SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


(Mark One)

[X]     Quarterly  report  pursuant  to  Section  13 or 15(d) of the  Securities
        Exchange Act of 1934 for the quarterly period ended September 30,1997 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                                  (I.R.S. Employer  
    of incorporation)                                        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 November 11, 1997
           -----                                --------------------------------
Common stock - $0.01 par  value                            14,209,112




<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 4 - Submission of Matters to a Vote of Security Holders

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

SIGNATURES                                                                   18



                                       -2-

<PAGE>



                              XYBERNAUT CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               September 30, 1997  December 31,
                                    ASSETS                          (unaudited)        1996
                                                                   ------------    ------------
<S>                                                                <C>             <C>         
Current assets:
    Cash and cash equivalents                                      $    520,779    $  6,274,967
                                                                   ------------    ------------
    Accounts receivable                                                 236,315         427,790
    Inventories                                                       1,253,541         402,381
    Prepaid and other current assets                                    774,670         197,711
                                                                   ------------    ------------
           Total current assets                                       2,785,305       7,302,849
                                                                   ------------    ------------
Fixed assets:
    Property and equipment, net of accumulated depreciation of
           $282,235 in 1997 and $126,139 in 1996                        499,629         323,828
                                                                   ------------    ------------
Other assets:
    Patent costs, net of accumulated amortization of $150,360 in
           1997 and $82,588 in 1996                                     395,612         247,612
    Tooling costs                                                       395,988         106,738
    Other                                                                77,236          33,547
                                                                   ------------    ------------
           Total other assets                                           868,836         387,897
                                                                   ------------    ------------
           Total assets                                            $  4,153,770    $  8,014,574
                                                                   ============    ============
                               LIABILITIES AND
                             STOCKHOLDERS' EQUITY
Current liabilities:
    Notes and loans payable                                        $     80,000    $      7,849
    Accounts payable                                                    396,368         250,944
    Deferred licensing revenue (see note 4)                                   0          60,000
    Accrued expenses                                                    766,948         571,742
                                                                   ------------    ------------
           Total current liabilities                                  1,243,316         890,535
                                                                   ------------    ------------
Long-term liabilities:
    Notes and loans payable                                                   0          44,080
    Deferred licensing revenue (see note 4)                                   0         190,000
                                                                   ------------    ------------
           Total long-term liabilities                                        0         234,080
                                                                   ------------    ------------
           Total liabilities                                          1,243,316       1,124,615
                                                                   ------------    ------------

Commitments and contingencies
Stockholders' equity:
    Series A preferred stock, $.01 par value                          1,756,097
    Common stock, $.01 par value                                        142,121         142,591
      Authorized: 30,000,000 shares, Issued:  14,209,112 shares
    Additional paid-in capital                                       16,851,693      15,520,245
    Accumulated deficit                                             (15,839,457)     (8,772,877)
                                                                   ------------    ------------
           Total stockholders' equity                                 2,910,454       6,889,959
                                                                   ------------    ------------
           Total liabilities and stockholders' equity              $  4,153,770    $  8,014,574
                                                                   ============    ============
</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 September 30,  Nine Months Ended September 30,
                                   ----------------------------    ----------------------------
                                       1997            1996            1997           1996
                                   ------------    ------------    ------------    ------------
<S>                                <C>             <C>             <C>             <C>         
Revenue:
    Product Sales and leases       $    129,365    $    326,020    $    349,822    $    903,733
    Consulting and license              227,000          22,049         257,000          60,683
                                   ------------    ------------    ------------    ------------
        Total revenue                   356,365         348,069         606,822         964,416

Cost of sales                           169,588         290,480         583,157         785,193
                                   ------------    ------------    ------------    ------------
        Gross margin                    186,777          57,589          23,665         179,223

Operating expenses:
    Sales and marketing               1,010,118         322,456       2,529,151         784,185
    General and administrative          933,128         692,109       2,639,263       1,375,302
    Research and development            568,058         528,522       1,791,680       1,226,905
                                   ------------    ------------    ------------    ------------
        Total operating expenses      2,511,304       1,543,087       6,960,094       3,386,392
                                   ------------    ------------    ------------    ------------

