INTERLINK COMPUTER SCIENCES INC, 10-K, 1998-09-24

INTERLINK COMPUTER SCIENCES INC
10-K, 1998-09-24
COMPUTER INTEGRATED SYSTEMS DESIGN

Previous: INTERLINK COMPUTER SCIENCES INC, DEF 14A, 1998-09-24

Next: INTERCELL CORP, 8-K, 1998-09-24

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, 1998
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)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value

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. |X|

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant, based on the closing sale price of the Common
Stock on August 31, 1998, as reported on the Nasdaq National Market was
approximately $13.4 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 $0.001 per share, as of August 31, 1998, was 8,194,425.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 1998 Annual
Stockholders Meeting are incorporated by reference in Part III hereof.
<PAGE>

TABLE OF CONTENTS

ITEM PAGE

PART I.

Item 1. Business...................................................... 3
Item 2. Properties.................................................... 26
Item 3. Legal Proceedings............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders........... 27

PART II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 28
Item 6. Selected Consolidated Financial Data.......................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 30
Item 8. Consolidated Financial Statements and Supplementary Data...... 39
Item 9. Changes in and Disagreements with Accountant on
Accounting and Financial Disclosure......................... 63

PART III.

Item 10. Directors and Executive Officers of the Registrant............ 63
Item 11. Executive Compensation........................................ 64
Item 12. Securities Ownership of Certain Beneficial Owners
and Management................................................ 64
Item 13. Certain Relationships and Related Transactions................ 64

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 64

SIGNATURE................................................................. 71

2
<PAGE>

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 systems networking.
Interlink provides software and services which enable customers to use their IBM
and IBM-compatible mainframes running the MVS or OS/390 operating systems as
"enterprise servers" in distributed, heterogeneous client/server network
environments. The Company's products and services enable customers to transport,
access, secure and manage mission-critical data and applications across
distributed network environments. The Company develops and markets network
transport products, which provide for enterprise server connectivity and network
file transfer using Transmission Control Protocol and Internet Protocol
("TCP/IP"). During the fiscal year ended June 30, 1998, the Company expanded its
product focus to include management and control of TCP/IP data and network
performance, as well as security of data transmissions over intranets, extranets
and the Internet. Revenue from these new product areas was insignificant during
the fiscal year.

In support of this more focused product strategy, Interlink made two
acquisitions and divested its HARBOR product line during the fiscal year. In
September 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. Interlink
has further developed such technology, releasing its initial product in January
1998 and expects to release a more advanced version in the quarter ending
September 1998. In December 1997, the Company sold substantially all of the
assets of the HARBOR product line to a former executive and member of the board
of directors of the Company. In January 1998, the Company acquired Networkers
Engineering Limited, giving the Company core technology and important
development resources used in its new management and control products, which are
expected to become available in the quarter ending September 1998.

As of June 30, 1998, the Company had approximately 1,370 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.

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

3
<PAGE>

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. In
addition, the significant growth in business-to-business communication and the
explosive growth of the Internet as a more cost-effective, open network for
communication are driving the migration from traditional System Network
Protocols ("SNA") to TCP/IP.

The integration of TCP/IP with the mainframe operating system, enables the
connection of centralized mainframes to distributed client/server networks and
to networks of other companies 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. IBM historically offered its MVS operating system for use
on mainframe computers sold by it and other suppliers. Recent releases of this
operating system, bundled together with certain other software tools, including
TCP/IP, have been re-named "OS/390." Interlink's TCPaccess, Cisco's IOS for
S/390, and Interlink's other software products are designed to operate with both
the MVS versions and the OS/390 version of IBM's operating system and are
designated herein together as OS/390. 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 inter-operate. As organizations move to TCP/IP
additional tools are required to protect and efficiently manage the network and
data. At the network transport level, the speed, efficiency, reliability and
manageability of a given transport solution can have a considerable impact on
the effectiveness of the overall computing 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. As Organizations migrate to using
TCP/IP as their principal network backbone, there is a greater need for tools to
manage these networks reliably and efficiently. 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.

4
<PAGE>

THE INTERLINK SOLUTION

Interlink's products enable OS/390 mainframes to function as enterprise
servers in client/server environments. The Company offers a suite of
high-performance network transport products, systems management and security
applications which efficiently transport, manage 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, TCPaccess and Cisco's
IOS for S/390 ("IOS/390"), integrate the OS/390 enterprise server into
client/server networks using open systems TCP/IP protocols, and its X.25
communications product and CICS (Customer Interface Control System) Programmers
Toolkit expand the capabilities of the networking teams. The Company's systems
management applications have been refocused on management and control of the
network, and include the Company's Enterprise Print Services ("EPS") product and
the new "e-Control" product. Initial product availability for e-Control is
anticipated in the quarter ending September 1998. The Company is continuing to
develop the NetLOCK technology, its end-to-end network security product, and
expects to release an important upgrade to the product in the quarter ended
September 1998, making NetLOCK compatible with existing IPsec-compliant
firewalls.

STRATEGY

Interlink's objective is to become the leading supplier of
high-performance solutions for communications with and managing, controlling and
securing 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 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. These products include efficient and cost effective network
transports, as well as network products focused on security, configuration and
administration, problem diagnosis and resolution, capacity planning and printing
services.

Capitalize on Sales Opportunities. The Company plans to expand its sales
force and dedicate additional resources to capitalize on new sales opportunities
resulting from new releases of its core products. The Company intends to pursue
cross-sell opportunities by leveraging its existing customer base for sales of
its new product offerings.

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

5
<PAGE>

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 solutions 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 continues to work with Cisco Systems to jointly market a software suite
that extends multi-protocol networking for OS/390 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 OS/390
operating system.

PRODUCTS

The following table summarizes the Company's software products and their
principal functions:

Product Name Description
------------ -----------

Network Transport Products-
IOS/390 and TCPaccess Provides high reliability TCP/IP networking
protocols that allow OS/390 mainframes to
communicate with clients and servers.

X.25 for S/390 Enables legacy OS/390 applications that
rely on the X.25 protocol to communicate in
a TCP/IP environment, without the need for
front-end processor for access to NPSI
based non-SNA applications.

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

Systems Management Products- Provides management of networked mainframe
e-Control computers. Consists of three modules
including Administration and Configuration
Assistant, Problem Diagnosis Assistant, and
Performance and Capacity Planning
Assistant. Also provides valuable security
logging and control functions.

6
<PAGE>

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

Network Security Products- Provides data protection among a variety of
NetLOCK popular hardware and operating system
configurations, including PCs running
Windows NT, Windows 95, OS/2, and
workstations and servers running UNIX and
Windows NT.

TECHNOLOGY

The Company's core technologies are the basis for its enterprise data
center transport and management and security products. These technologies allow
for the expansion of existing products and addition of new products to the
Company's basic technology architecture in three areas: network transport
products, systems management products, and network security products.

The products in each of the company's three principal areas were developed
within an application architecture consisting of key components which provide
high-performance, efficient operation, rapid development, reusable code and
improved maintainability.

Network Transport Products

The following products comprise the network transport product line. TCPaccess,
IOS/390, X.25 for S/390, and CPT.

TCPaccess and IOS/390 ("TCPaccess")

TCP/IP is the de facto standard protocol for network interoperability.
TCPaccess and IOS/390 provide a high performance, standards-based TCP/IP
capability for mainframe computers running the OS/390 operating system. It is
scalable to thousands of concurrent terminal, data transfer, or API users, while
easing system administration through compatibility with standard OS/390 security
and accounting facilities. Current versions of TCPaccess are year 2000
compliant.

The efficiency of customers' enterprise systems depends on the efficiency
of the network. TCPaccess is built to support more users concurrently with lower
CPU demands than competitive products. TCPaccess uses even fewer CPU resources
than products that offload protocols to improve CPU consumption. This results in
increased productivity and a longer period of use before hardware upgrades are
necessary.

TCPaccess is native to OS/390 and is entirely resident on the host. This
simplifies the data path and speeds up client/server transactions. And because
the architecture for TCPaccess is OS/390 based, interoperation with OS/390 is
simple, direct, fast, and highly efficient.

TCPaccess includes Fault Tolerant, which significantly enhances system
availability for business-critical production environments. TCPaccess-Fault
Tolerant automatically and transparently reroutes user sessions if a controller,
network router, or router link fails. User sessions continue without
interruption or delay.

7
<PAGE>

TCPaccess offers efficient FTP implementation for file transfers to and
from OS/390 systems. TCPaccess provides Application Program Interfaces ("APIs")
that enable application-to-application communications, permitting new
distributed applications to interface with TCP/IP.

X.25 for S/390 ("X.25")

X.25 is used for inter-enterprise communications in addition to more
traditional terminal-to-application communications.

X.25 permits X.25 support via TCP/IP routers in OS/390 super-server
networks using XOT (X.25 over TCP/IP) directly to TCP/IP on OS/390 instead of
the front-end processors (FEPs) required in the SNA environment. X.25 may also
be used to attach native X.25 equipment to SNA host systems without a packet
network. For client-based access to mainframe data, X.25 replaces IBM's X.25
Network Control Program Packet Switching Interface (NPSI) software.

CICS Programmers Toolkit ("CPT")

The CICS Programmers Toolkit implements a transparent interface between TCP/IP
LANs and mainframes running OS/390 to allow the development of Customer
Interface Control System ("CICS") to TCP/IP applications. This interface allows
both new and existing CICS applications to interoperate with TCP/IP network
applications. The most recent version of CPT is year 2000 compliant. Based on
open network protocols, CPT includes a set of automated CICS transactions called
CPT/Tools and a set of application program interface services called CPT/API.

CPT/Tools is prewritten CICS code that allows CICS programmers to send or
receive data over TCP or UDP open-network protocols. CPT/API is a flexible
programming environment that CICS programmers use to communicate with remote TCP
or UDP applications. The CPT/API programming environment allows programmers to
develop sophisticated applications that require bi-directional conversations or
data transfers.

Systems Management Products

The following products comprise the systems management product line:
e-Control and EPS.

e-Control (To be released in Q1 FY'99)

e-Control provides secure enterprise management for TCP/IP in the data
center. It places management tools in the hands of the key network team: the
network administrator, the help desk specialist and the capacity planning
analyst. e-Control provides powerful assistants: tools to aid in everyday audit
logging, problem determination and real-time situation monitoring. Current
version is year 2000 compliant.

The e-Control product includes 3 assistants to help manage the challenges
in a TCP/IP environment. An Administration and Configuration assistant for
TCP/IP setup and auditing; a Problem Diagnosis assistant for help-desk problem
determination and reporting; and a

8
<PAGE>

Performance and Capacity Planning assistant for isolating bottlenecks in the
network, providing both a real-time and a historical analysis capability.

The Administration and Configuration assistant ("A&C assistant") provides
support for product definition of TCPaccess and IBM's TCP/IP for MVS products as
well as a detailed audit log of modifications should problems arise after
updates are made. The A&C assistant maintains changes to the system and helps
manage "who made what change when?" types of questions. Also included in the A&C
assistant is the Sentinal/IP security facility, the basis for policy based
management of TCP connection security. Sentinel/IP provides a secure, auditable
solution for TCP/IP on MVS or OS/390 superservers, by empowering the existing
System Authorization Facility package to become the TCP/IP access firewall.

