SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB/A
                                (Amendment No. 1)

(Mark One)
X        Quarterly  report  pursuant  to Section  13 or 15(d) of the  Securities
         Exchange Act of 1934 for the quarterly period ended June 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: 0-21013

                              XYBERNAUT CORPORATION
             (Exact Name of registrant as specified in its charter)


         Delaware                                      54-1799851
(State or other jurisdiction
 of incorporation)                          (I.R.S. Employer Identification No.)

                   12701 Fair Lakes Circle, Fairfax, VA 22033
             (Address of principal executive offices with zip code)

Registrant's telephone number, including area code:       (703) 631-6925

                                       N/A
(Former  name,  former  address and former  fiscal year,  if changed  since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                              YES      X       NO  
                                     ----             ----           

                     APPLICABLE ONLY TO ISSUERS INVOLVED IN
                          BANKRUPTCY PROCEEDINGS DURING
                            THE PRECEDING FIVE YEARS:

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

                             YES              NO
                                  ----             ----           

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

               Class                            Outstanding at August 13, 1998
 Common stock - $0.01 par  value                               20,934,765   
<PAGE>



                                      INDEX


                                                                          PAGE
                                                                          ----

COVER PAGE                                                                   1

INDEX                                                                        2

PART I - FINANCIAL INFORMATION

         Item 1 - Financial Statements
                   Consolidated Balance Sheets                               3
                   Consolidated Statements of  Operations                    4
                   Consolidated Statements of Cash Flows                     5
                   Notes to Consolidated  Financial Statements               6

         Item 2 - Management's Discussion and Analysis of
                   Results of Operations and Financial Conditions            7

PART II - OTHER INFORMATION

         Item 6 - Exhibits and Reports on Form 8-K                          18

SIGNATURES                                                                  19

                                       -2-

<PAGE>
                              XYBERNAUT CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                              ASSETS                                    June 30, 1998              December 31,
                                                                         (unaudited)                   1997
                                                                   -----------------------    ----------------------



<S>                                                                <C>                          <C>                 
Current assets:
   Cash and cash equivalents                                       $             4,014,723    $              952,366
   Accounts receivable                                                             182,363                   216,767
   Inventories                                                                   1,172,699                 1,607,781
   Prepaid and other current assets                                                399,883                   334,245
                                                                   -----------------------    ----------------------
         Total current assets                                                    5,769,668                 3,111,159
                                                                   -----------------------    ----------------------

Fixed assets:

   Property and equipment, net                                                     773,788                   505,695
                                                                   -----------------------    ----------------------

Other assets:

   Patent costs, net                                                               414,683                   384,422
   Tooling costs, net                                                              312,368                   376,990
   Other                                                                           163,396                   153,351
                                                                   -----------------------    ----------------------
         Total other assets                                                        890,447                   914,763
                                                                   -----------------------    ----------------------
         Total assets                                              $             7,433,903    $            4,531,617
                                                                   =======================    ======================

                         LIABILITIES AND
                       STOCKHOLDERS' EQUITY

Current liabilities:

   Notes and loans payable                                            $                  -    $               19,530
   Accounts payable                                                                468,337                   429,780
     Accrued expenses                                                              809,068                   908,372
                                                                   -----------------------    ----------------------
         Total current liabilities                                               1,277,405                 1,357,682
                                                                   -----------------------    ----------------------
         Total liabilities                                                       1,277,405                 1,357,682
                                                                   -----------------------    ----------------------



Commitments and contingencies

Stockholders' equity:

   Preferred Stock, $.01 par value,  6,000,000 shares  authorized;  
      3,000 shares designated as Series A, 2,250 shares issued and 
      outstanding as of December 31,  1997;  4,180 and 3,180  shares
      designated  as Series B, 3,180 shares issued and  outstanding as
      of December 31, 1997; 375 shares  designated as Series C, 375
      shares issued and outstanding as of June 30, 1998, at net
      carrying value                                                               364,754                 4,193,355

   Common stock, $.01 par value,  40,000,000 shares  authorized;
      20,934,765 and 14,360,515 issued and outstanding as of June
      30, 1998 and December 31, 1997, respectively                                 209,348                   143,605
   Additional paid-in capital                                                   27,636,785                17,181,329      
   Deferred compensation                                                            (9,042)                  (91,511)
   Accumulated deficit                                                         (22,045,347)              (18,252,843)
                                                                   ------------------------   ----------------------
         Total stockholders' equity                                              6,156,498                 3,173,935
                                                                   -----------------------    ----------------------
         Total liabilities and stockholders' equity                $             7,433,903      $          4,531,617
                                                                   =======================    ======================
</TABLE>
                                       -3-
<PAGE>

<TABLE>
<CAPTION>


                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)




                                          Three Months Ended June 30,                   Six Months Ended June 30,
                                   -----------------------------------------     ----------------------------------------

                                          1998                   1997                  1998                   1997
                                   ------------------     ------------------     -----------------     ------------------

Revenue:

<S>                                   <C>                     <C>                 <C>                       <C>          
   Product sales and leases           $       229,634         $      125,032      $        356,861          $     220,458
   Consulting and license                       1,839                 15,000                 1,839                 30,000
                                   ------------------     ------------------     -----------------     ------------------
       Total revenue                          231,473                140,032               358,700                250,458



Cost of sales                                 271,905                258,229               379,476                409,790
                                   ------------------     ------------------     -----------------     ------------------
       Gross profit (loss)                    (40,432)              (118,197)              (20,776)              (159,332)



Operating expenses:

   Sales and marketing                        656,042                729,655             1,151,147              1,489,195
   General and administrative                 966,199                893,803             1,617,879              1,885,214
   Research and development                   643,413                564,398             1,010,769              1,196,319
                                   ------------------     ------------------     -----------------     ------------------
       Total operating expenses             2,265,654              2,187,856             3,779,795              4,570,728
                                   ------------------     ------------------     -----------------     ------------------



       Operating loss                      (2,306,086)            (2,306,053)           (3,800,571)            (4,730,060)



