate discount rate. At June 30, 1997,
the estimated net future cash flows of the purchased software products exceeded
their net book value. Accumulated amortization related to purchased software
products was $321,000 and $896,000 as of June 30, 1996 and 1997. The amount of
the purchase price allocated to purchased research and development, which had no
alternative future use and relates to products for which technological
feasibility had not been established, was expensed at the acquisition date.

In addition, contingent consideration up to a total of $2,600,000 is payable in
cash on January 31, 1998, upon the attainment of targeted revenue levels for New
Era software products and maintenance. These amounts represent additional
consideration paid for the acquisition of New Era, and up to $400,000 will be
recorded as purchased software products. Amounts paid in excess of amounts
allocated to purchased research and development and purchased software products
will be recorded as goodwill and amortized over the remaining life of the
goodwill, which is estimated at five years from the date of the acquisition. The
contingent consideration due on January 31, 1997 for approximately $2,600,000
was not paid as targeted revenue levels were not attained.

Summarized below are the unaudited pro forma results of operations of the
Company as though New Era had been acquired at the beginning of fiscal 1995.
Adjustments have been made for the estimated increases in amortization related
to purchased software,

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

increases and decreases in interest expense and income, respectively, and other
appropriate pro forma adjustments.

YEAR ENDED JUNE 30,
-------------------
1995 1996
---- ----
(in thousands, except per
share amounts)
Revenue.............................................. $29,954 $36,491
Net income (loss).................................... (450) 2,765
Net income (loss) per share.......................... (0.07) 0.56

The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable and do not reflect any benefit from economies
which might be achieved from combined operations. The pro forma financial
information presented above is not necessarily indicative of either the results
of operations that would have occurred had the acquisition taken place at the
beginning of fiscal 1995 or of future results of operations of the combined
companies.

3. BALANCE SHEET DETAIL:

Property and equipment, net comprised (in thousands):

JUNE 30,
--------
1996 1997
---- ----
Equipment............................................ $ 4,131 $ 4,876
Furniture and fixtures............................... 338 331
Leasehold improvements............................... 97 136
-- ---
4,566 5,343
----- -----
Less accumulated depreciation and amortization....... (3,285) (3,667)
------- -------
$ 1,281 $ 1,676
======= =======

Depreciation expense was $676,000, $742,000, and $787,000 in fiscal years 1995,
1996 and 1997, respectively.

Equipment acquired under capital leases included in property and equipment above
comprised (in thousands):

JUNE 30,
--------
1996 1997
---- ----
Equipment............................................ $ 1,030 $ 738
Less accumulated amortization........................ (766) (535)
----- -----
$ 264 $ 203
====== =======

Capitalized software, net, included in other assets, comprised (in thousands):

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30,
--------
1996 1997
---- ----
Capitalized software................................. $ 454 $ 438
Less accumulated amortization........................ (364) (225)
----- ------
$ 90 $ 213
===== ======

Accrued liabilities comprised (in thousands):
JUNE 30,
--------
1996 1997
---- ----
Accrued compensation................................. $ 2,302 $ 2,694
Accrued income tax................................... 1,476 2,296
Other accrued liabilities............................ 2,852 2,296
----- ------
$ 6,630 $ 7,286
======= =======
4. LONG-TERM DEBT:

OUTSTANDING LONG-TERM DEBT

As of June 30, 1997 the Company had long-term debt outstanding as follows:

Capitalized lease obligations........................................... $209
Western Economic Development notes payable, net of discount............. 907
---
1,116
------
Less current portion of long-term debt.................................. (314)
------
$ 802
======
The Company has leased equipment under capital lease obligations maturing
through fiscal year 2002. The lease agreements require the Company to maintain
liability and property insurance.

The Western Economic Development notes payable, which were assumed in
conjunction with the Company's acquisition of New Era, are unsecured, non-
interest bearing and are due in quarterly payments through June 2005 with
accelerated principal payments required each quarter beginning in June 1996,
calculated as 14% of quarterly HARBOR revenues in excess of approximately
$600,000. As this criteria was not met at June 30, 1997, no accelerated payments
are currently due. The notes payable are recorded net of a discount of $528,000
at June 30, 1997 based on the Company's borrowing rate of 11%, the interest rate
at which long- term borrowings were available to the Company at the time of
acquisition. Under the terms of these notes, the Company is required to maintain
minimum equity in its Canadian subsidiary, is restricted from paying dividends
and must continue to conduct certain product development operations in Western
Canada until the notes are fully repaid.

