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

                                   FORM 10-QSB

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


     For the quarterly period ended January 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 registrant as specified in its charter)


<TABLE> 
<CAPTION> 
                                Delaware                                                      23-2472952
---------------------------------------------------------------------------    -------------------------------------------
<S>                                                                            <C>
(State or other jurisdiction of  incorporation or organization)                 (IRS Employer Identification Number)

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

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



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 CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,255,952 shares of common stock as
of February 9, 1998.

Transitional Small Business Disclosure Format (check one):   Yes      No X
                                                                 ----    -
<PAGE>
 
                                      INDEX

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements:


         Consolidated Balance Sheets as of  January 2, 1998
         and April 4, 1997                                                  3


         Consolidated Statements of Operations for the three months
         ended January 2, 1998 and January 3, 1997                          4


         Consolidated Statements of Operations for the nine months
         ended January 2, 1998 and January 3, 1997                          5


         Consolidated Statements of Cash Flows for the nine months
         ended January 2, 1998 and January 3, 1997                          6


         Notes to Consolidated Financial Statements                         7


Item 2.  Management's Discussion and Analysis or Plan of Operations for the  
         three and nine months ended January 2, 1998                        8



                  PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                 12


Item 2.  Changes in Securities                                             12


Item 3.  Defaults Upon Senior Securities                                   12


Item 4.  Submission of Matters to a Vote of Security Holders               12


Item 5.  Other Information                                                 13


Item 6.  Exhibits and Reports on Form 8-K                                  13


Signatures                                                                 14

Exhibits Index                                                             15

                                       2
<PAGE>
 
                         PART I  FINANCIAL INFORMATION


Item 1. Financial Statements

                             Computone Corporation
                          Consolidated Balance Sheets
             (in thousands except par value and number of shares)

<TABLE> 
<CAPTION> 


                                                           January 2, 1998             April 4, 1997
                                                           ---------------             -------------
                                                             (unaudited)
<S>                                                        <C>                         <C> 
ASSETS
Current assets:
    Cash and cash equivalents                                  $     14                    $     88
    Receivables, net                                              2,166                       1,896
    Inventories, net                                              4,278                       4,600
    Prepaid expenses and other                                      282                         170
                                                               --------                    --------
Total current assets                                              6,740                       6,754
                                                                                 
Property, equipment and improvements, net                           466                         276
                                                                                 
Intangible assets, net                                              600                         655
                                                                                 
Other                                                                28                          90
                                                               --------                    --------
Total assets                                                   $  7,834                    $  7,775
                                                               ========                    ========
LIABILITIES AND STOCKHOLDERS' EQUITY                                             
Current liabilities:                                                             
    Accounts payable, trade                                    $  1,794                    $  2,647
    Accrued liabilities:                                                         
         Payroll                                                     88                         112
         Prepaid sales                                                0                           9
         Professional fees                                           63                         171
         Other                                                      397                         439
   Line of credit                                                   663                          --
   Notes payable to stockholders                                    350                         250
   Current maturities of long term debt                              89                         603
                                                               --------                    --------
Total current liabilities                                         3,444                       4,231
                                                                                 
Notes payable to stockholders                                       120                         120
                                                                                 
Long term debt, less current maturities                             129                          --
                                                               --------                    --------
Total liabilities                                                 3,693                       4,351
                                                                                 
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; 7,255,633 and 6,712,074 shares outstanding         75                          67
  Additional paid in capital                                     45,043                      43,031
  Accumulated deficit                                           (40,977)                    (39,674)
                                                               --------                    --------
Total stockholders' equity                                        4,141                       3,424
                                                               --------                    --------
Total liabilities and stockholders' equity                     $  7,834                    $  7,775
                                                               ========                    ========
</TABLE> 


       See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>
 
ITEM 1. Financial Statements (continued)


                                            Computone Corporation
                                    Consolidated Statements of Operations
                                   (in thousands except per share amounts)
                                                 (unaudited)

<TABLE> 
<CAPTION> 
                                                                         Three Months Ended
                                                              January 2, 1998           January 3, 1997
                                                           -------------------        ------------------- 
<S>                                                        <C>                        <C> 
Revenues:
     Product sales                                                 $  1,863                  $  3,477
                                                                                     
Expenses:                                                                            
     Cost of products sold                                            1,824                     1,945
     Selling, general and administrative                              1,338                     1,090
     Product development                                                304                       312
                                                                   --------                  --------
                                                                      3,466                     3,347
                                                                   --------                  --------
                                                                                     