Interest income, net                            2,902                  7,773                 8,066                 49,129
                                   ------------------     ------------------     -----------------     ------------------
Net loss                                   (2,303,184)            (2,298,280)           (3,792,505)            (4,680,931)
                                     ----------------     ------------------     ------------------    ------------------
Provision for preferred stock
   dividends                                   20,657              ---                      56,559              ---
Provision for accretion on
preferred stock beneficial
conversion feature                            533,264              ---                     907,489              ---         
                                   --------------------   ---------------------    ------------------  ---------------------


Net loss applicable to holders
     of common stock                   $   (2,857,105)          $ (2,298,280)        $  (4,756,553)       $   (4,680,931)
                                    ==================     ==================     =================     ==================
Per common share (basic and
diluted):
Net loss before provision for
   preferred stock                $             (0.13)   $       (0.18)   $          (0.24)   $          (0.38)

                                                          
Total provisions for preferred
stock                                           (0.03)               -                     (0.07)                    -
                                   -------------------   ------------------       ----------------      -----------------





Net loss applicable to holders     
   of common stock                 $            (0.16)   $            (0.18)    $          (0.31)     $          (0.38)     
                                   ==================     ==================     =================     ==================
Weighted average number of
common shares outstanding
(basic and diluted)                        17,343,590             12,459,112          15,516,067            12,459,112
                                   ==================     ==================     =================     ==================

</TABLE>

                                      -4-
<PAGE>
<TABLE>
<CAPTION>


                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)


                                                                                Six Months Ended June 30,
                                                                       --------------------------------------------
                                                                              1998                     1997
                                                                       -------------------     --------------------

<S>                                                                        <C>                     <C>             
Cash flows from operating activities
   Net loss attributable to common stock                                    $   (3,792,505)         $    (4,680,931)
   Adjustments to reconcile net loss to net cash used in operating
       activities:
           Depreciation and amortization                                           152,185                  160,547
           Provision for bad debts                                                 (30,697)                       -
           Non cash charges for tooling costs                                      138,682                        -
           Non cash charges for stock and options issued for services               82,469                  125,488
    Inventories                                                                    109,731                 (295,792)
    Accounts receivable                                                             65,101                   (2,338)
    Prepaid and other current assets                                               (65,638)                (184,312)
    Other assets                                                                   (10,528)                  (4,798)
    Accounts payable and accrued expenses                                          (14,873)                 (74,373)
    Deferred licensing revenue                                                           -                  (30,000)
                                                                       -------------------     --------------------
             Net cash used in operating activities                              (3,366,073)              (4,986,509)
                                                                       -------------------     --------------------

Cash flows from investing activities:
   Acquisition of property and equipment, net                                     (33,515)                (306,962)
   Acquisition of patents and related costs                                       (91,190)                (155,888)
   Capitalization of tooling costs and other assets                               (74,060)                (284,294)
                                                                                 --------                ---------
            Net cash used in investing activities                                (198,765)                (747,144)
                                                                       -------------------     --------------------

Cash flows from financing activities:
   Proceeds from:
           Preferred stock offerings                                             1,348,496                2,785,000
           Common stock offerings                                                5,307,048                        -
           Initial Public Offering, gross                                                -                  215,000
   Payments for:
            Notes and loans                                                       (19,530)                  (48,924)
            Other                                                                  (8,819)                        -
                                                                       -------------------     --------------------
            Net cash used in financing activities                                6,627,195                2,951,076
                                                                       -------------------     --------------------
Net decrease in cash and cash equivalents                                        3,062,357               (2,782,577)
Cash and cash equivalents, beginning of period                                     952,366                6,274,967
                                                                       -------------------     --------------------
Cash and cash equivalents, end of period                                    $    4,014,723           $    3,492,390
                                                                       ===================     ====================

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest                                     $    2,500               $    8,527
                                                                       ===================     ====================
Supplemental disclosure of non-cash financing activities:
   Common stock issued for preferred stock dividend requirements                $   84,022                   $    -
                                                                       ===================     ====================
   Common stock issued for services rendered                                    $   98,438                   $    -
                                                                       ===================     ====================
   Provision for preferred stock dividend requirements                          $   56,559                   $    -
                                                                       ===================     ====================
</TABLE>

                                       -5-

<PAGE>

                              XYBERNAUT CORPORATION

                   Notes to Consolidated Financial Statements

1.       Basis of Presentation

         The accompanying unaudited, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information  and  instructions  to Form  10-QSB  and  Rule  10-01  of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been reflected in such financial  statements.  Results of operations for the six
months  ended  June  30,1998  are  not  necessarily  indicative  of  results  of
operations  expected for the full year. The Company's  fiscal year ends December
31.

2.       Principles of Consolidation

         The consolidated financial statements include the accounts of Xybernaut
Corporation ("the Company") and its wholly-owned subsidiary,  Tech International
of Virginia  Inc.  ("Tech  Virginia").  All material  intercompany  accounts and
transactions have been eliminated.

3.       New Accounting Pronouncements

         The Financial  Accounting  Standards Board has issued two new standards
which become effective for reporting  periods beginning after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income",  requires additional disclosures
with respect to certain changes in assets and  liabilities  that previously were
not required to be reported as results of  operations  for the period.  SFAS No.
131,  "Disclosures  about  Segments of an Enterprise  and Related  Information",
requires  financial  and  descriptive  information  with  respect to  "operating
segments" of an entity based on the way management  disaggregates the entity for
making  internal  operating  decisions.  There  is no  impact  on the  financial
statements from the adoption of these pronouncements.

         In addition,  the Financial Accounting Standards Board has issued, SFAS
No. 133, "Accounting for Derivative  Instruments and Hedging Activities",  which
becomes effective for years beginning after June 15, 1999. SFAS No. 133 requires
that every  derivative  instrument be recorded in the balance sheet as either an
asset or a liability  measured at its basic value.  The statement  requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge  amortizing  criteria are met. The Company believes that the effect of the
adoption of SFAS No. 133 on the Company will not be material.