The Problem Diagnosis Assistant ("PDA") provides tools that aid in problem
determination in the TCP/IP protocol stack. These problems can range from a
user's inability to access certain applications to interface problems across the
channel or LAN. With the PDA, the Help Desk's challenges are minimized by
providing IP address to LU name mapping, Userid to IP address or LU name mapping
for any or all TCP connections. In addition, Telnet and FTP statistics can be
measured in real-time and diagnosed to verify if a network problem or VTAM
application problem exists. The PDA has the capability of gathering data from
multiple sources (TCPaccess, TCP/IP for MVS, VTAM, network ping/traceroute)
assembling and presenting this data in one common format from a single point of
control. This point of control begins with the primary option menu in a TSO or
NetView environment or at any telnet client. The powerful REXX interface allows
for integration with automated operations package and other specific
requirements.

The Performance and Capacity Planning Assistant ("PCPA") provides
real-time monitoring and historical data analysis for TCP/IP activities. Using
SMF data and current active connection data, the PCPA details connection status
by time, port and/or application on the spot. In addition, a user-friendly front
end assists the capacity planner with developing SMF statistics for historical
data analysis of a TCP/IP environment.

Specific monitoring of critical devices, such as routers in the network,
can be achieved by customizing parameters to obtain alerts and notification when
bottlenecks occur in a network. The e-Control address space can interface with
NetView, TSO/ISPF, and a telnet client. The architecture supports gathering
information from the various sources noted and presenting them in a common
place.

Enterprise Print Services ("EPS")

Enterprise computing environments are becoming increasingly complex, with
a variety of printers distributed across a mixture of TCP/IP networks and
mainframes. In these complex environments, users need the flexibility to access
the right printer for the right task, whether it is a high-speed mainframe
printer or a printer attached to a TCP/IP network and system administrators need
the management tools to oversee and control print resources.

EPS provides efficient print management and distributions across the
enterprise with bidirectional support of the lpr and lpd TCP/IP printing
protocols. It resides on the same host as the TCP/IP implementation functions as
a print gateway between TCP/IP and SNA networks, mapping print requests between
the two environments and allowing TCP/IP and MVS users to

9
<PAGE>

send print output to remote or locally attached printers. The most recent
version of EPS is year 2000 Compliant.

Network Security Products

As networks have become more pervasive, linking employees within companies
and connecting companies to their customers, suppliers, and business partners,
more confidential information has become vulnerable. NetLOCK provides a
standards-based end-to-end security solution for customer networks. The NetLOCK
solution enables businesses to securely extend their networks to more users over
a wide variety of LAN and WAN technologies and public data network services.

Companies have aggressively replaced traditional ways of doing business
with electronic communications and need to protect this data from many different
types of attacks.

NetLOCK is the first in a new class of network security software that
addresses the previously unmet need for enterprise-wide, end-to-end protection
of confidential information and the network over a wide variety of LAN and WAN
technologies and public data network services, including the Internet.

NetLOCK is transparent to the user, thus no concern over special training
or forgotten passwords. Proven encryption algorithms are used to hide all user
data, user passwords, and network-related information that travels between
networked computers - independent of their location and the connecting LAN and
WAN (Internet) infrastructure. Individual encryption keys can be changed
frequently and automatically. Computer-level authentication is used to tightly
control which computers can communicate over the network. Data integrity
checking can ensure that transmitted data arrives uncorrupted by a third party
or network errors.

NetLOCK security management capabilities allow organizations to manage
large networks while distributing security administration to the appropriate
responsible parties. For example, encryption key and authentication certificate
management can be decentralized and automated to improve security reliability
and minimize security administration tasks. It allows restricted communications
with unsecured computers at the manager's control. It provides 'virtual
firewall', through port filtering that restricts application use to only
required destinations (FTP, Telnet).

PRODUCT DEVELOPMENT

The Company has made substantial investments in research and development
to produce high-performance network transport products, management and control
products, and network security products. As of June 30, 1998, the Company's
research and development and quality assurance organization consisted of 63
employees. The Company intends to enhance its existing product offerings and to
introduce additional products for the enterprise data center transport and
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

10
<PAGE>

portable and adaptable to new client/server hardware and software environments.
Interlink uses software development tools such as configuration management, code
testing, performance monitoring and its intranet, to aid in this development.

The Company has completed the development of TCPaccess Version 5.2, which
supports MVS OS/390 Unix Systems Services APIs. The Company intends to develop
additional versions to provide increased performance, efficiency and
scalability. The Company acquired certain network security technology, known as
NetLOCK, from Hughes in September 1997, and has completed its first product. In
addition, the company acquired certain network transport and management
technologies from Networkers Engineering, Ltd. in January 1998, and expects to
complete its first product, e-Control, in Q1 FY99. 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.

SALES, MARKETING AND CUSTOMER SUPPORT

The Company markets and sells its software and services primarily through its
direct 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 and technical systems engineering personnel 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 sometimes prefer monthly payment arrangements,
usually over terms of 36 months. As of June 30, 1998, the Company employed 86
sales, marketing, systems engineering and consulting personnel. For the fiscal
years ending June 30, 1997 and 1998, 45% and 35%, respectively, of the Company's
total revenues were derived from international sales and 83% and 91%,
respectively, of the Company's product revenues were derived from direct sales.

Sales

The Company's sales organization consists of a staff of software sales
professionals based in field sales offices. As of June 30, 1998, the Company's
direct sales force included 24 account executives and 18 technical systems
engineers who provide pre-sales support and consulting services. Field offices
in the United States are located in Atlanta, Chicago, Dallas, Denver,
Indianapolis, New York, Phoenix, San Francisco and Washington D.C. The
international sales organization has offices in Koln Germany, London England,
and Paris France.

11
<PAGE>

in August 1997 Cisco and Interlink restated the agreement to allow the Company
to resell IOS/390 and, once again, independently market and sell TCPaccess. As a
result of these events, sales of network transport products declined
substantially in the June 1997 and September 1997 quarters, and has been
rebuilding since that time. Sales of IOS/390 by Interlink and by Cisco
represented 12% and 20%, respectively of product revenue in the years ended June
30, 1997 and 1998. The Company continues to cooperate in certain development
activities with Cisco.

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 the Company's internal sales force and those of
its channel partners. The marketing organization also plays a lead role in
product management and product marketing activities, including competitive
positioning, pricing and long-term product direction. Effective July 1998, the
Company changed its pricing structure for all network transport products and
maintenance services from platform based to millions-of-instructions-per-second
("MIPS") based, making upgrades to higher capacity systems easier to sell and
more directly related to customer requirements.

Customer Support

For the fiscal year ended June 30, 1997 and 1998, 37% and 45%,
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 is typically 15% to 18% of 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
customer's site. The Company's distributors and resellers also offer first level
customer support to their end user customers, while relying on the Company for
any additional support as needed. Because the Company's customers depend on the
Company's products to transport 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. During the fiscal year ended June 30, 1998, the Company made
significant improvements in reducing the time required to fix errors found in
its software and typically has few high-priority problems unattended at any
point in time.

12
<PAGE>

CUSTOMERS

As of June 30, 1998, the Company had approximately 1,370 customers,
revenues from Cisco Systems, Inc. accounted for 15% of the Company's
consolidated total revenues in fiscal 1998. No one customer accounted for more
than 10% of total consolidated revenues in fiscal year 1997 and 1996. The
Company's customer list includes the following companies:

<TABLE>
<S> <C> <C> <C>
Communications Energy/Utilities Government Services
- -------------- ---------------- ---------- --------
Austria PTT BOC Gases Internal Revenue Svc. Comdisco
BellSouth Boston Gas Bureau of Reclamation. Debis
Bell Atlantic British Gas SEC Dun & Bradstreet
MCI Edison International U.S. Dept. of State Lexis-Nexis
Pacific Telesis Florida Power & Light U.S. Dept of Justice Reuters
Telecom Eireann National Grid U.S. Postal Service
Telecom Italia National Power FBI Manufacturing
U.S. Sprint Powergen Serinf -------------
Severn Trent Serpro Air Prod. & Chemicals
Consumer/Retail South Wales Electric Apple Computers
- --------------- Williams Insurances Boeing
Argos ---------- Caterpillar
Estee Lauder Financial Services Allstate Cisco Systems
Federated Systems ------------------ Blue Cross/Blue Shield Consolid. Freightways
Giant Foods Alberta Treat Branches CHU Nancy Hosp. Gen. Ford
J. Crew Group Banco Imperio Cox Medical System Mercedes Benz
Johnson & Johnson Bank for Int'l Settlem. First Health Services McDonnel Douglas
Publix SuperMarkets Bank of Montreal Kemper Insurance Otis Elevator
Quaker Oats Barclays Macif Rolls-Royce
Sara Lee Commerzbank NW Mutual Life Sollac
Sherwin-Williams Edward D. Jones State Farm Sony
Mastercard Int'l Vision Service Plan Tandy
Republic Natl. Bank Wellpoint Health Netwk.
SKA Credit Suisse
Wells Fargo
Caixa Econ. Fed
</TABLE>

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, as well as 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.

13
<PAGE>

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

Principle competition for the Company's X.25 product is from IBM's specialized
front end processors which process X.25 protocol communications from the network
to the mainframe.

CICS Programmers Toolkit is a specialized application and has no direct
competition as a product. However, the benefits provided by CPT can also be
provided by IBM's CICS Sockets, which are part of the OS/390 operating system.

Systems Management Products. The primary competitors for e-Control include
Tivoli Systems (an IBM company) with its various framework products including
NetView, Sterling Software, Inc. with its NetMaster for TCP/IP product, Applied
Expert Systems and TDSLink. Many other companies in the computer industry have
announced products and plans to compete in the market for management and control
of computer systems and networks. The Company's Enterprise Print Services
competes principally with IBM's IP-PrintWay & NetSpool, as well as Levi, Ray &
Shoup, Inc. with their VPS product.

Network Security Products. The primary competitors for the NetLOCK
products are Snare Networks, Kyberpass, Cylink, Time Step, Red Creek
Communications Inc., and V-One Technologies, Inc. In addition, security products
comparable to NetLOCK are currently available and are already incorporated into
some operating systems, thereby significantly diminishing the market for
NetLOCK.

14
<PAGE>

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,
and the 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, 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 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.

15
<PAGE>

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, 1998, the Company and its subsidiaries employed a total of
170 persons, of which 70 are in sales and marketing, 63 are in product
development and quality assurance, 16 are in customer support and 21 are in
finance and administration. Interlink employs 144 persons in the United States
and 26 persons in Europe. In addition, the Company employed 16 contractors as of
June 30, 1998, principally in product development. The Company's continued
success will depend on its ability to attract and retain key employees.
Competition for employees is intense in the software industry. To date, the
company believes it has been successful in its efforts to recruit qualified
employees, but there is no assurance that the company will continue to be
successful in the future. No employees are subject to collective bargaining
agreements, and the Company considers its employee relations to be good.

Risk Factors

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:

New Products and Rapid Technological Change

The markets for the Company's network transport products, system
management products and network security products 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

16
<PAGE>

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, e-Control 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.

Competition

17
<PAGE>

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 IBM's TCP/IP product may
be less expensive to purchase than the Company's corresponding IOS/390 and
TCPaccess products 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. Principle
competition for the Company's X.25 product is from IBM's specialized front end
processors which process X.25 protocol communications from the network to the
mainframe.

18
<PAGE>

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.

Dependence on Current Products

During the fiscal years ended June 30, 1997 and 1998, sales of the network
transport products, excluding maintenance and consulting and hardware, accounted
for approximately 41% and 36% and, including related maintenance and consulting
and hardware, accounted for approximately 84% and 87%, 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
increased revenues from sales by Cisco or the Company of the IOS/390 product.
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 other
third-party products. The failure by either Cisco or the Company to increase
sales levels of the IOS/390 product 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
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
products, and have a material adverse effect on the Company's business,
financial condition and results of operations.

