##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2002 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 0-21013

XYBERNAUT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|                                                        |  |                                                
|------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION) |  | 54-1799851
(I.R.S. EMPLOYER IDENTIFICATION NO.)

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

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

N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES
X NO

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
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 practicable date.

|                                     |  |                                       
|------------------------------------ |  | --------------------------------------
|Class
Common stock  $0.01 par value |  | Outstanding at May 13, 2002
65,881,013

1



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##### 



INDEX

|                                                                                                               |                                                                                                |                                                             |    |      |   | 
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | -- | ---- | - | 
|                                                                                                               |                                                                                                |                                                             |    | PAGE
|                                                                                                               |                                                                                                |                                                             |    |     
|COVER PAGE                                                                                                     |                                                                                                |                                                             | 1  |     
|INDEX                                                                                                          |                                                                                                |                                                             | 2  |     
|PART I  FINANCIAL INFORMATION
Item 1  Financial Statements
Condensed Consolidated Balance Sheets (unaudited) |                                                                                                |                                                             | 3  |     
|                                                                                                               |                                                                                                | Condensed Consolidated Statements of Operations (unaudited) |    |      | 4 | 
|                                                                                                               |                                                                                                | Condensed Consolidated Statements of Cash Flows (unaudited) |    |      | 5 | 
|                                                                                                               |                                                                                                | Notes to Condensed Consolidated Financial Statements        |    |      | 6 | 
|                                                                                                               | Item 2  Managements Discussion and Analysis of Results of Operations and Financial Condition |                                                             |    | 11   |  
|                                                                                                               | Item 3  Quantitative and Qualitative Disclosures About Market Risk                            |                                                             |    | 19   |  
|PART II  OTHER INFORMATION                                                                                    |                                                                                                |                                                             | 20 |     
|                                                                                                               | Item 6  Exhibits and Reports on Form 8-K                                                      |                                                             |    | 21   |  

2



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##### 



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |              |            | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ------------ | ---------- | ------------ | --------- | ------------ | ---------- | 
|                                                    |                                                                                                                                      |                                            |           | March 31,    |            | December 31,
|                                                    |                                                                                                                                      |                                            |           | 2002         |            | 2001        
|                                                    |                                                                                                                                      |                                            |           |              |            |             
|Current assets:                                     |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    | Cash and cash equivalents                                                                                                            |                                            | $         | 3,481,431    |            |              | $         | 3,172,609    |           
|                                                    | Restricted cash                                                                                                                      |                                            |           | 650,904      |            |              |           | 500,000      |           
|                                                    | Accounts receivable, net of allowances of $279,733 and $213,434                                                                      |                                            |           | 3,452,534    |            |              |           | 3,283,828    |           
|                                                    | Inventory, net of reserves of $84,962 and $141,280                                                                                   |                                            |           | 5,074,831    |            |              |           | 4,621,019    |           
|                                                    | Notes receivable from officers, net                                                                                                  |                                            |           | 1,051,201    |            |              |           | 1,053,794    |           
|                                                    | Prepaid and other current assets                                                                                                     |                                            |           | 2,541,407    |            |              |           | 915,512      |           
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total current assets                       |           |              | 16,252,308 |              |           |              | 13,546,762 | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|Property and equipment, net                         |                                                                                                                                      |                                            | 1,139,229 |              |            |              | 1,083,411 |             
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|Other assets:                                       |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    | Patent costs, net of accumulated amortization of $1,222,780
and $1,115,910                                                           |                                            |           | 1,342,935    |            |              |           | 1,235,017    |           
|                                                    | Tooling costs, net of accumulated amortization of
$114,123 and $97,996, and reserves of $0, respectively                             |                                            |           | 1,086,801    |            |              |           | 1,108,869    |           
|                                                    | Other                                                                                                                                |                                            |           | 714,571      |            |              |           | 716,967      |           
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total other assets                         |           |              | 3,144,307  |              |           |              | 3,060,853  | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total assets                               |           | $            | 20,535,844 |              |           | $            | 17,691,026 | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|Current liabilities:                                |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    | Accounts payable                                                                                                                     |                                            | $         | 4,886,152    |            |              | $         | 4,303,078    |           
|                                                    | Accrued expenses and other                                                                                                           |                                            |           | 2,903,845    |            |              |           | 2,943,843    |           
|                                                    | Deferred revenue                                                                                                                     |                                            |           | 43,704       |            |              |           | 40,288       |           
|                                                    | Notes and loans payable                                                                                                              |                                            |           | 15,528       |            |              |           | 17,717       |           
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total current liabilities                  |           | $            | 7,849,229  |              |           | $            | 7,304,926  | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|Commitments
and contingencies
Stockholders equity: |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    | Common stock, $0.01 par value, 120,000,000 and
80,000,000 shares authorized, 65,881,013 and 59,528,113
shares issued and outstanding |                                            | $         | 658,810      |            |              | $         | 595,281      |           
|                                                    | Additional paid-in capital                                                                                                           |                                            |           | 124,794,332  |            |              |           | 114,523,028  |           
|                                                    | Foreign currency translation                                                                                                         |                                            |           | (308,561     | )          |              |           | (289,883     | )         
|                                                    | Accumulated deficit                                                                                                                  |                                            |           | (112,457,966 | )          |              |           | (104,442,326 | )         
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total stockholders equity                 |           | $            | 12,686,615 |              |           | $            | 10,386,100 | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             
|                                                    |                                                                                                                                      | Total liabilities and stockholders equity |           | $            | 20,535,844 |              |           | $            | 17,691,026 | 
|                                                    |                                                                                                                                      |                                            |           |              |            |              |           |             





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

3



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##### 



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                               |                                 |                            |                                                                   |                          |           |                              |            |           |           |            |            |  
|------------------------------ | ------------------------------- | -------------------------- | ----------------------------------------------------------------- | ------------------------ | --------- | ---------------------------- | ---------- | --------- | --------- | ---------- | ---------- | -
|                               |                                 |                            |                                                                   |                          |           | Three Months Ended March 31,
|                               |                                 |                            |                                                                   |                          |           |                             
|                               |                                 |                            |                                                                   |                          |           | 2002                         |            | 2001     
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|Revenue:                       |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 | Hardware                   |                                                                   | $                        | 1,760,192 |                              |            | $         | 1,275,760 |           
|                               |                                 | Software                   |                                                                   |                          |          |                              |            |           | 82,391    |           
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               | Total product                   |                            |                                                                   | 1,760,192                |           |                              |            | 1,358,151 |          
|                               | Consulting, licensing and other |                            |                                                                   | 1,049,729                |           |                              |            | 917,071   |          
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            | Total revenue                                                     |                          |           | 2,809,921                    |            |           |           | 2,275,222  |           
|Cost of sales:                 |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 | Hardware                   |                                                                   |                          | 1,457,512 |                              |            |           | 1,082,901 |           
|                               |                                 | Software                   |                                                                   |                          |          |                              |            |           | 36,538    |           
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               | Total product                   |                            |                                                                   | 1,457,512                |           |                              |            | 1,119,439 |          
|                               | Consulting, licensing and other |                            |                                                                   | 665,465                  |           |                              |            | 584,936   |          
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            | Gross income                                                      |                          |           | 686,944                      |            |           |           | 570,847    |           
|Operating expenses:            |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 | Sales and marketing        |                                                                   |                          | 5,187,425 |                              |            |           | 3,100,374 |           
|                               |                                 | General and administrative |                                                                   |                          | 1,653,362 |                              |            |           | 1,646,936 |           
|                               |                                 | Research and development   |                                                                   |                          | 1,904,766 |                              |            |           | 1,845,151 |           
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            |                                                                   | Total operating expenses |           |                              | 8,745,553  |           |           |            | 6,592,461  |  
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            |                                                                   | Operating loss           |           |                              | (8,058,609 | )         |           |            | (6,021,614 | )
|Interest and other income, net |                                 |                            | 45,003                                                            |                          |           |                              | 91,014     |          
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            | Loss before provision for income taxes                            |                          |           | (8,013,606                   | )          |           |           | (5,930,600 | )         
|Provision for income taxes     |                                 |                            | 2,034                                                             |                          |           |                              | 5,989      |          
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            | Net loss                                                          |                          |           | (8,015,640                   | )          |           |           | (5,936,589 | )         
|                               |                                 |                            | Net loss per share (basic and diluted)                            |                          | $         | (0.13                        | )          |           | $         | (0.13      | )         
|                               |                                 |                            |                                                                   |                          |           |                              |            |          
|                               |                                 |                            | Weighted average number of shares
outstanding (basic and diluted) |                          |           | 60,773,611                   |            |           |           | 45,395,818 |           
|                               |                                 |                            |                                                                   |                          |           |                              |            |          





