SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

MARK ONE)

                 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
                         FOR THE QUARTERLY PERIOD ENDED
                              SEPTEMBER 30, 1999 OR

             _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
                          TRANSITION PERIOD FROM_______TO___________

                         COMMISSION FILE NUMBER: 0-21013

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

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

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

                                 (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 date.

                   Class                    Outstanding at  November 11, 1999
       Common stock - $0.01 par  value                 27,899,406


<PAGE>

                                      INDEX

                                                                            PAGE
                                                                            ----

COVER PAGE.................................................................   1

INDEX......................................................................   2

PART I - FINANCIAL INFORMATION

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

     Item 2 - Management's Discussion and Analysis of
              Results of Operations and Financial Condition................  10

PART II - OTHER INFORMATION

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


                                      -2-
<PAGE>


                              XYBERNAUT CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                       ASSETS                             September 30, 1999       December 31,
                                                                              (Unaudited)             1998
                                                                          ------------------       -----------
<S>                                                                       <C>                      <C>
Current assets:
    Cash and cash equivalents                                             $    299,415            $    924,649
    Accounts receivable, net                                                   623,424                 229,120
    Inventories, net                                                         6,420,562               1,347,668
    Prepaid and other current assets                                           889,317                 374,243
                                                                           -----------             -----------
              Total current assets                                           8,232,718               2,875,680
                                                                           -----------             -----------
Fixed assets:
    Property and equipment, net                                                854,799                 462,384
                                                                           -----------             -----------
Other assets:
    Patent costs, net                                                          718,183                 560,625
    Tooling costs, net                                                         263,109                 370,285
    Other                                                                      224,109                 142,614
                                                                           -----------              ----------
              Total other assets                                             1,205,401               1,073,524
                                                                           -----------              ----------
              Total assets                                                $ 10,292,918             $ 4,411,588
                                                                           ===========              ==========

                                 LIABILITIES AND
                              STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                     $  4,717,650             $ 1,626,897
     Accrued expenses                                                        2,695,555                 786,980
     Notes and loans payable                                                   140,000               1,250,000
                                                                           -----------              ----------
              Total liabilities                                              7,553,205               3,663,877
                                                                           -----------              ----------

Commitments and contingencies
Stockholders' equity:
    Preferred stock, $.01 par value, 6,000,000 shares authorized; 8,600 and
       5,430 shares issued and outstanding as of September 30,
       1999 and December 31, 1998, respectively                              7,881,209                    182,378
    Common stock, $.01 par value, 40,000,000 shares authorized;
       23,734,892 and 21,359,751 shares issued and outstanding as of
       September 30, 1999 and December 31, 1998, respectively                  237,349                    213,597
    Additional paid-in capital                                              39,125,763                 31,716,067
    Accumulated deficit                                                    (44,608,501)               (31,364,331)
    Accumulated other comprehensive gain                                       103,893                          -
                                                                           -----------                -----------
              Total stockholders' equity                                     2,739,713                    747,711
                                                                           -----------                -----------
              Total liabilities and stockholders' equity                  $ 10,292,918                $ 4,411,588
                                                                           ===========                ===========

</TABLE>

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


                                      -3-
<PAGE>


                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                      Three Months Ended September 30,   Nine Months Ended September 30,
                                      --------------------------------   -------------------------------
                                          1999               1998           1999             1998
                                      --------------     -----------     -----------     ------------
<S>                                   <C>                <C>             <C>               <C>
Revenue:

   Product sales and leases           $      794,508     $   259,043     $ 2,076,052         615,904
   Consulting and license                     13,227               -          21,614           1,839
                                       -------------      ----------     -----------      -----------
       Total revenue                         807,735         259,043       2,097,666         617,743



Cost of sales                                650,182         794,793       1,693,517       1,174,269
                                       -------------      ----------     -----------      ----------
       Gross profit (loss)                   157,553        (535,750)        404,149        (556,526)

Operating expenses:

   Sales and marketing                     1,831,147         934,513       6,588,302       2,085,660
   General and administrative              1,836,700       1,181,938       4,886,894       2,799,817
   Research and development                  343,012         851,712       2,184,213       1,862,481
                                   ------------------     ----------      ----------      ----------
       Total operating expenses            4,010,859       2,968,163      13,659,409       6,747,958
                                   ------------------     ----------      ----------      ----------

       Operating loss                     (3,853,306)     (3,503,913)    (13,255,260)     (7,304,484)

Other income, net                             18,884          23,638          66,226          31,705
                                        -------------     ----------      ----------      ----------
Loss before income taxes                  (3,834,422)     (3,480,275)    (13,189,034)     (7,272,779)
Provision for income taxes                    49,832               -          55,136               -
                                        ------------      ----------      ----------      ----------
Net loss                                  (3,884,254)     (3,480,275)    (13,244,170)     (7,272,779)

Provision for preferred stock
   dividends                                 125,949           3,235         229,456          59,794
Provision for accretion on
   preferred stock beneficial
   conversion feature                        574,861               -       1,379,804         907,489
                                         -----------      ----------      ----------      ----------

Net loss applicable to holders
     of common stock                    $ (4,585,064)    $(3,483,510)   $(14,853,430)    $(8,240,062)
                                         ===========      ==========      ==========      ==========

Net loss per common share applicable
   to holders of common stock (basic
   and diluted)                         $      (0.20)    $     (0.18)    $     (0.66)    $     (0.49)
                                         ============     ==========      ==========      ==========
Weighted average number of
   common shares outstanding
   (basic and diluted)                    23,283,408     $19,446,119      22,545,253      16,840,480
                                         ===========      ==========      ==========      ==========

              The accompanying notes are an integral part of these
                        consolidated financial statements
</TABLE>


