SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                  FORM 10-Q SB


(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, 1998
            or

[_]         Transition  report pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934 for the transition period from ______ to ______

                         Commission file number: 0-15086


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

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

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

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

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

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

                             YES____     NO ____

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

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

                             YES____     NO ____

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

              Class                                  Outstanding at May 14, 1998
Common stock - $0.01 par value                               19,622,946



<PAGE>



                                      INDEX




                                                                            PAGE

COVER PAGE                                                                   1

INDEX                                                                        2

PART I - FINANCIAL INFORMATION

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

         Item 2 - Management's Discussion and Analysis of
                  Results of Operations and Financial Conditions             8

PART II - OTHER INFORMATION

         Item 6 - Exhibits and Reports on Form 8-K                          17

SIGNATURES                                                                  18



                                       2
<PAGE>



                              XYBERNAUT CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                       ASSETS                                   March 31, 1998   December 31,
                                                                 (unaudited)        1997
                                                                 ------------    ------------
<S>                                                              <C>             <C>         
Current assets:
   Cash and cash equivalents                                     $    446,024    $    952,366
   Accounts receivable                                                178,661         216,767
   Inventories                                                      1,589,025       1,607,781
   Prepaid and other current assets                                   332,316         334,245
                                                                 ------------    ------------
         Total current assets                                       2,546,026       3,111,159
                                                                 ------------    ------------

Fixed assets:
   Property and equipment, net                                        481,521         505,695

Other assets:
   Patent costs, net                                                  392,566         384,422
   Tooling costs, net                                                 451,050         376,990
   Other                                                              148,197         153,351
                                                                 ------------    ------------
         Total other assets                                           991,813         914,763
                                                                 ------------    ------------
               Total assets                                      $  4,019,360    $  4,531,617
                                                                 ============    ============

                         LIABILITIES AND
                       STOCKHOLDERS' EQUITY
Current liabilities:
   Notes and loans payable                                       $       --      $     19,530
   Accounts payable                                                   381,159         429,780
   Accrued expenses                                                 1,031,763         908,372
                                                                 ------------    ------------
         Total current liabilities                                  1,412,922       1,357,682
                                                                 ------------    ------------
         Total liabilities                                          1,412,922       1,357,682
                                                                 ------------    ------------

Commitments and contingencies

Stockholders' equity:

      Preferred  Stock, $.01 par  value, 6,000,000 shares
            authorized; 3,000 shares designated as Series A,
            1,500 and 2,250 shares issued and  outstanding  as
            of March 31, 1998 and December 31, 1997,
            respectively; 4,180 and 3,180 shares designated as
            Series B, 3,240 and 3,180 shares issued and
            outstanding as of March 31, 1998 and December 31,
            1997, respectively, at net carrying value               3,880,823       4,193,355

      Commonstock, $.01 par value, 40,000,000 shares
            authorized; 15,745,727 and 14,360,515 issued and
            outstanding  as of March 31, 1998 and December 31,
            1997, respectively                                        157,457         143,605
      Additional paid-in capital                                   18,346,488      17,181,329
      Deferred compensation                                           (36,167)        (91,511)
      Accumulated deficit                                         (19,742,163)    (18,252,843)
                                                                 ------------    ------------
         Total stockholders' equity                                 2,606,438       3,173,935
                                                                 ------------    ------------
         Total liabilities and stockholders' equity              $  4,019,360    $  4,531,617
                                                                 ============    ============
</TABLE>

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


                                       3
<PAGE>


                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)




<TABLE>
<CAPTION>
                                                                           Three Months Ended March 31,
                                                                           ----------------------------
                                                                                1998            1997
                                                                           ------------    ------------
<S>                                                                        <C>             <C>         
Revenue:
   Product sales and leases                                                $    127,227    $     95,426
   Consulting and license                                                          --            15,000
                                                                           ------------    ------------
       Total revenue                                                            127,227         110,426

Cost of sales                                                                   107,571         151,561
                                                                           ------------    ------------
       Gross profit (loss)                                                       19,656         (41,135)