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

4



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##### 



XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)

|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |            |          |  
|------------------------------------------------------------ | --------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------- | ---------- | ---------------------------- | -------- | ---------- | ---------- | ---------- | -------- | -
|                                                             |                                                                             |                                                                            |                                  |            | Three Months Ended March 31,
|                                                             |                                                                             |                                                                            |                                  |            |                             
|                                                             |                                                                             |                                                                            |                                  |            | 2002                         |          | 2001      
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |           
|Cash flows from operating activities:                        |                                                                             |                                                                            |                                  |            |                              |          |            |           
|                                                             | Net loss                                                                    |                                                                            | $                                | (8,015,640 | )                            |          | $          | (6,124,544 | )         
|                                                             | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Depreciation and amortization                                              |                                  |            | 465,779                      |          |            |            | 424,613    |         
|                                                             |                                                                             | Provision for bad debts                                                    |                                  |            | 50,000                       |          |            |            |           |         
|                                                             |                                                                             | Non-cash charges for equity securities issued for services                 |                                  |            | 215,517                      |          |            |            | 80,800     |         
|                                                             |                                                                             | Changes in assets and liabilities:                                         |                                  |            |                              |          |            |            |            |         
|                                                             |                                                                             |                                                                            | Inventory                        |            |                              | (326,398 | )          |            |            | 745,847  |  
|                                                             |                                                                             |                                                                            | Accounts receivable              |            |                              | (243,996 | )          |            |            | 976,655  |  
|                                                             |                                                                             |                                                                            | Prepaid and other current assets |            |                              | (228,969 | )          |            |            | 260,229  |  
|                                                             |                                                                             |                                                                            | Other assets                     |            |                              | (3,329   | )          |            |            | (11,691  | )
|                                                             |                                                                             |                                                                            | Accounts payable                 |            |                              | 599,384  |            |            |            | (551,620 | )
|                                                             |                                                                             |                                                                            | Accrued expenses and other       |            |                              | (5,411   | )          |            |            | (253,468 | )
|                                                             |                                                                             |                                                                            | Deferred revenue                 |            |                              | 3,417    |            |            |            | 128,719  |  
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Net cash used in operating activities                                      |                                  |            | (7,489,646                   | )        |            |            | (4,324,460 | )       
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Cash flows from investing activities:                        |                                                                             |                                                                            |                                  |            |                              |          |            |           
|                                                             | Acquisition of property and equipment                                       |                                                                            |                                  | (345,169   | )                            |          |            | (235,869   | )         
|                                                             | Acquisition of patents and trademarks                                       |                                                                            |                                  | (235,214   | )                            |          |            | (179,437   | )         
|                                                             | (Increase) / decrease in restricted cash                                    |                                                                            |                                  | (151,053   | )                            |          |            | 15,350     |           
|                                                             | Notes receivable from officers, net                                         |                                                                            |                                  | (23,407    | )                            |          |            | (148,919   | )         
|                                                             | Capitalization of tooling costs                                             |                                                                            |                                  | (25,617    | )                            |          |            | (363,730   | )         
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Net cash used in investing activities                                      |                                  |            | (780,460                     | )        |            |            | (912,605   | )       
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Cash flows from financing activities:                        |                                                                             |                                                                            |                                  |            |                              |          |            |           
|                                                             | Proceeds from:                                                              |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Common stock offerings, net                                                |                                  |            | 8,730,000                    |          |            |            |           |         
|                                                             |                                                                             | Exercise of stock options                                                  |                                  |            | 3,047                        |          |            |            |           |         
|                                                             | Payments for:                                                               |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Notes and loans                                                            |                                  |            |                             |          |            |            | (466,668   | )       
|                                                             |                                                                             | Capitalization of loan costs                                               |                                  |            | (20,000                      | )        |            |            | (10,000    | )       
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Net cash provided by financing activities                                  |                                  |            | 8,713,047                    |          |            |            | (476,668   | )       
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Effect of exchange rate changes on cash and cash equivalents |                                                                             |                                                                            | (134,119                         | )          |                              |          | (22,456    | )         
|Net increase (decrease) in cash and cash equivalents         |                                                                             |                                                                            | 308,822                          |            |                              |          | (5,736,189 | )         
|Cash and cash equivalents, beginning of period               |                                                                             |                                                                            | 3,172,609                        |            |                              |          | 8,848,715  |           
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Cash and cash equivalents, end of period                     |                                                                             | $                                                                          | 3,481,431                        |            |                              | $        | 3,112,526  |           
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Supplemental disclosure of cash flow information:            |                                                                             |                                                                            |                                  |            |                              |          |            |           
|                                                             |                                                                             | Cash paid for interest                                                     |                                  | $          | 727                          |          |            | $          | 3,673      |         
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|                                                             |                                                                             | Cash paid for taxes                                                        |                                  | $          | 39,789                       |          |            | $          | 29,502     |         
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           
|Supplemental disclosure of non-cash financing activities:    |                                                                             |                                                                            |                                  |            |                              |          |            |           
|                                                             |                                                                             | Equity securities issued for future services, recorded
as prepaid expenses |                                  | $          | 1,631,787                    |          |            | $          | 119,601    |         
|                                                             |                                                                             |                                                                            |                                  |            |                              |          |            |            |           



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

5



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##### 



XYBERNAUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION

The accompanying unaudited, condensed and consolidated financial statements of
Xybernaut Corporation (Xybernaut or the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP) for interim financial information and instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of Company management, these
unaudited, condensed and consolidated financial statements reflect all
adjustments of a normal, recurring nature necessary to present fairly the
financial position of the Company and its subsidiaries at March 31, 2002 and
December 31, 2001, and the results of their operations and cash flows for the
three months ended March 31, 2002 and 2001. Results of operations for the three
months ended March 31, 2002 are not necessarily indicative of results of
operations expected for the full fiscal year ending December 31, 2002. Please
refer to the Companys Annual Report on Form 10-K for the complete financial
statements.

2.     THE COMPANY

Xybernaut Corporation, a Delaware corporation (Xybernaut or the Company),
is engaged in the research, development, commercialization and production of
mobile, wearable computing and communication systems along with software and
service solutions designed to enhance productivity, improve product management,
asset management and the accuracy, timeliness and utilization of captured data.
The Company offers solutions with a software and services focus through its
wholly-owned subsidiary Xybernaut Solutions, Inc. (U.S.). The Company offers
solutions with a hardware focus through its U.S. operations and through its
wholly-owned subsidiaries Xybernaut K.K. (Japan) and Xybernaut GmbH (Germany).
The Mobile Assistant® (MA®) series is the Companys primary wearable computer
hardware product line, with the Mobile Assistant IV (the MA IV), MA V and MA
TC currently available. The Company also markets and sells the poma, a
wearable computer targeted at the light-commercial and near-consumer markets.

The Company was formed in 1990 and completed its Initial Public Offering
(IPO) in 1996. In April 2000, Xybernaut acquired Selfware, Inc, which
subsequently changed its name to Xybernaut Solutions, Inc. (XSI). The merger
was accounted for as a pooling of interests.

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RESTRICTED CASH

At March 31, 2002 and December 31, 2001, the Company had $650,904 and $500,000
in restricted cash. Included at both dates is a $500,000 cash deposit that
secures a long-term services contract. Also included in the March 31, 2002
balance is a $150,904 cash deposit that secures a bank guaranty related to an
inventory procurement commitment for the pomaproduct line.

INVENTORY

At March 31, 2002, inventory consisted primarily of wearable computer component
parts held for resale and allocated tooling costs, and is comprised primarily
of finished goods. Inventory is stated at the lower of cost or

6



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##### 



market, with cost being determined on a first-in, first-out basis. Management
periodically assesses the need to provide for obsolescence of inventory and
adjusts the carrying value of inventory to its net realizable value when
required.

