<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                     ----------------------------------------
                                    FORM 10-Q

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934.

               For the Quarterly period ended DECEMBER 31, 1998.
                                              -----------------

                                       or

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

         For the transition period from _____________ to ______________.


                         COMMISSION FILE NUMBER 0-14713


                                   [graphic]

                                 Interleaf, Inc.
                                 ---------------
             (exact name of registrant as specified in its charter)

          MASSACHUSETTS                              04-2729042
  (State or other jurisdiction         (I.R.S. employer identification number)
of incorporation or organization)

       62 FOURTH AVENUE, WALTHAM, MA                              02451
 (Address of principal executive offices)                      (Zip Code)


                                 (781) 290-0710
                         (Registrant's telephone number,
                              including area code)

Indicate by check /X/ 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 last 90 days Yes  X  No   .
                                             ---    --

                      APPLICABLE ONLY TO CORPORATE ISSUERS


    The number of shares outstanding of the issuer's Common Stock, $.01 par
value, as of February 9, 1999 was 7,652,480.

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



<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                     <C>

PART I - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

Consolidated balance sheets at December 31, 1998 and March 31, 1998..................................    3

Consolidated statements of operations for the three and nine months ended
December 31, 1998 and 1997 ...........................................................................   4

Consolidated statements of cash flows for the nine months ended
December 31, 1998 and 1997 ...........................................................................   5

Notes to consolidated financial statements ...........................................................   6


ITEM 2 - Management's Discussion and Analysis of Financial Condition
          and Results of Operations .................................................................   10



PART II - OTHER INFORMATION


ITEM 2 - Changes in Securities and Use of Proceeds...................................................   17

ITEM 4 - Submission of Matters to Vote of Security Holders ...........................................  18

ITEM 5 - Other Information ...........................................................................  18

ITEM 6 - Exhibits and Reports on Form 8-K ............................................................  18


SIGNATURES ...........................................................................................  19

</TABLE>

                                      -2-
<PAGE>


PART I - FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                        INTERLEAF, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                December 31,1998      March 31, 1998
                                                                                ----------------      --------------
     In thousands, except for share and per share amounts                          (unaudited)

<S>                                                                             <C>                  <C>      
ASSETS
Current assets
Cash and cash equivalents                                                             $  11,064       $  21,112
Accounts receivable, net of reserve for doubtful accounts of $1,141 at
   December 31, 1998 and $1,364 at March 31, 1998                                        12,927          12,706
Prepaid expenses and other current assets                                                 2,185             838
                                                                                      ---------       ---------
Total Current Assets                                                                     26,176          34,656
Property and equipment, net                                                               2,185           3,321
Intangible assets, net                                                                    1,816             583
Other assets                                                                                389             828
                                                                                      ---------       ---------
Total Assets                                                                          $  30,566       $  39,388
                                                                                      ---------       ---------
                                                                                      ---------       ---------

LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable                                                                      $   1,847       $   2,079
Accrued expenses                                                                         12,138          11,657
Unearned revenue                                                                         10,169          12,136
Accrued restructuring                                                                     1,137           2,143
                                                                                      ---------       ---------
Total Current Liabilities                                                                25,291          28,015
Long-term restructuring                                                                   1,244           2,063
                                                                                      ---------       ---------
Total Liabilities                                                                        26,535          30,078
                                                                                      ---------       ---------

Shareholders' Equity
Preferred stock, par value $.10 per share, authorized 5,000,000 shares:
   Series A Junior Participating, none issued and outstanding
   Senior Series B Convertible, shares issued and outstanding,                          
   726,003 at December 31, 1998 and 861,911 at March 31, 1998                                73              86
   Senior Series C Convertible, shares issued and outstanding, none at
   December 31, 1998 and 1,010,348 at March 31, 1998                                       --               101
   Senior Series D 6% Convertible, shares issued and outstanding, 
   1,350 at December 31, 1998 and 7,625 at March 31, 1998                                  --                 1
Common stock, par value $.01 per share, authorized 50,000,000 shares,
   issued and outstanding, 7,651,828 at December 31, 1998 and
   6,051,770 at March 31, 1998                                                               77              61
Additional paid-in capital                                                               90,217          93,490
Retained earnings (accumulated deficit)                                                 (86,147)        (84,072)
Cumulative translation adjustment                                                          (189)           (357)
                                                                                      ---------       ---------
Total Shareholders' Equity                                                                4,031           9,310
                                                                                      ---------       ---------
Total Liabilities and Shareholders' Equity                                            $  30,566       $  39,388
                                                                                      ---------       ---------
                                                                                      ---------       ---------
</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      -3-
<PAGE>



                        INTERLEAF, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                      Three months ended            Nine months ended
                                                          December 31                  December 31
                                                      1998           1997          1998           1997
                                                      ----           ----          ----           ----
                                                          (unaudited)                  (unaudited)
In thousands, except for per share amounts

<S>                                               <C>            <C>            <C>            <C>     
Revenues:
Products                                          $  2,265       $  3,695       $  6,150       $  9,595
Maintenance                                          5,576          6,400         16,592         19,744
Services                                             3,795          3,329          9,912         10,029
                                                  --------       --------       --------       --------
Total revenues                                      11,636         13,424         32,654         39,368
                                                  --------       --------       --------       --------

Costs of Revenues:
Products                                               545          1,177          1,817          2,859
Maintenance                                            724            976          2,300          2,934
Services                                             3,400          2,831          9,067          8,547
                                                  --------       --------       --------       --------
Total costs of revenues                              4,669          4,984         13,184         14,340
                                                  --------       --------       --------       --------

Gross margin                                         6,967          8,440         19,470         25,028

Operating Expenses:
Selling, general and administrative                  4,511          5,762         14,874         16,794
Research and development                             2,347          2,021          6,179          6,788
Purchased in process research & development           --             --              990           --
                                                  --------       --------       --------       --------
Total operating expenses                             6,858          7,783         22,043         23,582
                                                  --------       --------       --------       --------

Income (loss) from operations                          109            657         (2,573)         1,446

Other income                                           132             69            523            115
                                                  --------       --------       --------       --------

Income (loss) before income taxes                      241            726         (2,050)         1,561