19
<PAGE>

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 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.

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

The Company has acquired a significant portion of the technology
associated with its e-Control and NetLOCK products. There can be no assurance
that the Company will be successful in integrating the operations and personnel
associated with its recent acquisitions of the NetLOCK technology and Networkers
Engineering, Ltd. There can be no assurance that the Company will be successful
in deriving significant future sales from the products developed from these
technologies, or establishing and maintaining uniform standards, controls,
procedures and policies. 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.

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. 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 nor is it currently engaged in any
discussions or negotiations with respect to any such transaction.

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 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

20
<PAGE>

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.

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.

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. The
Company restructured this agreement with Cisco in August 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
continue to receive any revenues therefrom. 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 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.

21
<PAGE>

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, form competing arrangements with the Company's competitors, or
dispute the Company's other strategic relationships.

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 could be materially
adversely affected. See "Legal Proceedings."

Reliance on and Risks Associated with International Sales

During the fiscal years ended June 30, 1997 and 1998, 45% and 33%,
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 continue to represent a
significant portion of its total revenue. 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

22
<PAGE>

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.

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
nine months. 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 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, with a
substantial majority of those orders being 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 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 March and June and weaker
sales in the quarters ending in September and

23
<PAGE>

December. The decrease in product revenues in the quarters ending in September
is due to the international customer seasonal buying patterns. 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, the Company's results have been and
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.

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

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 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.

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
functionalities 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.

24
<PAGE>

Possible Volatility of Share Price

There can be no assurance that the market price of the Company's Common
Stock will not decline. 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 such
litigation could also subject the Company to significant liabilities.

Year 2000 Issues

In the computer industry many systems were not designed to handle any
dates beyond the year 1999, and such computer hardware and software will need to
be modified prior to the year 2000 in order to remain functional. The Company is
concerned that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
may result in spending being diverted over the next two years. The Company has
completed its assessment and testing of its product lines and has established
that the current versions of its products are all year 2000 compliant. The
Company is in the process of completing the assessment and testing of year 2000
compliance for its internal information and non-IT systems. The Company
anticipates that addressing the year 2000 problem for its internal information
and non-IT systems and current and future products will not have a material
impact on its operations or financial results and expects to complete its
assessment by the end of fiscal 1999. However, there can be no assurance that
these costs will not be greater than anticipated, or that corrective actions
undertaken will be completed before any year 2000 problems could occur. The year
2000 issue could lower demand for the Company's products while increasing the
Company's costs. These combining factors, while not quantified, could have a
material adverse impact on the Company's financial results. The Company uses
certain products from and has certain key relationships with suppliers,
including Cisco. If these suppliers fail to adequately address the year 2000
issue for the products this could have a material adverse impact on the
Company's operations and financial results. The Company is still assessing the
effect the year 2000 issue will have and, at this time, cannot determine the
impact it will have, if any.

25
<PAGE>

Issues Related to the European Monetary Conversion

The Company is aware of the issues associated with the forthcoming changes
in Europe aimed at forming a European economic and monetary union (the "EMU").
One of the changes resulting from this union will require EMU member states to
irrevocably fix their respective currencies to a new currency, the Euro, on
January 1, 1999. On that day, the Euro will become a functional legal currency
within these countries. During the next three years, business in the EMU member
states will be conducted in both the 25 existing national currencies, such as
the Franc or Deutsche Mark, and the Euro. As a result, companies operating in or
conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the Euro. The Company is still
assessing the impact the EMU formation will have on both its internal systems
and the products it sells. The Company will take appropriate corrective actions
based on the results of such assessment. The Company has not yet determined the
cost related to addressing this issue and there can be no assurance that this
issue and its related costs will not have a materially adverse affect on the
company's business, operating results and financial condition.

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. The
Company's NetLOCK personnel are in 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 17 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 is involved in a commercial dispute with a former Italian
distributor ("Claimant"), which has alleged that the Company and two of its
subsidiaries have breached and unlawfully terminated various distributorship
agreements for distribution of the Company's TCPaccess and HARBOR Products in
Italy, and which has asserted various claims in two lawsuits against the
Company, its subsidiaries, and several officers of the Company.

In January 1997, the Claimant initiated a lawsuit in Milan, Italy against
the Company's Canadian Subsidiary, New Era Systems Services Ltd. ("New Era");
the Company; the Company's French subsidiary, Interlink France S.A.R.L.
("Interlink France"); and the Company's current distributor in Italy, an
unrelated Italian Corporation. The litigation is based on the Claimant's
distribution of the Company's HARBOR products pursuant to a distributor
agreement with New Era Systems Services Ltd., an affiliated Irish corporation
("New Era Ireland"), which pre-dates the Company's acquisition of New Era. The
distributor relationship with the Claimant for the distribution of HARBOR
products in Italy and Spain has terminated. Pursuant to 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

26
<PAGE>

the defendants pay all expenses resulting from the litigation. New Era Ireland
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.

In March 1997 the Claimant initiated a separate lawsuit in Alameda
County, California against the Company, certain officers of the Company and of
Interlink France, and the Company's current Italian distributor. In the
complaint, Claimant alleges various tort claims related to the defendants'
alleged actions with respect to prior distribution agreements between Claimant,
the Company, and Interlink France for distribution of the Company's TCPaccess
products in Italy. The claims alleged include fraud, deceit, defamation, trade
libel, unfair competition, misappropriation, breach of confidential
relationship, and conversion. Claimant demands compensatory damages in excess of
$2,000,000, unspecified punitive damages, interest, attorneys' fees, and costs
of the litigation. The Company has successfully moved to compel arbitration of
the claims in accordance with the arbitration clauses in the earlier
distributorship agreements with the Claimant. The lawsuit was stayed as to all
parties by the Alameda County Superior Court pending arbitration of the claims
against the Company.

On or about March 9, 1998 the Claimant initiated arbitration proceedings
in San Francisco, California under the International Chamber of Commerce ("ICC")
Rules of Arbitration. The request for arbitration purports to allege claims for
breach of contract, fraudulent inducement, trade libel, use of trade secrets and
confidential information, unfair business practices, interference with customers
and improper use of confidential information and ideas. The request seeks
damages in the amount of $3,000,000, plus punitive damages in an unspecified
amount, less an offset for amounts owed to Interlink France, and a constructive
trust.

The Company has denied that it breached any agreement with the Claimant or
engaged in any wrongful or fraudulent conduct as the Claimant alleges. In
addition, the Company has counterclaimed against the Claimant for breach of
contract, claiming damages in an unspecified amount to be determined according
to proof.

On or about June 12, 1998 the parties agreed to a sole arbitrator.
Discovery is proceeding. Arbitration hearings are currently scheduled to occur
in February 1999.

The Company has accrued $350,000 for settlement of any liability that may
result upon resolution of these matters. No estimate of the ultimate liability
that may result upon the resolution of these matters is presently determinable.
Should the Company be unsuccessful in defending any of these claims, the
Company's business, financial condition and results of operations could 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, 1998.

27
<PAGE>

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 during the last two fiscal years. Such prices represent prices
between dealers, do not include retail mark-ups, mark-downs or commissions and
may not represent actual transactions.

<TABLE>
<CAPTION>
Fiscal 1998 High Low Fiscal 1997 High Low
- -------------- ------- ------- -------------- ------- ------
<S> <C> <C> <C> <C> <C>
First Quarter $7.6250 $5.2500 First Quarter* 10.1250 8.3750
Second Quarter $5.1875 $3.5625 Second Quarter 16.7500 8.6250
Third Quarter $5.8750 $3.3750 Third Quarter 17.6250 10.6250
Fourth Quarter $5.9375 $3.5000 Fourth Quarter 11.1250 5.9375
*Commencing August 15, 1996
</TABLE>

As of August 31, 1998, there were approximately 212 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

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, 1996, 1997 and
1998 and the consolidated balance sheet data as of June 30, 1997 and 1998 are
derived from financial statements of the Company that have been audited by
PricewaterhouseCoopers LLP formerly 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, 1994 and 1995 and the
consolidated balance sheet data as of June 30, 1994, 1995 and 1996 are derived
from financial statements of the Company audited by PricewaterhouseCoopers LLP
that are not included herein.

28
<PAGE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product ................................ $ 12,350 $ 15,818 $ 19,670 $ 24,978 $ 15,920
Maintenance and consulting ............. 9,525 11,261 14,332 14,856 13,129
-------- -------- -------- -------- --------

Total revenues ....................... 21,875 27,079 34,002 39,834 29,049
-------- -------- -------- -------- --------

Cost of revenues:
Product ................................ 2,380 3,316 3,413 3,025 1,299
Maintenance and consulting ............. 1,430 3,293 4,594 4,712 4,700
-------- -------- -------- -------- --------

Total cost of revenues ............... 3,810 6,609 8,007 7,737 5,999
-------- -------- -------- -------- --------

Gross profit ............................. 18,065 20,470 25,995 32,097 23,050
Operating expenses:
Product development .................... 6,276 6,245 5,241 7,742 11,226
Sales and marketing .................... 8,384 10,792 13,316 14,348 13,496
General and administrative ............. 2,561 3,329 3,954 4,669 5,746
Purchased research and development
and product amortization (1) ......... -- -- 10,479 575 6,564
Loss on sale of HARBOR ................. -- -- -- -- 2,047
-------- -------- -------- -------- --------
Total operating expenses ............. 17,221 20,366 32,990 27,334 39,079
-------- -------- -------- -------- --------

Operating income (loss) .................. 844 104 (6,995) 4,763 (16,029)
Interest and other income (expense), net.. (224) (81) (507) 735 828
-------- -------- -------- -------- --------

Income (loss) before income taxes and
extraordinary items .................... 620 23 (7,502) 5,498 (15,201)
Benefit from (provision for) income taxes (273) 1,624 (114) (2,138) 7,794
-------- -------- -------- -------- --------

Income (loss) before extraordinary items.. 347 1,647 (7,616) 3,360 (7,407)
Extraordinary items ...................... 1,320 -- -- -- --
-------- -------- -------- -------- --------

Net income (loss) ........................ $ 1,667 $ 1,647 $ (7,616) $ 3,360 $ (7,407)
-------- -------- -------- -------- --------

Net income (loss) per share (2):
Basic .................................. $ 0.57 $ 0.45 $ (3.11) $ 0.52 $ (0.95)
Diluted ................................ $ 0.53 $ 0.40 $ (3.11) $ 0.44 $ (0.95)
Shares used in per share calculation:
Basic .................................. 2,929 3,658 2,446 6,516 7,791
Diluted ................................ 3,127 4,133 2,446 7,595 7,791
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996 1997 1998
------- -------- -------- ------- -------
BALANCE SHEET DATA: (In thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) .......... $ 212 $ (183) $ (6,371) $25,355 $20,031
Total assets ....................... 15,853 20,000 25,925 48,363 42,782
Long-term debt, less current portion 672 368 2,892 802 132
Total stockholders' equity (deficit) 996 2,641 (4,585) 28,674 23,025
</TABLE>

(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. A non-recurring charge for purchased
research and development of $3.1 million and $2.6 million was recorded in
the fiscal year ended June 30, 1998 in connection with the acquisition of
the NetLOCK technology and the acquisition of Networkers Engineering, Ltd,
respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net income (loss) per share. 1994 basic and diluted
income per share before extraordinary items was $0.12 and $0.11,
respectively.

29
<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 may 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 solutions for enterprise
systems networking. 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 was incorporated in December 1985 and registered its shares on the
Nasdaq National Market System on August 15, 1996.