Operating expenses:
   Sales and marketing                                                          495,105         759,540
   General and administrative                                                   651,680         991,411
   Research and development                                                     367,356         631,921
                                                                           ------------    ------------

       Total operating expenses                                               1,514,141       2,382,872
                                                                           ------------    ------------
       Operating loss                                                        (1,494,485)     (2,424,007)

Interest income, net                                                              5,164          41,356
                                                                           ------------    ------------
   Net loss                                                                  (1,489,321)     (2,382,651)
                                                                           ------------    ------------

Provision for preferred stock dividends accrued                                  35,902            --
Provision for accretion on preferred stock beneficial conversion feature        374,225            --   
                                                                           ------------    ------------
   Net loss applicable to holders of common stock                          $ (1,899,448)   $ (2,382,651)
                                                                           ============    ============

Per common share (basic and diluted):


   Net loss before provisions for preferred stock dividend and accretion   $      (0.10)   $      (0.19)
   Total provisions for preferred stock dividend and accretion                    (0.03)           --
                                                                           ------------    ------------
       Net loss applicable to holders of common stock                      $      (0.13)   $      (0.19)
                                                                           ============    ============


Weighted average number of common shares outstanding (basic and diluted)     15,168,238      12,459,112
                                                                           ============    ============
</TABLE>
               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       4

<PAGE>



                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                       Three Months Ended March 31,
                                                                            1998           1997
                                                                        -----------    -----------
<S>                                                                     <C>            <C>         
Cash flows from operating activities
   Net loss                                                             $(1,489,321)   $(2,382,651)
   Adjustments to reconcile net loss to net cash used
   in operating activities:
           Depreciation and amortization                                     55,282         74,356
           Provision for bad debts                                           25,000           --
           Non cash charges for stock and options issued for services        55,344        125,488
           Changes in assets and liabilities:
             Inventories                                                     18,756       (394,187)
             Accounts receivable                                             13,106         18,839
             Prepaid and other current assets                                 1,929       (182,208)
             Other assets                                                     4,749         (6,261)
             Accounts payable and accrued expenses                          (23,668)        23,053
             Deferred licensing revenue                                        --          (15,000)
                                                                        -----------    -----------
             Net cash used in operating activities                       (1,338,823)    (2,738,571)


Cash flows from investing activities:
   Acquisition of property and equipment, net                                (1,318)      (262,541)
   Acquisition of patents and related costs                                 (37,529)       (63,508)
   Capitalization of tooling costs                                          (74,060)      (269,964)
                                                                        -----------    -----------
            Net cash used in investing activities                          (112,907)      (596,013)
                                                                        -----------    -----------

Cash flows from financing activities:
   Proceeds from:
            Preferred stock offerings                                       973,737           --
   Payments for:
            Notes and loans                                                 (19,530)       (28,445)
            Other                                                            (8,819)          --
                                                                        -----------    -----------
            Net cash provided by (used in) financing activities             945,388        (28,445)
                                                                        -----------    -----------

Net decrease in cash and cash equivalents                                  (506,342)    (3,363,029)
Cash and cash equivalents, beginning of period                              952,366      6,274,967
                                                                        -----------    -----------
Cash and cash equivalents, end of period                                $   446,024    $ 2,911,938
                                                                        ===========    ===========
Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                            $      --      $     7,108
                                                                        ===========    ===========
Supplemental disclosure of non-cash financing activities:
    Common stock issued for services rendered                           $    98,438    $      --
    Common stock issued for preferred stock dividend requirements       $    26,289    $      --
                                                                        ===========    ===========
</TABLE>




                                       5
<PAGE>

                              XYBERNAUT CORPORATION
                   Notes to Consolidated Financial Statements

1.       BASIS OF PRESENTATION

         The accompanying unaudited, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information  and  instructions  to Form 10-QSB Item 310 of Regulation
S-B.  Accordingly,  they do not include  all of the  information  and  footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements. In the opinion of management,  all adjustments (consisting of normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
reflected in such  financial  statements.  Results of  operations  for the three
months  ended  March  31,1998  are not  necessarily  indicative  of  results  of
operations  expected for the full year. The Company's  fiscal year ends December
31.