During 2001, a charge of $885,019 was recorded to reflect managements estimate
of losses to be incurred on shipments of the initial production run of the poma
product line. The Company elected to sell the pomasystems at prices that are
less than their initial production costs to favorably position the pomain the
price-sensitive light-commercial and near-consumer markets. Although the poma
inventory had not been received by the Company as of December 31, 2001, the
Company recorded the expected losses during 2001, which was the period in which
the underlying contracts were entered into. Because the inventory had not been
received by the Company as of December 31, 2001, and was therefore not recorded
as an asset, this charge was recorded as an accrued liability, which is being
reclassified to an inventory reserve as pomainventory shipments are received
during 2002. During the three months ended March 31, 2002, the Company began
receiving inventory shipments from the manufacturer and also began selling poma
systems to its customers. As of March 31, 2002, the Company had an inventory
reserve of $84,962 and an accrued liability of $771,556 based on the number of
pomaunits received, shipped and on-order. At December 31, 2001, an inventory
reserve of $141,280 was established for hard disk drives that were purchased
for the MA V product line but later replaced with higher-capacity hard disk
drives. During the three months ended March 31, 2002, all of the hard drives
were sold in bulk at an amount approximating their net carrying value and the
reserve of $141,280 at December 31, 2001 related to these hard drives had been
fully utilized as of March 31, 2002. No additional provisions for inventory
were recorded during the three months ended March 31, 2002 as management
believes that current reserves are adequate to cover existing inventory levels.
Additionally, no provision for inventory was recorded during the three months
ended March 31, 2001.

As of March 31, 2002, net of the effects of reserves and write-offs, the
Companys inventory consisted of $2,475,198 in MA V systems and components,
$2,194,097 in MA TC systems and components, $315,850 in MA IV systems and
components, and $89,686 in pomasystems and components.

ISSUANCE OF EQUITY SECURITIES FOR SERVICES

The Company periodically issues equity securities, primarily shares of common
stock and warrants to purchase common stock, to vendors and consultants in
return for goods or services. These transactions are recorded at either the
fair value of the securities issued or at the fair value of goods received or
services performed, whichever is more reliably determined.

RECLASSIFICATIONS

Certain 2001 balances and disclosures have been reclassified to conform to the
2002 presentation.

4. LIQUIDITY AND OPERATIONS

The Company has recorded net losses since its inception, including during the
periods presented in this Form 10-Q. These losses are primarily attributable
to the operating expenses incurred by the Company to design, develop, sell and
market its wearable computer products and to provide general and administrative
support for these operating activities. During these periods, the Companys
revenues and gross margins have not been sufficient to fund these operating
activities. As a result, the Company has consistently recorded negative cash
flows from operating activities and net losses and had an accumulated deficit
of $112,457,966 at March 31, 2002.

These continued operating losses have severely impacted the Companys financial
position and liquidity. At March 31, 2002, the Company had unrestricted cash on
hand of $3,481,431 and accounts payable and accrued expenses of $7,789,997.
During 2002, 2001 and 2000, the Company has funded its operating activities
through its financing activities, primarily private placements of equity,
warrant and stock option exercises and borrowings.

During 2002, management has taken steps that it believes are necessary to
improve its operations and raise additional capital, both of which are needed
to enhance its ability to meet its cash flow needs through December 31, 2002.

7



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During March 2002, the Company performed a detailed
review of operations in order to significantly reduce the
Companys operating expenses. The Company began
implementation of this cost cutting program beginning in April 2002 and intends
to complete this program by the end of June 2002. Assuming there are no significant
changes to the Companys business plan, management has targeted savings of
approximately 30% to 40% from annualized fourth quarter 2001 levels once these
steps are fully implemented.

Management expects that the Companys operating expenses will decline from
recent quarters during the second quarter of 2002, which is the period during
which this cost cutting program is being implemented. Management also expects
to record an approximate $100,000 to $200,000 non-recurring restructuring
charge during the second quarter of 2002 related to these cost cutting
measures. Managements initial target is an operating expense level of $6,000,000 to
$7,000,000 per quarter, beginning with the quarter ending
September 30, 2002. In addition, the Company also intends to
take additional actions and make additional structural changes to
reduce the operating expenses significantly beyond these levels.
Future significant fluctuations may still occur as a result of the Companys research and development activities, which
will still fluctuate depending on the Companys wearable computer product
development cycle during any given period.

The key cash saving
initiatives that the Company has, or intends to,
implement are listed below:



| |  |  | Worldwide headcount has been reduced by 15% from
approximately 145 full-time employees to approximately 123 full-time
employees.                                                                                                                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Companys worldwide engineering and product functions have been
consolidated.                                                                                                                                                                                                             
|
| |  |  | Operations in Asia were significantly reduced, especially related
to direct sales, marketing and product efforts. Future Asian
operations will focus primarily on channel sales and business
development.                                                                                     
|
| |  |  | Participation in trade shows and advertising activities will be
reduced.                                                                                                                                                                                                                      
|
| |  |  | Agreements with certain consultants, vendors and partners have
been, and will continue to be, cancelled or renegotiated in order to
minimize cash expenditures through the issuance of the Companys equity
securities, the renegotiation of terms and a reduction or elimination
of services.
|
| |  |  | Other various reductions in discretionary costs have been, and will
continue to be, implemented.                                                                                                                                                                                              

Subsequent to these changes, management believes that its staffing and
resources will be sufficient to carry out its business plan for the foreseeable
future.

Even after the above cost cutting initiatives are implemented, the Company will
still be required to obtain outside financing to supplement the Companys cash
position through 2002 and potentially thereafter. Potential sources of additional financing include private equity
offerings, strategic investments, strategic partnerships and various forms of
debt financing. The Companys management believes that the combination of cash
on hand, cash flows from operations, and outside funding will provide
sufficient liquidity to meet the Companys ongoing cash requirements, based
both on its historical ability to raise capital and on debt and equity
financings currently available to the Company. However, there can be no
assurance that the Company can or will obtain sufficient funds from operations
or from additional financings on terms acceptable to the Company.

During March 2002, the Company raised $9,000,000 in cash through sales of its
common stock to institutional investors.

5.     BORROWINGS

In December 2001, the Company entered into a revolving credit facility with IBM
Global Finance (the IBM Revolver). The IBM Revolver provides for up to
$3,000,000 in borrowings based on the Companys base of eligible U.S.
receivables and inventory. Interest on the facility accrues at the prime rate
plus 2.0% per annum. The borrowing is secured by the Companys U.S. assets,
excluding patents and intellectual property. The IBM Revolver includes
customary financial covenants and other restrictions, including the requirement
that the Company obtain a $1,000,000 irrevocable letter of credit (the Letter
of Credit) to secure this facility. The Company believes that it will have to
post cash collateral in an equal amount to obtain the Letter of Credit. At
March 31, 2001, the Company had not made any borrowings under the IBM Revolver.
Subject to the satisfaction of the various requirements of the facility, the
Company expects to draw down on the IBM Revolver during 2002.

8



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6.     STOCKHOLDERS EQUITY

During March 2002, the Company received gross proceeds of $9,000,000 through a
private placement of 5,625,000 shares of its common stock to certain investors.
These shares were sold at $1.60 per share, representing an approximate 20%
discount to the average closing bid price of the shares for the ten trading
days immediately preceding the closing. In connection with this private
placement, the Company issued to the investors callable warrants to purchase
1,406,250 shares of common stock at an exercise price of $3.00 per share. In
connection with this placement, the Company also paid $270,000 in cash to
financial advisors.

The Company has issued equity securities to certain employees, consultants and
companies for services provided to the Company. These securities include shares
of common stock and warrants and options to purchase shares of common stock.
These transactions were individually valued based upon the fair value of the
securities issued or the services provided, whichever was more reliably
measured. The Company recorded prepaid expenses of $1,631,787 and $119,601
associated with these services during the three months ended March 31, 2002 and
2001, respectively. These prepaid expenses will be amortized during 2002 and
2003 over the remaining lives of the underlying service agreements. The
Company recorded expenses related to these prepaid services of $215,517 and
$80,800 during the three months ended March 31, 2002 and 2001, respectively.

The Company issues warrants to purchase shares of its common stock, primarily
in connection with the Companys financings and borrowings. At March 31, 2002,
the Company had warrants outstanding to purchase 6,979,064 shares of its common
stock at prices that range from $2.25 to $18.00 per share, with a weighted
average of $3.78 per share.