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"). Pursuant to the agreement, Cisco had principal responsibility for
all TCP sales, with Interlink field personnel providing training and support.
Early experience with this sales structure was unsatisfactory and in August 1997
Cisco and Interlink restated the agreement to allow the Company to resell
IOS/390 and, once again, independently market and sell TCPaccess. Either Cisco
or the Company may terminate the current relationship upon 90 days written
notice.

In September 1997, the Company acquired the NetLOCK network security
technology from Hughes Electronics Corporation and recorded a charge in its
fiscal first quarter of approximately $3.1 million relating to in-process
software development. Revenue from the NetLOCK product commenced in January
1998.

In December 1997, the Company sold its HARBOR product line, which was
acquired in conjunction with the acquisition of New Era Systems Services, Ltd.
(see Note 2 to Notes to Consolidated Financial Statements) and recorded a charge
of $2.2 million, offset by a tax benefit of $3.2 million. The sale of the HARBOR
product line resulted in a charge to earnings because the Company guaranteed a
Canadian loan in the amount of $1.2 million, which was assumed by the buyers,
and because the notes receivable of $1.9 million from the sale could not
presently be recognized. During the fourth quarter of fiscal year 1998 the
Company recognized $124,000 as a recovery on the sale of HARBOR as payments were
made on the loan guaranteed by the Company.

In January 1998, the Company purchased Networkers Engineering, Limited and
the customer contracts of a related business, for a combined cost of
approximately $2.9 million, of which approximately $2.6 million was charged to
purchased research and development in the quarter ended March 31, 1998. (See
Note 3 to Notes to Consolidated Financial Statements.) Revenues from these new
products are expected to commence in the first quarter of fiscal 1999.

30
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Product .................................................... 57.9% 62.7% 54.8%
Maintenance and consulting ................................. 42.1 37.3 45.2
----- ----- -----

Total revenues: .......................................... 100.0 100.0 100.0
----- ----- -----

Cost of Revenues:
Product .................................................... 10.0 7.6 4.5
Maintenance and consulting ................................. 13.5 11.8 16.2
----- ----- -----

Total cost of revenues ................................... 23.5 19.4 20.7
----- ----- -----

Gross profit ................................................. 76.5 80.6 79.3
Operating expenses:
Product development ........................................ 15.4 19.4 38.6
Sales and marketing ........................................ 39.2 36.0 46.5
General and administrative ................................. 11.6 11.7 19.8
Purchased research and development and product amortization 30.8 1.5 22.6
Loss on sale of HARBOR ..................................... -- -- 7.0
----- ----- -----

Total operating expenses ................................. 97.0 68.6 134.5
----- ----- -----

Operating income (loss) ...................................... (20.5) 12.0 (55.2)
Interest and other income (expense), net ..................... (1.5) 1.8 2.9
----- ----- -----

Income (loss) before income taxes ............................ (22.0) 13.8 (52.3)
Benefit from (provision for) income taxes .................... (0.4) (5.4) 26.8
----- ----- -----

Net income (loss) ............................................ (22.4)% 8.4% (25.5)%
===== ===== =====

Cost of revenues as a percentage of the related revenues:
Product .................................................... 17.4% 12.1% 8.2%
Maintenance and consulting ................................. 32.1% 31.7% 35.8%
</TABLE>

FISCAL YEARS ENDED JUNE 30, 1997 AND 1998

Revenues

Total revenues were $39.8 million and $29.0 million for the fiscal years
ended June 30, 1997 ("fiscal 1997") and 1998 ("fiscal 1998"), respectively,
representing a decrease of 27%. Product revenues were $25.0 million and $15.9
million for fiscal 1997 and 1998, respectively, representing a decrease of 36%.
The decline in revenues in fiscal 1998 reflects the continued rebuilding of the
sales channel after restructuring the distribution relationship with Cisco in
August 1997. Fiscal 1998 product revenues include $.9 million from the HARBOR
product line compared to $3.3 million in fiscal 1997. The HARBOR product line
was sold in December 1997. Maintenance and consulting, revenues were $14.9
million and $13.1 million for fiscal years 1997 and 1998, respectively,
representing a decrease of 12%, resulting principally from a decline in product
shipments and cancellations of maintenance for the Company's older DECnet
products.

31
<PAGE>

Cost of Revenues

Product. Product cost of revenues consists primarily of software
royalties, hardware, product media, documentation and packaging costs. Product
cost of product revenues was $3.0 million and $1.3 million, representing 12% and
8% of total product revenues for fiscal 1997 and fiscal 1998, respectively. This
percentage decrease was due to significantly lower hardware sales and other
third-party product revenue in fiscal 1998 compared to fiscal 1997, 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, software updates and consulting and training. Cost of
revenues from maintenance and consulting was $4.7 million for fiscal 1997 and
fiscal 1998, representing 32% and 36% of total maintenance and consulting
revenues, respectively. The increases in maintenance and consulting costs as a
percentage of the related revenue is due to lower annual maintenance contract
pricing while costs, the majority of which are fixed, remained stable.

Operating Expenses

Total operating expenses were $27.3 million and $39.1 million,
representing 69% and 135% of total revenues for fiscal 1997 and fiscal 1998,
respectively. Excluding the loss on the sale of the HARBOR product line, and the
purchased research and development charges relating to the acquisition of the
NetLOCK technology and the acquisition of Networkers Engineering, Ltd., the
operating expenses for fiscal 1998 were approximately $31 million representing
108% of total revenues.

Product Development. Product development expenses consist primarily of
personnel related costs. Product development expenses were $7.7 million and
$11.2 million, representing 19% and 39% of total revenues for fiscal 1997 and
fiscal 1998, respectively. The increase in product development expenses resulted
from the expansion of the Company's product line as a result of the acquisition
of Networkers Engineering Limited and the NetLOCK network security technology
and ongoing product development efforts offset in part by the sale of the HARBOR
product line in December 1997. Product development expenses related to the
HARBOR product line were $1.5 million for fiscal 1998, all of which was incurred
prior to the sale of the product line.

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. Capitalized costs incurred by the Company between completion of
the working model and the point at which the product is ready for general
release amounted to $0.3 million and $0.2 million for fiscal 1997 and fiscal
1998, respectively.

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 expenses. The Company sells through its
direct sales force, as well as through resellers and distributors. The direct
channel produced 83% and 91% of product revenues for fiscal 1997 and fiscal
1998, respectively, and is also the major component of sales costs.

32
<PAGE>

Sales and marketing expenses were $14.3 million and $13.5 million,
representing 36% and 47% of total revenues for fiscal 1997 and fiscal 1998,
respectively. The decrease of $0.8 million was principally a result of lower
commission expense on lower revenues. The increase as a percentage of total
revenues was a result of basic fixed costs of worldwide field offices, related
to lower product revenues and increased marketing activities relating to the
Company's new products, e-Control and NetLOCK.

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 $4.7 million and $5.7
million, representing 12% and 20% of total revenues for fiscal 1997 and fiscal
1998, respectively. The $1.0 million increase in general and administrative
expenses principally relates to costs to replace the previous executive team in
the form of legal costs, recruiting costs, severance costs, and consulting
expenses.

Purchased Research and Development and Product Amortization. Purchased
research and development and product amortization were $0.6 million and $6.6
million, representing 2% and 23% of total revenues for fiscal 1997 and fiscal
1998, respectively. In fiscal 1997, $0.6 million of product amortization was
recorded in connection with the New Era acquisition. In fiscal 1998, one-time
charges of $3.1 million and $2.6 million were recorded for purchased research
and development related to the NetLOCK technology acquisition in September 1997
and the Networkers Engineering Limited acquisition in January 1998,
respectively. A write-down of $0.5 million relating to purchased research and
development in connection with the December 1995 HARBOR acquisition was recorded
in September 1997. Amortization of capitalized software development costs and
product amortization in connection with the New Era acquisition amounted to $0.4
million during fiscal 1998.

Loss on Sale of HARBOR Product Line. The loss on the sale of the HARBOR
product line was $2.2 million, representing 7% of total revenues for fiscal
1998. The sale of the HARBOR product line occurred in December 1997. (See Note 2
to Consolidated Financial Statements).

Interest and Other Income, net. Interest and other income was $735,000 and
$828,000 for fiscal 1997 and fiscal 1998, respectively. The increase was due
primarily to a reduction of bank borrowing and lower cash balances in fiscal
1997, prior the Company's public offering and sale of equity to Cisco.

Benefit from (Provision for) Income Taxes. Benefit from (provision for)
income taxes for fiscal 1997 was ($2.1) million, which represented an effective
tax rate of approximately 39%. The benefit from (provision for) income taxes for
fiscal 1998 was $7.8 million. Included in fiscal 1998 is a tax benefit of $3.2
million relating to the sale of the HARBOR product line. The effective tax rate
was approximately 39% and the effective benefit rate was 51% for fiscal 1997 and
fiscal 1998, respectively. The increase in the effective tax rate is due to a
$3.2 million tax benefit recorded relating to the sale of the HARBOR product
line. The Company has assessed that it is more likely than not that it will be
able to utilize its tax carryforwards and other deferred tax assets in the
future. In the event the company does not show profitability in the subsequent
fiscal quarters, the Company may be required to writeoff portions of the net
deferred tax assets.

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 fiscal 1996 and fiscal 1997 are not directly comparable
due to New Era being included

33
<PAGE>

for approximately 6 months of fiscal 1996 results of operations versus the full
year of fiscal 1997.

Revenues

Total revenues were $34.0 million and $39.8 million for fiscal 1996 and
fiscal 1997, respectively, representing an increase of 17%. Product revenues
were $19.7 million and $25.0 million for fiscal 1996 and fiscal 1997,
respectively, representing an increase of 27%. This increase was primarily due
to a $3.4 million increase (of which $2.0 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 revenues over fiscal 1996. Maintenance and consulting revenues
were $14.3 million and $14.9 million for the fiscal 1996 and fiscal 1997,
respectively, representing an increase of 4%, resulting principally from an
increase in the number of customers purchasing maintenance agreements.

Cost of Revenues

Product. Product cost of revenues consists primarily of software
royalties, hardware, product media, documentation and packaging costs. Cost of
product revenues was $3.4 million and $3.0 million, representing 17% and 12% of
total product revenues for fiscal 1996 and fiscal 1997, respectively. This
percentage decrease was due to the increased HARBOR revenues in fiscal 1997,
which have a high gross margin, and a reduction in third-party product revenue
in fiscal 1997 compared to fiscal 1996, which carry higher product costs as a
percentage of their respective revenues.

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 fiscal 1996 and fiscal 1997,
respectively.

Operating Expenses

Total operating expenses were $33.0 million and $27.3 million,
representing 97% and 69% of total revenues for fiscal 1996 and fiscal 1997,
respectively. Excluding the charge for purchased research and development
related to the New Era acquisition, operating expenses for fiscal 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 fiscal 1996 and fiscal
1997, respectively. The increase in product development expenses resulted from
the acquisition of Harbor and development efforts expended for IOS/390.

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 expenses. The Company sells through its
direct sales force as well as through resellers and distributors. The direct
channel produced 88% and 83% of product revenues for fiscal 1996 and fiscal
1997, respectively, and is also the major component of sales channel costs.

34
<PAGE>

Sales and marketing expenses were $13.3 million and $14.3 million,
representing 39% and 36% of total revenues for fiscal 1996 and fiscal 1997,
respectively. The increase in absolute dollars was a result of marketing program
costs and the New Era acquisition.

