<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

              FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996

                        COMMISSION FILE NUMBER 0-14713


                                   [LOGO]

                               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                     02154
 (Address of principal executive offices)               (Zip Code)


                                 (617) 290-0710
             (Registrant's telephone number, including area code)



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


                       APPLICABLE ONLY TO CORPORATE ISSUERS


  The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of February 4, 1997 was 17,459,219.


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<PAGE>


                                 Interleaf, Inc.

                                TABLE OF CONTENTS



                                                                           Page
                                                                           ----

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Consolidated balance sheets at December 31, 1996 and March 31, 1996 ........ 3

Consolidated statements of operations for the three and nine months
ended December 31, 1996 and 1995 ........................................... 4

Consolidated statements of cash flows for the nine months ended
December 31, 1996 and 1995 ................................................. 5

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

Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 9

PART II - OTHER INFORMATION

Item 5 - Other Information ................................................ 13

Item 6 - Exhibits and Reports on Form 8-K ................................. 13

SIGNATURE ................................................................. 13

                                      2
<PAGE>

                                 Interleaf, Inc.

                        PART I - FINANCIAL INFORMATION
                         ITEM 1. FINANCIAL STATEMENTS

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                          December 31, 1996    March 31, 1996
In thousands, except for share and per share amounts                         (unaudited)
<S>                                                                       <C>                  <C>

                                                    ASSETS

Current Assets
Cash and cash equivalents                                                    $  13,738           $  12,725
Accounts receivable, net                                                        17,772              19,771
Prepaid expenses and other current assets                                        1,702               2,112
                                                                             ---------           ---------
Total current assets                                                            33,212              34,608
Property and equipment, net                                                      6,679               7,800
Intangible assets                                                                4,684               6,164
Other assets                                                                       545                 344
                                                                             ---------           ---------
Total assets                                                                 $  45,120           $  48,916
                                                                             ---------           ---------
                                                                             ---------           ---------

                                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable                                                             $  2,104             $  2,908
Accrued expenses                                                               16,187               13,252
Unearned revenue                                                               14,734               15,986
Other current liabilities                                                       6,723                1,348
                                                                            ---------            ---------
Total current liabilities                                                      39,748               33,494
Other liabilities                                                                 188                    3
                                                                            ---------            ---------
Total liabilities                                                              39,936               33,497
                                                                            ---------            ---------

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, issued and outstanding 861,911
     at December 31, 1996 and 923,304 at March 31, 1996                            87                   92
     Series C Convertible Preferred Stock, issued and outstanding
     1,004,904 at December 31, 1996 and -0- at March 31, 1996                     100                    -

Common stock, par value $.01 per share, authorized
     30,000,000 shares, issued and outstanding 17,459,219 at December 31,
     1996 and 16,697,988 at March 31, 1996                                        174                  167
Additional paid-in capital                                                     85,505               72,348
Retained earnings (deficit)                                                   (80,594)             (56,958)
Cumulative translation adjustment                                                 (88)                (230)
                                                                            ---------            ---------
Total shareholders' equity                                                      5,184               15,419
                                                                            ---------            ---------
Total liabilities and shareholders' equity                                  $  45,120            $  48,916
                                                                            ---------            ---------
                                                                            ---------            ---------
</TABLE>
                    See notes to consolidated financial statements 

                                      3
<PAGE>
                                 Interleaf, Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                Three months ended December 31     Nine months ended December 31
                                                     1996           1995               1996           1995
In thousands, except for per share  amounts       (unaudited)    (unaudited)        (unaudited)    (unaudited)
<S>                                             <C>              <C>               <C>             <C>

Revenues:
Products                                           $  4,296       $  7,915           $  15,955      $  26,625
Maintenance                                           6,903          7,932              21,785         24,123
Services                                              4,149          5,408              13,247         16,945
                                                    -------        -------            --------       --------
Total Revenues                                       15,348         21,255              50,987         67,693
                                                    -------        -------            --------       --------
Costs of revenues:
Products                                              1,416          1,598               4,569          4,822
Maintenance                                           1,159          1,300               3,758          3,983
Service                                               3,931          4,474              12,493         14,050
                                                    -------        -------            --------       --------
Total costs of revenues                               6,506          7,372              20,820         22,855
                                                    -------        -------            --------       --------
Gross Margin                                          8,842         13,883              30,167         44,838
                                                    -------        -------            --------       --------
Operating Expenses:
Selling, general and administrative                   8,964          9,545              30,868         31,398
Research and development                              3,227          3,992              11,802         11,849
Write-down of intangible assets                       2,288              -               2,288              -
Restructuring expense                                 3,700              -               8,500              -
                                                    -------        -------            --------       --------
Total operating expenses                             18,179         13,537              53,458         43,247
                                                    -------        -------            --------       --------
Income (loss) from operations                        (9,337)           346             (23,291)         1,591

