<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

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


                         Commission File Number: 0-10902


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

                  MICHIGAN                                    38-1857379
         (State or other jurisdiction of                   (I.R.S. Employer
         incorporation or organization)                   identification No.)

                 5855 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
                    (Address of principal executive offices)

                                 (734) 769-5900
              (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. [ X ] Yes [ ] No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

         Common Stock, no par value, 4,469,626 shares as of February 1, 1999.
<PAGE>   2
                             INTERFACE SYSTEMS, INC.

                                    FORM 10-Q

                                      INDEX


                                                                       Page No.
PART I - FINANCIAL INFORMATION

     Item 1.  Financial Statements:
              
              Consolidated Balance Sheets at December 31, 1998
                 and September 30, 1998                                  3

              Consolidated Statements of Operations for the Quarters
                 Ended December 31, 1998 and 1997                        4

              Consolidated Statements of Cash Flows for the
                 Quarters Ended December 31, 1998 and 1997               5

              Notes to Consolidated Financial Statements                 6

     Item 2. Management's Discussion and Analysis 
     of Financial Condition and Results of Operations                    7


PART II - OTHER INFORMATION

     Item 6. Exhibits and Reports on Form 8-K                           11


SIGNATURES                                                              12

                                       2
<PAGE>   3
PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

                    INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                       December 31,           September 30,
                                                                           1998                   1998 
                                                                       ------------           -------------
                                                                        (unaudited)
<S>                                                                    <C>                    <C>
                                              ASSETS
Current assets:
   Cash and cash equivalents                                           $  1,257,742           $    128,234
   Accounts receivable, net                                               3,264,864              3,892,511
   Refundable income taxes                                                   36,357              1,507,634
   Inventories                                                            1,648,959              2,218,887
   Other current assets                                                     118,871                166,985
   Current assets of discontinued operations                                437,652                519,753
                                                                       ------------           ------------
          Total current assets                                            6,764,445              8,434,004
Property and equipment, net                                               3,374,249              3,443,349
Goodwill, net                                                               928,451                974,888
Software development costs, net                                              67,912                 90,549
Other assets                                                                217,889                234,280
                                                                       ------------           ------------
                                                                       $ 11,352,946           $ 13,177,070
                                                                       ============           ============

                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                    $  1,071,751           $  1,392,146
   Accrued expenses                                                         660,130                877,359
   Deferred revenue                                                         681,144                684,406
   Notes payable                                                              --                 1,350,000
   Current portion of long-term debt                                         50,200                 50,200
   Current liabilities of discontinued operations                           673,386                789,581
                                                                       ------------           ------------
          Total current liabilities                                       3,136,611              5,143,692

Long-term debt                                                              108,133                120,633
Stockholders' equity:
   Common stock, no par value, 12,500,000 shares authorized;
     4,469,626 and 4,452,349 shares issued and outstanding at
     December 31, 1998 and September 30, 1998, respectively              11,103,866             11,059,810
   Cumulative translation adjustment                                        (38,521)               (59,824)
   Accumulated deficit                                                   (2,957,143)            (3,087,241)
                                                                       -------------          -------------
          Total stockholders' equity                                      8,108,202              7,912,745
                                                                       ------------           ------------
                                                                       $ 11,352,946           $ 13,177,070
                                                                       ============           ============
</TABLE>

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

                                       3
<PAGE>   4
                    INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
 
                                                                            Quarters ended December 31,
                                                                        ----------------------------------
                                                                            1998                   1997 
                                                                        ----------------------------------
                                                                                    (unaudited)

<S>                                                                      <C>                    <C>       
Net revenues                                                             $5,211,186             $5,623,214
Cost of revenues                                                          2,101,439              2,391,938
                                                                        -----------             ----------
       Gross profit                                                       3,109,747              3,231,276
Expenses:
   Product development                                                      913,212                903,928
   Selling, general and administrative                                    2,106,519              2,176,309
                                                                        -----------            -----------
       Operating income from
         continuing operations                                               90,016                151,039
Interest expense                                                            (13,540)                (5,736)
Other income                                                                 62,622                  6,349
                                                                        ------------           -----------
Income from continuing
          operations before income taxes                                    139,098                151,652
Income tax benefit                                                            9,000                  --      
                                                                        -----------            -----------
Income from continuing operations                                           130,098                151,652
Loss from discontinued operations                                             --                  (214,280)
                                                                        -----------            ------------
Net income (loss)                                                       $   130,098            $   (62,628)
                                                                        ===========            ============

