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
MARCH 31, 2001 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 |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)
|                            
|                            
|                            
|                            
|OF INCORPORATION)           

12701 FAIR LAKES CIRCLE, FAIRFAX, VA 22033
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES WITH ZIP CODE)

(703) 631-6925
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)

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




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 practicable date.

|                                     |  |                                      
|------------------------------------ |  | -------------------------------------
|Class
Common stock  $0.01 par value |  | Outstanding at May 9, 2001
50,851,292





---



INDEX

|                               |                                                                                                 |                                                               |   |      |   | 
|------------------------------ | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | - | ---- | - | 
|                               |                                                                                                 |                                                               |   | PAGE
|                               |                                                                                                 |                                                               |   |     
|COVER PAGE                     |                                                                                                 |                                                               | 1 |     
|                              
|INDEX                          |                                                                                                 |                                                               | 2 |     
|                              
|PART I  FINANCIAL INFORMATION
|                              
|                               | Item 1   Financial Statements                                                                 
|                              
|                              
|                              
|                              
|                               |                                                                                                 | Condensed Consolidated
Balance Sheets (unaudited and audited) |   |      | 3 | 
|                              
|                              
|                              
|                              
|                               |                                                                                                 | Condensed Consolidated Statements of Operations (unaudited)   |   |      | 4 | 
|                              
|                              
|                              
|                              
|                               |                                                                                                 | Condensed Consolidated Statements of Cash Flows (unaudited)   |   |      | 5 | 
|                              
|                              
|                              
|                              
|                               |                                                                                                 | Notes to Condensed Consolidated Financial Statements          |   |      | 6 | 
|                              
|                               | Item 2   Managements Discussion and Analysis of
Results of Operations and Financial Condition |                                                               |   | 10   |  
|                              
|                               | Item 3   Quantitative and Qualitative Disclosures About Market Risk                            |                                                               |   | 18   |  
|                              
|PART II OTHER INFORMATION    
|                              
|                               | Item 6   Exhibits and Reports on Form 8-K                                                      |                                                               |   | 20   |  





---



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                              |                                                                |              |                                                         |             |             |            |              |             |         |            | 
|----------------------------- | -------------------------------------------------------------- | ------------ | ------------------------------------------------------- | ----------- | ----------- | ---------- | ------------ | ----------- | ------- | ---------- | 
|                              |                                                                |              |                                                         |             |            
|                              |                                                                |              |                                                         |             | March 31,   |            | December 31,
|                              |                                                                |              |                                                         |             | 2001        |            | 2000        
|                              |                                                                |              |                                                         |             | (unaudited) |            | (audited)   
|                              |                                                                |              |                                                         |             |             |            |             
|Current assets:              
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                      |              | $                                                       | 3,531,776   |             |            | $            | 9,273,632   |        
|                             
|                             
|                             
|                             
|                              | Accounts receivable, net of allowances of $129,355             |              |                                                         | 2,433,925   |             |            |              | 3,470,600   |        
|                             
|                             
|                             
|                             
|                              | Inventory, net of reserves of $1,370,000                       |              |                                                         | 2,252,301   |             |            |              | 3,207,939   |        
|                             
|                             
|                             
|                             
|                              | Notes receivable from officers, net                            |              |                                                         | 1,147,500   |             |            |              | 998,581     |        
|                             
|                             
|                             
|                             
|                              | Prepaid and other current assets                               |              |                                                         | 610,437     |             |            |              | 877,045     |        
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total current assets                                    |             |             | 9,975,939  |              |             |         | 17,827,797 | 
|                              |                                                                |              |                                                         |             |             |            |              |            
|Property and equipment, net   |                                                                |              | 775,491                                                 |             |             |            | 841,875      |            
|                              |                                                                |              |                                                         |             |             |            |              |            
|Other assets:                
|                             
|                             
|                             
|                             
|                              | Patent costs, net of accumulated amortization of $851,399     
|                             
|                             
|                             
|                             
|                              |                                                                | and $777,431 |                                                         |             | 891,770     |            |              |             | 790,014 |           
|                             
|                             
|                             
|                             
|                              | Tooling costs, net of accumulated amortization of $745,890 and
|                             
|                             
|                             
|                             
|                              |                                                                |              | $735,985, and reserves of $250,000                      |             |             | 559,639    |              |             |         | 197,578    | 
|                             
|                             
|                             
|                             
|                              | Other                                                          |              |                                                         | 681,926     |             |            |              | 585,418     |        
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total other assets                                      |             |             | 2,133,335  |              |             |         | 1,573,010  | 
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total assets                                            |             | $           | 12,884,765 |              |             | $       | 20,242,682 | 
|                              |                                                                |              |                                                         |             |             |            |              |            
|Current liabilities           |                                                                |              |                                                         |             |             |            |              |            
|                             
|                             
|                             
|                             
|                              | Accounts payable                                               |              | $                                                       | 1,325,646   |             |            | $            | 1,900,924   |        
|                             
|                             
|                             
|                             
|                              | Accrued expenses and other                                     |              |                                                         | 1,794,158   |             |            |              | 2,054,359   |        
|                             
|                             
|                             
|                             
|                              | Deferred revenue                                               |              |                                                         | 597,253     |             |            |              | 468,534     |        
|                             
|                             
|                             
|                             
|                              | Notes and loans payable                                        |              |                                                         | 23,750      |             |            |              | 492,263     |        
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total current liabilities                               |             | $           | 3,740,807  |              |             | $       | 4,916,080  | 
|                              |                                                                |              |                                                         |             |             |            |              |            
|Commitments and contingencies
|                             
|                             
|                             
|                             
|Stockholders equity         
|                             
|                             
|                             
|                             
|                              | Common stock, $0.01 par value, 80,000,000 shares authorized,   |              |                                                         |             |             |            |              |             |        
|                             
|                             
|                             
|                             
|                              |                                                                |              | 45,395,818 and 45,395,818 shares issued and outstanding |             | $           | 453,958    |              |             | $       | 453,958    | 
|                             
|                             
|                             
|                             
|                              | Additional paid-in capital                                     |              |                                                         | 87,382,175  |             |            |              | 87,301,374  |        
|                             
|                             
|                             
|                             
|                              | Foreign currency translation                                   |              |                                                         | (512,839    | )           |            |              | (185,983    | )      
|                             
|                             
|                             
|                             
|                              | Accumulated deficit                                            |              |                                                         | (78,179,336 | )           |            |              | (72,242,747 | )      
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total stockholders equity                              |             | $           | 9,143,958  |              |             | $       | 15,326,602 | 
|                              |                                                                |              |                                                         |             |             |            |              |            
|                              |                                                                |              | Total liabilities and stockholders equity              |             | $           | 12,884,765 |              |             | $       | 20,242,682 | 
|                              |                                                                |              |                                                         |             |             |            |              |            

