SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
                                   FORM 10-QSB

(Mark One)
[x]  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
         For  the quarterly period ended  August 31, 1998
                                          ---------------
                                       OR
[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
         For  the transition period from         to 
                                         -------    -------

                       Commission file number: 0-24318
                                               -------
                              DIEHL GRAPHSOFT, INC
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        Maryland                                       52-1407016
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. employer identification no.)
incorporation or organization)

10270 Old Columbia Road, Columbia, Maryland                      21046
--------------------------------------------------------------------------------
(Address of principal executive offices)                       (Zip Code)


Registrant's telephone number, including area code: 410-290-5114
--------------------------------------------------------------------------------
Former  name,  former  address and former  fiscal  year,  if changed  since last
report.

     Check 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 CORPORATE ISSUERS

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.
3,147,637 shares of common stock.
---------------------------------

Transitional Small Business Disclosure Format (check one)   Yes      No  x
                                                                ---     ---



                                        1


<PAGE>

                              DIEHL GRAPHSOFT, INC.
                                   FORM 10-QSB
                                      INDEX


Number                                                                 Page

PART I      FINANCIAL INFORMATION

Item 1      Financial Statements:
            Balance Sheet (unaudited) as of August 31, 1998             3

            Statements of Operations (unaudited) for the three
            months ended August 31, 1998 and 1997                       5

            Statements of Cash Flows (unaudited) for the three
            months ended August 31, 1998 and 1997                       6

            Statements of Stockholders' Equity (unaudited) as
            of August 31, 1998 and 1997                                 7

            Notes to Financial Statements                               8

Item 2      Management's Discussion and Analysis of Financial
            Condition and Results of Operations                         9

PART II     OTHER INFORMATION

Item 2      Changes in Securities                                      12

Item 6      Exhibits and Reports                                       12

            SIGNATURES                                                 13




                                       








                                       





                                       


                                       2

<PAGE>

                              DIEHL GRAPHSOFT, INC.
                                  BALANCE SHEET
                                 AUGUST 31, 1998
                                   (Unaudited)

                                     ASSETS
                                     ------
Current assets:
    Cash                                                       $   741,766
    Marketable securities                                        7,875,792
    Accounts receivable                                            277,557
    Inventory                                                      114,607
    Other current assets                                           285,894
                                                                   -------
         Total current assets                                    9,295,616
                                                                 ---------
Fixed assets:
    Equipment                                                      780,155
    Furnishings and fixtures                                       117,302
    Leasehold improvements                                          47,688
                                                                    ------
                                                                   945,145
    Accumulated depreciation                                       610,791
                                                                   -------
         Net fixed assets                                          334,354
                                                                   -------

Other assets:
    Unamortized organization expenses                               25,940
    Software development and licensing costs, net
       of accumulated amortization of $962,819                     932,732
    Other                                                            4,202
                                                                     -----
         Total other assets                                        962,874
                                                                   -------

                  Total assets                                 $10,592,844
                                                               ===========
                                       
                







                 




                
                 See accompanying notes to financial statements
                                       
                                       3
<PAGE>


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
    Accounts payable and accrued expenses                      $   516,875
    Income taxes payable                                           113,678
                                                                   -------
            Total current liabilities                              630,553
                                                                   -------

Long term liabilities:
    Deferred income taxes                                          345,976
                                                                   -------
         Total liabilities                                         976,529
                                                                   -------

Stockholders' equity:
    Common stock - $.01 par value; 10,000,000
       shares authorized, 3,147,637 shares
       issued and outstanding                                       31,476
    Additional paid in capital                                   4,182,812
    Retained earnings                                            5,402,027
                                                                 ---------
         Total stockholders' equity                              9,616,315
                                                                 ---------

                 Total liabilities and stockholders' equity    $10,592,844
                                                               ===========


               













                





                

                 See accompanying notes to financial statements

                                       
                                        4

<PAGE>


                              DIEHL GRAPHSOFT, INC.
                             STATEMENT OF OPERATIONS
                                   (Unaudited)


                                                     For the three months
                                                       ended August 31,
                                                       ----------------
                                                     1998            1997
                                                     ----            ----

Revenues                                         $1,873,580       $2,026,908

Cost of revenues                                    490,931          581,345
                                                    -------          -------

Gross profit                                      1,382,649        1,445,563
                                                  ---------        ---------

Operating expenses:
    General and administrative                      433,264          440,541
    Selling & marketing                             478,799          467,190
    Research and development                        124,752           91,757
                                                    -------           ------
         Total operating expenses                 1,036,815          999,488
                                                  ---------          -------

Income from operations                              345,834          446,075

Interest income                                     107,684           89,579
                                                    -------           ------

