<PAGE>

===============================================================================

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, DC  20549
                          -------------------------

                                  FORM 10-K

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

                 Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

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

For the fiscal year ended:                              Commission File Number:
     March 31, 1997                                             0-14713

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


                             INTERLEAF, INC.
            (Exact name of registrant as specified in its charter)

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


     Massachusetts                                      04-2729042
(State of Incorporation)                   (IRS employer identification number)

                             62 Fourth Avenue
                       Waltham, Massachusetts 02154
                 (Address of principal executive offices)
                      Telephone No.: (617) 290--0710

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

       Securities registered pursuant to Section 12(b) of the Act:
                                   None

       Securities registered pursuant to Section 12(g) of the Act:
                 Common Stock, par value $.01 per share
                     Preferred Stock Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.    Yes   X      No  
                                                      -----  -----

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

The aggregate market value of Common Stock held by non-affiliates of the 
registrant at June 18, 1997 was $23,868,250 based upon the last reported 
sales price of the Common Stock in the National Market System, as reported by 
NASDAQ on such date. 

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

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

The number of shares of the registrant's Common Stock, $.01 par value, 
outstanding at June 18, 1997 was 17,709,719.

                       DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Company's Proxy Statement relating to the Company's 
   Annual Meeting of Shareholders to be held on August 15, 1997. (Part III)

===============================================================================

<PAGE>

                                    PART I

ITEM 1. BUSINESS

   Interleaf-Registered Trademark-, Inc. and its subsidiaries ("Interleaf" or 
the "Company") develop and market software that is used in the creation, 
publication, management, and distribution of electronic documents. The 
Company's software enables customers to compose, edit, view and print 
documents, while also facilitating their electronic management, preparation, 
conversion and distribution, thereby enabling the Company to offer its 
customers an integrated document publishing ("IDP") solution.

   Since the Company's inception, Interleaf has primarily focused on the 
development and marketing of electronic publishing software for the technical 
documentation segment. These products were developed on 32-bit Unix 
workstations ("Workstations") manufactured by International Business Machines 
Corporation ("IBM"), Digital Equipment Corporation ("Digital"), Sun 
Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP"), and on 
Intel-based personal computers ("PCs").

   The market for high-end technical document management products for 
Workstations and PCs has matured. The maturing of this market has had a 
negative impact on Interleaf's revenue and business. This is most evident in 
product revenue which declined by 46% in fiscal year 1997 from the prior year 
while total revenue declined by 27%. In comparison, fiscal year 1996's 
product revenue and total revenue remained flat compared to fiscal year 1995 
(although 1995's total revenue declined by 21% from the prior year). As a 
response to revenue declines, the Company has reduced its asset base, 
employment levels, and other costs over the last three fiscal years. In 
fiscal years 1997 and 1995, Interleaf incurred restructuring charges of $11 
million and $7 million, respectively. A major part of restructuring costs 
was related to facilities which amounted to $8 million and $3 million for 
fiscal years 1997 and 1995, respectively. Additionally, total employment 
declined by 47% and 25% in fiscal years 1997 and 1995, respectively. 
Severance costs related to the restructuring amounted to $3 million and $5 
million in fiscal years 1997 and 1995, respectively. Investments in research 
and development, including the capitalized software development costs, 
were reduced by $4 million during fiscal year 1997 but averaged $19 million 
during the last three fiscal years. The net effect on costs from these 
changes is that quarterly operating expenses have been reduced by $8 million 
from the first to the last quarter of fiscal year 1997.

   While the demand for high-end technical document management products has 
matured, most mid to large size companies are requiring enterprise publishing 
solutions to assemble, integrate, control, and distribute documents as an 
essential part of their businesses. In fiscal year 1998, the enterprise 
publishing solutions market is expected to increase. The growth of the 
Internet and intranet account for most of this increase, and as a result, the 
definition of document publishing and management has changed. Solving 
enterprise document management problems is an enterprise-wide problem, 
beginning at a departmental level, e.g., Human Resources, Marketing, Sales, 
Engineering, Finance, etc. 

   Interleaf plans to introduce new technologies and products in fiscal year 
1998. These new technologies and products will focus on enterprise publishing 
solutions for complex document publishing, distribution and management across 
the entire enterprise. Interleaf's new technology, packaged and sold as IDP 
applications, will allow our customers to solve specific business problems 
such as enhancing corporate communication, reducing costs associated with 
disparate document information systems, allowing customers to offer more 
accurate, lower cost products and services, and substantially improving their 
bottom line. The Company's future revenue growth will be largely dependent on 
its ability to develop these new technologies and apply IDP application 
solutions, as well as its ability to reorganize sales and distribution 
channels to sell them successfully into the marketplace.

PRODUCTS AND SPECIALIZED SERVICES

   The Company currently markets an integrated suite of software products 
that are sold both individually and as parts of an IDP solution. These 
products include Interleaf 6 for publishing, WorldView for on-line 
distribution of document collections, RDM for document management, and 
BusinessWeb for Internet and intranet publishing and document management. The 
Company also markets consulting and training to enable its customers to 
deploy their IDP solutions.

   Interleaf 6. Interleaf 6 operates on Sun, Digital, HP, and IBM Workstations 
and on Windows NT and Windows 95 operating systems.

                                       2

<PAGE>

   Interleaf 6 is a production publishing engine that provides the 
capabilities to develop solutions for customers' complex document processes. 
Information-driven and collaborative publishing processes require a 
publishing engine to assimilate information from documents that originate 
from a variety of sources. These documents may be either a single document 
containing thousands of pages or a collection or library of interrelated 
documents. Interleaf 6 enables customers to reuse this information and 
re--purpose it for different distribution media: paper, Internet, intranet, 
local area network ("LAN"), wide area network ("WAN"), CD-ROM or for On 
Demand Printing. These documents share common characteristics such as 
multiple authors, controlled revisions and long life cycles. Interleaf 6 
automates complex document processes by providing tools for creating and 
maintaining documentation. By leveraging 32-bit operating environments, 
Interleaf 6 can execute rapid changes across large document collections, 
maintaining cross references, autonumbering and pagination.

   Foreign language versions of Interleaf 6 are available in French, 
Japanese, Italian and German. Interleaf 6 is sold in modules. In the United 
States, the base module is priced at $1,395 and the complete package is 
$15,000. Interleaf 6 is subject to volume price discounts, depending on the 
amount committed to by a customer.

   WorldView. WorldView is a comprehensive electronic document distribution 
system which enables customers to transform various types of electronic data 
into collections of interrelated information for distribution online, by 
CD-ROM, diskette or other media type for viewing on PCs and Workstations and 
is available in English, French, Italian, Spanish, German and Japanese 
languages. Customers may merge and assimilate documents ranging from single 
page reports to thousands of pages of documentation that may originate in 
different formats and different applications throughout an organization, 
thereby allowing customers to build comprehensive electronic distribution 
applications designed specifically for their document processes. WorldView 
also offers the ability to enhance information with formatting, structure, 
graphical road maps and access tools. 

   WorldView Java. WorldView Java is a server based product that transforms 
various types of electronic data into collections of interrelated information 
for distribution and viewing on Web Browsers. In fiscal year 1997, WorldView 
Java was released in Beta, and is expected to be ready for general 
availability in early fiscal 1998.

   These products have a list price starting at $195 in the United States. 
WorldView Press, the tool that customers use to prepare their documents 
created by either Interleaf or non-Interleaf authoring tools, for electronic 
viewing, starts at $5,000. WorldView is subject to volume discounts.

   RDM. Interleaf's RDM is a product for use on PCs and Workstations that 
enables users to manage documents, whether created with Interleaf 6 or other 
authoring products, in large document databases. RDM manages documents 
through the creation, revision, and approval processes. It provides users 
with a central document repository that manages document workflow, security, 
relationships and revisions, particularly relevant in regulated and 
quality-driven processes. This product has a list price starting at 
approximately $36,000 in the United States.

   BusinessWeb. This product offers Internet access to an RDM-managed 
knowledge repository using a standard Web browser. This product lists for 
approximately $25,000.

   Liaison. Liaison is an open Application Programming Interface designed to 
facilitate the development of IDP applications. Liaison's object-oriented 
framework is standards-based and makes it easy to rapidly create networked 
solutions that operate across applications and platforms. The price of this 
product begins at $499.

   All of the Company's core software products support documents in Hypertext 
Markup Language ("HTML"), the data form for Internet World Wide Web publishing.

                                       3

<PAGE>

   SERVICES. The Company continues to implement its services strategy of 
providing consulting and training to its customers to enable them to deploy 
their IDP solutions, utilizing Interleaf's software products. During the 
fiscal years ended March 31, 1997, 1996 and 1995, worldwide revenues from 
services were approximately $17.0 million, $21.5 million, and $22.6 million 
respectively, representing approximately 26%, 24%, and 26% respectively, of 
the Company's total revenues.

   MARKETS AND CUSTOMERS. Interleaf has historically directed its marketing 
efforts primarily to the technical documentation segment of the electronic 
publishing market. As this segment has matured, the Company has diversified 
into IDP solutions, by applying its broad--based technology to vertical 
markets. In fiscal 1998, Interleaf will aggressively market solutions to 
vertical markets such as financial services, manufacturing, insurance and 
healthcare.

SALES AND DISTRIBUTION

   UNITED STATES. In the United States, Interleaf distributes its software 
products and customized services through direct and alternate channels.

   Direct Channel. Currently, the Company sells its software products and 
consulting services to customers primarily through its direct sales force. 
Since the start of fiscal 1993, the Company  has had a telesales operation at 
its corporate offices to supplement its direct sales force. In fiscal 1998, 
the Company will team with technology partners, VARs and systems integrators 
to provide a broader range of solutions to the market.

   Consulting services are performed by consulting engineers working out of the
Company's direct sales offices or corporate headquarters.

   Direct Sales/Services. In the United States, the Company employs 
approximately 99 persons engaged in direct sales, sales support, and services 
activities. Services includes employees engaged in project management, 
customized services and pre-sales activities. Interleaf maintains sales and 
service offices in 7 United States locations.

    Alternate Channels. The Company has entered into agreements with a number 
of value-added resellers to market and distribute its software products. 
Currently, the Company has approximately 25 resellers in the United States 
who resell its software products. During the fiscal year ended March 31, 
1997, domestic revenues attributable to VAR sales totaled approximately 2% of 
the domestic revenues, compared with 5% of the domestic revenue in fiscal 
1996 and 5% in fiscal 1995.

   Overall, domestic revenue from the direct and alternate channels, 
including services and customer support, accounted for approximately $40 
million for the fiscal year ended March 31, 1997, representing approximately 
62% of the Company's revenues for such year, compared with approximately $55 
million or 62% of total revenues for fiscal 1996, and $57 million or 65% of 
total revenues for fiscal 1995.

   INTERNATIONAL. The Company primarily markets its software products and 
services in Canada,  Europe and Asia through its wholly-owned subsidiaries. 
In Italy, however, Interleaf products are sold exclusively through Interleaf 
Italia S.r.l. The Company has an equity interest of approximately 30% in 
Interleaf Italia S.r.l., and has the right to purchase the remaining equity 
at a formula price based upon investment by the other shareholders in such 
entity, as well as its sales and profitability. Since April 1989, Interleaf 
has been selling its products in Latin America through Interleaf Americas, 
Ltd., an exclusive distributor. The revenues from Interleaf Americas have 
been insignificant. 

   In August 1992, Interleaf established a wholly owned subsidiary in Japan 
to market the Company's Japanese language products. This subsidiary has been 
primarily selling through Japanese distributors and resellers who have 
significant services capabilities, and not directly to end users as the 
Company generally does outside of Japan.

   Sales and support offices for these non-U.S. entities are maintained in 
nearly all major European cities; the Company also has offices in Ottawa, 
Canada; Tokyo, Japan; and Sydney, Australia.

   Overall, international sales, including services and customer support, 
accounted for approximately $26 million for the fiscal year ended March 31, 
1997 or 40% of total revenues, compared with approximately $34 million or 38% 
of total revenues for fiscal 1996, and approximately $31 million or 36% of 
total revenues for fiscal 1995. As of March 31, 1997, 106 employees work in 
the Company's international operations. 

                                       4

<PAGE>

CUSTOMER SUPPORT

   Many of Interleaf's customers enter into customer support agreements. The 
Company employs 25 people in customer support at its corporate headquarters, 
and approximately 10 outside the United States. Each customer who has entered 
into a standard support contract receives telephone access to the Company's 
customer support staff and bug fixes and upgrades to Interleaf products 
covered under the support contract. Worldwide revenues from customer support  
and maintenance were $29 million, representing approximately 45% of total 
revenues for fiscal year ended March 31, 1997, compared with $32.3 million or 
36% of total revenues for fiscal year ended March 31, 1996, and $30.7 
million, or 35% of total revenues, for the fiscal year ended March 31, 1995.

   In the United States, the list price for standard support for Interleaf 6 
is approximately $450 per year, generally paid annually in advance, with the 
price increasing to $3,495 per year for Interleaf 6, with all options. 
Pricing for support of the Company's WorldView product is listed at 20% of 
end-user price, depending upon the configuration, with support for the 
Company's RDM product being priced at approximately 20% of end-user price. 
If non-standard support by a customer is required, prices will vary 
substantially. Standard support includes new releases (upgrades) to products.