        Operating loss               (2,324,527)     (1,485,498)     (6,936,429)     (3,207,169)

Interest income, net                     24,916         109,120          74,045          38,266
                                   ------------    ------------    ------------    ------------

        Net loss                   $ (2,299,611)   $ (1,376,378)   $ (6,862,384)   $ (3,168,903)

Dividend on Preferred Stock        $     37,500    $       --      $     37,500    $       --

Deemed dividend accretion on
    preferred stock                     164,634                         164,634
                                   ------------                    ------------

Loss attributable to holder of
    Common Stock                   $ (2,501,745)   $ (1,376,378)   $ (7,064,518)   $ (3,168,903)
                                   ============    ============    ============    ============ 

Net loss attributable to Common
    Stock                          $      (0.20)   $      (0.10)   $      (0.55)   $      (0.25)
                                   ============    ============    ============    ============ 

Weighted average number of   
    common shares outstanding        12,758,568      13,776,754      12,758,929      12,469,139 
                                   ============    ============    ============    ============ 
                             
</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>
                                                                           Nine Months Ended September 30,
                                                                            ----------------------------
                                                                                1997            1996
                                                                            ------------    ------------
<S>                                                                         <C>             <C>          
Cash flows from operating activities
    Net loss attributable to common stock                                   $ (7,064,518)   $ (3,168,903)
    Adjustments to reconcile net loss to net cash used in operating
        activities:
             Depreciation and amortization                                       226,223         203,334
             Non cash charges for preferred stock dividends and accretion        202,134            --
             Non cash charges for stock and options issued for services             --            85,037
(Increase) decrease in assets:
    Inventories                                                                 (851,159)         65,280
    Accounts receivable                                                          191,475        (274,962)
    Prepaid and other current assets                                            (576,960)       (249,918)
Increase (decrease) in liabilities:
    Accounts payable and accrued expenses                                        312,582         220,618
    Deferred licensing revenue                                                  (250,000)        265,500
                                                                            ------------    ------------
      Net cash used in operating activities                                   (7,810,223)     (2,854,514)
                                                                            ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment, net                                  (331,896)        (81,866)
    Acquisition of patents and related costs                                    (215,772)        (56,883)
    Capitalization of tooling costs and other assets                            (334,338)         20,256
                                                                            ------------    ------------
        Net cash used in investing activities                                   (882,006)       (118,493)
                                                                            ------------    ------------

Cash flows from financing activities:
    Proceeds from:
        Series A preferred stock                                               3,000,000            --
        Issuance of debentures                                                      --         1,000,000
        Initial Public Offering, gross                                              --        13,282,500
    (Payments for)/Proceeds from:
        Notes and loans                                                            4,572        (166,449)
        Financing costs and fees                                                 (66,531)     (2,607,531)
                                                                            ------------    ------------
             Net cash used in financing activities                             2,938,041      11,508,520
                                                                            ------------    ------------

Net decrease in cash and cash equivalents                                     (5,754,188)      8,535,513

Cash and cash equivalents, beginning of period                                 6,274,967         508,666
                                                                            ------------    ------------

Cash and cash equivalents, end of period                                         520,779       9,044,179
                                                                            ============    ============
</TABLE>


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


                                       -5-

<PAGE>



                              XYBERNAUT CORPORATION
                   Notes to Consolidated Financial Statements

1.         BASIS OF PRESENTATION

           The accompanying  unaudited,  consolidated  financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim financial  information and instructions to Form 10-QSB and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been reflected in such financial statements.  Results of operations for the nine
months ended  September  30,1997 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  $14.1  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.         LICENSING AGREEMENT

           In March 1996,  the Company  entered into a  non-exclusive  five-year
licensing  agreement  with  Rockwell   International,   which  was  subsequently
transferred to its wholly-owned subsidiary, Rockwell Collins, Inc. ("Rockwell").
Pursuant to this  agreement,  the Company  received an initial  cash  payment of
$300,000  and the release of the Company  from the  obligation  to pay  Rockwell
$1,395,000  pursuant to a purchase  order between the Company and Rockwell.  The
initial cash payment of $300,000 has been recorded as deferred licensing revenue
and was being recognized as revenue on a straight-line  basis over the five-year
term.  During the quarter  ending  September  30,  1997,  Rockwell  informed the
Company that as a result of the  restructuring  of the business  operations  for
both Rockwell  International  and Rockwell,  it had elected to not continue with
its business activities under the license. Given Rockwell's stated intent to not
to continue  conducting  business  operations  under the license,  the remaining
deferred  licensing  revenue of $220,000  at June 31, 1997 has been  recorded as
revenue in the third quarter.