2.       PRINCIPLES OF CONSOLIDATION

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

3.       INCOME TAX

         To date, the Company has a history of operating  losses and has not had
any taxable  income.  Subject to  realization,  the Company  has  generated  net
operating  losses  of  approximately  $16.0  million  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  once all net  operating  losses are fully  utilized  to offset  taxable
operating income.

4.       Preferred Stock

         In January 1998,  the Company placed 1,000 shares of Series B Preferred
Stock and received cash proceeds of  approximately  $974,000 from this issuance.
In connection  with this placement and the placement of 3,000 shares of Series B
Preferred  Stock in November 1997, the placement agent received 50,000 shares of
Common  Stock in lieu of 60 shares of Series B  Preferred,  warrants to purchase
25,000 shares of Common Stock at $2.1313 and warrants to purchase  75,000 shares
of Common Stock at $3.025.  During the three  months  ended March 31, 1998,  750
shares of Series A Preferred  Stock and 940 shares of Series B  Preferred  Stock
were  converted to 1,385,212  shares of Common  Stock,  pursuant to the terms of
those issues.



                                       6
<PAGE>



5.       Subsequent Events

         In April  1998,  the  Company  entered  into an  equity  line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for Common Stock,  from which the Company received net cash proceeds of
approximately $915,000. Under this line of equity the Company has the right, but
not the obligation,  to obtain up to $10,000,000 in a series of equity drawdowns
based on specified terms and conditions. In connection with this line of equity,
the company  issued  warrants to purchase up to 40,000  shares of stock at $1.76
and  20,000  shares  of stock at $2.81 at any time  starting  six  months  after
closing  and ending  five years  after  closing.  The  placement  agent for this
transaction received a cash fee of 5% and 50,000 shares of unregistered stock.

         Between  April 1,  1998 and the date  hereof,  750  shares  of Series A
Preferred Stock and 3,240 shares of Series B Preferred Stock were converted into
3,036,703  shares of Common Stock.  As of the date hereof,  there are 19,622,554
shares of Common Stock,  750 shares of Series A Preferred Stock and no shares of
Series B Preferred Stock outstanding.

























                                       7
<PAGE>




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

                                    OVERVIEW

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

         The  first  product  to  be   commercialized  by  the  Company  is  the
proprietary  portable  computer  technology  and related  software  applications
embodied in its Mobile Assistant(R) Series. The first product in this series was
introduced  in 1994 and uses "486"  based  technology  ("486  System")  that was
produced in a limited  quantity  and is no longer  being  manufactured.  Product
development  has been based on the  expectation  of the Company  that  continued
improvements  in  software  for  operating  systems,   applications  and  speech
recognition software will require continued  improvements in the performance and
capabilities of the Mobile  Assistant  Series.  Based on that  expectation,  the
Company  undertook a product  development  program  that  resulted in the second
product offering in the Mobile  Assistant(R)  Series,  which was introduced on a
preproduction  basis in  January  1997 and which  used  "586"  based  technology
("Mobile  Assistant(R) II System").  The Mobile  Assistant(R) II was replaced by
the third  system in this  product  development  program,  which was  introduced
during the third quarter of 1997 and uses a Pentium(R)  processor running at 133
MHz ("133P System"). The 133P System is tailored for those customers who require
additional  processing  capacity  for their  applications,  such as a  body-worn
server for wireless LAN  applications,  and also for those  customers  using new
continuous  speech  recognition  or phonetic  recognition  software that require
higher processing  speeds,  such as that available from IBM Corporation,  Dragon
Systems,  Inc., and Texas  Instruments,  among others.  In the fourth quarter of
1997,  the  Company  announced  the fourth  system in this  product  development
program,  the Mobile  Assistant(R) IV ("MA IV"), which uses a Pentium(R) chipset
known as the "Tillamook" that runs at up to 266 MHz.