PRODUCT DEVELOPMENT AND ENGINEERING

   The software industry is characterized by rapid technological change which 
requires the continuing enhancement of existing products, development of new 
products and the porting of these products to new hardware platforms, 
operating systems, and to various industry standard graphical user interfaces 
and operating systems: (1) Motif-Registered Trademark-, (2) Windows, and (3) 
Windows NT. During fiscal 1997, the Company completed its port of Interleaf 6 
to operate on the Windows NT and Windows 95 operating systems.

   In fiscal 1997, as the Internet and intranets grew in the marketplace, the 
Company developed its BusinessWeb product to enable its IDP solutions to be 
utilized with these emerging technologies. In fiscal 1998, the Company 
expects to continue to shift development and engineering resources toward the 
development of new, Web-based publishing products and applications.

   During the fiscal years ended March 31, 1997, 1996 and 1995, the Company's 
product development and engineering expenses, including the amortization of 
software development costs, were approximately $20.0 million, $19.1 million, 
and $22.1 million respectively, representing 31%, 22%, and 25% respectively, 
of the Company's total revenues. As of March 31, 1997, the Company had 62 
employees engaged in product development and engineering. 

MANUFACTURING

   The Company's manufacturing operations are engaged in the duplication of 
tapes, diskettes, CDs, and printed documents, assembling, and final packaging. 

BACKLOG

   The Company generally manufactures its software on the basis of its 
forecast of near-term demand and generally ships to end users within 30 days 
after receipt of the order. Consequently, the Company's product backlog at 
this time is not indicative of future sales levels. The Company does not 
regard the amount of backlog at any time to be material to a current 
understanding of its business.

                                       5

<PAGE>

COMPETITION

   The electronic publishing, distribution, viewing, and document management 
markets are highly competitive. Some of these competitors are larger and have 
greater resources than the Company has. Many new competitors emerged in the 
electronic publishing, viewing, and document management market in fiscal 
1997. The introduction and market acceptance of new technologies such as the 
Internet and intranet, have also offered new forms of competition to the 
Company's existing products.

   At the low end of the electronic publishing and viewing market, the 
Company competes with Adobe Systems Inc. Principal competitive factors 
include product functionality, customer support, ease of use, integration, 
and price. In the document management market, the Company competes with 
numerous companies, including Documentum, Inc.

   The Company's products, integrated with each other, blended with 
specialized services, and used across different hardware platforms, are its 
principal competitive advantages in a market that is fragmented with many 
companies offering only separate parts of a solution. The Company also 
believes that its ability to provide IDP solutions for customer specific 
business problems will increasingly distinguish the Company from its 
competitors.

EMPLOYEES

   As of March 31, 1997, the Company, worldwide, employed 342 full-time 
employees, of whom 62 were employed in research and development, which 
includes quality assurance and technical documentation, 99 in  domestic sales 
operations, including services, 25 in domestic customer support, 10 in 
corporate marketing, 40 in finance and administration, and 106 in the 
Company's international operations. The Company's success will depend in 
large part on its ability to attract and retain qualified personnel, who are 
in demand throughout the industry. None of the Company's employees are 
represented by a labor union. Interleaf believes that its employee relations 
are good.

PRODUCT PROTECTION

   The Company relies on a combination of trade secret, patent, copyright and 
trademark laws, license agreements and technical measures to protect its 
rights in and to its software. Although the Company's license agreements 
prohibit disclosure of the proprietary aspects of its products, it is 
technically possible for competitors to copy aspects of its products in 
violation of the Company's rights. INTERLEAF is a registered trademark of the 
Company, WorldView and RDM are trademarks of the Company.

   The Company believes that, because of rapid technological change in the 
software industry, patent, trade secret and copyright protection are less 
significant than factors such as the knowledge, ability and experience of 
employees as well as name recognition.

ITEM 2. PROPERTIES

   The Company's principal executive, administrative and research and 
development operations are located in two adjacent buildings, cumulatively 
totalling approximately 70,965 square-feet in Waltham, Massachusetts, both of 
which the Company occupies under leases expiring in December 2000. 

   The Company also leases sales and support offices in 6 locations in the 
United States and 8 foreign locations for its subsidiaries.

ITEM 3. LEGAL PROCEEDINGS

   There are no material legal proceedings to which the Company is a party or 
to which any of its property is subject.

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

   No matter was submitted to a vote of security holders during the fourth 
quarter of the fiscal year covered by this report.

                                       6

<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

   The current executive officers of the Company are listed below:

   Jaime W. Ellertson, 40, joined the Company as President, Chief Executive 
Officer and Director in January 1997. Prior to that date, he was Chairman of 
Purview Technologies, Inc., an Internet monitoring, management, and analysis 
software company, from July 1996 to January 1997. Mr. Ellertson was President 
and Chief Executive Officer of Tartan, Inc., a manufacturer of compilers, 
from December 1995 to June 1996. Previously, he was President and Chief 
Executive Officer of Openware Technologies, a software and services company, 
from July 1990 to December 1995. 

   Robert A. Fisher, 48, joined the Company as Vice President, Customer 
Support in May 1997. Mr. Fisher was Vice President of Worldwide Customer 
Support at Interleaf from 1989 to 1994 and rejoined Interleaf in May of this 
year. Prior to rejoining Interleaf, Mr. Fisher was Vice President, Worldwide 
Customer Services at Open Environment Corporation/Borland, a manufacturer of 
middleware software, from August 1994 to May 1997. 

   Robert R. Langer, 51, became Chief Financial Officer of the Company in 
January 1997. Prior to that date, Mr. Langer was interim President of Arity 
Corporation, a database and related development tool technology company, from 
February 1995 to October 1996. Mr. Langer served as Vice President and Chief 
Financial Officer at Phoenix Technologies, Ltd., a systems software company, 
from May 1990 to January 1995.

   Christopher McKee, 38, joined the Company in May 1997, as Vice President 
of Europe, Middle East, and Africa. Mr. McKee joined Interleaf from Inference 
Corporation, a provider of knowledge management software and services, where 
he was Senior Vice President, International Operations, from May 1996 to May 
1997. Prior to being promoted to international vice president, Mr. McKee was 
Vice President for Northern Europe from February 1994 to April 1995 and held 
senior sales management positions with Inference Corporation from 1991 to 
1994. 

   Gary Phillips, 37, joined the Company as Vice President, Sales in June 
1997. Prior to joining Interleaf, Mr. Phillips was Vice President, Sales at 
BBN Planet where he was responsible for Internet solutions sales, from June 
1996 to June 1997. Prior to that, he was Vice President of Sales and 
Marketing for BBN Enterprise Networks, which provided network consulting and 
systems integration services, from June 1994 to June 1996. Prior to joining 
BBN, Mr. Phillips held the position of Vice President of Sales and Marketing 
for Application Systems Group, a start-up software/systems integration 
company, from June 1993 to June 1994. Mr. Phillips held several sales 
management positions, most recently as  Director of Sales for U.S. 
Operations, at Wang Laboratories, a computer manufacturer, software 
applications developer, and services provider, from 1984 to June 1993.

   Michael L. Torto, 35, joined the Company as Vice President, Marketing in 
April 1997. Prior to joining Interleaf, Mr. Torto was Chief Operating Officer 
at Ontos, Inc., an object database and object middleware technology company, 
from April 1996 to April 1997.  Mr. Torto served as Director of Marketing for 
Intersolv's data access products division, from December 1995 to April 1996. 
Previously, he was Vice President of TechGnosis, Inc., a European-based 
software company in the database middleware market, from November 1994 to 
December 1995. Previously, Mr. Torto was Director of Product Marketing at 
Trinzic Corp., a manufacturer of client server software, from October 1991 
until December 1994.

   There is no family relationship among the foregoing individuals.

   Executive officers are elected on an annual basis and serve at the 
discretion of the Board of Directors.

                                       7

<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER 
        MATTERS

   The Company's common stock is traded on the over-the-counter market and 
   is quoted on the NASDAQ National Market tier of the NASDAQ Stock Market 
   under the symbol LEAF. On June 18, 1997, there were 839 holders of record 
   of the Company's common stock. This number does not reflect persons or 
   entities who hold their stock in nominee or "street name" through various 
   brokerage firms.

<TABLE>
<CAPTION>

Quarter ended                   June 30     September 30     December 31     March 31      Year
-------------                   -------     ------------     -----------     --------     -------
<S>                             <C>         <C>              <C>             <C>          <C>
FISCAL 1997
Common stock prices
  High........................   8 7/8          5 3/8            3 3/8        2 7/16       8 7/8

  Low.........................   6 1/2          2 3/8            1 7/8        1 3/8        1 3/8

  Close.......................   6 1/2          2 3/8            1 7/8        1 9/16       1 9/16

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

FISCAL 1996
Common stock prices
  High........................   8             11               12 5/8       10 3/8       12 5/8 

  Low.........................   4 1/4          7 1/4            7 1/4        6 1/8        4 1/4 

  Close.......................   7 3/8         10               10 1/8        8 7/8        8 7/8

----------------------------------------------------------------------------------------------------
</TABLE>

The Company has never paid cash dividends. The Company is restricted from 
paying cash dividends during the term of the credit agreement.

                                       8


<PAGE>

ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA


<TABLE>
<CAPTION>

(in thousands except for per share amounts)
Year ended March 31                               1997 a         1996 b          1995 c          1994 d            1993
------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>            <C>             <C>             <C>
Total revenues                                  $ 64,823        $88,557        $ 87,856        $111,229        $117,341
------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                (29,550)           311         (48,362)         (8,448)          9,303
------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                     $  (1.70)       $  0.02        $  (3.47)       $  (0.63)       $   0.55
------------------------------------------------------------------------------------------------------------------------
Shares used in computing net income 
   (loss) per share                               17,344         18,495          13,938          13,384          16,836
------------------------------------------------------------------------------------------------------------------------
Total assets                                    $ 37,900        $48,916        $ 50,793        $ 96,884        $ 99,519
------------------------------------------------------------------------------------------------------------------------
Long-term obligations                              2,955            733             625           1,565           1,857
------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit)            $   (772)       $15,419        $ 10,615        $ 56,632        $ 63,126
------------------------------------------------------------------------------------------------------------------------
Common stock outstanding                          17,459         16,698          14,203          13,631          13,064
------------------------------------------------------------------------------------------------------------------------

</TABLE>

   a. Fiscal 1997 results include $10.9 million of restructuring charge 
      for restructuring of the Company's worldwide operations, a $2.3 
      million write-off of intangible assets, and a $2.5 million write-off 
      of capitalized software, inventory and prepaid royalties.

   b. Fiscal 1996 results include a $1.2 million benefit from the 
      settlement of a long-term dispute with a joint venture partner.

   c. Fiscal 1995 results include a $15.2 million write-off of 
      goodwill related to the acquisition of distributorships in Canada, 
      France and Germany, a $7.1 million charge for restructuring the 
      Company's worldwide operations, a $2.0 million write-off of 
      capitalized software development costs, and a $1.9 million charge 
      for revaluation of the Company's deferred tax asset.

   d. Fiscal 1994 results include a $4 million charge for acquired in-
      process research and development in connection with the 
      acquisition of Avalanche Development Company in June 1993, a $3 
      million charge for restructuring the Company's worldwide 
      operations, and a $1.9 million benefit upon adoption of Statement 
      of Financial Accounting Standards No. 109, "Accounting for Income 
      Taxes," effective April 1, 1993.

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

Results of Operations 

   Overview: The Company recorded a net loss of $29.6 million on revenues of 
   $64.8 million in fiscal 1997. This compares with net income of $0.3 
   million on revenues of $88.6 million and a net loss of $48.4 million on 
   revenues of $87.9 million in fiscal 1996 and 1995, respectively. Much of 
   the decline in revenue for fiscal 1997 is due to a decrease in product 
   revenue (46% reduction) caused by the ongoing maturation of the market for 
   complex authoring products which is a main product line at the Company. An 
   effort to focus on developing and supporting integrated document 
   publishing ("IDP") applications for the extended enterprise has been 
   initiated. As a result of the total revenue decline of 27% in fiscal year 
   1997 from fiscal year 1996, principally in software products, the Company 
   underwent a comprehensive restructuring of facilities, fixed assets, and 
   personnel during the year. The net loss of $29.6 million for fiscal 1997 
   was due to the impact from the decline in product revenue, charges of $2.3 
   million for the write-off of intangible assets from an early fiscal year 
   1997 acquisition, a $2.5 million write-off of capitalized software, 
   inventory and prepaid royalties, and charges of $10.9 million for 
   restructuring the Company's worldwide operations. In addition to the 1997 
   restructuring, the Company began installing a new senior management team, 
   refocusing its business strategy, streamlining product offerings, and 
   significantly reducing the cost structure of the Company.

   REVENUES

   Product: Total product revenue decreased by $16.0 million or 46% in fiscal 
   1997 compared to fiscal 1996. Revenue declined in all geographic regions. 
   Fiscal 1996 was level with fiscal 1995. The continuing trend in the 
   reduction in product license revenue is due to several factors. The first 
   negative trend is the decline in licensing of the Company's UNIX-based 
   high-end authoring products which is primarily attributable to the 
   increasing popularity of Windows-based publishing software, for which the 
   Company did not have any offerings until fiscal 1996. A second factor is 
   the saturation of UNIX-based high-end authoring software in the 
   aerospace/defense industry, where the Company had historically derived most 
   of its authoring product license revenue.