Provision for income taxes                            --             --               25           --
                                                  --------       --------       --------       --------

Net Income (loss)                                 $    241       $    726       $ (2,075)      $  1,561
                                                  --------       --------       --------       --------

Dividends on Preferred Stock                           (94)          --             (553)          --
Gain on preferred stock redemption                   8,771           --            8,771           --
                                                  --------       --------       --------       --------

Net income applicable to common
     shareholders-basic earnings per share        $  8,918       $    726       $  6,143       $  1,561
                                                  --------       --------       --------       --------

Effect of dilutive securities
    Dividends on Preferred Stock                        74           --             492            --
    Gain on preferred stock redemption              (8,771)          --          (8,771)           --
                                                  --------       --------       --------       --------

Net income (loss) applicable to common
     shareholders-diluted earnings per share      $    221       $    726       $ (2,136)      $  1,561
                                                  --------       --------       --------       --------
                                                  --------       --------       --------       --------
INCOME (LOSS) PER SHARE:
Basic                                             $   1.30       $   0.12       $   0.96       $   0.26
                                                  --------       --------       --------       --------
                                                  --------       --------       --------       --------
Diluted                                           $   0.03       $   0.10       $  (0.25)      $   0.20
                                                  --------       --------       --------       --------
                                                  --------       --------       --------       --------
Shares used in computing income (loss) per share
Basic                                                6,884          5,964          6,418          5,919
                                                  --------       --------       --------       --------
                                                  --------       --------       --------       --------
Diluted                                              8,406          7,203          8,642          7,712
                                                  --------       --------       --------       --------
                                                  --------       --------       --------       --------
</TABLE>



                                      -4-
<PAGE>

                                            INTERLEAF, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOW


<TABLE>
<CAPTION>

                                                                Nine months ended December 31
                                                                ------------------------------
                                                                          Unaudited
                                                                          ---------
                                                                     1998           1997
                                                                     ----           ----
<S>                                                             <C>            <C>     

       In thousands

Cash Flows from Operating Activities:
Net (loss) income                                                $ (2,075)      $  1,561
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense                               2,028          3,110
Purchased in-process research & development                           990           --
Changes in assets and liabilities, net of amounts acquired:
  Decrease (increases) in accounts receivable, net                    964           (900)
  Decreases (increases) in other assets                                62         (1,094)
  Decreases in accounts payable and accrued expenses               (1,437)        (1,677)
  Decreases in unearned revenue                                    (2,154)        (4,284)
  Decreases in other liabilities                                   (1,572)        (2,623)
   Other, net                                                         (59)           405
                                                                 --------       --------
  Net cash used in operating activities                            (3,253)        (5,502)
                                                                 --------       --------

Cash Flows from Investing Activities:
Capital expenditures, net                                            (650)          (919)
Acquisitions, net of cash acquired                                 (2,731)          --
                                                                 --------       --------
  Net cash used in investing activities                            (3,381)          (919)
                                                                 --------       --------

Cash Flows from Financing Activities:
Net proceeds from issuance of common stock                           --            1,420
Net proceeds from issuance of convertible preferred stock            --            6,961
Repayment of long-term debt & capital leases                         --              (20)
Dividends Paid                                                       (251)          --
Redemption of preferred stock                                      (3,824)          --
                                                                 --------       --------
  Net cash (used in) provided by financing activities              (4,075)         8,361
                                                                 --------       --------

Effect of exchange-rate changes on cash                               661           (618)
                                                                 --------       --------
Net (decrease) increase in cash and cash equivalents              (10,048)         1,322

Cash and cash equivalents at beginning of period                   21,112         17,349
                                                                 --------       --------

Cash and cash equivalents at end of period                       $ 11,064       $ 18,761
                                                                 --------       --------
                                                                 --------       --------
</TABLE>



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                      -5-
<PAGE>


INTERLEAF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (UNAUDITED)

1.   BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Interleaf, Inc.
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are
collectively referred to as the "Company."

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations for the interim periods
reported and of the financial condition of the Company as of the date of the
interim balance sheet. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1998.

2.   RECENTLY ISSUED ACCOUNTING STANDARDS

Effective April 1, 1998, the Company adopted Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" which provides guidance for applying generally
accepted accounting principles on software transactions and supersedes SOP 91-1,
"Software Revenue Recognition." The adoption of SOP 97-2 did not have a material
impact on the Company's revenue recognition for the quarter or nine month period
ended December 31, 1998.

Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement established
standards for reporting comprehensive income and its components. Comprehensive
income for the Company is equal to net income plus the change in cumulative
translation adjustments during the period. Total comprehensive income for the
quarter ended December 31, 1998 was $.2 million, and for the nine months ended
December 31, 1998, total comprehensive income was a loss of $1.9 million. For
the quarter and nine months ended December 31, 1997, total comprehensive income
was $.7 million and $1.4 million respectively.

On June 15, 1998, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR 
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133). FAS 133 is effective 
for all fiscal quarters of all fiscal years beginning after June 15, 1999 
(for the Company, the fiscal year beginning April 1, 2000). FAS 133 requires 
that all derivative instruments be recorded each period in current earnings 
or other comprehensive income, depending on whether a derivative is 
designated as part of a hedge transaction and, if it is, the type of hedge 
transaction. The Company is currently evaluating the effect of implementing 
this standard; however, the Company does not currently engage in any hedging 
activities.