Other income (expense)                                 (172)           113                (345)           262
                                                    -------        -------            --------       --------
Income (loss) before income taxes                    (9,509)           459             (23,636)         1,853
Provision for income taxes                                -             30                   -             30
                                                    -------        -------            --------       --------
Net income (loss)                                   $(9,509)       $   429            $(23,636)      $  1,823
                                                    -------        -------            --------       --------
                                                    -------        -------            --------       --------
Net income (loss) per share                         $ (0.54)       $  0.02            $  (1.37)      $   0.10
                                                    -------        -------            --------       --------
                                                    -------        -------            --------       --------
Shares used in computing net 
  income (loss) per share                            17,459         18,874              17,306         18,382
                                                    -------        -------            --------       --------
                                                    -------        -------            --------       --------
</TABLE>

                 See notes to consolidated financial statements

                                      4
<PAGE>

                                Interleaf, Inc.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                           
                                                            Nine months ended
                                                              December 31
                                                           1996         1995
In thousands                                                  (unaudited)

Cash Flows from Operating Activities
Net income (loss)                                        $(23,636)     $ 1,823
Adjustments to reconcile net income (loss)
  to net cash provided by
  (used in) operating activities:
Restructuring expense                                       8,500            -
Write-down of intangible assets                             2,288            -
Gain from settlement of legal dispute                           -       (1,230)
Depreciation and amortization expense                       5,880        5,833
Changes in assets and liabilities:
    Decrease in accounts receivable, net                    2,356        2,399
    Decrease in other assets                                  740          448
    Increase (decrease) in accounts payable 
       and accrued expenses                                 1,335         (189)
    Decrease in unearned revenue                           (1,294)      (1,465)
    Decrease in other liabilities                          (3,099)      (2,220)
Other, net                                                     70           (4)
                                                         --------      -------
    Net cash provided by (used in) operating activities    (6,860)       5,395
                                                         --------      -------

Cash Flows from Investing Activities
Capital expenditures                                       (1,796)        (811)
Capitalized software development costs                       (887)      (3,452)
                                                         --------      -------
    Net cash used in investing activities                  (2,683)      (4,263)
                                                         --------      -------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock                  1,250        2,655
Net proceeds from issuance of convertible 
   preferred stock                                          9,382            -
Repayment of long-term debt and capital leases                 (8)      (1,680)
                                                         --------      -------
    Net cash provided by financing activities              10,624          975
                                                         --------      -------

Effect of exchange-rate changes on cash                       (68)        (114)
                                                         --------      -------
Net increase (decrease) in cash and cash equivalents        1,013        1,993

Cash and cash equivalents at beginning of period           12,725       10,441
                                                         --------      -------
Cash and cash equivalents at end of period               $ 13,738      $12,434
                                                         --------      -------
                                                         --------      -------

                    See notes to consolidated financial statements 

                                      5
<PAGE>


                               Interleaf, Inc.

                  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." Certain 
    1995 amounts have been reclassified to conform to the 1996 method of 
    presentation.

    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, 1996.

2.   Net 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.
    
3.   The Learning Alliance
    
    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 market 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 have been included in the consolidated 
    financial statements since the date of the acquisition. Pro forma 
    presentations have not been included as the acquisition was not material 
    to the results of operations of the Company. 

                                       6
<PAGE>

                               Interleaf, Inc.


4.   Noncash Financing Activities

    Senior Series B Convertible Preferred Stock holders converted 61,393 and 
    805,269 shares of preferred stock into 82,496 and 1,082,081 shares of 
    the Company's common stock during the nine months ended December 31, 
    1996 and 1995, respectively. The Company issued 366,113 shares of common 
    stock, during the nine months ended December 31, 1995, in connection 
    with the exercise of a warrant. The Company received no proceeds upon 
    the conversion of the warrant into common stock.
    