                                       -6-

<PAGE>



5.         SERIES A PREFERRED STOCK

           On  June  30,  1997,  the  Company  completed  a $3  million  private
placement of an aggregate  of 3,000 shares of the  Company's  Series A Preferred
Stock,  par value  $0.01 per share  ("Series A Preferred  Stock").  The Series A
Preferred  Stock  has a stated  value of  $1,000  per  share and a holder of the
Series A Preferred 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 of the Company,  par value $0.01 per share (the "Common  Stock")
or in cash.  The Series A Preferred  Stock  provides  the Company  with  several
redemption  options and  alternatively  allows for the  periodic  conversion  of
portions of unredeemed  Series A Preferred Stock to Common Stock over a one-year
period from the date of issuance.  Any Series A Preferred  Stock  outstanding on
June 30, 1999 must be converted into Common Stock at that date.

6.         DEEMED DIVIDEND ON SERIES A PREFERRED STOCK

           Effective  July 1, the  Company  recorded  a deemed  dividend  on the
Series A  Preferred  Stock of  approximately  $659,000,  or $219.51 per share of
Series A  Preferred  Stock,  in  accordance  with the  Securities  and  Exchange
Commission's  position on accounting for preferred stock which is convertible at
a discount to the market price for common stock. The effect of this dividend was
to reduce the par value of Series A Preferred Stock by  approximately  $659,000,
resulting  in a negative  value for the Series A Preferred  Stock on the balance
sheet,  and increased  additional  paid-in  capital by the same amount,  with no
impact on the total amount of equity.  This  dividend  will be accreted over the
twelve-month  period ending June 30, 1998, the conversion period of the Series A
Preferred  Stock.  The effect of this accretion was to increase the value of the
Series A  Preferred  Stock for the three  months  ended  September  30,  1997 by
approximately $164,000 and reduce the accumulated deficit by the same amount.

7.         SUBSEQUENT EVENT

           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").  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 the  Common  Stock  or in  cash,  payable  upon  conversion  of the  Series B
Preferred  Stock into Common Stock.  The Series B Preferred  Stock  provides the
Company  with  several  redemption  options  and  alternatively  allows  for the
periodic  conversion  of portions of  unredeemed  Series B Preferred  Stock into
Common Stock over a period of approximately five months from closing. Any Series
B Preferred Stock outstanding on November 12, 1999 must be converted into Common
Stock at that date.


                                       -7-

<PAGE>



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

OVERVIEW

The  Company  was  originally  incorporated  in  Virginia  in  October  1990  as
Contemporary Products & Services, Inc. and changed its name to Computer Products
& Services, Inc. ("CPSI") in 1992. In April 1996, CPSI was merged with Xybernaut
Corporation to reincorporate  in Delaware.  Since the commencement of operations
in November 1992, the Company has been engaged in the research,  development and
commercialization  of hardware,  software and  services for  body-worn  computer
applications.  Since commencing operations, the Company has incurred significant
operating losses.


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"):  this product 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  series,  which was  introduced  on a  preproduction  basis in
January  1997 and which  uses  "586"  based  technology  ("Mobile  Assistant  II
System").  The third system in this product  development  program was introduced
during the third quarter of 1997 and uses  Pentium(R)  based  technology  ("133P
System").  It is anticipated  that these two new systems will address  different
segments of the market for wearable  computers.  The Mobile  Assistant II System
has a lower  selling  price  than 133P  Systems  and is well  suited  for use in
applications such as "thin clients" in wireless LANs and for speech  recognition
systems with discrete dictation speech  technology.  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.

