UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A

[X]  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF  THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended October 2, 1998


[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     Commission file number 0-16172


                              COMPUTONE CORPORATION
        (Exact name of small business issuer as specified in its charter)


            Delaware                                     23-2472952
-------------------------------             ------------------------------------
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)

1060 Windward Ridge Parkway,  Suite 100, Alpharetta, GA             30005
-------------------------------------------------------             -----
      (Address of principal executive offices)                    (Zip Code)

         Issuer's telephone number, including area code: (770) 625-0000

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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

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

                               Yes  [ ]       No [X]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest  practicable date:  7,698,444 shares of common stock on
November 6, 1998.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [ ]

<PAGE>

                              COMPUTONE CORPORATION

                                      INDEX

                         PART I - FINANCIAL INFORMATION

ITEM 1.   Financial Statements:

          Balance Sheets as of October 2, 1998 and April 3, 1998               3

          Statements of Operations for the three months ended
          October 2, 1998 and October 3, 1997, As Restated (Note 2)            4

          Statements of Operations for the six months ended
          October 2, 1998 and October 3, 1997, As Restated (Note 2)            5

          Statements of Cash Flows  for the six months ended
          October 2, 1998 and October 3, 1997, As Restated (Note 2)            6

          Notes to Financial Statements                                        7

ITEM 2.   Management's Discussion and Analysis or Plan of Operation           11


                           PART II - OTHER INFORMATION

ITEM 1.   Legal Proceedings                                                   14

ITEM 2.   Changes in Securities                                               14

ITEM 3.   Defaults Upon Senior Securities                                     14

ITEM 4.   Submission of Matters to a Vote of Security Holders                 14

ITEM 5.   Other Information                                                   14

ITEM 6.   Exhibits and Reports on Form 8-K                                    15

SIGNATURES                                                                    16

<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                                 Balance Sheets
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 October 2, 1998  April 3, 1998
                                                                 ---------------  -------------
                                                                   (unaudited)
ASSETS
Current assets:
<S>                                                                 <C>              <C>
    Cash and cash equivalents                                       $    106         $    146
     Receivables, net of allowance for doubtful
        accounts of $694 at October 2, 1998
        and $668 at April 3, 1998                                      1,529            2,540
    Inventories, net                                                   2,482            3,752
    Prepaid expenses and other                                           119              102
                                                                    --------         --------
Total current assets                                                   4,236            6,540

Property, equipment and improvements, net                                600              594

Intangible assets, net                                                   459              506

Advance (See Note 7)                                                     450               --

Other                                                                     25               27
                                                                    --------         --------

TOTAL ASSETS                                                        $  5,770         $  7,667
                                                                    ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable, trade                                         $  2,362         $  2,600
    Accrued liabilities:
         Payroll                                                          92               97
         Deferred sales                                                  484              523
         Professional fees                                                32              153
         Other                                                           516              504
   Line of credit                                                        309            1,252
   Notes payable to stockholders                                         450              460
   Current maturities of long term debt                                  166               76
                                                                    --------         --------
Total current liabilities                                              4,411            5,665

Notes payable to stockholders                                            420              120

Long term debt, less current maturities                                   --                6
                                                                    --------         --------

Total liabilities                                                      4,831            5,791

Stockholders' Equity
  Convertible redeemable preferred stock, $.01 par value;
      10,000,000 shares authorized; no shares issued                      --               --
  Common stock, $.01 par value; 25,000,000 shares
      authorized; 7,698,444 and 7,382,622 shares outstanding              77               74
  Additional paid in capital                                          45,892           45,062
  Accumulated deficit                                                (45,030)         (43,260)
                                                                    --------         --------
Total stockholders' equity                                               939            1,876
                                                                    --------         --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $  5,770         $  7,667
                                                                    ========         ========
</TABLE>

               See accompanying notes to the financial statements.

                                       3
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                            Statements of Operations
                      (in thousands, except per share data)
                                   (unaudited)

                                                      Three Months Ended
                                                --------------------------------
                                                October 2, 1998  October 3, 1997
                                                ---------------  ---------------
                                                                   As Restated
                                                                     (Note 2)
Revenues:
     Product sales                                  $  2,808         $  2,746
                                                    --------         --------
Expenses:
     Cost of products sold                             1,883            1,805
     Selling, general and administrative               1,196            1,079
     Product development                                 521              292
                                                    --------         --------
                                                       3,600            3,176
                                                    --------         --------

Operating income (loss)                                 (792)            (430)

Other income (expense):
     Other income (expense)                                2              298
     Interest expense - affiliates                       (18)             (12)
     Interest expense - other                            (11)             (36)
                                                    --------         --------

Income (loss) before income taxes                       (819)            (180)

Provision for income taxes                                --               --
                                                    --------         --------

Net income (loss)                                   $   (819)        $   (180)
                                                    ========         ========

Income (loss) per common share:
            Basic                                   $  (0.11)        $  (0.03)
                                                    ========         ========
            Diluted                                 $  (0.11)        $  (0.03)
                                                    ========         ========

               See accompanying notes to the financial statements.