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 fiscal 1996 and fiscal
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 fiscal 1996. In addition, approximately $321,000 and $575,000 of product
amortization resulting from such acquisition was included in fiscal 1996 and
fiscal 1997. (See Note 2 of Notes to Consolidated Financial Statements.)

Interest and other Income (Expense), net. Interest and other income
(expense) was ($507,000) and $735,000 for fiscal 1996 and fiscal 1997,
respectively. The improvement was due to 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 by Cisco in August and December
1996, respectively.

Benefit from (Provision for) Income Taxes. The income tax provision for
fiscal 1996 was $114,000. The effective tax rate for fiscal 1996, 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 fiscal 1997 was $2.1 million which represented an
effective tax rate of approximately 39%.

35
<PAGE>

Quarterly Results

The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended June 30, 1998. 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.

<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product .................. $ 4,832 $ 5,960 $ 7,546 $ 6,640 $ 2,833 $ 3,388 $ 4,806 $ 4,893
Maintenance and
consulting ............. 3,893 3,673 3,611 3,679 3,482 3,360 3,194 3,093
------- ------- -------- -------- -------- -------- -------- -------

Total revenues ......... 8,725 9,633 11,157 10,319 6,315 6,748 8,000 7,986
------- ------- -------- -------- -------- -------- -------- -------

Cost of revenues:
Product .................. 685 678 564 1,098 280 348 378 293
Maintenance and
consulting ............. 1,237 1,209 1,139 1,127 1,329 1,176 1,202 993
------- ------- -------- -------- -------- -------- -------- -------
Total cost of
revenues ............. 1,922 1,887 1,703 2,225 1,609 1,524 1,580 1,286
------- ------- -------- -------- -------- -------- -------- -------
Gross profit ............... 6,803 7,746 9,454 8,094 4,706 5,224 6,420 6,700
Operating expenses:
Product development ...... 1,901 1,969 1,957 1,915 2,318 3,233 3,048 2,627
Sales and marketing ...... 3,064 3,194 4,142 3,948 2,778 3,020 3,473 4,225
General and
administrative ......... 912 1,107 1,301 1,349 1,324 1,933 1,235 1,254
Purchased research
and development
and product
amortization ........... 162 139 127 147 3,746 117 2,664 37
Loss (recovery) on
sale of HARBOR ........ -- -- -- -- -- 2,171 -- (124)
------- ------- -------- -------- -------- -------- -------- -------

Total operating
expenses ............. 6,039 6,409 7,527 7,359 10,166 10,474 10,420 8,019
------- ------- -------- -------- -------- -------- -------- -------

Operating income (loss) .... 764 1,337 1,927 735 (5,460) (5,250) (4,000) (1,319)
Interest and other income
(expense), net ........... (56) 144 256 391 265 255 184 124
------- ------- -------- -------- -------- -------- -------- -------
Income (loss) before
provision for income
taxes .................... 708 1,481 2,183 1,126 (5,195) (4,995) (3,816) (1,195)
Benefit from (provision
for) income taxes ........ (269) (578) (851) (439) 1,454 4,546 1,358 436
------- ------- -------- -------- -------- -------- -------- -------
Net income (loss) .......... $ 439 $ 903 $ 1,332 $ 687 $ (3,741) $ (449) $ (2,458) $ (759)
======= ======= ======== ======== ======== ======== ======== =======

Net income (loss) per share:
Basic .................... $ 0.09 $ 0.14 $ 0.19 $ 0.09 $ (0.50) $ (0.06) $ (0.31) $ (0.09)
Diluted .................. $ 0.07 $ 0.12 $ 0.16 $ 0.08 $ (0.50) $ (0.06) $ (0.31) $ (0.09)

Shares used in per share
Basic .................... 4,988 6,492 7,177 7,398 7,557 7,615 7,932 8,061
Diluted .................. 6,147 7,671 8,331 8,158 7,557 7,615 7,932 8,061
</TABLE>

36
<PAGE>

Liquidity and Capital Resources

Working capital decreased at June 30, 1998 over that at June 30, 1997
primarily due to the loss incurred during the fiscal year and the acquisitions
of the NetLOCK technology and Networkers Engineering, Ltd. 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 fiscal 1998, net cash used in operating activities resulted primarily
from the net loss, an increase in deferred income taxes, and a decrease in other
liabilities, partially offset by depreciation and amortization, a charge
relating to the sale of HARBOR, and the write-off of purchased research and
development relating to the acquisitions of the NetLOCK technology and
Networkers Engineering, Ltd. For fiscal 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 fiscal 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 fiscal 1998, the Company's investing activities consisted primarily of
the acquisition of the NetLOCK technology and Networkers Engineering, Ltd. and
the purchases of property and equipment. For fiscal 1997, the Company's
investing activities consisted primarily of purchases of property and equipment.
For fiscal 1996, the Company's investing activities consisted primarily of the
acquistion of New Era and the redemption of available-for-sale securities.

For the fiscal 1998, the Company's financing activities consisted of
payments on capital lease obligations and proceeds from the issuance of common
stock issued for the Company's stock option plan and employee stock purchase
plan. Net cash provided by financing activities for the fiscal 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 fiscal 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, 1998, the Company had $18.2 million in cash and cash
equivalents and $20.0 million in working capital. The Company had $8.9 million
in accounts receivable, net of allowance for doubtful accounts, and $8.2 million
of unearned revenues, the majority of which are expected to be earned over the
12 month period following June 30, 1998.

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.

Year 2000 Issues

In the computer industry many systems were not designed to handle any
dates beyond the year 1999, and such computer hardware and software will need to
be modified prior to the year

37
<PAGE>

2000 in order to remain functional. The Company is concerned that many
enterprises will be devoting a substantial portion of their information systems
spending to resolving this upcoming year 2000 problem. This may result in
spending being diverted over the next two years. The Company has completed its
assessment and testing of its product lines and has established that the current
versions of its products are all year 2000 compliant. The Company is in the
process of completing the assessment and testing of year 2000 compliance for its
internal information and non-IT systems. The Company anticipates that addressing
the year 2000 problem for its internal information and non-IT systems and
current and future products will not have a material impact on its operations or
financial results and expects to complete its assessment by the end of fiscal
1999. However, there can be no assurance that these costs will not be greater
than anticipated, or that corrective actions undertaken will be completed before
any year 2000 problems could occur. The year 2000 issue could lower demand for
the Company's products while increasing the Company's costs. These combining
factors, while not quantified, could have a material adverse impact on the
Company's financial results. The Company uses certain products from and has
certain key relationships with suppliers, including Cisco. If these suppliers
fail to adequately address the year 2000 issue for the products this could have
a material adverse impact on the Company's operations and financial results. The
Company is still assessing the effect the year 2000 issue will have and, at this
time, cannot determine the impact it will have, if any.

Issues Related to the European Monetary Conversion

38
<PAGE>

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

PAGE

Report of Independent Accountants.......................................... 40
Consolidated Balance Sheets as of June 30, 1997 and 1998................... 41
Consolidated Statements of Operations for the years ended June 30, 1996,
1997 and 1998............................................................ 42
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1996, 1997 and 1998....................................... 43
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1997 and 1998............................................................ 44
Notes to Consolidated Financial Statements................................. 45

39
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Interlink Computer Sciencs, Inc. and its subsidiaries at June 30,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
July 24, 1998

40
<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

June 30,
--------------------
1997 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents ............................ $ 28,106 $ 18,189

Accounts receivable, net of allowance for doubtful
accounts of $623 in 1997 and $578 in 1998 .......... 9,752 8,876
Inventories .......................................... 674 380
Current deferred tax asset ........................... 2,092 7,497
Other current assets ................................. 1,240 492
-------- --------
Total current assets ............................. 41,864 35,434
Property and equipment, net ............................ 1,676 2,392
Long-term deferred tax asset ........................... 1,541 3,615
Purchased software products and other non-current assets 3,282 1,341
-------- --------

Total assets ..................................... $ 48,363 $ 42,782
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 1,421 $ 793
Current portion of long-term debt .................... 314 1,031
Accrued compensation ................................. 2,694 1,879
Accrued income taxes ................................. 2,296 1,328
Other accrued liabilities ............................ 2,296 3,544

Deferred maintenance and product revenue ............. 7,488 6,828
-------- --------
Total current liabilities ........................ 16,509 15,403
Long-term debt, less current portion ................... 802 132
Deferred maintenance revenue ........................... 1,403 1,421
Other liabilities ...................................... 975 1,692
Liabilities retained in connection with sale of HARBOR . -- 1,109
-------- --------

Total liabilities ................................ 19,689 19,757
-------- --------

Commitments and contingencies (Note 6)
Preferred stock, par value $0.001 in 1997 and 1998
Authorized: 5,000,000 shares in 1997 and 1998
Issued and outstanding: no shares in 1997 and 1998
Common stock, par value $0.001:
Authorized: 20,000,000 shares in 1997 and 1998
Issued and outstanding: 7,548,000 shares in 1997
and 8,149,000 shares in 1998 ....................... $ 7 $ 8
Additional paid-in capital ............................. 50,814 52,505
Cumulative translation adjustment ...................... (591) (525)
Accumulated deficit .................................... (21,556) (28,963)
-------- --------

Total stockholders' equity ....................... 28,674 23,025
-------- --------

Total liabilities and stockholders' equity ....... $ 48,363 $ 42,782
======== ========

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

41
<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES::
Product .................................................... $ 19,760 $ 24,978 $ 15,920
Maintenance and consulting ................................. 14,332 14,856 13,129
-------- -------- --------

Total revenues ........................................... 34,002 39,834 29,049
-------- -------- --------

Cost of Revenues:
Product .................................................... 3,413 3,025 1,299
Maintenance and consulting ................................. 4,594 4,712 4,700
-------- -------- --------

Total cost of revenues ................................... 8,007 7,737 5,999
-------- -------- --------

Gross profit ................................................. 25,995 32,097 23,050
-------- -------- --------

Operating expenses:
Product development ........................................ 5,241 7,742 11,226
Sales and marketing ........................................ 13,316 14,348 13,496
General and administrative ................................. 3,954 4,669 5,746
Purchased research and development and product amortization 10,479 575 6,564
Loss on sale of HARBOR ..................................... -- -- 2,047
-------- -------- --------

Total operating expenses ................................. 32,990 27,334 39,079
-------- -------- --------

Operating income (loss) ...................................... (6,995) 4,763 (16,029)
Interest and other income (expense), net ..................... (507) 735 828
-------- -------- --------

Income (loss) before income taxes ............................ (7,502) 5,498 (15,201)
Benefit from (provision for) income taxes .................... (114) (2,138) 7,794
-------- -------- --------

Net income (loss) ............................................ $ (7,616) $ 3,360 $ (7,407)
======== ======== ========

Net income (loss) per share:
Basic ...................................................... $ (3.11) $ 0.52 $ (0.95)
Diluted .................................................... $ (3.11) $ 0.44 $ (0.95)

Shares used in per share calculation:
Basic ...................................................... 2,446 6,516 7,791
Diluted .................................................... 2,446 7,595 7,791
</TABLE>

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

42
<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)

<TABLE>
<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, 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 income (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
issuance costs of $3.2
million ................... -- -- 2,530 22,148 -- -- -- 22,148
From private offerings, net
of issuance costs of
$28,000 ................... -- -- 622 6,814 -- -- -- 6,814
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
Issuance of common stock:
Upon exercise of stock
options ................... -- -- 225 -- 236 -- -- 236
Under Employee stock
purchase plan ............. -- -- 136 -- 529 -- -- 529
In connection with
acquisition of Networkers
Engineering, Ltd. ......... -- -- 240 1 913 -- -- 914
Compensation charge for
consultants ................. -- -- -- -- 13 -- -- 13
Translation adjustment ........ -- -- -- -- -- 66 -- 66
Net income (loss) ............. -- -- -- -- -- -- (7,407) (7,407)
------ ------ ----- -------- -------- -------- -------- --------