Operating income (loss)                                              (1,603)                      130
                                                                                     
Other income (expense):                                                              
     Other, net                                                         (50)                       23
     Interest expense                                                   (41)                      (27)
                                                                   --------                  --------
                                                                                     
Income (loss) before income taxes                                    (1,694)                      126
                                                                                     
Provision for income taxes                                              --                        --
                                                                   --------                  --------
                                                                                     
Net income (loss)                                                  $ (1,694)                 $    126
                                                                   ========                  ========
                                                                                     
Net income (loss) per share - basic                                   (0.22)                     0.02
                                                                                     
Net income (loss) per share - diluted                                 (0.22)                     0.02
                                                                                     
Shares used in computing net income (loss)  per share - basis         7,672                     6,848
                                                                                     
Shares used in computing net income (loss)  per share - dilutive      7,672                     6,848
</TABLE> 




       See accompanying notes to the consolidated financial statements.

                                       4
<PAGE>

ITEM 1.  Financial Statements (continued)
 
                             Computone Corporation
                     Consolidated Statements of Operations
                    (in thousands except per share amounts)
                                  (unaudited)


<TABLE> 
<CAPTION> 
                                                                                    Nine Months Ended
                                                                      January 2, 1998                 January 3, 1997   
                                                                    ------------------               ------------------  
<S>                                                                 <C>                              <C> 
Revenues:                                                                                                               
     Product sales                                                             $ 8,868                $          10,006  
                                                                                                                         
Expenses:                                                                                                                
     Cost of products sold                                                       6,054                            5,856  
     Selling, general and administrative                                         3,377                            2,824  
     Product development                                                           872                              851  
                                                                    ------------------               ------------------  
                                                                                10,303                            9,531  
                                                                    ------------------               ------------------ 
                                                                                                                        
Operating income (loss)                                                         (1,435)                             475  
                                                                                                                         
Other income (expense):                                                                                                  
     Other, net                                                                    247                               28  
     Interest expense                                                             (115)                             (94) 
                                                                    ------------------               ------------------ 
                                                                                                                        
Income (loss) before income taxes                                               (1,303)                             409  
                                                                                                                        
Provision for income taxes                                                          --                               --
                                                                    ------------------               ------------------ 
                                                                                                                        
Net income (loss)                                                              $(1,303)               $             409  
                                                                    ==================               ================== 
                                                                                                                        
                                                                                                                        
Net income (loss) per share - basic                                              (0.18)                            0.06  
                                                                                                                         
Net income (loss) per share - diluted                                            (0.18)                            0.06  
                                                                                                     
Shares used in computing net income (loss)  per share - basis                    7,362                            6,848   
                                                                                                     
Shares used in computing net income (loss)  per share - dilutive                 7,362                            6,848    

</TABLE> 



       See accompanying notes to the consolidated financial statements.

                                       5
<PAGE>
 
                                           Computone Corporation

                                   Consolidated Statements of Cash Flows

                                              (in thousands)

<TABLE> 
<CAPTION> 
                                                                             For the nine months ended
                                                                        -------------------------------------
                                                                        January 2, 1998       January 3, 1997
                                                                        ---------------       ---------------
                                                                                     (unaudited)
<S>                                                                     <C>                   <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Income  (loss) from continuing operations                                   $(1,303)          $    409
  Adjustments to reconcile income (loss) from continuing operations
     to net cash provided by (used in) continuing operations:
       Depreciation and amortization                                              389                515
       Provision for possible losses                                              154                 70
       Changes in current assets and current liabilities:
          Accounts receivables                                                   (363)            (1,064)
          Inventories                                                             261               (522)
          Prepaid expenses and other                                             (112)                 4
          Accounts payable and accrued liabilities                             (1,035)              (229)
                                                                              -------            -------
Net cash (used in) operating activities                                        (2,009)              (817)
                                                                              -------            -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   (Increase) decrease in other assets                                             63                 (3)
   Capitalization of software costs                                              (185)              (105)
   Capital expenditures                                                           (88)               (86)
                                                                              -------            -------
Net cash (used in) investing activities                                          (210)              (194)
                                                                              -------            -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of debt  net                                                        (500)              (429)
  Net borrowings under lines of credit                                            663                --                             

  Net borrowings under term loan                                                  180                --                             

  Net borrowings from affiliates                                                   35                250
  Issuance of common stock                                                      1,742              1,418
  Exercise of common stock options and warrants                                    25                  4
                                                                              -------            -------
Net cash provided by financing activities                                       2,145              1,243
                                                                              -------            -------
Net decrease in cash and cash equivalents                                         (74)               232
Cash and cash equivalents, beginning of period                                     88                143
                                                                              -------            -------
Cash and cash equivalents, end of period                                      $    14            $   375
                                                                              =======            =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    Cash paid during the year for:
        Interest                                                              $   115                 94
</TABLE> 

       See accompanying notes to the consolidated financial statements.