4.       Preferred Stock

         In January 1998,  the Company placed 1,000 shares of Series B Preferred
Stock and received cash proceeds of  approximately  $974,000 from this issuance.
In connection with this placement and

                                       -6-

<PAGE>



the placement of 3,000 shares of Series B Preferred  Stock in November 1997, the
placement  agent received  50,000 shares of Common Stock in lieu of 60 shares of
Series B  Preferred,  warrants  to  purchase  25,000  shares of Common  Stock at
$2.1313 and warrants to purchase 75,000 shares of Common Stock at $3.025. During
the six months ended June 30, 1998, 2,250 shares of Series A Preferred Stock and
4,180 shares of Series B Preferred  Stock were converted to 4,878,074  shares of
Common Stock, pursuant to their respective terms. As of the current date, all of
the  3,000  shares  of Series A  Preferred  Stock  and 4,180  shares of Series B
Preferred Stock issued by the Company have been fully converted resulting in the
issuance of 1,958,984 and 3,172,239 shares of Common Stock, respectively.

         In May 1998, the Company placed 375 shares of Series C Preferred  Stock
and received cash proceeds of $375,000 from this issuance. No shares of Series C
Preferred Stock have been converted as of the date hereof.

5.       Commitments

         The Company  entered into a Memorandum  of  Understanding  ("MOU") with
Sony Digital  Products  ("SODP") on May 14, 1998.  This agreement  obligates the
Company to reimburse  SODP Yen 100 million  over a ten month  period  commencing
April 1998.  These  payments  are  reimbursements  to SODP for  engineering  and
development of the Company's Mobile Assistant IV(TM). The Company,  through June
1998, has remitted to SODP Yen 15 million under the Memorandum of  Understanding
in  accordance  with the  payment  terms.  The balance of the  payments  and the
related  recognition  of expense will occur as the services are provided by SODP
to the Company.

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

                                    Overview

         The Company was  incorporated as a Virginia company in October 1990 and
commenced  active  operations in November 1992 as Computer  Products & Services,
Inc. to develop, manufacture and sell mobile computing systems. Since commencing
operations,  the Company has incurred  significant  operating  losses.  In April
1996, the Company was merged with  Xybernaut  Corporation in order to change the
company  name  and  reincorporate  in  Delaware.   In  July  1996,  the  Company
successfully  completed the initial public offering  ("IPO") of its Common Stock
and Warrants which are traded on the NASDAQ SmallCap Market.

      The first product to be  commercialized  by the Company is the proprietary
portable computer technology and related software  applications  embodied in its
Mobile  Assistant(R)  Series. The first product in this series was introduced in
1994 and uses "486"  based  technology  ("486  System")  that was  produced in a
limited quantity and is no longer being  manufactured.  Product  development has
been based on the  expectation  of the Company that  continued  improvements  in
software for operating  systems,  applications and speech  recognition  software
will require  continued  improvements in the performance and capabilities of the
Mobile Assistant Series. Based on that expectation, the Company

                                       -7-

<PAGE>



undertook a product  development  program  that  resulted in the second  product
offering  in  the  Mobile  Assistant(R)   Series,  which  was  introduced  on  a
preproduction  basis in  January  1997 and which  used  "586"  based  technology
("Mobile  Assistant(R) II System").  The Mobile  Assistant(R) II was replaced by
the third  system in this  product  development  program,  which was  introduced
during the third quarter of 1997 and uses a Pentium(R)  processor running at 133
MHZ ("133P System"). The 133P System is tailored for those customers who require
additional  processing  capacity  for their  applications,  such as a  body-worn
server for wireless LAN  applications,  and also for those  customers  using new
continuous  speech  recognition  or phonetic  recognition  software that require
higher processing  speeds,  such as that available from IBM Corporation,  Dragon
Systems,  Inc., and Texas  Instruments,  among others.  In the fourth quarter of
1997,  the  Company  announced  the fourth  system in this  product  development
program,  the Mobile  Assistant(R)  IV ("MA IV"),  which uses a Pentium  chipset
known as the "Tillamook" that runs at up to 266 MHZ.

        Additional  software  products are being  developed  and are planned for
development for use on the Mobile Assistant and other personal computers. In the
third quarter of 1997, the Company announced the introduction of linkAssist(TM),
a software  product which  provides a "windows"  style  graphical user interface
with speech  navigation  that  allows data stored in almost any format,  such as
commonly-used word processing,  spreadsheet, data base, graphics or media files,
to be linked to most any  application  without  altering the original  data. The
Company has  announced  webAssist(TM),  a software  product  that  allows  voice
navigation of HTML document  links such as those found on the World Wide Web and
intranets.

         The  Company  has  derived  its  revenues  from  sales  of  the  Mobile
Assistant(R) Series, less volume discounts, and from consulting services related
to the Mobile  Assistant(R),  application  software for the Mobile Assistant(R),
and other computer  platforms.  During the three months ended June 30, 1998, the
Company derived 99% of its revenues from sales of the Mobile  Assistant(R).  For
the three months ended June 30, 1997, the Company derived  approximately  89% of
its revenues from sales of the Mobile  Assistant(R) and 11% of its revenues from
consulting services and licensing  revenues.  In the future, the Company expects
to derive additional  revenues from the sale of software and additional optional
components of the Mobile Assistant(R) Series.  Revenues from sales to customers,
VARs and OEMs are  recognized  when products are shipped.  The  Company's  sales
agreements  generally do not involve any  significant  obligations  to customers
subsequent  to  delivery  except as  provided  in  separate  service  or support
agreements.  Revenues from future  software sales will be recognized at the time
the software  master is delivered in accordance  with  Statement of Position No.
91-1.  Cost of sales include the cost of components for the Mobile  Assistant(R)
Series, direct labor and overhead expense,  manuals,  diskettes and duplication,
packaging materials, assembly, paper goods and shipping.