At June 30, 1997, future minimum annual payments due under the long-term debt
and the capital lease obligations are as follows (in thousands):

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FISCAL YEAR

1998.............................................$328
1999..............................................265
2000..............................................265
2001..............................................265
2002..............................................260
Thereafter........................................298
---
1,681
Less amounts representing interest............. (565)
------
Total minimum payments.........................$1,116

5. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company leases its facilities and certain equipment under various operating
leases with terms ranging from month-to-month to five years. Under the terms of
these leases, the Company is also responsible for taxes, insurance and
utilities.

The minimum future annual rental payments as of June 30, 1997 under leases with
initial or remaining non-cancelable lease terms longer than one year are as
follows (in thousands):

FISCAL YEAR

1998...............................................$921
1999................................................628
2000................................................575
2001................................................266
2002................................................271
Thereafter..........................................105
---

Total minimum lease payments.....................$2,766

Rent expense was $1,668,000, $1,767,000 and $1,668,000 in fiscal years 1995,
1996 and 1997, respectively.

CONTINGENCY

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 28, 1997, a Danish distributor has made a claim against the Company
asking for approximately $300,000 monetary damages caused by the Company's
failure to deliver workable products on three software orders in Denmark. The
claim is in the discovery stage and the Company believes it has meritorious
defense against the asserted claim.

FOREIGN EXCHANGE CONTRACTS

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company occasionally enters into forward exchange contracts to mitigate the
effects of balance sheet exposures to fluctuations in foreign currency exchange
rates. The effects of hedges on balance sheet exposures are recognized in income
when the exchange rate changes. Gains and losses on hedges of existing assets or
liabilities are included in the carrying amounts of those assets or liabilities
and are ultimately recognized in income as part of those carrying amounts.

The Company had a foreign exchange contract outstanding with a notional amount
of $1,465,000 at June 30, 1996. Risk equal to the notional amount of the
contract arises from the possible inability of the counter party to meet the
terms of this contract. The other party to this contract is a major financial
institution. The loss resulting from this contract was insignificant and was
recorded in general and administrative expense. The Company did not have any
foreign exchange contracts outstanding at June 30, 1997.

6. STOCKHOLDERS' EQUITY:

PREFERRED STOCK

Upon the effective date of the initial public offering on August 15, 1996, all
of the Company's then outstanding preferred stock was converted to common stock
on a one-for one basis.

The Board of Directors has the authority to issue preferred stock in one or more
series and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders.

REVERSE STOCK SPLIT

The Company elected a one-for-two reverse stock split in July 1996. This reverse
stock split has been retroactively reflected in the accompanying Consolidated
Financial Statements.

EQUITY INVESTMENT BY CISCO

On January 27, 1997, the Company signed a definitive agreement with Cisco (See
Note 1) regarding a strategic alliance to jointly market IOS/390 a software
suite that extends Cisco's Internetwork Operating System (IOS) networking
technologies to IBM and compatible MVS mainframes and mainframe applications. As
part of the alliance, on December 12, 1996, Cisco purchased 622,000 newly-issued
shares of the Company's Common Stock (approximately nine percent (9%) of the
Company's then outstanding shares) for approximately $6.8 million. Total
revenues from Cisco totaled approximately to 2.6 million during fiscal year
1997.