Basic and diluted income (loss) per share:
  Income from continuing operations                                     $      0.03            $      0.03
  Income (loss) from discontinued operations                                   --                    (0.04)
                                                                        -----------            ------------
Net income (loss) per share                                             $      0.03            $     (0.01)
                                                                        ===========            ===========

Weighted average common shares outstanding                                4,458,108              4,408,384
                                                                        ===========            ===========
</TABLE>

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

                                       4
<PAGE>   5
                    INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                             Quarters ended December 31, 
                                                                            1998                    1997 
                                                                            ----                    ---- 
                                                                                   (unaudited)
<S>                                                                    <C>                     <C>
Cash flows from operating activities:
    Net income (loss)                                                  $     130,098           $   (62,628)
    Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
      Depreciation and amortization                                          281,683               627,765
      Change in operating assets and liabilities:
       Accounts receivable                                                   627,647               899,605
       Refundable income taxes                                             1,471,277               (59,028)
       Inventories                                                           569,928               417,912
       Prepaid expenses and other                                             48,114               444,240
       Other assets                                                             (816)               (9,532)
       Accounts payable                                                     (320,395)             (184,398)
       Accrued expense                                                      (217,229)             (152,251)
       Deferred revenue                                                       (3,262)              (97,630)
    Discontinued operations - depreciation
       and working capital changes                                           (34,094)             (221,227)
                                                                         ------------          ------------
     Net cash used provided by operating activities                        2,552,951             1,602,828
                                                                         -----------           -----------

Cash flows from investing activities-
    Additions to property and equipment                                     (126,302)             (114,443)
                                                                       --------------          ------------

Cash flows from financing activities:
    Change in notes payable                                               (1,350,000)           (1,040,491)
    Proceeds from issuance of stock                                           44,056                 --
    Reduction of long-term debt                                              (12,500)              (12,500)
                                                                       --------------          ------------
     Net cash used in financing activities                                (1,318,444)           (1,052,991)
                                                                       --------------          ------------

Effect of exchange rate changes on cash                                       21,303                57,834
                                                                       -------------           -----------

Net increase in cash and cash equivalents                                  1,129,508               493,228
Cash and cash equivalents, beginning of period                               128,234               830,086
                                                                       -------------           -----------
Cash and cash equivalents, end of period                               $   1,257,742           $ 1,323,314
                                                                       =============           ===========

Supplemental disclosure of cash flow information:
    Cash paid for interest                                             $      13,540           $    5,736
                                                                       =============           ==========
    Cash refunded for income taxes                                     $   1,462,277           $    --   
                                                                       =============           ==========
</TABLE>

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

                                       5
<PAGE>   6
                             INTERFACE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Basis of Presentation

The interim consolidated financial statements of Interface Systems, Inc. have
been prepared by the Company without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The information included in this report
should be read in conjunction with the financial statements for the year ended
September 30, 1998 and notes thereto included in the Company's Annual Report on
Form 10-K.

In the opinion of management, the accompanying interim consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. The
results for the quarter ended December 31, 1998 may not be indicative of the
results to be expected for future quarters or the fiscal year ending September
30, 1999.

Certain prior year amounts have been reclassified to conform to the 1999
financial statement presentation. As more thoroughly discussed in Note 2,
Interface Systems International, Ltd. ("ISIL") is presented as a discontinued
operation for all periods presented.

2.  Sale of Interface Systems International Ltd. Distribution Business; 
    Discontinued Operations

In May 1998, the Company sold substantially all assets and certain liabilities
of its ISIL distribution business to Fayrewood plc for approximately $3.1
million cash. The sale resulted in a loss of $2,140,262. The sale did not
include the assumption by Fayrewood of all of ISIL's liabilities, and therefore,
no assurances can be given that claims will not be made against the Company in
the future arising out of ISIL's former operations. In management's opinion,
such claims would not have a material adverse effect on the Company's financial
condition and results of operations.

