<PAGE>   1

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

                     U.S. 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 SEPTEMBER 30, 1998

                                       OR

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

                 For the transition period from ______ to ______

                         Commission File Number: 0-28480

                                EDIFY CORPORATION
             (Exact name of Registrant as specified in its charter)

           DELAWARE                                             77-0250992
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)


                            2840 SAN TOMAS EXPRESSWAY
                          SANTA CLARA, CALIFORNIA 95051
                    (Address of principal executive offices)

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

                                 (408) 982-2000
              (Registrant's telephone number, including area code)

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

Indicate by checkmark 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.

                       (1)     Yes  X        No
                                  ------        ------


As of September 30, 1998, there were 17,322,681 shares of the Registrant's
common stock outstanding.


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

<PAGE>   2

EDIFY CORPORATION
FORM 10-Q
INDEX

<TABLE>
<CAPTION>
                                                                                                                     PAGE
PART I               FINANCIAL INFORMATION                                                                          NUMBER
<S>                  <C>                                                                                            <C>

ITEM 1:              Condensed Consolidated Financial Statements (Unaudited)

                     Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997.........     3

                     Condensed Consolidated Statements of Operations for the three and nine months ended
                          September 30, 1998 and 1997.............................................................     4

                     Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
                          1998 and 1997...........................................................................     5

                     Notes to Condensed Consolidated Financial Statements.........................................     6

ITEM 2:              Management's Discussion and Analysis of Financial Condition and Results of Operations........     9

ITEM 3:              Quantitative and Qualitative Disclosures About Market Risk...................................    18



PART II              OTHER INFORMATION

ITEM 1:              Legal Proceedings............................................................................    19

ITEM 2:              Changes in Securities and Use of Proceeds....................................................    19

ITEM 3:              Defaults Upon Senior Securities..............................................................    20

ITEM 4:              Submission of Matters to a Vote of Security Holders..........................................    20

ITEM 5:              Other Information............................................................................    20

ITEM 6:              Exhibits and Reports on Form 8-K.............................................................    20

                     Signatures...................................................................................    21

</TABLE>



                                      -2-
<PAGE>   3



PART I:  FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



                                EDIFY CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,      DECEMBER 31, 
                                                                     1998               1997
                                                                   --------           --------
<S>                                                              <C>                <C>     

                                    ASSETS
Current assets:
    Cash, cash equivalents and short-term investments ...          $ 40,164           $ 43,161
    Accounts receivable, net ............................            21,076             16,668
    Prepaid expenses and other current assets ...........             1,984              1,457
                                                                   --------           --------

           Total current assets .........................            63,224             61,286
Property and equipment, net .............................             7,196              6,953
Other assets ............................................               312                241
                                                                   --------           --------

           Total assets .................................          $ 70,732           $ 68,480
                                                                   ========           ========


                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable ....................................          $  3,121           $  1,062
    Current installments of capital lease obligations ...               327                424
    Accrued expenses ....................................             6,444              6,265
    Accrued intellectual property settlement ............             5,000                 --
    Unearned revenue ....................................             4,213              4,581
                                                                   --------           --------
           Total current liabilities ....................            19,105             12,332
                                                                   --------           --------
Capital lease obligations, excluding current installments               115                340
Commitments and contingencies
Stockholders' equity:
    Common stock ........................................                17                 17
    Additional paid-in capital ..........................            69,035             66,624
    Deferred compensation and other .....................               (88)              (193)
    Accumulated deficit .................................           (17,452)           (10,640)
                                                                   --------           --------
           Total stockholders' equity ...................            51,512             55,808
                                                                   --------           --------

           Total liabilities and stockholders' equity ...          $ 70,732           $ 68,480
                                                                   ========           ========

</TABLE>


See notes to condensed consolidated financial statements.


                                      -3-
<PAGE>   4


                                EDIFY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                   SEPTEMBER 30,              SEPTEMBER 30,
                                                               ----------------------     ----------------------
                                                                 1998          1997         1998          1997
                                                               --------      --------     --------      --------
<S>                                                            <C>           <C>          <C>           <C>     
Net revenues:
  License ................................................     $ 10,087      $  8,742     $ 26,324      $ 23,681
  Services and other .....................................        8,623         5,478       24,005        16,386
                                                               --------      --------     --------      --------
     Total net revenues ..................................       18,710        14,220       50,329        40,067
Cost of license revenues .................................          465           162          987           498
Cost of services and other revenues ......................        6,034         4,136       16,792        12,787
                                                               --------      --------     --------      --------
     Gross profit ........................................       12,211         9,922       32,550        26,782
                                                               --------      --------     --------      --------
Operating expenses:
  Product development ....................................        3,305         2,721        8,723         7,330
  Sales and marketing ....................................        7,918         5,329       22,758        14,803
  General and administrative .............................        1,418         1,160        4,265         3,342
  Intellectual property settlement .......................        5,000            --        5,000            --
                                                               --------      --------     --------      --------
     Total operating expenses ............................       17,641         9,210       40,746        25,475
                                                               --------      --------     --------      --------
     Income (loss) from operations .......................       (5,430)          712       (8,196)        1,307
Interest income, net .....................................          481           476        1,465         1,470
                                                               --------      --------     --------      --------
     Income (loss) before income taxes ...................       (4,949)        1,188       (6,731)        2,777
Provision for income taxes ...............................           26            95           81           224
                                                               --------      --------     --------      --------
     Net income (loss) ...................................     $ (4,975)     $  1,093     $ (6,812)     $  2,553
                                                               ========      ========     ========      ========