         The  Company   intends  to  continue   expenditures   on  research  and
development  of  additional   hardware  and  software  products.   Research  and
development  activities  consist  primarily of personnel engaged in the research
and design of new products, test components, consulting fees and equipment costs
required to conduct the Company's development  activities.  Software development
costs are expensed as incurred until technological feasibility is established in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86,
Accounting for the Costs of Computer

                                       -8-

<PAGE>



Software to be Sold, Leased or Otherwise  Marketed),  after which any additional
costs are  capitalized  until the  software  is ready for  release.  The Company
started limited shipments of its linkAssist(TM)  software late in the year ended
December 31, 1997,  but the costs  eligible for  capitalization  under SFAS were
immaterial during this period and were not capitalized. The Company expects such
costs to be immaterial  during the coming fiscal year.  Research and development
expenses  for the three  months  ended June 30, 1998 and 1997 were  $643,413 and
$564,398, respectively, none of which was capitalized.

         The  Company's  consolidated  financial  statements,  for  all  periods
presented,  include the results of operations of Tech  Virginia,  a wholly-owned
subsidiary that supplies  software and consulting  services to the United States
government  and  others.  In July  1996,  the  Company  exercised  its option to
purchase all of the capital stock of Tech Virginia and completed  payments under
this option during the year ended December 31, 1997. The consolidated  financial
statements  contain  eliminations  for all  material  transactions  between  the
Company and Tech Virginia for all periods presented.

         The  Company's  consolidated  financial  statements  do not  contain  a
provision for income tax expense due to the net operating  losses incurred since
inception.  Subject to  realization,  the Company has  generated  net  operating
losses that can be used to offset taxable  operating  income in the future.  The
Company's  future  operations,  if  profitable,  will be  subject  to income tax
expense  not  previously  incurred by the  Company  (see Note 9 to  Consolidated
Financial  Statements).   At  June  30,  1998,  the  Company  had  approximately
$16,000,000 of net operating loss carry forwards for federal income tax purposes
which expire in 2012.  The use of these carry forwards may be limited in any one
year under Internal  Revenue Code Section 382 if significant  ownership  changes
occur.

         The Company is aware of the computing issues associated with the coming
of the  millennium  (year 2000),  most  notably  whether  computer  systems will
properly  recognize  date sensitive  information  when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system  to fail.  Based on  preliminary  investigations  and the
representations of several of its suppliers, the Company currently believes that
computers and software used in its  operations  and sold by the Company are year
2000  compliant.  The Company is working  with its  suppliers  and  customers to
either verify year 2000 compliance or identify and execute  appropriate  changes
to make such systems year 2000 compliant.  The Company believes that the cost of
completing  any  modifications  for year 2000  compliance to the systems used or
sold by the Company  will not be  material.  However,  there can be no assurance
that the  Company's  suppliers  will be correct in their  assertions  that their
products are year 2000  compliant or that the Company's  estimate of the cost of
systems  modifications  for year 2000  compliance  will prove  ultimately  to be
correct.

                                       -9-

<PAGE>



Results of Operations

         The following table sets forth items from the  Consolidated  Statements
of Income as a percentage of revenues:
<TABLE>
<CAPTION>



                                                Three Months Ended                        Six Months Ended
                                            ---------------------------             ----------------------------

                                            6/30/98             6/30/97             6/30/98              6/30/97
                                            -------             -------             -------              -------

<S>                                  <C>                <C>                  <C>                  <C> 
Revenues                                      100%               100%                 100%                 100%
Cost of sales                               117.5%             184.4%               105.8%               163.6%
                                            ------             ------               ------               ------
   Gross margin                            (17.5)%            (84.4)%               (5.8)%              (63.6)%

Operating expenses:
   Sales & marketing                        283.4%             521.1%               320.9%               594.6%
   General & administrative                 417.4%             638.3%               451.0%               752.7%
   Research & development                   277.9%             403.0%               281.8%               477.7%
                                            ------             ------               ------               ------
Total operating expense                     978.7%           1,562.4%             1,053.7%             1,825.0%
Interest income                               1.3%               5.6%                 2.2%                19.6%
                                              ----               ----                 ----                -----
Net loss                                   (995.0%)         (1,641.2%)           (1,057.3%)           (1,869.0%)
                                          ========         ==========           ==========           ==========
Provisions for preferred stock              239.3%                 -                268.8%     
                                          =========        ==========           ==========           ==========
Net loss applicable to holders
of common stock                          (1,234.3%)         (1,641.2%)           (1,326.1%)           (1,869.0%)
                                         ==========         ==========           ==========           ==========
</TABLE>

THREE MONTHS ENDED JUNE 30, 1998 AND 1997

         Revenues.  Total revenues for the three months ended June 30, 1998 were
$231,473,  an  increase  of $91,441,  or 65.3%,  compared  to  $140,032  for the
corresponding  period in 1997.  Product revenues for the three months ended June
30, 1998 were $229,634,  an increase of $104,602 or 83.7%,  compared to $125,032
for the  corresponding  period in 1997. The increase in product revenues for the
three  months  ended June 30,  1998 was  related  to the  higher  number of 133P
Systems that were sold during that period,  compared to the higher number of 586
Systems  that were sold in the  corresponding  period  in 1997.  Consulting  and
license revenues for the three months ended June 30, 1998 were $1,839 a decrease
of $13,161 or 87.7%,  compared to $15,000 for the corresponding  period in 1997.
The  decrease in  consulting  and license  revenues was due to the lack of sales
activity under a License Agreement with Rockwell  International that was related
to the restructuring of Rockwell's operations.

         Cost of Sales.  The cost of goods sold for the three  months ended June
30, 1998 was $271,905, an increase of $13,676, or 5.3%, compared to $258,229 for
the   corresponding   period  in  1997.   The  cost  of  goods  sold   increased
commensurately  with the increase in product sales but was offset by a charge of
approximately  $120,000  in 1997 to  reduce  the  carrying  value of an  earlier
versions of the  computing  unit for Mobile  Assistant  II Systems to  estimated
market value.