                                       9
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
 
   The Company is refocusing its business strategy on providing integrated 
   document publishing (IDP) applications targeted toward specific vertical 
   markets. While the Company has built well-accepted integrated document 
   publishing based solutions for individual customers, it has not yet 
   demonstrated the ability to develop, market and sell IDP applications. 
   There is no assurance that the Company will be successful in implementing 
   its strategy and,  therefore, the Company is unable to predict if or when 
   product revenues will stabilize or grow. Additionally, since the Company's 
   services and maintenance revenue is largely dependent on new product 
   licenses, these revenue components have also experienced downward pressure. 
   This trend will continue unless product revenue stabilizes.
   
   Maintenance: Maintenance revenue declined by $3.3 million or 10% in fiscal 
   1997 from fiscal 1996, although it was relatively stable in fiscal 1996 and 
   1995. This relative stability, during a time of decreasing product 
   licensing, was largely attributable to renewals from the Company's very 
   large, long-term customers primarily in the aerospace/defense industry. 
   Future maintenance revenue is dependent on the Company's ability to 
   maintain its existing customer base and to increase maintenance contract 
   volume related to the new IDP application sales. This will be necessary to 
   offset the general downward pricing pressure on maintenance in the software 
   industry and customers perceived value of maintenance services. 

   Services: Services revenue, consisting of consulting and customer training 
   revenue, declined by $4.5 million or 21% in fiscal 1997 compared to a 
   decrease of $1.1 million or 5% in fiscal 1996 from 1995. The Company 
   leverages software product licenses with services to provide IDP solutions 
   to its customers. During fiscal 1995, the Company worked on several large 
   service projects which were completed during early fiscal 1996. The decline 
   in fiscal 1997 and 1996 was primarily attributable to the decrease in 
   product license revenues, a decrease in services personnel, and lower 
   training revenue associated with the decline in authoring software product 
   licensing. In fiscal 1997, consulting projects tended to be smaller with 
   resultant lower margins due to lower utilization rates and there was no 
   replacement of the large consulting projects completed in 1996 and 1995.

   North America: Revenues were approximately $41.8 million (64%), $57.1 
   million (64%), and $60.0 million (68%) of total revenues during fiscal 
   1997, 1996, and 1995, respectively. The decline in fiscal 1997 was 
   primarily due to a decrease in product license and consulting revenues. The 
   decline in fiscal 1996 was primarily due to a decrease in product license 
   and training revenues.

   International: Revenues from the Company's international operations were 
   approximately $23.0 million (36%), $31.5 million (36%), and $27.9 million 
   (32%) of total revenues during fiscal 1997, 1996, and 1995, respectively. 
   The decrease in fiscal 1997 was primarily due to declining product revenue 
   compared to fiscal 1996. The increase in fiscal year 1996 from fiscal year 
   1995 was due to the growth in software site licenses or electronic 
   distribution software licensing agreements in Europe and increased demand 
   from resellers in Japan, partially offset by a decline in European service 
   revenue.   

   Product license revenue in Japan is volatile because the Company 
   distributes its products through a network of large credit-worthy 
   resellers and integrators who typically enter into upfront fixed fee 
   license agreements. Reorders in Japan are dependent on the success of the 
   resellers and integrators in licensing the Company's products to end-user 
   customers.

   Fiscal 1998: During fiscal 1998, the Company plans to develop several 
   Integrated Document Publishing ("IDP") application offerings which solve 
   specific business problems in several industries. Growth in revenues during 
   fiscal 1998 will be largely dependent on improving sales force 
   productivity, the effectiveness of the Company's increased investment in 
   marketing and lead generation programs, customer acceptance of the new and 
   enhanced software products planned to be released in fiscal 1998 and the 
   next year, and the Company's success in leveraging software products with 
   services to provide IDP solutions to its customers. If the Company is 
   unable to grow or stabilize its revenues in fiscal 1998, further expense 
   reductions will be necessary in order to sustain operations.

                                       10
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
    
   COSTS OF REVENUES

   Cost of product revenues includes amortization of capitalized software 
   development costs; product media, documentation materials, packaging and 
   shipping costs; and royalties paid for licensed technology. Cost of product 
   revenues increased $1.1 million or 16% in fiscal 1997 from 1996, compared 
   to a decrease of $6.4 million (50%) in fiscal 1996 from 1995. Included in 
   the cost of product revenues for fiscal 1997 and 1995, which was absent in 
   fiscal 1996, were write-downs  of $2.0 million and $3.2 million, 
   respectively, of capitalized software development costs. This occurred as a 
   result of a strategic product review by management and a decision to 
   discontinue products and write-down old software products with limited 
   future revenue potential. Additionally, in fiscal year 1997, there 
   were write-offs of inventory and prepaid royalties. The cost of 
   maintenance revenue decreased by $0.6 million or 12% in fiscal 1997 from 
   1996, compared to a decrease of $1.0 million or 16% in fiscal 1996 from 
   1995. Most of the decreases were related to a reduction in customer support 
   personnel associated with the Company's 1997 and 1995 restructurings. The 
   decrease in cost of services revenue of $2.2 million or 12% in fiscal 1997 
   from 1996, compared to a decrease of $1.3 million or 7% in fiscal 1996 
   from 1995, is primarily related to the downward trend in product revenue 
   which results in less integration services.

   OPERATING EXPENSES

   Selling, General and Administrative (SG&A): SG&A expenses decreased $5.6 
   million or 13% in fiscal 1997 from 1996, compared to a decrease of $12.6 
   million or 23% in fiscal 1996 from fiscal 1995. The decline in SG&A 
   expenses over the last two fiscal years was primarily due to significant 
   personnel and facilities expense reductions related to the Company's fiscal 
   1997 and 1995 restructurings. Also contributing to lower SG&A expenses in 
   fiscal 1996 was the settlement of a long-term dispute with a joint venture 
   partner that resulted in a non-recurring expense reduction of 
   approximately $1.2 million (see Note 12 to the Consolidated Financial 
   Statements for further discussion). Further SG&A expense reductions are 
   anticipated throughout fiscal 1998 as the full benefit of the restructuring 
   programs are realized. In addition, the Company will continue to manage 
   SG&A expenses to keep costs in line with revenue.

   Research and Development (R&D): R&D expenses consist primarily of personnel 
   expenses to support product development offset by capitalized software 
   development costs. R&D expenses decreased by approximately $0.9 million 
   (6%) in fiscal 1997 from 1996, compared to a decrease of approximately $1.0 
   million (6%) in fiscal 1996 from fiscal 1995. The decrease in fiscal 1997 
   and 1996 was primarily due to reduced personnel expenses associated with the 
   Company's fiscal 1997 and 1995 restructurings and, for fiscal 1996 versus 
   1995, increased capitalization of software development costs. During fiscal 
   1997, 1996, and 1995, R&D expenses were approximately 23%, 18%, and 19%, 
   respectively, of total revenues. R&D spending, which excludes the offset 
   for capitalized software development costs, represented approximately 24%, 
   23%, and 24% of total revenues, respectively. During fiscal 1997, the 
   Company completed product enhancements across all of its major product 
   lines. Functionality and additional platform support were added to 
   Interleaf 6, WorldView, Intellecte/BusinessWeb, Liaison, and RDM in 
   multiple localized releases for its North American, European and 
   Asia/Pacific markets.

   The Company's product development plans for fiscal 1998 call for a 
   consolidation of many individual product lines into focused integrated 
   enterprise publishing and distribution applications. The product strategy 
   directly aligns with the corporate strategy to refocus its efforts on 
   database enabled electronic publishing. As part of this effort, some 
   existing products that no longer align with its focus will be retired and a 
   number of new products will be developed to expand the Company's ability to 
   capture sales in new departments of its Fortune 1000 customer base, or in 
   mid-sized firms with high growth rates.

                                       11
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
 
   Restructuring and Other Charges:  In fiscal year 1997, the Company incurred 
   restructuring charges of approximately $10.9 million, of which $8.5 million 
   related to the July and October 1996 restructurings. Additionally, there 
   was a $2.4 million charge recorded in the fourth quarter to reflect changes 
   in cost and timing assumptions for previously restructured facilities. 
   These restructuring initiatives were taken in an effort to realign the 
   Company's cost structure with the Company's revenues, which declined 
   throughout fiscal 1997. In addition, the Company recorded a charge of $2.3 
   million to write-off intangible assets associated with the acquisition of 
   The Learning Alliance (see further discussion in Liquidity and Capital 
   Resources). The Company also recorded a $2.5 million expense (of which 
   $2.2 million was recorded in the fourth quarter) for the write-off of 
   capitalized software development costs, inventory, and prepaid royalties 
   for discontinued products and products with limited revenue potential. In 
   fiscal year 1995, the Company incurred restructuring charges of 
   approximately $7.1 million due to a worldwide reorganization and a 
   reduction in the size of its operations. During the fourth quarter of 
   fiscal 1995, the  management team performed a strategic and operational 
   review of the Company's sales and marketing processes, distribution 
   channels, product development plans, and customer support operations. As a 
   consequence of this review and associated changes in the Company's business 
   strategy and operations, the Company evaluated the carrying value of its 
   long-lived intangible assets, principally goodwill and capitalized 
   software development costs, which resulted in a write-down of 
   approximately $17.2 million.

   INCOME TAXES

   For fiscal year 1997, no tax provision was required due to the losses 
   sustained during the year. In fiscal 1996, the effective tax rate was 
   reduced by net operating loss carryforwards. Fiscal 1995 was negatively 
   impacted by an adjustment to the beginning deferred tax asset valuation 
   allowance of approximately $1.9 million when an analysis of the Company's 
   actual and anticipated operating results indicated, at that time, that the 
   deferred tax asset established in fiscal 1994 was not expected to be 
   realized.

   The Company has net operating loss carryforwards of approximately $60 
   million in several tax jurisdictions to offset future taxable income. In 
   addition, the Company has tax credit carryforwards of approximately $7 
   million to offset federal and state income tax liabilities. Therefore, the 
   Company expects to pay minimal income taxes for the foreseeable future.

                                       12
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
 
Liquidity and Capital Resources 
   
   The Company had approximately $17.3 million of cash and cash equivalents at 
   March 31, 1997, an increase of approximately $4.6 million from March 31, 
   1996. The increase was primarily attributable to the net proceeds from the 
   issuance of Senior Series C Preferred Stock of $9.4 million and common 
   stock issuances related to its stock option plans and employee stock 
   purchase plan of approximately $1.2 million. This increase was partially 
   offset by payments of $4.1 million related to the Company's 
   restructurings and investments of $1.1 million in capitalized software
   development costs. The Company also made investments of $1.8 million in 
   capital equipment, principally for improvements to the Company's 
   information system infrastructure in fiscal 1997. Interleaf's German 
   subsidiary, Interleaf GmbH, has been notified that it is liable for German 
   withholding taxes related to payments remitted to the United States from 
   Germany in 1990. The Company is appealing this assessment. At March 31, 
   1996, the Company had approximately $1.1 million of cash restricted for 
   potential payment of German withholding taxes.

   As part of the Company's former strategy to develop sales force automation 
   and integration applications, the Company acquired The Learning Alliance, 
   Inc. ("TLA") in May 1996 for 341,500 shares of common stock valued at $2.7 
   million. In December 1996, in order to allow the Company's management to 
   focus on development of its core businesses, the Company decided to divest 
   itself of TLA. TLA was sold in January 1997 for future royalty 
   considerations and foregone severance obligations. As a result of this 
   decision, in December 1996, the Company recorded a $2.3 million write-off 
   of certain intangible assets which had been recorded in connection with the 
   acquisition.

   Restructuring accruals associated with both the fiscal 1997 and 1995 
   restructurings were approximately $7.3 million at March 31, 1997 and $1.3 
   million at March 31, 1996. Cash payments related to these restructurings, 
   the majority of which are related to operating lease payments, net of 
   subleases, are anticipated to continue until December 2000. All significant 
   vacant space under lease has been subleased, or is the subject of a letter 
   of understanding. Other future obligations at March 31, 1997, consist 
   primarily of facility and equipment leases relating to the regular 
   operations of the Company. In 1998, the Company expects to spend 
   approximately $700,000 in capital improvements and $3.4 million in cash 
   payments related to the restructuring accrual.

   In May 1995, the Company obtained a revolving line of credit from a major 
   commercial lender. Borrowings from the line of credit are secured by 
   substantially all domestic assets of the Company. At March 31, 1997 and 
   1996, there were no loans outstanding under this line of credit. However, a 
   letter of credit for $0.8 million is issued and outstanding and, 
   accordingly, the amount available for borrowings was approximately $1.2 
   million (see Note 5 to the Consolidated Financial Statements regarding 
   borrowing limits and restrictive covenants associated with the credit 
   agreement). This agreement expires in August 1997 and negotiations are 
   underway to establish a new credit facility. Management believes that they 
   will be able to continue or replace the existing agreement by August 1997.

   In addition to the sale of Series C Convertible Preferred Stock (see Note 
   10 to the Consolidated Financial Statements), the Company also, in November 
   1995, issued 190,000 shares of common stock associated with an agreement 
   between the Company and a joint venture partner (see Note 12 to the 
   Consolidated Financial Statements). The objective of the fiscal 1997 Series 
   C financing was to enable the Company to generate sufficient cash flow to 
   return to a sustainable profitable condition.