                                      -4-
<PAGE>


                              XYBERNAUT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                             Nine Months Ended September 30,
                                                                       ----------------------------------------
                                                                              1999                    1998
                                                                       -------------------     ----------------
<S>                                                                    <C>                     <C>
Cash flows from operating activities:
   Net loss                                                               $(13,244,170)         $(7,272,779)
   Adjustments to reconcile net loss to net cash used in operating
       activities:
           Depreciation and amortization                                       992,427              331,866
           Gain on disposal of assets                                             (834)              (5,892)
           Provision for write-down of inventory                                     -              320,000
           Provision for bad debts                                              50,000              (18,697)
           Non-cash charges for property and equipment                               -              233,097
           Non-cash charges for tooling costs                                        -              299,266
           Non-cash charges for stock and warrants issued for services          11,772               91,511
   Changes in assets and liabilities:
     Inventories                                                            (4,310,575)             220,961
     Accounts receivable                                                      (269,570)             (21,265)
     Prepaid and other current assets                                         (495,047)            (362,907)
     Other assets                                                              (55,951)             (37,733)
     Accounts payable and accrued expenses                                   4,510,499             (162,879)
     Deferred revenue                                                            1,810               12,833
                                                                          ------------          -----------
            Net cash used in operating activities                          (12,809,639)          (6,372,618)
                                                                          ------------          -----------
Cash flows from investing activities:
   Sale of property and equipment                                                  834               28,312
   Acquisition of property and equipment, net                                 (861,103)            (103,750)
   Acquisition of patent costs                                                (350,239)            (202,715)
   Capitalization of tooling costs                                            (814,851)            (114,524)
                                                                          ------------          -----------
            Net cash used in investing activities                           (2,025,359)            (392,677)
                                                                          ------------          -----------
Cash flows from financing activities:
   Preferred stock offerings, net                                           11,845,509            1,348,496
   Common stock offerings, net                                               3,456,802            5,307,048
   Notes and loans                                                          (1,110,000)             (19,530)
   Other                                                                             -               (8,819)
                                                                          ------------          -----------
            Net cash provided by financing activities                       14,192,311            6,627,195
                                                                          ------------          -----------
Effect of exchange rate changes on cash and cash equivalents                    17,453                    -
                                                                          ------------          -----------

Net decrease in cash and cash equivalents                                     (625,234)            (138,100)
Cash and cash equivalents, beginning of period                                 924,649              952,366
                                                                          ------------          -----------
Cash and cash equivalents, end of period                                  $    299,415          $   814,266
                                                                          ============          ===========

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest                               $      1,483          $     2,526
                                                                          ============          ===========
   Cash paid during the period for income taxes                           $      9,419          $         -
                                                                          ============          ===========
Supplemental disclosure of non-cash financing activities:
   Common stock issued for preferred stock dividend requirements          $     65,934          $    85,266
                                                                          ============          ===========
   Common stock and warrants issued for services rendered                 $     11,772          $    98,438
                                                                          ============          ===========
   Provision for preferred stock dividend requirements                    $    229,456          $    59,794
                                                                          ============          ===========
</TABLE>
              The accompanying notes are an integral part of these
                        consolidated financial statements


                                      -5-
<PAGE>

                              XYBERNAUT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       BASIC OF PRESENTATION

         The  accompanying  unaudited,   consolidated  financial  statements  of
Xybernaut  Corporation  (the  "Company")  have been prepared in accordance  with
generally accepted accounting  principles for interim financial  information and
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, these
statements  do not  include all of the  information  and  footnotes  required by
generally accepted accounting principles for complete financial  statements.  In
the  opinion  of  Company  management,  all  adjustments  (consisting  of normal
recurring  adjustments)  considered  necessary for a fair presentation have been
reflected in such  financial  statements.  Please refer to the Annual  Report on
Form 10-KSB for the complete financial statements. Results of operations for the
three  months and nine  months  ended  September  30,  1999 are not  necessarily
indicative of results of operations  expected for the full year ending  December
31, 1999. The Company's fiscal year ends December 31.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The  consolidated  financial  statements  include  the  accounts of the
Company and those of the Company's wholly-owned subsidiaries, Tech International
of Virginia  Inc.  ("Tech  Virginia"),  Xybernaut  KK and  Xybernaut  GmbH.  All
material intercompany accounts and transactions have been eliminated.

         The Company recognizes  revenues to end-users upon shipment pursuant to
a valid purchase order ("sell-to  accounting").  Shipments to  distributors  are
accounted for using "sell-through accounting," under which revenue is recognized
when the  distributor  ships to an  end-user,  until  such  time as an  adequate
history of shipments and returns from distributors can be developed to allow for
revenue to be  recognized  upon  shipment  offset by an  allowance  for returns.
Shipments to  distributors  are treated as revenue upon shipment only if shipped
pursuant to a separate  purchase order that stipulates that the products are for
demonstration  or testing by the  distributor  and that the obligation to pay is
binding and not subject to contingencies.

3.       NEW ACCOUNTING PRONOUNCEMENTS

         During 1998,  the Company  adopted  Statement  of Financial  Accounting
Standards  ("SFAS")  No.  130,  "Reporting   Comprehensive   Income."  SFAS  130
establishes  standards  for  reporting  comprehensive  income  in a full  set of
general purpose financial statements either in the statement of operations or in
a separate statement. The Company's comprehensive gain was $103,893 for the nine
months  ended  September  30, 1999 and  consists  entirely  of foreign  currency
translation adjustments.

         In June 1998, the Financial  Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of  derivatives  are  recorded  each period in current
earnings or other  comprehensive  income,  depending on whether a derivative  is
designated  as part of a hedge  transaction  and,  if it is,  the  type of hedge
transaction.  Currently,  the Company does not utilize  derivative  instruments.
Therefore, the adoption of SFAS 133 is not expected to have a significant effect
on the Company's  results of operations or its financial  position.  The Company
plans to adopt SFAS 133 for the year ending December 31, 2001.

4.       FINANCINGS

         As  of  September  30,  1999,  the  Company  had  6,000,000  shares  of
authorized  Preferred Stock of which 3,000, 4,180, 375, 10,500, and 2,100 shares
had been  designated as  Convertible  Preferred  Stock Series A, B, C, D, and E,
respectively ("Series A, B, C, D and E Preferred Stock"). Under the terms of the
Company's Certificate of Incorporation, the Board of Directors may determine the
rights,  preferences,  and terms of the Company's authorized but unissued shares
of Preferred Stock.


                                      -6-
<PAGE>
         On June 30, 1997, the Company issued 3,000 shares of Series A Preferred
Stock  for  gross  proceeds  of  $3,000,000.  These  shares  were  eligible  for
conversion  into common  stock as follows:  25% at September  28,  1997,  25% at
January  1, 1998,  25% at April 1, 1998 and the final 25% at July 1,  1998.  The
Series A Preferred Stock was eligible for conversion at the lesser of 82% of the
average five closing bid prices prior to  conversion  or $3.50.  The closing bid
price of the common  stock on June 29, 1997 was $2.75.  As of December 31, 1998,
all Series A Preferred Stock had been converted into 1,958,981  shares of common
stock, which included payment of all accrued dividends.

         On November  12,  1997,  the Company  issued  3,180  shares of Series B
Preferred Stock for gross proceeds of $3,180,000. In 1998, the Company issued an
additional  1,000 shares of Series B Preferred Stock with identical terms for an
additional  gross  proceeds  of  $1,000,000.  These  shares  were  eligible  for
conversion into common stock as follows:  25% at February 10, 1998, 25% at March
12, 1998,  25% at April 13, 1998 and the final 25% at May 11, 1998. The Series B
Preferred  Stock was eligible for conversion at the lesser of 85% of the average
five closing bid prices prior to conversion,  or $2.75. The closing bid price of
the common stock on November 11, 1997 was $2.875.  As of December 31, 1998,  all
Series B Preferred  Stock had been  converted  into  3,172,239  shares of common
stock, which included payment of all accrued dividends.