                                      -6-
<PAGE>

3.   EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

<TABLE>
<CAPTION>

                                                          Three Months ended        Nine Months ended
                                                              December 31,               December 31,
                                                          1998         1997          1998          1997
                                                        -------       -------       -------       -------
 In thousands, except for per share amounts
<S>                                                     <C>           <C>           <C>           <C>    

NUMERATOR:
Net income                                              $   241       $   726       $(2,075)      $ 1,561

Preferred stock dividends
    Senior series C convertible                             (30)         --            (283)         --
    Senior series D convertible -redeemed                   (44)         --            (209)         --
    Senior series D convertible -outstanding                (20)         --             (61)         --
                                                        -------       -------       -------       -------
                                                            (94)         --            (553)         --
                                                        -------       -------       -------       -------

Gains on redemption
    Senior series C convertible                           8,100          --           8,100          --
    Senior series D convertible                             671          --             671          --
                                                        -------       -------       -------       -------
                                                          8,771          --           8,771          --
                                                        -------       -------       -------       -------

Numerator for basic income (loss) per share
    Income loss available to common shareholders          8,918           726         6,143         1,561
                                                        -------       -------       -------       -------

EFFECT OF DILUTIVE SECURITIES
Preferred stock dividends
    Senior series C convertible                              30          --             283          --
    Senior series D convertible -redeemed                    44          --             209          --
    Senior series D convertible -outstanding -             --            --            --
                                                        -------       -------       -------       -------
                                                             74          --             492          --
                                                        -------       -------       -------       -------
Gains on redemption
    Senior series C convertible                          (8,100)         --          (8,100)         --
    Senior series D convertible                            (671)         --            (671)         --
                                                        -------       -------       -------       -------
                                                         (8,771)         --          (8,771)         --
                                                        -------       -------       -------       -------

Numerator for diluted income (loss) per share
    Income (loss) available to common shareholders      $   221       $   726       $(2,136)      $ 1,561
                                                        -------       -------       -------       -------
                                                        -------       -------       -------       -------
DENOMINATOR:
Denominator for basic earnings per share
Weighted average shares                                   6,884         5,964         6,418         5,919
                                                        -------       -------       -------       -------

Effect of dilutive securities
    Series B convertible preferred stock                    284           386          --             386
    Series C convertible preferred stock                    322          --           1,008           894
    Series D convertible preferred stock                    764          --           1,216          --
    Stock options                                           152           792          --             482
    Stock purchase plan rights                             --              56          --              26
    Warrants                                               --               5          --               5
                                                        -------       -------       -------       -------
Dilutive potential common shares                          1,522         1,239         2,224         1,793
                                                        -------       -------       -------       -------

Denominator for diluted earnings per share
Adjusted weighted average shares
     and assumed conversions                              8,406         7,203         8,642         7,712
                                                        -------       -------       -------       -------
                                                        -------       -------       -------       -------

Basic earnings (loss) per share                         $  1.30       $  0.12       $  0.96       $  0.26
                                                        -------       -------       -------       -------
                                                        -------       -------       -------       -------

Diluted earnings (loss) per share                       $  0.03       $  0.10       $ (0.25)      $  0.20
                                                        -------       -------       -------       -------
                                                        -------       -------       -------       -------

</TABLE>


Effective December 31, 1998, the Company declared a 1 for 3 reverse split of 
its common stock. Par value did not change as a result, and all share and per 
share data have been restated to give effect to the 1 for 3 reverse split. In 
connection with a private placement of Common Stock (see Note 6), the Company 
issued 1,761,167 shares of Common Stock on February 16, 1999. These shares 
are not included in the basic and diluted earnings (loss) per share amounts 
for the three and nine month periods ending December 31, 1998 and 1997.

                                      -7-
<PAGE>

4.   ACQUISITIONS

     Effective August 31, 1998, the Company purchased 100% of the outstanding
     common shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR
     provides subcontracting and outsourcing services for the development,
     management and distribution of information, and has developed certain
     technology surrounding image processing. The acquisition has been accounted
     for as a purchase business combination and, therefore, the operating
     results of PDR have been included in the Consolidated Statement of
     Operations since the date of acquisition. The Company paid cash of $2.9
     million and, depending upon certain financial contingencies, may pay an
     additional $3.0 million or more, payable in stock, except that the Company
     may pay in cash under certain circumstances. A minimum contingent payment
     of $.7 million is included in accrued expenses in the accompanying balance
     sheet as part of the initial purchase price. The Company recorded costs
     associated with the acquisition of $.1 million related to valuation
     services, legal and audit fees.

     In connection with this acquisition, the acquired net tangible assets of
     PDR were recorded at $1.3 million, which approximates fair value. The
     Company has also recorded $1.6 million of goodwill and other intangibles,
     and $.8 million of purchased in-process research and development. It has
     been determined that technological feasibility of the in-process technology
     purchased has not been established and the technology has no alternative
     future use. Therefore, in accordance with generally accepted accounting
     principles, the Company has expensed the amount of the purchase price
     allocated to purchased research and development of approximately $.8
     million. The goodwill and other intangibles will be amortized on a straight
     line basis over estimated useful lives ranging up to ten years.

     The following pro-forma results of operations combine the operations of the
     Company and PDR as if the combination had occurred at the beginning of each
     period.

<TABLE>
<CAPTION>

                                                          Nine Months Ended
                                                          -----------------
          Amounts in thousands, except                12/31/98        12/31/97
          per share amounts                           --------        --------

<S>                                                   <C>             <C>    

          Revenue                                     $  35,136       $44,088
                                                      ---------       -------

          Net income (loss) applicable to common 
          stockholders:
               Basic                                  $   6,284       $ 1,309
                                                      ---------       -------
                                                      ---------       -------
               Diluted                                $  (1,995)      $ 1,309
                                                      ---------       -------
                                                      ---------       -------


          Earning per share:
               Basic                                  $     .98       $   .22
                                                      ---------       -------
                                                      ---------       -------

               Diluted                                $    (.23)      $   .17
                                                      ---------       -------
                                                      ---------       -------
</TABLE>

     Effective September 11, 1998, the Company acquired the Panorama and CD Web
     Publishing product lines from Softquad Inc. for $.4 million. The
     acquisition provides the Company with products which are complementary to
     its existing complex publishing product line and in-process technologies
     which are expected to contribute to the development of the Company's new
     content management products. The total fair value of the assets acquired
     was approximately $.1 million.

     In connection with this acquisition, it has been determined that
     technological feasibility of the in-process technology purchased has not
     been established and the technology has no alternative future use.
     Therefore, in accordance with generally accepted accounting principles, the
     Company has expensed the amount of the purchase price allocated to
     purchased research and development of 


                                      -8-
<PAGE>


     approximately $.2 million. The excess of purchase price over the fair value
     of the assets acquired ($.1 million) has been recorded as goodwill, and
     will be amortized on a straight line basis over five years. This
     acquisition is not considered material to the Company's financial position
     or results of operation.