5.   Credit Agreement
    
    The Company has a revolving line of credit of 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 credit agreement expires in May 1997.  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 
    December 31, 1996, 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 December 31, 1996, 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 
    was approximately $1.9 million. In January 1997, the Company received 
    notification that the lender does not plan to extend the line of credit 
    beyond May 1997. If the Company is unable to extend this financing 
    facility, the commercial lender will call the letter of credit. The Company
    will then have to pay $800,000 to the lessor of the computer equipment.

6.   Restructuring

    In July 1996, 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. Cash outlays are anticipated to be 
    approximately $4.1 million of the total $4.8 million restructuring 
    charge and will require lease payments through December 2000. 
    Approximately $1.3 million of the restructuring charge was for employee 
    termination benefits and $3.5 million for other exit costs, primarily 
    related to facility leases.
    
    In October 1996, the Company announced a restructuring plan and recorded 
    a charge of $3.7 million to further reduce employment by approximately 
    100 people and to close or reduce space in six sales offices. The 
    employee terminations affected all groups throughout the organization. 
    
    During the nine months ended December 31, 1996, the Company paid 
    approximately $2.2 million for employee termination benefits and 
    approximately $1.0  million, net of sublease receipts, for other exit 
    costs related to the 1996 and 1995 restructurings. 

                                      7
<PAGE>

                               Interleaf, Inc.

7.   Shareholders' Equity

    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. The Company received net proceeds of approximately 
    $9.4 million which is being used for working capital and general 
    corporate purposes. 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.
    
    On September 12, 1996, the Board of Directors authorized a repricing 
    program which allows 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 2.3 million shares are eligible to be repriced.
    
8.   Contingencies

    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 December 31, 1996 is restricted for 
    potential payment of the German withholding taxes. The Company believes 
    the final outcome will not have a material adverse effect on results of 
    operations of the Company. 
    
                                      8
<PAGE>

                                  Interleaf, Inc.
                                           
                                       ITEM 2.

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

Results of Operations

Overview

The Company recorded a net loss of approximately $9.5 million, on total 
revenues of $15.3 million, for the third quarter and a net loss of 
approximately $23.6 million, on total revenues of $51.0 million, for the nine 
months ended December 31, 1996. This compares with net income of 
approximately $0.4 million, on total revenues of $21.3 million, for the third 
quarter and net income of approximately $1.8 million, on total revenues of 
$67.7 million, for the nine months ended December 31, 1995. As a result of 
the significant decline in revenues, the Company initiated two restructuring 
plans, in July 1996 and October 1996, to reduce worldwide employment and 
facility costs. A $4.8 million restructuring charge was recorded in July 1996 
and a restructuring charge of $3.7 million was recorded during the third 
quarter of fiscal 1997. Combined, these restructurings reduced employment by 
approximately 175 people, approximately one-third of the Company's worldwide 
workforce prior to the July restructuring. The Company has also closed or 
reduced space in 12 sales offices and is implementing the final stage of 
relocating its corporate offices to smaller and less expensive space. (See, 
Note 6 to the Consolidated Financial Statements).

In addition, during the end of the third quarter and beginning of the fourth 
quarter, a new senior management team has been installed, including a new 
President and Chief Financial Officer. The new team will continue to review 
and assess the Company's global operation, which may result in further 
consolidation. In connection therewith, in the third quarter the Company 
decided to divest itself of The Learning Alliance which was sold in January 
1997.

Revenues

Total revenues decreased approximately $5.9 million (28%) and $16.7 million 
(25%) for the third quarter and nine months ended December 31, 1996, when 
compared with the same periods a year ago. Revenue has declined in all 
geographic regions. Product revenue declined significantly during these 
periods as sales of the Company's stand-alone products continue to decrease. 
The Company is refocusing its business strategy on providing document 
management applications targeted toward specific vertical markets. While the 
Company has built well-accepted integrated document management ("IDM") based 
solutions for individual customers, it has not yet demonstrated the ability 
to develop, market and sell IDM 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 revenue, resulting from contracts to provide telephone support 
and upgrades to the Company's software products, declined approximately 13% 
and 10% during the third quarter and nine months ended December 31, 1996, 
respectively, when compared with the same periods a year ago. Services 
revenue, consisting of consulting and customer training revenue, decreased 
approximately 23% and 22% for the third quarter and nine months ended 
December 31, 1996, respectively, when compared with the same periods a year 
ago. The Company leverages software product licensing with services to 
provide IDM solutions to its customers.  In fiscal 1996, the Company had 
several large consulting projects, which were completed during early fiscal 
1996, that have not been replaced with similar sized projects. This was 
primarily attributable to the decline in product licensing over the past few 
quarters. 