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCENTIVE STOCK OPTION PLAN

The Company terminated its 1988 Stock Option Plan and replaced it with a 1992
Stock Option Plan ("1992 Plan") under which 1,955,000 shares of common stock
were reserved for issuance. During the 1997, the Company increased the number of
shares of common stock reserved under the 1992 plan by 150,000 shares to
2,105,000 shares. All stock options outstanding or available for grant under the
1988 Stock Option Plan were canceled or terminated, respectively. Under the 1992
Plan, incentive stock options may be granted to employees, officers and
directors and non-statutory stock options to employees, officers, directors or
consultants at prices not lower than 100% and 85%, respectively of the fair
market value of the Company's common stock at the date of grant as determined by
the Board of Directors. Furthermore, the 1992 Plan provides that options are
exercisable within the times, or upon the events determined by the Board of
Directors, or by a committee of the Board appointed to administer the 1992 Plan,
and are exercisable no later than seven years from the date of grant. Generally,
options become exercisable as to 9/48 after nine months from the date of grant
and ratably thereafter over three years and three months.

DIRECTOR OPTION PLAN

At June 30, 1997 the Company reserved a total of 150,000 shares of common stock
for issuance under the 1996 Director Option Plan (the "Director Plan"). The
option grants under the Director Plan are automatic and non-discretionary, and
the exercise price of the options is 100% of the fair market value of the common
stock on the grant date. Each non-employee director of the Company (an "Outside
Director") will automatically be granted an option to purchase 15,000 shares of
common stock upon joining the Board of Directors. Subsequently, each Outside
Director will automatically be granted an additional option to purchase 3,750
shares of common stock at the next meeting of the Board of Directors following
the annual meeting of stockholders, if on such date, such Outside Director has
served on the Board of Directors for at least six months. The term of such
options is ten years. As of June 30, 1997, 45,000 options have been issued under
the Director Plan.

PLAN ACTIVITY
<TABLE>

Option activity under the 1992 plan and the Director Plan for the fiscal years
1995, 1996, and 1997 follows:
<CAPTION>

OUTSTANDING OPTIONS
OPTIONS ------------------- WEIGHTED
AVAILABLE EXERCISE AVERAGE EXERCISE
FOR GRANT SHARES PRICE PRICE AMOUNT
--------- ------ ----- ----- ------

<S> <C> <C> <C> <C> <C>
Balances, June 30, 1994 ............ 186,989 693,339 $0.70-$1.10 $0.85 $ 590,000
Options reserved ................... 75,000 -- -- -- --
Options granted .................... (313,483) 313,483 $ 1.10 1.10 345,000
Options exercised .................. -- (27,798) $0.70-$1.10 0.76 (21,000)
Options canceled ................... 182,796 (182,796) $0.70-$1.10 0.93 (170,000)
------- ------- ----------- ---- -------

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balances, June 30, 1995 ............ 131,302 796,228 $0.70-$1.10 0.93 744,000
Options reserved ................... 980,000 -- -- -- --
Options granted .................... (355,150) 355,150 $1.10-$14.00 3.52 1,250,000
Options exercised .................. -- (18,564) $0.70-$1.10 0.86 (16,000)
Options canceled ................... 114,311 (114,311) $0.70-$1.10 1.08 (123,000)
------- ------- ------------ ---- -------

Balances, June 30, 1996 ............ 870,463 1,018,503 $0.70-$14.00 1.82 $ 1,855,000
Options reserved ................... 150,000 -- -- -- --
Options granted .................... (826,239) 826,239 $5.94-$16.25 8.83 7,291,734
Options exercised .................. -- (393,608) $ .70-$8,00 0.93 (364,984)
Options canceled ................... 317,169 (317,169) $ .90-$16.25 9.96 (3,160,376)
------- ------- ------------ ---- ---------
Balances, June 30, 1997 ............ 511,393 1,133,965 $ .70-$16.25 $4.96 $ 5,621,374
======= ========= ============ ==== ==========
<FN>
The following table summarizes information with respect to stock options
outstanding at June 30, 1997:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
----------- -----------

Weighted
Average Weighted
Range Remaining Number Average Number Weighted
Of Contractual Outstanding Exercise Exercisable Average
Exercise Price Life (years) June 30, 1997 Price June 30, 1997 Exercise Price
-------------- ------------ ------------- ----- ------------- --------------

<S><C> <C> <C> <C> <C> <C> <C>
$.70 - $4.00 4.34 507,831 $1.27 375,414 $1.10
$5.93 - $8.00 7.04 114,334 7.04 10,386 7.71
$8.13 - $10.63 7.53 509,025 8.42 37,141 8.93
$12.13 - $16.25 6.38 2,775 14.08 249 14.00
----- --- -----
Total 6.05 1,133,965 5.09 423,192 1.95
========= =======
</TABLE>

At June 30, 1996, options to purchase 566,347 shares of common stock at a
weighted exercise price of $.91 were exercisable.