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 linkAssist(TM),  a software product which
provides a "windows" style graphical user interface with speech  navigation that
allows data stored in almost any format,  such as commonly-used word processing,
spreadsheet,  data  base,  graphics  or media  files,  to be  linked to most any
application without altering the original data. The Company currently expects to
begin shipments of linkAssist(TM) in the quarter ending December 31, 1997.


                                       -8-

<PAGE>



The  Company's  revenues  include sales of the Mobile  Assistant,  license fees,
software,  and consulting  services which relate to the Mobile  Assistant and to
other software applications.  Cost of sales include the cost of Mobile Assistant
components,   direct  labor  and  overhead  expense,   manuals,   diskettes  and
duplication,  packaging materials, assembly, paper goods, shipping, and warranty
reserves.   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  development  costs are  capitalized  until the software is ready for
release.  No software  development  costs have been capitalized to date, but the
Company anticipates that costs for linkAssist will be capitalized in the quarter
ending December 31, 1997, and amortized over the estimated  economic life of the
software.

The Company purchases numerous parts and components from third-party  suppliers,
which the Company assembles into its products.  The Company generally provides a
90 day  warranty  on parts  and  labor and a one year  warranty  on  parts.  The
Company's  suppliers for most components  provide the Company with warranties on
those  components.  While warranty claims in the past have been negligible,  the
Company  initiated a policy of recording  warranty reserves in the third quarter
to provide for possible claims in the future.

Product  sales are recorded on shipment  pursuant to a valid  customer  purchase
order.  For equipment  shipped  under  equipment  rental or leasing  agreements,
revenue is  recognized on a  straight-line  basis over the term of the rental or
lease agreement.  Consulting revenue is recognized as the services are performed
pursuant to a written  agreement with the client.  Revenues from future software
sales  will be  recognized  at the time the  software  program is  delivered  in
accordance  with  Statement of Position  No. 91-1 of the  American  Institute of
Certified Public Accountants.

Research and development  expenses consist primarily of consulting fees and test
components,  as well as salaries and related benefits paid to Company  personnel
engaged in the research and design of new  products.  Salaries paid to Xybernaut
employees,  fees and expenses paid to outside  software  development  consulting
firms for further development and enhancement after technological feasibility of
a product has been established,  will be capitalized in the future in accordance
with SFAS No. 86.

The  Company's   consolidated   financial  statements  include  the  results  of
operations for Tech Virginia,  a wholly-owned  subsidiary that supplies software
and  consulting  services  to the  United  States  government  and  others.  The
consolidated  financial statements eliminate all material  intercompany accounts
and transactions between the Company and Tech Virginia.


                                       -9-

<PAGE>



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


                               Three Months Ended        ine Months Ended
                               ------------------        ----------------
                               9/30/97     9/30/96      9/30/97      9/30/96
                              --------    --------    ----------    --------
Revenues                        100.0%      100.0%        100.0%      100.0%
Cost of sales                    47.6%       83.5%         96.1%       81.4%
                              --------    --------    ----------    --------
   Gross margin                  52.4%       16.5%          3.9%       18.6%
                                                                    
Operating expenses:                                                 
   Sales & marketing            283.5%       92.6%        416.8%       81.3%
   General & administrative     261.8%      198.8%        434.9%      142.6%
   Research & development       159.4%      151.8%        295.3%      127.2%
                              --------    --------    ----------    --------
Total operating expense         704.7%      443.2%      1,147.0%      351.1%
Interest income                   7.0%       31.4%         12.2%        4.0%
                              --------    --------    ----------    --------
Net loss                       (645.3%)    (395.3%)    (1,130.9%)    (328.5%)
                              ========    ========    ==========    ========
                                                                  