Balances, June 30, 1998 ......... -- -- 8,149 $ 8 $ 52,505 $ (525) $(28,963) $ 23,025
------ ------ ----- -------- -------- -------- -------- --------
</TABLE>

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

43
<PAGE>

INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ (7,616) $ 3,360 $ (7,407)
Adjustments to reconcile net income to net cash
provided by operating activies:
Purchased research and development .................... 10,158 6,228
Loss on sale of HARBOR ................................ -- -- 2,047
Depreciation and amortization ......................... 1,477 2,023 1,678
Provision for net realizable value of inventory
and accounts receivable ............................. 243 301 238
Exchange losses ....................................... 130 310 64
Increase in deferred income taxes ..................... (1,203) (543) (7,884)
Changes in operating assets and liabilities:
Accounts receivable ................................. (744) (847) 564
Inventories ......................................... (45) (97) 200
Prepaid expenses and other assets ................... (16) (414) 949
Accounts payable .................................... (92) (1,207) (620)
Accrued liabilities ................................. (424) 789 (607)
Deferred maintenance and product revenue ............ 1,969 (34) (306)
Other accrued liabilities ........................... 278 223 (1,071)
-------- -------- --------

Net cash provided by (used in) operating activities 4,115 3,864 (5,927)
-------- -------- --------
Cash flows from investing activities:
Acquisition of New Era, net of cash acquired ............ (10,168) -- --
Acquisition of NetLOCK network security technology ...... -- -- (1,175)
Acquisition of Networkers Engineering, Ltd. ............. -- -- (724)
Proceeds from sale of available-for-sale securities ..... 2,525 -- --
Acquisition of property and equipment ................... (384) (1,151) (2,244)
Capitalization of software development costs ............ (90) (349) (174)
-------- -------- --------

Net cash used in investing activities ............. (8,117) (1,500) (4,317)
-------- -------- --------

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 ..................... (630) (4,929) (203)
Payments on bank line of credit ......................... (1,300) (5,000) --
Proceeds from issuance of preferred and common stock, net 36 29,909 765
-------- -------- --------

Net cash provided by financing activities ......... 6,106 19,980 562
-------- -------- --------

Net increase (decrease) in cash and cash
equivalents ................................... 2,104 22,344 (9,682)

Effect of exchange rate changes on cash ............... (131) (359) (235)
Cash and cash equivalents, beginning of period ........ 4,148 6,121 28,106
-------- -------- --------

Cash and cash equivalents, end of period .............. $ 6,121 $ 28,106 $ 18,189
======== ======== ========
</TABLE>

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

44
<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF OPERATIONS

Interlink Computer Sciences, Inc. (the "Company") is a supplier of
high-performance solutions for enterprise systems networking. 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. The Company's network transport products, which include
the IOS/390, TCPaccess, X.25 for S/390 and CPT products, has generated
substantially all of the Company's product and maintenance and consulting
revenues. Total revenues from network transport products totaled $32.4 million,
$33.6 million and $25.3 million during fiscal 1996, 1997 and 1998, respectively.
The Company's operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of these 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
effect 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. Interlink is an
authorized reseller of the IOS/390 product, which has been available since May
13, 1997, and continues to independently market and sell TCPaccess. 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 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

45
<PAGE>

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

FINANCIAL INSTRUMENTS (Continued):

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, 1997 and 1998, approximately 51% and 46% 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. 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 and third parties sell to
Interlink's customers. The Company's principal network controller is supplied by
Bus-Tech. The CIPs are supplied by Cisco. Sales of network controllers and, in
fiscal 1998, commission from CIPs have accounted for substantially all of the
Company's hardware revenues to date. Total hardware revenues have accounted for
19%, 14% and 16% of product revenues in fiscal 1996, fiscal 1997, and fiscal
1998, respectively. CIP commissions in fiscal 1998 were $1.2 million. The
Company does not anticipate receiving such commission credit in the future. In
addition, the Company also relies upon this company and Cisco for network
controller and CIP replacement parts. 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.

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, 1997 and 1998.

46
<PAGE>

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

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements and property under capital leases are amortized using a
straight-line method 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; provided remaining
obligations are insignificant, collection of the resulting receivable is
probable and product returns are reasonably 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 and training fees are generally
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 the primary
functions described in its original specifications, contains 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 method over
two years. During fiscal 1996, fiscal 1997 and fiscal 1998 amortization of
capitalized software was $32,000, $225,000 and $48,000, respectively.

47
<PAGE>

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

ADVERTISING EXPENSE

Advertising costs are expensed when incurred. In fiscal 1996, 1997 and
1998 advertising expense was $691,000, $236,000 and $301,000, 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. 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 translation of intercompany accounts 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

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128") effective December 31, 1997. SFAS 128 requires
the presentation of basic and diluted earnings per share. Basic EPS is computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period. For the Company, dilutive potential common shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants for all periods. In accordance with SFAS 128, all prior period earnings
per share amounts have been restated to reflect this method of calculation.

RECENT PRONOUNCEMENTS

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 1999, 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 about operating

48
<PAGE>

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

RECENT PRONOUNCEMENTS (Continued):

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 the Company for fiscal 1999, 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.

In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 ("SOP 97-2"), Software Revenue Recognition as amended
on March 31, 1998, which delineates the accounting for software product and
maintenance revenues. SOP 97-2 supersedes the Accounting Standards Executive
Committee Statement of Position 91-1, Software Revenue Recognition, and is
effective for transactions entered into in fiscal 1999. The Company does not
anticipate SOP 97-2 to materially impact its results of operations.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its financial
position and its results of operations. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of fiscal 2000.

2. ACQUISITION AND SALE OF HARBOR PRODUCT LINE

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 ("HARBOR product line"). During the quarter ended September 30, 1997,
revenue expectations for the HARBOR product line declined. As a result, the
Company determined that the recorded amount for purchased software had been
impaired and recorded a loss of approximately $550,000, the amount by which the
recorded intangible at September 30, 1997 exceeded the present value of the
estimated future net cash flows.

In the acquisition, 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 7). 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. These amounts resulted in a
purchase price for New Era of $13,001,000 including 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. The
acquisition was 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.

49
<PAGE>

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

ACQUISITION AND SALE OF HARBOR PRODUCT LINE (Continued):

The fair market value of the assets and liabilities acquired from New Era,
was determined through established valuation techniques used in the software
industry.

The amount of the purchase price allocated to purchased software products
($3.2 million), for which technological feasibility had been established at the
acquisition date, is being amortized on a straight line basis over five years.
An amount of $10.2 million allocated to purchased research and development,
which had no alternative future use and which related to products for which
technological feasibility had not been established, was expensed at the
acquisition date.

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 1996.
Adjustments have been made for the estimated increases in amortization related
to purchased software, increases and decreases in interest expense and income,
respectively, and other appropriate pro forma adjustments.

YEAR ENDED JUNE 30,
1996
---------------------
(in thousands, except
per share amounts)
Revenues ................................................ $ 36,491
Net income (loss) ....................................... 2,765
Net income (loss) per share-basic ....................... 1.13
Net income (loss) per share-diluted ..................... 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 have been 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 1996 or of future results of operations of the
combined companies. On December 18, 1997 the Company sold substantially all of
the assets of the HARBOR product line to a former executive and member of the
board of directors of the Company who resigned both posts effective as of the
date of the sale. The consideration paid to the Company consisted of $1,250,000
in installment notes plus a $600,000 convertible note that may, upon the
occurrence of certain events, entitle the Company to an additional payment of
$150,000. In addition the purchasers assumed certain liabilities and
obligations, including a note payable in the amount of $1,232,000 for which the
Company is the guarantor, and $356,000 in deferred maintenance obligations. As
the Company has continuing involvement in the HARBOR business, primarily through
its guarantee of the note payable, and there is substantial uncertainty about
the ability of HARBOR to meet its obligations, the Company has (i) not recorded
the notes receivable, (ii) provided a valuation allowance on all assets
transferred to the purchaser and (iii) recorded a liability equal to the amount
of the guarantee of the note assumed. As a result of this treatment, the Company
recorded a loss of $2,171,000 on the sale of the HARBOR product line. The
Company also recorded a tax benefit of $3.2 million relating to the sale of the
HARBOR product line. During the fourth quarter of fiscal year 1998, the Company
recognized $124,000 as a recovery on the sale of HARBOR product line, as two
payments on the loan guaranteed by the Company were made by the buyer.

50
<PAGE>

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

3. FISCAL 1998 ACQUISITIONS:

NETLOCK TECHNOLOGY

On September 18, 1997, the Company acquired the NetLOCK technology, an
end-to-end network security technology, that encrypts data and helps prevent
security break-ins, and certain assets from Hughes Aircraft Company for
approximately $2,144,000 in cash and incurred related acquisition costs of
$300,000. The Company also licensed certain core technology that is incorporated
into the NetLOCK technology from a third party licensor. Under the terms of the
license agreement, the Company paid an up front fee of $175,000 and is obligated
to pay royalties ranging from 3% to 9% of future NetLOCK revenues on an ongoing
basis, with guaranteed future minimum royalties of $2,300,000 through 2002,
payable in quarterly amounts ranging from $25,000 to $187,500. This amount has
been recorded net of a $724,000 discount; and is included in other liabilities.
During fiscal 1998, the Company amortized $116,000 of this discount. As of the
date of the acquisition, the NetLOCK technology had not reached technological
feasibility nor did it have any future alternative use. Accordingly, $3.1
million has been recorded as purchased research and development, which consists
of the amount of the purchase price allocated to purchased research and
development and the guaranteed minimum royalty payments, net of the present
value discount. The remaining portion of the purchase price of $1,144,000 has
been recorded as property and equipment. In conjunction with the NetLOCK
technology purchase, the Company employed approximately 25 people and entered
into an operating lease for facilities with a third party. These employee and
facility costs have been included in the Company's results of operations from
the date of the acquisition of the technology.

NETWORKERS ENGINEERING, LTD

On January 13, 1998, the Company acquired Networkers Engineering Limited, a
software development company based in the United Kingdom in exchange for cash of
$600,000, deferred cash payments of $1,000,000 and 239,578 shares of the
Company's common stock. The deferred cash payments will be made in four
consecutive quarterly payments of $250,000 beginning July 1, 1998. Of the
approximate $2.5 million purchase price and approximately $400,000 of
acquisition costs, the Company recorded $2.6 million as purchased research and
development relating to the in-process technology and recorded approximately
$300,000 as purchased software products relating to the completed technology.
Purchased software is being amortized over a 5 year period from the date of
acquisition. The purchased research and development of $2.6 million was not
deemed to have reached technological feasibility nor did it have any future
alternative use and was therefore expensed as of the date of the acquisition. In
conjunction with the acquisition, the Company employed three people and assumed
an operating lease for the facilities in the United Kingdom.

51
<PAGE>

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

4. BALANCE SHEET DETAIL:

Property and equipment, net comprised (in thousands):

JUNE 30,
--------------------
1997 1998
------- -------
Equipment ............................................ $ 4,876 $ 5,777
Furniture and fixtures ............................... 331 499
Leasehold improvements ............................... 136 346
------- -------
5,343 6,622
------- -------
Less accumulated depreciation and amortization ....... (3,667) (4,230)
------- -------
$ 1,676 $ 2,392
======= =======

Depreciation expense was $742,000, $787,000, and $1,183,000 in fiscal
1996, fiscal 1997 and fiscal 1998, respectively.