Accordingly, the operating results of ISIL have been segregated from continuing
operations and reported as a separate line item on the Company's consolidated
statement of operations. In addition, the assets and liabilities of ISIL,
excluding its cash and note payable, have been reclassified on the Company's
consolidated balance sheet and reported as assets and liabilities of the
discontinued operation. The Company has restated its prior financial statements
to present the operating results of ISIL as a discontinued operation.

                                       6
<PAGE>   7
3.  Line-of-Credit and Notes Payable

The Company has a $3.5 million bank credit facility that matures on February 28,
1999. As of December 31, 1998, there were no borrowings outstanding under this
facility. Advances bear interest at the bank's prime rate (8.25% at December 31,
1998) plus 1%, are payable on demand and are collateralized by substantially all
of the Company's assets. The amount available for borrowing at any time is based
on borrowing base formulas relating to levels of accounts receivable,
inventories and other bank covenants. Under such formulas, $3.5 million was
available to the Company as of December 31, 1998.

Under the terms of the credit agreement, the Company is required to maintain
certain minimum working capital, net worth and profitability levels and other
specific financial ratios. In addition, the credit agreement prohibits the
payment of cash dividends and contains certain restrictions on the Company's
ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. As of December 31, 1998, the
Company was in compliance with the bank covenants.

4.   Impact of Recently Issued Accounting Standards

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information", and No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
131 for its fiscal year ending September 30, 1999 and SFAS No. 133 for fiscal
2000. These adoptions are not expected to affect results of operations or
financial position but may require either additional disclosure or modification
of previous disclosures.

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" for the
quarter ended December 31, 1998. SFAS No. 130 requires disclosure of
comprehensive income and its components, however it has no impact on the
Company's net income or stockholders' equity. Comprehensive income is the total
of net income and all other non-owner changes in equity. The components of
comprehensive income, net of tax, are as follows:

<TABLE>
<CAPTION>

                                                                               Quarters ended December 31,
                                                                             -----------------------------
                                                                                  1998             1997 
                                                                                  ----             ---- 
<S>                                                                          <C>                <C>
Net income (loss)                                                            $   130,098        $(  62,628)
Change in foreign currency translation                                            21,303            57,834
                                                                             -----------        ----------
Comprehensive income (loss)                                                  $   151,401        $   (4,794)
                                                                             ===========        ===========
</TABLE>

                                       7
<PAGE>   8
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

DISCONTINUED OPERATIONS

In May 1998, the Company sold substantially all assets and certain liabilities
of its ISIL distribution business to Fayrewood plc for approximately $3.1
million cash. Accordingly, the operating results of ISIL and the loss on sale of
$2.1 million have been segregated from continuing operations and reported as
separate line items on the Company's consolidated statement of operations. In
addition, the assets and liabilities of ISIL, excluding its cash and note
payable, have been reclassified on the Company's consolidated balance sheet and
reported as assets and liabilities of the discontinued operation. The Company
has restated its prior financial statements to present the operating results of
ISIL as a discontinued operation. Net revenues of the ISIL distribution business
totaled $38.8 million, $62.8 million, and $56.3 million for fiscal 1998, 1997
and 1996, respectively.

RESULTS OF OPERATIONS

Net Revenues. Revenues for the first quarter ended December 31, 1998 were $5.2
million, a decrease of 7.3% over revenues of $5.6 million for the first quarter
of fiscal 1998. The decrease was due primarily to decreased sales of the
Company's Cleo Enterprise Networking products, which are impacted by large
corporate orders, partially offset by increased sales of Document Server and
e-Statement Direct software products.

Cost of Revenues. Cost of revenues were $2.1 million and $2.4 million, or 40.3%
and 42.5% of net revenues for the quarters ended December 31, 1998 and 1997,
respectively. During the first quarter of fiscal 1999, cost of revenues
decreased as a percentage of net revenues primarily due to a decrease in
non-recurring charges for inventory obsolescence and capitalized software
development costs. Cost of revenues includes amortization of capitalized
software development costs of $23,000 and $355,000 for the quarters ended
December 31, 1998 and 1997, respectively. Cost of revenues also includes charges
of $158,000 and $48,000 for inventory obsolescence during the quarter ended
December, 1998 and 1997, respectively. Additionally, the decrease in cost of
revenues as a percentage of net revenues resulted from increased sales of higher
margin software products as a percentage of net revenue.