         On May 22,  1998,  the Company  issued 375 shares of Series C Preferred
Stock for gross proceeds of $375,000.  These shares were eligible for conversion
into common stock as follows:  25% at August 15, 1998, 25% at November 14, 1998,
25% at  February  15,  1999 and the  final  25% at May 15,  1999.  The  Series C
Preferred Stock was eligible for conversion at the lesser of 100% of the average
five closing bid prices prior to conversion  or $4.00.  The closing bid price of
the common stock on May 21, 1997 was $6.00.  The closing bid price of the common
stock on June 29, 1997 was $As of  September  30,  1999,  all Series C Preferred
Stock had been  converted  into 165,230  shares of common stock,  which included
payment of all accrued dividends.

         On March 10, 1999, the Company issued the first tranche of 5,000 shares
of the Company's  Series D Preferred Stock, par value $0.01 per share, for gross
proceeds of $5,000,000.  An additional  5,000 shares of Series D Preferred Stock
were issued upon the  effectiveness  of a  registration  statement  covering the
resale of the common stock  issuable  upon  conversion of the Series D Preferred
Stock for gross proceeds of $5,000,000.  In connection with these issuances, the
investors received warrants to purchase 20 shares of common stock for each share
of Series D Preferred  Stock  purchased.  The warrants have an exercise price of
$6.09 per share and a term of three years. The Series D Preferred Stock has a 5%
cumulative  dividend which is payable, in cash or through the issuance of common
stock,  upon the  conversion of the Series D Preferred  Stock into common stock.
The Series D  Preferred  Stock were  eligible  for  conversion  in four  monthly
installments  starting on May 17, 1999, the effective  date of the  registration
statement  covering resale of the common stock underlying the Series D Preferred
Stock. The Series D Preferred Stock may be converted into shares of common stock
by dividing the dollar  amount of Series D Preferred  Stock  outstanding  by the
lesser of 100% of the average of the three  lowest  closing  bids for the common
stock during the twenty trading days prior to conversion or $4.875,  the closing
bid price of the common  stock on the  trading  day  immediately  preceding  the
closing  date of this  private  placement.  The Company may redeem the Series D
Preferred Stock at any time for a premium to face value that varies depending on
the timing of redemption. In connection with this private placement, the Company
also issued an  additional  500 shares of Series D Preferred  Stock to a finder,
which shares are expected to be cancelled  and replaced by cash or equity,  or a
combination thereof. As of September 30, 1999, holders of the Series D Preferred
Stock had converted  4,000 shares into 2,022,366  shares of common stock,  which
included  payment of all accrued  dividends  on these  4,000  shares of Series D
Preferred Stock.

         On May 12, 1999,  the Company issued 2,000 shares of Series E Preferred
Stock,  par value  $0.01  per  share,  for  gross  proceeds  of  $2,000,000.  In
connection  with this  issuance,  the investor  received  warrants to purchase a
total of 50,000 shares of common stock.  The warrants have an exercise  price of
$4.648 per share and a term of three years.  The Series E Preferred  Stock has a
5%  cumulative  dividend  which is payable,  in cash or through the  issuance of
common stock,  upon the conversion of the Series E Preferred  Stock. The Company
may redeem the Series E  Preferred  Stock at any time at a premium to face value
that varies  depending on the timing of the redemption,  as long as the price of
the common  stock is above  certain  levels.  The Series E Preferred  Stock were
eligible  for  conversion  into  common  stock in three  or four  equal  monthly
installments,  depending on the trading volume of the common stock,  starting on
September  9, 1999.


                                      -7-
<PAGE>


Holders of the Series E Preferred Stock may convert these securities into shares
of common stock at the lesser of 94% of the average of the three lowest  closing
bids for the common stock during the twenty trading days prior to conversion, or
$3.719, the closing bid price of the common stock on the trading day immediately
preceding the closing date of this private placement.  A registration  statement
to register the common stock  underlying  the Series E Preferred  Stock has been
filed with the SEC but has not been declared effective. An additional 100 shares
of Series E  Preferred  Stock were  issued to a finder in  connection  with this
private  placement,  which shares are  expected to be cancelled  and replaced by
cash or equity, or acombination  thereof. As of September 30, 1999, no shares of
Series E Preferred Stock had been converted into common stock.

         The  Company's  preferred  stock  issues  have  included  nondetachable
conversion  features  that are  considered  to be "in the  money" at the date of
issuance (a "beneficial conversion feature").  The beneficial conversion feature
was recognized as a return to the preferred stockholders over the minimum period
in which  the  preferred  stockholders  could  realize  the  maximum  beneficial
conversion.  As a result of the accumulated  deficit, the value of the preferred
stock was not allocated between par value and additional paid-in capital and the
accretion of the value  allocated to the beneficial  conversion on the preferred
stock and the related dividends is recorded against additional paid-in capital.

         In August 1999, the Company  entered into a financing  agreement with a
lender under which the Company  receives 80% of an accounts  receivable  balance
upon  presentation  to  the  lender  of  certain  documentation  supporting  the
underlying  sale.  The Company  receives the remaining 20%, net of a fee paid to
the lender, upon collection of the original accounts receivable balance. Initial
placement fees associated with this facility total $60,000, of which $43,333 was
paid during the three months ended  September 30, 1999, and are being  amortized
over the five month period ending December 31, 1999.

         On  September  21,  1999,  the  Company  completed  a $100,000  private
placement of common stock in which 135,000 restricted shares, as defined in Rule
144 promulgated under the Securities Act, were issued.

5.       ESCROWED SHARES

         As a condition to the Company's  initial public offering (the "IPO"), a
representative  of the several  underwriters  required  certain of the Company's
stockholders  to  deposit  a total of  1,800,000  shares of  common  stock  (the
"Escrowed Shares") in escrow pursuant to an escrow agreement.

       The Escrowed  Shares were to be released over a three-year  period in the
event  the  Company's  gross  revenues  and  earnings  (loss)  per share for the
12-month  periods ending  September 30, 1997,  1998 and 1999 equaled or exceeded
certain per share targets or if the Company's stock price exceeded a certain per
share  target  price.  If such  targets  were not met,  certain  amounts  of the
Escrowed Shares were to be returned to the Company and canceled.

         The Company did not meet the targets for escrow release for the periods
ending  September  30, 1997,  1998 or 1999.  As a result,  300,000,  750,000 and
750,000  shares of common stock were canceled from the escrow pool at the end of
each of these periods, respectively, resulting in a reduction of 2.1%, 3.6%, and
3.1%, respectively, of the outstanding shares of common stock.