                                       4
<PAGE>

                  PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                            Statements of Operations
                      (in thousands, except per share data)
                                   (unaudited)

                                                        Six Months Ended
                                                --------------------------------
                                                October 2, 1998  October 3, 1997
                                                ---------------  ---------------
                                                                   As Restated
                                                                     (Note 2)

Revenues:
     Product sales                                  $  5,652         $  6,240
                                                    --------         --------
Expenses:
     Cost of products sold                             3,881            3,926
     Selling, general and administrative               2,525            2,038
     Product development                                 957              568
                                                    --------         --------
                                                       7,363            6,532
                                                    --------         --------

Operating income (loss)                               (1,711)            (292)

Other  income (expense):
     Other income (expense)                                2              296
     Interest expense - affiliates                       (28)             (24)
     Interest expense - other                            (32)             (50)
                                                    --------         --------

Income (loss) before income taxes                     (1,769)             (70)


Provision for income taxes                                --               --
                                                    --------         --------

Net income (loss)                                   $ (1,769)        $    (70)
                                                    ========         ========

Income (loss) per common share:
            Basic                                   $  (0.23)        $  (0.01)
                                                    ========         ========
            Diluted                                 $  (0.23)        $  (0.01)
                                                    ========         ========

        See accompanying notes to the financial statements.

                                       5
<PAGE>

                     PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                            Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                              --------------------------------
                                                              October 2, 1998  October 3, 1997
                                                              ---------------  ---------------
                                                                                 As Restated
                                                                                   (Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                              <C>              <C>
  Net income (loss) from operations                              $ (1,769)        $    (70)
  Adjustments to reconcile income (loss) from operations
     to net cash provided by (used in) operations:
       Depreciation and amortization                                  224              224
       Provision for uncollectible accounts                            26              (17)
       Provision for inventory reserve                                 60              (38)
       Changes in current assets and current liabilities:
          Accounts receivable                                         985             (169)
          Inventories                                               1,210             (126)
          Prepaid expenses and other                                  (16)            (188)
          Accounts payable and accrued liabilities                   (392)          (1,007)
                                                                 --------         --------
Net cash (used in) provided by operations                             328           (1,391)
                                                                 --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   (Increase) decrease in other assets                                 --              (11)
   Advance (See Note 7)                                              (450)              --
   Capitalization of software costs                                   (88)            (143)
   Capital expenditures                                               (94)             (54)
                                                                 --------         --------
Net cash used in investing activities                                (632)            (208)
                                                                 --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings from affiliates                                          400               75
  Repayment of debt - net                                             (25)            (500)
  Net borrowings under term loan                                       --              192
  Net borrowings under lines of credit                               (943)             733
  Exercise of common stock options and warrants                         3               20
  Issuance of common stock                                            829            1,320
                                                                 --------         --------
Net cash provided by financing activities                             264            1,840
                                                                 --------         --------

Net increase in cash and cash equivalents                             (40)             241
Cash and cash equivalents, beginning of period                        146               88
                                                                 --------         --------
Cash and cash equivalents, end of period                         $    106         $    329
                                                                 ========         ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
        Interest                                                 $     60         $     74
</TABLE>

               See accompanying notes to the financial statements.

                                       6
<PAGE>

                              COMPUTONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


     All statements contained in this Form-10QSB/A Quarterly Report that are not
historical  facts  are  based  on  current  expectations.  Such  statements  are
forward-looking  (as defined in the Private Securities  Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties.  Actual results
could vary  materially.  The  factors  that could cause  actual  results to vary
materially  include:  the ability of the Company to obtain and maintain adequate
working capital,  the Company's need for substantial  additional equity capital,
the outcome of certain litigation pending against the Company,  including an SEC
investigation,  the loss of the exemption pursuant to which the Company's Common
Stock is currently  traded on the Nasdaq SmallCap  Market,  general business and
economic  conditions  in the  market,  the  Company's  ability to  maintain  its
existing  customers  and other risks that may be described  from time to time in
reports the Company files with the SEC. Undue  reliance  should not be placed on
any such forward-looking statements.