7.     SEGMENT AND ENTERPRISE WIDE REPORTING

During 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS 131 requires the disclosure of
certain financial and supplementary information of each reportable segment of
an enterprise. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
discrete financial information is evaluated regularly by the chief operating
decision maker or decision making group, in deciding how to allocate resources
and assess performance. The financial information disclosed herein materially
presents all of the financial information related to the Companys principal
operating segments as a provider of wearable computing and communications
systems and software and service solutions.

Revenues by geographical destination as a percentage of total revenues for the
three months ended March 31, 2002 and 2001 are as follows:

|                                             |  |                    |    |      |  |  |    |  
|-------------------------------------------- |  | ------------------ | -- | ---- |  |  | -- | -
|                                             |  | Three Months Ended
|                                             |  | March 31,         
|                                             |  |                   
|                                             |  | 2002               |    | 2001
|                                             |  |                    |    |     
|North America, principally the United States |  |                    | 72 | %    |  |  | 73 | %
|Europe, principally Germany                  |  |                    | 20 | %    |  |  | 19 | %
|Asia, principally Japan                      |  |                    | 8  | %    |  |  | 8  | %

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Operations in various geographical areas are summarized as follows:

|                    |  |                    |            |      |  |   |           | 
|------------------- |  | ------------------ | ---------- | ---- |  | - | --------- | 
|                    |  | As of and for the 
|                    |  | Three Months Ended
|                    |  | March 31,         
|                    |  |                   
|                    |  | 2002               |            | 2001
|                    |  |                    |            |     
|North America:      |  |                    |            |      |  |   |           | 
|Total revenue       |  | $                  | 2,021,468  |      |  | $ | 1,664,684 | 
|Net loss            |  |                    | 7,096,667  |      |  |   | 5,069,722 | 
|Identifiable assets |  |                    | 15,649,414 |      |  |   | 9,718,541 | 
|                   
|Europe:             |  |                    |            |      |  |   |           | 
|Total Revenue       |  | $                  | 562,103    |      |  | $ | 428,550   | 
|Net loss            |  |                    | 839,948    |      |  |   | 654,569   | 
|Identifiable assets |  |                    | 4,127,895  |      |  |   | 1,429,915 | 
|                   
|Asia:               |  |                    |            |      |  |   |           | 
|Total revenue       |  | $                  | 226,350    |      |  | $ | 181,988   | 
|Net loss            |  |                    | 79,025     |      |  |   | 212,298   | 
|Identifiable assets |  |                    | 758,535    |      |  |   | 1,736,309 | 

(1)  Included in the Companys operations in Europe are $347,954 and
$348,558, respectively, in expenses related to research and development
activities conducted by a branch of the Company operating in Germany.

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

|                                      |  |                                |      |      |  |  |      |  
|------------------------------------- |  | ------------------------------ | ---- | ---- |  |  | ---- | -
|                                      |  | As of the for the Three Months
|                                      |  | Ended March 31,               
|                                      |  |                               
|                                      |  | 2002                           |      | 2001
|                                      |  |                                |      |     
|Revenue:                              |  |                                |      |      |  |  |      |  
|Number of Customers                   |  |                                | 2    |      |  |  | 2    |  
|Percent of Total Revenue              |  |                                | 28.0 | %    |  |  | 35.5 | %
|                                     
|Accounts Receivable:                  |  |                                |      |      |  |  |      |  
|Number of Customers                   |  |                                | 2    |      |  |  | 2    |  
|Percent of Total Acccounts Receivable |  |                                | 55.2 | %    |  |  | 48.9 | %



For the three months ended, March 31, 2002, revenue from the following
customers each comprised greater than 10% of total revenue: the State of
Tennessee Department of Transportation (DOT) and Europart KG. As of March
31, 2002, the following customers accounts receivable balance each comprised
greater than 10% of total accounts receivable: the State of Tennessee DOT and
Europart KG. For the three months ended, March 31, 2001, revenue from the
following customers each comprised greater than 10% of total revenue:
Department of Defense

10



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and Europart KG. As of March 31, 2001, the following customers accounts
receivable balance each comprised greater than 10% of total accounts
receivable: Department of Defense and Europart KG.

The Company has contracted with IBM to design, develop and manufacture certain
components of the MA V product line, including the computer portion and two
versions of flat panel displays. The Company has also entered into an
agreement with IBM under which IBM purchases MA V products from the Company and
markets and sells the systems to its own customers. During the three months
ended March 31, 2002 and 2001, the Company was billed $2,155,579 and
$1,443,300, respectively, by IBM related to design and development services and
inventory purchases. During the three months ended March 31, 2002 and 2001,
the Company recorded revenues of $89,624 and $0, respectively, related to sales
of MA V products to IBM. The Companys management believes that the agreements
and contracts underlying both the design, development and manufacture of the MA
V product line and the sale of MA V products to IBM contain arms-length terms
and conditions.

Certain of the end-users of the Companys wearable computer products are
universities and other not-for-profit agencies (collectively, the End-Users)
that purchase these products from a Value Added Reseller (the VAR) of
Xybernaut GmbH. The Company also contracts with certain of the End-Users to
provide research and development and sales and marketing services to the
Company. The research and development services provided to the Company include
activities such as hardware and software development, product testing and
evaluation. The sales and marketing services include activities such as
Company participation in and sponsorship of industry trade shows, the
preparation of competitive market analysis, and the use of the End-Users as
named reference accounts. During the three months ended March 31, 2002 and
2001, the Company recorded revenues of approximately $325,000 and $302,000,
respectively, related to sales of its products to the VAR which were ultimately
sold to the End-Users. During the three months ended March 31, 2002 and 2001,
the Company recorded total research and development and sales and marketing
expenses of $228,244 and $232,330, respectively, related to services performed
by the End-Users. The Companys management believes that the agreements and
contracts underlying both the sale of the products and the performance of the
services contain arms-length terms and conditions.

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

OVERVIEW

Xybernaut Corporation, a Delaware corporation (Xybernaut or the Company),
is engaged in the research, development and commercialization of mobile,
wearable computing and communication systems, along with software and service
solutions designed to enhance productivity, improve product management, asset
management and the accuracy, timeliness and utilization of captured data. The
Company offers solutions with a software and services focus through its
wholly-owned subsidiary Xybernaut Solutions, Inc. (XSI). The Company offers
solutions with a hardware focus through its U.S. operations and through its
wholly-owned subsidiaries Xybernaut K.K. (Japan) and Xybernaut GmbH (Germany).

The Company was formed in 1990 and completed its initial public offering
(IPO) in 1996. In April 2000, Xybernaut acquired XSI, formerly known as
Selfware, Inc., a company that provides software and services solutions. The
merger was accounted for as a pooling of interests.

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: XSI (Virginia, U.S.), Xybernaut Development
Corporation (Virginia, U.S.), Xybernaut K.K. (Yokohama, Japan), and Xybernaut
GmbH (Boeblingen, Germany). All significant intercompany accounts and
transactions have been eliminated in the consolidation.

The Mobile Assistant® (MA®) series is the Companys primary wearable computer
hardware product line, with the Mobile Assistant IV (the MA IV), MA V and MA
TC currently available. Since its commercial introduction in 1995, the Company
has realized revenue of over $17,000,000 on sales of approximately 3,500 units
of the MA series. The Company began shipping the poma, a wearable computer
targeted at the light-commercial and near-consumer markets, during the first
quarter of 2002. The Company derives its revenues from sales of its wearable
computers, software products and consulting services. In the future, the
Company expects to obtain additional

11



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revenues from the licensing of its intellectual property.

A number of trends are expected to have a significant effect on the Companys
operations in the future. Particularly during the fourth quarter of 2001 and
first quarter of 2002, many of the Companys large customers deferred or
delayed anticipated purchases of Company products because of uncertain economic
conditions. If these conditions persist or worsen, it is possible that more
potential customers will defer, delay or cancel scheduled purchases, which
would have an adverse effect on Company operations. While the Company expects
general economic conditions to begin improving by the end of the second quarter
of 2002, there can be no assurance that this expectation will be realized.

Beginning with the widespread use of the internet on desktop computers, there
has been an increasing demand for mobile computing and wireless communications
devices that can bring the desktop internet experience to mobile users. The
rapid growth of internet-enabled cell phones, PDAs, interactive pagers and the
like result in a growing number of devices that cater to the mobile data user
and which will compete with the Companys products.