         Additional  software  products are being  developed and are planned for
development for use on the Mobile Assistant and other personal computers. In the
third quarter of 1997, the Company announced the introduction of linkAssist(TM),
a software  product which  provides a "windows"  style  graphical user interface
with speech  navigation  that  allows data stored in almost any format,  such 


                                       8
<PAGE>




as commonly-used  word  processing,  spreadsheet,  data base,  graphics or media
files, to be linked to most any application  without altering the original data.
The Company has announced  webAssist(TM),  a software  product that allows voice
navigation of HTML document  links such as those found on the World Wide Web and
intranets.

         The  Company  has  derived  its  revenues  from  sales  of  the  Mobile
Assistant(R) Series, less volume discounts, and from consulting services related
to the Mobile  Assistant(R),  application  software for the Mobile Assistant(R),
and other computer platforms.  During the three months ended March 31, 1998, the
Company derived 100% of its revenues from sales of the Mobile Assistant(R).  For
the three months ended March 31, 1997, the Company derived  approximately 86% of
its revenues from sales of the Mobile  Assistant(R) and 14% of its revenues from
consulting services and licensing  revenues.  In the future, the Company expects
to derive additional  revenues from the sale of software and additional optional
components of the Mobile Assistant(R) Series.  Revenues from sales to customers,
VARs and OEMs are  recognized  when products are shipped.  The  Company's  sales
agreements  generally do not involve any  significant  obligations  to customers
subsequent  to  delivery  except as  provided  in  separate  service  or support
agreements.  Revenues from future  software sales will be recognized at the time
the software  master is delivered in accordance  with  Statement of Position No.
97-2.  Cost of sales include the cost of components for the Mobile  Assistant(R)
Series, direct labor and overhead expense,  manuals,  diskettes and duplication,
packaging materials, assembly, paper goods and shipping.

         The  Company   intends  to  continue   expenditures   on  research  and
development  of  additional   hardware  and  software  products.   Research  and
development  activities  consist  primarily of personnel engaged in the research
and design of new products, test components, consulting fees and equipment costs
required to conduct the Company's development  activities.  Software development
costs are expensed as incurred until technological feasibility is established in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86,
Accounting  for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed),  after which any additional costs are capitalized  until the software
is  ready  for  release.   The  Company   started   limited   shipments  of  its
linkAssist(TM)  software late in the year ended December 31, 1997, but the costs
eligible for  capitalization  under SFAS were immaterial  during this period and
the quarter ended March 31, 1998 and were not  capitalized.  The Company expects
such  costs  to be  material  during  the  coming  fiscal  year and  expects  to
capitalize such costs during this period.  Research and development expenses for
the three  months  ended March 31,  1998 and 1997 were  $367,356  and  $631,921,
respectively, none of which was capitalized.

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



                                       9
<PAGE>




         The  Company's  consolidated  financial  statements  do not  contain  a
provision  for income tax expense due to net operating  losses since  inception.
Subject to realization,  the Company has generated net operating losses that can
be used to offset taxable  operating income in the future.  The Company's future
operations, if profitable,  will be subject to income tax expense not previously
incurred by the Company (see Note 9 to Consolidated  Financial  Statements).  At
March 31, 1998, the Company had approximately  $16,000,000 of net operating loss
carry  forwards for federal income tax purposes which expire in 2012. The use of
these carry forwards may be limited in any one year under Internal  Revenue Code
Section 382 if significant ownership changes occur.

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

RESULTS OF OPERATIONS

         The following table sets forth certain consolidated financial data as a
percentage of revenues for the three months ended March 31, 1998 and 1997.