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





---



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                         |                                 |                                                    |                                  |           |                              |            |          |           |            |            |  
|---------------------------------------- | ------------------------------- | -------------------------------------------------- | -------------------------------- | --------- | ---------------------------- | ---------- | -------- | --------- | ---------- | ---------- | -
|                                         |                                 |                                                    |                                  |           | Three Months Ended March 31,
|                                         |                                 |                                                    |                                  |           |                             
|                                         |                                 |                                                    |                                  |           | 2001                         |            | 2000    
|                                         |                                 |                                                    |                                  |           |                              |            |         
|Revenue:                                
|                                        
|                                        
|                                        
|                                        
|                                         | Product                         |                                                    | $                                | 1,358,151 |                              |            | $        | 1,499,442 |           
|                                        
|                                        
|                                        
|                                        
|                                         | Consulting, licensing and other |                                                    |                                  | 917,071   |                              |            |          | 605,030   |           
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Total revenue                                      |                                  |           | 2,275,222                    |            |          |           | 2,104,472  |           
|                                        
|                                        
|                                        
|                                        
|Cost of sales:                          
|                                        
|                                        
|                                        
|                                        
|                                         | Product                         |                                                    |                                  | 1,119,439 |                              |            |          | 1,091,293 |           
|                                        
|                                        
|                                        
|                                        
|                                         | Consulting, licensing and other |                                                    |                                  | 584,936   |                              |            |          | 465,235   |           
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Gross income                                       |                                  |           | 570,847                      |            |          |           | 547,944    |           
|                                        
|                                        
|                                        
|                                        
|Operating expenses:                     
|                                        
|                                        
|                                        
|                                        
|                                         |                                 | Sales and marketing                                |                                  |           | 3,100,374                    |            |          |           | 3,100,904  |           
|                                        
|                                        
|                                        
|                                        
|                                         |                                 | General and administrative                         |                                  |           | 1,646,936                    |            |          |           | 1,446,573  |           
|                                        
|                                        
|                                        
|                                        
|                                         |                                 | Research and development                           |                                  |           | 1,845,151                    |            |          |           | 589,828    |           
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 |                                                    | Total operating expenses         |           |                              | 6,592,461  |          |           |            | 5,137,305  |  
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 |                                                    | Operating loss                   |           |                              | (6,021,614 | )        |           |            | (4,589,361 | )
|                                        
|                                        
|                                        
|                                        
|Interest and other income/(expense), net |                                 |                                                    | 91,014                           |           |                              |            | (159,845 | )        
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Loss before provision for income taxes             |                                  |           | (5,930,600                   | )          |          |           | (4,749,206 | )         
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                                 |                                                    | 5,989                            |           |                              |            | 26,209   |          
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Net loss                                           |                                  |           | (5,936,589                   | )          |          |           | (4,775,415 | )         
|                                        
|                                        
|                                        
|                                        
|Provision for preferred stock dividends  |                                 |                                                    |                                 |           |                              |            | 8,130    |          
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Net loss applicable to holders of common stock     |                                  | $         | (5,936,589                   | )          |          | $         | (4,783,545 | )         
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Net loss per common share applicable to holders of
|                                        
|                                        
|                                        
|                                        
|                                         |                                 |                                                    | common stock (basic and diluted) |           | $                            | (0.13      | )        |           | $          | (0.14      | )
|                                         |                                 |                                                    |                                  |           |                              |            |          |          
|                                         |                                 | Weighted average number of common shares          
|                                        
|                                        
|                                        
|                                        
|                                         |                                 |                                                    | outstanding (basic and diluted)  |           |                              | 45,395,818 |          |           |            | 35,421,340 |  
|                                         |                                 |                                                    |                                  |           |                              |            |          |          

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





---



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)

|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |            |            |            |  
|------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------------------- | ---------- | ---------------------------- | -------- | --------- | ---------- | ---------- | ---------- | -
|                                                             |                                                                             |                                                               |                                     |            | Three Months Ended March 31,
|                                                             |                                                                             |                                                               |                                     |            |                             
|                                                             |                                                                             |                                                               |                                     |            | 2001                         |          | 2000     
|                                                             |                                                                             |                                                               |                                     |            |                              |          |          
|Cash flows from operating activities:                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                                                    |                                                               | $                                   | (6,124,544 | )                            |          | $         | (4,775,415 | )         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Adjustments to reconcile net loss to net cash used in
operating activities:
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Depreciation and amortization                                 |                                     |            | 424,613                      |          |           |            | 396,874    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Provision for bad debts                                       |                                     |            |                             |          |           |            | 22,794     |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Amortization of note discount                                 |                                     |            |                             |          |           |            | 191,969    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Non-cash charges for equity securities issued for services    |                                     |            | 80,800                       |          |           |            | 529,172    |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Changes in assets and liabilities:                           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Inventory                           |            |                              | 745,847  |           |            |            | (286,546   | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Accounts receivable                 |            |                              | 976,655  |           |            |            | (313,556   | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Prepaid and other current assets    |            |                              | 260,229  |           |            |            | (24,545    | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Notes receivable from officers, net |            |                              | (148,919 | )         |            |            | 4,823      |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Other assets                        |            |                              | (11,691  | )         |            |            | (59,215    | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Accounts payable                    |            |                              | (551,620 | )         |            |            | (2,405,093 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Accrued expenses and other          |            |                              | (243,785 | )         |            |            | (677,775   | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               | Deferred revenue                    |            |                              | 128,719  |           |            |            |           |  
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Net cash used in operating activities                         |                                     |            | (4,463,696                   | )        |           |            | (7,396,513 | )         
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Cash flows from investing activities:                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Acquisition of property and equipment                                       |                                                               |                                     | (235,869   | )                            |          |           | (113,147   | )         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Acquisition of patents and trademarks                                       |                                                               |                                     | (179,437   | )                            |          |           | (68,305    | )         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Capitalization of tooling costs                                             |                                                               |                                     | (363,730   | )                            |          |           | (56,664    | )         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Capitalization of loan costs                                                |                                                               |                                     | (10,000    | )                            |          |           |           |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Net cash used in investing activities                         |                                     |            | (789,036                     | )        |           |            | (238,116   | )         
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Cash flows from financing activities:                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Proceeds from:                                                             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Common stock offerings, net                                   |                                     |            |                             |          |           |            | 2,463,000  |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Exercise of warrants                                          |                                     |            |                             |          |           |            | 9,128,561  |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Notes and loans                                               |                                     |            |                             |          |           |            | 2,752,413  |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Payments for:                                                              
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Notes and loans                                               |                                     |            | (466,668                     | )        |           |            |           |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Net cash (used in)/provided by financing activities           |                                     |            | (466,668                     | )        |           |            | 14,343,974 |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of exchange rate changes on cash and cash equivalents |                                                                             |                                                               | (22,456                             | )          |                              |          | 17,775    |           
|                                                            
|                                                            
|                                                            
|                                                            
|Net (decrease)/increase in cash and cash equivalents         |                                                                             |                                                               | (5,741,856                          | )          |                              |          | 6,727,120 |           
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents, beginning of period               |                                                                             |                                                               | 9,273,632                           |            |                              |          | 2,126,000 |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Cash and cash equivalents, end of period                     |                                                                             | $                                                             | 3,531,776                           |            |                              | $        | 8,853,120 |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Supplemental disclosure of cash flow information:            |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             | Cash paid for interest                                        |                                     | $          | 3,673                        |          |           | $          | 37,032     |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Cash paid for taxes                                          |                                                                             | $                                                             | 29,502                              |            |                              | $        | 26,209    |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|Supplemental disclosure of non-cash financing activities:   
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Equity securities issued for future services                  |                                     | $          | 119,601                      |          |           | $          | 373,364    |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Equity securities issued as payment of accounts payable       |                                     | $          |                             |          |           | $          | 109,740    |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Provision for preferred stock dividend requirements           |                                     | $          |                             |          |           | $          | 8,130      |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           
|                                                             |                                                                             | Common stock issued for preferred stock dividend requirements |                                     | $          |                             |          |           | $          | 133,904    |           
|                                                             |                                                                             |                                                               |                                     |            |                              |          |           |           

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





---



XYBERNAUT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited, condensed and consolidated financial
statements of Xybernaut Corporation (Xybernaut or the Company) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Company management, these
unaudited, condensed and consolidated financial statements reflect all
adjustments of a normal recurring nature necessary to present fairly the
financial position of the Company and its subsidiaries at March 31, 2001 and
December 31, 2000 and the results of their operations and cash flows for the
three months ended March 31, 2001 and 2000. Results of operations for the three
months ended March 31, 2001 are not necessarily indicative of results of
operations expected for the full fiscal year ending December 31, 2001. Please
refer to the Companys Annual Report on Form 10-K for the complete financial
statements.