                                      9
<PAGE>

                               Interleaf, Inc.


Costs of Revenues

Cost of product were flat in the current period and year-to-date when 
compared with prior year periods as increased amortization of capitalized 
software development costs was offset by lower direct product costs 
associated with the decrease in product license revenue. Because of the 
decline in product revenues, however, cost of product revenues increased as a 
percentage of product revenues to 33% and 29% for the third quarter and nine 
months ended December 31, 1996, respectively, compared with approximately 20% 
and 18% for the corresponding periods in the prior year. Cost of maintenance 
revenues remained relatively stable in both  amount and as a percentage of 
maintenance revenues relative to the prior year. Cost of services revenue 
decreased primarily as a result of a decline in services personnel. However, 
cost of services revenue increased as a percentage of services revenue to 
approximately 95% and 94% for the third quarter and nine months ended 
December 31, 1996, respectively, compared with approximately 83% for both the 
corresponding periods in the prior year, as the decline in services revenue 
discussed above was only partially offset by the decline in services 
personnel.

Operating Expenses

Selling, general and administrative ("SG&A") expenses decreased slightly from 
the prior year primarily due to the restructurings discussed previously. 
Because of the decrease in total revenues, SG&A expenses increased as a 
percentage of total revenues to approximately 58% and 61% for the third 
quarter and nine months ended December 31, 1996, respectively, compared with 
approximately 45% and 46% for the corresponding periods in the prior year. 
SG&A expenses are expected to decrease further as a result of the fiscal 1997 
restructurings.

Research and development ("R&D") expenses decreased slightly from the prior 
year primarily due to lower personnel expenses. For the third quarters ended 
December 31, 1996 and 1995, R&D expenses were approximately 21% and 19%, 
respectively, of total revenues. For the nine months ended December 31, 1996 
and 1995, R&D expenses were approximately 23% and 18%, respectively, of total 
revenues. The Company's product development plans are to focus on IDM-based 
product offerings as well as enhancements to existing products. R&D spending 
is expected to decline further as a result of the fiscal 1997 restructurings.

Liquidity and Capital Resources

The Company had approximately $13.7 million of cash and cash equivalents at 
December 31, 1996, an increase of approximately $1.0 million from March 31, 
1996. The increase was primarily attributable to the Company's sales of 
convertible preferred stock (see below) which generated $9.4 million and 
common stock which generated $1.2 million, offset by negative cash flow from 
operations during the first nine months of fiscal 1997 and payments 
associated with the July and October 1996 restructurings. In addition, a 
large portion of the maintenance fees for calender 1997 were collected in 
December 1996. Capital expenditures of approximately $1.8 million were 
principally for improvements to the Company's information system 
infrastructure.  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 December 31, 1996, the Company had approximately $1.1 
million of cash restricted for potential payment of German withholding taxes, 
and approximately $0.3 million as collateral for various lease commitments.

As part of the Company's 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-down of certain intangible 
assets which had been recorded in connection with acquisition (See, Note 3 to 
the Consolidated Financial Statements for further discussion). 

                                      10
<PAGE>

                               Interleaf, Inc.

Total accrued restructuring charges associated with both the fiscal 1995 and 
1996 restructurings were approximately $6.7 million at December 31, 1996. Cash
payments related to these restructurings are anticipated to continue until
December 2000.

The Company has a revolving line of credit from a major commercial lender. 
Borrowings from the line of credit are secured by substantially all tangible 
and intangible domestic assets of the Company. At December 31, 1996, there 
were no outstanding borrowings under this line of credit, but a letter of 
credit in the amount of approximately $800,000 was issued and, therefore, the 
amount available for borrowings was approximately $1.9 million (See, Note 5 
to the Consolidated Financial Statements regarding borrowing limits and 
restrictive covenants associated with the credit agreement). The Company has 
received notification that the lender does not plan to extend the line of 
credit beyond May 1997. If the Company is unable to extend this line of 
credit, or secure other financing, the Company will be required to pay 
approximately $800,000, the amount of the outstanding letter of credit.

In October 1996, the Company sold Series C Convertible Preferred Stock 
("Series C") in a private placement resulting in net proceeds of 
approximately $9.4 million (See, Note 7 to the Consolidated Financial 
Statements for further discussion). 