In May 1997, the company offered employees the right to cancel certain
outstanding stock options at original exercise prices and receive new options
with a new exercise price. The new exercise price is $8.125 per share, based on
the closing price of common stock on the date employees agreed to cancel their
original outstanding stock options. Options to purchase a total of 257,025
shares at original exercise prices ranging from $9.00 to $16.25 per share were
canceled and new options were issued in May 1997. Vesting under the new options
commenced on a date six months after the original vesting start date, and occurs
over a four-year period.

EMPLOYEE STOCK PURCHASE PLAN

At June 30, 1997, the Company had reserved a total of 250,000 shares of common
stock for issuance under its 1996 Employee Stock Purchase Plan ("the ESPP").
Employees (including officers and employee directors at the Company) are
eligible to participate if

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

they are customarily employed for at least 20 hours per week and for more than
five months in any calendar year. The Purchase Plan permits eligible employees
to purchase common stock through payroll deductions, which may not exceed 15% of
any employee's compensation . The purchase price of the common stock under the
Purchase Plan will be equal to 85% of the lesser of the fair market value per
share of common stock on the start date of the offering period or on the date on
which the option is exercised. During fiscal year 1997, 62,262 shares were
purchased through the ESPP. The aggregate fair value and weighted average fair
value per share of purchase rights under the ESPP in fiscal year 1997 were
$466,965 and $7.50 respectively.

WARRANTS

At June 30, 1997, the Company had issued fully exercisable warrants to purchase
the common stock with the terms indicated:

NUMBER EXERCISE
OF SHARES PRICE EXERCISE PERIOD
--------- ----- ---------------

213,533 $3.20 through December 2000
62,500 $3.20 through April 2003
6,250 $12.80 through April 2003

PRO FORMA STOCK-BASED COMPENSATION

The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", for financial reporting purposes and
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the Company's Stock
Option Plan or ESPP. Had compensation cost for the Company's Stock Option Plan
and ESPP been determined on the fair value at the grant date for awards in
fiscal years 1996 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share for the fiscal years ended June
30, 1996 and 1997 would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):

Year Ended June 30,
1996 1997
---- ----
Net Income (loss) - as reported...................... ($7,616) $3,360
Net Income (loss) - pro forma........................ ($7,655) $2,501
Net income (loss) per share- as reported............. ($2.44) $.44
Net income (loss) per share- pro forma............... ($2.45) $.34

The above pro-forma disclosures are not necessarily representative of the
effects on reported net income for future years.

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The aggregate fair value and weighted fair value per share of options granted in
fiscal 1996 and 1997 were $325,962 and $3,998,180 , and $.92 and $4.84 per
share, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes Option Pricing Model with the following
weighted assumptions:

Year Ended June 30,
1996 1997
---- ----
Expected volatility ........................... -% 84.5%
Risk-free interest rate ....................... 5.90% 6.30%
Expected life ................................. 4.82 years 4.82 years
Expected dividend yield ....................... 0.00% 0.00%

The Company has also estimated the fair value for the purchase rights under the
Employee Stock Purchase Plan using the Black-Scholes Option Pricing Model with
the following assumptions for rights granted in 1997:

Year Ended June 30,
1996 1997
---- ----
Expected volatility............................ - 84.50%
Risk-free interest rate........................ - 6.54%
Expected life.................................. - 0.5 years
Expected dividend yield........................ - 0.00%

7. INCOME TAXES:

Income (loss) applicable to domestic and foreign income taxes follows (in
thousands):

YEAR ENDED JUNE 30,
1995 1996 1997
---- ---- ----
Domestic................................... $73 $3,737 $5,953
Foreign.................................... (50) (11,239) (455)
$23 $(7,502) $5,498
=== ======== =======