On April 7, 2000, Xybernaut acquired Selfware, Inc, which subsequently
changed its name to Xybernaut Solutions, Inc. (XSI). The merger was accounted
for as a pooling of interests. All financial data of the Company, including
Xybernauts previously issued financial statements for the periods presented in
this Form 10-Q, have been restated to include the historical financial
information of XSI.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: XSI (Vienna, Virginia, U.S.A),
Xybernaut GmbH (Boeblingen, Germany), Xybernaut K.K. (Yokohama, Japan) and
Xybernaut Development Corporation (Fairfax, Virginia, U.S.A.). All significant
intercompany accounts and transactions have been eliminated in the
consolidation. Net gains and losses resulting from foreign currency
transactions have not been material.

Revenues

The Companys revenues are principally derived from sales of its hardware
and software products and from consulting services. Revenue from product sales
is recognized upon shipment of the Companys products to end-users pursuant to
binding customer purchase orders. When shipments are made to distributors,
revenue is recognized upon ultimate sale by the distributors to end-users, when
the distributors purchase product for their own use pursuant to separate
binding purchase orders, or when returns can be reasonably estimated.

Revenue recognition related to consulting services is dependent on the
terms and conditions of the Companys various contracts with its customers.
Revenue is typically recognized ratably over the contractual periods or as the
services are provided. In time-and-materials contracts, revenue is recognized
as the Company incurs billable costs. In fixed-price contracts, revenue is
recorded on the basis of estimated percentage of completion, based on the ratio
of costs incurred over total estimated costs to complete.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition, income
statement presentation and financial disclosures. The Company adopted SAB 101
during 2000. At March 31, 2001 and December 31, 2000, the Company has deferred





---



$309,780 in revenue associated with shipments of its hardware products pursuant
to sales contracts which included provisions for future upgrades of its
products. The Company expects to recognize this deferred revenue during 2001
as the upgraded products are ultimately shipped to the customers.

Comprehensive Income

During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which separates
comprehensive income into two components, net income and other comprehensive
income. Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are recorded as
elements of stockholders equity and are excluded from net income. The
Companys other comprehensive income is comprised principally of foreign
currency translation gains and losses. For the three months ended March 31,
2001 and 2000, comprehensive loss was $6,263,445, consisting of a net loss of
$5,936,589 and foreign currency translation loss of $326,856, and $4,681,526,
consisting of a net loss of $4,775,415 and foreign currency translation gain of
$93,889, respectively.

3. NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In 1999,
the required implementation date of SFAS 133 was delayed to fiscal years
beginning after June 15, 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Currently, the Company does not utilize derivative instruments, but may elect
to do so to hedge foreign currency, interest rate or other exposures if such
exposures become significant. The Company adopted SFAS 133 during the quarter
ended March 31, 2001. The adoption did not have a significant effect on the
Companys results of operations or its financial position.

4. INVENTORY AND TOOLING

At March 31, 2001 and December 31, 2000, inventory consisted primarily of
component hardware parts held for resale and allocated tooling costs, and is
comprised primarily of finished goods. Capitalized tooling costs consist
primarily of payments  made to
third-party vendors for their products and services, used in the design and
manufacture of the Companys hardware product lines. Inventory at March 31, 2001 and December 31, 2000
consisted primarily of hardware components for the Companys current product line, the
Mobile Assistant® IV, (the MA® IV). Tooling at
March 31, 2001 was related primarily to production of the MA IV and the MA V, the
Companys next generation product line. Tooling at
December 31, 2000 was related primarily
to the MA IV product line. Inventory is stated at the lower of cost or market,
with cost being determined on a first-in, first-out basis. Management
periodically assesses the need to provide for obsolescence of inventory and
tooling and adjusts the carrying values to their net realizable value when
required. During 2000, the Company announced the introduction of the MA IV TC,
a new model of its MA IV product line, as well as the MA V,
both of which are scheduled for introduction during 2001. While the Companys
management believes that it can sell the existing MA IV inventory at above
historical cost, the Company has established inventory and tooling reserves to
cover potential losses which it may incur in selling this inventory at below
cost, given the uncertainties created by the introduction of these new
products. In the event that anticipated sales of the Companys hardware
products do not materialize, additional adjustments may be necessary to write
down the carrying value of the Companys inventory and related capitalized
tooling costs of these components. As of March 31, 2001 and December 31, 2000,
the allowance to reduce inventory balances to net realizable value was
$1,370,000 and the allowance to reduce capitalized tooling costs to net
realizable value was $250,000.





---



5. FINANCINGS

Common Stock

On January 3, 2000, the Company received net proceeds of $2,460,500
through the issuance of 647,500 shares its common stock.

The Company has issued equity securities to certain employees, consultants
and companies for services provided to the Company. These securities include
shares of common stock and warrants and options to purchase shares of common
stock. These transactions were individually valued based upon the fair value of
the securities issued or the services provided, whichever was more reliably
measured. The Company recorded expenses associated with these services of
$80,800 and $529,172 during the three months ended March 31, 2001 and 2000,
respectively. At March 31, 2001, an additional $119,601 was recorded as
prepaid expenses that will be amortized over the remaining lives of the
underlying service agreements.

Employees and consultants of the Company have exercised stock options that
had been issued pursuant to the Companys various stock incentive plans. During
the three months ended March 31, 2001 and 2000, the Company received gross
proceeds of $0 and $841,941, respectively, and issued 0 and 364,282 shares,
respectively, of its common stock related to these exercises.

In connection with the Companys various financings and borrowings, the
Company has issued warrants to purchase common stock. The Company received
gross proceeds of $0 and $8,196,875 through the issuance of 0 and 1,765,200
shares of its common stock during the three months ended March 31, 2001 and
2000, respectively, related to the exercise of certain of these warrants. At
March 31, 2001, the Company had warrants outstanding to purchase 3,814,937
shares of its common stock at prices that range from $2.00 to $18.00 per share,
with a weighted average of $4.64 per share.

Borrowings

In April 1999, XSI entered into a term loan and revolving line of credit
that were secured by its assets. Borrowings under the loans accrued interest at
the prime rate plus 1.0%. During the three months ended March 31, 2000, XSI
borrowed $95,000 and incurred $3,415 in interest expense pursuant to these
facilities.