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

6.       LEGAL PROCEEDINGS

         On March 19,  1998,  Matrix  Corporation  ("Matrix")  filed a complaint
against the Company in the United States  District  Court,  Eastern  District of
North Carolina,  alleging that: Matrix has been damaged by a purported breach of
an agreement between the two companies concluded in December 1997 (the "December
Agreement");  and that the  Company  should  return all goods  shipped by Matrix
under both the December  Agreement and a prior agreement  concluded in June 1997
(the "June  Agreement").  The Company and its legal counsel filed a counterclaim
against Matrix stating that Matrix failed to perform to the requirements of both
the June  Agreement  and the  December  Agreement  and that the Company has been
damaged by this  failure to  perform.  The trial for the case was  completed  in
August 1999 and on  September  22, 1999 the District  Court  rendered a judgment
against  the  Company,  under  which  the  Company  is  required  to pay  Matrix
approximately $800,000 plus pre-judgment interest calculated as specified in the
judgment. On or about October 21, 1999, Matrix filed an appeal from that part of
the judgment that denied  certain  additional  relief to Matrix.


                                      -8-
<PAGE>


On October 27, 1999,  the Company  filed a cross appeal of the judgment and made
an application to stay enforcement of the judgment pending the conclusion of the
appellate  proceedings,  which  application  is  currently  pending  before  the
District  Court.  On or about  November 2, 1999,  Matrix filed an application to
withdraw its appeal from judgment.  This application is currently pending before
the District Court.  The Company accrued  $200,000 and $600,000 during the three
months ended June 30, 1999 and September 30, 1999, respectively, related to this
legal proceeding.  During the three months ended September 30, 1999, the Company
accrued  $150,000 in legal fees incurred in connection with this lawsuit.  These
amounts are included in the Company's general and administrative expenses in the
related periods.

7.       INVENTORY

         Inventory  is  stated  at the  lower  of cost  or  market,  cost  being
determined  on a first-in,  first-out  basis.  On a periodic  basis,  management
evaluates the carrying value of inventory. As of September 30, 1999 and December
31, 1998, the allowance to reduce inventory balances to net realizable value was
$0 and $770,557, respectively.

8.       SUBSEQUENT EVENTS

         In October 1999, the investors  converted an additional 2,000 shares of
Series D Preferred Stock, along with related dividends, into 2,037,033 shares of
common stock.

         In  October  1999 and  November  1999,  the  Series E  Preferred  Stock
investor  converted all of its 2,000 shares of Series E Preferred  Stock,  along
with related dividends, into 1,627,481 shares of common stock

         In November 1999, the Company issued 500,000 shares of its common stock
to certain  investors who  exercised  warrants  granted in  connection  with the
establishment of an equity line of credit for gross proceeds of $750,000.


                                      -9-
<PAGE>


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

                                    OVERVIEW

         The Company was  incorporated as a Virginia company in October 1990 and
commenced  operations in November 1992 as Computer Products & Services,  Inc. to
develop,  manufacture  and sell mobile  computing  systems.  In April 1996,  the
Company was merged  with  Xybernaut  Corporation  in order to change the company
name and  reincorporate  in  Delaware.  In July 1996,  the Company  successfully
completed the initial public offering  ("IPO") of its common stock and warrants.
The common stock is traded on the NASDAQ SmallCap Market under the ticker symbol
"XYBR." The warrants expired on their own terms on July 19, 1999.

         The  first  product  to  be  commercialized  by  the  Company  was  the
proprietary  portable  computer  technology  and related  software  applications
embodied in its Mobile Assistant(R) Series. The first product in this series was
introduced in 1994 and used "486" based  technology and the most recent model in
this  series is the  Mobile  Assistant  IV(R)  ("MA  IV"),  which uses a Pentium
chipset  that runs at 200 MHz or 233 MHz.  The Company  also  offers  linkAssist
(TM),  a  software  product  that  provides a  "windows"  style  graphical  user
interface with speech  navigation  that allows data stored in almost any format,
such as commonly-used word processing, spreadsheet, data base, graphics or media
files, to be linked to virtually any application  without  altering the original
data.  In  addition  to these  products,  the  Company  offers  services  to its
customers  for  the  design  and  use  of  information  systems,   primarily  in
conjunction  with  applications  using the  Company's  wearable  computers.  The
Company also has a license to Data Disk storage  technology that allows up to 80
Mb of compressed data to be stored on a durable device the size of a "dogtag."

         Since  inception,  the Company has  financed its  operations  primarily
through private and public sales of equity  securities,  and to a lesser extent,
cash generated from  operations.  In 1998 and 1997, the Company received cash of
$10,426,622 and $5,710,406,  respectively, from private placements of its equity
securities,  net of expenses.  During the nine months ended  September 30, 1999,
the  Company  received   $15,302,311  from  private  placements  of  its  equity
securities, net of expenses.

         The Company derives its revenues from sales of the Mobile  Assistant(R)
Series,  consulting  services  related to the Mobile  Assistant(R),  application
software  for the Mobile  Assistant(R),  and other  computer  platforms.  In the
quarter ended September 30, 1999, the Company derived  approximately  98% of its
revenues  from sales of the Mobile  Assistant(R).  In the  future,  the  Company
expects to derive additional revenues from licensing its intellectual  property,
services,  the sale of software,  and sales of additional optional components of
the Mobile Assistant(R) Series. Cost of sales include the cost of components for
the  Mobile  Assistant(R)  Series,  direct  labor,  direct  materials,  overhead
allocations,  inventory obsolescence charges,  amortization of tooling costs and
shipping costs.

         The Company has incurred  operating losses  throughout 1999 and expects
such losses to  continue in the near term as it expands its product  development
and marketing  efforts.  At September 30, 1999,  the Company had an  accumulated
deficit of $44,608,501.  The achievement of profitability is primarily dependent
upon the  continued  development  and  commercial  acceptance  of the  Company's
products,  the successful management of the business and management's ability to
strategically focus the Company and minimize operating expenses. 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  operating  cash flows
through  1999 and for a period  of time  thereafter.  The  Company  will need to
conclude  additional  debt,  equity or working capital  financings to fund these
negative operating cash flows.

         The  Company's   independent   accountant's  report  on  its  financial
statements as of and for the years ended  December 31, 1998 and 1997 contains an
explanatory paragraph that the Company's historical operating losses and limited
capital  resources  raise  substantial  doubt about its ability to continue as a
going  concern.  The  Company may require  substantial  additional  funds in the
future, and there can be no assurance that the independent  accountant's  report
on


                                      -10-
<PAGE>


the Company's future financial statements will not include a similar explanatory
paragraph  if the  Company  is  unable  to raise  sufficient  funds or  generate
sufficient cash from operations to cover the costs of its operations.