Basic net income (loss) per share ........................     $  (0.29)     $   0.07     $  (0.40)     $   0.16
                                                               ========      ========     ========      ========
Shares used in computing basic net income (loss) 
  per share ..............................................       17,252        16,454       17,007        16,356
                                                               ========      ========     ========      ========
Diluted net income (loss) per share ......................     $  (0.29)     $   0.06     $  (0.40)     $   0.14
                                                               ========      ========     ========      ========
Shares used in computing diluted net income 
  (loss) per share .......................................       17,252        18,137       17,007        18,011
                                                               ========      ========     ========      ========

</TABLE>

See notes to condensed consolidated financial statements.



                                      -4-
<PAGE>   5

                                EDIFY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED SEPTEMBER 30,
                                                                                  -------------------------------
                                                                                       1998          1997
                                                                                     --------      --------
<S>                                                                               <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss) ..........................................................     $ (6,812)     $  2,553

    Adjustments to reconcile net income (loss) to net cash provided by 
        (used in) operating activities:
       Depreciation and amortization ...........................................        3,207         2,332

       Amortization of deferred compensation ...................................          105           201

       Changes in operating assets and liabilities:
          Accounts receivable ..................................................       (4,408)       (5,014)

          Prepaid expenses and other current assets ............................         (527)         (482)

          Accounts payable .....................................................        2,059          (351)

          Accrued expenses .....................................................          179           341

          Accrued intellectual property settlement .............................        5,000            --

          Unearned revenue .....................................................         (368)          696
                                                                                     --------      --------

             Net cash provided by (used in) operating activities ...............       (1,565)          276
                                                                                     --------      --------


CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of property and equipment, net ...................................       (3,450)       (3,443)

    Purchases of short-term investments ........................................       (9,022)       (6,391)

    Sales and maturities of short-term investments .............................       11,253        11,999

    Other assets ...............................................................          (71)           --
                                                                                     --------      --------

             Net cash provided by (used in) investing activities ...............       (1,290)        2,165
                                                                                     --------      --------


CASH FLOWS FROM FINANCING ACTIVITIES
    Principal payments under capital lease obligations .........................         (322)         (283)

    Net proceeds from issuance of common stock .................................        2,411         2,272
                                                                                     --------      --------

             Net cash provided by financing activities .........................        2,089         1,989
                                                                                     --------      --------

Increase (decrease) in cash and cash equivalents ...............................         (766)        4,430

Cash and cash equivalents at beginning of period ...............................       31,790        33,704
                                                                                     --------      --------

Cash and cash equivalents at end of period .....................................     $ 31,024      $ 38,134
                                                                                     ========      ========


Supplemental schedule of cash flow information:
    Cash paid during the period for interest ...................................     $     65      $     93

    Cash paid during the period for taxes ......................................     $    170      $     87

Supplemental schedule of noncash investing and financing activities:
    Property and equipment acquired under capital lease obligations ............     $     --      $     35

</TABLE>


See notes to condensed consolidated financial statements.



                                      -5-
<PAGE>   6

                                EDIFY CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(1)        BASIS OF PRESENTATION

           The Company's unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary to fairly state the Company's
financial position, results of operations, and cash flows for the periods
presented. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's Form 10-K for the fiscal year ended December 31, 1997. The results of
operations for the three- and nine-month periods ended September 30, 1998 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 1998. The December 31,
1997 balance sheet was derived from audited consolidated financial statements,
but does not include all disclosures required by generally accepted accounting
principles.

(2)        NET INCOME (LOSS) PER SHARE

           The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" in 1997 and restated all comparative per
share amounts for prior periods. SFAS No. 128 requires the presentation of basic
earnings per share and, for companies with potentially dilutive securities, such
as options, diluted earnings per share.

           Basic earnings per share is computed using the weighted average
number of shares of common stock outstanding. Diluted earnings per share is
computed using the weighted average number of shares of common stock and, when
dilutive, common equivalent shares from options to purchase common stock and
warrants outstanding using the treasury stock method.

           The following table sets forth the computation of net income (loss)
per share (in thousands, except per share data):



                                      -6-
<PAGE>   7


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED          NINE MONTHS ENDED
                                                            SEPTEMBER 30,              SEPTEMBER 30,
                                                      ------------------------     ---------------------
                                                         1998           1997           1998       1997
                                                      -----------      -------     -----------   -------
<S>                                                     <C>            <C>         <C>            <C>    
 