     In connection with the acquisitions of PDR and certain assets of 
     Softquad, Inc. during the current fiscal year as described above, 
     Interleaf wrote off approximately $990,000 for in-process research and 
     development. The SEC has recently increased the scrutiny of certain 
     accounting practices, including the extent of write-offs of in-process 
     research and development in connection with acquisitions. While 
     Interleaf did obtain an evaluation from an outside accounting firm 
     concerning the amount of its write-off with respect to PDR, there is a 
     risk that a portion of those write-offs may be reduced, which would 
     result in a corresponding increase in the amount of goodwill and other 
     intangibles associated with those acquisitions. Any additional goodwill 
     would have to be amortized over future years.

5.   CREDIT AGREEMENT

     At December 31, 1998 and March 31, 1998, the Company had an equipment
     letter of credit for $.4 and $.6 million, respectively, which was secured
     by the equivalent amount of cash. This letter of credit expires on July 31,
     1999.

6.   STOCKHOLDER'S EQUITY

     During the third quarter, the Company redeemed 100% of its Series C
     Convertible Preferred Stock ("Series C Stock") for $1.6 million.
     Additionally, dividends accrued at September 30, 1998 totaling $.2 million
     were waived and will not be paid. For purposes of the 1999 third quarter
     and nine months basic earnings per share calculation, this redemption
     resulted in $8.1 million being added to net income to arrive at net income
     available to common shareholders. The $8.1 million represents the excess of
     the carrying amount of the Series C Stock over the fair value of the
     consideration paid by the Company.

     On November 4, 1998, the Company reached agreement with the holders of 79%
     of its 6% Convertible Preferred Stock ("Series D Stock") outstanding,
     pursuant to which all of the Series D Stock held by such persons (5,487
     shares out of 6,987 outstanding) was converted into a total of
     approximately $2.2 million in cash and approximately 3.5 million shares of
     Common Stock. This conversion occurred on November 18, 1998. The shares of
     Common Stock issued to the former Series D stockholders are held subject to
     the restrictions on re-sale, prohibitions against short-selling and the
     other terms and conditions of the Preferred Stock Investment Agreement
     under which the Series D Stock was originally issued. For purposes of the
     1999 third quarter and nine months basic earnings per share calculation,
     this conversion resulted in $.7 million being added to net income to arrive
     at net income available to common shareholders. The $.7 million represents
     the excess of the carrying amount of Series D Stock over the fair value of
     consideration paid by the Company.

     The Company financed the redemption of the Series C Shares and the 
     cash portion of the conversion of the Series D Shares out of its 
     existing working capital and the sale of Common Stock to investors in a 
     private placement described below.
     
     Between November 18 and December 15, 1998, the Company entered into 
     agreements with certain officers, directors and existing stockholders 
     of the Company under which each of them granted to the Company an 
     option to require each to purchase a specified number of shares of 
     Common Stock, up to an aggregate maximum of 1,761,167 shares if 
     Interleaf exercised its option in full, at an exercise price of $2.40 
     per share. On February 11, 1999, the Company exercised its option in 
     full and the 1,761,167 shares were issued on February 16, 1999 and the 
     Company received $4.2 million in cash proceeds.

                                      -9-
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

The Company reported net income of $.2 million on revenues of $11.6 million 
for its third quarter and a net loss of $2.1 million on revenues of $32.7 
million for the nine months ended December 31, 1998. The Company has recorded 
preferred stock dividends of $.1 million and $.6 million for the third 
quarter and nine months ended December 31, 1998, respectively, in deriving 
net income applicable to common shareholders for basic earnings per share. 
Additionally the Company recorded gains on the redemption of all outstanding 
shares of its Series C preferred stock and conversion of 79% of its 
outstanding Series D preferred stock aggregating $8.8 million. For purposes 
of calculating diluted earnings per shares, all of the gains on redemption of 
the preferred stock have been excluded. Dividends on the remaining 
outstanding Series D shares have been included in the calculation of diluted 
earnings per share for the third quarter and nine months ended December 31, 
1998. Therefore, after dividends on preferred stock, the Company's net income 
applicable to common shareholders was $8.9 million and $6.1 million for the 
third quarter and nine months ended December 31, 1998, respectively, for 
purposes of basic earnings per share. For purposes of diluted earnings per 
share, the Company had net income applicable to common shareholders of $.2 
million for the third quarter of 1998 and a net loss of $2.1 million for the 
nine months ended December 31, 1998. This compares with net income of $.7 
million on revenues of $13.4 million and net income of $1.6 million on 
revenues of $39.4 million for the same periods during the prior year. There 
were no dividends to record in the third quarter or the nine months ended 
December 31, 1997.

Much of the decline in revenue is due to a decrease in product revenue and the
related decline in maintenance and service revenue caused by the continuing
maturation and saturation of the market for complex authoring products and the
increasing popularity of low-end versions of Windows-based authoring software.
The Company has continued its efforts to focus on developing a new content
management product family targeted to its customers' extended enterprises.

Effective August 31, 1998, the Company purchased 100% of the outstanding common
shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR provides
subcontracting and outsourcing services for the development, management and
distribution of information, and has developed certain technology surrounding
image processing. The acquisition has been accounted for as a purchase business
combination and, therefore, the operating results of PDR have been included in
the Consolidated Statement of Operations since the date of acquisition. The
Company paid cash of $2.9 million and, depending upon certain financial
contingencies, may pay an additional $3.0 million or more, payable in stock,
except that the Company may pay in cash under certain circumstances. A minimum
contingent payment of $.7 million is included in accrued expenses in the
accompanying balance sheet as part of the initial purchase price. The Company
recorded costs associated with the acquisition of $.1 million related to
valuation services, legal and audit fees.

In connection with this acquisition, the acquired net tangible assets of PDR
were recorded at $1.3 million, which approximates fair value. The Company has
also recorded $1.6 million of goodwill and other intangibles, and $.8 million of
purchased in-process research and development. It has been determined that
technological feasibility of the in-process technology purchased has not been
established and the technology has no alternative future use. Therefore, in
accordance with generally accepted accounting principles, the Company has
expensed the amount of the purchase price allocated to purchased research and
development of approximately $.8 million. The goodwill and other intangibles
will be amortized on a straight line basis over estimated useful lives ranging
up to ten years.