   During 1997, the Company experienced a substantial decline in revenues and 
   a substantial loss from operations, resulting in a shareholders' deficit at 
   March 31, 1997. Due to the downward trend in the Company's revenues, the 
   Company is unable to predict future revenues and when or if, it will 
   achieve a sustainable profitable level of operations. In response to these 
   matters, the Company developed detailed plans relating to its fiscal 1998 
   operations which, if realized, will restore the Company to profitable 
   operations. Although no assurances can be given that such plans will be 
   achieved, management is committed to taking all appropriate and necessary 
   actions to effect timely cost reductions in the event that anticipated 
   revenue levels are not achieved. In the event such actions are not 
   successful in achieving breakeven or profitable operations, additional 
   financing will be needed. Under such circumstances, no assurance can be 
   given that such financing could be obtained or that it could be obtained 
   at commercially reasonable terms or without incurring substantial dilution 
   to existing shareholders. The financial statements do not include any 
   adjustments to reflect the possible effects of these uncertainties.

   The Company believes its current cash balances and cash generated from 
   operations will be sufficient to meet the Company's liquidity needs for 
   fiscal 1998 and the foreseeable future. The Company can only fund its long-
   term growth through increasing revenues, combined with tightly managed 
   cost controls.

                                       13
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
 
Risk  Factors

   From time to time, information provided by the Company or statements made 
   by its employees may contain forward-looking information. The Company's 
   actual future results may differ materially from those projections or 
   suggestions made in such forward-looking information as a result of 
   various potential risks and uncertainties including, but not limited to, 
   the factors discussed below.

   The Company's future operating results are dependent on its ability to 
   develop and market integrated document publishing software products and 
   services that meet the changing needs of organizations with complex 
   document publishing requirements. There are numerous risks associated with 
   this process, including rapid technological change in the information 
   technology industry and the requirement to bring to market IDP applications 
   that solve complicated business needs in a timely manner. In addition, the 
   existing document publishing, electronic distribution, and document 
   management markets are highly competitive. Many of these competitors are 
   larger and better funded than the Company. The Company competes for sales 
   of its software products on both an individual product basis and integrated 
   with services in large IDP solution sales.

   Sales cycles associated with IDP solution sales are long because 
   organizations frequently require the Company to solve complex business 
   problems that typically involve reengineering of their business processes. 
   In addition, a high percentage of the Company's product license revenues 
   are generally realized in the last month of a fiscal quarter and can be 
   difficult to predict until the end of a fiscal quarter. Accordingly, given 
   the Company's relatively fixed cost structure, a shortfall or increase in 
   product license revenue can have a significant impact on the Company's 
   operating results and liquidity.

   The Company markets its software products and services worldwide. Global 
   and/or regional economic factors, currency exchange rate fluctuations, and 
   potential changes in laws and regulations affecting the Company's business 
   could impact the Company's financial condition or future operating results.

   The market price of the Company's common stock may be volatile at times in 
   response to fluctuations in the Company's quarterly operating results, 
   changes in analysts' earnings estimates, market conditions in the computer 
   software industry, as well as general conditions and other factors external 
   to the Company.

                                       14
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              INTERLEAF, INC.
              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                   AND FINANCIAL STATEMENT SCHEDULE

   The following consolidated financial statements and schedules of Interleaf, 
Inc. and subsidiaries, and report, are included herein:


    Description                                                            Page
    ------------                                                           ----
Report of Management...................................................
Report to Shareholders

Consolidated Statements of Operations for the Years
Ended March 31, 1997, 1996, and 1995...................................
Report to Shareholders

Consolidated Balance Sheets at March 31, 1997 and 1996.................
Report to Shareholders

Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended March 31, 1997, 1996, and 1995.....................
Report to Shareholders

Consolidated Statements of Cash Flows
for the Years Ended March 31, 1997, 1996, and 1995.....................
Report to Shareholders

Notes to Consolidated Financial Statements.............................
Report to Shareholders

Report of Independent Auditors.........................................
Report to Shareholders

Supplemental Financial Information.....................................
Report to Shareholders

Schedule II - Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting 
regulation of the Securities and Exchange Commission are not required under the 
related instructions or are inapplicable, and therefore have been omitted.


                                       15
<PAGE>


Report of Management

   The financial statements, including all related financial information 
   presented in the Annual Report, were prepared by management, and management 
   is responsible for their fairness, integrity and objectivity. These 
   statements have been prepared in accordance with generally accepted 
   accounting principles, and include amounts that are based on management's 
   best estimates and judgement and incorporate accounting policies that are 
   reasonable and prudent for the Company's business environment. The 
   financial statements have been audited by our independent public 
   accountants, Ernst & Young LLP, and their report is included elsewhere 
   herein.

   The Company maintains accounting and control systems that are subject to 
   modification based on recommendations from Ernst & Young LLP. Management 
   believes the internal control systems in use are sufficient to provide 
   reasonable assurance that assets are safeguarded against material loss and 
   are properly accounted for, and that transactions are properly recorded in 
   the financial records used in preparing the financial statements.

   The Company has distributed throughout the organization its policies for 
   financial control. Management believes that its policies and the monitoring 
   of compliance with these policies provide reasonable assurance that its 
   operations are adhering to prescribed financial policy.

   The Board of Directors carries out its responsibility for these financial 
   statements through its Audit Committee, composed of nonemployee Directors. 
   The Audit Committee reviews the financial statements before they are 
   released for publication. The Committee meets periodically with the senior 
   financial officers and Ernst & Young LLP. It reviews the audit scope, 
   significant financial transactions, major accounting issues and 
   recommendations of Ernst & Young LLP. Ernst & Young LLP has full and free 
   access to the Audit Committee and meets with its members, with and without 
   management being present, to discuss internal control, auditing and 
   financial reporting matters.
   
   /s/ Jaime W. Ellertson             /s/ Robert R. Langer
   -----------------------            --------------------
   Jaime W. Ellertson                 Robert R. Langer
   President                          Vice President, Finance and Administration
   and Chief Executive Officer        and Chief Financial Officer


                                       16

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

(in thousands except for per share amounts)
Year ended March 31                                   1997                 1996               1995
--------------------------------------------------------------------------------------------------
<S>                                               <C>                    <C>            <C>
REVENUES
Products                                          $ 18,821              $34,786            $34,602
Maintenance                                         28,972               32,281             30,652
Service                                             17,030               21,490             22,602
--------------------------------------------------------------------------------------------------
Total revenues                                      64,823               88,557             87,856
--------------------------------------------------------------------------------------------------
COSTS OF REVENUES
Products                                             7,502                6,443             12,866
Maintenance                                          4,561                5,179              6,178
Services                                            16,041               18,270             19,605
--------------------------------------------------------------------------------------------------
Total costs of revenues                             28,104               29,892             38,649
--------------------------------------------------------------------------------------------------
Gross margin                                        36,719               58,665             49,207
--------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative                 37,114               42,674             55,283
Research and development                            14,994               15,875             16,855
Write-down of intangible assets                      2,288                   --             15,185
Restructuring charge                                10,942                   --              7,109
--------------------------------------------------------------------------------------------------
Total operating expenses                            65,338               58,549             94,432
--------------------------------------------------------------------------------------------------
Income (loss) from operations                      (28,619)                 116            (45,225)
Other income (expense)                                (931)                 225             (1,019)
--------------------------------------------------------------------------------------------------
Income (loss) before income taxes                  (29,550)                 341            (46,244)
Provision for income taxes                              --                   30              2,118
--------------------------------------------------------------------------------------------------
Net income (loss)                                 $(29,550)             $   311           $(48,362)
--------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE                           $  (1.70)             $  0.02         $    (3.47)
--------------------------------------------------------------------------------------------------
Shares used in computing income (loss
 per share)                                         17,344               18,495             13,938
---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.

                                      17


<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

(in thousands except for share and per share amounts)
MARCH 31                                                                      1997      1996
--------------------------------------------------------------------------------------------
<S>                                                                       <C>       <C>
Assets
CURRENT ASSETS
Cash and cash equivalents                                                 $ 17,349  $ 12,725
Accounts receivable, net of reserve for doubtful
  accounts of $1,371 in 1997 and $1,695 in 1996                             11,359    19,771
Prepaid expenses and other current assets                                    1,504     2,112
--------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                        30,212    34,608
Property and equipment, net                                                  4,963     7,800
Intangible assets                                                            2,281     6,164
Other assets                                                                   444       344
--------------------------------------------------------------------------------------------
TOTAL ASSETS                                                              $ 37,900  $ 48,916
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit)
CURRENT LIABILITIES
Accounts payable                                                          $  1,774  $  2,908
Accrued expenses                                                            14,455    13,255
Unearned revenue                                                            15,102    15,986
Accrued restructuring                                                        4,386       615
--------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                   35,717    32,764
Long-term restructuring                                                      2,955       733
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                           38,672    33,497
--------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $.10 per share,
  authorized 5,000,000 shares:
  Series A Junior Participating, none issued and
    outstanding
  Senior Series B convertible, issued and
    outstanding 861,911 in 1997 and 923,304 in
    1996 (liquidation value $7 per share)                                       86        92
  Senior Series C convertible, issued and outstanding
    1,006,220 in 1997 (liquidation value $9.95 per share)                      101        --
Common stock, par value $.01 per share, authorized
  30,000,000 shares, issued and outstanding
  17,459,219 in 1997 and 16,697,988 in 1996                                    175       167
Additional paid-in capital                                                  85,513    72,348
Retained earnings (deficit)                                                (86,508)  (56,958)
Cumulative translation adjustment                                             (139)     (230)
---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                          (772)   15,419
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  (DEFICIT)                                                               $ 37,900  $ 48,916
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------

</TABLE>
 
See Notes to Consolidated Financial Statements.
 
                                       18


<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

(in thousands)
 
<TABLE>
<CAPTION>
                                                                                                                       Total
                             Preferred       Preferred                  Additional    Retained    Cumulative    Shareholders'
                          Stock Senior    Stock Senior     Common          Paid-in    Earnings   Translation           Equity
                              Series B        Series C      Stock          Capital   (Deficit)    Adjustment        (Deficit)
------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>              <C>              <C>          <C>          <C>         <C>            <C>
Balances at March 31,
  1994                      $     179        $      --      $     136    $  65,551   $   (8,907)   $    (327)    $    56,632
Net loss                           --               --             --           --      (48,362)          --         (48,362)
Conversion of Senior
  Series B Convertible
  Preferred stock into
  common stock                     (6)              --              1            5           --           --              --
Common stock issued in
  connection with stock
  options exercised by
  employees                        --               --              2          660           --           --             662
Common stock issued in
  connection with
  employee stock
  purchase plan                    --               --              2        1,167           --           --           1,169
Common stock issued in
  connection with
  warrants exercised               --               --              1           (1)          --           --              --
Equity adjustment for
  foreign currency
  translation                      --               --             --           --           --          514             514
------------------------------------------------------------------------------------------------------------------------------
Balances at March 31,
  1995                            173               --            142       67,382      (57,269)         187          10,615
Net income                         --               --             --           --          311           --             311
Conversion of Senior
  Series B Convertible
  Preferred stock into
  common stock                    (81)              --             11           70           --           --              --
Common stock issued in
  connection with stock
  options exercised by
  employees                        --               --              7        2,087           --           --           2,094
Common stock issued in
  connection with
  employee stock
  purchase plan                    --               --              1          685           --           --             686
Income tax benefit
  related to exercise
  of stock options                 --               --             --           30           --           --              30
Common stock issued in
  connection with
  warrants exercised               --               --              4           (4)          --           --              --
Common stock issued in
  connection with
  acquisition                      --               --              2        2,098           --           --           2,100
Equity adjustment for
  foreign currency
  translation                      --               --             --           --           --         (417)           (417)
------------------------------------------------------------------------------------------------------------------------------
Balances at March 31,
  1996                             92               --            167       72,348      (56,958)        (230)         15,419
Net loss                           --               --             --           --      (29,550)          --         (29,550)
Conversion of Senior
  Series B Convertible
  Preferred stock into
  common stock                     (6)              --              1            5           --           --              --
Issuance and
  obligations of
  Preferred Stock
  Series C                         --              101             --        9,289           --           --           9,390
Common stock issued in
  connection with stock
  options exercised by
  employees                        --               --              2          447           --           --             449
Common stock issued in
  connection with
  employee stock
  purchase plan                    --               --              2          737           --           --             739
Common stock issued in
  connection with
  acquisition                      --               --              3        2,687           --           --           2,690
Equity adjustment for
  foreigncurrency
  translation                      --               --             --           --           --           91              91
------------------------------------------------------------------------------------------------------------------------------
Balances at March 31,
  1997                      $      86        $     101      $     175    $  85,513   $  (86,508)   $    (139)    $      (772)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.
 