         The  Company   intends  to  continue   expenditures   on  research  and
development  of  additional   hardware  and  software  products.   Research  and
development  activities  consist  primarily of personnel engaged in the research
and design of new products, test components, consulting fees and equipment costs
required to conduct the Company's development  activities.  Software development
costs are expensed as incurred until technological feasibility is established in
accordance  with Statement of Financial  Accounting  Standards  ("SFAS") No. 86,
"Accounting for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed," after which any additional  costs are capitalized  until the software
is ready for release.  The Company  shipped its  linkAssist(TM)  software during
1997,  1998,  and 1999.  Costs  eligible for  capitalization  under SFAS 86 were
immaterial  during  these  periods  and  were  not  capitalized.   Research  and
development  expenses for the nine months ended September 30, 1999 and 1998 were
$2,184,213 and $1,862,481, respectively, none of which were capitalized.

         The  Company's  consolidated  financial  statements,  for  all  periods
presented,  include the results of operations of Tech Virginia, Xybernaut KK and
Xybernaut GmbH. The consolidated  financial  statements contain eliminations for
all material transactions between the Company and its wholly-owned  subsidiaries
for all periods presented.

         The Company's consolidated financial statements contain a provision for
income tax expense for its operations outside the United States, but there is no
provision  for income tax expense  related to the  Company's  operations  in the
United States due to net operating losses incurred since  inception.  Subject to
realization,  the Company has generated net operating losses that can be used to
offset U.S. taxable  operating income in the future.  At September 30, 1999, the
Company had  approximately  $40,000,000 of net operating loss carry forwards for
federal income tax purposes that begin to expire in 2010. The use of these carry
forwards may be limited in any one year under Internal  Revenue Code Section 382
if significant ownership changes occur.

DISCLOSURE REGARDING YEAR 2000 COMPLIANCE

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer programs that have  date-sensitive  software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a  system  failure  or  miscalculations   causing   disruptions  of  operations,
including,  among other things, a temporary  inability to process  transactions,
send invoices, or engage in normal business activities.

         The Company  utilized  both  internal and  external  resources to test,
reprogram or replace,  as needed, its computing and communications  hardware and
software for Year 2000 modifications.  Based on this evaluation, the Company has
made  modifications  to its computer  systems and determined  that these systems
will properly utilize dates beyond December 31, 1999 and, as such, are compliant
with the Year 2000 Issue ("Y2K compliant").  The Company has determined that the
Mobile Assistant IV is Y2K compliant.

         As a result of this testing, it was determined that the Company's phone
system was not Y2K compliant.  Replacement or modification of the existing phone
system to provide similar  capabilities  and Y2K compliance is estimated to cost
between  $50,000  and  $75,000.  Outside  of the phone  system,  the cost to the
Company of testing and modifying its computer  systems to obtain Y2K  compliance
was less than $10,000 in the aggregate.

         The Company has  contacted all of its  significant  suppliers and large
customers to determine the possible  effect on its operations of their inability
or failure to remediate their own Year 2000 Issues. The Company cannot guarantee
that the systems of other  companies  on which its  systems  rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is  incompatible  with the Company's  systems,  would not have material  adverse
effect on its operations.  The Company's estimates of the date of completion and
cost of its Year 2000 project are based on its best estimates,  which it derived
utilizing  numerous   assumptions  of  future  events  including  the  continued
availability  of certain  resources,  third party  modification  plans and other
factors.


                                      -11-
<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                             Three Months Ended                Nine Months Ended
                                          -------------------------        ------------------------
                                           9/30/99         9/30/98          9/30/99        9/30/98
                                          ---------       ---------        ---------      ---------
<S>                                       <C>             <C>              <C>            <C>
Revenues                                     100.0%          100.0%           100.0%        100.0%
Cost of sales                                 80.5%          306.8%            80.7%        190.1%
                                          ---------       ---------        ---------      ---------
   Gross margin                               19.5%         (206.8%)           19.3%        (90.1%)

Operating expenses:
   Sales & marketing                        226.7%           360.7%           314.1%        337.6%
   General & administrative                 227.4%           456.3%           233.0%        453.2%
   Research & development                    42.5%           328.8%           104.1%        301.5%
                                         ---------        ---------       ----------     ---------
Total operating expenses                    496.6%         1,145.8%           651.2%      1,092.3%
Other income and income taxes                (3.8%)            9.1%             0.5%          5.1%
                                         ---------        ---------       ----------     ---------
Net loss                                   (480.9%)       (1,343.5%)         (631.4%)    (1,177.3%)
                                         =========        =========       ==========     =========
Provisions for preferred stock               86.8%             1.2%            76.7%        156.6%
                                         =========        =========       ==========     =========
Net loss applicable to holders
of common stock                            (567.7%)       (1,344.8%)         (708.1%)    (1,333.9%)
                                         =========        =========       ==========     =========
</TABLE>


          THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998

         REVENUES.  Revenues  for the  quarter  ended  September  30,  1999 were
$807,735,  an  increase of  $548,692,  or 212%,  compared  to  $259,043  for the
corresponding  period in 1998.  The increase in revenues  for the quarter  ended
September 30, 1999 was primarily related to the higher number of sales of the MA
IV in the 1999 period compared to the lower number of sales of  older-generation
Mobile Assistant(R) units in the corresponding 1998 period.

         COST OF SALES.  The cost of sales for the quarter  ended  September 30,
1999 was $650,182,  a decrease of $144,611,  or 18%, compared to $794,793 in the
corresponding period in 1998. The cost of goods sold decreased because of higher
margins on the MA IV  compared  to the  margins on the  older-generation  Mobile
Assistant  (R)  sold  prior  to the  introduction  of the MA IV and  because  of
approximately  $480,000  in  non-cash  charges  recorded  in the  quarter  ended
September 30, 1998 to write-down  certain  inventories and to write-off  certain
capitalized  tooling costs for which there was no  comparable  item for the same
period of the current year.

         SALES AND  MARKETING  EXPENSES.  Sales and  marketing  expenses for the
quarter ended September 30, 1999 were  $1,831,147,  an increase of $896,634,  or
96%,  compared to $934,513 for the  corresponding  period in 1998.  The increase
resulted mainly from increases in expenses  related to additional  marketing and
advertising  programs  to  support  the  launch  of  the MA  IV,  personnel  and
infrastructure  costs to support  sales,  marketing  and customer  service,  and
expenses related to the Company's subsidiaries in Germany and Japan.

         GENERAL  AND  ADMINISTRATIVE   EXPENSES.   General  and  administrative
expenses for the quarter ended September 30, 1999 were  $1,836,700,  an increase
of $654,762,  or 55%,  compared to $1,181,938  for the  corresponding  period in
1998. This increase was caused by an accrual of approximately $900,000 for legal
expenses  and  judgments,  for which there was no  comparable  item for the same
period of the prior year.  Without  this  accrual,  general  and  administrative
expenses were $936,700 for the quarter, a decrease of $245,238, or 21%, compared
to $1,181,938 for the  corresponding  period in 1998. This decrease is primarily
the  result of the  Company's  continued  efforts to reduce  operating  expenses
commensurate with revenue levels.