                                                          Three Months Ended
                                                          ------------------
                                                         3/31/98     3/31/97
                                                         -------     -------
Revenues                                                   100.0%      100.0%
Cost of sales                                               84.6%      137.3%
                                                         -------     -------
   Gross margin                                             15.4%      (37.3)%
Operating expenses:
   Sales and marketing                                     389.2%      687.8%
   General and administrative                              512.2%      897.8%
   Research and development                                288.7%      572.3%
                                                         -------     -------
Total operating expense                                  1,190.1%    2,157.9%
Interest income, net                                         4.1%       37.5%
                                                         -------     -------
Net loss                                                (1,170.6%)  (2,157.7%)
                                                         -------     -------
Provisions for preferred stock                             322.4%        0.0%
                                                         -------     -------
Net loss applicable to holders of common stock          (1,493.0%)  (2,157.7%)
                                                         =======     =======



                                       10

<PAGE>


                   THREE MONTHS ENDED MARCH 31, 1998 AND 1997

         REVENUES.  Revenues  for the three  months  ended  March 31,  1998 were
$127,227,  an increase of $16,801, or 15.2%,  compared to $110,426 for the three
months ended March 31, 1997.  Product  revenues for the three months ended March
31, 1998 were $127,227, an increase of $31,801 or 33.3%, compared to $95,426 for
the corresponding period in 1997. The increase in product revenues for the three
months  ended March 31, 1997 was  related to the higher  number of 133P  Systems
that were sold during that  period,  compared to the lower number of 486 and 586
Systems  that were sold in the  corresponding  period  in 1997.  Consulting  and
license  revenues for the three months ended March 31, 1998 were $0, compared to
$15,000 for the  corresponding  period in 1997.  The decrease in consulting  and
license revenues was due to the lack of sales activity under a License Agreement
with Rockwell  International that was related to the restructuring of Rockwell's
operations.

         COST OF SALES.  The cost of goods sold for the three months ended March
31, 1998 was $107,571, a decrease of $43,990, or 29.0%, compared to $151,561 for
the three months  ended March 31, 1997.  During the three months ended March 31,
1997,  a charge was  incurred of  approximately  $105,000 to reduce the carrying
value of the computing unit for the 486 System to estimated  market value.  This
was offset by an increase in cost of goods sold  during the three  months  ended
March 31, 1998 related to increased product sales.

         SALES AND MARKETING.  Sales and marketing expenses for the three months
ended March 31, 1998 were $495,105, a decrease of $264,435,  or 34.8%,  compared
to $759,540 for three  months  ended March 31,  1997.  The decrease was due to a
change in  compensation  structure for sales  personnel  which resulted in lower
base salaries,  a reduction in travel related expenses due to the centralization
of sales staff,  and a decrease in the use of outside  consultants for sales and
marketing programs.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months  ended March 31, 1998 were  $651,680,  a decrease of  $339,731,  or
34.3%,  compared with  $991,411 for the three months ended March 31, 1997.  This
decrease resulted  primarily from a reduction in personnel and related occupancy
expenses, along with a decrease in travel expenses.

         RESEARCH AND  DEVELOPMENT.  Research and  development  expenses for the
three months  ended March 31, 1998 were  $367,356,  a decrease of  $264,565,  or
41.9%,  compared with  $631,921 for the three months ended March 31, 1997.  This
decrease resulted  primarily from reduced activity and related expense given the
substantial  completion  of  development  for the  head-mounted  display and the
body-worn  computing unit for the 133P, and the sharing of development  expenses
for  the  Mobile  Assistant  IV  System  with  the  Company's   development  and
manufacturing partners.

         INTEREST  INCOME,  NET. Net interest  income for the three months ended
March 31,  1998 was  $5,164,  a decrease of  $36,192,  or 87.5%,  compared  with
$41,356 for the three months ended March 31,  1997.  This  decrease is primarily
the result of lower average  monthly cash balances during the 






                                       11
<PAGE>




three  months  ended March 31, 1998 versus  those  during the three months ended
March 31,  1997 which were  higher as a result of  remaining  proceeds  from the
Company's Initial Public Offering that was completed in July 1996.