Product Development Costs. Product development costs were $913,000 and $903,000,
or 17.5% and 16.1% of net revenues for the quarters ended December 31, 1998 and
1997, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.1 million and $2.2 million, or 40.2% and 38.7%
of net revenues for the quarters ended December 31, 1998 and 1997, respectively.
The absolute dollar decrease was primarily due to the Company's efforts to
reduce its general and administrative expenses.

Income Taxes. The income tax provision for the quarter ended December 31, 1998
includes federal alternative minimum taxes and the utilization of approximately
$380,000 of net operating loss carryforwards. The Company has net operating loss
carryforwards of approximately $8.6 million available to offset future taxable
income through fiscal year 2013.

                                       8
<PAGE>   9
LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's primary sources of liquidity included cash
and cash equivalents of $1.3 million and a short-term credit facility with a
bank providing for $3.5 million of borrowings, of which $3.5 million was
available.

The Company met its liquidity needs during the first quarter of fiscal 1999
primarily through cash generated from operating activities of $2.6 million. Cash
provided by operating activities was primarily the result of refunded income
taxes, net income before depreciation and amortization expense and lower
accounts receivable and inventories offset in part by decreases in accounts
payable and accrued expenses.

Cash used in financing activities was $1.3 million in the first quarter of
fiscal 1999 primarily due to repayment of borrowings under the Company's bank
credit facility as a result of improved operating cash flow.

The Company has a $3.5 million bank credit facility that expires on February 28,
1999. As of December 31, 1998, there were no borrowings outstanding under this
facility. Advances bear interest at the bank's prime rate (8.25% at December 31,
1998) plus 1%, are payable on demand and are collateralized by substantially all
of the Company's assets. The amount available for borrowing at any time is based
on borrowing base formulas relating to levels of accounts receivable,
inventories and other bank covenants. Under such formulas, $3.5 million was
available to the Company as of December 31, 1998.

Under the terms of the credit agreement, the Company is required to maintain
certain minimum working capital, net worth and profitability levels and other
specific financial ratios. In addition, the credit agreement prohibits the
payment of cash dividends and contains certain restrictions on the Company's
ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. As of December 31, 1998, the
Company was in compliance with the bank covenants.

The Company believes that its existing cash balances, available credit facility
and future operating cash flows will be sufficient for near term operating
needs. The Company believes it will renew its bank credit facility prior to
expiration of the facility. The foregoing statements are "forward looking
statements" within the meaning of the Securities Exchange Act of 1934. The
extent to which such sources will be sufficient to meet the Company's
anticipated cash requirements is subject to a number of uncertainties including
the ability of the Company's operations to generate sufficient cash to support
operations, and other uncertainties described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Uncertainties
Relating to Forward-Looking Statements."

YEAR 2000

The "year 2000" problem is pervasive and complex, with the potential to cause
systems failures and business process interruption resulting from the use of
2-digit date formats as the year changes from 1999 to 2000. The Company has been
addressing the risks associated with its information technology ("IT") and
non-information technology ("non-IT") systems as the year 2000 approaches. In
addition to the Company's own systems, the Company relies, directly and
indirectly, on external systems of its customers, suppliers, financial
organizations, utilities providers and government entities (collectively, "Third
Parties"). Consequently, the Company could be affected by disruptions in the
operations of Third Parties with which the Company interacts. Furthermore, 

                                       9
<PAGE>   10
the purchasing frequency and volume of customers or potential customers may be
affected by Year 2000 correction efforts as companies expend significant efforts
to make their systems Year 2000 compliant.

The Company is using both internal and external resources to (a) assess the
Company's state of readiness (including the readiness of Third Parties with
which the Company interacts) with respect to the year 2000 problem; (b) estimate
the cost to correct and/or replace non-compliant internal IT and non-IT systems;
(c) assess the known risks and consequences related to failure to correct any
Year 2000 problems identified; and (d) develop a contingency plan, if advisable,
to address the Company's Year 2000 exposure. The Company's Board of Directors
has established a committee to review the Company's efforts to address its Year
2000 issues and report back to the Board at each Board meeting.