                                      -12-
<PAGE>


         RESEARCH AND DEVELOPMENT  EXPENSES.  Research and development  expenses
for the quarter ended September 30, 1999 were $343,012,  a decrease of $508,700,
or 60%, compared to $851,712 for the corresponding period in 1998. This decrease
is the result of both the significant expenditures made during the quarter ended
September 30, 1998 related to the research and development efforts for the MA IV
without any comparable expenses for new product development in the quarter ended
September 30, 1999, and the use of technology  and  production  partners to fund
development  and  non-recurring  engineering  costs  during  the  quarter  ended
September 30, 1999. These results are consistent with the Company's objective of
funding basic product development and having its manufacturing partners fund the
detailed product development and manufacturing setup costs.

         OTHER INCOME,  NET.  Other income for the quarter  ended  September 30,
1999 was  $18,884,  a decrease  of $4,754,  or 20%,  compared to $23,638 for the
corresponding  period in 1998.  This  decrease is primarily  the result of gains
from exchange of assets and interest income, partly offset by interest expense.

         PROVISION  FOR TAXES.  The  provision  for taxes for the quarter  ended
September  30,  1999 was  $49,832,  compared to no  provision  for taxes for the
corresponding  period  in 1998.  This  provision  is  related  to the  Company's
operations  outside of the U.S.  There is no  provision  for income tax  expense
related to the  Company's  operations  in the United States due to net operating
losses incurred since inception.

         DIVIDEND ON PREFERRED  STOCK,  DEEMED  DIVIDEND  ACCRETION ON PREFERRED
STOCK.  The Company's  outstanding  preferred stock accrues  dividends at 5% per
annum on the outstanding  principal amount.  For the quarter ended September 30,
1999, the amount of dividends accrued was $125,949,  an increase of $122,714, or
3,793%,  compared to $3,235 for the same period of the prior year. In accordance
with the Emerging  Issues Task Force report titled  "Accounting for the Issuance
of  Convertible  Preferred  Stock  and  Debt  Securities  with  a  Nondetachable
Conversion  Feature,"  the  accretion  of  the  beneficial   conversion  feature
recognized in the quarter ended September 30, 1999 was $574,861,  an increase of
$574,861  compared to $0 for the same period a year  earlier.  This increase was
related to the  issuance of the Series D Preferred  Stock and Series E Preferred
Stock during 1999 and related  accretion.  Additional paid-in capital is reduced
by the amount of  accretion  and  preferred  stock is increased by the amount of
accretion, resulting in no impact on overall stockholders' equity.

         NET LOSS  ATTRIBUTABLE  TO HOLDERS OF COMMON STOCK.  As a result of the
factors  described above,  the net loss  attributable to holders of common stock
for the  quarter  ended  September  30,  1999 was  $4,585,064,  an  increase  of
$1,101,554, or 32%, compared to $3,483,510 for the corresponding period in 1998.


                  NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

         REVENUES.  Revenues for the nine months ended  September  30, 1999 were
$2,097,666,  an increase of  $1,479,923,  or 240%,  compared to $617,743 for the
nine months ended  September  30, 1998.  The increase in revenues was  primarily
related to the higher  number of sales of MA IV units in the nine  months  ended
September  30, 1999  compared to the lower  number of sales of  older-generation
Mobile Assistant(R) units in the corresponding 1998 period.

         COST OF  SALES.  The cost of  goods  sold  for the  nine  months  ended
September 30, 1999 was $1,693,517,  an increase of $519,248, or 44%, compared to
$1,174,269  for the  corresponding  period  in  1998.  The  cost of  goods  sold
increased  commensurately  with the  increase  in sales  while  being  offset by
approximately  $480,000 in  non-recurring  charges recorded in the quarter ended
September 30, 1998 to write-down  certain  inventories and to write-off  certain
capitalized  tooling  costs for which there was no  comparable  item in the same
period of the current year.

         SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended September 30, 1999 were $6,588,302,  an increase of $4,502,642,  or
216%, compared to $2,085,660 for the corresponding period in 1998. This increase
resulted mainly from increases in expenses  related to additional  marketing and
advertising  programs  to  support  the  launch  of  the MA  IV,  personnel  and
infrastructure  costs to support  sales,  marketing  and customer  service,  and
expenses related to the Company's subsidiaries in Germany and Japan.


                                      -13-
<PAGE>

         GENERAL  AND  ADMINISTRATIVE   EXPENSES.   General  and  administrative
expenses  for the nine  months  ended  September  30, 1999 were  $4,886,894,  an
increase of $2,087,077,  or 75%,  compared to $2,799,817  for the  corresponding
period in 1998. This increase resulted primarily from increases in personnel and
infrastructure  expenses  related to the  increased  business  activity  and the
establishment and activities of the Company's subsidiaries in Germany and Japan.
In addition, $1,100,000 was accrued for separation and legal expenses during the
nine months ended  September 30, 1999,  for which there was no  comparable  item
during  the 1998  period.  Without  this  accrual,  general  and  administrative
expenses  were  $3,786,894  for the quarter,  an increase of  $987,077,  or 35%,
compared to $2,799,817 for the corresponding period in 1998.

         RESEARCH AND DEVELOPMENT  EXPENSES.  Research and development  expenses
for the nine months ended  September  30, 1999 were  $2,184,213,  an increase of
$321,732, or 17%, compared to $1,862,481 for the corresponding 1998 period. This
increase reflects the Company's research and development efforts for accessories
and improvements to existing products along with future products.

         OTHER INCOME, NET. Other income for the nine months ended September 30,
1999 was $66,226,  an increase of $34,521,  or 109%, compared to $31,705 for the
corresponding  period in 1998.  This  increase is primarily the result of a gain
from exchange of assets and net interest income.

         DIVIDEND ON PREFERRED  STOCK,  DEEMED  DIVIDEND  ACCRETION ON PREFERRED
STOCK.  The Company's  preferred stock accrues  dividends at 5% per annum on the
outstanding  principal amount. For the nine months ended September 30, 1999, the
amount of dividends  accrued was  $229,456,  an increase of  $169,662,  or 284%,
compared to $59,794 for the same period of the prior year.  In  accordance  with
the Emerging  Issues Task Force report  titled  "Accounting  for the Issuance of
Convertible Preferred Stock and Debt Securities with a Nondetachable  Conversion
Feature," the accretion of the beneficial  conversion  feature recognized in the
nine months ended September 30, 1999 was $1,379,804,  an increase of $472,315 or
52%, compared to $907,489 for the same period a year earlier.  This increase was
caused by the larger  beneficial  conversion  feature related to the issuance of
the Series D  Preferred  Stock and Series E Preferred  Stock  during the period,
compared to the value of the beneficial  conversion feature  attributable to the
other  preferred  stock  outstanding  for  the  corresponding  period  in  1998.
Additional  paid-in  capital is reduced by the amount of accretion and preferred
stock is increased by the amount of accretion, resulting in no impact on overall
stockholder's equity.