On December 2, 1999, the Company entered into a financing facility with
IBM Global Finance (IBM Finance and the 1999 IBM Facility, respectively).
Borrowings under the 1999 IBM Facility were secured by the Companys equipment,
inventory and accounts receivable balances. Under the terms of the facility,
the Company borrowed $1,000,000 under a six-month term loan and was extended a
$3,000,000 credit line to finance customer purchases upon presentation to the
lender of certain documentation supporting the underlying sales. The borrowing
under the term loan accrued interest at up to the prime rate plus 2.5% per
annum. Borrowings under the credit line accrue interest at up to the prime
rate plus 2.75%, depending on certain specifics of the underlying sales being
financed, such as the type of customer and the age of the accounts receivable
balance. The Company repaid the remaining balance of $333,333 of the term loan
and incurred $22,246 in interest expense during the three months ended March
31, 2000.

In January 2000, the Company borrowed $3,025,000 from several lenders
pursuant to promissory notes that required the Company to repay the borrowings
by January 2001 unless repaid earlier upon a public or private placement of
common stock in excess of $10,000,000. Interest on the notes accrued at 10% per
annum. In connection with these borrowings, the Company issued warrants to
purchase 302,500 shares of unregistered common stock at $0.10 per share. Based
on the relative fair values of the securities issued, these warrants were
assigned a value of $921,452, which was recorded as a note discount that was
amortized into interest expense over the lives of the notes. In November and
December 2000, the principal and unpaid interest were repaid upon completion by
the Company of a private placement of common stock. Upon repayment, the
remaining note discount balances were amortized as interest expense.





---



In July 2000, subsequent to the repayment of the 1999 IBM Facility term
loan, the Company entered into a new six-month $1,400,000 term loan with IBM
Finance (the 2000 IBM Facility), the terms of which were similar to those in
the 1999 IBM Facility. The borrowing was secured by certain of the Companys
equipment, inventory and accounts receivable balances. The borrowing accrued
interest at the prime rate plus 1.5% and was repaid in three equal installments
in September and November 2000 and January 2001. The Company owed $466,668 at
December 31, 2000 and incurred $6,702 in interest expense during the three
months ended March 31, 2001 associated with the 2000 IBM Facility. The
remaining balance was repaid during the first quarter of 2001. The Company has
received a proposal from IBM Finance to obtain an expanded revolving credit
facility based on the Companys inventory and accounts receivable balances,
but there can be no assurance that this facility will be finalized.

Preferred Stock

During 1999, the Company issued 10,500 shares of series D convertible
preferred stock (Series D Preferred Stock) for gross proceeds of $10,000,000
and 2,100 shares of its series E convertible preferred stock (Series E
Preferred Stock) for gross proceeds of $2,000,000.

During the three months ended March 31, 2000, 4,250 shares of the Series D
Preferred Stock were converted into 3,970,581 shares of common stock. As of
March 31, 2000, all shares of preferred stock had been converted into shares of
common stock except for 250 shares of Series D Preferred Stock and 100 shares
of Series E Preferred Stock. These remaining shares were converted into shares
of common stock during the three months ended June 30, 2000.

6. SEGMENT AND ENTERPRISE WIDE REPORTING

Operating segments are defined in accordance with SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, as
components of an enterprise about which separate discrete financial information
is evaluated regularly by the chief operating decision maker or decision making
group, in deciding how to allocate resources and assess performance. The
financial information disclosed herein, materially represents all of the
financial information related to the Companys principal operating segments as
a provider of wearable computing and communications systems and software and
service solutions.

Revenues by geographical destination as a percentage of total revenues for
the three months ended March 31, 2001 and 2000 are as follows:

|                                         |  |                    |    |      |  |  |    |  
|---------------------------------------- |  | ------------------ | -- | ---- |  |  | -- | -
|                                         |  | Three Months Ended
|                                         |  | March 31,         
|                                         |  | 2001               |    | 2000
|                                         |  |                    |    |     
|United States                            |  |                    | 73 | %    |  |  | 58 | %
|                                        
|                                        
|                                        
|                                        
|European countries, principally Germany  |  |                    | 19 | %    |  |  | 18 | %
|                                        
|                                        
|                                        
|                                        
|Far Eastern countries, principally Japan |  |                    | 8  | %    |  |  | 24 | %

Operations in various geographical areas are summarized as follows:

|               |                     |  |                    |           |      |  |   |            | 
|-------------- | ------------------- |  | ------------------ | --------- | ---- |  | - | ---------- | 
|               |                     |  | As of and for the 
|               |                     |  | Three Months Ended
|               |                     |  | March 31,         
|               |                     |  | 2001               |           | 2000
|               |                     |  |                    |           |     
|North America:
|              
|              
|              
|              
|               | Total revenue       |  | $                  | 1,664,684 |      |  | $ | 1,224,968  | 
|              
|              
|              
|              
|               | Net loss            |  | $                  | 5,069,722 |      |  | $ | 4,168,015  | 
|              
|              
|              
|              
|               | Identifiable assets |  | $                  | 9,718,541 |      |  | $ | 15,162,179 | 
|              
|              
|              
|              
|Europe:       
|              
|              
|              
|              
|               | Total Revenue       |  | $                  | 428,550   |      |  | $ | 375,363    | 
|              
|              
|              
|              
|               | Net loss            |  | $                  | 654,569   |      |  | $ | 444,551    | 
|              
|              
|              
|              
|               | Identifiable assets |  | $                  | 1,429,915 |      |  | $ | 728,205    | 





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|      |                     |  |   |           |  |  |   |           | 
|----- | ------------------- |  | - | --------- |  |  | - | --------- | 
|Asia:
|     
|     
|     
|     
|      | Total revenue       |  | $ | 181,988   |  |  | $ | 504,141   | 
|     
|     
|     
|     
|      | Net loss            |  | $ | 212,298   |  |  | $ | 162,849   | 
|     
|     
|     
|     
|      | Identifiable assets |  | $ | 1,736,309 |  |  | $ | 4,817,027 | 

The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue or total accounts receivable and
their aggregate percentage of the Companys total revenue or total accounts
receivable.

|                                     |      |  |           |   |               |  |           |      |                  |  |                     |   |  |  |  |      |  
|------------------------------------ | ---- |  | --------- | - | ------------- |  | --------- | ---- | ---------------- |  | ------------------- | - |  |  |  | ---- | -
|                                     |      |  |           |   |               |  |           |      |                  |  | ACCOUNTS RECEIVABLE
|                                     |      |  | REVENUE   |   |              
|                                     |      |  |           |   |               |  |           |      | PERCENT OF TOTAL
|                                     |      |  | NUMBER OF |   | PERCENT OF    |  | NUMBER OF |      | ACCOUNTS        
|                                     |      |  | CUSTOMERS |   | TOTAL REVENUE |  | CUSTOMERS |      | RECEIVABLE      
|                                     |      |  |           |   |               |  |           |      |                 
|For the Three Months Ended
March 31,
|                                    
|                                    
|                                    
|                                    
|                                     | 2001 |  |           | 2 |               |  |           | 35.5 | %                |  |                     | 2 |  |  |  | 48.9 | %
|                                    
|                                    
|                                    
|                                    
|                                     | 2000 |  |           | 1 |               |  |           | 12.0 | %                |  |                     | 1 |  |  |  | 12.0 | %

The Company has contracted with IBM to design, develop and manufacture the
computer portion of its next generation of wearable computer systems, the MA V,
which is scheduled for introduction in 2001. As of March 31, 2001,
a substantial portion of the design and development of the MA V product was
complete. Under the terms of the underlying agreements, Xybernaut pays IBM for
design and development work and retains ownership of the manufacturing package
including the tools, dies and other items needed for production. Management
believes that other partners could provide the remaining design, development
and manufacture services on similar terms if required. However, a delay in
supply of the necessary parts and components, as a result of a change in
supplier, could have a material adverse effect on the Companys results of
operations.