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

REVENUES.  Total  revenues for the three months  ended  September  30, 1997 were
$356,365,  a  decrease  of  $8,296,  or  2.4%,  compared  to  $348,069  for  the
corresponding  period  in 1996.  Product  revenues  for the three  months  ended
September 30, 1997 were $129,365,  a decrease of $196,655 or 60.3%,  compared to
$326,020 for the corresponding period in 1996. The reduction in product revenues
for the three months ended September 30, 1997 was related to the lower number of
133P Systems that were sold during that period, compared to the higher number of
486 Systems that were sold in the corresponding  period in 1996.  Consulting and
license revenues for the three months ended September 30, 1997 were $227,000, an
increase of $204,951 or 929.5%, compared to $22,049 for the corresponding period
in 1996.  During the three  months  ended  September  30,  1997,  the  Company's
licensee  informed  the  Company  that as a result of the  restructuring  of its
business operations,  the licensee had elected to not continue with its business
activities  under the license.  A portion of the  consideration  received by the
Company in March 1996 for  granting  this license was a $300,000  cash  payment,
which the company  recorded as deferred  license revenue and was amortizing this
amount over a five year period.  Given the  licensee's  stated  intent to not to
continue  conducting  business  operations  under  the  license,  the  remaining
deferred  licensing revenue of $220,000 as of June 30, 1997 has been recorded as
revenue in the three months ended September 30, 1997.

COST OF SALES.  The cost of goods sold for the three months ended  September 30,
1997 was $169,588,  a decrease of $120,892,  or 41.6%,  compared to $290,480 for
the   corresponding   period  in  1996.   The  cost  of  goods  sold   decreased
commensurately  with the decrease in product sales but was offset by a charge of
approximately $60,000 to reduce the carrying value of an earlier versions of the
computing unit for Mobile Assistant II Systems to estimated market value.


                                      -10-

<PAGE>



SALES AND  MARKETING.  Sales and  marketing  expenses for the three months ended
September 30, 1997 were $1,010,118, an increase of $687,662, or 213.3%, compared
to $322,456 for the corresponding period in 1996. This increase resulted from an
increase in personnel and infrastructure,  the expansion of marketing activities
to Europe  and Asia,  the  development  of  training  programs  for  Value-Added
Resellers ("VARs"),  customer service,  additional marketing programs to support
the launch of new products,  public relations efforts and related travel,  along
with  a  charge  of  approximately   $129,000  related  to  a  receivable  whose
collectability was deemed to be doubtful and was written off.

GENERAL AND  ADMINISTRATIVE.  General and administrative  expenses for the three
months ended  September  30, 1997 were  $933,128,  an increase of  $241,019,  or
34.8%,  compared  with  $692,109  for the  corresponding  period  in 1996.  This
increase  resulted  primarily  from an increase in  personnel,  consulting,  and
travel  expenses  related to the  expansion  and  continued  development  of the
Company's  infrastructure,  and  activities  related  to  discussions  regarding
certain strategic partnerships and international operations.

RESEARCH AND DEVELOPMENT. Research and development expenses for the three months
ended  September  30, 1997 were  $568,058,  an  increase  of  $39,536,  or 7.5%,
compared with $528,522 for the  corresponding  period in 1996.  This increase is
the primarily the result of increased  research and development  personnel,  the
use of outside  consultants,  and the planning and  development  efforts for the
Company's head mounted  display,  Mobile Assistant II System,  133P System,  and
software, particularly for the linkAssist software product.

INTEREST  INCOME,  NET. Net interest income for the three months ended September
30, 1997 was $24,916, a decrease of $84,204, or 77.2%, compared with 109,120 for
the  corresponding  period in 1996.  This  decrease  is the  result  of  reduced
interest  income from the lower  average cash balances in the three months ended
September  30,  1997 than for the  corresponding  period a year  earlier,  which
reflected  the interest  income on proceeds from the  Company's  Initial  Public
Offering that was completed in July 1996.

DIVIDEND ON PREFERRED STOCK,  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.  For the three
months ended September 30,1997, the amount of accrued dividend was $37,500, with
no comparable item for the corresponding  period in 1996. 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,  which will be accreted  quarterly as
portions of the Series A Preferred Stock are convertible  into Common Stock. The
amount of this accretion for the three months ended September 30, 1997 was $164,
634, with no comparable item for the corresponding period in 1996.