Benefit from (provision for) income taxes comprises (in thousands):

YEAR ENDED JUNE 30,
1995 1996 1997
---- ---- ----
Current:
Federal (net of benefit of operating loss
carryforward of $600 in 1995, $45 in
1996 and 1997)............................. $(580) $(1,100) $(2,099)
State (net of benefit of operating loss
carryforward of $44 in 1995, $12 in
1996 and 1997)............................. (218) (370)

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign......................................... 193 (232)
--- ----- -----
(387) (1,318) (2,701)

Deferred:
Federal......................................... 1,091 262 223
State........................................... 100 91 40
Foreign......................................... (72) 300
----- ---- ---
1,191 281 563
----- --- ---
Decrease in valuation allowance .................... 820 923
--- --- ---
$1,624 $(114) $(2,138)
====== ====== ========

The components of the deferred tax asset are as follows (in thousands):

JUNE 30,
--------
1996 1997
---- ----
Deferred tax assets:
Allowance for doubtful accounts receivable.......... $ 180 $ 207
Allowance for excess and obsolete inventories ...... 50 90
Depreciation and amortization....................... 1,092 1,083
Accrual for warranty and other...................... 1,452 1,795
Net operating loss carryforwards.................... 1,164 458
Tax credit carryforwards ........................... -- 543
-- ---
Total deferred tax assets ...................... 3,938 4,176
Deferred tax liability:
Purchased software products......................... (1,321) (1,016)
------ ------
Net deferred tax assets............................. $2,617 $3,160
====== ======

The principal items accounting for the difference between income taxes computed
at the U.S. statutory rate and the (provision for) benefit from income taxes
reflected in the statements of operations are as follows (in thousands):

Year Ended June 30,
-------------------
1995 1996 1997
---- ---- ----
United States statutory rate.................. $ (8) $ 2,551 $ (1,873)
State taxes, net of federal benefit .......... (1) (127) (331)
Foreign taxes, net............................ 193 (72) 68
Utilization of operating loss carryforwards... 644 -- --
Change in valuation allowance................. 820 923 --
Alternative minimum tax ...................... -- 5 --
Foreign sales corporation..................... -- 60 70
Non-deductible purchased research and
development............................... -- (3,454) --
Other ..................................... (24) -- (72)
--- --- ---
$1,624 $ (114) $(2,138)
====== ======= ========

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has net operating loss and general business tax credit carryforwards
for federal income tax purposes which may be used to reduce future taxable
income, if any, and federal income tax liability, respectively. The years in
which these carryforwards expire and their amounts as of June 30, 1997 are as
follows:

Expiration
Date Amounts
---- -------
U.S. federal net operating loss
carryforwards............................... Through 2007 $1,346,000
Foreign net operating loss
carryforwards............................... none 400,000
Tax credit carryforwards........................ Through 2006 543,000

The Tax Reform Act of 1986 substantially changed the rules relating to net
operating loss and tax credit carryforwards in the case of an ownership changes
of a corporation. The Company had such an ownership change, as defined, which
has limited the amount of net operating loss carryforwards that can be used in
any one year to approximately $135,000.

8. SEGMENT INFORMATION:

The Company offers a suite of high-performance, network transport products and
systems management applications which efficiently transport, store and protect
the integrity of mission critical data and applications. Its business falls into
one industry segment. No one customer accounted for more than 10% of
consolidated annual revenues in fiscal years 1995, 1996 and 1997. The
distribution of revenues between the United States, Canadian and European
operations are as follows (in thousands):

YEAR ENDED JUNE 30,
-------------------
1995 1996 1997
---- ---- ----
Revenues from unaffiliated customers:
United States........................... $16,105 $ 19,923 $ 24,203
Canada.................................. -- 1,258 1,245
Europe.................................. 10,974 12,821 14,386
Transfer from U.S. to Europe............ 5,221 5,620 5,711
Elimination's........................... (5,221) (5,620) (5,711)
------- ------- -------
Consolidated............................ $27,079 $ 34,002 $ 39,834
======= ======== ========