The Company believes that sales of its wearable computers will rely to a great
extent on the availability of wireless broadband services that can take
advantage of the processing power and display capabilities of the Companys
hardware products. Wireless LANs are now well established in the commercial
markets for providing broadband capabilities in limited-range applications such
as warehouses, factory floors, flightline operations and the like. However,
wide-range wireless access, commonly referred to as 2.5G or 3G, is not
established at this time but is expected in the near future. The Company
believes that the consumer markets will require such wireless broadband access
to fully develop.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated financial data as a
percentage of revenues for the three months ended March 31, 2002 and 2001.

|                         |                          |  |                              |       |      |  |        |       | 
|------------------------ | ------------------------ |  | ---------------------------- | ----- | ---- |  | ------ | ----- | 
|                         |                          |  | Three Months Ended March 31,
|                         |                          |  |                             
|                         |                          |  | 2002                         |       | 2001
|                         |                          |  |                              |       |     
|Revenue                  |                          |  | 100.0                        | %     |      |  | 100.0  | %    
|Cost of sales            |                          |  | 75.6                         |       |      |  | 74.9   |      
|                         |                          |  |                              |       |      |  |        |      
|                         | Gross margin             |  |                              | 24.4  |      |  |        | 25.1  | 
|                         |                          |  |                              |       |      |  |        |      
|Operating expenses:      |                          |  |                              |       |      |  |        |      
|                         | Sales & marketing        |  |                              | 184.6 |      |  |        | 136.3 | 
|                         | General & administrative |  |                              | 58.8  |      |  |        | 72.4  | 
|                         | Research & development   |  |                              | 67.8  |      |  |        | 81.1  | 
|                         |                          |  |                              |       |      |  |        |      
|Total operating expenses |                          |  | 311.2                        |       |      |  | 289.8  |      
|                         |                          |  |                              |       |      |  |        |      
|Interest and other       |                          |  | 1.6                          |       |      |  | 4.0    |      
|                         |                          |  |                              |       |      |  |        |      
|Net loss                 |                          |  | (285.3                       | )     |      |  | (260.9 | )    
|                         |                          |  |                              |       |      |  |        |      

THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001

REVENUE. The Company derives its revenue from product sales of its wearable
computers and components, software, and from consulting services. Total revenue
for the three months ended March 31, 2002 was $2,809,921, an increase of
$534,699, or 24%, compared to $2,275,222 for the three months ended March 31,
2001. Product revenue for the three months ended 2002 was $1,760,192, an
increase of $402,041, or 30%, compared to $1,358,151

12



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for the three months ended March 31, 2001. Sales from the Companys wearable
computers and components increased 38%, or $484,432, to $1,760,192 for the
three months ended March 31, 2002 compared to $1,275,760 for the corresponding
period in 2001. This increase resulted from sales of the MA V and MA TC
product lines which were introduced in the second half of 2001. The revenues
for the first quarter of 2002 include approximately $364,000 of revenues
related to the bulk sale of components for the MA V system. Offsetting this
increase in wearable computer sales was a decrease in software product revenue
from $82,391 for the three months ended March 31, 2001 to $0 for the same
period in 2002. Revenues from software products are generally related to a few
large transactions during the year and, therefore, it is not uncommon for the
Company to have significant fluctuations in software revenue from quarter to
quarter. The Companys consulting, licensing and other revenue for the three
months ended March 31, 2002 was $1,049,729, an increase of $132,658, or 14%,
from revenue of $917,071 for the three months ended March 31, 2001. This
increase resulted primarily from a new consulting contract for which
significant work was performed in the first quarter of 2002 compared to 2001.

COST OF SALES. The Companys cost of sales include the costs of components for
the Companys wearable computer product lines, purchased software, direct labor
and materials, amortization of tooling costs, warranty costs, fulfillment and
shipping costs, and inventory and tooling reserves. Total cost of sales for the
three months ended March 31, 2002 was $2,122,977, an increase of $418,602, or
25%, compared to $1,704,375 for the three months ended March 31, 2001. This
increase is consistent with the 24% increase in revenues from the three months
ended March 31, 2001 to the same period in 2002. Product cost of sales and
consulting, licensing and other cost of sales increased $338,073, or 30%, and
$80,529, or 14%, respectively, from the three months ended March 31, 2001
compared with the same period in 2002, which is also consistent with the 30%
and 14% increase in product revenues and consulting, licensing and other
revenues, respectively, over the same periods. The cost of sales related to the
Companys wearable computer products increased $374,611, or 35%, from the three
months ended March 31, 2001 compared to the same period in 2002, which is
approximately consistent with the 38% increase in hardware sales. Additionally,
the cost of sales for software products decreased from $36,538 for the period
ended March 31, 2001 to $0 for the corresponding period in 2002 as the Company
did not have any software product sales in the first quarter of 2002. Overall
gross margins were consistent at 24% and 25% for the periods ending March 31,
2002 and 2001, respectively. The Companys gross margin from its product sales
remained consistent as well between the quarter ended March 31, 2002 and 2001
with margins of 17% and 18%, respectively. The Companys gross margin from its
consulting, licensing and other services remained consistent at 37% for the
three months ended March 31, 2002 compared to 36% for the same period in 2001.

SALES AND MARKETING EXPENSES. Sales and marketing expenses for the three months
ended March 31, 2002 were $5,187,425, an increase of $2,087,051, or 67%,
compared to $3,100,374, for the corresponding period in 2001. The increase was
the result of an increase of approximately $782,000 in personnel costs related
to its sales, marketing and business development functions; expenditures
relating to outside marketing services of $525,000; and an increase in trade
shows and conferences of approximately $670,000, primarily resulting from the
costs associated with the International Conference on Wearable Computing
(ICWC) held at Chicago Comdex in the first quarter of 2002. In 2001, the
ICWC was held during the second quarter. The Company recorded $161,638 and
$80,800 of non-cash expenses during the first quarter of 2002 and 2001,
respectively, for outside marketing services which were paid through the
issuance of the Companys equity securities.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the three months ended March 31, 2002 were $1,653,362, an increase of $6,426,
or less than 1%, compared to $1,646,936 for the same period in 2001. General
and administrative expenses remained relatively constant as there were no
significant administrative personnel changes or large non-recurring
expenditures from the first quarter of 2001 to the same period in 2002.

RESEARCH AND DEVELOPMENT EXPENSES. The Companys research and development
expenses consist primarily of personnel costs, the purchase of test equipment
and payments to consultants and other third-parties which provide research and
development services. Research and development expenses for the three months
ended March 31, 2002 were $1,904,766, an increase of $59,615 or 3%, compared to
$1,845,151 for the corresponding period in 2001. Expenditures to third-party
vendors related to research and development for the Companys product lines,
particularly the MA V, decreased approximately $344,000 from the first quarter
of 2001 to the same period in 2002 as the MAV was introduced in the third
quarter of 2001. This decrease was offset by a $200,000 increase in expenses
related to outside research services for general wearable technology for the
three months ended March 31,

13



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2002 compared to the same period in 2001. Additionally, the decrease was
further offset by a $197,000 increase in research and development personnel
costs from the three months ended March 31, 2001 to the corresponding period in
2002.

INTEREST AND OTHER, NET. Net interest income and other income for the three
months ended March 31, 2002 were $45,003, a decrease of $46,011, or 51%,
compared to interest and other income of $91,014 for the same period in 2001.
This decrease resulted primarily from a decrease in interest income earned from
the Companys cash balances from the first quarter in 2001 compared to the
first quarter of 2002.

PROVISION FOR INCOME TAXES. The provision for income taxes for the three months
ended March 31, 2002 was $2,034, a decrease of $3,955, compared to the income
tax provision of $5,989 for the three months ended March 31, 2001. These
amounts relate to the operations of the Companys foreign subsidiaries. The
Companys U.S. operations had a net loss during these periods and, therefore,
no provision for U.S. income taxes was made.

NET LOSS. As a result of the factors described above, the net loss for the
three months ended March 31, 2002 was $8,015,640, an increase of $2,079,051 or
35%, compared to $5,936,589 for the three months ended March 31, 2001.

OTHER OPERATING ACTIVITIES

For the three months ended March 31, 2002, the Companys operating activities
used cash of $7,489,646 as a result of its net loss of $8,015,640 and working
capital requirements of $205,302, offset by non-cash expenses of $731,296. The
Companys investing activities used cash of $780,460. These activities were
funded through the Companys financing activities which provided cash of
$8,713,047, principally through the private placement of common stock. As a
result, the Companys cash balance increased to $3,481,431 at March 31, 2002
from $3,172,609 at December 31, 2001.