A customer of the Company provides marketing services to
the Company. The Company recorded revenues on sales of its hardware products to
this customer of $0 and $252,139 during the three months ended
March 31, 2001 and March 31, 2000, respectively.
The Company recorded $71,250 and $124,455 of expenses related to the marketing services
performed by this customer during the three months ended
March 31, 2001 and 2000, respectively. These
services were paid through the issuance of the Companys equity securities during 2000.

7. SUBSEQUENT EVENTS

During April and May 2001, the Company received gross proceeds of
$11,704,589 through private placements and warrant exercises. Of this amount,
the Company raised $10,200,000 through the private placement of 5,238,094
shares of its common stock to several investors. These shares were sold at a
weighted average price of $1.95, representing an approximate 13% discount to
the closing bid price of the shares on the days preceding the
finalization of negotiations
between the Company and the investors. In connection with these private
placements, the Company issued warrants to purchase 1,616,427 shares of its
common stock at an exercise price of $5.00 per share and paid $350,000 in
finders fees.

The remaining $1,504,589 in gross proceeds was raised by the Company
through the exercise of existing warrants by investors, through which 716,471
shares of common stock were issued.





---



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

FORWARD-LOOKING STATEMENTS

To keep investors informed of the Companys future plans and objectives,
this Quarterly Report on Form 10-Q (and other reports and statements issued
by the Company and its officers from time to time) contain certain statements
concerning the Companys future results, future performance,
intentions, objectives, plans and expectations that are, or may be deemed to
be, forward-looking statements. The Companys ability to do this has been
fostered by the Private Securities Litigation Reform Act of 1995 which provides
a safe harbor for forward-looking statements to encourage companies to
provide prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement.
Such forward-looking statements are subject to a number of known and unknown
risks and uncertainties that, in addition to general economic and business
conditions, could cause the Companys actual results, performance, and
achievements to differ materially from those described or implied in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the Companys ability to profit
from its products and services as expected, the Companys ability to meet
competition, the Companys ability to maintain superior technological
capability, foresee changes and continue to identify, develop and
commercialize innovative and competitive products and services, the Companys
ability to penetrate different markets and successfully expand its revenue, and
the Companys ability to generate cash flow and obtain financing to support its
operations and growth.

OVERVIEW

Xybernaut Corporation (the Company), a Delaware corporation originally
incorporated in 1990, is engaged in the research, development, manufacture,
marketing and sales of mobile, wearable computing and communication systems as
well as software and service solutions designed to enhance productivity and
improve product management, asset management, and the accuracy, timeliness and
utilization of captured data. The Company offers solutions with a software and
services focus through its wholly-owned subsidiary Xybernaut Solutions, Inc.
(XSI). The Company offers solutions with a hardware focus through its U.S.
operations and through its wholly-owned subsidiaries Xybernaut K.K. (Japan) and
Xybernaut GmbH (Germany). The Mobile Assistant®
(MA®) series is the Companys primary line of hardware products,
with the MA IV currently available and the MA V and MA IV TC scheduled for
commercial release during 2001.

The Mobile Assistant is a wearable personal computer which combines the
speed, memory, processing, multimedia and communications capabilities of a
desktop PC in a lightweight, user-supported unit with hands-free operation and
simultaneous user mobility. The Mobile Assistant is a combination of hardware
and software designed to be worn on the body to perform complex and time
consuming tasks such as remote video teleconferencing, installation,
maintenance, repair and inspection of complex technological and mechanical
systems, retrieval and analysis of information from remote locations, and
coordination of remote commercial and industrial activities, or military field
operations.

The Mobile Assistant incorporates technologically advanced optional
features such as real-time, two-way video and audio communications through
radio frequency transmissions or cellular linkups, global positioning system
tracking capabilities and access to information through intranets, the Internet
and the World Wide Web. The head-mounted display includes a two-way audio
system and optional built-in video camera, and presents a desk-top quality
color image that is equivalent to that of a desktop PC monitor at a distance of
18 inches. An optional light-weight, daylight readable, full color flat panel
display, with an integrated digitizer, is offered for those users who may not
need to be fully hands-free, may need to capture signatures or other
forms-related data, or may need to share the displayed data with others. The
lightweight body-worn computing unit is designed to allow operation in
conditions in which conventional portable computers can not operate and is
designed to run software applications designed for Microsoft®
Windows® 3.11, 95, 98, 2000 and NT, as well as DOS, SCO
UNIX® and LINUX.

Through XSI, formerly known as Selfware, Inc., the Company provides a full
line of software development and implementation services. XSI provides
programming capabilities in a variety of





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advanced languages including Visual
Basic and Visual C++, along with database experience in Microsoft SQL server,
Oracle and Sybase. Telecommunication and information technology for asset
management are also provided by XSI for computers, hubs, routers and data
lines, along with asset
management software for linear referenced assets including roads, railways,
utility, and pipelines. XSIs solutions have been developed for use with
Windows, UNIX and Novell Netware.

XSI offers the proprietary OPMIST asset management system that has been
installed in over 200 sites worldwide at shipyards, utilities, manufacturers,
departments of transportation, military bases and railroads. Also offered by
XSI is the Program and Project Management System (PPMS) solution that has
been provided to six state Departments of Transportation (DOTs). The PPMS is
a fully integrated program, project and task management system designed by XSI
in conjunction with state DOT organizations to help manage capital improvement
programs. The PPMS is a total solution that includes commercial-off-the-shelf
project scheduling systems, such as Artemis, Primavera, OPX2 and Microsoft
Project. By using the PPMS, state DOT organizations have the ability to model
every project included in capital improvement programs.

RESULTS OF OPERATIONS

Historically, the Company has derived its revenues from sales of the
Mobile Assistant series and software products and through consulting services.
In the future, the Company expects to derive additional revenues from the
licensing of its intellectual property.

The Companys cost of sales includes the costs of components for the
Mobile Assistant series, costs of purchased software, direct labor and
materials, inventory reserves, amortization of tooling costs and fulfillment
and shipping costs.

The Company incurs sales and marketing expenses primarily related to its
(i) direct sales force for its product and consulting businesses, including
salary, commissions, travel and other costs, (ii) channel sales strategy,
including the management of relationships with high-volume generic
distributors, strategic partners, system integrators, value added resellers and
original equipment manufacturers, (iii) strategic marketing initiatives,
including analysis related to customer needs and competition and (iv)
advertising and marketing programs, including participation in
industry-specific trade shows, selected press coverage, and exhibitions at
special events such as the annual International Conference on Wearable
Computing.

The Company has historically made, and intends to continue to make,
significant expenditures on research and development of hardware and software
products and has made substantial efforts to enhance its current line and to
design and engineer its next generation of wearable products. Research and
development activities relate primarily to the research and design of new
products, test components 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 (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, after which any
additional costs are capitalized until the software is ready for release.

General and administrative expenses consist of costs associated with the
Companys legal, tax and accounting, information technology, executive and
other general activities.