NET LOSS  ATTRIBUTABLE  TO COMMON  STOCK.  As a result of the factors  described
above,  the net loss  attributable  to Common  Stock for the three  months ended
September 30, 1997 was $2,501,745, an


                                      -11-

<PAGE>



increase of $1,125,367,  or 81.8%,  compared to $1,376,378 for the corresponding
period in 1996.  Although  the Company was subject to taxation  during the three
months ended September 30, 1997 and September 30, 1996, the Company incurred net
losses during these periods and no provision for income taxes was made.

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

REVENUES.  Total  revenues  for the nine months  ended  September  30, 1997 were
$606,822,  a decrease  of  $357,594,  or 37.1%,  compared  to  $964,416  for the
corresponding  period  in  1996.  Product  revenues  for the nine  months  ended
September 30, 1997 were $349,822, a decrease of $553,911,  or 61.3%, compared to
$903,733 for the corresponding period in 1996. The reduction in product revenues
for the nine months ended  September 30, 1997 was related to the limited  number
of  preproduction  Mobile  Assistant  II and  production  133P Systems that were
available  for sale during  that  period,  compared to the higher  number of 486
Systems that were sold during the corresponding  period in 1996.  Consulting and
license revenues for the nine months ended September 30, 1997 were $257,000,  an
increase of $196,317 or 323.5%, compared to $60,683 for the corresponding period
in 1996.  During the three  months  ended  September  30,  1997,  the  Company's
licensee  informed  the  Company  that as a result of the  restructuring  of its
business operations,  the licensee had elected to not continue with its business
activities  under the license.  A portion of the  consideration  received by the
Company in March 1996 for  granting  this license was a $300,000  cash  payment,
which the company  recorded as deferred  license revenue and was amortizing this
amount over a five year period.  Given the  licensee's  stated  intent to not to
continue conducting  business operations under the license,  the Company elected
to have the remaining deferred licensing revenue of $220,000 as of June 30, 1997
recorded as revenue in the three months ended September 30, 1997.

COST OF SALES.  The cost of goods sold for the nine months ended  September  30,
1997 was $583,157,  a decrease of $202,036,  or 25.7%,  compared to $785,193 for
the   corresponding   period  in  1996.   The  cost  of  goods  sold   decreased
commensurately  with  the  decrease  in sales  but were  offset  by  charges  of
approximately  $152,000 to reduce earlier versions of the computing unit for the
Mobile Assistant II Systems to estimated market value and to write off parts for
these  earlier  versions of this  computing  unit that have been  replaced  with
upgraded parts, and by a full reserve for obsolescence of approximately $225,000
for the  remaining  computing  units used in 486  Systems  that are  believed by
Company management to be saleable, but whose value is uncertain given changes in
technology and advances in the market.

SALES AND MARKETING  EXPENSES.  Sales and marketing expenses for the nine months
ended September 30, 1997 were $2,529,151,  an increase of $1,744,966, or 222.5%,
compared  to  $784,185  for the  corresponding  period  in 1996.  This  increase
resulted mainly from an increase in personnel, related travel, infrastructure to
support sales,  VAR training  programs,  customer  service,  additional U.S. and
international  marketing  programs  to support the launch of new  products,  and
public  relations  efforts.  In addition,  the Company recorded charges to sales
expense of  approximately  $200,000 for a receivable  whose  collectability  was
deemed to be doubtful and was written off.



                                      -12-

<PAGE>



GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
nine months ended September 30, 1997 were $2,639,263, an increase of $1,263,961,
or 91.9%,  compared to $1,375,302  for the  corresponding  period in 1996.  This
increase resulted from an increase in personnel, consulting, and travel expenses
related  to  the   expansion  and   continued   development   of  the  company's
infrastructure,  activities  related to discussions  regarding certain strategic
partnerships  and  international  operations,  along  with  increases  in legal,
accounting,  investor relations and other costs associated with being a publicly
held company.

RESEARCH AND DEVELOPMENT  EXPENSES.  Research and  development  expenses for the
nine months ended September 30, 1997 were  $1,791,680,  an increase of $564,775,
or 46.0%,  compared to $1,226,905  for the  corresponding  period in 1996.  This
increase is the  primarily  the result of  increased  research  and  development
personnel,  the use of outside  consultants,  and the planning  and  development
efforts for the Company's  head mounted  display,  Mobile  Assistant II Systems,
133P  Systems,  and  software,  particularly  for  the  linkAssist(TM)  software
product.