Net income (loss) ...............................       $(4,975)       $ 1,093       $(6,812)    $ 2,553
                                                        =======        =======       =======     =======
 Basic:
  Weighted average common shares outstanding 
     used in computing basic net income (loss) 
     per share ..................................        17,252         16,454        17,007      16,356
                                                        =======        =======       =======     =======
  Basic net income (loss) per share .............       $ (0.29)       $  0.07       $ (0.40)    $  0.16
                                                        =======        =======       =======     =======
 Diluted:
  Weighted average common shares 
     outstanding ................................        17,252         16,454        17,007      16,356
  Dilutive options outstanding ..................            --          1,683            --       1,655
                                                        -------        -------       -------     -------
    Shares used in computing diluted net 
     income (loss) per share ....................        17,252         18,137        17,007      18,011
                                                        =======        =======       =======     =======
  Diluted net income (loss) per share ...........       $ (0.29)       $  0.06       $ (0.40)    $  0.14
                                                        =======        =======       =======     =======
</TABLE>

           As of September 30, 1998, there were options to acquire 3,474,891
shares of common stock with weighted-average exercise prices of $7.17 which
could potentially dilute basic earnings per share in the future but which were
not included in diluted per share results for the three months and nine months
ended September 30, 1998. These options were excluded because the Company
reported an operating loss for the three months and nine months ended September
30, 1998. Therefore, these options would be antidilutive for purposes of this
calculation.

           As of September 30, 1997, there were options to acquire 272,691 and
594,577 shares of common stock with weighted-average exercise prices of $18.17
and $16.38, respectively, in which the exercise price was greater than the
average market price of the common stock for the three-month and nine-month
period ended September 30, 1997. These options were not included in diluted per
share results for the three months and nine months ended September 30, 1997, as
these options would be antidilutive for purposes of this calculation.

           In July 1998, the Board of Directors approved the repricing of all
incentive stock options granted during the period from May 1, 1996 through July
24, 1998. The repricing does not include incentive stock options granted to the
Company's officers or Board of Directors. Employees had the choice of exchanging
any stock options granted from May 1, 1996 through July 24, 1998 for new options
that would have a new exercise price of $8.625, the then current market value
of the Company's stock. Options to purchase 1,096,393 shares of common stock
were exchanged under this option repricing program.

(3)        RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

           In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from 



                                      -7-
<PAGE>   8

changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. This
Statement is effective for annual financial statements for periods beginning
after June 15, 1999. The Company believes that this Statement will not have a
significant impact on its financial condition or results of operations when such
statement is adopted.

(4)         STOCKHOLDER RIGHTS PLAN

           On August 7, 1998, the Board of Directors adopted a stockholder
rights plan designed to protect the long-term value of the Company for its
shareholders during any future unsolicited acquisition attempt. In connection
with the plan, the Board declared a dividend of one preferred share purchase
right for each share of the Company's common stock outstanding on August 14,
1998 (the "Record Date") and further directed the issuance of one such right
with respect to each share of the Company's common stock that is issued after
the Record Date, except in certain circumstances. The rights will expire on
August 10, 2008. The rights are initially attached to the Company's common stock
and will not trade separately. If a person or a group (an "Acquiring Person")
acquires 20 percent or more of the Company's common stock, or announces an
intention to make a tender offer for the Company's common stock, the
consummation of which would result in a person or group becoming an Acquiring
Person, then the rights will be distributed (the "Distribution Date"). After the
Distribution Date, each right may be exercised for one-hundredth of a share of a
newly designated Series A Junior Participating Preferred Stock, par value of
$0.001 per share, at an exercise price of $70.00. The preferred stock has been
structured so that the value of one-hundredth of a share of such preferred stock
will approximate the value of one share of common stock.

(5)        SUBSEQUENT EVENT

           In April 1996, the Company received a letter from Lucent
Technologies, Inc. ("Lucent") inviting the Company to negotiate a license of
Lucent's patents. Lucent asserted that certain of the Company's products
infringe certain of Lucent's patents and offered to license those patents to the
Company for a substantial payment. In November 1997, the Company received a
letter from Lucent in which Lucent made similar assertions with respect to other
patents it holds. The Company believes that it has substantial arguments that
its current products do not violate any valid claims of the Lucent patents
referenced in the April 1996 letter and in the November 1997 letter.

           On November 2, 1998, the Company entered into a patent cross-license
agreement with Lucent, under which each party released the other from claims of
past infringement and settled their patent disputes. Under the cross-license
agreement, Edify paid Lucent a one-time fee and, in addition, will pay future
license fees that are not expected to be material to the Company's results of
operations. In connection with this settlement, the Company recorded a
non-recurring charge of $5 million (approximately $0.29 per basic and diluted
share), which is reflected in the condensed consolidated financial statements
for the three and nine months ended September 30, 1998.


                                      -8-
<PAGE>   9

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

           This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those indicated by the forward-looking statements herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
set forth below in "Factors That May Affect Future Operating Results" as well as
those discussed in the "Business Risks" section included in the Company's Form
10-K for the fiscal year ended December 31, 1997.

RESULTS OF OPERATIONS

NET REVENUES

           Total net revenues were $18.7 million for the quarter ended September
30, 1998 as compared to $14.2 million for the comparable 1997 quarter,
representing an increase of 31.6%. Total net revenues were $50.3 million for the
nine months ended September 30, 1998, an increase of 25.6% as compared to $40.1
million for the same period a year ago. The Company's revenues are principally
derived from software licenses and fees for services, which generally are
charged separately. Revenues are recorded net of reserves for potential product
returns. In the three- and nine-month periods ended September 30, 1998 and 1997,
6% or less of the Company's total net revenues were derived from international
sales. Over time, the Company intends to expand its international operations and
enter additional international markets. International operations entail a number
of risks including those associated with product customization and regulatory
compliance, and there can be no assurance that such expansion will be
successful.