For the three months ended March 31, 2001, the Companys operating activities
used cash of $4,324,460 as a result of its net loss of $6,124,544, offset by
proceeds from working capital and non-cash expenses of $1,294,671 and $505,413,
respectively. The Companys investing activities used cash of $912,605. The
Companys financing activities used cash of $476,668, principally through the
repayment of notes and loans outstanding. As a result, the Companys cash
balance decreased from $8,848,715 at December 31, 2000 to $3,112,526 at March
31, 2001.

For hardware product sales, the Company generally provides a one-year warranty
on its parts and a six-month warranty on labor. The Companys suppliers for the
significant components of the MA series, including the computing unit, flat
panel and head mounted displays, and batteries, provide the Company with
similar warranties. A provision for estimated future warranty costs is
recorded at the time of shipment as a component of cost of sales. The provision
is an estimate of internal costs to be incurred for such sales above and beyond
the warranty offered to the Company by its suppliers. The trend in the
computer hardware industry is to provide extended warranties for up to two
years beyond the one-year base warranty. In certain circumstances, the Company
recently began offering such an additional two-year warranty period to its
customers. The Company is negotiating with its suppliers to offer similar
warranties to the Company to back up the extended warranties offered to the
Companys customers. In the event that the Company is not able to obtain such
warranties from its suppliers, the Company may incur warranty expenses in the
future that are significantly greater than those incurred in the past. The
Company recorded warranty expense, net of warranty coverage from suppliers, of
$186,689 and $35,179 during the three months ended March 31, 2002 and 2001,
respectively, and had a warranty reserve of $85,027 and $86,915 at March 31,
2002 and December 31, 2001, respectively.

The Companys consolidated financial statements contain a provision for income
tax expense related to its operations outside the United States. Subject to
realization, the Company has generated net operating losses in the U.S. that
can be used to offset taxable operating income in the future. The Companys
future operations, if profitable, will be subject to income tax expense not
previously incurred by the Company. At December 31, 2001, the Company had
approximately $94,000,000 and $3,800,000 of net operating loss carryforwards
for U.S. federal and foreign income tax purposes, respectively. The U.S. losses
will begin to expire in 2010 and the losses from foreign operations do not
expire. The use of the U.S. carryforwards may be limited in any one year under
Internal Revenue Code Section 382 if significant ownership changes occur.

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The Company is involved in routine legal and administrative proceedings and
claims of various types. While any such proceeding or claim contains an element
of uncertainty, management does not expect that they will have a material
adverse effect on the Companys results of operations or financial position.

TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES

Two of the Companys executive officers were members of the board of directors
of a former customer that purchased software products and consulting services
from the Company. During 2001, this customer was forced to cease operations
when its largest customer withheld payment for ongoing services. During the
three months ended March 31, 2002 and 2001, the Company recorded revenues on
sales to this customer of $0 and $29,603, respectively. As of December 31,
2000, the Company had a $259,566 accounts receivable balance from this
customer. During the three months ended March 31, 2001, the Company billed
this customer an additional $29,603, collected $259,333 and wrote off the
remaining $29,836 balance. The Company billed this customer using the
established billing rates used with its other customers. Additionally, the
Company believes that the final payment received by the Company was
commensurate with those received by other similar vendors of the customer. As
a result, the Companys management believes that the relationship with this
customer was based on arms-length terms and conditions.

Between November 2000 and February 2001, the Company loaned $940,188, net of repayments, to the Companys President, Chief Executive Officer and Chairman of
the Board of Directors. The proceeds were used to prevent a forced sale of a
portion of this officers personal common stock holdings of the Company that
secured a margin loan from an investment bank. The loan was made pursuant to a
Promissory Note that is secured by shares of the officers personal common
stock holdings of the Company. On December 31, 2001, the Companys Board of
Directors increased the number of shares securing the loan from 200,000 shares
to 250,000 shares, extended the maturity date from December 31, 2001 to
December 31, 2002 and reduced the interest rate from 8.0% to 6.0%, reflective
of a general decline in interest rates over this period. The outstanding
principal and interest owed to the Company under this Promissory Note totaled
$1,041,354 and $1,026,708 at March 31, 2002 and December 31, 2001,
respectively. If the value of the pledged shares is not sufficient to repay
the outstanding balance of the note at maturity or upon acceleration, the
Company would have recourse to other assets of the officer.

The Company has contracted with IBM to design, develop and manufacture certain
components of the MA V product line, including the computer portion and two
versions of flat panel displays (the Engineering and Inventory Agreement).
The Company has also entered into an agreement with IBM under which IBM
purchases MA V products from the Company and markets and sells the systems to
its own customers (the Sales and Marketing Agreement). During the three
months ended March 31, 2002 and 2001, the Company was billed $2,155,579 and
$1,443,300, respectively, by IBM related to design and development services and
inventory purchases. During the three months ended March 31, 2002 and 2001,
the Company recorded revenues of $89,624 and $0, respectively, related to sales
of MA V products to IBM. Before selecting IBM as its partner for the
Engineering and Inventory Agreement, the Company reviewed IBMs proposal to
provide such services, which included discussion of the estimated costs to be
incurred, IBMs track-record of bringing new technologies to market, IBMs
reputation for quality and other customary evaluations. The Sales and
Marketing Agreement was reached with similar terms and conditions provided to
other volume resellers of the Companys products. As a result, the Companys
management believes that the Engineering and Inventory Agreement and the Sales
and Marketing Agreement contain arms-length terms and conditions.

One of the Companys resellers is an entity that is owned by the son of a Vice
President of the Company, who is also a member of the Board of Directors of the
Company. During the three months ended March 31, 2002 and 2001, the Company
recorded sales of $29,096 and $0 to this reseller and the products related to
these revenues were subsequently sold to a third party end-user under
arms-length terms and conditions. The sales were transacted with similar terms
and conditions provided to other resellers of the Companys products. As a
result, the Companys management believes that these sales transactions contain
arms-length terms and conditions.

Certain of the end-users of the Companys wearable computer products are
universities and other not-for-profit entities (collectively, the End-Users)
that purchase these products from a Value Added Reseller (the VAR) of
Xybernaut GmbH. The Company also contracts with certain of the End-Users to
provide research and development and sales and marketing services to the
Company. The research and development services provided to the Company

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include activities such as hardware and software development, product testing
and evaluation. The sales and marketing services include activities such as
Company participation in and sponsorship of industry trade shows, the
preparation of competitive market analysis and the use of the End-Users as
named reference accounts. During the three months ended March 31, 2002 and
2001, the Company recorded revenues of approximately $325,000 and $302,000,
respectively, related to sales of its products to the VAR which were ultimately
sold to the End-Users. During 2002 and 2001, the Company recorded total
research and development and sales and marketing expenses of $228,244 and
$232,330, respectively, related to services performed by the End-Users. The
Company compares the cost of the projects performed by the End-Users against
the cost it would likely incur if it were to obtain these services from
entities other than the End-Users. Management also evaluates the cost if the
Company performed these services in-house, including expenses that would be
incurred for salary and benefits, training, travel, supplies and equipment, and
overhead. As a result, the Companys management believes that the agreements
and contracts underlying both the sale of the products and the performance of
the services contain arms-length terms and conditions.

LIQUIDITY AND CAPITAL RESOURCES

From its inception until the completion of the IPO, the Company financed its
operations through the private sale of its equity securities, vendor credit,
and short-term loans received from management, stockholders and others. During
and subsequent to the IPO, the Company has financed its operations from public
and private sales of its common and preferred stock, borrowings from financial
institutions, management and investors, proceeds from the exercise of warrants
and stock options, and sales of its products and services. The Companys
financing and borrowing activities for 2002 and 2001 are provided below.

COMMON STOCK

During April and May 2001, the Company received net proceeds of $10,192,469
through the private placement of 5,238,094 shares of its common stock to
several investors. In connection with this private placement, the Company
issued warrants to purchase 1,616,427 shares of its common stock at an exercise
price of $5.00 per share and paid $350,000 in finders fees.

On July 31, 2001, the Company received gross proceeds of $4,000,000 through a
private placement of 1,324,503 shares of its common stock. In connection with
this private placement, the Company issued callable warrants to purchase
331,126 shares of its common stock at an exercise price of $4.53 per share. The
Company also paid $120,000 in cash and issued callable warrants to purchase
39,735 shares of common stock with the same terms to a financial advisor.