Income before income taxes                          453,518          535,654

Provision for income taxes                          134,000          190,000
                                                    -------          -------

Net income                                       $  319,518       $  345,654
                                                 ==========       ==========

Net income per share                             $      .10       $      .11
                                                 ==========       ==========

Weighted average number of shares outstanding     3,147,637        3,141,406
                                                  =========        =========



                




                 See accompanying notes to financial statements


                                        5

<PAGE>

                              
                             DIEHL GRAPHSOFT, INC.
                             STATEMENT OF CASH FLOWS
                                   (Unaudited)


                                                         For the three months
                                                           ended August 31,
                                                           ----------------
                                                           1998          1997
                                                           ----          ----
Cash flows from operating activities:
    Net income                                         $ 319,518      $ 345,654
    Adjustments:
       Deferred income taxes                               7,975         26,540
       Amortization of bond premiums and discounts       (17,454)       (37,580)
       Other depreciation and amortization               245,671        241,624
       Changes in operating assets and liabilities:
         Accounts receivable                             165,829       (166,392)
         Inventory                                       (33,175)        51,212
         Other assets                                    (28,130)        17,349
         Accounts payable and accrued expenses           (38,671)       265,485
         Income taxes receivable/payable                  51,025        163,260
                                                          ------        -------
            Net cash provided by operating activities:   672,588        907,152
                                                         -------        -------

Cash flows from investing activities:
    Purchases of marketable securities                (2,995,538)    (1,621,699)
    Maturities of marketable securities                2,964,000      1,580,000
    Capitalized software and licensing costs            (241,803)      (260,260)
    Purchase of fixed assets                             (34,235)       (47,813)
                                                         -------        -------
            Net cash used in investing activities       (307,574)      (349,772)
                                                        --------       --------

Net increase in cash                                     365,012        557,380

Cash balance at beginning of period                      376,754        247,359
                                                         -------        -------

Cash balance at end of period                          $ 741,766      $ 804,739
                                                       =========      =========

Supplemental disclosure of cash flow information:
       
       Cash paid for income taxes                      $  75,000      $    -
                                                          ======        =======

       Issuance of common stock                        $    -         $  14,500
       Reduction in accrued expenses                                     14,500
                                                          -----          ------
                                                       $    -         $    -
                                                       =========      ========= 


                 See accompanying notes to financial statements


                                       6

<PAGE>


                              DIEHL GRAPHSOFT, INC.
                        STATEMENT OF STOCKHOLDER' EQUITY
                                   (Unaudited)


                                          Additional
                     Common     Common     Paid in      Retained
                     shares      stock     Capital      Earnings       Total
                     ------      -----     -------      --------       -----

Balance
   May 31, 1997    3,140,739    $31,407   $4,147,605   $4,089,627   $8,268,639

Issuance of
    Common Stock       2,000         20       14,480         -          14,500

Net Income               -         -            -         345,654      345,654
                     -------    -------      -------      -------      -------

Balance
    August 31, 1997 3,142,739   $31,427   $4,162,085   $4,435,281   $8,628,793
                    =========   =======   ==========   ==========   ==========


Balance
    May 31, 1998    3,147,637   $31,476   $4,182,812   $5,082,509   $9,296,797

Net Income             -           -           -          319,518      319,518
                    -------     -------     -------       -------      -------

Balance
    August 31, 1998 3,147,637   $31,476   $4,182,812   $5,402,027   $9,616,315
                    =========   =======   ==========   ==========    =========





                






                 




                 See accompanying notes to financial statements


                                        7

<PAGE>


                              DIEHL GRAPHSOFT, INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE A - BASIS OF PRESENTATION

      The  accompanying  unaudited  financial  statements  have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information  and  with  the  instructions  to  Form  10-QSB  and  Article  10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial  statements.  In the opinion of management,  all necessary adjustments
(consisting  of  normal  recurring  accruals)  considered  necessary  for a fair
presentation  have been included.  Operating  results for the three month period
ended August 31, 1998 are not necessarily  indicative of the results that may be
expected for the year ended May 31, 1999.


NOTE B - RECLASSIFICATION OF EXPENSES

     Certain  expenses  reported in the  statement of  operations  for the three
month period ended  August 31, 1997 have been  reclassified  to conform with the
presentation  of expenses  reported  for the three month period ended August 31,
1998.