           LICENSE REVENUES. License revenues were $10.1 million for the quarter
ended September 30, 1998 as compared to $8.7 million for the comparable 1997
quarter. License revenues for the nine-month period ended September 30, 1998
were $26.3 million as compared to $23.7 million for the comparable period in
1997. The increases in license revenues were due to an increase in unit volume
as a result of the market's growing awareness and acceptance of Electronic
Workforce, Electronic Banking System, and Employee Service System, increased
follow-on business from existing customers, and expansion of the Company's field
sales force. The Company does not believe that the historical growth rates of
license revenues are indicative of future results.

           SERVICES AND OTHER REVENUES. Services and other revenues consist
primarily of fees from consulting, post-contract customer support and, to a
lesser extent, training and installation services. Services and other revenues
were $8.6 million for the quarter ended September 30, 1998 as compared to $5.5
million for the comparable 1997 quarter. Services and other revenues for the
nine months ended September 30, 1998 were $24.0 million as compared to $16.4
million for the comparable period of 1997. Services and other revenues



                                      -9-
<PAGE>   10
as a percentage of total net revenues increased to 46.1% for the quarter ended
September 30, 1998 from 38.5% for the quarter ended September 30, 1997, and
increased to 47.7% for the nine months ended September 30, 1998 from 40.9% for
the comparable 1997 period. The increase in services and other revenues in
absolute dollars and as a percentage of total net revenues occurred primarily
due to increased demand for consulting services, as well as increases in
post-contract customer support and installation services associated with the
increased installed base of the Company's software. The Company does not expect
historical growth rates of its services revenues to be sustainable. To the
extent services and other revenues is a higher percentage of total net revenues,
overall gross profit margins may be adversely impacted.

COST OF REVENUES

           COST OF LICENSE REVENUES. Cost of license revenues consists primarily
of the cost of product media, product duplication, documentation and royalties
paid to third parties under technology licenses. Cost of license revenues was
$465,000 and $162,000 for the quarters ended September 30, 1998 and 1997,
representing 4.6% and 1.9% of the related license revenues for the respective
quarters. Cost of license revenues was $987,000 for the nine months ended
September 30, 1998 as compared to $498,000 for the comparable 1997 period,
representing 3.7% and 2.1% of the related license revenues for the respective
periods. The increase in the cost of license revenues in absolute dollars and as
a percentage of license revenues for the comparable periods was due primarily to
the costs of third-party technology used for particular customers. If the
Company were required to obtain licenses from or pay royalties to third parties
under patent or other intellectual property rights, the cost of license revenues
could increase significantly.

           COST OF SERVICES AND OTHER REVENUES. Cost of services and other
revenues consists primarily of personnel-related costs and fees for third-party
consultants incurred in providing consulting, post-contract customer support,
training and installation services to customers. Cost of services and other
revenues was $6.0 million and $4.1 million for the quarters ended September 30,
1998 and 1997, representing 70.0% and 75.5% of the related services and other
revenues for the respective quarters. Cost of services and other revenues was
$16.8 million for the nine months ended September 30, 1998 as compared to $12.8
million for the comparable 1997 period, representing 70.0% and 78.0% of the
related services and other revenues for the respective periods. The increase in
absolute dollars for the comparable periods was due primarily to increases in
personnel-related costs as the Company continued to expand its consulting and
customer support organizations. The increase in gross profit margins was due
primarily to increased demand for consulting services, as well as increases in
post-contract customer support and installation services associated with the
increased installed base of the Company's software. The Company does not expect
historical growth rates of its gross profit margins to be sustainable. The cost
of services and other revenues as a percentage of services and other revenues
may vary between periods due to the amount and mix of services provided by the
Company and to varying levels of expenditures to build the services
organizations. Any significant decline in the demand for the Company's
consulting services would have a material adverse impact on the Company's
revenues and, as a result of the under-utilization of consulting personnel, on
the Company's gross profit and results of operations.



                                      -10-
<PAGE>   11

PRODUCT DEVELOPMENT

           Product development expenses were $3.3 million and $2.7 million, or
17.7% and 19.1% of total net revenues, for the quarters ended September 30, 1998
and 1997, respectively. Product development expenses were $8.7 million and $7.3
million, or 17.3% and 18.3% of total net revenues, for the nine-month periods
ended September 30, 1998 and 1997, respectively. Product development expenses
consist primarily of salaries and other related expenses for research and
development personnel, as well as the cost of facilities and depreciation of
capital equipment. The increase in absolute dollars for the comparable periods
was attributable primarily to increased staffing related to the development of
the Company's application products and ongoing enhancements to Electronic
Workforce. The decrease in product development expenses as a percentage of total
net revenues was due primarily to a decrease in the personnel-related costs
associated with the development of the Company's Windows NT-based software,
which was delivered in the fourth quarter of 1997. The Company believes that
significant investments in product development are required to remain
competitive. As a result, the Company expects that product development expenses
will increase in absolute dollars in the future and will not decline
significantly as a percentage of total net revenues from their current levels.