                                       19


<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

(in thousands)
Year ended March 31                                                  1997           1996         1995
-------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                $(29,550)       $   311     $(48,362)

Adjustments to reconcile net income
 (loss) to net cash provided by
 (used in) operating activities:
Write-off of intangible assets                                      2,288             --       15,185    
Restructuring charge                                               10,942             --        7,108
Gain from settlement of legal dispute                                  --         (1,230)          --
Depreciation and amortization expense                               9,706          7,754       14,176
Loss from disposal of property and
 equipment                                                            212             11          261
Deferred income taxes                                                  --             --        1,860
Income tax benefit from stock options
 exercised                                                             --             30           --
Changes in assets and liabilities:
  Decrease in accounts receivable, net                              8,126          2,950       13,550
  (Increase) decrease in other assets                                 309             97         (610)
  Decrease in accounts payable and
   accrued expenses                                                  (172)        (1,068)      (3,188)
  Increase (decrease) in unearned revenue                            (730)           507          439
  Decrease in other liabilities                                    (4,379)        (2,532)      (5,333)
  Other, net                                                          410             76         (385)
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
 activities                                                        (2,838)         6,906       (5,298)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                               (1,816)        (1,597)      (4,827)
Capitalized software development costs                             (1,113)        (4,138)      (3,831)
-------------------------------------------------------------------------------------------------------
Net cash used in investing activities                              (2,929)        (5,735)      (8,658)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred
 stock                                                              9,390             --           --
Net proceeds from issuance of common
 stock                                                              1,250          2,780        1,831
Property and equipment financing                                       --             --          682
Repayment of long-term debt and capital
 leases                                                               (18)        (1,688)      (1,819)
-------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                          10,622          1,092          694

-------------------------------------------------------------------------------------------------------
Effect of exchange-rate changes on cash                              (231)            21          339
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
 equivalents                                                        4,624          2,284      (12,923)
Cash and cash equivalents at beginning of
 year                                                              12,725         10,441       23,364
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                         $ 17,349        $12,725     $ 10,441
-------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                         20



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Note 1  Company
 
    Interleaf, Inc. and its subsidiaries (the Company) develop and market
    integrated document publishing and management software and services
    worldwide for networked and Web-based business solutions. The Company's
    software is used for the electronic assembly, management, retrieval,
    publishing and distribution of business-critical documents.
 
Note 2  Summary of Significant Accounting Policies
 
    Principles of Consolidation: The consolidated financial statements include
    the accounts of Interleaf, Inc. and its subsidiaries. All significant
    intercompany balances and transactions have been eliminated in
    consolidation.
 
    Revenue Recognition: Revenue from the license of software products is
    recognized when the products are shipped, provided there are no significant
    vendor obligations remaining and collection of the receivable is considered
    probable. The Company also maintains a reserve for a sales allowance to
    provide for possible product returns or allowances resulting from a lack of
    sell through of products by resellers. In the fourth quarter of fiscal 1997,
    the Company recorded a charge of $1.5 million to provide for anticipated 
    allowances expected to be granted. Costs associated with insignificant
    vendor obligations are accrued. Maintenance revenue is recognized ratably
    over the contract period. Services (consulting and training) revenue is
    recognized as the related services are performed on either a time and
    materials basis or pro-rata based on project or contract completion.
 
    Unearned revenue represents the remaining amount of revenue to be recognized
    in future periods primarily related to maintenance and service contracts.
 
    Cash and Cash Equivalents: Cash equivalents, consisting primarily of bank
    notes, commercial paper and treasury bills, represent highly liquid
    investments with maturities at date of purchase of three months or less.
    These investments are stated at cost, which approximates market value.
 
    Property and Equipment: Property and equipment are stated at cost.
    Depreciation and amortization are determined on the straight-line method
    over the estimated useful lives of the related assets. The estimated useful
    lives generally range from 3 to 5 years. Expenditures for repairs and
    maintenance are charged to operations as incurred.
 
    Capitalized Software Development Costs: Costs incurred in the research,
    design and development of software for sale to others are charged to expense
    until technological product feasibility is established, after which
    remaining software development costs are capitalized. These costs are
    amortized as part of the cost of revenue beginning when the product is
    available for general release to customers. Such amounts are amortized over
    the estimated remaining useful life of the product not to exceed three
    years. The Company continually compares the unamortized portion of
    capitalized software development costs to the net realizable value of the
    related product. The net realizable value is the estimated future gross
    revenues from that product reduced by the estimated future costs of
    completing and disposing of that product. The amount by which the
    unamortized capitalized costs exceed the net realizable value is
    written-off.
 
    See Note 4 for discussion of Intangible Asset write-downs recorded during
    fiscal 1997 and 1995.
 
    Foreign Currency Translation: The translation of assets and liabilities of
    foreign subsidiaries is made at year-end rates of exchange, and revenues
    and expenses are recorded at average rates of exchange. The resulting
    translation adjustments are excluded from net income and are accumulated as
    a separate component of shareholders' equity. Realized and unrealized
    exchange gains or losses from foreign currency transactions are reflected in
    the statements of operations. The exchange loss for fiscal year 1997 was
    $531,000 and not material for fiscal years 1996 and 1995.

    Income Taxes: Income taxes have been provided using the liability method in
    accordance with FASB Statement No. 109, "Accounting for Income Taxes".
 
    Income (Loss) Per Share: Per share amounts are calculated using the weighted
    average number of common shares and common share equivalents outstanding
    during periods of net income. Common share equivalents are attributable to
    stock options, common stock warrants and convertible preferred stock. Per
    share amounts are calculated using only the weighted average number of
    common shares outstanding during periods of net loss. Fully diluted earnings
    per share is not materially different from reported primary earnings per
    share. In February 1997, the Financial Accounting Standards Board issued
    Statement No. 128, Earnings per Share, which is required to be adopted on
    December 31, 1997. At that time, the Company will be required to change the
    method currently used to compute earnings per share and to restate all
    prior periods. Under the new requirements for calculating primary earnings
    per share, the dilutive effect of stock options will be excluded. The 
    Company has not yet determined what the impact of Statement 128 will be on
    the calculation of fully diluted earnings per share.
 
    Stock-Based Compensation: Statement of Financial Accounting Standards No.
    123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but
    does not require companies to record compensation cost for stock-based
    employee compensation plans at fair value. The Company has chosen to
    continue to account for stock-based employee compensation using the
    intrinsic value method prescribed in Accounting Principles Board (APB)
    Opinion No. 25, "Accounting for Stock Issued to Employees," and related
    interpretations. Accordingly, compensation cost for stock options granted to
    employees is measured as the excess, if any, of the quoted market price of
    the Company's stock at the date of the grant over the amount an employee
    must pay to acquire the stock.
 
    Long-Lived Assets: Effective April 1, 1996, the Company adopted Financial
    Accounting Standards Board (FASB) Statement of Financial Accounting
    Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
    for Long-Lived Assets to Be Disposed Of," which requires impairment losses
    to be recorded on long-lived assets used in operations, such as property,
    equipment and improvements, and intangible assets, when indicators of
    impairment are present and the undiscounted cash flows estimated to be
    generated by those assets are less than the carrying amount of the assets.
    The adoption of this statement did not have an effect on the Company's
    financial statements.
 
                                       21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)

Note 2  Summary of Significant Accounting Policies (con't)

    Concentrations of Credit Risk: Financial instruments which potentially
    subject the Company to concentrations of credit risk consist principally of
    cash investments and accounts receivable. The Company places its cash
    investments in investment grade instruments with maturities of three months
    or less and limits the amount of investment with any one financial
    institution. The credit risk associated with accounts receivable is limited
    due to the Company's credit evaluation process and the large number of
    customers and their dispersion over different industries and geographic
    areas.
 
    Use of Accounting 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. Significant estimates include adequacy
    of restructuring accruals, collectibility of accounts receivable, and
    recoverability of depreciable assets and intangible assets. Actual results
    could differ from these estimates.
 
    Basis of Presentation: Certain 1996 and 1995 amounts have been 
    reclassified to conform to the 1997 basis presentation. The accompanying 
    financial statements have been presented assuming that the Company will 
    continue as a going concern. During 1997, the Company experienced a 
    substantial decline in revenues and a substantial loss from operations, 
    resulting in a shareholders' deficit at March 31, 1997. In response to 
    these matters, the Company developed detailed plans relating to its fiscal 
    1998 operations which, if realized, will restore the Company to profitable 
    operations. Although no assurances can be given that such plans will be 
    achieved, management is committed to taking all appropriate and necessary 
    actions to effect timely cost reductions in the event that anticipated 
    revenue levels are not achieved. In the event such actions are not 
    successful in achieving breakeven or profitable operations, additional 
    financing will be needed. Under such circumstances, no assurance can be 
    given that such financing could be obtained or that it could be obtained 
    at commercially reasonable terms or without incurring substantial dilution 
    to existing shareholders. The financial statements do not include any 
    adjustments to reflect the possible effects of these uncertainties. 
    Management believes that, based on the 1998 operating plan and existing 
    cash balances, the Company will have sufficient cash to support 
    operations.

Note 3  Property and Equipment
 
    Property and equipment at March 31 consisted of the following:
 
<TABLE>
<CAPTION>
(in thousands)                                                                 1997       1996
----------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>
Office, demonstration and other equipment                                 $  27,739  $  29,142
Development equipment                                                        12,654     13,118
Furniture                                                                     3,799      4,296
Leasehold improvements                                                        1,637      1,818
----------------------------------------------------------------------------------------------
                                                                             45,829     48,374
Less allowances for depreciation and amortization                            40,866     40,574
----------------------------------------------------------------------------------------------
                                                                          $   4,963  $   7,800
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
 
Note 4  Intangible Assets
 
    The Company's intangible assets have historically been purchased goodwill
    and capitalized software development costs. The Company's policy has been to
    amortize purchased goodwill to selling, general and administrative expense
    and capitalized software development costs to cost of revenue.
 
    In fiscal year 1997, the Company wrote-off goodwill of approximately $2.0
    million related to the acquisition of The Learning Alliance (see Note 13).
    As a result of a strategic product review, the Company wrote-off
    capitalized software development costs of $2.0 million and $3.2 million in
    fiscal years 1997 and 1995, respectively. These costs were associated with
    discontinued products or products with limited future revenue potential. In
    fiscal year 1995, the Company recorded a charge to write-off goodwill of
    approximately $15.2 million which related to the Company's acquisition in
    prior years of its exclusive distributors in Canada, France and Germany.
    This goodwill was written-off as the Company had concluded the goodwill was
    permanently impaired.
 
    The unamortized portion of capitalized software development costs was $2.0
    million and $6.2 million at March 31, 1997 and 1996, respectively.
    Amortization and write-downs to net realizable value of capitalized
    software development costs were approximately $5.0 million, $3.2 million,
    and $5.3 million during fiscal 1997, 1996 and 1995, respectively.

                                      22

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)

Note 5  Credit Agreement
 
    The Company has a revolving line of credit up to $10 million from a major
    commercial lender. The credit agreement also provides for the issuance of
    letters of credit of up to $2 million. Borrowings from the line of credit
    bear interest at the higher of 9% or the prime rate plus 2% and are 
    secured by substantially all tangible and intangible domestic assets of 
    the Company. Outstanding letters of credit bear interest at 2%. The 
    agreement contains certain financial covenants relating to the Company's 
    current ratio, tangible net worth, and working capital, as well as 
    restrictions on certain additional indebtedness, acquisitions, capital 
    expenditures, and dividend payments. At March 31, 1997, there were no 
    loans outstanding under this line of credit. Borrowings under the credit 
    agreement are based on the level of eligible North American accounts 
    receivable, modified by cash collections during the previous 90 days. As 
    of March 31, 1997, approximately $0.8 million of standby letters of 
    credit were outstanding to secure the leasing of computer equipment, and 
    the amount available for additional borrowings is approximately $1.2 
    million. The current credit agreement expires in August 1997 and 
    negotiations are underway to establish a new credit facility.
 
Note 6  Accrued Expenses
 
    Accrued expenses at March 31 consisted of the following:
 
<TABLE>
<CAPTION>
(in thousands)                                                                 1997       1996
----------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>
Accrued compensation and related items                                    $   4,987  $   4,790
Taxes, other than income                                                      2,414      2,460
Royalties                                                                     1,030        706
Rent                                                                          1,228      1,561
Other                                                                         4,796      3,738
----------------------------------------------------------------------------------------------
                                                                          $  14,455  $  13,255
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
 
Note 7  Lease Commitments
 
    The Company leases its headquarters and sales offices, and certain equipment
    under various operating leases, which expire through the year 2001. Rent
    expense amounted to approximately $5.1 million, $6.6 million, and $9.4
    million during fiscal 1997, 1996, and 1995, respectively.

    Future minimum lease commitments on noncancelable operating leases and
    sublease income are as follows:
 
<TABLE>
<CAPTION>
(in thousands)
Year ended March 31                                                  1998       1999       2000       2001       2002  THEREAFTER
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>        <C>            <C>        <C>
Future minimum lease commitments on noncancelable leases        $   7,839  $   6,126  $   5,468  $   3,841     $  --       $  --
---------------------------------------------------------------------------------------------------------------------------------

Future minimum sublease income                                      2,285      2,058      1,974      1,403        --          --
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
    These future minimum lease commitments include approximately $10.3 million,
    net of sublease income, related to facilities the Company has elected to
    abandon or downsize in connection with the restructuring and
    acquisition-related initiatives.
 
                                      23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)

Note 8  Restructurings
 
    Restructuring charges include costs associated with employee termination
    benefits and facility closures and related costs. Employee termination
    benefits include severance, wage continuation, notice pay and related fringe
    benefits. Facility closure and related costs include lease payments, lease
    buyout costs, disposal of property and equipment, and related costs. 
 