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

JUNE 30,
--------------------
1997 1998
------- -------
Equipment ............................................ $ 738 $ 791
Less accumulated amortization ........................ (535) (632)
------- -------
$ 203 $ 159
======= =======

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

JUNE 30,
--------------------
1997 1998
------- -------
Capitalized software ................................. $ 438 $ 612
Less accumulated amortization ........................ (225) (438)
------- -------
$ 213 $ 174
======= =======

5. LONG-TERM DEBT:

OUTSTANDING LONG-TERM DEBT

As of June 30, 1998 the Company had long-term debt outstanding as follows:

Capitalized lease obligations....................................... $ 163
Notes payable for acquisition of Networkers Engineering Ltd......... 1,000
-------
1,163
-------
Less current portion of long-term debt.............................. (1,031)
-------
$ 132
=======

The notes payable are non-interest bearing, unsecured notes which are
payable in four consecutive quarterly installments of $250,000, beginning July
1, 1998.

The Company has equipment under capital lease obligations maturing through
fiscal 2003. The lease agreements require the Company to maintain liability and
property insurance.

52
<PAGE>

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

LONG-TERM DEBT (Continued):

At June 30, 1998, future minimum annual payments due under the long-term
debt and the capital lease obligations are as follows (in thousands):

FISCAL
1999....................................................... $ 1,047
2000....................................................... 47
2001....................................................... 47
2002....................................................... 47
2003....................................................... 15
Thereafter................................................. --
---------
1,203
Less amounts representing interest..................... (40)
---------
Total minimum payments................................. $ 1,163
=========

6. 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, 1998 under leases
with initial or remaining non-cancelable lease terms longer than one year are as
follows (in thousands):

FISCAL
1999....................................................... $ 1,255
2000....................................................... 665
2001....................................................... 208
2002....................................................... 131
2003....................................................... 99
Thereafter................................................. 21
---------
Total minimum payments..................................... $ 2,379
=========

Rent expense was $1,767,000, $1,668,000 and $1,585,000 in fiscal 1996,
fiscal 1997 and fiscal 1998, respectively.

CONTINGENCY

The Company is involved in a commercial dispute with a former Italian
distributor ("Claimant"), which has alleged that the Company and two of its
subsidiaries have breached and unlawfully terminated various distributorship
agreements for distribution of the Company's TCPaccess and HARBOR products in
Italy, and which has asserted various claims in two lawsuits against the
Company, its subsidiaries, and several officers of the Company.

53
<PAGE>

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

COMMITMENTS AND CONTINGENCIES (Continued):

In March 1997 the Claimant initiated a separate lawsuit in Alameda County,
California against the Company, certain officers of the Company and of Interlink
France, and the Company's current Italian distributor. In the complaint,
Claimant alleges various tort claims related to the defendants' alleged actions
with respect to prior distribution agreements between Claimant, the Company, and
Interlink France for distribution of the Company's TCPaccess products in Italy.
The claims alleged include fraud, deceit, defamation, trade libel, unfair
competition, misappropriation, breach of confidential relationship, and
conversion. Claimant demands compensatory damages in excess of $2,000,000,
unspecified punitive damages, interest, attorneys' fees, and costs of the
litigation. The Company has successfully moved to compel arbitration of the
claims in accordance with the arbitration clauses in the earlier distributorship
agreements with the Claimant. The lawsuit was stayed as to all parties by the
Alameda County Superior Court pending arbitration of the claims against the
Company.

On or about March 9, 1998 the Claimant initiated arbitration proceedings
in San Francisco, California under the International Chamber of Commerce ("ICC")
Rules of Arbitration. The request for arbitration alleges claims for breach of
contract, fraudulent inducement, trade libel, use of trade secrets and
confidential information, unfair business practices, interference with customers
and improper use of confidential information and ideas. The request seeks
damages in the amount of $3,000,000, plus punitive damages in an unspecified
amount, less an offset for amounts owed to Interlink France, and a constructive
trust.

On or about June 12, 1998 the parties agreed to a sole arbitrator.
Discovery is proceeding. Arbitration hearings are currently scheduled to occur
in February 1999.

The Company has accrued $350,000 for settlement of any liability that may result
upon resolution of these matters. No estimate of the ultimate liability that may
result upon the

54
<PAGE>

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

COMMITMENTS AND CONTINGENCIES (Continued):

resolution of these matters is presently determinable. Should the Company be
unsuccessful in defending any of these claims, the Company's business, financial
condition and results of operations could be materially adversely affected.

FOREIGN EXCHANGE CONTRACTS

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 did not have any foreign exchange contracts
outstanding at June 30, 1997 or 1998.

7. STOCKHOLDERS' EQUITY:

PREFERRED STOCK

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.

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 $2.6 million and $4.5 million during fiscal 1997 and
fiscal 1998, respectively.

INCENTIVE STOCK OPTION PLAN

The Company has an employee stock option plan (the "1992 Plan"). Under the
1992 Plan, incentive stock options may be granted to employees, officers and
directors, and non-statutory stock options may be granted 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

55
<PAGE>

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

STOCKHOLDERS' EQUITY(Continued):

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, 1998 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, 1998, options to acquire 82,500
shares have been issued under the Director Plan.

PLAN ACTIVITY

Option activity under the 1992 Plan and the Director Plan for the fiscal 1996,
fiscal 1997, and fiscal 1998 follows:

<TABLE>
<CAPTION>
Outstanding
--------------------------------------------------------------
Options Weighted
Available For Average
Grant Shares Exercise Price Exercise Price Amount
------------- ---------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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
Options reserved 300,000 -- -- -- --
Options granted (1,787,840) 1,787,840 $ 3.69-$6.44 4.97 8,889,949
Options exercised -- (225,339) $ .70-$8.00 1.05 (236,072)
Options canceled 1,104,083 (1,104,083) $ .70-$15.00 6.88 (7,600,699)

Balances, June 30, 1998 127,636 1,592,383 $ .70-$16.25 $ 4.19 $ 6,674,552
</TABLE>

56
<PAGE>

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

STOCKHOLDERS' EQUITY (Continued):

The following table summarizes information with respect to stock
options outstanding at June 30, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ------------------------------
Average
Remaining Weighted Number Weighted Number Weighted
Range Of Exercise Contractual Outstanding Average Exercisable Average
Price Life (years) June 30, 1998 Exercise Price June 30, 1998 Exercise Price
- ----------------- ------------ --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ .70 - $ 4.39 5.27 469,200 $2.60 231,333 $1.36
$4.44 - $ 4.81 6.59 140,350 $4.65 16,409 $4.80
$4.88 - $ 4.88 6.65 714,417 $4.88 99,680 $4.88
$5.00 - $16.25 7.05 268,416 $6.65 24,794 $9.61
--------- -------
Total 6.31 1,592,383 $4.48 372,216 $3.00
========= =======
</TABLE>

At June 30, 1996 and June 30, 1997 options to purchase 566,347 and 423,192
shares of common stock at weighted exercise prices of $.91 and $1.95 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 was $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.

In February 1998, 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 $4.875 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
705,240 shares at original exercise prices ranging from $5.00 to $15.00 per
share were canceled and new options were issued in February 1998. 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, 1998, the Company had reserved a total of 350,000 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 they are customarily employed for at least 20 hours
per week and for more than five months in any calendar year. The ESPP 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 ESPP 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 1997, 62,262
shares were purchased through the ESPP. During fiscal 1998, 135,951 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 1997 and fiscal 1998
were $466,965 and $665,149 and $7.50 and $4.89, respectively.

57
<PAGE>

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

STOCKHOLDERS' EQUITY (Continued):

WARRANTS

At June 30, 1998, the Company had issued fully exercisable warrants to
purchase the common stock with the terms indicated:

Number of shares Exercise 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 1996, fiscal 1997 and fiscal 1998 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
for the fiscal 1996, fiscal 1997 and fiscal 1998 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Net Income (loss) - as reported ................... $ (7,616) $ 3,360 $ (7,407)
Net Income (loss) - pro forma ..................... $ (7,655) $ 2,501 $ (9,020)
Net income (loss) per share- as reported-basic .... $ (3.11) $ .52 $ (.95)
Net income (loss) per share- as reported-diluted .. $ (3.11) $ .44 $ (.95)
Net income (loss) per share- pro forma-basic ...... $ (3.13) $ .38 $ (1.16)
Net income (loss) per share- pro forma-diluted .... $ (3.13) $ .33 $ (1.16)
</TABLE>

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

The aggregate fair value and weighted fair value per share of options
granted in fiscal 1996, fiscal 1997 and fiscal 1998 were $325,962, $3,998,180
and $3,662,291 and $.92, $4.84 and $2.05 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:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Expected volatility................................ --% 84.5% 79.6%
Risk-free interest rate............................ 5.90% 6.30% 5.73%
Expected life...................................... 4.82 years 4.82 years 4.02 years
Expected dividend yield............................ 0.00% 0.00% 0.00%
</TABLE>

58
<PAGE>

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

STOCKHOLDERS' EQUITY (Continued):

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 fiscal 1997and fiscal
1998:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Expected volatility................................ -- 84.50% 79.6%
Risk-free interest rate............................ -- 6.54% 5.48%
Expected life...................................... -- 0.5 years 0.5 years
Expected dividend yield............................ -- 0.00% 0.00%
</TABLE>

8. INCOME TAXES:

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Domestic..................................... $ 3,737 $ 5,953 $ (10,081)
Foreign...................................... (11,239) (455) (5,120)
--------- -------- ----------
Total $ (7,502) $ 5,498 $ (15,201)
========= ======== ==========
</TABLE>

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Current:
Federal (net of benefit of operating loss
carryforward of $45 in 1996 and 1997).......... $ (1,100) $ (2,099) $ (7)
State (net of benefit of operating loss
carryfoward of $12 in 1996 and 1997)........... (218) (370) (5)
Foreign.......................................... -- (232) (146)
---------- -------- -----------
(1,318) (2,701) (158)

Deferred:
Federal.......................................... 262 223 6,975
State............................................ 91 40 504
Foreign.......................................... (72) 300 473
---------- -------- -----------
281 563 7,952
---------- -------- -----------
Decrease in valuation allowance.................... 923 -- --
---------- -------- -----------
$ (114) $ (2,138) $ 7,794
========== ======== ===========
</TABLE>

59
<PAGE>

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

INCOME TAXES (Continued):

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

JUNE 30,
--------------------
1997 1998
------- -------
Deferred tax assets:
Allowance for doubtful accounts receivable .......... $ 207 $ 196
Allowance for excess and obsolete inventories ....... 90 108
Depreciation and amortization ....................... 1,083 2,849
Accrual for warranty and other ...................... 1,795 1,617
Net operating loss carryforwards .................... 458 5,916
Tax credit carryforwards ............................ 543 426
------- -------
Total deferred tax assets ......................... 4,176 11,112

Deferred tax liability:
Purchased software products ......................... (543) 0
------- -------
Net deferred tax assets ............................. $ 3,633 $11,112
======= =======

Realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.