           In accordance with SFAS No. 86, the Company expects to capitalize
eligible computer software development costs upon the achievement of
technological feasibility, subject to net realizable value considerations. The
Company has defined technological feasibility as completion of a working model.
To date, the Company believes its process for developing software was
essentially completed concurrently with the establishment of technological
feasibility, and, accordingly, no software development costs have been
capitalized in the accompanying consolidated balance sheet.

SALES AND MARKETING

           Sales and marketing expenses were $7.9 million and $5.3 million, or
42.3% and 37.5% of total net revenues, for the quarters ended September 30, 1998
and 1997, respectively. Sales and marketing expenses were $22.8 million and
$14.8 million, or 45.2% and 36.9% of total net revenues, for the nine-month
periods ended September 30, 1998 and 1997, respectively. Sales and marketing
expenses consist primarily of salaries and commissions earned by sales and
marketing personnel and promotional expenses. The increase in absolute dollars
and as a percentage of total net revenues for the comparable periods was due
primarily to the expansion of the Company's field and indirect sales operations
and increased marketing activities. The Company expects to continue to expand
its field sales and marketing efforts, its third party value added reseller
("VAR") distribution channel and its operations outside the United States and,
therefore, anticipates that sales and marketing expenditures will increase in
absolute dollars in the future. In addition, sales and marketing expenses as a
percentage of total net revenues may fluctuate between periods due to varying
levels of expenditures to build the sales and marketing organizations.



                                      -11-
<PAGE>   12

GENERAL AND ADMINISTRATIVE

           General and administrative expenses were $1.4 million and $1.2
million, or 7.6% and 8.2% of total net revenues, for the quarters ended
September 30, 1998 and 1997, respectively. General and administrative expenses
were $4.3 million and $3.3 million, or 8.5% and 8.3% of total net revenues, for
the nine months ended September 30, 1998 and 1997, respectively. General and
administrative expenses consist primarily of salaries and other related expenses
of administrative, executive and financial personnel and outside professional
fees. The increase in absolute dollars for the comparable quarter was
attributable primarily to increased infrastructure costs to support the growth
of the Company's business and an increase in the provision for doubtful
accounts. The decrease in general and administrative expenses as a percentage of
total net revenues for the comparable quarter was due primarily to the growth in
total net revenues. The increase in absolute dollars and as a percentage of
total net revenues for the comparable nine-month period was primarily due to
increased infrastructure costs and an increase in the provision for doubtful
accounts. The Company expects to continue to expand its staffing and other items
related to infrastructure and, therefore, anticipates that general and
administrative expenses will increase in absolute dollars in the future.

INTELLECTUAL PROPERTY SETTLEMENT

           Intellectual property settlement represents a non-recurring charge of
$5 million related to the resolution of the Company's patent discussions with
Lucent in November 1998, which was recorded as a subsequent event in the quarter
ended September 30, 1998. See Note 5 of Notes to Condensed Consolidated
Financial Statements for further discussion of this settlement.

INTEREST INCOME, NET

           Interest income, net was $481,000 for the quarter ended September 30,
1998, compared to $476,000 for the quarter ended September 30, 1997. Interest
income, net for each of the nine months ended September 30, 1998 and 1997 was
$1.5 million. For the three and nine months ended September 30, 1998, interest
income, net consists primarily of interest earned from the Company's cash, cash
equivalents, and short-term investments.

PROVISION FOR INCOME TAXES

           The provision for income taxes was $26,000 and $95,000 for the
quarters ended September 30, 1998 and 1997, respectively. The provision for
income taxes was $81,000 and $224,000 for the nine months ended September 30,
1998 and 1997, respectively. For the three and nine months ended September 30,
1998, the provision for income taxes relates primarily to state income and
foreign withholding taxes.



                                      -12-
<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

           At September 30, 1998, the Company's cash, cash equivalents and
short-term investments totaled $40.2 million. At September 30, 1998, the Company
also had available an $8.0 million unsecured revolving bank line of credit
agreement which expires in December 1998 and contains certain financial
covenants, with which the Company was in compliance. Borrowings accrue interest
at the bank's prime rate. As of September 30, 1998, there were no borrowings
outstanding under this line of credit.

           For the nine months ended September 30, 1998, operating activities
used cash of $1.6 million, resulting primarily from the net loss, offset by an
increase in accrued intellectual property settlement. Investing activities used
cash of $1.3 million from the purchase of $3.5 million in property and
equipment, partially offset by the net sale and maturity of $2.2 million in
short-term investments. The Company expects that its capital expenditures will
increase as the Company's employee base grows. Net cash generated from financing
activities of $2.1 million was related primarily to proceeds from the issuance
of the Company's common stock through its Employee Stock Purchase Plan and stock
option exercises.