On November 15, 2001, the Company received gross proceeds of $9,250,000 through
the private placement of 5,441,175 shares of its common stock. In connection
with this private placement, the Company issued callable warrants to purchase
1,360,294 shares of its common stock at an exercise price of $2.55 per share.
The Company also paid $266,131 in cash and issued callable warrants to purchase
61,765 shares of common stock with the same terms to a financial advisor and a
finder.

During March 2002, the Company received gross proceeds of $9,000,000 through a
private placement of 5,625,000 shares of its common stock to certain investors.
These shares were sold at $1.60 per share, representing an approximate 20%
discount to the average closing bid price of the shares for the ten trading
days immediately preceding the closing. In connection with this private
placement, the Company issued to the investors callable warrants to purchase
1,406,250 shares of common stock at an exercise price of $3.00 per share. In
connection with this placement, the Company also paid $270,000 in cash to
financial advisors.

The Company has issued equity securities to certain employees, consultants and
companies for goods and services provided to the Company. These securities
include shares of common stock and warrants and options to purchase shares of
common stock. These transactions were individually valued based upon the fair
value of the securities issued or the services provided, whichever was more
reliably measured. The Company had recorded prepaid expenses of $1,631,787 and
$119,601 associated with these services as of March 31, 2002 and December 31,
2001, respectively. These prepaid expenses will be amortized during 2002 and
2003 over the remaining lives of the

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underlying agreements. The Company recorded expenses related to these prepaid
services of $215,517 and $80,800 during the three months ended March 31, 2002
and 2001, respectively.

The Company issues warrants to purchase shares of its common stock, primarily
in connection with the Companys financings and borrowings. The Company
received gross proceeds of $0 and $3,773,405 through the issuance of 0 and
1,881,470 shares of its common stock during the three months ended March 31,
2002 and the fiscal year ended December 31, 2001, respectively, through the
exercise of certain of these warrants. At March 31, 2002, the Company had
warrants outstanding to purchase 6,979,064 shares of its common stock at prices
that range from $2.25 to $18.00 per share, with a weighted average exercise
price of $3.78 per share.

BORROWINGS

In December 2001, the Company entered into a revolving credit facility with IBM
Global Finance (the IBM Revolver). The IBM Revolver provides for up to
$3,000,000 in borrowings based on the Companys base of eligible U.S.
receivables and inventory. Interest on the facility accrues at the prime rate
plus 2.0% per annum. The borrowing is secured by the Companys U.S. assets,
excluding patents and intellectual property. The IBM Revolver includes
customary financial covenants and other restrictions, including the requirement
that the Company obtain a $1,000,000 irrevocable letter of credit (the Letter
of Credit) to secure this facility. The Company believes that it will have to
post cash collateral in an equal amount to obtain the Letter of Credit. At
March 31, 2001, the Company had not made any borrowings under the IBM Revolver.
Subject to the satisfaction of the various requirements of the facility, the
Company expects to draw down on the IBM Revolver during 2002.

COMMITMENTS

Inventory. At March 31, 2002, the Company had commitments to purchase
inventory, tooling and engineering and other services from its suppliers and
manufacturers related to its current hardware product lines. The Company expects that it will enter into
similar inventory and engineering commitments in the future as it designs,
develops and procures future wearable computer product lines.

The current contract with IBM requires the Company to purchase up to
24,000 computing units (the MA V CPUs).
Changes in available technology and current negotiations with IBM are
such that the Company believes that the contract will be modified and
that this obligation will be significantly reduced and/or transferred
to future generations of products or services. However, there can be
no assurance that the Company will be successful in renegotiating
this commitment. Under the current contract, the MA V CPUs
are scheduled for purchase over a 15 month period following final acceptance by
the Company, which acceptance is determined by a number of criteria, including
receipt of comprehensive product documentation and other defined deliverables.
All criteria for acceptance had not been met at the time of this filing, but
the Company expects that all criteria may be met during 2002.
Under the current contract, the Company may cancel its purchase
commitment following product acceptance by
paying a cancellation fee in an amount not to exceed approximately $4,000,000,
which amount decreases in proportion to the number of MA V CPUs purchased over
the contract period.

In addition to the obligation
related to the MA V CPUs, the Company has commitments to purchase computing
units, flat panel and head mounted displays, miscellaneous computing components
as well as engineering and other services from its various vendors related to
the MA V, poma, MA TC and future product lines. The Company believes that the
timing and amount of many of these shipments, services and payments may be
adjusted through the payment of cancellation fees, contract negotiations or the
satisfaction of obligations through the issuance of the Companys equity
securities. However, there can be no assurance that the Company can
successfully modify these contracts or commitments. Excluding the
potential impact of ongoing contract negotiations, the Company estimates
that it will make total payments of $9,000,000 between April 2002 and December
2002 related to inventory commitments for the current product lines under which
the Company was obligated as of March 31, 2002. In addition, the Company
estimates that it will make additional payments of between $6,000,000
and $10,000,000 between April 2002 and December 2002 in order to
execute its business plan for the remainder of 2002. If the current
contracts between the Company and its suppliers were completed in
full, the Company would be obligated to make approximately
$26,000,000 in payments during 2003 related to these contracts.
However, the Company believes that these contracts will be modified
such that this obligation will be
significantly reduced and/or transferred to future generations of
products or services.

Operating Leases and Other. The Company leases operating facilities and
equipment under operating leases expiring on various dates through 2006. Future
minimum payments under noncancelable operating leases at December 31, 2001 are:

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|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|YEAR ENDING DECEMBER 31, |  |   |           | 
|                         |  |   |           | 
|2002                     |  | $ | 595,592   | 
|2003                     |  |   | 604,944   | 
|2004                     |  |   | 172,449   | 
|2005                     |  |   | 155,852   | 
|2006                     |  |   | 160,528   | 
|                         |  |   |           | 
|                         |  | $ | 1,689,365 | 
|                         |  |   |           | 

On January 1, 2002, the Company entered into an agreement with a vendor to
provide it with marketing services and certain retail space at the Waldorf
Astoria Hotel in New York City. The agreement has an initial term of two years
and will be extended for an additional three year term unless either company
chooses to not extend the agreement. Pursuant to the terms of the agreement,
during the three months ended March 31, 2002, the Company paid $300,000 in
cash, issued 400,000 shares of the Companys common stock and issued warrants
to purchase an additional 100,000 shares of the Companys common stock. In
addition to these payments and equity issuances, the Company is required to pay
an additional $700,000 during the initial two year term.

OTHER LIQUIDITY AND CAPITAL RESOURCES DISCLOSURES

Certain government contracts of XSI require that five to ten percent of direct
labor reimbursements per contract be withheld from payments remitted to the
Company until such time as the contract is completed and a final accounting and
approval has been made. Since the amounts billed will not be collected within
one year of the financial statements date, the balance is included in long-term
other assets. Retainage at March 31, 2002 and December 31, 2001 was $321,460
and $316,839, respectively.

The Company has incurred operating losses to date and expects such losses to
continue in the near term as it expands its product development and marketing
efforts. At March 31, 2002, the Company had an accumulated deficit of
$112,457,966. The achievement of profitability is primarily dependent upon the
continued development and commercial acceptance of the Companys products, the
successful management of the business, the ability to profitably sell the
Companys wearable computer products, and managements ability to reduce or
minimize operating expenses relative to the growth in revenues and
strategically focus the Company. There can be no assurance as to whether or
when profitable operations will occur. In addition, the Company is experiencing
negative cash flow from operations and it is expected that it will continue to
experience negative cash flows through 2002 and potentially thereafter.

The Company anticipates that its working capital requirements and operating
expenses, without the restructuring and cost reduction program discussed below,
will increase as the Company expands production of its current wearable
computer product lines, develops new models, further expands its sales, service
and marketing functions, and develops the support structure for these
activities. The timing of increases in personnel and other expenses, the amount
of working capital consumed by operations, inventory procurement, marketing and
rollout expenses for the Mobile Assistant series and other products, and
competitive pressures on gross margins will impact the magnitude and timing of
the Companys cash requirements.