For the three months ended March 31, 2001, the Companys operating
activities used cash of $4,463,696, primarily as a result of its net loss
offset by changes in working capital, and its investing activities used cash of
$789,036. The Company used $466,668 in its financing activities, which
consisted solely of the repayment of a loan. As a result, the Companys cash
balance decreased to $3,531,776 at March 31, 2001 from $9,273,632 at December
31, 2000.

For the three months ended March 31, 2000, the Companys operating
activities used cash of $7,396,513, primarily as a result of its net loss and
changes in working capital and its investing





---



activities used cash of $238,116,. These
activities were funded through the Companys financing activities which
provided cash of $14,343,974, principally through the issuance of common stock
through private placements
and the exercise of warrants and stock options and through borrowings. As a
result, the Companys cash balance increased to $8,853,120 at March 31, 2000
from $2,126,000 at December 31, 1999.

The following table sets forth certain consolidated financial data as a
percentage of revenues:

|                                               |                          |  |                              |       |      |  |        |       |  
|---------------------------------------------- | ------------------------ |  | ---------------------------- | ----- | ---- |  | ------ | ----- | -
|                                               |                          |  | Three Months Ended March 31,
|                                               |                          |  |                             
|                                               |                          |  | 2001                         |       | 2000
|                                               |                          |  |                              |       |     
|Revenue                                        |                          |  | 100.0                        | %     |      |  | 100.0  | %    
|                                              
|                                              
|                                              
|                                              
|Cost of sales                                  |                          |  | 74.9                         | %     |      |  | 74.0   | %    
|                                               |                          |  |                              |       |      |  |        |      
|Gross margin                                   |                          |  | 25.1                         | %     |      |  | 26.0   | %    
|                                              
|                                              
|                                              
|                                              
|Operating expenses:                           
|                                              
|                                              
|                                              
|                                              
|                                               | Sales & marketing        |  |                              | 136.3 | %    |  |        | 147.3 | %
|                                              
|                                              
|                                              
|                                              
|                                               | General & administrative |  |                              | 72.4  | %    |  |        | 68.7  | %
|                                              
|                                              
|                                              
|                                              
|                                               | Research & development   |  |                              | 81.1  | %    |  |        | 28.0  | %
|                                               |                          |  |                              |       |      |  |        |      
|                                               | Total operating expenses |  |                              | 289.8 | %    |  |        | 244.1 | %
|                                              
|                                              
|                                              
|                                              
|Interest and other, net                        |                          |  | 4.0                          | %     |      |  | (7.6   | %)   
|                                               |                          |  |                              |       |      |  |        |      
|Loss before provision for income taxes         |                          |  | (260.7                       | %)    |      |  | (225.7 | %)   
|                                              
|                                              
|                                              
|                                              
|Provision for income taxes                     |                          |  | 0.2                          | %     |      |  | 1.2    | %    
|                                               |                          |  |                              |       |      |  |        |      
|Net loss                                       |                          |  | (260.9                       | %)    |      |  | (226.9 | %)   
|                                               |                          |  |                              |       |      |  |        |      
|Provisions for preferred stock                 |                          |  |                             | %     |      |  | 0.4    | %    
|                                               |                          |  |                              |       |      |  |        |      
|Net loss applicable to holders
of common stock |                          |  | (260.9                       | %)    |      |  | (227.3 | %)   
|                                               |                          |  |                              |       |      |  |        |      

THREE MONTHS ENDED MARCH 31, 2001 AND 2000

REVENUE. The Company derives its revenue from product sales of its
wearable computers and software, and from consulting services. Total revenue
for the quarter ended March 31, 2001 was $2,275,222, an increase of $170,750 or
8%, compared to $2,104,472 for the quarter ended March 31, 2000. Product
revenue for the first quarter of 2001 was $1,358,151, a decrease of $141,291 or
9%, compared to $1,499,442 for the first quarter of 2000. The decrease in
product revenue was attributable to sales of the Companys hardware products,
which totaled $1,275,760 in the three months ended March 31, 2001, compared with
$1,490,873 in the three months ended March 31, 2000. This decrease resulted
primarily from the Companys emphasis on new and enhanced product lines, the MA
V and MA IV TC, which are scheduled for introduction during 2001. In several
instances, customers have deferred purchases until the new products are
available. Additionally, the Companys current product line, the MA IV, was
sold at a larger discount in the first quarter of 2001 than in the comparable
quarter in 2000 in anticipation of the new product lines. The decrease in
hardware revenue was offset by an increase in software revenue from the first
quarter of 2000 to the first quarter of 2001. The Companys consulting,
licensing and other revenue during the first quarter of 2001 was $917,071, an
increase of $312,041 or 52%, from revenue of $605,030 in the first quarter of
2000. This increase was the result of having additional contract activity in
the first quarter of 2001 compared with the corresponding period in 2000.

COST OF SALES. The Companys cost of sales includes the costs of
components for the Mobile Assistant series, purchased software, direct labor
and materials, amortization of tooling costs, warranty reserves, and
fulfillment and shipping costs. Total cost of sales for the quarter ended
March 31, 2001 was $1,704,375, an increase of $147,847 or 9%, compared to
$1,556,528 for the quarter ended March 31, 2000. This increase resulted
primarily from the increase in consulting services and other inventory charges
such as tooling, warranty expense, and configuration expense, resulting in
overall gross





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margins of 25% and 26% for the first quarter of 2001 and 2000,
respectively. The Companys gross margin from its product sales decreased to
18% for the first quarter of 2001 from 27% for the first quarter of 2000,
resulting primarily from larger discounts given to customers during the first
quarter of 2001 in anticipation of upcoming new product launches. The Companys
gross margin on software sales remained consistent from 2000 to 2001. The
Companys gross margin from its consulting, licensing
and other services increased to 36% in the first quarter of 2001 from 23% in
the comparable quarter for 2000, primarily as the result of several higher
margin contracts billed during the 2001 period compared with the 2000 period.

SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter
ended March 31, 2001 were $3,100,374, which was consistent with the $3,100,904
recorded in the comparable 2000 quarter. The majority of these costs related
to the continued sales and marketing efforts for the Companys hardware
products. Included in these amounts were non-cash expenses of $80,800 and
$529,172 for outside marketing services funded through the issuance of the
Companys equity securities during the comparable 2001 and 2000 periods,
respectively.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended March 31, 2001 were $1,646,936, an increase of $200,363,
or 14%, compared to $1,446,573, for the corresponding period in 2000. This
increase was primarily the result of an increase in spending to expand the
Companys infrastructure, including installation of new inventory and
accounting information systems in anticipation of increased sales transaction
volume with the introduction of new product lines.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the quarter ended March 31, 2001 were $1,845,151, an increase of $1,255,323, or
213%, compared to $589,828 for the corresponding period in 2000. This is
primarily the result of increased expenditures in the first quarter of 2001
related to the introduction of the MA IV TC and MA V product lines. During the
comparable period of 2000, significant product development costs were not
incurred because significant development on the Companys next product line had
not begun.

INTEREST AND OTHER, NET. Other income for the quarter ended March 31, 2001
was $91,014, an increase of $250,859, or 157%, compared to other expense of
$159,845 for the corresponding period in 2000. This increase was primarily the
result of interest expense on loans and the amortization of note discount for
the first quarter of 2000 for which no similar loan and notes were outstanding
for the corresponding period in 2001. The Companys primary source of other
income relates to interest earned on the Companys cash balances.