    In the second quarter of fiscal 1997, as a result of a significant decline
    in product revenue, the Company announced a restructuring plan and recorded
    a charge of $4.8 million to reduce employment by approximately 75 people, to
    close or reduce space in seven sales offices, and to implement the second
    and final stage of relocating corporate headquarters to smaller and less
    expensive space. The employee terminations affected all groups throughout
    the organization. Approximately $1.3 million of the restructuring charge was
    for employee termination benefits and $3.5 million for facility closures and
    related costs.
 
    In the third quarter of fiscal 1997, the Company announced another
    restructuring plan and recorded a charge of $3.7 million to further reduce
    employment by approximately 100 people at a cost of $1.8 million and to 
    close or reduce space in six sales offices at a cost of $1.9 million. 
    The employee terminations affected all groups throughout the organization. 
    In the fourth quarter of fiscal 1997, the Company recorded an additional 
    charge of $2.4 million to reflect changes in cost and timing assumptions 
    relating to previously restructured facilities.
 
    During the second quarter of fiscal 1995, as part of a Company
    reorganization and to reduce its size of operations, the Company recorded a
    restructuring charge of approximately $7.1 million. The restructuring plan
    was to reduce worldwide employment and to consolidate sales offices in North
    America and Europe. The employment reduction primarily related to the
    marketing, sales, general and administrative, and research and development
    groups. Approximately $4.6 million of the restructuring charge was for
    employee termination benefits and $2.5 million for facility closures and
    related costs. As a result of the restructuring program, worldwide
    employment was reduced by approximately 150 people, 19 sales offices were
    consolidated and a part of headquarters operations was relocated.
 
    The Company paid approximately $2.7 million, $0.7 million, and $4.4 million
    for employee termination benefits during fiscal 1997, 1996, and 1995,
    respectively. Payments for facility closures and related costs, net of
    sublease receipts, were approximately $1.4 million, $1.3 million, and $1.2
    million during fiscal 1997, 1996, and 1995, respectively. Expenditures for
    facility closures, primarily lease payments, are anticipated to continue
    through the fiscal year 2001.
 
Note 9  Income Taxes
 
    The provision for income taxes is composed of the following:
 
<TABLE>
<CAPTION>
(in thousands)                                                                          1997       1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>         <C>      
Current:
Federal                                                                           $   --      $  30         $    --
State                                                                                 --         --              --
Foreign                                                                               --         --             258
-------------------------------------------------------------------------------------------------------------------
Total current                                                                         --         30             258
-------------------------------------------------------------------------------------------------------------------
Deferred:
Federal                                                                               --         --           1,860
State                                                                                 --         --              --
-------------------------------------------------------------------------------------------------------------------
Total deferred                                                                        --         --           1,860
-------------------------------------------------------------------------------------------------------------------

                                                                                  $   --      $  30         $ 2,118
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
 
    The provision for income taxes is based on the following amounts of income
    (loss) before income taxes:
 
<TABLE>
<CAPTION>
(in thousands)                                                                          1997       1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>        <C>
Domestic                                                                          $  (21,586) $   3,793  $  (43,607)
Foreign                                                                               (7,964)    (3,452)     (2,637)
-------------------------------------------------------------------------------------------------------------------
                                                                                  $  (29,550) $     341  $  (46,244)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)

Note 9  Income Taxes (con't)

    Total income taxes reported are different from the amount that would have
    been computed applying the federal statutory tax rate to income before
    income taxes. The difference is attributable to the following:
 
<TABLE>
<CAPTION>
(in thousands)                                                                     1997        1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>           <C>
Computed at federal statutory rate                                              $  (10,047)   $  116      $  (15,723)
Loss for which no tax benefit was realized                                           9,151        --           9,051
Nondeductible amortization                                                              --        51             397
Nondeductible write-downs                                                              778        --           5,021
Other nondeductible expenses                                                           118        66             101
Benefit of net operating loss carryforward                                              --      (195)             --
Other temporary differences for which no tax benefit was realized                       --        --           1,262
Adjustment to beginning of the year deferred tax asset valuation allowance              --        --           1,860
U.S. and foreign tax rate difference                                                    --        --             123
State income taxes, net of federal tax benefit                                          --        --              --
Other, net                                                                              --        (8)             26
--------------------------------------------------------------------------------------------------------------------
                                                                                $       --    $   30      $    2,118
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
</TABLE>

    Deferred taxes result from temporary differences in the recognition of
    revenues and expenses for tax and financial reporting purposes. The
    components of the Company's deferred tax assets and liabilities as of March
    31 are as follows:
 
<TABLE>
<CAPTION>
(in thousands)                                                                       1997        1996        1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>         <C>
Deferred tax assets:
Net operating loss carryforwards                                                $   22,897  $   14,919  $   13,453
Tax credit carryforwards                                                             7,150       7,120       6,950
Accrued rent                                                                           473         601         738
Reserve for doubtful accounts receivable, vacation and other accruals                  864         401         475
Restructuring                                                                        2,555         392         888
-------------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                           33,939      23,433      22,504
Deferred tax asset valuation allowance                                             (33,619)    (21,294)    (20,594)
-------------------------------------------------------------------------------------------------------------------
                                                                                       320       2,139       1,910
-------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software development costs                                                (320)     (1,891)     (1,464)
Depreciation                                                                            --        (225)       (422)
Other                                                                                   --         (23)        (24)
-------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                        (320)     (2,139)     (1,910)
-------------------------------------------------------------------------------------------------------------------
Net deferred tax asset                                                          $       --    $     --     $     --
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
 
    Realization of total deferred tax assets is contingent upon future taxable
    income. A 100% valuation allowance of net deferred tax assets has been
    established due to the uncertainty of realization of these tax benefits. The
    deferred tax asset valuation allowance increased $12,325,000 and $700,000
    during fiscal 1997 and 1996, respectively. In the second quarter of fiscal
    1995 the Company recorded an adjustment of approximately $1.9 million to the
    beginning of the year balance when an analysis of the Company's actual and
    anticipated operating results indicated, at that time, that utilization of
    the deferred tax asset was not expected to be realized.
 
    At March 31, 1997, the Company and its subsidiaries had net operating loss
    carryforwards of approximately $60 million that are available to offset
    future taxable income. The loss carryforwards are attributable to operations
    in several tax jurisdictions and expire in 1998 and thereafter. In addition,
    the Company has research and development and other tax credit carryforwards
    of approximately $7 million available to reduce future federal and state
    income tax liabilities. The tax credit carryforwards expire in 1999 and
    thereafter. During fiscal 1996, the Company made income tax payments of
    approximately $252,000. No tax payments were made in 1997 or 1995. (See
    Note 14.)
 
                                      25

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
 
Note 10  Shareholders' Equity
 
    On July 15, 1988, the Company declared a dividend distribution of one
    Preferred Stock Purchase Right (a Right) for each outstanding share of the
    Company's common stock to shareholders of record on July 25, 1988 and for
    shares of the Company's common stock issued and outstanding thereafter. Each
    Right entitles the holder to purchase a unit consisting of one-hundredth of
    a share (a Unit) of Series A Junior Participating Preferred Stock, $.10 par
    value (the Preferred Stock), at a purchase price of $65.00 in cash. The
    Rights initially trade with the shares of common stock and are not
    exercisable. The Rights will separate from the common stock and become
    exercisable 10 days after a public announcement that a person or group (an
    Acquiring Person) acquires beneficial ownership of 20% or more of the
    outstanding shares of common stock, or 10 business days after commencement
    of a tender offer that would result in a person or group beneficially owning
    30% or more of the outstanding shares of common stock. In the event that the
    Company is not the surviving corporation in a merger with an Acquiring
    Person, or the acquisition of 25% of common stock by any person (except
    pursuant to a tender offer for all shares of common stock determined to be
    fair by certain directors of the Company), or upon certain self--dealing
    transactions or increases in an Acquiring Person's ownership of common
    stock, each holder of an outstanding Right other than an Acquiring Person
    will receive, upon exercise of a Right, the number of shares of the
    Company's common stock that equals the exercise price of the Right divided
    by one half of the current market price of the Company's common stock. In
    the event that the Company is not the surviving corporation in a merger, or
    if more than 50% of its assets or earning power is sold or transferred after
    any person has become an Acquiring Person, each holder of an outstanding
    Right other than any Acquiring Person will receive, upon exercise of a
    Right, the number of shares of common stock of the acquiring company that
    equals the exercise price of the Right divided by one half of the current
    market price of the acquiring company's common stock. The Rights are
    non-voting, expire on July 15, 1998 and may be redeemed at any time prior
    to becoming exercisable at a price of $.01 per Right.
 
    On September 29, 1989, the Company completed a private placement of
    2,142,857 shares of its Senior Series B Convertible Preferred Stock, at
    $7.00 per share. In the event of liquidation, the Series B holders have a
    liquidation preference over all other shareholders of the Company and are
    entitled to receive $7.00 per share. Thereafter, all other shareholders are
    entitled to receive, on a per share basis, an amount equal to $15 million
    divided by the total number of shares of common stock that the Series B
    holders would have been entitled to receive upon conversion. Finally, the
    Series B holders and common shareholders share ratably in the remainder, if
    any, with each share of Series B being deemed to have been converted to
    common stock. Series B holders are entitled to vote on all matters submitted
    to the common shareholders as a single class with the common shareholders,
    receiving the number of votes equal to the number of common shares that they
    would have received upon conversion, except that the Series B holders are
    entitled to elect one director, and the Company needs the approval of the
    majority of the Series B holders on certain significant events.
 
    The Series B holders can convert each share of preferred stock into 1.34375
    shares of common stock. Series B holders converted 61,393, 805,269, and
    57,142 shares of Series B Convertible Preferred Stock into shares of the
    Company's common stock during fiscal 1997, 1996, and 1995, respectively.
 
    The Senior Series B Convertible Preferred Stock may be redeemed by the
    Company at $21.00 per share, at any time, provided at least 20% of the then
    outstanding shares of Senior Series B Convertible Preferred Stock are
    redeemed. Preferred shareholders shall share ratably in any dividends
    declared on the common stock, as if each Series B share had been converted
    to common stock.
 
    On October 15, 1996, the Company issued 1,004,904 shares of newly authorized
    Series C Convertible Preferred Stock ("Series C") at a price of $9.9512 per
    share receiving net proceeds of $9.4 million. In accordance with the
    agreement, the Company is obligated to issue an additional 1,316 shares of
    Series C Convertible Preferred Stock. Each Series C share is initially
    convertible into 4 shares of common stock, which rate is adjustable upon
    certain issuances of common stock by the Company. Dividends of $0.24878 per
    share are payable on April 15, 1998 and October 15, 1998, and $0.49756 per
    share on each April 15 and October 15 thereafter. Holders of outstanding
    shares of Series C Preferred Stock are entitled to the number of votes equal
    to one-half the number of shares of common stock into which the Series C
    shares are convertible. Series C shareholders are entitled to receive upon
    liquidation an amount equal to $9.9512 per share plus any declared or
    accrued but unpaid dividends, which amount is payable prior to any payments
    to holders of the Series B Preferred Stock and common stock. Series C
    shareholders must convert their shares into common stock upon the
    consolidation, merger or sale of substantially all assets of the Company or,
    subject to certain conditions, if the Company's common stock trades for
    twenty consecutive days above $3.7317. The Company may, at its option,
    redeem the Series C shares on or after October 16, 1999. The initial
    redemption premium is 25%, which decreases 5% annually until October 16,
    2004. As part of the Series C issuance, the Company issued warrants to
    purchase 74,929 shares of common stock at an exercise price of $2.67 per 
    share to its investment banking firm. These warrants are exercisable 
    until October 15, 2001.
 
    In prior years, the Company had issued warrants to purchase the Company's
    common stock at various prices in connection with certain research and
    development agreements and exclusive distribution agreements. The Company
    issued 366,113 and 72,368 shares of common stock in connection with the
    exercise of warrants during fiscal 1996 and 1995, respectively. The Company
    received no proceeds upon the conversion of the warrants into common stock.
 
                                       26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
 
Note 10  Shareholders' Equity (con't)

    Stock Option Plans: The Company has stock option plans that provide for the
    granting of non-qualified and incentive stock options to employees,
    consultants, and officers. The Board of Directors determines the option
    price, the option term, and the vesting period. Incentive stock options are
    granted at a price not less than the fair market value on the date of grant.
    On July 14, 1994, the Board of Directors adopted the 1994 Employee Stock
    Option Plan which provides for a maximum of 750,000 shares of common stock
    to be issued and sold under the plan. On September 12, 1996, the Board of
    Directors authorized a repricing program which allowed employees to elect to
    reprice all or some of their outstanding options, ranging in exercise price
    from $2.75 to $10.75 per share, to the September 12, 1996 closing price of
    $2.5625. Any options repriced may not be exercised until March 12, 1997.
    Options for approximately 2.1 million shares were repriced. On August 3, 
    1994, the Board of Directors authorized the repricing of approximately 
    746,000 stock options and the cancellation and re-grant of approximately 
    297,000 stock options ranging in price from $4.00 to $19.38 to the fair 
    market value of $2.75 on that date. At the Annual Meeting of Shareholders 
    on August 17, 1995, shareholders approved an amendment to the Company's 
    1993 Stock Option Plan to increase the number of shares of common stock 
    available for issuance under the plan by 750,000. In May 1996 and October 
    1996, the Board of Directors approved amendments to the Company's 1994 
    Employee Stock Option Plan to increase the number of shares of common
    stock available for issuance under the plan by 750,000 and 1,000,000,
    respectively.
 