The objectives of the Company's two restructurings in the last six months and 
the Series C private placement were to enable the Company to return to a 
sustainable profitable condition. However, due to the uncertainty among the 
Company's customers and employees created by the Company's restructurings, 
along with the downward trend in the Company's revenue, the Company is unable 
to predict its future revenue. The Company will continue to closely monitor 
revenue and manage its expenses and cost structure accordingly. While the 
Company believes its current cash position will meet the Company's liquidity 
needs for the remainder of fiscal 1997, the Company can fund its longer term 
ongoing business operations only by increasing revenues, combined with 
tightly managed cost controls. If the Company's cash resources are 
insufficient to fund its operations at any time, there can be no assurance 
that the Company will be able to obtain additional capital or, if it does so, 
that such capital can be obtained at commercially reasonable terms or without 
incurring substantial dilution to existing shareholders.

The Company has retained the investment banking firm Hambrecht & Quist LLC to 
assist it in exploring long-term strategic alternatives.

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 management software products and 
services that meet the changing needs of organizations with complex document 
management requirements. There are numerous risks associated with this 
process, including the uncertainty among customers and employees created by 
the Company's recent financial difficulties, the appointment of new senior 
management, rapid technological change in the information technology industry 
and the requirement to bring to market IDM solutions that solve complex 
business needs in a timely manner. In addition, the existing document 
publishing, electronic distribution, and document management markets are 
highly competitive. The Company competes against a number of companies for 
sales of its software products on both an individual product basis and 
integrated with services in large IDM solution sales.

Sales cycles associated with IDM solution sales are long as organizations 
frequently require the Company to solve complex business problems which 
typically involve reenginering 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 are 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 will have a significant impact on the Company's operating results and 
liquidity. 

                                      11
<PAGE>

                               Interleaf, Inc.


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 economic conditions and other factors 
external to the Company.

                                      12
<PAGE>

                               Interleaf, Inc.

                          PART II - OTHER INFORMATION
                                           
Item 5. Other Information

Effective November 15, 1996, the Company's Board of Directors ("Board") 
accepted the resignation of Ed Koepfler as its President and Chief Executive 
Officer and elected Rory J. Cowan as its President and Chief Executive 
Officer on an interim basis. Effective January 24, 1997, the Board elected 
Jaime W. Ellertson President and Chief Executive Officer and accepted Rory J. 
Cowan's resignation.

Effective January 2, 1997 the Board appointed Robert R. Langer  as Vice 
President of Finance and Administration, Treasurer, and Chief Financial 
Officer and Principal Financial and Accounting Officer, and accepted the 
resignation of Robert M. Stoddard from these positions.

On November 15, 1996, the Board accepted the resignation of Stan Douglas, as 
the Company's Vice President of Engineering Operations, and on February 3, 
1997 the Board accepted the resignation of Robert T. Maher, as Vice President 
of Engineering.

Item 6. Exhibits and Reports on Form 8-K

  (a)  The exhibits listed in the accompanying Exhibit Index
       are filed as part of this Quarterly Report on Form
       10-Q.
  (b)  No reports were filed on Form 8-K by the Company
       during the quarter ended December 31, 1996.


                                        
                                  SIGNATURE
                                           
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.                           


                                INTERLEAF, INC.                     
February 13, 1997
                                           
                                /s/ Robert R. Langer     
                                ---------------------------------
                                Robert R. Langer
                                Vice President of Finance and Administration
                                and Chief Financial Officer 
                                (Principal Financial and Accounting Officer) 

                                      13
<PAGE>


                                 INTERLEAF, INC.
                                  EXHIBIT INDEX
                                           

Exhibit
Number                              Description                Method of Filing
--------                            -----------                ----------------

3(a)       Restated Articles of Organization of the Company,
           as amended                                               Included

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

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

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

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, as amended    [xiii]

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

                                      14
<PAGE>


Exhibit
Number                        Description                      Method of Filing
--------                      -----------                      ----------------

10(r)      Letter Agreement between the Company and Robert M.
           Stoddard, as the Company's then Vice President of 
           Finance and Administration, and Chief Financial 
           Officer, dated November 11, 1996.                       Included

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

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

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


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

10(w)      Resignation Agreement and Release and 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.                             Included

10(w1)     Resignation Agreement and Release and Employment 
           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.              Included

10(x)      Resignation Agreement and Release and Employment 
           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.              Included

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

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

11         Computation of Earnings Per Share                        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.

[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.

                                       15
<PAGE>

                                 INTERLEAF, INC.

[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. 


                                      16