1.   BASIS OF PRESENTATION
     ---------------------

     The financial  statements included in this Form 10-QSB/A have been prepared
by the Company,  without  audit,  pursuant to the rules and  regulations  of the
Securities   and  Exchange   Commission.   Certain   information   and  footnote
disclosures,  normally included in financial  statements  prepared in accordance
with generally accepted accounting principles,  have been condensed, or omitted,
pursuant to such rules and  regulations.  These financial  statements  should be
read in conjunction with the financial  statements and related notes included in
the Company's Form 10-KSB Report for its fiscal year ended April 3, 1998.

     The financial statements presented herein as of October 2, 1998 reflect, in
the opinion of management,  all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented.  The
results of operations for any interim period are not  necessarily  indicative of
the results for the full year.

2.   RESTATEMENT OF FINANCIAL DATA
     -----------------------------

     The Company has restated its financial  statements  for the fiscal  quarter
ended  October  3,  1997  (as  presented  herein)  as a  result  of the  ongoing
investigation by the Securities and Exchange Commission (SEC) in matters focused
principally  on  the  Company's  revenue   recognition   policies  and  internal
accounting  controls.  Since March 1996,  the Company has been the subject of an
investigation  by the SEC  pursuant to a Formal  Order of Private  Investigation
relating to the Company. Since that date, certain former and current officers of
the Company have testified in the  investigation.  On June 22, 1998, the Company
was advised by the Staff of the SEC of the Staff's  intention  to  recommend  an
enforcement  action  against the Company for alleged  violations  of the federal
securities  laws and to  recommend  the filing of a complaint  in federal  court
seeking a permanent  injunction  against the Company for violations arising from
the Company's  reporting of certain revenues in violation of generally  accepted
accounting  principles in periodic  filings made during certain of the quarterly
and annual  filings by the Company in the five year period ending April 3, 1998.
As a result of the foregoing,  the Company is required,  among other things,  to
restate certain previously issued financial information. The Company has advised
the  Staff  of the  Company's  intention  to  negotiate  a  mutually  acceptable
settlement of this matter.

     In  response  to the  forgoing,  the  Company  has  taken a number of steps
including  (a)  changing  the  application  of its revenue  recognition  policy,
effective  with the fourth  quarter of the fiscal year ended  April 3, 1998,  to
defer  recognition  of  revenue  to  customers  who are not the end users of the
Company's  product  until such time as the product has been sold  through to the
end user;  (b) improving  its quarterly and fiscal year end cut-off  procedures;
(c) accepting the  resignation  of the  Company's  previous  president and chief
executive officer subsequent to April 3, 1998; and (d) accepting the resignation
of the Company's  previous chief financial officer  subsequent to April 3, 1998.
The Company believes that these steps will provide reasonable assurance that the
aforementioned  accounting errors do not recur.

                                       7
<PAGE>

                             COMPUTONE CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)

2.   RESTATEMENT OF FINANCIAL DATA, CONTINUED
     ----------------------------------------

     This  restatement  of  financial  data for the  periods  reported on herein
results from the improper recognition of revenue on certain sales, which had the
effects on the results of operations as follows:

                                              Quarter Ended October 3, 1997
                                              -----------------------------
                                            As Reported           As Restated
                                            -----------           -----------
                                         (In thousands except per share amounts)
Revenues                                      $ 3,511               $ 2,746
Operating Income (Loss)                       $    30               $  (430)
Net Income (Loss)                             $   280               $  (180)
Basic and Diluted Earnings (Loss) Per Share   $   .04               $  (.03)


                                          Six Month Period Ended October 3, 1997
                                          --------------------------------------
                                            As Reported           As Restated
                                            -----------           -----------
                                         (In thousands except per share amounts)
Revenues                                      $ 7,005               $ 6,240
Operating Income (Loss)                       $   168               $  (292)
Net Income (Loss)                             $   390               $  ( 70)
Basic and Diluted Earnings (Loss) Per Share   $   .06               $  (.01)


3.   REVENUE RECOGNITION
     -------------------

     Product sales are generally  recognized,  net of an allowance for estimated
sales returns and  allowances,  when the related  products are shipped;  however
beginning  with the fourth  quarter of the fiscal year ended April 3, 1998,  the
Company  modified the  application  of its revenue  recognition  policy to defer
recognition  of  revenue  on sales  to  customers  who are not end  users of the
Company's  products  until such time as the product has been sold through to the
end  user.  The   modification  was  implemented  in  response  to  management's
determination  that the estimated  returns and allowances  attributable  to such
sales cannot be  accurately  quantified  and is  considered a change in estimate
under APB  Opinion No. 20,  "Accounting  Changes".  The effect of adopting  this
modification  on the  Company's  financial  statements  for the six months ended
October 2, 1998 was to increase  revenue by  approximately  $80,000 and decrease
operating  loss  by   approximately   $30,000.   The  effect  of  adopting  this
modification  on the Company's  financial  statements for the three months ended
October 2, 1998 was to increase  revenue by  approximately  $30,000 and decrease
operating loss by approximately $15,000.