PROVISION FOR TAXES. The Company accrued $5,989 for a tax provision
at March 31, 2001 related to the operations of its foreign subsidiaries. The
Companys U.S. operations had a net loss for the three months ended March 31,
2001 and, therefore, no provision for U.S. income taxes is required.

DIVIDEND ON PREFERRED STOCK. The Company accrued dividends at 5% per
annum on the outstanding principal amount of its preferred stock. For the
quarter ended March 31, 2001, the amount of dividends accrued was $0, a
decrease of $8,130, or 100%, compared for the same period of the prior year.
All outstanding preferred stock was converted to common stock as of June 30,
2000.

NET LOSS ATTRIBUTABLE TO HOLDERS OF COMMON STOCK. As a result of the
factors described above, the net loss attributable to holders of common stock
for the quarter ended March 31, 2001 was $5,936,589, an increase of $1,153,044,
or 24%, compared to $4,783,545 for the corresponding period in 2000.

LIQUIDITY AND CAPITAL RESOURCES

From its inception until the completion of the IPO, the Company financed
its operations through the private sale of its equity securities, vendor
credit, and short-term loans received from management, stockholders and others.
During and subsequent to the IPO, the Company has financed its operations





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from
public and private sales of its common and preferred stock, borrowings from
financial institutions, management and investors, proceeds from the exercise of
warrants and stock options, and sales of its products and services. The
Company has raised approximately $87,800,000 through its various financings
from its inception through March 31, 2001. In addition, as described further
below, the
Company raised an additional $11,700,000 from private placements and warrant
exercises in April and May 2001.

The Companys significant financing activities for the three months ended
March 31, 2001 and for the year ended December 31, 2000 are summarized below.

On January 3, 2000, the Company received net proceeds of $2,460,500
through the issuance of 647,500 shares its common stock.

In January 2000, the Company borrowed $3,025,000 from several lenders
pursuant to promissory notes that required the Company to repay the borrowings
by January 2001 unless repaid earlier upon a public or private placement of
common stock in excess of $10,000,000. Interest on the notes accrued at 10% per
annum. In connection with these borrowings, the Company issued warrants to
purchase 302,500 shares of unregistered common stock at $0.10 per share. Based
on the relative fair values of the securities issued, these warrants were
assigned a value of $921,452, which was recorded as a note discount that was
amortized into interest expense over the lives of the notes. In November and
December 2000, the principal and unpaid interest were repaid upon completion by
the Company of a private placement of common stock. Upon repayment, the
remaining note discount balances were amortized as interest expense.

On June 23, 2000, the Company received net proceeds of $3,453,470 through
the issuance of 437,500 shares of its common stock. In connection with this
private placement, the Company issued warrants to purchase 87,500 shares of its
common stock for $10.00 per share.

In July 2000, the Company entered into a six-month $1,400,000 term loan
with IBM Global Finance (IBM Finance). The borrowing was secured by certain
of the Companys equipment, inventory and accounts receivable balances. The
borrowing accrued interest at the prime rate plus 1.5% and was repaid in three
equal installments in September and November 2000 and January 2001.

On September 29, 2000, the Company received net proceeds of $2,989,970
through the issuance of 717,703 shares of its common stock. In connection with
this private placement, the Company issued warrants to purchase 119,880 shares
of its common stock for $6.25 per share.

On November 15, 2000, the Company received proceeds of $15,393,554 through
the issuance of 5,970,656 shares of its common stock. In connection with this
private placement, the Company issued warrants to the investors to purchase
2,239,057 shares of its common stock for $4.33 per share. The Company paid
investment banking and other financing fees in cash of $1,133,849 and issued
warrants to purchase an additional 866,000 shares its common stock for $4.33
per share.

The Company has issued equity securities to certain employees, consultants
and companies for services provided to the Company. These securities include
shares of common stock and warrants and options to purchase shares of common
stock. These transactions were individually valued based upon the fair value of
the securities issued or the services provided, whichever was more reliably
measured. The Company recorded expenses associated with these services of
$80,800 and $1,312,630 during the three months ended March 31, 2001 and the
year ended December 31, 2000, respectively. At March 31, 2001, an additional
$119,601 was recorded as prepaid expenses that will be amortized during 2001
over the remaining lives of the underlying service agreements. Additionally,
equity securities were issued in settlement of accounts payable of $0 and
$202,888 during the three months ended March 31, 2001 and the year ended
December 31, 2000, respectively.

Employees and consultants of the Company have exercised stock options that
had been issued pursuant to the Companys various stock incentive plans. During
the three months ended March 31,





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2001 and the year ended December 31, 2000, the
Company received gross proceeds of $0 and $1,547,011, respectively, and issued
0 and 662,724 shares, respectively, of its common stock related to these
exercises.

During the three months ended March 31, 2001 and the year ended December
31, 2000, the Company issued 0 and 3,312,437 warrants, respectively, to
purchase common stock, primarily in connection with the Companys financings
and borrowings. The warrants had a weighted average price of $4.55 per share.
The Company received gross proceeds of $0 and $8,274,975 through the issuance
of 0 and 2,077,700 shares of its common stock during the three months ended
March 31, 2001 and the year ended December 31, 2000, respectively, through the
exercise of certain of these warrants. At March 31, 2000, the Company had
warrants outstanding to purchase 3,814,937 shares of its common stock at prices
that range from $2.00 to $18.00 per share, with a weighted average of $4.64 per
share.

The Company currently has a $3,000,000 credit line with IBM Finance to
finance customer purchases upon presentation to the lender of certain
documentation supporting the underlying sales. This credit line is secured by
certain of the Companys equipment, inventory and accounts receivable balances.
Borrowings under the credit line accrue interest at up to the prime rate plus
2.75%, depending on certain specifics of the underlying sales being financed,
such as the type of customer and the age of the accounts receivable balance.
The Company has received a proposal from IBM Finance to obtain an expanded
revolving credit facility based on the Companys inventory and accounts
receivable balances but there can be no assurance that this facility
will be finalized.

During April and May 2001, the Company received gross proceeds of
$11,704,589 through private placements and warrant exercises. Of this amount,
the Company raised $10,200,000 through the private placement of 5,238,094
shares of its common stock to several investors. These shares were sold at a
weighted average price of $1.95, representing an approximate 13% discount to
the closing bid price of the shares on the days preceding the
finalization of negotiations
between the Company and the investors. In connection with these private
placements, the Company issued warrants to purchase 1,616,427 shares of its
common stock at an exercise price of $5.00 per share and paid $350,000 in
finders fees.

The remaining $1,504,589 in gross proceeds was raised by the Company
through the exercise of existing warrants by investors, through which 716,471
shares of common stock were issued

At March 31, 2001, the Company had commitments to purchase inventory,
tooling and engineering services from its suppliers and partners related to the
MA V and MA IV TC products. While the timing and amount of certain of these
shipments and services may be adjusted, the total amount to be paid between
April and December 2001 is estimated at approximately $7,500,000, of which
approximately $5,000,000 is committed to the purchase of inventory.

The Company has incurred operating losses to date and expects such losses
to continue in the near term as it expands its product development and
marketing efforts. At March 31, 2001, the Company had an accumulated deficit of
approximately $78,200,000. The achievement of profitability is primarily
dependent upon the continued development and commercial acceptance of the
Companys products, the successful management of the business and managements
ability to strategically focus the Company. There can be no assurance as to
whether or when profitable operations will occur. In addition, the Company is
experiencing negative cash flow from operations and it is expected that it will
continue to experience negative cash flows through 2001 and potentially
thereafter.