         Sales and Marketing.  Sales and marketing expenses for the three months
ended June 30, 1998 were $656,042, a decrease of $73,613, or 10.1%,  compared to
$729,655 for the corresponding  period in 1997. The decrease was due to a change
in compensation structure for sales personnel

                                       -10-

<PAGE>



which  resulted in lower base salaries,  a reduction in travel related  expenses
due to the  centralization  of sales staff, and a decrease in the use of outside
consultants for sales and marketing programs.

         General and Administrative. General and administrative expenses for the
three months ended June 30, 1998 were $966,199, an increase of $72,396, or 8.1%,
compared  with  $893,803 for the  corresponding  period in 1997.  This  increase
resulted  primarily  from an  increase  in  activities  related  to  discussions
regarding certain strategic partnerships and international operations.

         Research and  Development.  Research and  development  expenses for the
three  months  ended June 30, 1998 were  $643,413,  an  increase of $79,015,  or
14.0%,  compared  with  $564,398  for the  corresponding  period  in 1997.  This
increase is the primarily the result of increased  development  expenses for the
Mobile Assistant IV System.

         Interest  Income,  Net. Net interest  income for the three months ended
June 30, 1998 was $2,902, a decrease of $4,871,  or 62.7%,  compared with $7,773
for the  corresponding  period in 1997.  This  decrease is the result of reduced
interest  income from the lower  average cash balances in the three months ended
June 30, 1998 than for the corresponding period a year earlier,  which reflected
the interest income on proceeds from the Company's  Initial Public Offering that
was completed in July 1996.

         Dividend on preferred stock, and deemed dividend accretion on preferred
stock.  We issued our Series A Preferred  Stock on June 30,  1997.  The Series A
Preferred Stock accrued  dividends at 5% per annum on the outstanding  principal
amount.  We issued our Series B Preferred Stock on November 11, 1997. The Series
B Preferred Stock accrued dividends at 4% per annum on the outstanding principal
amount.  We issued our Series C Preferred  Stock on May 15,  1998.  The Series C
Preferred Stock accrues  dividends at 5% per annum on the outstanding  principal
amount. For the three months ended June 30, 1998, the amount of accrued dividend
was $20,657,  an increase of $20,657,  or 100% for the  corresponding  period in
1997.  In  accordance   with  the  Emerging  Issues  Task  Force  report  titled
"Accounting for the Issuance of Convertible  Preferred Stock and Debt Securities
with a Nondetachable  Conversion Feature," a deemed dividend was assumed for the
Series A and  Series B  Preferred  Stock,  which was  accreted  periodically  as
portions of the Series A and Series B Preferred Stock were converted into Common
Stock. The amount of this accretion for the three months ended June 30, 1998 was
$533,264,  an increase of $533,264 or 100%, compared to the corresponding period
in 1997.  Additional  paid in capital was reduced by the amount of accretion and
preferred stock was increased by the amount of accretion, resulting in no impact
on the overall amount of stockholder's equity.

         Net Loss  Attributable  to Common  Stock.  As a result  of the  factors
described above, the net loss  attributable to Common Stock for the three months
ended June 30, 1998 was $2,857,105,  an increase of $558,825, or 24.3%, compared
to $2,298,280  for the  corresponding  period in 1997.  Although the Company was
subject to  taxation  during the three  months  ended June 30, 1998 and June 30,
1997, the Company  incurred net losses during these periods and no provision for
income taxes was made.

                                      -11-

<PAGE>



SIX MONTHS ENDED JUNE 30, 1998 AND 1997

         Revenues.  Total  revenues  for the six months ended June 30, 1998 were
$358,700,  an  increase of  $108,242,  or 43.2%,  compared  to $250,458  for the
corresponding period in 1997. Product revenues for the six months ended June 30,
1998 were $356,861,  an increase of $136,403, or 61.9%, compared to $220,458 for
the corresponding period in 1997. The increase in product revenues for the three
months ended June 30, 1998 was related to the higher number of 133P Systems that
were sold  during  that  period,  compared  to the higher  number of 486 and 586
Systems  that were sold in the  corresponding  period in 1997.  The  decrease in
consulting  and license  revenues was due to the lack of sales  activity under a
license  agreement  with  Rockwell   International   that  was  related  to  the
restructuring of Rockwell's operations.

         Cost of Sales. The cost of goods sold for the six months ended June 30,
1998 was $379,476,  a decrease of $30,314, or 7.4%, compared to $409,790 for the
corresponding  period in 1997. The cost of goods sold  increased  commensurately
with the  increase in sales but were offset by charges in 1997 of  approximately
$97,000 of parts for 586 Systems  that were  replaced  and written off, and by a
full  reserve for  obsolescence  of  approximately  $225,000  for the  remaining
computing  units used in 486 Systems that are believed by Company  management to
be  saleable,  but whose value is  uncertain  given  changes in  technology  and
advances in the market.

         Sales and marketing expenses.  Sales and marketing expenses for the six
months ended June 30, 1998 were  $1,151,147,  a decrease of $338,048,  or 22.7%,
compared to $1,489,195 for the  corresponding  period in 1997. This decrease was
due to a change in compensation  structure for sales personnel which resulted in
lower  base  salaries,  a  reduction  in  travel  related  expenses  due  to the
centralization of sales staff, and a decrease in the use of outside  consultants
for sales and marketing programs.

         General  and  administrative   expenses.   General  and  administrative
expenses for the six months ended June 30, 1998 were  $1,617,879,  a decrease of
$267,335, or 14.2%, compared to $1,885,214 for the corresponding period in 1997.
This  decrease  resulted  primarily  from a reduction in  personnel  and related
occupancy expenses,  along with a decrease in travel expenses. These were offset
by an increase in activities related to international operations.

         Research and development  expenses.  Research and development  expenses
for the six months ended June 30, 1998 were $1,010,769, an increase of $185,550,
or 15.5%,  compared to $1,196,319  for the  corresponding  period in 1997.  This
increase is the primarily the result of increased  development  expenses for the
Mobile Assistant IV System.