     A warranty reserve of less than one percent of sales is accrued at the date
of shipment.  The Company generally  provides a warranty of five years on all of
its products sold.

                                       8
<PAGE>

                              COMPUTONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

4.   INVENTORIES
     -----------

     Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out method.

     Raw materials that have no planned  production  life or exceed 18 months of
anticipated  supply are deemed excess and are fully reserved.  Reserves are also
established,   as  management  deems  appropriate,   for  obsolete,  excess  and
non-salable inventories, including finished goods inventories.

     Inventories are net of a reserve for obsolete, excess and non-salable items
of $911,000 and $851,000 at October 2, 1998 and April 3, 1998, respectively.

     Inventories,  net of a reserve for obsolete,  excess and non-salable items,
consisted of the following at October 2, 1998 and April 3, 1998 (in thousands):

                                     October 2, 1998     April 3, 1998
                                     ---------------     -------------

     Finished goods                      $    526          $  1,375
     Work in progress                         822               533
     Raw materials                          1,134             1,844
                                         --------          --------
                                         $  2,482          $  3,752
                                         ========          ========


5.   INCOME (LOSS) PER SHARE
     -----------------------

     In February 1997, the FASB issued SFAS No. 128,  "Earnings Per Share." SFAS
No. 128  establishes  standards for computing and presenting  earnings per share
("EPS"). SFAS No. 128 requires the dual presentation of basic and diluted EPS on
the face of the  statement of  operations.  Basic EPS  excludes  dilution and is
computed by dividing  income  (loss)  available  to common  shareholders  by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted  into common stock.
The Company  adopted SFAS No. 128 during  fiscal 1998 and has restated all prior
period EPS data. For purposes of computing basic and diluted EPS, the net income
(loss) for each period  presented  (the  numerator)  is divided by the  weighted
average number of common shares outstanding (the denominator) resulting in basic
and  diluted  EPS of  ($0.11)  for the three  months  ended  October 2, 1998 and
($0.03) for the three  months ended  October 3, 1997.  The basic and diluted EPS
for the six months  ended  October 2, 1998 is ($0.23)  and  ($0.01)  for the six
months ended October 3, 1997.  For purposes of computing  diluted EPS during the
three and six month  periods  ended  October 2, 1998,  the Company  excluded the
effects of  outstanding  common  stock  options and  warrants  because they were
anti-dilutive.

6.   INCOME TAXES
     ------------

     Income taxes are calculated  using the liability  method  specified by SFAS
109,  "Accounting for Income Taxes". The Company provides a valuation  allowance
against its deferred tax assets to the extent that management  concludes that it
is more likely than not that the Company will not benefit  from the  utilization
of such deferred tax assets.

     The Company has  available  net  operating  and capital loss  carryforwards
amounting to  approximately  $53 million at April 3, 1998,  including  operating
loss carryforwards which relate to a predecessor company,  which expire in 2013.
As a result of several  ownership  changes which have occurred  since the losses
started  to  accumulate,  statutory  provisions  will  substantially  limit  the
Company's future use of the loss carryforwards.

                                       9
<PAGE>

                              COMPUTONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


7.   DEBT
     ----

     On June 20, 1997, the Company entered into a financing  arrangement  with a
lender  which  provided  for a term  loan in the  amount of  $254,000  ($141,000
outstanding  at  October  2,  1998),  at a rate of prime  plus  1.50%,  which is
collateralized  by the  Company's  inventory  and is payable at $4,233 per month
through  June 2000.  In  addition,  a line of credit  agreement  exists with the
lender for up to  $2,500,000  ($309,000  outstanding  at October 2, 1998) and is
based on the  available  borrowing  base,  at rate of prime plus 1.25%  which is
collateralized by the Company's accounts receivable.