                                       6

<PAGE>
 
                              COMPUTONE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIS OF PRESENTATION

         The consolidated financial statements included in this Form 10-QSB 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 consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form 10-KSB for the year
ended April 4, 1997.

         The consolidated financial statements presented herein, as of January
2, 1998 reflect in the opinion of management, all adjustments, consisting only
of normal recurring accruals, 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. INVENTORIES

         Inventories, net of a reserve for obsolete, excess and non-salable
items, consisted of the following at January 2, 1998 and April 4, 1997 (in
thousands):

                                       January 2, 1998         April 4, 1997
                                       ---------------         -------------
         Finished goods                $         1,375         $        1,740
         Work in progress                          687                    725
         Raw materials                           2,216                  2,135
                                       ---------------        ----------------
                                       $         4,278         $        4,600
                                       ===============        ================

3. INCOME PER SHARE

         Earnings per share ("EPS") is computed based on the weighted average
number of common shares, and common stock options and warrants (unless
conversion would have an antidilutive effect on EPS) (using the treasury
method), in accordance with the requirements of FASB Statement of Standards No.
128 Earnings per Share. For purposes of computing EPS, for all periods presented
the numerator is represented by net income or net loss for each respective
period; the denominator for computing basic EPS is represented by the weighted
average number of shares outstanding for each respective period; the denominator
for computing diluted EPS for fiscal 1998 periods presented is the same number
as used in computing basic EPS as the effects of conversion would be
antidilutive.

4. INCOME TAXES

         Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No.109 (SFAS 109), "Accounting for
Income Taxes". Management 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.

5. DEBT

         On June 20, 1997, the Company entered into a financing arrangement with
Heller Financial to provide a term loan in the amount of $254,000, which is
collateralized by the Company's inventory, and a line of credit of up to
$2,500,000, based on the available borrowing base, collateralized by the
Company's accounts receivable. The term loan bears interest at a rate of prime
plus 1.50% and is payable in monthly installments of $4,233 plus accrued
interest for the first thirty-five months with a final monthly payment in the
amount of the entire then outstanding principal plus accrued interest. The line
of credit bears interest at a rate of prime plus 1.25%. At January 2, 1998, the
balance outstanding on the term loan was approximately $179,562 and the balance
under the line of credit was approximately $662,894. The available borrowings
under the line of credit at January 2, 1998 were $102,356. The Company also paid
in full, on June 20, 1997, its outstanding balance to NationsBank, N.A. in the
amount of $447,000.

                                       7
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

RESULTS OF OPERATIONS

For the Three Months Ended January 2, 1998 Compared to the Three Months Ended
January 3, 1997

         The Company reported an operating loss of $1,603,000 and net loss of
$1,694,000 for the three months ended January 2, 1998 compared to operating
income of $130,000 and net income of $126,000 for the comparable three months of
the prior fiscal year. The decrease in income is due primarily to working
capital shortages and subsequent payment delays to the Company's major
outsourcing vendors during the first quarter of the fiscal year which resulted
in the Company's accounts being placed on credit hold with these vendors. After
the Company's accounts were again in good standing, one of these vendors was
unable to procure certain long lead time components in a timely enough manner to
provide the Company with sufficient products to meet its open orders during the
second quarter. The current period's decrease in income is due primarily to the
continued effects of the product mix shortages, the lingering effects of the
lost sales opportunities during the second quarter resulting from the product
shortages and numerous one-time or non-recurring expenses amounting to
approximately $600,000.

         Product sales revenue for the quarter ended January 2, 1998 total
approximately $1,863,000 compared to $3,477,000 for the comparable quarter of
the prior fiscal year, a decrease of 46%. This change in product sales revenue
is attributable to the continued effects of the product mix shortages and the
lingering effects of lost sales opportunities during the second quarter
resulting from the product shortages. A significant increase in sales to major
accounts was offset by decreases in sales to North American distributors, OEM's,
VAR's and international customers.