The Company assembles its systems domestically and then sells these systems to
its European subsidiaries for distribution in the European market. Internal
selling prices are designed to allocate operating profits to the operating
entity, with sales and service profits to the sales and service entities.
Consolidated income (loss) before income-taxes comprised (in thousands):

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED JUNE 30,
-------------------
1995 1996 1997
---- ---- ----

United States.......................... $ 73 $ 4,711 $ 5,952
Canada................................. -- (10,858) (243)
Europe................................. (50) (1,355) (211)
---- ------- -----
$ 23 $(7,502) $5,498
==== ======== ======

Consolidated total assets comprised (in thousands):

JUNE 30,
--------
1996 1997
---- ----
United States.............................. $10,858 $36,607
Canada..................................... 5,857 3,561
Europe..................................... 9,210 8,195
----- -----
$25,925 $48,363
======= =======

Export sales were $440,000, $305,000 and $777,000 in fiscal years 1995, 1996 and
1997, respectively.
<TABLE>
9. SUPPLEMENTAL CASH FLOW DISCLOSURES (IN THOUSANDS):
<CAPTION>

Year ended June 30,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest paid...................................................... $ 309 $ 591 $ 192
Income taxes paid.................................................. 14 890 1,743
Noncash transactions from investing and financing activities:
Property and equipment acquired from capital lease obligations 678 - 130
Issuance of preferred and common stock warrants............... -- 84 --
Issuance of common stock for acquisition of Lennox and Partner
GmbH......................................................... 46 19 -
Reduction of property and equipment and accumulated depreciation
for the disposal of fully depreciated assets.................. - 4,127 --
Issuance of common stock in lieu of recruiting expenses....... 5 -- --
Reclassification of inventory as rental equipment under
property and equipment.................................... 230 -- --
Acquisition of New Era (see Note 2):
Assets acquired, excluding cash............................... - 2,330 --
Liabilities assumed........................................... - (3,473) --
Purchased software products................................... - 3,199 --
Purchased research and development............................ - 10,158 --
Notes payable issued to former New Era stockholders (see Note 5) - (1,328) --
Accrued liabilities for acquisition costs..................... - (403) --
Issuance of common stock warrants............................. - (315) --
- ----- --
Net cash payments......................................... - $10,168 --
= ======= ==
</TABLE>

10. EMPLOYEE BENEFIT PLAN:

<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has a 401(k) Profit Sharing Plan (the "Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986. All full-time U.S.
employees are eligible to participate in the Plan.

Each eligible employee may elect to contribute to the Plan up to 15% of the
employee's annual compensation. The Company, at the discretion of its board of
directors, may make matching contributions to the Plan but has not done so for
fiscal years 1995, 1996 and 1997.

11. SUBSEQUENT EVENTS:

On September 18, 1997, the Company acquired NetLOCK technology, an end-to-end
network security technology that encrypts data and helps prevent security
break-ins and certain assets from Hughes for approximately $2,375,000 in cash
and related acquisition costs of $200,000. Of the $2,375,000, $1,000,000 and
$175,000 was paid to Hughes and a third party, respectively, for the technology.
The remaining $1,200,000 was paid to Hughes for certain assets. In conjunction
with the acquisition, the Company licensed certain core technology incorporated
into the NetLOCK technology from a third party licensor. Under the terms of the
license, the Company is obligated to pay royalties ranging from 3% to 9% of
future NetLOCK revenues, with guaranteed minimum royalties of $2,300,000. All
royalty obligations expire by 2002. As of the date of the acquisition, the
NetLOCK technology had not reached technological feasibility nor did it have any
future alternative use. Accordingly, the Company believes a substantial portion
of the purchase price and the guaranteed minimum royalty amounts will be charged
to purchased research and development in the first quarter of fiscal year 1998.

In September 1997, the, Company entered into an operating lease for facilities
for the NetLOCK development efforts. Under the terms of the lease, the Company
is responsible for taxes, insurance, and utilities. The future minimum payments
under this operating lease are $66,000 in fiscal year 1998, $133,000 in fiscal
year 1999 , $141,000 in fiscal year 2000 and $24,000 in fiscal year 2001.