     The  financing   arrangement  contains  various  affirmative  and  negative
covenants  and,  as of October 2, 1998,  the  Company  was in  violation  of the
minimum net worth  covenant.  On September 8, 1998, the Company  received notice
that the lender had accelerated  all sums due under the financing  agreement and
made demand for payment of all  outstanding  balances.  As such, the Company has
reclassified  the  previously   reported   long-term  loan  balance  to  current
maturities of long-term  debt. The Company and its lender have also entered into
a forbearance  agreement that expires on November 16, 1998. Although the Company
is engaged in negotiation with a new lender to provide working capital financing
and repay all balances due to the Company's  current lender, no assurance can be
given that the Company will be able to consummate an agreement with a new lender
and,  if the  Company  cannot  do so,  that the  expiration  of the  forbearance
agreement  would not have a material  adverse effect on the Company's  financial
position and results of operations.


8.   ADVANCE
     -------

     On June  5,  1998,  the  Company  entered  into an  Agreement  and  Plan of
Reorganization (the "Agreement") with Ladia Communications Technologies, Inc., a
newly formed subsidiary of the Company ("LCTI"),  New Computone  Corporation,  a
newly formed subsidiary of the Company ("Newco"), Ladia, L.L.C., a Massachusetts
limited  liability  company  ("Ladia")  and the members of Ladia.  A copy of the
Agreement  was  included  as Exhibit 1 to the  Company's  Form 8-K Report  dated
August 3, 1998 and reference is made to such exhibit for a full statement of the
terms and  conditions of the  transactions  contemplated  by the  Agreement.  In
summary, the Agreement provides that the current holders of the Company's Common
Stock and the current members of Ladia will become  shareholders of LCTI and the
Company and Ladia will become  subsidiaries of LCTI. The Agreement provides that
the current members of Ladia and the holders of  approximately  $250,000 of debt
owed by Ladia  would  initially  receive  approximately  430,000  shares of LCTI
Common Stock and,  subject to the  satisfaction  of certain  specified  criteria
relating to Ladia financial performance through April 30, 1999, could receive up
to 8.1 million shares of LCTI Common Stock. A copy of the Company's June 9, 1998
press release  relating to the execution of the Agreement is included as Exhibit
2 to the Company's Form 8-K Report.

     The  Company and Ladia are  currently  renegotiating  certain  terms of the
Agreement.  The Company cannot currently  predict when the  renegotiation of the
Agreement  will  be  completed  or when  the  transactions  contemplated  by the
Agreement will be consummated.

     The Agreement also contemplated that LCTI would use commercially reasonable
efforts to raise  additional  equity  financing  of up to $5 million  for Ladia.
During the quarter  ended October 2, 1998,  the Company made  available to Ladia
$450,000 in proceeds from the private  placement of Common Stock by the Company.
The  unwritten  understanding  between  the  Company and Ladia is that the funds
advanced to Ladia by the Company would be converted in Common Stock of LCTI upon
the consummation of the transactions contemplated by the Agreement and, if those
transactions  are not  consummated,  the  amount of  advances  would  constitute
unsecured indebtedness of Ladia to the Company.

                                       10
<PAGE>

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF  OPERATIONS  FOR THE
          THREE AND SIX MONTHS ENDED  OCTOBER 2, 1998  COMPARED TO THE THREE AND
          SIX MONTHS ENDED OCTOBER 3, 1997.


SEE NOTE 2 IN ITEM 1 - RESTATEMENT OF FINANCIAL DATA

RESULTS OF OPERATIONS
---------------------

FOR THE THREE MONTHS ENDED OCTOBER 2, 1998
------------------------------------------

     The Company  reported a loss from  operations for the quarter ended October
2, 1998 of $792,000  compared  to a loss from  operations  of  $430,000  for the
comparable quarter of the prior fiscal year. The Company's operating results for
the three months ended  October 2, 1998 were  unfavorably  affected by depressed
sales volume,  reduced margins on sales and increased general and administrative
expenses.  Sales volume during the quarter was unfavorably  affected by internal
delays in releasing new products into the market due to a reorganization  of the
Company's sales forces,  and external delays in receiving  product delivery from
suppliers due to the Company's cash shortages. Margins were unfavorably affected
by sales made to the  Company's  largest  customer at reduced  margins,  and the
write-off of previously  capitalized  manufacturing  overhead costs. General and
administrative  expenses  were  unfavorably  affected by increases the Company's
compensation  costs,  legal costs,  trade  shows/advertising  costs and bad debt
expenses.

     Product  sales  revenue  for the  quarter  ended  October  2, 1998  totaled
approximately  $2,808,000  compared to $2,746,000 for the comparable  quarter of
the prior fiscal year,  an increase of $62,000,  or 2%.  Product  sales  revenue
continues  to be  affected  by the  delay in the  delivery  of new  products  in
conjunction with a  reorganization  of the Company's sales force to utilize more
of the  distribution  channel and in the receipt of product  from the  Company's
suppliers due to the Company's cash shortages.