INTEREST  INCOME,  NET. Net interest  income for the nine months ended September
30, 1997 was $74,045, an increase of $35,779, or 93.5%,  compared to $38,266 for
the corresponding period in 1996. This increase is the result of interest income
from the  investment of cash balances in 1997 versus the net of interest  income
related to proceeds  from the  Company's  Initial  Public  Offering in the three
months ended September 30, 1996, and interest expense on convertible  debentures
and other borrowings in the six months ended June 30, 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.  For the nine
months ended  September  30, 1997,  the amount of accrued  dividend was $37,500,
with no comparable item for the corresponding period in 1996. 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,  which will be accreted  quarterly
as portions of the Series A Preferred Stock are  convertible  into Common Stock.
The amount of this  accretion  for the nine months ended  September 30, 1997 was
$164,634, with no comparable item for the corresponding period in 1996.

NET LOSS  ATTRIBUTABLE  TO COMMON  STOCK.  As a result of the factors  described
above, the net loss for the nine months ended September 30, 1997 was $7,064,518,
an  increase  of  $3,895,615,   or  122.9%,   compared  to  $3,168,903  for  the
corresponding  period in 1996.  Although  the  Company  was  subject to taxation
during the nine  months  ended  September  30,  1997 and the nine  months  ended
September 30, 1996, the Company  incurred net losses during these periods and no
provision for taxes was made.



                                      -13-

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

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  Company's
initial public offering (the "IPO"). On July 18, 1996, the Company completed its
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 3,000 shares of the Company's  Series A Preferred  Stock, par value
$0.01 per share.  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 of the  Company,  par value
$0.01 per share (the "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"). 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.

For the nine months ended September 30, 1997, the Company's operating activities
used cash of $7,810,233,  compared to a use of $2,854,514 for the  corresponding
period in 1996.  The net use of cash for the nine month period  ended  September
30,  1997 was  primarily  the  result of a  $7,064,518  net loss,  along with an
increase in  inventories  of $851,159  largely  related to the production of the
Mobile  Assistant  II System,  the 133P System and the  Company's  head  mounted
display;  an increase in prepaid and other  current  assets of $576,960  and the
reduction in deferred licensing revenue of $250,000,  offset by depreciation and
amortization expense of $226,225, a dividend and accretion of $202,134, recorded
in accordance with the Securities  Exchange  Commission  report,  a reduction in
receivables  of $191,475  and an increase  of payables  and accrued  expenses of
$312,582. Cash used for investing activities for the nine months ended September
30, 1997 was $331,896 for the acquisition of property and equipment, $334,338 in
capitalized  costs related to the production of the Mobile  Assistant II System,
the 133P System and the Company's head mounted display, and


                                      -14-

<PAGE>



$215,772  related to patents.  The Company's  financing  activities for the nine
months  ending  September  30, 1997  consisted of the  placement of its Series A
Preferred  Stock,  which had net proceeds during the period of $2,938,041.  As a
result of the above, cash on hand as of September 30, 1997, was $520,779.

At  September  30, 1997,  the Company had no material  capital  commitments  and
working capital of $1,541,989.