                                      -10-
<PAGE>


Effective September 11, 1998, the Company acquired the Panorama and CD Web
Publishing product lines from Softquad Inc. for $.4 million. The acquisition
provides the Company with products which are complementary to its existing
complex publishing product line and in-process technologies which are expected
to contribute to the development of the Company's new content management
products. The total fair value of the assets acquired was approximately $.1
million.

In connection with this acquisition, it has been determined that technological
feasibility of the in-process technology purchased has not been established and
the technology has no alternative future use. Therefore, in accordance with
generally accepted accounting principles, the Company has expensed the amount of
the purchase price allocated to purchased research and development of
approximately $.2 million. The excess of purchase price over the fair value of
the assets acquired ($.1 million) has been recorded as goodwill, and will be
amortized on a straight line basis over five years. This acquisition is not
considered material to the Company's financial position or results of operation.

In connection with the acquisitions of PDR and certain assets of Softquad, 
Inc. during the current fiscal year as described above, Interleaf wrote off 
approximately $990,000 for in-process research and development. The SEC has 
recently increased the scrutiny of certain accounting practices, including 
the extent of write-offs of in-process research and development in connection 
with acquisitions. While Interleaf did obtain an evaluation from an outside 
accounting firm concerning the amount of its write-off with respect to PDR, 
there is a risk that a portion of those write-offs may be reduced, which 
would result in a corresponding increase in the amount of goodwill and other 
intangibles associated with those acquisitions. Any additional goodwill would 
have to be amortized over future years.

REVENUES

PRODUCT: Product revenue decreased by $1.4 million (39%) and $3.4 million (36%)
for the third quarter and nine months ended December 31, 1998, respectively,
compared with the same periods in fiscal 1998. The continuing trend of reduction
in product revenue is due to two factors. The first 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. The second factor 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.

The Company is refocusing its business strategy on providing a new family of
content management products 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 content management products. 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 are 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 decreased by $.8 million (13%) and $3.2 million
(16%) for the third quarter and nine months ended December 31, 1998,
respectively, compared with the same periods in fiscal 1998. 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 content
management products. This will be necessary to offset the general downward
pricing pressure on maintenance in the software industry and a reduction in
customers' perceived value of maintenance services.


                                      -11-
<PAGE>


SERVICES: Service revenue, consisting of consulting and training revenue,
increased by $.5 million (14%) and $.1 million (1%) for the third quarter and
nine months ended December 31, 1998, respectively, compared with the same
periods in fiscal 1998. The increase in the third quarter is attributable to the
inclusion of PDR for the entire three month period. Future services revenue is
dependent on the Company's ability to maintain its existing customer base and to
increase consulting and training contracts based on the introduction and success
of new products.

FISCAL 1999: During the balance of fiscal 1999, the Company plans to develop and
release several upgrades to its traditional products. During the balance of
fiscal 1999 and beyond, the Company also plans to develop new product offerings
which address at least two vertical segments of the content management market.
Growth in revenues during fiscal 1999 and fiscal 2000 will be largely dependent
on the introduction and customer acceptance of the new and enhanced software
products planned to be released in fiscal 1999 and the following year, and the
Company's success in leveraging software products with services to provide
content management solutions to its customers, improving sales force
productivity and the effectiveness of the Company's investment in marketing and
lead generation programs. If the Company is unable to grow or stabilize its
revenues in fiscal 1999, further expense reductions will be necessary in order
to sustain profitable operations. As part of its strategy to increase revenues,
the Company acquired PDR and acquired the Panorama and CD Web Publishing product
lines of SoftQuad Inc. The acquisition of PDR also provides the Company with
in-process development of certain technology surrounding image processing that
is expected to result in a completed product in fiscal 2000 and may be
incorporated into a content management software product currently under
development. The acquisition of the Panorama and CD Web Publishing product line
complements the Company's existing complex publishing products, and provides
technologies and resources to be used in the development of content management
products. The technologies acquired from this acquisition are expected to
shorten the development cycle of the Company's new content management products.

COSTS OF REVENUES

Cost of product revenue 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 decreased by $.6 million (54%) and $1.0 million (36%) for the third 
quarter and nine months ending December 31, 1998 compared to the same periods 
in fiscal 1998. Cost of product revenues as a percentage of product revenues 
were (24%) and (30%) for the third quarter and the nine months ended December 
31, 1998, respectively, compared with (32%) and (30%) for the same periods in 
fiscal 1998. The decrease in cost of product revenue is due to decreased 
amortization of capitalized software development cost, decreased royalties 
expense and reduced cost of manufacturing. The cost of maintenance revenue 
declined by $.3 million (26%) and $.6 million (22%) for the third quarter and 
the nine months ended December 31, 1998, compared with the same periods in 
fiscal 1998. Maintenance cost is directly related to maintenance revenue, and 
the reduction in costs of maintenance are mainly the result of reduced 
maintenance revenue. The cost of services revenue increased by $.6 million 
(20%) and $.5 million (6%) for the third quarter and nine months ending 
December 31, 1998, respectively, compared with same periods of fiscal 1998. 
The increase in cost of service revenue was due to the inclusion of the 
results of PDR during the quarter. The cost of services revenue as a 
percentage of service revenue was 90% for the third quarter and 91% for the 
nine months ended December 31, 1998 compared with 85% for the same periods 
fiscal 1998. The increase in cost of services as a percentage of revenues 
reflects the pricing pressure in the Company's consulting service business 
coupled with increasing salary and related costs of consultants.

                                      -12-
<PAGE>

OPERATING EXPENSES

Selling, general and administrative ("SG&A") expenses decreased by 1.3 million
(22%) and $1.9 million (11%) for the third quarter and nine months ended
December 31, 1998, respectively, compared with the same periods in fiscal 1998.
The declines were primarily due to a continued focus on stringent cost controls
by management, including an expense reduction initiative that began in September
1998. Additionally, SG&A expense was reduced by $.2 million as a result of the
adjustment of certain accrued expenses for which it was determined an accrual
were no longer necessary.