NOTE C - WEIGHTED AVERAGE SHARES OUTSTANDING

     Weighted average number of shares outstanding during the periods is 
computed as follows:

                                             For the three months
                                               ended August 31,
                                               ----------------
                                               1998         1997
                                               ----         ----

Average outstanding shares                  3,147,637    3,141,406

Dilutive effect of stock
  options and warrants                           -           -
                                            ---------    ---------
Weighted average number of
  shares outstanding                        3,147,637    3,141,406
                                            =========    =========
                                   


                                      
                                       





                                        8









                                      


                                       

<PAGE>


                              DIEHL GRAPHSOFT, INC.
                       MANAGEMENT'S DISCUSSION & ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     In connection  with the Private  Securities  Litigation  Reform Act of 1995
(the  "Litigation  Reform  Act"),  the  Company  is  hereby  disclosing  certain
cautionary   information  to  be  used  in  connection  with  written  materials
(including  this Report on Form 10-QSB) and oral statements made by or on
behalf of its employees and  representatives  that may contain  "forward looking
statements"  within the meaning of the  Litigation  Reform Act. Such  statements
consist of any statement  other than a recitation of historical  fact and can be
identified by the use of forward looking  terminology such as "many,"  "expect,"
"anticipate,"  "estimate"  or  "continue"  or  the  negative  thereof  or  other
variations  thereon  or  comparable  terminology.  The  listener  or  reader  is
cautioned that all forward looking  statements are  necessarily  speculative and
there are numerous  risks and  uncertainties  that could cause actual  events or
results to differ  materially  from those  referred to in such  forward  looking
statements. The reader or listener is cautioned that the Company does not have a
policy of updating or revising  forward  looking  statements  and thus he or she
should not assume that silence by management  over time means that actual events
are bearing out as estimated in such forward looking statements.

     Results  of  Operations  for the three  months  ended  August  31,  1998 as
compared to the three months ended August 31, 1997.

     Revenues for the three months ended August 31, 1998  declined to $1,873,580
as  compared  to  $2,026,908   for  the  three  months  ended  August  31,  1997
representing a decrease of 8%. Upgrade sales of MiniCAD declined to $346,569 for
the three  months  ended  August 31, 1998 as compared to $491,262  for the three
months ended August 31, 1997. The decrease in upgrade sales reflects the release
of MiniCAD 7 in May 1997 which  generated  a surge in  upgrade  sales  after its
release.  The Company  did not issue a  comparable  release in the three  months
ended  August 31,  1998.  Sales of MiniCAD for Windows  rose to $654,568 for the
three  months ended August 31, 1998 as compared to $478,970 for the three months
ended August 31, 1997. This increase incorporates a decrease in sales within the
United States of $76,126.  Foreign sales of MiniCAD for Windows rose to $444,838
for the three  months ended  August 31, 1998 as compared  with  $193,115 for the
three  months  ended  August 31,  1997.  Most major  international  distributors
commenced  distribution  of MiniCAD 7 in the  latter  half of fiscal  1998.  The
decrease in sales within the United States  reflects the aging of the product in
its life cycle.  Foreign sales of MiniCAD for the Macintosh rose to $755,591 for
the three months ended August 31, 1998 as compared  with  $540,968 for the three
months  ended  August 31,  1997.  Most of this  increase  reflects  increases in
upgrade sales which rose $139,445 from the three months ended August 31, 1997 to
the three months ended  August 31, 1998.  Sales of MiniCAD for the  Macintosh in
the United  States  declined  substantially  from  $891,643 for the three months
ended  August 31, 1997 to $413,594  for the three  months ended August 31, 1998.
Included in this decrease is a decline in upgrade  revenues of $293,795 from the
three  months  ended  August 31, 1997 to the three months ended August 31, 1998.
The decrease in upgrade revenues reflects the timing of the release of MiniCAD 7
in May 1997  with many  users  upgrading  shortly  after  the new  release.  The
remaining  decrease in sales of MiniCAD for the  Macintosh in the United  States
reflects the aging of the product in its life cycle. The Company believes part 
of the decrease is also attributable to the continuing  uncertainty the Company 
has with the Macintosh market in general.
                                      
                                       9
<PAGE>

     The cost of revenues for the three months ended August 31, 1998 declined to
$490,931  as compared to $581,345  for the three  months  ended  August 31, 1997
representing  a decrease  of 16%.  The gross  profit  percentages  for the three
months  ended  August  31,  1998 and 1997 were  73.8%  and  71.3%  respectively.
Amortization of software licensing and development  included in cost of revenues
rose to $ 208,619  for the three  months  ended  August 31,  1998 as compared to
$204,605 for the three  months  ended  August 31,  1997.  The decline in overall
costs and increase in profit margins reflects a decrease in upgrade sales in the
United States which generally bring in less revenue per unit shipped but require
the same cost to deliver as new  product  sales.  The  decline  also  reflects a
decrease in overall sales within the United States and a substantial increase in
foreign  sales which  generally  cost less to produce with foreign  distributors
handling  reproduction  of the product in their  native  languages  at their own
expense.