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):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
United States statutory rate .................... $ 2,551 $(1,873) $ 5,168
State taxes, net of federal benefit ............. (127) (331) 499
Foreign taxes, net .............................. (72) 68 --
R&D credit ...................................... -- -- 336
Change in valuation allowance ................... 923 -- --
Alternative minimum tax ......................... 5 -- --
Foreign sales corporation ....................... 60 70 --
Benefit from disposition of HARBOR product line . -- -- 1,812
Non-deductible purchased research and development (3,454) -- 0
Other ........................................... -- (72) (21)
------- ------- -------
$ (114) $(2,138) $ 7,794
======= ======= =======
</TABLE>

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, 1998
are as follows:

Expiration Date Amounts
--------------- -------
U.S. federal net operating loss carryforwards. 2013 $17,000,000
Tax credit carryforwards 2013 426

60
<PAGE>

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

INCOME TAXES (Continued):

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 approximately $1.2 million of the net operating loss carryforwards
that can be used in any one year to approximately $135,000. The Company's
remaining net operating losses are not subject to any such limitations.

9. SEGMENT INFORMATION:

The Company offers a suite of high-performance solutions for enterprise
systems networking. Its business falls into one industry segment. Cisco Systems,
Inc. accounted for 15% of the Company's total consolidated annual revenues in
fiscal 1998. No one customer accounted for more than 10% of consolidated annual
revenues in fiscal 1996 and fiscal 1997. The distribution of revenues between
the United States, Canadian and European operations are as follows (in
thousands):

FISCAL YEAR ENDED JUNE 30,
---------------------------------
1996 1997 1998
-------- -------- --------
Revenues from unaffiliated customers:
United States ............................ $ 19,923 $ 24,203 $ 19,525
Canada ................................... 1,258 1,245 75
Europe ................................... 12,821 14,386 9,449
Transfer from U.S. to Europe ............. 5,620 5,711 3,557
Elimination's ............................ (5,620) (5,711) (3,557)
-------- -------- --------
Consolidated ............................. $ 34,002 $ 39,834 $ 29,049
======== ======== ========

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):

FISCAL YEAR ENDED JUNE 30,
---------------------------------
1996 1997 1998
-------- -------- --------
United States............................... $ 4,711 $ 5,952 $(10,082)
Canada...................................... (10,858) (243) (4,708)
Europe...................................... (1,355) (211) (411)
-------- -------- --------
$ (7,502) $ 5,498 $(15,201)
======== ======== ========

Consolidated total assets comprised (in thousands):

JUNE 30,
---------------------------------
1996 1997 1998
-------- -------- --------
United States............................... $ 10,858 $ 36,607 $ 38,844
Canada...................................... 5,857 3,561 23
Europe...................................... 9,210 8,195 3,915
-------- -------- --------
$ 25,925 $ 48,363 $ 42,782
======== ======== ========

61
<PAGE>

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

10. SUPPLEMENTAL CASH FLOW DISCLOSURES (IN THOUSANDS):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Interest paid ......................................................... $ 591 $ 192 $ 18
Income taxes paid ..................................................... 890 1,743 1,309
Noncash transactions from investing and financing activities:
Property and equipment acquired from capital lease obligations .... -- 130 53
Issuance of preferred and common stock warrants ................... 84 -- --
Issuance of common stock for acquisition of Lennox and Partner GmbH 19 -- --
Reduction of property and equipment and accumulated depreciation
for the disposal of fully depreciated assets ...................... 4,127 -- --
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 ............... (1,328) -- --
Accrued liabilities for acquisition costs ......................... (403) -- --
Issuance of common stock warrants ................................. (315) -- --
Acquisition of NetLOCK Technology (see Note 3):
Liabilities assumed, net of discount .............................. -- -- 1,576
Acquisition of Networkers Engineering, Ltd. (see Note 3):
Liabilities assumed ............................................... -- -- 1,094
Issuance of common stock to Networkers Engineering stockholders ... -- -- 914
Assets acquired ................................................... -- -- 100
Sale of HARBOR product line (see Note 2):
Assets of the HARBOR product line sold to a related party ......... -- -- 2,265
Liabilities of the HARBOR product line assumed by a related party . -- -- (356)
Costs accrued related to the sale of the HARBOR product line ...... -- -- 262
</TABLE>

62
<PAGE>

11. COMPUTATION OF NET INCOME (LOSS) PER SHARE:

Basic and diluted earnings per share are calculated as follows for fiscal 1996,
fiscal 1997 and fiscal 1998 (in thousands except for per share amounts):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Basic:
Weighted average shares .................................. 2,446 6,516 7,791
------- ------- -------
Shares used in per share calculation ..................... 2,446 6,516 7,791
======= ======= =======
Net income (loss) ........................................ (7,616) 3,360 (7,407)
======= ======= =======
Net income (loss) per share .............................. $ (3.11) $ 0.52 $ (0.95)
======= ======= =======

Diluted:
Weighted average shares .................................. 2,446 6,516 7,791
Common equivalent shares from stock options and warrants . -- 1,079 --
------- ------- -------
Shares used in per share calculation ..................... 2,446 7,595 7,791
======= ======= =======
Net income (loss) ........................................ $(7,616) $ 3,360 $(7,407)
======= ======= =======
Net income (loss) per share .............................. $ (3.11) $ 0.44 $ (0.95)
======= ======= =======
</TABLE>

12. EMPLOYEE BENEFIT PLAN:

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 1996, fiscal 1997 and fiscal 1998.

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 and executive officers are
incorporated herein by reference from the section entitled "Election of
Directors" and "Executive Officers of the Registrant", respectively, 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
1998.

63
<PAGE>

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

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 70 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 40 and page 69, respectively, of this
Report on Form 10-K.

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

3.1 Restated Certificate of Incorporation of the Company. (1)

3.2 Bylaws of the Company, as amended to date. (1)

64
<PAGE>

4 Shareholder Rights Plan (3)

10.1 1992 Stock Option Plan, as amended, and from of agreement
thereto. (1)

10.2 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereto. (1)

10.3
1996 Director Stock Option Plan, as amended, and form of
agreement thereto. (2)

10.4 Form of Indemnification Agreement between the Company and its
officers and directors. (2)

10.5+ OEM/Remarketing Agreement between the Company and Bus-Tech,
Inc. dated February 13, 1989, as amended. (1)

10.6 Lease Agreement between the Company and King & Lyons dated
December 8, 1996. (1)

10.7 Lease Agreement between New Era Systems Services, Ltd. and
Trizec Properties Limited. (1)

10.8+ Software License and Distribution Agreement between the
Company and Legato Systems, Inc. dated May 10, 1996. (1)

10.9+ Revenue Sharing Agreement between the Company and Legato
Systems, Inc. dated May 10, 1996. (1)

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. (1)

10.12+ Letter Agreement between the Company and Gloria Purdy dated
January 18, 1996, as amended. (1)

10.13+ Letter Agreement between the Company and Augustus J. Berkeley
dated December 9, 1994. (1)

10.14+ Letter Agreement between the Company and Barbara Booth dated
January 16, 1996. (1)

10.18 Note and Security and Loan Agreement between the Company and
Imperial Bank dated April 25, 1996. (1)

65
<PAGE>

10.19.1 Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated September
10, 1993. (1)

10.19.2 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
February 7, 1994. (1)

10.19.3 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
April 29, 1994. (1)

10.19.4 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
February 28, 1995. (1)

10.19.5 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 12, 1995. (1)

10.19.6 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 12, 1995. (1)

10.19.7 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
June 23, 1995. (1)

10.19.8 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
January 11, 1996. (1)

10.19.9 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated
January 11, 1996. (1)

10.19.10 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated May
29, 1996. (1)

10.19.11 Amendment to Agreement between New Era Systems Services, Ltd.
and The Minister of Western Economic Diversification dated May
29, 1996. (1)

10.20 Stock Purchase Agreement between the Company and Cisco
Systems, Inc. dated December 12, 1996. (2)

10.21 Change of Control Severance Agreement. (4)

66
<PAGE>

10.22 Letter Agreement between the Company and Augustus J. Berkeley
dated 10/97. (4)

10.23 Letter Agreement between the Company and James A. Barth dated
11/97. (4)

10.24 Letter Agreement between the Company and Victor Langford dated
3/98. (4)

10.25 Letter Agreement between the Company and William Jones dated
3/98. (4)

10.26 Severance Agreement between the Company and Charles W. Jepson
dated 5/97. (4)

10.27 Severance Agreement between the Company and Gloria M. Purdy
dated 12/97. (4)

10.28 Amendment to 1992 Stock Option Plan (5)

10.29 Acquisition of the NetLOCK network security technology dated
September 18, 1997. (6)

10.30 Sale of the HARBOR product line to HARBOR Systems Management,
Ltd. dated December 18, 1997. (7)

21.1 List of Company's subsidiaries

23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants

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

27.1 Financial Data Schedule

(1) 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.

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

(3) Incorporated by reference from the Company's report on Form 8-A filed with
the Securities and Exchange Commission on February 26, 1998.

(4) Incorporated by reference from the Company's report on Form 10-Q for the
quarter ended March 31, 1998.

(5) Incorporated by reference from the Company's report on Form S-8 filed with
the Securities and Exchange commission on March 25, 1998.

(6) Incorporated by reference from the Company's report on Form 8-K filed with
the Securities and Exchange commission on October 3, 1997.

67
<PAGE>

(7) Incorporated by reference from the Company's report on Form 8-K filed with
the Securities and Exchange commission on January 2, 1998.

+ 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, 1998, the Company filed
no current reports on Form 8-K.

68
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

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

Our report on the consolidated financial statements of Interlink Computer
Sciences, Inc. is included on page 41 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/ PricewaterhouseCoopers LLP

San Jose, California
July 24, 1998

69
<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ----------- ------ -------- ---------- ------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:

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

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

Year ended June 30, 1998 $623 $145 $(190) $578
</TABLE>

70
<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/ Augustus J. Berkeley Date: September 18, 1998
----------------------------
President and Chief Executive Officer

POWER OF ATTORNEY

Know all persons by these present, that each person whose signature
appears below constitutes and appoints James A. Barth, 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/ Augustus J. Berkeley President, Director and September 18, 1998
- ------------------------ Chief Executive Officer
Augustus J. Berkeley (Principal Executive Officer)

/s/ James A. Barth Vice President and Chief Financial September 18, 1998
- ------------------ Officer (Principal Financial and
James A. Barth Accounting Officer)

/s/ Thomas Bredt Chairman of the Board September 18, 1998
- ----------------
Thomas Bredt

/s/ Andy Fillat Director September 18, 1998
- ---------------
Andy Fillat

/s/ Ronald W. Braniff Director September 18, 1998
- ---------------------
Ronald W. Braniff

/s/ Ralph B. Godfrey Director September 18, 1998
- --------------------
Ralph B. Godfrey

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 Software Engineering, LTD

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 24, 1998, on our audits of the financial statements of
Interlink Computer Sciences, Inc. as of June 30, 1997 and 1998 and for each of
the three years in the period ended June 30, 1998, which reports are included in
this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

San Jose, California
September 18, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 18,189
<SECURITIES> 0
<RECEIVABLES> 9,454
<ALLOWANCES> (578)
<INVENTORY> 818
<CURRENT-ASSETS> 35,434
<PP&E> 6,622
<DEPRECIATION> 1,183
<TOTAL-ASSETS> 42,782
<CURRENT-LIABILITIES> 15,403
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 23,018
<TOTAL-LIABILITY-AND-EQUITY> 42,782
<SALES> 15,920
<TOTAL-REVENUES> 29,049
<CGS> 1,299
<TOTAL-COSTS> 5,999
<OTHER-EXPENSES> 39,079
<LOSS-PROVISION> 146
<INTEREST-EXPENSE> 224
<INCOME-PRETAX> (15,201)
<INCOME-TAX> (7,794)
<INCOME-CONTINUING> (7,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,407)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)

</TABLE>