The Companys consolidated financial statements contain a provision for
income tax expense related to its operations outside the United States. Subject
to realization, the Company has generated net operating losses in the U.S. 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. At December 31, 2000, the Company had
approximately $66,000,000 and $2,000,000 of net operating loss carry forwards
for U.S. federal and foreign income tax purposes,





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respectively. The U.S. losses
will begin to expire in 2010 and the losses from foreign operations do not
expire. The use of the U.S. carryforwards may be limited in any one year under
Internal Revenue Code Section 382 if significant ownership changes occur.

The Company anticipates that its working capital requirements and
operating expenses will increase as the Company expands production of its
Mobile Assistant series, develops new models in the Mobile Assistant series,
further expands its 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 Mobile Assistant series and other
products, and competitive pressures on gross margins will impact the magnitude
and timing of the Companys cash requirements.

Management is currently exploring financing alternatives to supplement the
Companys cash position. Potential sources of additional financing include
private equity offerings, strategic investments, strategic partnerships and
various forms of debt financing. Subsequent to March 31, 2001, the Company
raised approximately $11,700,000 through private placements of its common stock
and warrant exercises. The Company has a $3,000,000 borrowing facility with IBM
Finance which allows for the funding of large orders through borrowings made at
the time the Company receives a customers purchase order through the
collection of the customers receivable. Additionally, the Company has
received a proposal from IBM Finance to obtain an expanded revolving credit
facility based on the Companys inventory and accounts receivable balances,
but there can be no assurance that this facility will be finalized.

If additional funds are raised through the issuance of equity securities,
the percentage of ownership of current stockholders of the Company will be
reduced. If additional funds are raised through borrowings, the Company will be
subject to additional interest charges and principal repayments and may be
required to comply with financial covenants or other restrictions. The
Companys management believes that the combination of cash on hand, cash flows
from operations, and outside funding will provide sufficient liquidity to meet
the Companys ongoing cash requirements. Although the equity markets have
remained depressed in recent months, management believes the Company will be
successful in its efforts to obtain such additional financing, based both on
its historical ability to raise capital and on debt and equity financings
currently available to the Company. However, there can be no assurance that the
Company can or will obtain sufficient funds from operations or from closing
additional financings on terms acceptable to the Company. If the Company is
unable to obtain sufficient additional financing, it will be required to reduce
discretionary spending in order to maintain its operations at a reduced level.
Management believes that it will be able to reduce discretionary spending if
required but that such reduction would negatively impact progress on
implementing the Companys business plan.





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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in foreign
currency exchange rates and changes in interest rates. The Company does not
hold investments or use derivative financial instruments for speculative or
trading purposes. All of the potential changes noted below are based on
sensitivity analyses performed on the Companys financial position at March 31,
2001. Actual results may differ materially.

FOREIGN CURRENCY EXCHANGE RISK

The majority of the Companys revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, as a result of the
Companys international manufacturing, research and development, sales and
marketing, and other activities, the Company enters into transactions
denominated in other currencies, primarily the Japanese Yen, European Euro, and
German Deutsche Mark. As of January 1, 2001 Xybernaut GmbH
converted its functional currency from the
German Deutsche Mark to the European Euro. The effects of this conversion on
beginning retained earnings was a decrease of $151,123, which is included in
foreign currency translation balance. Historically, the Company has not had
significant realized gains or losses in transactions denominated in foreign
currencies. To date, the Company has not entered into foreign exchange forward
or option contracts to hedge its exposure to future movements in foreign
exchange rates because the Companys management believes that the potential
impact of these movements does not justify the costs of entering into such
contracts. As international sales and operations increase, the Company may
enter into foreign exchange forward and option contracts to hedge transactions
denominated in a foreign currency. At March 31, 2001, the Companys operations
in Europe and Asia comprised 18.8% and 8.0% of its total revenue and 11.0% and
3.6% of its net loss, respectively. At March 31, 2001, the Companys assets in
Europe and Asia comprised 11.1% and 13.5% of its total assets, respectively. At
March 31, 2000, the Companys operations in Europe and Asia comprised 17.8% and
24.0% of its total revenue and 9.3% and 3.4% of its net loss, respectively. At
March 31, 2000, the Companys assets in Europe and Asia comprised 3.5% and
23.3% of its total assets, respectively. According to published sources, the
average fluctuation of the European Euro during the first quarter of fiscal
year 2001 was 1.8%; the average fluctuation of the German Deutsche Mark during
first quarter of fiscal year 2000 was -1.6%; and the average fluctuation of the
Japanese Yen during the first quarter of fiscal years 2001 and 2000 was 3.4%
and 4.5%, respectively. Management believes that these fluctuations did not
have a material impact on the Companys results of operations or financial
position for the first quarter of fiscal year 2001 or 2000.

INTEREST RATE SENSITIVITY

As discussed in the Liquidity and Capital Resources section, the Company
has historically entered into debt financings, has established a borrowing
facility based on inventory and accounts receivable balances and is currently
exploring various new financing alternatives, including debt financing. If
additional funds are raised through borrowings, the Company will be subject to
additional interest charges and may be required to comply with financial
covenants or other restrictions. Interest rate increases may materially
increase the Companys interest expense, hinder the Companys ability to borrow
additional funds or have a negative affect on the ability of the Companys
customers to purchase its products. To date, the Company has not entered into
interest rate forward or option contracts to hedge its exposure to future
movements in interest rates because the Companys management believes that the
potential impact of these movements does not justify the costs of entering into
such contracts. As the Companys exposure to interest rate fluctuations becomes
more significant, it may enter into interest rate forward and option contracts
to hedge against such fluctuations. According to published sources, the average
prime interest rate during the first quarter of fiscal year 2001 and 2000 was
8.83% and 8.67%, respectively, or an average change of 1.00% and 0.25%,
respectively. Management believes that these fluctuations did not have a
material impact on the Companys results of operations or financial position
for 2000, 1999 and 1998.





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EURO CONVERSION

On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
Euro. The transition period for the introduction of the Euro ends June 30,
2002. As of January 1, 2001, Xybernaut GmbH converted its
functional currency from the German Deutsche
Mark to the European Euro. The effects of this conversion on beginning
retained earnings was a decrease of $151,123, which is included in foreign
currency translation balance. Issues that were addressed by the Company as a
result of the introduction of the Euro included the conversion of information
technology systems, reassessment of foreign currency exchange risk, negotiation
and amendment of existing agreements and contracts, and processing of tax and
accounting records. At March 31, 2001, the Company did not experience
significant issues with the Euro conversion and the conversion did not have a
material impact on the Companys results of operations or financial position.





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PART II  OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

A) EXHIBITS

27.1 Financial Data Schedule

B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarterly period ended March
31, 2001.

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
| | ---------------------



| | /s/ EDWARD G. NEWMAN
| | --------------------



| | By:   Edward G. Newman
         President, Chief Executive Officer and
         Chairman of the
Board of Directors
| | ------------------------------------------------------------------------------------------------------------------



| | /s/ JOHN F.
MOYNAHAN
| | --------------------



| | By:   John F. Moynahan
         Senior Vice President, Chief Financial
         Officer and
Treasurer
| | -----------------------------------------------------------------------------------------------------