     General and  administrative  expenses  declined  to $433,264  for the three
months ended August 31, 1998 from $440,541 for the three months ended August 31,
1997  representing an decrease of 2%. Salary  expenses  declined to $138,875 for
the three months ended August 31, 1998 as compared  with  $172,762 for the three
months ended August 31, 1997.  There  decreases  reflects  streamlining of costs
within administrative  operations  which were partly offset by increases in 
other costs commensurate with growth in research and development operations.

     Research  and  development  expenses  increased  to $124,752  for the three
months  ended August 31, 1998 from $91,757 for the three months ended August 31,
1997  representing  and increase of 36%.  This  increase  reflects the increased
commitment by the Company to develop new engineering technology.

     Selling and marketing  expenses  increased to $478,799 for the three months
ended August 31, 1998 from  $467,190 for the three months ended August 31, 1997.
representing  an increase of 2%. Trade show  expenses rose from the three months
ended  August  31,  1997 to the  three  months  ended  August  31,  1998 with an
increased  commitment  to marketing  industry  specific  solutions to customers.
These  increases  were partly  offset by declines  in credit card  expenses  and
expenses for sales aids during the three  months ended August 31, 1998.  Each of
these  expenses  were higher in the three months ended August 31, 1997 due to 
the large volume of upgrade sales in that period.

     Interest income rose to $107,684 for the three months ended August 31, 1998
as compared with $89,579 for the three months ended August 31, 1997 representing
an  increase  of 20%.  This  increase  reflects a larger  investment  base and a
partial shift in the investment portfolio from tax exempt municipal  obligations
during the three months ended August 31, 1997 to other  corporate and government
securities  during the three months ended August 31, 1998 which  generally carry
higher yields than tax exempt municipal obligations.

     Net income decreased to $319,518 for the three months ended August 31, 1998
from $345,654 for the three months ended August 31, 1997 representing a decrease
of 8%. This  decrease is after giving  effect to a provision for income taxes of
$134,000  for the three  months ended August 31, 1998 and $190,000 for the three
months  ended  August 31, 1997.  The  effective  tax rates were 29.5% and 35.5%,
respectively.  The decrease in effective tax rates reflects the establishment of
a foreign sales  corporation by the Company in March 1998, which exempts certain
profits related to foreign sales, and the tax benefits from charitable  donation
of an  earlier  version  of MiniCAD in  September  1997 which will  provide  tax
benefits to the Company throughout the current fiscal year.

                                       10
<PAGE>

     Liquid and Capital Resources

     The Company  increased its working  capital by $921,959 from  $7.743,104 at
August 31, 1997 to $8,665,063 at August 31, 1998. Working capital also rose from
$8,364,614 at May 31, 1998  representing  an increase of $300,449.  The increase
from  August 31,  1997 to August 31,  1998 is  primarily  due to cash flows form
operations during the period. These cash flows have been invested into equipment
and software  development  with  remaining  excess flows placed  temporarily  in
marketable securities.  Company marketable securities continue to be in short to
intermediate term government and corporate instruments.

     The Company's  future capital  requirements  will depend upon many factors,
including the extent,  timing and progress of the Company's  development  of new
software.  The Company  anticipates  that its  existing  capital  resources  and
earnings from  operations  will be adequate to satisfy its capital  requirements
for the next twelve months.



                                       
















                                      








                                       




                                       11


<PAGE>


PART II

                                OTHER INFORMATION


Item 2.           Changes in Securities and Use of Proceeds

                  On February 28, 1995, the Company completed its initial public
                  offering of common  stock and warrants and raised net proceeds
                  of  $4,135,075   including  the  exercise  of  warrants.   The
                  effective date of the  registration  statement for the initial
                  public  offering was November 29, 1994. From February 28, 1995
                  through  August 31, 1998,  the net proceeds were  allocated to
                  working  capital and were invested  temporarily  in short term
                  U.S. Government, Corporate and municipal obligations.

Item 6.           Exhibits and Reports
                  Exhibit 27 - Financial Data Schedule

                  The Company has filed no reports on Form 8-K during the three
                  months ended August 31. 1998.



                                     






















                                       12

<PAGE>


                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                        DIEHL GRAPHSOFT, INC.


DATE: October 14, 1998                  By:/s/Richard Diehl
                                        Richard Diehl, President
                                        Chief Executive Officer


DATE: October 14, 1998                  By:/s/ Joseph Schmelzle
                                        Joseph Schmelzle, Treasurer
                                        Chief Financial and Accounting Officer



                                       13