The Company  anticipates that its working capital  requirements will increase as
the  Company  expands  production  and  sales of the  Mobile  Assistant  series,
continues to establish a full sales, service and marketing functions both in the
U.S. and internationally, expands the Company's ongoing research and development
efforts, and develops the support structure for these activities.  The timing of
increases in personnel, research and development expenses, the amount of working
capital  consumed by operations and competitive  pressures on gross margins will
impact the magnitude and timing of the Company's cash requirements. Cash on hand
as of September 30, 1997 is not  sufficient to meet the Company's  operating and
working  capital needs into the fourth  quarter at current  levels of cash usage
and the Company closed on a $3 million  placement of Series B Preferred Stock on
November 10, 1997. To meet working capital needs thereafter, the Company intends
to reduce operating expenses, to obtain a working capital line of credit, and/or
complete additional  financings.  The Company has received several proposals for
financing and it is the opinion of the Company's  management that such financing
arrangements  are readily  available  to the Company and the  execution  of such
arrangements is a decision that will depend on timing, market conditions and the
final terms and  conditions  of such  arrangements,  as well as adherence to the
Company's objective of minimizing  dilution to existing  shareholders by raising
minimum amounts of equity at current stock prices. Receivables from sales of the
Mobile Assistant  series are expected to provide  collateral for working capital
borrowing  facilities  in the  future.  The  Company  has  completed a series of
meetings with potential  licensees,  joint venture partners and investors in the
U.S.,  Europe and the Middle  East,  from  which the  Company  expects to obtain
additional cash in the future.  Company management believes that the combination
of cash on hand,  reduced  operating  expenses,  cash  collections from sales of
products and services,  and outside funding will provide sufficient liquidity to
meet the Company's cash requirements until at least March 1998.  However,  there
can be no assurance  that the Company can or will obtain  sufficient  funds from
collections of product sales or from the establishment of 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 head mounted display and the batteries for the
Mobile  Assistant II System and 133P  System.  In the event that  production  is
interrupted for any reason, revenues will be adversely affected.



                                      -15-

<PAGE>



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  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 300,000 shares of
stock were canceled,  resulting in no earnings  impact and a reduction in shares
outstanding of approximately 2.1%.

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


                                      -16-

<PAGE>



factors,  the ability to successfully  complete additional  financings and other
risks described in the Company's SEC reports and filings.










                                      -17-

<PAGE>



                           PART II - OTHER INFORMATION

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

           The annual meeting of  stockholders of the Company was held on August
28, 1997 for the purpose of (i) approving an amendment to the  Company's  Bylaws
to provide for the  classification of the Board of Directors of the Company into
three classes,  (ii) electing nine  directors to serve,  if the amendment to the
Company's  Bylaws to create a  classified  Board of Directors is approved by the
stockholders,  for terms of one, two or three years,  as the case may be, and if
the amendment is not approved by the stockholders, until the next annual meeting
of stockholders and until their respective successors are elected and qualified,
(iii)  approve an amendment to the Company's  Certificate  of  Incorporation  to
increase  the number of  authorized  shares of common stock from  30,000,000  to
40,000,000 and the number of authorized shares of Preferred Stock from 5,000,000
to  6,000,000,  and (iv)  approving  the Company's  1997 Stock  Incentive  Plan.
Proxies  for the  meeting  were  solicited  pursuant  to  Regulation  14A of the
Securities Exchange Act of 1934 and there was no solicitation in opposition.

           The  proposal to approve the  amendment to the  Company's  Bylaws was
approved by the following vote:


             For                 Against             Non Votes/Abstentions
             ---                 -------             ---------------------
           7,773,393              68,257                    17,500




           The following directors were elected by the following vote:


                                      Votes
                                      -----
                            For               Against             Term
                            ---               -------             ----
Edward G. Newman        10,994,368               0               3 years
Steven A. Newman        10,994,368               0               3 years
James J. Ralabate       10,994,368               0               3 years
Eugene J. Amobi         10,994,368               0               2 years
Phillip E. Pearce       10,994,368               0               2 years
Harry E. Soyster        10,994,368               0               2 years
Keith P. Hicks          10,994,368               0               1 year


                                      -18-

<PAGE>




John F. Moynahan        10,994,368               0               1 year
Martin Eric Weisberg    10,994,368               0               1 year


           The  proposal  to  approve  the  amendment  to  the   Certificate  of
Incorporation was approved by the following vote:


             For                 Against             Non Votes/Abstentions
             ---                 -------             ---------------------
          7,605,772              109,672                   10,250


           The proposal to approve the Company's  1997 Stock  Incentive Plan was
approved by the following vote:


             For                 Against             Non Votes/Abstentions
             ---                 -------             ---------------------
          7,490,846               94,140                   32,782



ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

a)         EXHIBITS:

           27.1 FINANCIAL DATA SCHEDULE

b)         REPORTS ON FORM 8-K

           A report on Form 8-K was filed on August 14, 1997.



                                      -19-

<PAGE>


                                   SIGNATURES

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

                                             XYBERNAUT CORPORATION

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


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



                                      -20-