         Interest income, net. Net interest income for the six months ended June
30, 1998 was $8,066,  a decrease of $41,063,  or 83.6%,  compared to $49,129 for
the  corresponding  period in 1997.  This  decrease  is the  result  of  reduced
interest  income from the lower  average  cash  balances in the six months ended
June 30, 1998 than for the corresponding period in 1997, which reflected the

                                      -12-

<PAGE>



interest income on proceeds from the Company's  initial public offering that was
completed in July 1996.

         Dividend on preferred stock, and deemed dividend accretion on preferred
stock.  We issued our Series A Preferred  Stock on June 30,  1997.  The Series A
Preferred Stock accrued  dividends at 5% per annum on the outstanding  principal
amount.  We issued our Series B Preferred Stock on November 11, 1997. The Series
B Preferred Stock accrued dividends at 4% per annum on the outstanding principal
amount.  We issued our Series C Preferred  Stock on May 15,  1998.  The Series C
Preferred Stock accrues  dividends at 5% per annum on the outstanding  principal
amount.  For the six months ended June 30, 1998, the amount of accrued  dividend
was $56,559,  an increase of $56,559,  or 100% for the  corresponding  period in
1997.  In  accordance   with  the  Emerging  Issues  Task  Force  report  titled
"Accounting for the Issuance of Convertible  Preferred Stock and Debt Securities
with a Nondetachable  Conversion Feature," a deemed dividend was assumed for the
Series A and  Series B  Preferred  Stock,  which was  accreted  periodically  as
portions of the Series A and Series B Preferred Stock were converted into Common
Stock.  The amount of this  accretion for the six months ended June 30, 1998 was
$907,489,  an increase of $907,489 or 100%, compared to the corresponding period
in 1997.  Additional  paid in capital was reduced by the amount of accretion and
preferred stock was increased by the amount of accretion, resulting in no impact
on the overall amount of stockholder's equity.

         Net Loss  Attributable  to Common  Stock.  As a result  of the  factors
described  above,  the net loss  attributable to common stock for the six months
ended June 30, 1998 was $4,756,553, an increase of $75,622, or 1.6%, compared to
$4,680,931  for the  corresponding  period in 1997.  Although  the  Company  was
subject to taxation during the six months ended June 30, 1998 and the six months
ended June 30, 1997, the Company incurred net losses during these periods and no
provision for taxes was made.

Liquidity and Capital Resources

         Since  its  inception  until the  completion  of the IPO,  the  Company
financed its  operations  from the private sale of its  securities,  from vendor
credit and from  short-term  loans received from  management,  stockholders  and
others.

         From  October  1994 to August  1995 the  Company  raised  approximately
$1,243,000  from the private  sale of shares of Common Stock at $6.00 per share.
In November 1995, the Company raised $1,505,000 through the private placement of
convertible  debentures and in April 1996, the Company raised $1,000,000 through
a second  private  placement of  convertible  debentures.  The Company  received
approximately  $2,140,000  from these  financings  net of  offering  costs.  The
placement  fees in respect of these  financings  were  carried by the Company as
interest-bearing loans and were repaid from the proceeds of the IPO and realized
gross proceeds of  approximately  $13,280,000 and net proceeds of  approximately
$10,840,000 after related expenses.

      On June 30, 1997, the Company  completed a $3 million private placement of
an aggregate  of 3,180 shares of the  Company's  Series A Preferred  Stock,  par
value $0.01 per share ("Series A Preferred Stock"),  and realized gross proceeds
of $3,000,000 and net proceeds of approximately

                                      -13-

<PAGE>



$2,762,000 after related  expenses.  The holders of the Series A Preferred Stock
converted  all such shares  resulting  in the  issuance of  1,958,981  shares of
Common Stock.

         On  November  12,  1997,  the Company  completed  a $3 million  private
placement of an aggregate  of 3,000 shares of the  Company's  Series B Preferred
Stock,  par value $0.01 per share  ("Series B Preferred  Stock"),  and  realized
gross proceeds of $3,180,000 and net proceeds of approximately  $2,950,000 after
related  expenses.  On February  23,  1998,  the  Company  completed a follow-on
placement of its Series B Preferred  and realized  gross  proceeds of $1,000,000
and net proceeds of approximately  $990,000 after related expenses.  The holders
of the Series B  Preferred  Stock  converted  all such shares  resulting  in the
issuance of 3,172,239 shares of Common Stock.

         In April  1998,  the  Company  entered  into an  equity  line of credit
agreement with institutional  investors who had formerly invested in the Company
in which the Company  received an initial gross amount of $1,000,000 in exchange
for Common Stock.  Under this line of equity the Company has the right,  but not
the obligation,  to obtain up to an additional $10,000,000 in a series of equity
drawdowns  based on terms and  conditions  specified  in the line of equity.  In
connection with this line of equity,  the Company issued warrants to purchase up
to 40,000  shares of stock at $1.76 and  20,000  shares of stock at $2.81 at any
time starting six months after closing and ending five years after closing.  The
placement agent for this transaction received a cash fee of 5% and 50,000 shares
of unregistered stock.

         In May 1998, the Company  completed a $750,000 private  placement of an
aggregate of 375 shares of the  Company's  Series C Preferred  Stock,  par value
$0.01 per share ("Series C Preferred  Stock") and 110,294 shares of Common Stock
with  institutional  investors  who had formerly  invested in the  Company.  The
Series C Preferred  Stock has a stated value of $1,000 per share and a holder of
the Series C Preferred Stock is entitled to receive, if and when declared by the
Company, a dividend equal to 5% of the stated value per share per annum, payable
in shares of Common Stock or in cash,  payable upon  conversion  of the Series C
Preferred  Stock.  The Series C Preferred  Stock also  provides the Company with
several redemption options and allows for the periodic conversion of portions of
unredeemed  Series C Preferred Stock over a two-year period ending May 15, 2000.
Any Series C Preferred Stock  outstanding on May 15, 2000 must be converted into
Common Stock at that date.

         In June 1998, the Company completed a $1,000,000 private placement with
an institutional  investor who had formerly invested in the Company in which the
Company issued 153,846 unregistered shares of Common Stock.