         NET LOSS  ATTRIBUTABLE  TO HOLDERS OF COMMON STOCK.  As a result of the
factors  described above, the net loss attributable to common stock for the nine
months ended September 30, 1999 was $14,853,430,  an increase of $6,613,368,  or
80%, compared to $8,240,062 for the corresponding period in 1998.


                         LIQUIDITY AND CAPITAL RESOURCES

         The Company has  financed its  operations  through its IPO, the private
sale  of  its  securities,   vendor  credit,  and  short-term   borrowings  from
management, stockholders and others.

         On July 18,  1996,  the Company  completed  its IPO and sold  2,415,000
units at a price of $5.50 per unit.  Each unit  consisted of one share of common
stock and one warrant to purchase a share of common stock at $9.00 (the "Unit").
The warrants  expired on their own terms on July 19, 1999.  Gross  proceeds from
the sale of the Units were  $13,282,500  and net proceeds  after  expenses  were
$10,842,487.

         In 1997,  the  Company  issued  3,000 and 4,180  shares of Series A and
Series B Preferred Stock, respectively,  for gross proceeds of $7,180,000. As of
December 31, 1998, all Series A and Series B Preferred  Stock had been converted
into 5,131,223 shares of common stock, which included payment of all dividends.

         In April  1998,  the  Company  entered  into an  equity  line of credit
agreement  and received an initial  gross amount of  $1,000,000  in exchange for
common stock.  Under this line of equity, the Company had the right, but not the
obligation,  to obtain  up to an  additional  $10,000,000  in a series of equity
drawdowns based on terms and conditions specified in the line of credit.


                                      -14-
<PAGE>


         On May 22,  1998,  the Company  issued 375 shares of Series C Preferred
Stock for gross  proceeds of $375,000.  As of September  30, 1999,  all Series C
Preferred  Stock had been converted  into 165,230 shares of common stock,  which
included payment of all dividends.

         In June 1998, the Company  completed a $1,000,000  private placement of
common  stock  in  which  153,846  restricted  shares,  as  defined  in Rule 144
promulgated under the Securities Act, were issued at a price of $6.50 per share.

         In June 1998,  the Company  amended  and  exercised a put option in the
aggregate  principal  amount of $3,000,000  under the April 1998 private  equity
line of credit agreement  mentioned  above. In connection with such action,  the
Company  issued  545,454  shares of common  stock.  Such shares were  subject to
restrictions  on  resale  for a period  of nine  months  and to  repricing  upon
occurrences of certain  conditions.  Subsequent to that time, the Company issued
an additional 94,004 shares upon the occurrence of certain repricing events.

         In October 1998, the Company entered into a financing agreement with an
investor  pursuant to which the Company sold  $2,600,000 of common stock to this
investor  during the period  from  October 8, 1998 to  November  12,  1998.  The
Company  issued  593,201  shares of common stock at prices ranging from $4.04 to
$5.72 under this financing agreement.

         In November 1998, the Company  entered into a financing  agreement with
an investor  pursuant to which the Company  sold  $1,595,000  of common stock to
this  investor.  The Company  issued 290,000 shares of common stock at $5.50 per
share under this  financing  agreement.  Such shares were  subject to  repricing
under  certain  circumstances.  Subsequent to that time,  the Company  issued an
additional 150,000 shares upon the occurrence of certain repricing events.

         On  December  17,  1998,  the  Company  borrowed  $1,250,000  from  two
financial  institutions.  The maturity date of the debt was January 29, 1999 and
interest was at 12% per annum. On January 29, 1999, the Company repaid the debt.

         In January  1999,  the Company  exercised  separate  put options in the
aggregate  amount of  $3,360,000  under the April 1998  private  equity  line of
credit  agreement  mentioned  above.  In connection  with such put options,  the
Company  issued  841,356  shares of common stock at prices ranging from $4.08 to
$4.46.

         On March 10, 1999,  the Company  completed  the first  tranche of 5,000
shares of the Company's Series D Preferred Stock, par value $0.01 per share, for
gross proceeds of $5,000,000.  An additional  5,000 shares of Series D Preferred
Stock were issued upon the  effectiveness of a registration  statement  covering
the  resale  of the  common  stock  issuable  upon  conversion  of the  Series D
Preferred  Stock for gross  proceeds of  $5,000,000.  In  connection  with these
issuances, the investors received warrants to purchase 20 shares of common stock
for each share of Series D  Preferred  Stock  purchased.  The  warrants  have an
exercise  price of $6.09  per  share  and a term of three  years.  The  Series D
Preferred  Stock  has a 5%  cumulative  dividend  which is  payable,  in cash or
through  the  issuance  of common  stock,  upon the  conversion  of the Series D
Preferred  Stock into common stock.  The Series D Preferred  Stock were eligible
for  conversion  in four  monthly  installments  starting on May 17,  1999,  the
effective date of the registration statement covering resale of the common stock
underlying  the Series D Preferred  Stock.  The Series D Preferred  Stock may be
converted  into shares of common stock by dividing the dollar amount of Series D
Preferred  Stock  outstanding  by the lesser of 100% of the average of the three
lowest closing bids for the common stock during the twenty trading days prior to
conversion  or $4.875,  the closing bid price of the common stock on the trading
day  immediately  preceding  the closing  date of this  private  placement.  The
Company  may redeem the  Series D  Preferred  Stock at any time for a premium to
face value that varies depending on the timing of redemption. In connection with
this private placement, the Company also issued 500 shares of Series D Preferred
Stock to a finder.  As of September 30, 1999,  holders of the Series D Preferred
Stock had converted  4,000 shares into 2,022,366  shares of common stock,  which
included  payment of all  accrued  dividends.  Between  September  30,  1999 and
November  11,  1999,  holders  of the  Series D  Preferred  Stock  converted  an
additional  2,000 shares into 2,037,033  shares of common stock,  which included
payment of all accrued  dividends,  leaving  4,500  shares of Series D Preferred
Stock outstanding as of this date. Of these outstanding  shares, 500 shares were
issued to the finder in connection with this private  placement and are expected
to be cancelled and replaced by cash or equity, or a combination thereof.