     Cost of products  sold for the quarter  ended  October 2, 1998  amounted to
$1,883,000,  or 67% of product sales revenues versus $1,805,000, or 66%, for the
comparable  quarter of the prior year.  The slight  increase in cost of products
sold as a percentage  of revenues is  attributable  to the high dollar volume of
low margin sales to a major customer.

     Selling, general and administrative expenses amounted to $1,196,000, or 43%
of product  sales  revenue,  for the three months  ended  October 2, 1998 versus
$1,079,000,  or 39%, for the  comparable  three months of the prior fiscal year.
The  increase in expenses  during the quarter  ended  October 2, 1998 versus the
same  period  of  the  prior  fiscal  year  is   attributable  to  increases  in
compensation  costs,  legal costs,  trade  shows/advertising  costs and bad debt
expenses.

     Product development expenses amounted to $521,000,  or 19% of product sales
revenue, for the three months ended October 2, 1998 versus $292,000, or 11%, for
the  comparable  three month period of the prior fiscal year.  This  increase in
product  development costs is attributable to additional  staffing and equipment
rental expenses  necessary to ensure the timely  completion of the Company's new
product release dates for the current fiscal year.

RESULTS OF OPERATIONS
---------------------

FOR THE SIX MONTHS ENDED OCTOBER 2, 1998
----------------------------------------

     The Company  reported a loss from operations for the six month period ended
October 2, 1998 of $1,711,000 compared to a loss from operations of $292,000 for
the comparable period of the prior fiscal year. The Company's  operating results
for the six month  period  ended  October 2, 1998 were  unfavorably  affected by
depressed  sales  volume,  reduced  margins on sales and  increased  general and
administrative  expenses.  Sales volume  during the six months ended  October 2,
1998 was unfavorably  affected by internal delays in releasing new products into
the market due to a  reorganization  of the  company's  sales force and external
delays in receiving  product  delivery from  suppliers due to the Company's cash
shortages.  Margins  were  unfavorably  affected by sales made to the  Company's
largest  customer  at  reduced  margins,  a change  in sales mix  reflecting  an
increase in low margin sales of third party

                                       11
<PAGE>

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF  OPERATIONS  FOR THE
          THREE AND SIX MONTHS ENDED  OCTOBER 2, 1998  COMPARED TO THE THREE AND
          SIX MONTHS ENDED OCTOBER 3, 1997.

products that were bundled with the Company's  remote access  products,  and the
reduction of previously  capitalized  manufacturing  overhead costs. General and
administrative  expenses were unfavorably affected by increases in the Company's
compensation  costs,  legal costs,  trade  shows/advertising  costs and bad debt
expenses.

     Product  sales  revenue  for the six month  period  ended  October  2, 1998
totaled  approximately  $5,652,000  compared to  $6,240,000  for the  comparable
period of the prior fiscal year, a decrease of $588,000, or 9%. This decrease in
product sales revenue is  attributable to the continued delay in the delivery of
new products in conjunction with a  reorganization  of the Company's sales force
to utilize more of the  distribution  channel and in the receipt of product from
the Company's suppliers due to the Company's cash shortages.

     Cost of  products  sold for the six  month  period  ended  October  2, 1998
amounted to $3,881,000,  or 69% of product sales revenues versus $3,926,000,  or
63% of product sales revenues,  for the comparable period of the prior year. The
increase in cost of products sold as a percentage  of product sales  revenues is
attributable  to the high dollar volume of low margin sales to a major customer,
the continued sales of third party  manufacturers  products in conjunction  with
the Company's products,  and a reduction in sales volumes and margins associated
with the Company's I/O boards products.

     Selling, general and administrative expenses amounted to $2,525,000, or 45%
of product sales revenue,  for the six month period ended October 2, 1998 versus
$2,038,000,  or 33%, for the  comparable  period of the prior  fiscal year.  The
increase in expenses is attributable to increases in compensation  costs,  legal
costs, trade shows/advertising costs and bad debt expenses.

     Product development expenses amounted to $957,000,  or 17% of product sales
revenues, for the six month period ended October 2, 1998 versus $568,000, or 9%,
for the  comparable  period of the prior fiscal year.  This  increase in product
development  costs is attributable to additional  staffing and equipment  rental
expenses  necessary to ensure the timely  completion  of the  Company's  product
release dates for the current fiscal year.