<PAGE>

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding directors is incorporated herein by reference from the
section entitled "Election of Directors" of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, for the registrant's Annual Meeting of Stockholders (the
"Proxy Statement"). The Proxy Statement is anticipated to be filed within 120
days after the end of the registrant's fiscal year ended June 30, 1997. For
information regarding executive officers of the Company, see the information
appearing under the caption "Executive Officers of the Registrant" in Part I,
Item 4a of this Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by reference
from the section entitled "Executive Compensation" of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.

PART IV

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

(a) (1) Financial Statements

<PAGE>

The consolidated financial statements of the registrant as set forth under Item
8 are filed as part of this Annual Report on Form 10-K.

(a) (2) Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts is filed on page -- of this
Report on Form 10-K.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required under the related instructions or are inapplicable.

The independent accountant's report with respect to the above listed financial
statements and financial statement schedule listed in Items 14 (a) (1) and 14
(a) (2), respectively, is filed on page -- of this Report on Form 10-K.

Exhibit
Number
Exhibit
- ----------------- --------------------------------------------------------------

3.1* Restated Certificate of Incorporation of the Company.

3.2* Bylaws of the Company, as amended to date.

10.1* 1992 Stock Option Plan, as amended, and from of agreement
thereto.

10.2* 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereto.

10.3** 1996 Director Stock Option Plan, as amended, and form of
agreement thereto.

10.4** Form of Indemnification Agreement between the Company and its
officers and directors. (1)

10.5*+ OEM/Remarketing Agreement between the Company and Bus-Tech,
Inc. dated February 13, 1989, as amended.

10.6* Lease Agreement between the Company and King & Lyons dated
December 8, 1996.

10.7* Lease Agreement between New Era Systems Services, Ltd. and
Trizec Properties Limited.

10.8*+ Software License and Distribution Agreement between the
Company and Legato Systems, Inc. dated May 10, 1996.

10.9*+ Revenue Sharing Agreement between the Company and Legato
Systems, Inc. dated May 10, 1996.

10.10* Agreement and Plan of Business Acquisition by the Company, New
Era Systems Services, Ltd., and Principal Shareholders of New
Era Systems Services, Ltd. dated December 13, 1995, as
amended.

<PAGE>

10.12*+ Letter Agreement between the Company and Gloria Purdy dated
January 18, 1996, as amended.

10.13*+ Letter Agreement between the Company and Augustus J. Berkeley
dated December 9, 1994.

10.14*+ Letter Agreement between the Company and Barbara Booth dated
January 16, 1996

10.18* Note and Security and Loan Agreement between the Company and
Imperial Bank dated April 25, 1996.

10.19.1* Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated September
10, 1993.

10.19.2* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
February 7, 1994.

10.19.3* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
April 29, 1994.

10.19.4* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
February 28, 1995.

10.19.5* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 12, 1995.

10.19.6* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 12, 1995.

10.19.7* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 23, 1995.

10.19.8* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
January 11, 1996.

10.19.9* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
January 11, 1996.

10.19.10* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated May
29, 1996.

10.19.11* Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated May
29, 1996.

10.20** Stock Purchase Agreement between the Company and Cisco
Systems, Inc. dated December 12, 1996.

11.1 Statement re computation of per share earnings

21.1 List of Company's subsidiaries

23.1 Consent of Coopers and Lybrand L.L.P., Independent Accountants

<PAGE>

24.1 Power of Attorney (included on the signature page herein)

27.1 Financial Data Schedule

* Incorporated by reference from the Company's Registration Statement on
Form S-1, as amended (File No. 333-05243) which became effective on
August 15, 1996.

** Incorporated by reference from the Company's Report on Form 10-Q for
quarter ended December 31, 1996.

+ Confidential Treatment has previously been granted for portions of this
exhibit pursuant to an order of the Commission.

(b) Reports on Form 8-K

For the Company's quarterly period ending June 30, 1997, the Company
filed current reports on Form 8-K on April 21, 1997, May 1, 1997, and May 30,
1997.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and to the stockholders
Interlink Computer Sciences, Inc. and Subsidiaries

Our report on the consolidated financial statements of Interlink Computer
Sciences, Inc. is included on page 39 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related
consolidated financial statement schedule listed in Item 14(a)(2) of this Form
10-K.