    A summary of activity for these stock option plans is as follows:
 
<TABLE>
<CAPTION>

                                                                           Number of       Price Range of       Weighted Average
                                                                              Shares               Shares        Price Per Share
<S>                                                                        <C>              <C>                 <C>
(in thousands, except price range of shares)
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31,1994                                                   1,553        $1.13--$19.38                 $  --
Granted                                                                        1,574         2.75--  7.25                    --
Exercised                                                                       (216)        1.13--  3.63                    --
Cancelled                                                                       (951)        2.75-- 15.63                    --
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1995                                                  1,960         2.75-- 10.75                    --
Granted                                                                          798         5.50--  7.38                  6.25
Exercised                                                                       (689)        2.75--  5.75                  3.10
Cancelled                                                                       (250)        2.75-- 10.63                  8.75
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1996                                                  1,819         2.75-- 10.75                  4.50
Granted                                                                        2,813         2.05--  2.56                  2.44
Exercised                                                                       (154)        2.75--  4.50                  2.90
Cancelled                                                                     (1,539)        2.50-- 10.63                  5.95
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1997                                                  2,939        $2.05--$10.75                $2.75
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
    At March 31, 1997, there were approximately 789,000 shares available for
    grant. Options exercisable were approximately 1,238,000, 912,000, and
    915,000 at March 31, 1997, 1996, and 1995, respectively.
 
    The Company also has stock option plans for non-employee directors. In
    September 1993, the Board of Directors approved, with subsequent
    ratification by the shareholders, the Company's 1993 Director Stock Option
    Plan. The 1993 Director Stock Option Plan replaced the 1989 Director Stock
    Option Plan. Options are granted at the fair market value at date of grant
    and are exercisable one year later. Each non-employee director received a
    grant of 5,000 options at the inception of the 1993 Director Stock Option
    Plan. Each newly elected non-employee director receives a grant of 5,000
    options as of the first date of his or her election as a director. Every
    April 1, each non-employee director automatically receives a grant of 5,000
    options. During fiscal 1997, no options were exercised and in fiscal 1996,
    10,000 options were exercised. At March 31, 1997, there were options
    outstanding to purchase 70,000 shares and 45,000 shares were available for
    grant. Options exercisable were 70,000, 105,000, and 85,000 at March 31,
    1997, 1996, and 1995, respectively.
 
    Pro Forma Disclosure of the Effects of Stock--Based Compensation Plans: The
    Company accounts for stock-based compensation using the method prescribed
    in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
    to Employees." The Company has adopted the disclosure-only provisions of
    Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
    "Accounting for Stock-Based Compensation." Accordingly, no compensation
    cost has been recognized for the Company's stock option plans and employee
    stock purchase plan.
 
                                       27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
 
Note 10  Shareholders' Equity (con't)

    Had compensation cost been determined based on the fair value at the grant
    dates for awards under those plans in fiscal 1997 and 1996 on a basis
    consistent with the provisions of SFAS No. 123, the Company's net income and
    earnings per share on a fully diluted basis would have been as indicated
    below:
 
<TABLE>
<CAPTION>

                                                                                   1997       1996
(in thousands, except per share amounts)
-------------------------------------------------------------------------------------------------------
<S>                                                                                <C>        <C>
Net income (loss)--as reported                                                 $(29,550)      $311
Net income (loss)--pro forma                                                    (29,858)       228
Earnings (loss) per-share--as reported                                            (1.70)      0.02
Earnings (loss) per share--proforma                                               (1.72)      0.01
<CAPTION>
 
    Because SFAS No. 123 is only applicable to options granted subsequent to
    March 31, 1995, its pro forma effects will not be fully reflected until
    1998. The fair value of options at date of grant was estimated using the
    Black-Scholes option pricing model with the following weighted average
    assumptions:
 
-------------------------------------------------------------------------------------------------------
<S>                                                                                <C>        <C>
Expected life (years)                                                                 4          4
Risk-free interest rate.                                                           6.38%      5.79%
Volatility                                                                         73.8%      73.8%
Dividend yield                                                                      --         --
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

</TABLE>
 
    The weighted-average grant-date fair value of options granted during 1997
    and 1996 was $1.38 and $2.86, respectively.
 
    The following table summarizes information about stock options outstanding
    at March 31, 1997:
 
<TABLE>
<CAPTION>

(in thousands, except price range of 
              shares)                                  Options Outstanding                   Options Exercisable
-----------------------------------------------------------------------------------------------------------------
                                              Weighted
                                               Average
                                              Remaining          Weighted                               Weighted
                             Number         Contractual           Average             Number             Average
Range of Exercise       Outstanding            Life (in          Exercise         Exercisable           Exercise
           Prices        at 3/31/97              Years)             Price          at 3/31/97              Price
-----------------------------------------------------------------------------------------------------------------

<S>                <C>                <C>                <C>                <C>                <C>
$2.00--$ 2.56                   2,591                9.7              $2.38              1,115              $2.56
$2.75--$ 5.50                     190                6.7               2.95                140               3.02
$6.65--$ 8.87                     225                6.4               6.91                 89               7.28
$9.00--$10.75                       3                3.5              $9.64                  3              $9.64
-----------------------------------------------------------------------------------------------------------------
</TABLE>
 
    Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan
    allows eligible officers and employees to withhold up to 10% of their total
    compensation to purchase shares of the Company's common stock. The purchase
    price is 85% of the fair market value of the stock on the date a one-year
    offering commences or the date an offering terminates, whichever is lower.
    Shares issued to employees were approximately 183,000, 157,000, and 208,000
    during fiscal 1997, 1996, and 1995, respectively.
 
    At March 31, 1997, approximately 10,235,000 shares of common stock were
    reserved for issuance primarily related to the Series B and C Convertible
    Preferred Stock, various stock option plans, warrants, and the Employee
    Stock Purchase Plan.
 
Note 11 Employee Benefit Plans
 
    The Company's retirement savings plan (401(k) plan) allows eligible
    employees to make tax-deferred contributions. Participants in the 401(k)
    plan may contribute up to 15% of their total annual compensation, not to
    exceed the specified statutory limit. Participants are 100% vested in their
    own contributions. The 401(k) plan permits, but does not require, the
    Company to make contributions to the 401(k) plan. The Company made
    contributions of $100,000 during fiscal 1995; no contributions were made
    during fiscal 1997 and 1996.
 
                                       28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
 
Note 12 Research and Development Agreement
 
    In October 1988, the Company entered into a joint venture (the Venture) with
    PruTech Research and Development Partnership III (PruTech), for the purpose
    of developing and marketing certain products. PruTech contributed
    approximately $2,950,000 in cash to the Venture; the Company licensed to the
    Venture certain base technology and was required to perform certain
    development, marketing and administrative services for the Venture. 

    In March 1994, PruTech commenced an arbitration action against the Company, 
    alleging, among other things, (i) that the Company had mismanaged the 
    Venture; (ii) that PruTech was entitled to cash distributions of 30% of 
    Venture revenues; and (iii) that certain Venture-owned technology was used 
    in the Company's other products. In November 1995, the Company and PruTech 
    reached an agreement. The Company paid PruTech $2.1 million (the Purchase 
    Price) in consideration of (i) the acquisition by the Company of PruTech's 
    interest in the Venture, and (ii) the settlement of the pending arbitration
    action and the release by PruTech of all claims that it may have had 
    against the Company arising out of the formation and operation of the 
    Venture. The Company issued to PruTech 190,000 common stock shares for 
    payment of the Purchase Price. The settlement of the arbitration action 
    resulted in an expense reduction of approximately $1.2 million, which is 
    included in selling, general and administrative expenses in the 
    Consolidated Statements of Operations. The Venture-owned technology 
    acquired by the Company was valued at $1.4 million and is included in 
    Intangible assets in the Consolidated Balance Sheets. The technology is 
    being amortized in the same manner as other capitalized software 
    development costs.
 
Note 13  Acquisitions
 
    On May 1, 1996, the Company purchased all of the outstanding equity
    securities of The Learning Alliance, Inc. ("TLA") for 341,500 shares of
    common stock valued at $2,690,000. TLA provides sales training services and
    develops and markets related software for the sales force automation and
    integration marketplace.
 
    The acquisition was accounted for using the purchase method of accounting,
    whereby the purchase price was allocated to the assets acquired and
    liabilities assumed based on their respective estimated fair values. The
    acquisition resulted in goodwill of approximately $2.6 million.
 
    In December 1996, in order to allow the Company's management to focus on
    development of its core businesses, the Company decided to divest itself of
    TLA. TLA was sold in January 1997 for future royalty considerations and
    foregone severance payments. As a result of this decision, in December 1996
    the Company recorded a write-down of approximately $2.3 million of goodwill
    which had been recorded in connection with the acquisition.
 
    The operating results of TLA, which were not material, have been included in
    the consolidated financial statements from the date of the acquisition to
    the date of disposition. Pro forma presentations have not been included as
    the acquisition was not material to the results of operations of the
    Company.
 
Note 14  Contingencies
 
    In the ordinary course of its business activities, the Company is subject to
    various investigations, claims and legal proceedings. Each of these matters
    is subject to various uncertainties, and it is possible that some of these
    matters may be resolved unfavorably to the Company. Management believes that
    the ultimate resolution of these matters will not have a material adverse
    effect on the financial position or results of operations of the Company.
 
    Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is
    liable for certain German withholding taxes related to payments remitted to
    the United States from Germany. The Company is appealing this assessment;
    however, approximately $1.1 million of the cash and cash equivalents balance
    at March 31, 1997 and 1996 has been restricted for potential payment of the
    German withholding taxes. The Company believes the final outcome will not
    have a material adverse effect on the financial position or results of
    operations of the Company.
 
                                       29

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't)
 
Note 15  Industry Segment and Geographic Information
 
    The Company operates in a single industry segment: developing and marketing
    integrated document publishing software and services worldwide. Information
    regarding geographic areas at March 31, 1997, 1996 and 1995, and for the
    years then ended is as follows:
<TABLE>
<CAPTION>
(in thousands)
March 31, 1997
and for the year then ended                      U.S.          Non-U.S.       Eliminations             Total
--------------------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>                <C>                <C>
Sales to unaffiliated customers     $          39,558  $          25,265  $            --    $          64,823
Intercompany royalties and
  transfers                                     6,547                201             (6,748)              --
--------------------------------------------------------------------------------------------------------------
Net revenues                                   46,105             25,466             (6,748)            64,823
--------------------------------------------------------------------------------------------------------------
Income (loss) from operations                 (21,025)            (7,594)               --             (28,619)
--------------------------------------------------------------------------------------------------------------
Identifiable assets                            58,575             19,288            (39,963)            37,900
--------------------------------------------------------------------------------------------------------------

<CAPTION>
March 31, 1996
and for the year then ended                     U.S.           Non-U.S.       Eliminations             Total
--------------------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>                <C>                <C>
Sales to unaffiliated customers     $          54,953  $          33,604  $        --          $          88,557
Intercompany royalties and
  transfers                                     8,770               --               (8,770)               --
--------------------------------------------------------------------------------------------------------------
Net revenues                                   63,723             33,604             (8,770)            88,557
--------------------------------------------------------------------------------------------------------------
Income (loss) from operations                   2,797             (2,764)                83                116
--------------------------------------------------------------------------------------------------------------
Identifiable assets                            63,734             17,590            (32,408)            48,916
--------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31, 1995
and for the year then ended                      U.S.         Non--U.S.       Eliminations              Total
----------------------------------  -----------------  -----------------  -----------------  -----------------
<S>                                 <C>                <C>                <C>                <C>
Sales to unaffiliated customers     $          56,853  $          31,003  $          --      $          87,856
Intercompany royalties and
  transfers                                     7,076                 18             (7,094)              --
--------------------------------------------------------------------------------------------------------------
Net revenues                                   63,929             31,021             (7,094)            87,856
--------------------------------------------------------------------------------------------------------------
Income (loss) from operations                 (35,538)            (9,687)              --              (45,225)
--------------------------------------------------------------------------------------------------------------
Identifiable assets                            61,679             18,877            (29,763)            50,793
--------------------------------------------------------------------------------------------------------------
</TABLE>
 
    Intercompany transfers between geographic areas are accounted for at prices
    that approximate prices charged to unaffiliated customers.
 
                                       30
<PAGE>
REPORT OF ERNST & YOUNG LLP, IDNEPENDENT AUDITORS 

Board of Directors
Interleaf, Inc.

We have audited the accompanying consolidated balance sheets of Interleaf, 
Inc. as of March 31, 1997 and 1996, and the related consolidated statements 
of operations, changes in shareholders' equity (deficit), and cash flows for 
each of the three years in the period ended March 31, 1997. Our audits also 
included the financial statement schedule listed in the Index at Item 14(a). 
These financial statements and schedule are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
financial statements and schedule based on our audits. 