         DIVIDEND ON PREFERRED  STOCK,  DEEMED  DIVIDEND  ACCRETION ON PREFERRED
STOCK.  The Company's  Series A Preferred  Stock was issued on June 30, 1997 and
accrues dividends at 5% per annum on the outstanding  principal amount,  payable
in cash or in  Common  Stock.  The  Company  issued  3,000  shares  of  Series B
Preferred  Stock on  November  11,  1997 and 1,000  shares of Series B Preferred
Stock  on  January  22,  1998,  and  accrues  dividends  at 4% per  annum on the
outstanding principal amount,  payable in cash or in Common Stock. For the three
months ended March 31,1998, the amount of accrued dividend was $35,902,  with no
comparable  item for the three months ended March 31, 1997. In  accordance  with
the  Emerging  Issues  Task  Force  report  from  the  Securities  and  Exchange
Commission  titled  "Accounting for the Issuance of Convertible  Preferred Stock
and Debt Securities with a Nondetachable  Conversion Feature," a deemed dividend
was  assumed  for the Series A  Preferred  Stock and Series B  Preferred  Stock,
representing the beneficial  conversion feature contained in those offerings and
which will be accreted  quarterly  as portions of these  preferred  stock issues
become convertible into Common Stock. The amount of this accretion for the three
months ended March 31, 1998 was $374,225,  with no comparable item for the three
months ended March 31, 1997.

         NET LOSS  ATTRIBUTABLE  TO HOLDERS OF COMMON STOCK.  As a result of the
factors described above, the net loss attributable to Common Stock for the three
months ended March 31, 1998 was  $1,899,448,  a decrease of $483,203,  or 20.3%,
compared to $2,382,651  for the three months ended March 31, 1997.  Although the
Company was subject to taxation during the three months ended March 31, 1998 and
1997, the Company  incurred net losses during these periods and no provision for
income taxes was made.

                         LIQUIDITY AND CAPITAL RESOURCES

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

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

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




                                       12
<PAGE>



$2,762,000  after related  expenses.  The Series A Preferred  Stock has a stated
value of  $1,000  per  share and a holder  of the  Series A  Preferred  Stock is
entitled to receive, if and when declared by the Company, a dividend equal to 5%
of the stated value per share per annum, payable in shares of Common Stock or in
cash,  payable upon  conversion  of the Series A Preferred  Stock.  The Series A
Preferred provides the Company with several redemption options and alternatively
allows for the periodic  conversion of portions of unredeemed Series A Preferred
Stock over a one-year  period ending June 30, 1998. Any Series A Preferred Stock
outstanding on June 30, 1999 must be converted into Common Stock at that date.

         On  November  12,  1997,  the Company  completed  a $3 million  private
placement of an aggregate  of 3,000 shares of the  Company's  Series B Preferred
Stock,  par value $0.01 per share  ("Series B Preferred  Stock"),  and  realized
gross proceeds of $3,180,000 and net proceeds of approximately  $2,950,000 after
related  expenses.  On January  22,  1998,  the  Company  completed  a follow-on
placement of its Series B Preferred  and realized  gross  proceeds of $1,000,000
and net proceeds of approximately  $875,000 after related expenses. The Series B
Preferred  Stock  has a stated  value of  $1,000  per  share and a holder of the
Series B Preferred  Stock is entitled  to receive,  if and when  declared by the
Company, a dividend equal to 4% of the stated value per share per annum, payable
in shares of Common Stock or in cash,  payable upon  conversion  of the Series B
Preferred  Stock into Common  Stock.  The Series B  Preferred  Stock into Common
Stock also provides the Company with several  redemption  options and allows for
the period  conversion of portions of unredeemed Series B Preferred Stock over a
five-month period from closing.

         In April  1998,  the  Company  entered  into an  equity  line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for Common Stock, and realized cash proceeds of approximately  $974,000
after related  expenses.  Under this line of equity the Company has the right to
obtain  up to  $10,000,000  in a series  of  installments  based  on  terms  and
conditions specified in the line of equity.