           At September 30, 1998, the Company's working capital was $44.1
million. The Company has no significant capital spending or purchase commitments
other than normal purchase commitments and commitments under its facilities and
capital leases. The Company believes that its working capital, together with its
bank line of credit and anticipated cash flows from operations, if any, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 12 months.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

           Except for the historical information contained in this Form 10-Q,
the matters discussed herein are forward-looking statements. These
forward-looking statements concern matters which include, but are not limited
to, the sustainability of historical revenue growth rates, the Company's
expected mix of revenues, expected gross margins on license revenues and
services and other revenues, certain expected operating expense levels and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. The revenue levels and results of operations
achieved during the quarter and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be achieved in any future period.
There can be no assurance that the Company will achieve or sustain profitability
or experience growth in revenues in any future quarter. The Company's revenues,
margins and operating results have fluctuated in the past, and are expected to
continue to fluctuate in the future, on an annual and quarterly basis as a
result of a number of factors, such as demand for the Company's products,
including new products and product enhancements, sales force initiatives,
transitions to new products, the mix of products and services sold, the mix of
distribution channels through which the Company's products are sold, customer
order deferrals in anticipation of new products or product enhancements,
purchasing patterns of value added resellers and customers, Company decisions
regarding hiring and other expenses and competitive conditions in the industry.
In particular, the 



                                      -13-
<PAGE>   14

Company plans to increase its operating expenses to expand its sales and
marketing operations, expand its distribution channels, expand its international
operations, fund greater levels of product development, broaden its consulting
services and customer support capabilities and increase its administrative
infrastructure. A relatively high percentage of the Company's expenses is fixed
in the short term as the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenues fall below expectations,
expenditure levels could be disproportionately high as a percentage of total net
revenues, and operating results would be immediately and adversely affected.

           The Company historically has operated with little backlog because its
products are generally shipped as orders are received. As a result, license
revenues in any quarter depend on the volume and timing of, and the Company's
ability to fill, orders received in that quarter. Individual orders for the
Company's products typically are for relatively large dollar amounts. The
Company also believes the purchase of its products is relatively discretionary
and generally involves a significant commitment of capital resources. Therefore,
any downturn in any potential customer's business, or any loss or delay of
individual orders for any reason, could have a significant impact on the
Company's revenues and quarterly results. In addition, because the Company
typically recognizes a substantial portion of its total revenue from
transactions booked and shipped in the last weeks, or even days, of the quarter,
the magnitude of quarterly fluctuations may not become evident until very late
in a particular quarter. Revenues are difficult to forecast because the market
for the Company's products is rapidly evolving.

           Based upon all of the foregoing, the Company believes that its
quarterly revenues, expenses and operating results could vary significantly in
the future and that period-to-period comparisons should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be able to grow in future periods or that it will be able to sustain its
level of total net revenues or increase or sustain its rate of revenue growth on
a quarterly or annual basis. It is likely that, in some future quarters, the
Company's operating results will be below the expectations of stock market
analysts and investors. In such event, the price of the Company's common stock
could be materially adversely affected.

           The Company's future success will depend on its ability to design,
develop, test, sell and support new software products and enhancements of
current products on a timely basis in response to changing customer needs,
competition, technological developments and emerging industry standards.
Versions through 4.x of Electronic Workforce and 1.x of EBS and ESY run on IBM's
OS/2 operating system. In October 1997, the Company released its first version
of Electronic Workforce Release 5 for the Windows NT operating system. In
December 1997, the Company released initial versions of EBS and ESY for NT.
Because these products were released in the past year, many customers licensing
these versions have not yet fully deployed the product and undetected errors may
remain in these versions. The existence of any such errors may delay the release
of future versions and adversely affect the acceptance of these products, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, certain features of the
OS/2 versions of the Company's software are not available on currently available
NT-based versions. Accordingly, the Company is devoting significant engineering
and 



                                      -14-
<PAGE>   15

development resources to develop enhancements to the versions of its products
that run on the Microsoft Windows NT operating system. It is possible that the
newness of or lack of features on the Windows NT-based versions of its products
will cause potential customers to defer or forgo purchases of current or future
versions of these products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will depend upon the timely and successful introduction of new
versions of its Windows NT-based products. There can be no assurance that the
Company will be successful in developing, on a timely basis or at all, fully
featured Windows NT-based versions of its products or that such versions, if
developed, will achieve customer acceptance. Failure by the Company to develop
new Windows NT-based versions successfully and in a timely manner would have a
material adverse effect on the Company's business, financial condition and
results of operations.

           The Company intends to invest a significant majority of its product
development resources on products and product enhancements for the Windows NT
operating system. The Company must manage the effect on its existing OS/2
customers of this focus on the Windows NT operating system. There can be no
assurance that updates to and enhancements for the Company's OS/2-based products
will be sufficient to encourage its OS/2 customers to continue to purchase
additional software or services from the Company. In addition, the Company must
provide its customers with an economically reasonable and technologically
feasible migration path from the OS/2-based products to the NT-based products.
There can be no assurance that the Company's OS/2 customers will migrate to the
Company's NT-based products. The failure of a significant number of its existing
OS/2 customers to purchase additional software or services from the Company, for
any reason, would have a material adverse effect on the Company's business,
operating results and financial condition.

           In April 1996, the Company received a letter from Lucent inviting the
Company to negotiate a license of Lucent's patents. Lucent asserted that certain
of the Company's products infringe certain of Lucent's patents and offered to
license those patents to the Company for a substantial payment. In November
1997, the Company received a letter from Lucent in which Lucent made similar
assertions with respect to other patents it holds. The Company believes that it
has substantial arguments that its current products do not violate any valid
claims of the Lucent patents referenced in the April 1996 letter and in the
November 1997 letter.