LIQUIDITY
---------

     In order to meet the Company's  liquidity  needs arising from the operating
losses,  the Company is endeavoring to raise  approximately $2 million in equity
capital by November 30,1998 by offering for sale, to accredited investors, up to
1,000,000  shares  of the  Company's  common  stock  under  Regulation  D of the
Securities Act of 1993.  Management believes that these funds will be sufficient
to fund the Company's  operations during fiscal 1999. However, no assurances can
be given that the Company  will be  successful  in raising  additional  capital.
Further,  there can be no assurance,  assuming the Company  successfully  raises
additional  funds that the Company will achieve  profitability  or positive cash
flow.

     The  Company's  primary cash  commitments  in fiscal 1999 include  payments
under  non-cancelable  operating  leases  ($308,000),  line of  credit & current
maturities  of  long-term  debt  ($925,000)  and  investments  in  research  and
development  ($1,288,000 in fiscal 1998).  Relationships  with major vendors are
satisfactory although the Company is on a "Cash On Delivery" status with several
raw  materials  vendors.  Of the  $925,000  outstanding  as of  October 2, 1998,
approximately  $475,000  is due to related  parties,  the  maturity of which the
Company believes can be extended as needed.

     On June 20, 1997, the Company entered into a financing  arrangement  with a
lender  which  provided  for a term  loan in the  amount of  $254,000  ($141,000
outstanding at October 2, 1998), at a rate of prime plus 1.50% which

                                       12
<PAGE>

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF  OPERATIONS  FOR THE
          THREE AND SIX MONTHS ENDED  OCTOBER 2, 1998  COMPARED TO THE THREE AND
          SIX MONTHS ENDED OCTOBER 3, 1997.

collateralized  by the  Company's  inventory  and is payable at $4,233 per month
through  June 2000.  In  addition,  a line of credit  agreement  exists with the
lender for up to  $2,500,000  ($309,000  outstanding  at October 2, 1998) and is
based on the  available  borrowing  base, at a rate of prime plus 1.25% which is
collateralized by the Company's accounts receivable.

     The  financing   arrangement  contains  various  affirmative  and  negative
covenants  and,  as of October 2, 1998,  the  Company  was in  violation  of the
minimum net worth  covenant.  On September 8, 1998, the Company  received notice
that the lender had accelerated  all sums due under the financing  agreement and
made demand for payment of all  outstanding  balances.  As such, the Company has
reclassified  the  previously   reported   long-term  loan  balance  to  current
maturities of long-term  debt. The Company and its lender have also entered into
a forbearance  agreement that expires on November 16, 1998. Although the Company
is engaged in negotiation with a new lender to provide working capital financing
and repay all balances due to the Company's  current lender, no assurance can be
given that the Company will be able to consummate an agreement with a new lender
and if the  Company  cannot  do  so,  that  the  expiration  of the  forbearance
agreement  would not have a material  adverse effect on the Company's  financial
position and results of operations.

     Cash provided by  operations  amounted to $328,000 for the six months ended
October 2, 1998 compared to cash used in  operations  of $1,391,000  for the six
months  ended  October 3, 1997.  The  increase in cash  provided  by  operations
compared to the prior year fiscal  period  primarily  reflects  the  decrease in
accounts receivable and inventories.

     Cash used in investing  activities  amounted to $632,000 for the six months
ended October 2, 1998 compared  with $208,000 used in financing  activities  for
the six months ended October 3, 1997.  This increase from the same period of the
prior  fiscal  year  is  attributable  to an  advance  (See  Note 7 for  further
information).

     Cash provided by financing  activities  during the six months ended October
2, 1998 was $264,000 versus $1,840,000 for the six months ended October 3, 1997.
This decrease is partially due to the Company's  repayments on the June 20, 1997
financing  arrangement  during  the six  months  ended  October  2, 1998  versus
borrowings under that  arrangement  during the six months ended October 3, 1997.
In  addition,  issuance of common  stock was  $829,000  in the six months  ended
October 2, 1998 versus  $1,320,000  in the six months ended October 3, 1997 (See
Note 7).

     Working  capital  was a deficit  of  $175,000  at  October  2, 1998  versus
positive working capital of $875,000 at April 3, 1998, a decrease of $1,050,000.
The ratio of current  assets to current  liabilities at October 2, 1998 was 0.96
to 1.00 compared to 1.15 to 1.00 at April 3, 1998.