         For the three  months  ended March 31, 1998,  the  Company's  operating
activities  used cash of  $1,338,823.  The net use of cash by operations for the
three months ended March 31, 1998 was primarily  the result of a $1,489,321  net
loss,  offset  non-cash  charges for stocks and options  issued for  services of
$55,344,  and depreciation and amortization of $55,282.  Cash used for investing
activities  for the three  months  ended  March  31,  1998 was  $112,907,  which
included $74,060 in capitalized  production  costs.  Proceeds from the Company's
financing  activities  for the three months  ended March 31, 1998 were  $973,737
which primarily  consisted of $945,388 from the issuance of the Company's Series
B Preferred Stock, net of related fees. As a result of the above,  cash and cash
equivalents  on hand as of March 31, 1998 was  $446,024,  a decrease of $506,342
from the $952,366 of cash and cash equivalents on hand as of December 31, 1997.

         For the three  months  ended March 31, 1997,  the  Company's  operating
activities  used cash of  $2,738,571.  The net use of cash for the three  months
ended March 31, 1997 was primarily the result of a $2,382,651  net loss combined
with  $394,187 of cash used by  inventories  and  $182,208 for prepaid and other
assets, offset by non-cash charges for stocks and options issued for services of




                                       13
<PAGE>




$125,488 and depreciation  and amortization of $74,356.  Cash used for investing
activities  for the three  months  ended  March  31,  1997 was  $596,103,  which
included  $269,964  in  capitalized   production  costs  and  $262,541  for  the
acquisition  of property and equipment.  Cash used for financing  activities for
the three  months ended March 31, 1997 was $28,445 that was used for payments on
notes and loans

         At March 31, 1998, the Company had no material capital  commitments and
working capital of $1,133,104.

         On March 19,  1998,  Matrix  Corporation  ("Matrix"),a  supplier to the
Company,  filed a summons  against  the  Company in the United  States  District
Court,  Eastern  District  of North  Carolina,  alleging  that:  Matrix has been
damaged by a purported  breach of a contract  executed in December  1997 between
the Company  and Matrix  (the  "December  Agreement");  that the Company  should
return all goods  shipped  by Matrix  under both the  December  Agreement  and a
contract  between  the  Company  and  Matrix  executed  in June 1997 (the  "June
Agreement");  that the  Company  did not  intend  to  comply  with the  December
Agreement and therefore the governing  contract  between the two entities should
revert to the June  Agreement.  In  addition,  this  summons  requests  that any
damages  incurred by Matrix as a result of this purported  breach of contract be
trebled.  On April 30,  1998,  the  Company  filed a motion in the same court to
dismiss the complaints  contained in the March 19, 1998 filing by Matrix.  While
there can be no assurance of the outcome of this legal proceeding, the Company's
management believes that the claims by Matrix are groundless and that the impact
of this  legal  proceeding  will  not be  adversely  material  to the  Company's
operations.  The  maximum  amount  payable  by the  Company  under the  December
Agreement if Matrix  performs  defined tasks is  approximately  $250,000 and the
maximum  amount of  inventory  that could be assumed  by the  Company  under the
December Agreement is approximately $600,000.

         The consolidated balanch sheet as of December 31, 1997 and 1996 ane the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the years then ended,  include the report  dated  March 31,  1998,  by
Coopers & Lybrand L.L.P., independent accountants, which includes an explanatory
paragraph  concerning the Company's ability to continue as a going concern.  The
Company anticipates that its working capital requirements and operating expenses
will  increase  as the  Company  expands  production  and  sales  of the  Mobile
Assistant(R),  and expands its full sales, service and marketing functions,  and
develops the support structure for these activities.  The timing of increases in
personnel  and  other  expenses,  the  amount of  working  capital  consumed  by
operations,  marketing  and  rollout  expenses  for the MA IV,  and  competitive
pressures on gross margins will impact the magnitude and timing of the Company's
cash  requirements.  To meet working capital needs,  the Company has completed a
$10 million equity line of credit and intends to use funds from  operations,  to
obtain a working capital line of credit, and/or complete additional  financings.
It  is  the  opinion  of  the  Company's   management  that  additional  funding
arrangements are readily  available to the Company and the execution of any such
arrangement  will depend on timing,  market  conditions  and the final terms and
conditions  of such  arrangements.  Full  production  of the MA IV  model of the
Mobile Assistant(R) is expected to begin in the quarter ending December 31, 1998
and receivables  from sales of the MA IV are expected to provide  collateral for
borrowing facilities at that point. Although there can be no assurance that such
facilities will be available,  the Company intends to seek to establish  secured
borrowing  facilities at such time as appropriate  collateral is available.  The
Company's  management  believes that the combination of cash on hand,  operating
cash flow,  and outside  funding will provide  sufficient  liquidity to meet the
Company's cash requirements until at least March 1999. However,  there can be no
assurance that the Company can