           On November 2, 1998, the Company entered into a patent cross-license
agreement with Lucent, under which each party released the other from claims of
past infringement and settled their patent disputes. Under the cross-license
agreement, Edify paid Lucent a one-time fee and, in addition, will pay future
license fees that are not expected to be material to 



                                      -15-
<PAGE>   16

the Company's results of operations. In connection with this settlement, the
Company recorded a non-recurring charge of $5 million (approximately $0.29 per
basic and diluted share), which is reflected in the condensed consolidated
financial statements for the three and nine months ended September 30, 1998.

           In the future, the Company may receive additional communications from
other parties asserting that the Company's products, trademarks or other
proprietary rights require a license of intellectual property rights or
infringe, or may infringe, on their property rights. As the number of software
products in the industry increases, and the functionality of these products
further overlaps, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation to determine the validity of any claims could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel from productive tasks, whether or not such litigation is
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. The failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.

           An integral part of the Company's strategy is to develop multiple
distribution channels, including a field sales force, VARs and OEMs. The Company
intends to increase its reliance on third-party distribution partners in the
future. The Company is expending and intends to continue to expend significant
resources to develop the VAR channel. VARs and OEMs are not, however, subject to
any minimum purchase or resale requirements and can cease marketing the
Company's products at any time. Certain VARs and OEMs may offer competing
products that they produce or that are produced by third parties. There can be
no assurance that the Company's existing VARs will continue to provide the level
of services and technical support necessary to provide a complete self service
solution to the Company's customers, that they will transition smoothly to sales
of new products or enhancements of existing products or that they will not
emphasize their own or third-party products to the detriment of the Company's
products. The loss of VARs, the failure of such parties to perform under
agreements with the Company or the inability of the Company to attract and
retain new VARs with the technical, industry and application expertise required
to market the Company's products successfully in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations. To the extent that the Company is successful in
increasing its sales through VARs, those sales will be at discounted rates, and
revenue to the Company for each such sale will be less than if the Company had
licensed the same products to the customer directly.



                                      -16-
<PAGE>   17

           Many currently installed computer systems and software products are
coded to accept two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.

           The Company is currently taking steps to address Year 2000 issues in
the following three areas: (1) the Company's products; (2) internal systems; and
(3) readiness of third party vendors and business partners. The Company has
assigned a Year 2000 project team to develop and implement the Year 2000
readiness effort for its domestic operations. The project has executive
sponsorship and is regularly reviewed by senior management, the Board of
Directors, and the Audit Committee.

           The Company has designed and tested its current products to be Year
2000 compliant. However, since all customer situations cannot be anticipated,
particularly those involving third party products, the Company may see an
increase in warranty and other claims as a result of the Year 2000 transition.
As such, the impact of customer claims could have a material adverse impact on
the Company's business, financial condition and results of operations.

           The Company's internal systems include both information technology
systems such as financial and order entry systems and non-information technology
systems such as telephones and facilities. In August 1998, the Company completed
the installation of a Year 2000 compliant enterprise resource planning ("ERP")
system, which includes the Company's order entry, project accounting, and
financial systems. The Company expects to resolve remaining Year 2000 compliance
issues substantially through normal replacement and upgrades of software by June
1999. In the first quarter of 1999, the Company will initiate a comprehensive
inventory and evaluation of all desktop systems and expects to complete this
process by April 1999. The additional costs of remediation are not expected to
be material to the Company's financial condition or results of operations.
However, if significant new non-compliance issues are identified, the Company's
business, financial condition and results of operations could be materially
adversely affected.

           Finally, the Company is in the process of sending detailed
questionnaires to critical suppliers and business partners to certify Year 2000
compliance. The Company anticipates this process to be completed by December
1998. Where practicable, the Company will attempt to mitigate its risk with
respect to the failure of suppliers and business partners to be Year 2000 ready.
However, such failures remain a possibility and could have an adverse impact on
the Company's business, financial condition and results of operations.

           The Company has estimated a preliminary budget of approximately
$300,000 for investigating and remedying issues related to Year 2000 compliance
involving software or systems used in its internal operations. Costs that have
already been incurred to replace and upgrade software and services  in the
Company's ordinary course of business are not included in the estimated budget.
While the Company has dedicated substantial resources towards attaining Year
2000 compliance, there can be no assurance that the Company's Year 2000
compliance program will be completed on a timely basis. In 



                                      -17-
<PAGE>   18

addition, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality or that the Company will
not incur substantial costs to avoid such limitations. Any failure to
effectively monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, even if the Company's products are Year
2000 compliant, other systems or software used by the Company's customers may
not be Year 2000 compliant. The failure of such non-compliant third-party
software or systems could affect the perceived performance of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The most likely worst case
scenarios would include hardware failure and the failure of infrastructure
services provided by government agencies, systems vendors, and other third
parties (e.g., electricity, telephone service, water transport, internet
services, etc.). The Company is in the process of completing its contingency
planning for high risk areas at this time and is scheduled to commence
contingency planning for medium to low risk areas in by the end of the fiscal
year. The Company expects its contingency plans to include, among other things,
manual "work-arounds" for software and hardware failures, as well as
substitution of systems, if necessary.