         In June 1998,  the Company  amended  and  exercised a put option in the
aggregate  principal  amount  of  $3,000,000  under the  private  line of equity
agreement  mentioned  above. In connection with such action,  the Company issued
545,454  shares of Common  Stock.  Such  shares are subject to  restrictions  on
resale for a period of nine months and to repricing upon  occurrences of certain
conditions. In addition, the Company issued five-year warrants to purchase up to
300,000 shares of Common Stock at a price of $5.25.


                                      -14-

<PAGE>



         For the six  months  ended  June  30,  1998,  the  Company's  operating
activities  used cash of  $3,366,073.  The net use of cash by operations for the
six months  ended June 30, 1998 was  primarily  the result of a  $3,792,505  net
loss. This was offset by a net decrease in inventories of $109,731, depreciation
and amortization of $152,185 and non-cash charges for tooling costs of $138,682.
Cash used for  investing  activities  for the six months ended June 30, 1998 was
$198,765  which included  $91,190  related to patents and $74,060 in capitalized
tooling  costs.  Proceeds from the Company's  financing  activities  for the six
months  ended  June 30,  1998  were  $6,627,195  which  primarily  consisted  of
$5,307,048 from the issuance of the Company's  Common Stock, net of related fees
and  $1,348,496  from  the  issuance  of the  Company's  Series  B and  Series C
Preferred  Stock,  net of related fees. As a result of the above,  cash and cash
equivalents  on hand  as of  June  30,  1998  was  $4,014,723,  an  increase  of
$3,062,357 from the $952,366 of cash and cash equivalents on hand as of December
31, 1997.

         For the six  months  ended  June  30,  1997,  the  Company's  operating
activities used cash of $4,986,509. The net use of cash for the six month period
ended June 30,  1997 was  primarily  the  result of a  $4,680,931  net loss,  an
increase in inventories of $295,792 largely related to the production of the 586
System and the Company's head mounted display,  an increase in prepaid and other
current assets of $184,312,  offset by depreciation  and  amortization  costs of
$160,547 and non-cash  compensation  costs of $125,488.  Cash used for investing
activities  for the six months ended June 30, 1997 was $747,144  which  included
$306,962 for the acquisition of property and equipment,  $284,294 in capitalized
tooling costs related to the production of the 586 System and the Company's head
mounted display,  and $155,188  related to patents.  Proceeds from the Company's
financing  activities  for the six months  ending June 30, 1997 were  $2,951,076
which  primarily  consisted  of  $2,785,000  from the  issuance  of its Series A
Preferred  Stock and deferred  placement  fees of  $215,000.  As a result of the
above,  cash  on hand as of  June  30,  1997,  was  $3,492,390,  a  decrease  of
$2,782,577  from  the  $6,274,967  of cash and  cash  equivalents  on hand as of
December 31, 1996.

         At June 30, 1998, the Company had no material  capital  commitments and
working capital of $4,492,263.

         On March 19,  1998,  Matrix  Corporation  filed a summons  against  the
Company in the United States District Court, Eastern District of North Carolina,
alleging  that:  Matrix has been  damaged by a purported  breach of the December
Agreement by the Company;  that the Company  should  return all goods shipped by
Matrix  under  both the June  Agreement  and the  December  Agreement;  that the
Company did not intend to comply with the December  Agreement  and therefore the
governing contract between the two entities should revert to the June Agreement.
In addition,  this  summons  requests  that any damages  incurred by Matrix as a
result of this purported  breach of contract be trebled.  On April 30, 1998, the
Company filed a motion in the same court to dismiss the complaints  contained in
the March 19, 1998  filing by Matrix.  While  there can be no  assurance  of the
outcome of this legal  proceeding,  the Company's  management  believes that the
claims by Matrix are  groundless  and that the  impact of this legal  proceeding
will not be adversely material to the Company's  operations.  The maximum amount
payable by the Company under the December  Agreement if Matrix performs  defined
tasks is  approximately  $250,000 and the maximum amount of inventory that could
be  assumed  by the  Company  under  the  December  Agreement  is  approximately
$600,000.

                                      -15-

<PAGE>



         The Company  anticipates  that its  working  capital  requirements  and
operating  expenses will increase as the Company expands production and sales of
the Mobile  Assistant(R),  and  expands its full  sales,  service and  marketing
functions,  and develops the support structure for these activities.  The timing
of increases  in personnel  and other  expenses,  the amount of working  capital
consumed  by  operations,  marketing  and  rollout  expenses  for the MA IV, and
competitive  pressures on gross  margins will impact the magnitude and timing of
the Company's cash requirements.  To meet working capital needs, the Company has
completed  a $10  million  equity  line of credit and  intends to use funds from
operations,  to  obtain  a  working  capital  line of  credit,  and/or  complete
additional  financings.  It is the  opinion  of the  Company's  management  that
additional  funding  arrangements  are readily  available to the Company and the
execution of any such arrangement will depend on timing,  market  conditions and
the final terms and conditions of such  arrangements.  Full production of the MA
IV model of the Mobile  Assistant(R)  is expected to begin in the quarter ending
December  31,  1998 and  receivables  from  sales of the MA IV are  expected  to
provide collateral for borrowing facilities at that point. Although there can be
no assurance that such facilities will be available, the Company intends to seek
to establish secured borrowing facilities at such time as appropriate collateral
is available.  The Company's management believes that the combination of cash on
hand, operating cash flow, and outside funding will provide sufficient liquidity
to meet the  Company's  cash  requirements  until at least March 1999.  However,
there can be no assurance that the Company can or will obtain  sufficient  funds
from  operations  or from a  working  capital  line of  credit  or from  closing
additional financings on terms acceptable to the Company.

                      Possible Impact on Near-Term Revenues

         The Company has agreements  with  third-party  suppliers to manufacture
and supply the body- worn computing unit, the HMD and the batteries for the 133P
and  the MA  IV.  Production  of the  computing  unit  for  the  133P  has  been
substantially  curtailed  pending  the  introduction  of the MA IV in the fourth
quarter,  although  management  believes that it can restart  production to meet
large orders.  As a result,  revenue growth is expected to be modest through the
first three  quarters of the year ending  December  31, 1998,  until  full-scale
production  by these MA IV  suppliers  is  started  and these  units are sold in
volume,  which is expected to begin in the quarter ending  December 31, 1998. In
the event that the start of  full-scale  production  is delayed  for any reason,
revenues for the year ending December 31, 1998 will be adversely affected.