OUTLOOK FOR REMAINDER OF FISCAL YEAR 1999
-----------------------------------------

     Management believes that the release of the Company's TotalAccess DCS-5000,
scheduled for the fourth quarter of fiscal 1999, will significantly  enhance the
Company's ability to increase its sales. The DCS-5000 combines the features of a
high  performance  Ethernet  digital  remote  access  server  with  up to 12 DSP
24-channel  modem cards.  The  DCS-5000 is intended for use by Internet  Service
Providers and medium to large companies that require high-density  connectivity,
allowing  remote  users and  locations  access  to the  Internet  and  corporate
Intranets.  The DCS-5000  will reduce the  Company's  dependence  on third party
products and management believes that it can be sold at a considerable margin.

                                       13
<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

          None,  other than those  matters  described in Item 3 to the Company's
          Annual Report on Form 10-KSB for the year ended April 3, 1998.

ITEM 2.   CHANGES IN SECURITIES

          In July 1998,  the  Company  sold 15,300  shares of Common  Stock at a
          price of $3.75  per  share to two  accredited  investors  in a private
          placement. In September 1998, the Company sold 95,693 shares of Common
          Stock at a price of $2.09 per share to an  accredited  investor in the
          same  private   placement.   The  private  placement  is  pursuant  to
          Regulation D under the  Securities Act of 1933. No  underwriters  were
          utilized  in  connection  with such sales,  nor were any  underwriting
          discounts or commissions paid. The aggregate  proceeds from such sales
          of Common Stock of $257,000 were used for working capital items and to
          partially fund the Company's loss from  operations of $792,000  during
          the fiscal quarter ended October 2, 1998.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          Not Applicable.

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

          Not Applicable.

ITEM 5.   OTHER INFORMATION

          On July 22, 1998, the Company was notified by the Nasdaq Stock Market,
          Inc. that effective July 29, 1998, the Company's Common Stock would be
          delisted  from the  Nasdaq  SmallCap  Market.  On July 27,  1998,  the
          Company  filed an  appeal  with  the  Nasdaq  Stock  Market,  Inc.  On
          September 17, 1998, the Company's appeal was heard by a Nasdaq Listing
          Qualifications  Panel (the  "Panel").  On October 22, 1998,  the Panel
          determined  to continue the listing of the  Company's  Common Stock on
          the Nasdaq  SmallCap Market subject to the condition that on or before
          November 30, 1998 the Company  must make a public  filing with the SEC
          and Nasdaq  evidencing a minimum of $3,000,000 in net tangible assets.
          The determination of the Panel also indicated that the Company must be
          able to demonstrate  compliance  with all  requirements  for continued
          listing on The Nasdaq SmallCap Market.  In the event the Company fails
          to meet any of the terms of the  exception  granted by the Panel,  the
          Company's  Common  Stock will be  delisted  from The  Nasdaq  SmallCap
          Market.  A copy of the October 22, 1998  determination by the Panel is
          included  as Exhibit  99.1 to this Form  10-QSB  Quarterly  Report and
          reference is made to the text of the Panel's  determination for a full
          statement of the terms and  conditions  of the exception  granted.  On
          October 27, 1998,  the Company  issued a press  release  reporting the
          exception granted by the Panel, a copy of which is included as Exhibit
          99.2 to this Form 10-QSB Quarterly Report.

                                       14
<PAGE>

                     PART II - OTHER INFORMATION, CONTINUED.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

          Exhibit No.     Description of Exhibit                  Reference
          -----------     ----------------------                  ---------

               1          October 22, 1998 determination by       Filed Herewith
                          Nasdaq Listing Qualifications Panel

               2          October 27, 1998 press release of       Filed Herewith
                          the Company relating to Nasdaq
                          Determination


          (b)  Reports on 8-K:

               No  reports  on Form 8-K were  filed by the  Company  during  the
               quarter ended October 2, 1998, except for a Form 8-K Report dated
               August 3, 1998 reporting certain information under Item 5.

                                       15
<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.


                              COMPUTONE CORPORATION


Date: June 30, 1999           By:  \s\ Perry J. Pickerign
                                   ----------------------
                                   Perry J. Pickerign
                                   President and Chief Executive Officer
                                   (Principal Operating Officer)


                              By:  \s\ Keith H. Daniel
                                   -------------------
                                   Keith H. Daniel
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

<PAGE>

                                  EXHIBIT INDEX


Exhibit Number    Description                                     Reference
--------------    -----------                                     ---------


      1           October 22, 1998 determination by               Filed Herewith
                  Nasdaq Listing Qualifications Panel


      2           October 27, 1998 press release of               Filed Herewith
                  the Company relating to Nasdaq
                  Determination