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

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of Interleaf, Inc. at March 31, 1997 and 1996, and the consolidated results 
of its operations and its cash flows for each of the three years in the 
period ended March 31, 1997, in conformity with generally accepted accounting 
principles. Also, in our opinion, the related financial statement schedule, 
when considered in relation to the basic financial statements taken as a 
whole, present fairly in all material respects the information set forth 
therein.
 
/s/ Ernst & Young LLP
------------------------
Boston, Massachusetts
June 16, 1997

                                        31
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION

The following summarizes unaudited selected quarterly results of operations 
for the years ended March 31, 1997 and 1996 and the market range for the 
Company's common stock for those periods: 

<TABLE>
<CAPTION>
(in thousands except for per share amounts)
Quarter ended              June 30             September 30          December 31              March 31                   Year
-------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                  <C>                   <C>                     <C>                      <C>
FISCAL 1997
Revenues                     $19,054                 $16,585              $15,348               $13,836 d            $64,823
----------------------------------------------------------------------------------------------------------------------------
Gross margin                  11,920                   9,405                8,842                 6,552               36,719
----------------------------------------------------------------------------------------------------------------------------
Net income (loss)             (3,800)                (10,327)a             (9,509)a,b            (5,914)a,e          (29,550) 
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share    (0.22)                  (0.59)               (0.54)               (0.35)                (1.70) 
----------------------------------------------------------------------------------------------------------------------------
FISCAL 1996
Revenues                     $23,127                 $23,311              $21,255              $20,864             $  88,557
----------------------------------------------------------------------------------------------------------------------------
Gross margin                  15,289                  15,666               13,883               13,827                58,665
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss)                472                     922                  429 c             (1,512)                  311
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share     0.03                    0.05                 0.02                (0.09)                 0.02
------------------------------------------------------------------------------------------------------------------------------

</TABLE>






Notes to Supplemental Financial Information

a. Includes restructuring charges of $4.8 million, $3.7 million, and $2.4 
   million for the second, third, and fourth quarter, respectively. These 
   restructuring charges were to reduce worldwide employment and facility 
   costs.

b. Includes a $2.3 million write-off of goodwill related to the TLA 
   acquisition.

c. Includes a $1.2 million benefit from the settlement of a long-term 
   dispute with a joint venture partner.

d. Includes a $1.5 million reserve for sales allowances during the quarter.

e. Includes a $2.2 million write-off of capitalized software development 
   costs, inventory, and prepaid royalties for discontinued products and 
   products with limited future revenue potential.     


                                        32
<PAGE>
                                   SCHEDULE II

                        Valuation and Qualifying Accounts

                                  (In thousands)
<TABLE>
<CAPTION>
              COL. A                     COL. B          COL. C       COL. D       COL. E        COL. F
-------------------------------------  ------------   ------------  -----------  -----------  -------------
                                        Balance at    Additions to    Other
                                       Beginning of    Costs and    Additions--  Deductions    Balance at   
           Description                    Period        Expenses    Describe(1)  Describe(2)  End of Period
-------------------------------------  ------------   ------------  -----------  -----------  -------------
<S>                                    <C>            <C>           <C>          <C>          <C>
Year ended March 31, 1995:
   Deducted from asset accounts
   Allowance for doubtful accounts       $1,169          $683        $1,750       $(1,649)       $1,953

Year ended March 31, 1996:
   Deducted from asset accounts
   Allowance for doubtful accounts       $1,953          $630        $  300       $(1,188)       $1,695

Year ended March 31, 1997:
   Deducted from asset accounts
   Allowance for doubtful accounts       $1,695          $304        $  --          $(628)       $1,371
-------------------------------------  ------------   ------------  -----------  -----------  -------------
</TABLE>







---------------------
(1)  Reclass to allowance for doubtful accounts from accrued expenses
(2)  Write-off of uncollectible accounts receivable and effect of foreign 
     exchange rate fluctuations

                                       33

<PAGE>

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

None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part under the caption 
"Executive Officers of the Company" in Part I hereof and the remainder is 
incorporated herein by reference to "Election of Directors" (except for the 
information contained under the subheadings "Compensation Committee Report" and 
"Stock Performance Graph") in the Company's Proxy Statement for the Company's 
Annual Meeting of Shareholders to be held on August 15, 1997 (the "1997 Proxy 
Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to 
"Executive Compensation,"  "Severance Plan and Change in Control," "Directors' 
Compensation," and "Ratification and Approval of the Amendment to the Company's 
1993 Stock Option Plan" contained in the 1997 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to 
information contained in the table appearing under the heading "Principal 
Shareholders"  contained in the 1997 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to 
"Certain Relationships and Related Transactions" contained in the 1997 Proxy 
Statement.

                                   PART IV

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

(a)   1. Financial Statements. The financial statements are listed in the 
         Index to Consolidated Financial Statements and Financial Statement 
         Schedule filed as part of this Annual Report on Form 10-K.

      2. Financial Statement Schedule. The financial statement schedule is 
         listed in the Index to Consolidated Financial Statements and 
         Financial Statement Schedule filed as part of this Annual Report on 
         Form 10-K.

      3. Exhibits. The exhibits listed in the accompanying Exhibit Index are 
         filed as part of this Annual Report on Form 10-K.

(b)   Reports on Form 8-K

      None.

The following trademarks are used herein:

Interleaf-Registered Trademark- is a registered trademark of Interleaf, Inc.

RDM and WorldView are trademarks of Interleaf, Inc.

Motif-Registered Trademark- is a registered trademark of the Open Software 
Foundation, Inc.

Microsoft Windows is a trademark of Microsoft Corporation.

                                      34
<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.

                                         INTERLEAF, INC.

                                    By:  /s/ Jaime W. Ellertson
                                         ---------------------------------
                                         Jaime W. Ellertson, President and
                                         Chief Executive Officer
Dated: June 30, 1997

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.

<TABLE>
<CAPTION>

             Signature                                      Capacity                                 Date
             ---------                                      --------                                 ----
<S>                                         <C>                                                 <C>
/s/ Jaime W. Ellertson                      President and Chief Executive Officer and           June 30, 1997
-----------------------------------         a Director (Principal Executive Officer)
Jaime W. Ellertson


/s/ Robert R. Langer                        Vice President of Finance and Administration        June 30, 1997
-----------------------------------         and Chief Financial Officer (Principal Financial 
Robert R. Langer                            and Accounting Officer)                          


/s/ Rory J. Cowan                           Chairman of the Board of Directors                  June 30, 1997
-----------------------------------
Rory J. Cowan


/s/ Frederick B. Bamber                     Director                                            June 30, 1997
-----------------------------------
Frederick B. Bamber


/s/ David A. Boucher                        Director                                            June 30, 1997
-----------------------------------
David A. Boucher


/s/ Marcia J. Hooper                        Director                                            June 30, 1997
-----------------------------------
Marcia J. Hooper


/s/ George D. Potter, Jr.                   Director                                            June 30, 1997
-----------------------------------
George D. Potter, Jr.

</TABLE>
                                        35



<PAGE>
                              EXHIBIT INDEX

Exhibit
Number                   Description                         Method of Filing
-------                  -----------                         ----------------
3(a)       Restated Articles of Organization of the                [xvi]
           Company, as amended

3(b)       By-Laws of the Company, as amended                      [v]

4(a)       Specimen Certificate for Shares of the                  [xiv]
           Company's Common Stock

4(b)       Rights Agreement, dated July 15, 1988,                  [xv]
           between the Company and the First National
           Bank of Boston

10(a)      Company's 1983 Stock Option Plan, as amended            [v]

10(a1)     1994 Employee Stock Option Plan, as amended             [xiii]

10(a2)     1993 Incentive Stock Option Plan, as amended            [viii]

10(b)      Company's 1989 Director Stock Option Plan               [i]

10(b2)     Company's 1987 Employee Stock Purchase Plan,            [xiii]
           as amended

10(c)      Company's 1989 Officer and Employee Severance           [i]
           Benefit Plans

10(cc)     Company's 1993 Director Stock Option Plan               [v]

10(d)      Agreements between PruTech Research and                 [ii]
           Development Partnership III and the Company,
           dated October 21, 1988.

10(e)      Exclusive Marketing and Licensing Agreement,            [i]
           between Interleaf South America, Ltd. and the
           Company, and related Option Agreement, dated
           March 31, 1989.

10(f)      Distribution and License Agreement between              [i]
           Interleaf Italia, S.r.l. and the Company,
           and related Joint Venture Agreement, dated
           October 31, 1988.

10(g)      Preferred Stock Purchase Agreements, for the            [ii]
           issuance of 2,142,857 shares of the Company's
           Senior Series B Convertible Preferred Stock,
           dated September 29, 1989.

10(h)      Notification to Preferred Shareholder of                [iii]
           increase in conversion ratio, dated May 18,
           1992.

10(i)      Lease of Prospect Place, Waltham, MA, between           [iv]
           Prospect Place Limited Partnership and
           Interleaf, Inc., and related Agreements,
           dated March 30, 1990.

10(j)      Employment and severance agreement between              [vii]
           the Company and Edward Koepfler, the Company's
           President, dated October 3, 1994.

10(k)      Loan and Security Agreement between the                 [ix]
           Company and Foothill Capital Corporation,
           dated May 2, 1995.

10(l)      Employment and severance agreement between              [ix]
           the Company and G. Gordon M. Large, the
           Company's Executive Vice President and Chief
           Financial Officer, dated June 5, 1995.

10(m)      Net Lease, dated August 14, 1995, between               [x]
           Principal Mutual Insurance Company and the
           Company.

10(n)      Sublease, dated September 15, 1995, between             [x]
           Parametric Technology Corporation and the
           Company.

10(o)      Employment and severance agreement between              [xi]
           the Company and Mark Cieplik, the Company's
           Vice President, Americas, dated March 17, 1995.

10(p)      Agreement between PruTech Research and                  [xii]
           Development Partnership III and the Company,
           dated November 14, 1995.

10(q)      Series C Preferred Stock Agreement between              [xiii]
           Interleaf, Inc. and Lindner Investments,
           dated October 14, 1996.

                                     36

<PAGE>

Exhibit
Number                   Description                         Method of Filing
-------                  -----------                         ----------------
10(r)      Letter Agreement between the Company and                [xvi]
           Robert M. Stoddard, as the Company's then
           Vice President of Finance and Administration,
           and Chief Financial Officer, dated
           November 11, 1996.

10(s)      Letter Agreement between the Company and                [xvi]
           Rory J. Cowan, the Company's President and
           Chief Executive Officer, dated November 15,
           1996, concerning his employment and
           compensation with the Company.

10(t)      Letter Agreement between the Company and                [xvi]
           Mark H. Cieplik, the Company's Vice President
           of Sales, dated November 15, 1996, concerning
           his employment and compensation with the
           Company.

10(u)      Letter Agreement between the Company and                [xvi]
           Michael L. Shanker, the Company's Vice
           President of Professional Services, dated
           November 15, 1996, concerning his employment
           and compensation with the Company.

10(v)      Letter Agreement between the Company and                [xvi]
           Stephen J. Hill, the Company's Vice President
           of Europe, dated November 15, 1996, concerning
           his employment and compensation with the
           Company.

10(w)      Resignation Agreement and Release and                   [xvi]
           Employment Agreement between Ed Koepfler, the
           Company's former President and Chief Executive
           Officer, and the Company, dated November 15,
           1996, concerning his employment and severance
           with the Company.

10(w1)     Resignation Agreement and Release and Employment        [xvi]
           Agreement between G. Gordon M. Large, the
           Company's former Executive Vice President of
           Finance and Administration and Chief Financial
           Officer, and the Company, dated November 12,
           1996, concerning his employment and severance
           with the Company.

10(x)      Resignation Agreement and Release and Employment        [xvi]
           Agreement between Stan Douglas, the Company's
           former Vice President of Engineering Operations,
           and the Company, dated November 15, 1996,
           concerning his employment and severance with the
           Company.

10(y)      Terms of Engagement between the Company and             [xvi]
           Robert R. Langer, Vice President of Finance and
           Administration and Chief Financial Officer,
           dated December 30, 1996, concerning his
           employment with the Company.

10(z)      Offer Letter and Acceptance between Jaime W.            [xvi]
           Ellertson, the Company's President and Chief
           Executive Officer, and the Company, dated
           January 9, 1997.

11         Computation of Earnings Per Share                      Included

21         Subsidiaries of the Company                            Included

23         Consent of Independent Auditors                        Included

27         Financial Data Schedule                                Included

____________________

[i] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1989, File Number
0-14713.

[ii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1990, File Number
0-14713.

[iii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1992, File Number
0-14713.

                                     37


<PAGE>

[iv] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed April 13, 1990, File Number 0-14713.

[v] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1994, File Number
0-14713.

[vi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1994, File Number
0-14713.

[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1994, File Number
0-14713.

[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1995, File Number
0-14713.

[ix] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended June 30, 1995, File Number 0-14713.

[x] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-2, File Number 33-63785.

[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1995, File Number
0-14713.

[xii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1995, File Number
0-14713.

[xiii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1996, File Number
0-14713.

[xiv] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-1, File Number 33-5743.

[xv] Incorporated herein by reference is Exhibit 1 to Company's Registration
Statement on Form 8-A, filed July 27, 1988.

[xvi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10--Q for the quarter ended December 31, 1996, File Number
0-14713.


                                     38