In our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.

/s/COOPERS & LYBRAND L.L.P.

San Jose, California
July 21, 1997

<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ----------- ------ -------- ---------- ------

Allowance for Doubtful Accounts:

Year ended June 30, 1995 $ 334 $ 67 $(122) $ 279

Year ended June 30, 1996 $ 279 $ 215 $ 48 $ 542

Year ended June 30, 1997 $ 542 $ 172 $ (91) $ 623

<PAGE>

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.

INTERLINK COMPUTER SCIENCES, INC.

By: /s/Ronald Braniff Date : September 29, 1997
----------------------
Interim Chief Executive Officer

POWER OF ATTORNEY

Know all persons by these present, that each person whose signature appears
below constitutes and appoints Gloria M. Purdy, his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Signature Title Date

/s/ Ronald W. Braniff Interim Chief Executive Officer September 29, 1997
- -------------------- (Principal Executive Officer)
Ronald W. Braniff

/s/ Gloria M. Purdy Vice President and Chief Financial September 29, 1997
- ------------------- Officer (Principal Financial and
Gloria M. Purdy Accounting Officer)

/s/ Thomas Bredt Chairman of the Board September 29, 1997
- ----------------
Thomas Bredt

/s/Andy Fillat Director September 29, 1997
- --------------
Andy Fillat

/s/D. Benedict Dulley Vice President and Director September 29, 1997
- ---------------------
D. Benedict Dulley

EXHIBIT 11.1

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except per share data)

Year ended June 30
------------------
1995 1996 1997
---- ---- ----
Primary and fully diluted:
Weighted average shares:
Common ................................ 2,428 2,446 6,516
Preferred................................ 1,230
Common equivalent shares from
stock options and warrants............... 475 1,079
Common and common equivalent
shares pursuant to Staff
Accounting Bulletin
No. 83 ................................ 681 681 -
--- --- -

Shares used in per share calculation.............. 4,814 3,127 7,595
===== ===== =====

Net income (loss) ................................ $1,647 $(7,616) $3,360

Net income (loss) per share....................... $ .34 $(2.44) $ .44

(1) There is no difference between primary and fully diluted net income per
share for all periods presented.

EXHIBIT 21.1
INTERLINK COMPUTER SCIENCES, INC.

Interlink Computer Sciences, SARL
Interlink Computer Sciences, SA (Switzerland)
Interlink Computer Sciences, GmbH
Interlink Computer Sciences, LTD
Interlink Computer Sciences, Espania
Interlink HARBOR Ltd., Canada
Interlink Financial Services, Inc.

EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement of
Interlink Computer Sciences, Inc. on Form S-8 (File No. 333-14249) of our
reports dated July 21, 1997, except for Note 5, "Contingencies", for which the
date is August 28, 1997 and Note 11 for which the date is September 18, 1997 on
our audits of the financial statements of Interlink Computer Sciences, Inc. as
of June 30, 1996 and 1997 and for each of the three years in the period ended
June 30, 1997, which reports are included in this Annual Report on Form 10-K.

San Jose, California
September 29, 1997

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 28,106
<SECURITIES> 0
<RECEIVABLES> 10,375
<ALLOWANCES> (623)
<INVENTORY> 872
<CURRENT-ASSETS> 41,864
<PP&E> 1,676
<DEPRECIATION> 787
<TOTAL-ASSETS> 48,363
<CURRENT-LIABILITIES> 16,509
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 28,667
<TOTAL-LIABILITY-AND-EQUITY> 48,363
<SALES> 24,978
<TOTAL-REVENUES> 39,834
<CGS> 3,025
<TOTAL-COSTS> 7,737
<OTHER-EXPENSES> 27,334
<LOSS-PROVISION> 301
<INTEREST-EXPENSE> 467
<INCOME-PRETAX> 5,498
<INCOME-TAX> 2,138
<INCOME-CONTINUING> 3,360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,360
<EPS-PRIMARY> .44
<EPS-DILUTED> .44

</TABLE>