Research and development ("R&D") expenses consist primarily of personnel and
related overhead expenses to support product development. R&D expenses increased
by $.3 million (16%) in the third quarter of fiscal 1999 compared with the same
period of 1998. The increase is attributable to additional resources added to
accelerate the development of the Company's new enterprise content management
products. R&D expenses decreased by $.6 million (9%) for the nine months ended
December 31, 1998 compared with the same period of fiscal 1998. The decline can
be attributed to the Company's focus on cost controls resulting in lower
overhead expenses, mainly reduced facility costs of the Company's engineering
group and dedication of the Company's engineering resources to fewer development
projects.

In connection with the acquisition of PDR and the Panorama and CD Web Publishing
product line from SoftQuad, Inc., the Company recorded charges of $.8 million
and $.2 million, respectively, of purchased in-process research and development.

LIQUIDITY AND CAPITAL RESOURCES

The Company had approximately $11.1 million of cash and cash equivalents at
December 31, 1998, a decrease of $10.0 million from March 31, 1998. The decrease
in cash is mainly attributed to the amounts paid for the acquisition of PDR
($2.4 million net of cash acquired) and the Panorama and CD Web Publishing
product line from SoftQuad, Inc. ($.3 million), the redemption of the Series C
and D preferred Stock ($3.8 million) coupled with the decreases in cash due to
operating activities, $3.3 million, capital expenditures, $.7 million and
dividend payments, $.3 million. These decreases were partially offset by the
increase in cash due to the effect of exchange rate changes on cash, mainly cash
held by the Company's German subsidiary of $.7 million.

During the third quarter, the Company redeemed 100% of its Series C Convertible
Preferred Stock ("Series C Stock") for $1.6 million. Additionally, dividends
accrued at September 30, 1998 totaling $.2 million were waived and will not be
paid. For purposes of the 1999 third quarter and nine months basic earnings per
share calculation, this redemption resulted in $8.1 million being added to net
income to arrive at net income available to common shareholders. The $8.1
million represents the excess of the carrying amount of the Series C Stock over
the fair value of the consideration paid by the Company.

On November 4, 1998, the Company reached agreement with the holders of 79% of 
its 6% Convertible Preferred Stock ("Series D Stock") outstanding, pursuant 
to which all of the Series D Stock held by such persons (5,487 shares out of 
6,987 outstanding) was converted into a total of approximately $2.2 million 
in cash and approximately 3.5 million shares of Common Stock. This conversion 
occurred on November 18, 1998. The shares of Common Stock issued to the 
former Series D stockholders are held subject to the restrictions on re-sale, 
prohibitions against short-selling and the other terms and conditions of the 
Preferred Stock Investment Agreement under which the Series D Stock was 
originally issued. For purposes of the 1999 third quarter and nine months 
basic earnings per share calculation, this conversion resulted in $.7 million 
being added to net income to arrive at net income available to common 

                                      -13-
<PAGE>


shareholders. The $.7 million represents the excess of the carrying amount of
Series D Stock over the fair value of consideration paid by the Company.

The Company financed the redemption of the Series C Shares and the cash 
portion of the conversion of the Series D Shares out of its existing working 
capital and the sale of Common Stock to investors in a private placement 
described below.

Between November 18 and December 15, 1998, the Company entered into 
agreements with certain officers, directors and existing stockholders of the 
Company under which each of them granted to the Company an option to require 
each to purchase a specified number of shares of Common Stock, up to an 
aggregate maximum of 1,761,167 shares if Interleaf exercised its option in 
full, at an exercise price of $2.40 per share. On February 11, 1999, the 
Company exercised its option in full and the 1,761,167 shares were issued on 
February 16, 1999 and the Company received $4.2 million in cash proceeds.

At December 31, 1998 and March 31, 1998, the Company had approximately $1.0 
million of cash restricted for potential payment of a withholding tax 
assessment on its German subsidiary related to payments remitted to the 
United States from Germany in 1990. The Company is appealing this assessment.

The Company believes its current cash balances and cash generated from 
operations, combined with the cash proceeds from the private placement 
(previously discussed), offset by restructuring payments, will be 
sufficient to meet the Company's liquidity needs for fiscal 1999 and the 
foreseeable future.

YEAR 2000

BACKGROUND

Some computers, software, and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of the systems do not properly recognize a year that begins with
"20" instead of "19". These problems are widely expected to increase in
frequency and severity as the year 2000 approaches, and are commonly referred to
as the "Millenium Bug" or "Year 2000 problem".

INTERLEAF APPROACH

Interleaf established a Year 2000 project team to address all aspects of the
Year 2000 problem in each area of its business. The project team has four areas
of focus, each with its own project manager. These four areas are: (1) the
software that is created by Interleaf and sold to customers; (2) internal
business systems; (3) the hardware and operating system software used by
employees; and (4) facilities and critical vendors other than computer
suppliers.

INTERLEAF CREATED PRODUCTS

Assessment:

In 1997 Interleaf began to focus on the Year 2000 problem regarding its software
products created for sale to customers. Products that generate the most revenue
or create the highest risk were prioritized for testing and repair. The
assessment of these products was completed in early 1998 and the repair process
begun. The Company made the decision to discontinue sales and support for
certain low volume products and computer platforms.

Customer Communications:

The Company sent a description of its Year 2000 product strategy to all of its
maintenance customers. It created and is maintaining a Year 2000 product status
page as part of its web site. Interleaf will distribute another mailing to the
entire maintenance base with the status of the year 2000 releases and a list of
retired products and platforms in the first calendar quarter of 1999.

Status:

Most major products have been tested and modified, and updates which correct any
known Year 2000 problems with those products are available at no extra charge to
the customers with current maintenance contracts for most of the computer
platforms that will be supported beyond the year 2000. Year 2000 updates will be
completed for supported products (those which Interleaf has committed to bring
into Year 2000 compliance) by the end of the first calendar quarter of 1999. The
extent of the changes required 


                                      -14-
<PAGE>


ranges from simple recompilation with Year 2000 compliant operating systems to
extensive modifications. Testing and repair of layered applications for which
Interleaf has committed Year 2000 compliance has begun and will be completed by
the end of the second calendar quarter of 1999. The Company expects that the
layered applications will not require significant modifications, since initial
analysis has indicated that there is no date handling performed by these
products. Moreover, in many instances the Company created layered applications
under contracts with specific customers, and not for general re-sale, and the
Company believes that it has no obligation to modify those applications to
address the Year 2000 problem. All products under development are being
developed to be Year 2000 compliant.