                                       14
<PAGE>



or will obtain  sufficient  funds from operations or from a working capital line
of credit or from  closing  additional  financings  on terms  acceptable  to the
Company.


                      POSSIBLE IMPACT ON NEAR-TERM REVENUES

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


                         POSSIBLE NON-CASH FUTURE CHARGE

         In  connection  with  the  Company's  IPO,  the  representative  of the
underwriters for the transaction (the  "Representative")  required the Company's
officers,  directors and certain other  stockholders  to deposit an aggregate of
1,800,000 shares of Common Stock into an escrow account (the "Escrowed Shares").
The  Escrowed  Shares  will  be  subject  to  release  to such  stockholders  in
increments  over a  three-year  period  only in the  event the  Company's  gross
revenues and earnings (loss) per share for the 12-month periods ending September
30,  1997,  1998 and 1999 meet or exceed  targets  which  have been  established
through negotiations with the Representative (the "Performance Targets"). If the
Performance Targets are not met in any of the relevant 12-month periods (and the
price of the Common  Stock has not met or exceeded the price  described  below),
the Escrowed  Shares will be returned to the Company in amounts  which have been
agreed  upon  between  the  Representative  and the  Company for each period and
canceled.  In  addition  to the  foregoing,  all then  Escrowed  Shares  will be
released  to the  stockholders  if the  closing  price  of the  Common  Stock as
reported  on  The  NASDAQ  SmallCap  Market  equals  or  exceeds  $11.00  for 25
consecutive  trading  days or 30 out of 35  consecutive  trading days during the
period  ending  September  30, 1999.  In the event any  Escrowed  Shares held by
officers,  employees or consultants  are released,  the  difference  between the
initial  offering  price  and the  market  value of such  shares  at the time of
release will be deemed to be additional  compensation expense to the Company. If
the price of the Common Stock at the time of any release of the Escrowed  Shares
is  greater  than the  value  of the  Common  Stock  at the time of the IPO,  an
earnings  charge  could  result  which  would  have the  effect of  reducing  or
eliminating  any  earnings  per share and could  have a  negative  effect on the
market price for the Common  Stock.  The  earnings per share target  calculation
will be based on the average number of shares issued and outstanding during each
period, but excluding shares issued pursuant to the  Representative's  option to
purchase units of Common Stock and Warrants issued at the Company's IPO ("Unit")
at a price of $9.075 per Unit (165% of the offering price of the Units) during a
period  of  four  years  



                                       15
<PAGE>



commencing  one  year  from the  closing  of the IPO,  extraordinary  items,  or
compensation  expense  charged  to the  Company  related  to the  release of the
Escrowed Shares.

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

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

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



                                       16
<PAGE>




                           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 three  months ended March
         31, 1998.



                                       17
<PAGE>






                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                      XYBERNAUT CORPORATION

                                      BY
                                      /s/ EDWARD G. NEWMAN
                                      -----------------------------------------
                                      Edward G. Newman
                                      President and Chief Executive Officer


                                      /s/ JOHN F. MOYNAHAN
                                      -----------------------------------------
                                      John F. Moynahan
                                      Senior Vice President and Chief Financial
                                      Officer



                                       18