         On May 12, 1999,  the Company issued 2,000 shares of Series E Preferred
Stock,  par value  $0.01  per  share,  for  gross  proceeds  of  $2,000,000.  In
connection  with this  issuance,  the investor  received  warrants to purchase a
total of 50,000 shares of common stock.  The warrants have an exercise  price of
$4.648 per share and a term of three years.  The


                                      -15-
<PAGE>


         Series E Preferred Stock has a 5% cumulative dividend which is payable,
in cash or through the  issuance of common  stock,  upon the  conversion  of the
Series E Preferred Stock. The Company may redeem the Series E Preferred Stock at
any time at a premium to face value that varies  depending  on the timing of the
redemption,  as long as the price of the common stock is above  certain  levels.
The Series E Preferred  Stock were eligible for conversion  into common stock in
three or four equal monthly installments, depending on the trading volume of the
common stock,  starting on September 9, 1999.  Holders of the Series E Preferred
Stock may convert these  securities into shares of common stock at the lesser of
94% of the average of the three lowest  closing bids for the common stock during
the twenty trading days prior to conversion or $3.719,  the closing bid price of
the common stock on the trading day  immediately  preceding  the closing date of
this private  placement.  A registration  statement to register the common stock
underlying the Series E Preferred  Stock has been filed with the SEC but has not
been declared  effective.  An additional 100 shares of Series E Preferred  Stock
were  issued  to a finder  in  connection  with this  private  placement.  As of
September  30, 1999,  no shares of Series E Preferred  Stock had been  converted
into common stock.  Between September 30, 1999 and November 11, 1999, holders of
the Series E Preferred  Stock  converted  2,000 shares into 1,627,481  shares of
common stock,  leaving 100 shares of Series E Preferred Stock  outstanding as of
this date.  These 100 shares of Series E Preferred Stock were issued to a finder
in connection  with this private  placement and are expected to be cancelled and
replaced by cash or equity, or a combination thereof.

         In August 1999, the Company  entered into a financing  agreement with a
lender under which the Company  receives 80% of an accounts  receivable  balance
upon  presentation  to  the  lender  of  certain  documentation  supporting  the
underlying  sale.  The Company  receives the remaining 20%, net of a fee paid to
the lender, upon collection of the original accounts receivable balance. Initial
placement fees associated with this facility total $60,000, of which $43,333 was
paid during the three months ended  September 30, 1999, and are being  amortized
over the five month period ending December 31, 1999.

         On  September  21,  1999,  the  Company  completed  a $100,000  private
placement of common stock in which 135,000 restricted shares, as defined in Rule
144 promulgated under the Securities Act, were issued.

         For the nine months ended  September 30, 1999, the Company's  operating
activities  used  cash of  $12,809,639.  This  was  primarily  the  result  of a
$13,244,170 net loss and a net increase in inventories of $4,310,575,  offset by
a  net  increase  in  accounts   payable  of  $4,510,499  and  depreciation  and
amortization of $992,427.  Cash used in investing activities for the nine months
ended September 30, 1999 was $2,025,359,  which included $814,851 in capitalized
tooling costs,  $350,239  related to the acquisition of patents and $861,103 for
the acquisition of property and equipment. Proceeds from the Company's financing
activities  for nine months ended  September  30, 1999 were  $14,192,311,  which
primarily consisted of proceeds of $11,845,509 from the issuance of Series D and
Series E Preferred  Stock,  $3,456,802 from the issuance of the Company's common
stock, both net of related fees, offset by net repayment of $1,110,000 for notes
and loans.  As a result of the above,  cash and cash  equivalents  on hand as of
September  30, 1999 was  $299,415,  a decrease of $625,234  from the $924,649 of
cash on hand as of December 31, 1998.

         For the nine months ended  September 30, 1998, the Company's  operating
activities  used cash of  $6,372,618.  This net use of cash for the nine  months
ended  September  30, 1998 was  primarily  the result of a $7,272,779  net loss,
offset by non-cash charges and depreciation and amortization of $1,184,229. Cash
used for investing  activities for the nine months ended  September 30, 1998 was
$392,677 and was primarily  related to  acquisition  of property and  equipment,
patents,  and tooling costs. Cash provided by financing  activities for the nine
months ended September 30, 1998 was $6,627,195, which primarily consisted of net
proceeds  of  $1,348,496  and  $5,307,048  from the  issuance  of the  Company's
preferred and common stock, respectively.

         At September 30, 1999, the Company had informal agreements with several
of its  suppliers  to take  shipments  of  additional  inventory  of  parts  and
components  during the first half of 2000.  While the timing and amount of these
shipments  may be adjusted,  the total amount of inventory  and related  payment
under  these  agreements  could  be  approximately  as  much  as  $1,500,000  to
$2,000,000.

         The Company  anticipates  that its  working  capital  requirements  and
operating  expenses will increase as the Company expands sales and production of
the Mobile  Assistant(R),  and  expands its full  sales,  service and  marketing
functions,  and develops the support structure for these activities.  The timing
of increases  in personnel  and other  expenses,  the amount of working  capital
consumed by operations  and  competitive  pressures on gross margins will impact
the magnitude and timing of the Company's cash requirements. In addition to cash
requirements  for future business  activities,


                                      -16-
<PAGE>


the  Company had  accounts  payable and  accrued  expenses of  $7,413,205  as of
September  30, 1999,  the majority of which relates to the purchase of inventory
and portions of which are past due.  Management is currently exploring financing
alternatives  to supplement the Company's cash  position.  Potential  sources of
additional  financing  include  private equity  financings,  mergers,  strategic
investments,  strategic  partnerships  or various forms of debt  financings.  In
addition,  the Company is  formulating  a program to reduce  operating  expenses
commensurate  with anticipated  revenues,  but there can be no assurance that it
will be able to do so. If additional funds are raised by the Company through the
issuance of equity  securities,  the percentage of ownership of the then current
stockholders of the Company will be reduced.  The Company's  management believes
that the combination of cash on hand and outside funding will provide sufficient
liquidity to meet the Company's ongoing cash requirements. 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.

         The  Company's   independent   accountant's  report  on  its  financial
statements as of and for the years ended  December 31, 1998 and 1997 contains an
explanatory paragraph that the Company's historical operating losses and limited
capital  resources  raise  substantial  doubt about its ability to continue as a
going  concern.  The  Company may require  substantial  additional  funds in the
future, and there can be no assurance that the independent  accountant's  report
on the  Company's  future  financial  statements  will  not  include  a  similar
explanatory  paragraph  if the  Company is unable to raise  sufficient  funds or
generate sufficient cash from operations to cover the costs of its operations.


                                      -17-
<PAGE>

PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

A)       EXHIBITS:

         27.1     Financial Data Schedule

B)       REPORTS ON FORM 8-K

         On  September  17, 1999,  the Company  filed a Report on Form 8-K dated
         September 13, 1999 which disclosed a change in the Company's certifying
         accountants.


                                      -18-

<PAGE>


                                   SIGNATURES

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

                                   XYBERNAUT CORPORATION


                                   /s/  Edward G. Newman
                                   ---------------------------------------------
                                   By:  Edward G. Newman
                                        President