INTERNAL BUSINESS SYSTEMS

Interleaf contracted an independent third party to perform Year 2000 compliance
testing on its critical internal business systems. Some problems were identified
and appropriate modifications were made. The systems were then re-tested and
performed successfully. The software vital to corporate operations has been
proven by the independent third party to function without problems related to
the millenium change. The assessment phase is now underway for business software
used in Europe, Japan, and Australia. The Company's intent is to insure that all
critical internal business software is Year 2000 compliant by the end of the
second calendar quarter of 1999.

HARDWARE AND OPERATING SYSTEMS SOFTWARE

Assessment of the systems used by employees began in early 1997 and has been
completed. The Company has developed a plan to upgrade or replace all critical
systems used by employees, including all hardware in the enterprise from servers
to laptops. The upgrade/replacement process began in early 1998 and is
approximately 40% complete. The entire process is anticipated to be complete by
the end of the third calendar quarter of 1999.

FACILITIES AND CRITICAL VENDORS

In the fourth calendar quarter of 1998 Interleaf began discussions with facility
management of its leased office spaces to ensure that the proper actions are
taken to avoid disruption of productivity in all Interleaf facilities. Two major
elements of Interleaf's business, payroll and manufacturing, are outsourced.
Interleaf is currently working with those service providers to insure that
operations of these critical business areas will not be affected by the
Millenium change.

COST

The costs of the Interleaf Year 2000 efforts are being funded out of cash flow
from operations. The total cost associated with the required modifications and
upgrades associated with the Year 2000 projects is not expected to be material
to the Company's financial position. The process of repairing and testing the
software that Interleaf creates for sale has been done with existing personnel.
The Year 2000 testing equipment and lab environment have been created using
existing equipment and space. The capital costs associated with the upgrade and
replacement of corporate and field office computing environments is budgeted to
be approximately $250,000. These expenditures began in late 1997 and will
continue through the third calendar quarter of 1999. Software maintenance costs
attributable to the Year 2000 process will be approximately $50,000. Labor
associated with this process of implementing the internally used systems comes
from the existing budgeted personnel.

RISK

Specifically, from Year 2000 problems, the Company could experience an
interruption in its ability to collect and process receivables, process payments
to vendors, safeguard and manage its invested assets and operating cash
accounts, accurately maintain customer information, accurately maintain
accounting records, process new orders and/or perform adequate customer service.


                                      -15-
<PAGE>

While the Company believes the occurrence of such a situation is unlikely, a
possible worst case scenario might include one or more of the Company's
significant accounting systems or inventory management systems being
non-compliant. Such an event could result in a material disruption to the
Company's operations. Should the worst case scenario occur it could, depending
on its duration, have a material impact on the Company's results of operations
and liquidity and ultimately on its financial position. . The Company intends to
begin preparing a contingency plan to address reasonably likely worst case
scenarios in the second calendar quarter of 1999.

EURO CONVERSION.

On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The transition to the Euro will be complete as of January 1, 2002.
The Company has significant operations within the European Union and is
currently preparing for the Euro conversion. The issues that the Company is
addressing include preparing its information systems for the Euro, analyzing the
benefit of decreased exchange rate risk in cross border transactions involving
participating countries and assessing the potential impact of increased price
transparency. In addition, the Euro is expected to affect general economic
conditions within the participating countries. The Company is analyzing the
impact of the Euro with a view to minimizing the impact of the Company's
operations. The Company does not expect the costs of upgrading its systems for
the Euro to be material.

FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements concerning the Company's
performance and business operations. The Company cautions readers that actual
future results may differ materially from the projections or suggestions made in
such forward-looking statements.

Factors which might cause actual future results to differ materially from 
those projected in the forward-looking statements contained herein include 
the following: The Company's ability to develop and market new and enhanced 
products, particularly the Company's content management products and 
services; reliance by the Company on third party development partners who are 
engaged in developing a portion of the Company's content management products 
and the Company's dependence on the quality and timeliness of performance of 
those vendors for on-time and high quality delivery of the Company's content 
management products; delays in the development and introduction of such new 
and enhanced products and services; failure to achieve customer and market 
acceptance of the Company's new and enhanced products and services; delays in 
the growth and development of market demand for content management software 
products; inability to increase maintenance contract revenue related to 
content management products; inability to increase revenue from consulting 
and training contracts with respect to the introduction of new products; 
inability to improve sales force productivity; the Company's ability to keep 
pace with the rapid technological change in its industry (including changes 
to the standards upon which the Company's new products are based) and compete 
with companies which have greater market penetration, and greater financial, 
technical and marketing resources; failure to adequately protect the 
Company's intellectual property; inability to successfully leverage the 
Company's software products with services to provide content management 
solutions to its customers; inability to establish or maintain strategic 
relationships with companies with outsourcing or service bureau businesses 
and with companies that have presence and publishing expertise in the 
financial services market; the inability of the Company to make acquisitions 
of, or significant investments in, businesses that offer complementary 
products and technologies; and failure to integrate the operations, 
information systems and personnel of any acquired businesses. In addition, 
the application of guidelines recently issued by the SEC concerning 
write-offs of in-process research and development ("R&D") costs could result 
in a reduction in the in-process R&D write-offs taken by the Company for 
acquisitions, and corresponding increases in the amount of goodwill and other 
intangibles recorded. Certain of these and other factors which might cause

                                      -16-
<PAGE>

actual results to differ materially from those projected are more fully set
forth under the caption "Risk Factors" on pages 13-15 of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.

PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) During the third quarter, the Company redeemed 100% of its Series C
Convertible Preferred Stock ("Series C Stock") for $1.6 million. Additionally,
dividends accrued at September 30, 1998 totaling $.2 million were waived and
will not be paid. For purposes of the 1999 third quarter and nine months basic
earnings per share calculation, this redemption resulted in $8.1 million being
added to net income to arrive at net income available to common shareholders.
The $8.1 million represents the excess of the carrying amount of the Series C
Stock over the fair value of the consideration paid by the Company.

(b) On November 4, 1998, the Company reached agreement with the holders of 
79% of its 6% Convertible Preferred Stock ("Series D Stock") outstanding, 
pursuant to which all of the Series D Stock held by such persons (5,487 
shares out of 6,987 outstanding) was converted into a total of approximately 
$2.2 million in cash and approximately 3.5 million shares of Common Stock. 
This conversion occurred on November 18, 1998. The shares of Common Stock 
issued to the former Series D stockholders are held subject to the 
restrictions on re-sale, prohibitions against short-selling and the other 
terms and conditions of the Preferred Stock Investment Agreement under which 
the Series D Stock was originally issued. For purposes of the 1999 third 
quarter and nine months basic earnings per share calculation, this conversion 
resulted in $.7 million being added to net income to arrive at net income 
available to common shareholders. The $.7 million represents the excess of 
the carrying amount of Series D Stock over the fair value of consideration 
paid by the Company.

The Company financed the redemption of the Series C Shares and the cash portion
of the conversion of the Series D Shares out of its existing working capital and
the sale of Common Stock to investors in a private placement described in
paragraph (c) below.

(c) Between November 18 and December 15, 1998, the Company entered into
agreements with certain officers, directors and existing stockholders of the
Company under which each of them granted to the Company an option to require
each to purchase a specified number of shares of Common Stock, up to an
aggregate maximum of 1,761,167 shares if Interleaf exercised its option in full,
at an exercise price of $2.40 per share. On February 11, 1999, the Company
exercised its option in full and the 1,761,167 shares were issued on February
16, 1999 and the Company received $4.2 million in cash proceeds.

(d) Effective as of the open of business on December 31, 1998, the Company
declared a one for three reverse split of its Common Stock. As a result, each
certificate representing shares of Common Stock outstanding immediately prior to
the reverse stock split was automatically deemed to represent one-third the
number of shares of Common Stock after the reverse stock split, with fractional
shares being rounded up.

Neither the number of shares authorized nor the par value of the Company's
capital stock were changed as a result of the reverse stock split. In addition,
the voting and other rights of the Common Stock were not changed, with each
share of Common Stock outstanding after the reverse stock split carrying one
vote. The exercise prices and conversion price of the Company's outstanding
stock options and its Senior Series B Convertible Preferred Stock, respectively,
were adjusted so that one-third the number of shares of Common Stock are
issuable upon the exercise or conversion thereof. The reverse split had no
effect 


                                      -17-
<PAGE>


on the number of shares outstanding of the Company's 6% Convertible Preferred
Stock or on the conversion price of such shares, which is calculated as a
discount to market value at the date of conversion.

(e) As of December 14, 1998, employees of the Company holding approximately 
95% of the stock options outstanding under the Company's 1994 Employee Stock 
Option Plan and its 1993 Stock Option Plan entered into agreements with the 
Company pursuant to which the exercise prices of such options were reduced to 
fair market value of the Common Stock as of such date. Such stock options 
were further amended so that no such option may be exercised until December 
15, 1999.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

At the Special Meeting of Stockholders held on December 28, 1998, the 
stockholders of the Company approved the one for three reverse stock split 
and certain other changes to the Company's Restated Articles of Organization, 
and authorized the issuance of up to 2,500,000 shares (post-split) of Common 
Stock in a private placement. The reverse stock split and other amendments 
were approved by a vote of 6,869,900 in favor, 174,399 against and 16,550 
abstentions. The stock issuance was approved by a vote of 3,359,898 in favor, 
202,116 against and 19,202 abstentions. A more complete description of these 
matters appears in the Company's Proxy Statement dated December 4, 1998. 

ITEM 5. OTHER INFORMATION

As of December 31, 1998, the Company had reached agreement in principle, and
signed a letter of intent, under which the Company would acquire from Finpiave,
S.p.A. its 69% ownership interest in Interleaf Italia S.r.l., which distributes
the Company's products in Italy. Interleaf currently owns the remaining 31% of
Interleaf Italia S.r.l. Since that date, the parties have successfully
negotiated the final terms of the transaction, and the Company expects that the
definitive agreements will be executed, and the transaction consummated, before
the end of February, 1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits


         EXHIBIT NUMBER                            DESCRIPTION

              3(a)                      Restated Articles of Organization of the
                                        Company, as amended (incorporated herein
                                        by reference to the applicable Exhibit
                                        in the Company's Quarterly Report on
                                        Form 10-Q for the quarter ended
                                        September 30, 1997)

              3(b)                      By-Laws of the Company, as amended
                                        (incorporated herein by reference to the
                                        applicable Exhibit to the Company's
                                        Annual Report on From 10-K for the year
                                        ended March 31, 1994)

              4(a)                      Specimen Certificate for Shares of the
                                        Company's Common Stock (incorporated
                                        herein by reference to the applicable
                                        Exhibit to the Company's Registration
                                        Statement on Form S-1, File No. 33-5743)

               11                       Computation of Earnings Per Share
                                        (included as Note 3 to Financial
                                        Statements)


                                      -18-
<PAGE>


               27                       Financial Data Schedule

(b)(1)    Amendment to Current Report on Form 8-K/A was filed by the Company on
          November 12, 1998, providing financial information concerning PDR
          Automated Systems and Publications, Inc., a company acquired by
          Interleaf as reported in the prior quarter.

(2)       A Current Report on Form 8-K was filed by the Company on November 27,
          1998 with respect to the call of the Special Meeting described in Part
          II, Item 4 above.

                                   SIGNATURES

Pursuant to the requirements 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.

February 16, 1999

                                   /s/ Peter J. Rice
                                   ---------------------------------------------
                                   Peter J. Rice,
                                   Vice President of Finance and Administration
                                   and Chief Financial Officer and Treasurer
                                   (Principal Financial and Accounting Officer)



                                      -19-