           In addition to the factors discussed above, among the other factors
that could cause actual results to differ materially are the following: demand
for and market acceptance of application products; the Company's ability to
deliver on time, and market acceptance of, new products or upgrades of existing
products; customer order deferrals in anticipation of new products; the timing
of, or delay in, large customer orders; continued availability of technology and
intellectual property license rights; changes in the mix of distribution
channels through which the Company's products are offered; competitive
conditions in the industry; risks associated with global operations; general
economic conditions; and the "Business Risks" listed from time to time in
reports that the Company files with the U.S. Securities and Exchange Commission,
including but not limited to the Company's Form 10-K for the fiscal year ended
December 31, 1997.


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           Not applicable.



                                      -18-
<PAGE>   19

PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

           None.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

           On August 7, 1998, the Board of Directors adopted a stockholder
           rights plan designed to protect the long-term value of the Company
           for its shareholders during any future unsolicited acquisition
           attempt. In connection with the plan, the Board declared a dividend
           of one preferred share purchase right for each share of the Company's
           common stock outstanding on August 14, 1998 (the "Record Date") and
           further directed the issuance of one such right with respect to each
           share of the Company's common stock that is issued after the Record
           Date, except in certain circumstances. The rights will expire on
           August 10, 2008. The rights are initially attached to the Company's
           common stock and will not trade separately. If a person or a group
           (an "Acquiring Person") acquires 20 percent or more of the Company's
           common stock, or announces an intention to make a tender offer for
           the Company's common stock, the consummation of which would result in
           a person or group becoming an Acquiring Person, then the rights will
           be distributed (the "Distribution Date"). After the Distribution
           Date, each right may be exercised for one-hundredth of a share of a
           newly designated Series A Junior Participating Preferred Stock, par
           value of $0.001 per share, at an exercise price of $70.00. The
           preferred stock has been structured so that the value of
           one-hundredth of a share of such preferred stock will approximate the
           value of one share of common stock.

           Upon a person or group becoming an Acquiring Person, holders of the
           rights (other than the Acquiring Person) will have the right to
           acquire shares of the Company's common stock at a substantially
           discounted price. Additionally, if a person or group becomes an
           Acquiring Person and the Company is acquired in a merger or other
           business combination, or 50 percent or more of its assets are sold in
           a transaction with an Acquiring Person, the holders of rights (other
           than the Acquiring person) will have the right to receive shares of
           common stock of the acquiring corporation at a substantially
           discounted price.

           Subsequent to a person or group becoming an Acquiring Person, the
           Company's Board of Directors may, at its option, require the exchange
           of outstanding rights (other than those held by the Acquiring Person)
           for common stock at an exchange ratio of one share of the Company's
           common stock per right. The Company's Board may redeem outstanding
           rights at any time prior to a person or group becoming an Acquiring
           Person at a price of $0.001 per right. Prior to such time, the terms
           of the rights may be amended by the Board.



                                      -19-
<PAGE>   20

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

           Not applicable.

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

           Not applicable.

ITEM 5.   OTHER INFORMATION

           Not applicable.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

         (a)      The following exhibits are being filed as part of this Report:

                  3.01     Certificate of Designations (Series A Junior
                           Participating Preferred Stock (1)

                  3.02     Bylaws of the Company, as amended and restated
                           effective August 7, 1998 (2)

                  4.01     Rights Agreement dated August 10, 1998, between the
                           Company and BankBoston, N.A., as Rights Agent, which
                           includes as Exhibit A the form of Certificate of
                           Designations of Series A Junior Participating
                           Preferred Stock, as Exhibit B the Form of Right
                           Certificate and as Exhibit C the Summary of Rights to
                           Purchase Preferred Shares (3)

         (b)      Reports on Form 8-K:

                  On August 11, 1998, the Company filed a Form 8-K to report
                  under Item 5 its adoption of a stockholder rights plan and
                  amendment of its Bylaws. No financial statements were filed.


-----------

         (1)      Incorporated by reference to Exhibit 3.2 to Registrant's
                  Registration Statement on Form 8-A (No. 000-28480), filed on
                  August 11, 1998.

         (2)      Incorporated by reference to Exhibit 3.1 to Registrant's
                  Current Report on Form 8-K (No. 000-28480), filed on August
                  11, 1998.

         (3)      Incorporated by reference to Exhibit 4.1 to Registrant's
                  Registration Statement on Form 8-A (No. 000-28480), filed on
                  August 11, 1998.


                                      -20-
<PAGE>   21

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.

                              EDIFY CORPORATION




Date: November 13, 1998       By:  /s/  Stephanie A. Vinella
                                   ---------------------------------------------
                                   Stephanie A. Vinella
                                   Vice President of Finance and Administration,
                                   Chief Financial Officer and Secretary




                                      -21-
<PAGE>   22

EDIFY CORPORATION
FORM 10-Q
EXHIBIT INDEX


<TABLE>
<CAPTION>
                     EXHIBITS
<S>                  <C>
27.01                Financial Data Schedule

</TABLE>


                                      -22-