During March 2002, the Company performed a detailed
review of operations in order to significantly reduce the
Companys operating expenses. The Company began
implementation of this cost cutting program beginning in April 2002 and intends
to complete this program by the end of June 2002. Assuming there are no significant
changes to the Companys business plan, management has targeted savings of
approximately 30% to 40% from annualized fourth quarter 2001 levels once these
steps are fully implemented. Management expects that the Companys operating
expenses will decline from recent quarters during the second quarter of 2002,
which is the period during which this cost cutting program is being
implemented. Management also expects to record an approximate $100,000 to
$200,000 non-recurring restructuring charge during the second quarter of 2002
related to these cost cutting measures. Managements target is an operating
expense level of $6,000,000 to $7,000,000 per quarter, beginning with the
quarter ending September 30, 2002. In addition, the Company also
intends to take additional actions and make additional structural
changes to reduce the operating expenses significantly beyond these
levels. Future significant
fluctuations may still occur as a result of the Companys research and
development activities, which will still fluctuate depending on the Companys
wearable computer product development cycle during any given period.

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Even after the above cost cutting initiatives are implemented, the Company will
still be required to obtain outside financing to supplement the Companys cash
position. Management is currently exploring financing alternatives to
supplement the Companys cash position. Potential sources of additional
financing include private equity offerings, strategic investments, strategic
partnerships and various forms of debt financing. If additional funds are
raised through the issuance of equity securities, the percentage of ownership
of current stockholders of the Company will be reduced. If additional funds are
raised through borrowings, the Company will be subject to additional interest
charges and principal repayments and will most likely be required to comply
with financial covenants or other restrictions.

During March 2002, the Company raised $9,000,000 in cash through sales of its
common stock to institutional investors. The equity markets, especially for
small capitalization technology stocks, have remained depressed, and the U.S.
and world economies have generally been in a decline or recession. If a
sustained decline in the general equity markets, the price of the Companys
common stock, or the U.S. or world economy were to occur, the Company could
face difficulties in its ability to raise additional capital. Additionally, the
Company has historically made several private placements of its common stock
per year, primarily to institutional investors who specialize in making similar
types of investments. If these institutional investors were to choose to not
participate in future private placements, the Company could face difficulties
in its ability to raise additional capital. A decline in the Companys stock
price to below $1 per share could also have a significant negative impact on
the Companys ability to raise capital through equity financings and also
negatively affect the Companys NASDAQ National listing for its common stock.

The Companys management believes that the combination of cash on hand, cash
flows from operations, and outside funding will provide sufficient liquidity to
meet the Companys ongoing cash requirements, based both on its historical
ability to raise capital and on debt and equity financings currently available
to the Company. However, there can be no assurance that the Company can or will
obtain sufficient funds from operations or from closing additional financings
on terms acceptable to the Company.

If the Company is unable to obtain sufficient additional financing, it will be
required to reduce discretionary spending in order to maintain its operations
at a reduced level. Management believes that it will be able to reduce
discretionary spending if required. However, such reduction would negatively
impact progress on implementing the Companys business plan, and would require
substantial reductions in the purchase commitments previously disclosed herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in foreign currency
exchange rates and changes in interest rates. The Company does not hold
investments or use derivative financial instruments for speculative or trading
purposes. All of the potential changes noted below are based on sensitivity
analyses performed on the Companys financial position at March 31, 2002.
Actual results may differ materially.

FOREIGN CURRENCY EXCHANGE RISK

The majority of the Companys revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, as a result of the
Companys international manufacturing, research and development, sales and
marketing, inventory procurement, and other activities, the Company enters into
transactions denominated in other currencies, primarily the Japanese Yen and
the European Euro or in which the U.S. Dollar equivalent is determined by the
values of such currencies. Prior to the adoption of the Euro, the Company also
regularly entered into transactions denominated in the German Deutsche Mark. As
of January 1, 2001, Xybernaut GmbH converted its functional currency from the
German Deutsche Mark to the European Euro. The effects of this conversion was
an increase of $151,123 on beginning accumulated deficit, which is included in
the foreign currency translation balance. Historically, the Company has not
realized significant gains or losses in transactions denominated in, or
determined by, foreign currencies. To date, the Company has not entered into
foreign exchange forward or option contracts to hedge its exposure to future
movements in foreign exchange rates because the Companys management believes
that the potential impact of these movements does not justify the costs of
entering into such contracts or the use of capital to collateralize these
contracts. In the future, the Company may enter into foreign exchange forward
and option contracts to hedge transactions denominated in a foreign currency if
management determines that the levels

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of international sales or operations justify the use of such contracts. During
the three months ended March 31, 2002, the Companys operations in Europe and
Asia comprised 20.0% and 8.1% of its total revenue and 10.5% and 1.0% of its
net loss, respectively. At March 31, 2002, the Companys assets in Europe and
Asia comprised 20.1% and 3.7% of its total assets, respectively. During the
three months ended March 31, 2001, the Companys operations in Europe and Asia
comprised 18.8% and 8.0% of its total revenue and 11.0% and 3.6% of its net
loss, respectively. At March 31, 2001, the Companys assets in Europe and Asia
comprised 11.1% and 13.5% of its total assets, respectively. According to
published sources, the average fluctuation of the European Euro for the three
months ended March 31, 2002 and 2001 was -1.6% and -1.8%, respectively, and the
average fluctuation of the Japanese Yen for the three months ended March 31,
2002 and 2001 was -1.0% and -3.4%, respectively. Management believes that these
fluctuations did not have a material impact on the Companys results of
operations or financial position for 2002 and 2001.

INTEREST RATE SENSITIVITY

As discussed in the Liquidity and Capital Resources section, the Company has
established a revolving credit facility that provides for up to $3,000,000 in
borrowings and is also exploring various other financing alternatives,
including debt financings. If additional funds are raised through borrowings,
the Company will be subject to additional interest charges and will most likely
to be required to comply with financial covenants or other restrictions.
Interest rate increases may materially increase the Companys interest expense,
hinder the Companys ability to borrow additional funds or have a negative
effect on the ability of the Companys customers to purchase its products.
Required financial covenants may also hinder the Companys ability to expand or
change its business operations. To date, the Company has not entered into
interest rate forward or option contracts to hedge its exposure to future
movements in interest rates because the Companys management believes that the
potential impact of these movements does not justify the costs of entering into
such contracts or the use of capital to collateralize these contracts. As the
Companys exposure to interest rate fluctuations becomes more significant, it
may enter into interest rate forward and option contracts to hedge against such
fluctuations. According to published sources, the average prime interest rate
during the three months ended March 31, 2002 and 2001 was 4.8% and 8.8%,
respectively, or a prime interest rate fluctuation at March 31 compared to the
rate at the beginning of the fiscal year in 2002 and 2001 of 0% and -1.0%,
respectively. Management believes that these fluctuations did not have a
material impact on the Companys results of operations or financial position
for 2002 and 2001.

EURO CONVERSION

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

PART II  OTHER INFORMATION

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

During March 2002, the Company received gross proceeds of $9,000,000 through a
private placement of 5,625,000 shares of its common stock to certain investors.
These shares were sold at $1.60 per share, representing an approximate 20%
discount to the average closing bid price of the shares for the ten trading
days immediately preceding the closing. In connection with this private
placement, the Company issued to the investors callable warrants to purchase
1,406,250 shares of common stock at an exercise price of $3.00 per share. In
connection with this placement, the Company also paid $270,000 in cash to
financial advisors. The net proceeds of the sales were

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used for working capital of the Company. The private placement was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule
506 promulgated thereunder.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

A) EXHIBITS

None.

B) REPORTS ON FORM 8-K

On March 4, 2002, the Company filed a report on Form 8-K disclosing a press
release that had been issued that announced results for the fiscal quarter and
fiscal year ended December 31, 2001.

SIGNATURES

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

| |                                                                                                | 
| | ---------------------------------------------------------------------------------------------- | 
| | XYBERNAUT CORPORATION                                                                          | 
|
| | /s/ EDWARD G. NEWMAN                                                                           | 
|
| | By: Edward G. Newman
President, Chief Executive Officer and
Chairman of the Board of Directors | 
|
| | /s/ JOHN F. MOYNAHAN                                                                           | 
|
| | By: John F. Moynahan
Senior Vice President, Chief Financial
Officer and Treasurer              | 
|
| | /s/ THOMAS D. DAVIS                                                                            | 
|
| | By: Thomas D. Davis
Vice President, Finance                                                    | 

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