The Company has tested all current versions of its products to determine whether
such products are Year 2000 compliant. The Company believes that all of its
current products are Year 2000 compliant. Earlier versions of the Company's
products can be classified as either (a) known to be Year 2000 compliant, (b)
known to not be Year 2000 compliant, or (c) not tested for Year 2000 compliance.
The Company has no plans to make earlier versions of its products Year 2000
compliant and, in cases where the end user of a non-compliant product is known,
has made attempts to contact the customer. In cases where the product has been
sold through a reseller, the end user is not known and therefore, cannot be
contacted.

If any of the Company's customers are unable to make their IT systems Year 2000
compliant in a timely fashion, they may suspend further product purchases from
the Company until their systems are Year 2000 compliant. Because most of the
Company's customers are Fortune 500 companies and banking and finance
institutions, the Company expects most of its customers will become Year 2000
compliant in a timely fashion, although the Company is not in a position to
monitor their progress.

All of the Company's critical vendors have been queried as to their Year 2000
preparedness. For the few that have not responded satisfactorily, alternative
sources are being sought and will be in place by June 1999.

The Company has completed the assessment of its principal internal IT software
systems and its personal computer and network hardware and software for Year
2000 compliance. The Company is in process of replacing its accounting software
and IGK's customer order tracking system with third party products. The Company
believes that these systems will be replaced by June 1999 and that its principal
internal IT software systems and its personal computer and network hardware and
software will be Year 2000 compliant by June 1999.

The Company has incurred costs of approximately $85,000 to date and presently
expects to incur an additional $115,000 in the future to address Year 2000
compliance issues. Such costs consist primarily of the cost of replacing
non-compliant internal IT system software and upgrading or replacing
non-compliant personal computer and network hardware and software, but do not
include internal staff costs, which the Company has not separately tracked. The
Company would have incurred many of the costs for these efforts in any event
because of the normal process of internal IT system upgrades. These cost
estimates are subject to a number of uncertainties, which could result in actual
costs exceeding the estimated amounts including, but not limited to, undetected
errors or defects discovered in the remediation process or unanticipated
difficulties in completing the remediation in a timely fashion.

                                       10
<PAGE>   11
While the Company believes that its efforts to address Year 2000 issues for
which it is responsible should be successful, a description of its most
reasonably likely worse case Year 2000 scenarios have been described above. In
addition, it is possible that there will be undetected errors or defects
associated with Year 2000 in the Company's current products and internal systems
or those of its principal vendors. If any of the foregoing scenarios should
occur, it is possible that the Company could be involved in litigation. In
addition, although the Company does not believe that it has any obligation to
make prior versions of its products Year 2000 compliant, it is possible that its
customers may take a contrary position and initiate litigation. Because of the
relative lack of litigation concerning the Year 2000 issue, it is uncertain how
such issues may affect the Company. In the event of litigation or one or more of
the worst case Year 2000 scenarios described above, the Company's financial
condition and results of operation could be materially adversely affected.

UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS

"Management's Discussion and Analysis of Results of Operations" contain
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended, based on current management expectations. Actual results
could differ materially from those in the forward-looking statements due to a
number of uncertainties, including, but not limited to, those discussed in this
section. Factors that could cause future results to differ from these
expectations include general economic conditions particularly related to demand
for the Company's products and services; changes in Company strategy; product
life cycles; competitive factors (including the introduction or enhancement of
competitive products); pricing pressures; the Company's success in and expense
associated with developing, introducing and shipping new products; software
defects and latent technological deficiencies in new products; changes in
operating expenses; inability to attract or retain consulting, sales and/or
engineering talent; changes in customer requirements; evolving industry
standards; and the impact of undetected errors or defects associated with the
Year 2000 date function on the Company's current products and internal systems.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no material market risk exposure.


PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits: 

         27  Financial Data Schedule

(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.

                                       11
<PAGE>   12
                                   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.


                                 INTERFACE SYSTEMS, INC.

Date:   February 10, 1999        /S/ John R. Ternes                          
                                 ------------------------------------------
                                 John R. Ternes
                                 Vice President and Chief Financial Officer

                                       12
<PAGE>   13

                                 Exhibit Index
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.                        Description
-----------                        -----------
<S>                                <C>
     27                            Financial Data Schedule
</TABLE>