                         Possible Non-Cash Future Charge

         In  connection  with  the  Company's  IPO,  the  representative  of the
underwriters for the transaction (the  "Representative")  required the Company's
officers,  directors and certain other  stockholders  to deposit an aggregate of
1,800,000 shares of Common Stock into an escrow account (the "Escrowed Shares").
The  Escrowed  Shares  will  be  subject  to  release  to such  stockholders  in
increments  over a  three-year  period  only in the  event the  Company's  gross
revenues and earnings (loss) per share for the 12-month periods ending September
30,  1997,  1998 and 1999 meet or exceed  targets  which  have been  established
through negotiations with the Representative (the "Performance Targets"). If the
Performance Targets are not met in any of the relevant 12-month periods (and the
price of the Common  Stock has not met or exceeded the price  described  below),
the Escrowed Shares

                                      -16-

<PAGE>



will be returned to the Company in amounts  which have been agreed upon  between
the Representative and the Company for each period and canceled.  In addition to
the foregoing,  all then Escrowed Shares will be released to the stockholders if
the closing price of the Common Stock as reported on The NASDAQ  SmallCap Market
equals  or  exceeds  $11.00  for 25  consecutive  trading  days  or 30 out of 35
consecutive  trading days during the period  ending  September  30, 1999. In the
event any  Escrowed  Shares  held by  officers,  employees  or  consultants  are
released, the difference between the initial offering price and the market value
of  such  shares  at the  time  of  release  will  be  deemed  to be  additional
compensation  expense to the  Company.  If the price of the Common  Stock at the
time of any  release of the  Escrowed  Shares is  greater  than the value of the
Common Stock at the time of the IPO, an earnings charge could result which would
have the effect of reducing or eliminating any earnings per share and could have
a negative  effect on the market  price for the Common  Stock.  The earnings per
share target  calculation  will be based on the average  number of shares issued
and outstanding  during each period, but excluding shares issued pursuant to the
Representative's option to purchase units of Common Stock and Warrants issued at
the  Company's  IPO ("Unit") at a price of $9.075 per Unit (165% of the offering
price of the Units) during a period of four years  commencing  one year from the
closing of the IPO,  extraordinary items, or compensation expense charged to the
Company related to the release of the Escrowed Shares.

         The  Company's  gross  revenues and  allowable  losses did not meet the
Performance  Targets for the 12-month period ending  September 30, 1997, and the
stock price did not meet the levels  described  above by that time.  Pursuant to
the terms of the escrow agreement, 300,000 of the Escrowed Shares were canceled,
resulting in no earnings  impact and a reduction in shares  outstanding  at that
time of approximately 2.1%. Given the expected start of full-scale production of
the MA IV in the quarter  ending  December 31, 1998,  the  Company's  management
believes  that it is likely that the  Company's  gross  revenues  and  allowable
losses will not meet the  Performance  Targets for the 12- month  period  ending
September  30,  1998.  Accordingly,  the  release of the escrow  shares for this
period is only  likely if the  stock  price  equals  or  exceeds  $11.00  for 25
consecutive  trading  days or 30 out of 35  consecutive  trading  days  prior to
September  30, 1998.  If  conditions  are not met for release from escrow,  then
750,000  shares of stock will be returned to the Company on  September  30, 1998
and canceled,  resulting in no earnings impact and a commensurately lower number
of outstanding shares.

         Since  the  Company  has  reported  losses,  the loss per share for the
Company is  calculated  using  outstanding  shares less shares held in escrow to
avoid antidilution.  Therefore,  the cancellation of shares from escrow does not
affect the reported loss per share.

         Certain  statements  in  the  foregoing  Management's   Discussion  and
Analysis (the "MD&A") are not historical  facts or information and certain other
statements in the MD&A are forward-looking  statements within the meaning of The
Private  Securities  Litigation  Reform Act of 1995 (the "Act").  In particular,
when used in the preceding discussion, the words "believes,  expects, or intends
to" and similar conditional expressions are intended to identify forward-looking
statements  within  the  meaning of the Act and are  subject to the safe  harbor
created  by  the  Act.  Such   statements  are  subject  to  certain  risks  and
uncertainties and actual results could differ materially from those expressed in
any of the forward-looking statements. Such risks and uncertainties include, but
are not limited to,

                                      -17-

<PAGE>



conditions in the general acceptance of the Company's products and technologies,
competitive factors, the ability to successfully  complete additional financings
and other risks described in the Company's SEC reports and filings.

                                      -18-

<PAGE>



PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

a)       EXHIBITS:

         *4.1     Private Line of Equity Agreement
         *4.2     Form of Warrant A
         *4.3     Form of Warrant B
        **4.4     Form of Warrant Issued in Connection with the Exercise of the
                  Put Option
       **10.1     Amendment and Modification Agreement (Exercise of $3,000,000 
                  Put Option)
         27.1     Financial Data Schedule
         --------------------

          * Incorporated by reference to the  correspondingly  numbered  exhibit
included in the Company's  Registration  Statement on Form S-3,  Commission File
No. 333-52567.

          ** Previously filed.

b)       REPORTS ON FORM 8-K

         A  report  on  Form  8-K was  filed  on June  4,  1998  to  report  the
resignation  of John F. Moynahan from the Board of Directors  effective  June 3,
1998,  and the  appointment,  effective  June 5, 1998 of Mr. Kaz Toyosato to the
Board of Directors to fill such vacancy.

                                      -19-

<PAGE>



                                   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.

                                            XYBERNAUT CORPORATION


                                           By: /s/ Edward G. Newman   
                                               ---------------------------------
                                                   Edward G. Newman
                                           President and Chief Executive Officer