         Cost of products sold for the quarter ended January 2, 1998 amounted to
$1,824,000 or 98% of product sales revenues compared to $1,945,000 or 56% for
the comparable quarter of the prior year. The decrease in cost of products sold
is attributable to the decrease in product sales revenue. However, the increase
in cost of goods sold as a percentage of revenues is attributable to the
Company's sales of remote access products with a higher cost and the reduction
of capitalized overhead costs resulting from the Company's move toward greater
outsourcing of its product assembly.

         Selling, general and administrative expenses amounted to $1,338,000 or
72% of product sales revenue for the three months ended January 2, 1998 compared
to $1,090,000 or 31% of product sales revenue for the comparable three months of
the prior fiscal year. The increase in expenses during the quarter ended January
2, 1998 compared to the same period of the prior fiscal year is attributable to
the Company's relocation to its new facility, an increase in professional fees
and the Company's annual shareholders' meeting and related open house. The
Company experienced an increase in selling related costs associated with the
Company's efforts to sell the remote access products that were shipped to a
major customer during last fiscal year (and accounted for as a consignment) and
returned to the Company during the second quarter of this fiscal year. The
Company implemented additional sales promotions in an effort to sell the
remaining products associated with this transaction along with other products
that were not affected by delivery delays.

         Product development expenses amounted to $304,000 or 16% of product
sales revenue for the three months ended January 2, 1998 compared to $312,000 or
9% of product sales revenue for the comparable three month period of the prior
fiscal year.

For the Nine Months Ended January 2, 1998 Compared to the Nine Months Ended
January 3, 1997

         The Company reported an operating loss of $1,435,000 and net loss of
$1,303,000 for the nine months ended January 2, 1998 compared to operating
income of $475,000 and net income of $409,000 for the comparable nine months of
the prior fiscal year. The decrease in income is due primarily to working
capital shortages and subsequent payment delays to the Company's major
outsourcing vendors during the first quarter of this fiscal year which resulted
in the Company's accounts being placed on credit hold with these vendors. After
the Company's accounts were again in good standing, one of these vendors was
unable to procure certain long lead time components in a timely enough manner to
provide the Company with sufficient products to meet its open orders during the
second quarter. The current period's decrease in income is due primarily to the
continued effects of the product mix shortages, the lingering effects of lost
sales opportunities during the second quarter resulting from the product
shortages an numerous one-time or non-recurring expenses amounting to
approximately $600,000.

                                       8
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

For the Nine Months Ended January 2, 1998 Compared to the Nine Months Ended
January 3, 1997

         Product sales revenue for the nine months ended January 2, 1998 totaled
approximately $8,868,000 compared to $10,006,000 for the comparable nine months
of the prior fiscal year, a decrease of 11%. This decrease in product sales
revenue is attributable to the continued effects of the product mix shortages
and the lingering effects of lost sales opportunities during the second quarter
resulting from the product shortages. Significant increases in sales to major
accounts and OEM's were offset by decreases in sales to North American
distributors, VAR's and international customers.

         Cost of products sold for the nine months January 2, 1998 amounted to
$6,054,000 or 68% of product sales revenues compared to $5,856,000 or 59% for
the comparable nine months of the prior year. The increase in cost of products
sold is attributable to the reduction of capitalized overhead costs, resulting
from the Company's move toward greater outsourcing of its product assembly,
along with an increase in fixed manufacturing overhead expenses.

         Selling, general and administrative expenses amounted to $3,377,00 or
38% of product sales revenue for the nine months ended January 2, 1998 compared
to $2,824,000 or 28% of product sales revenue for the comparable nine months of
the prior fiscal year. The increase in expenses during the nine months ended
January 2, 1998 compared to the same period of the prior fiscal year is
attributable to the Company's relocation to its new facility, an increase in
professional fees and the Company's annual shareholders' meeting and related
open house. The Company experienced an increase in selling related costs
associated with the Company's effort to sell the remote access products that
were shipped to a major customer during last fiscal year (and accounted for as a
consignment) and returned to the Company during the second quarter of this
fiscal year. The Company implemented additional sales promotions in an effort to
sell the remaining products associated with this transaction along with other
products that were not affected by delivery delays.

         Product development expenses amounted to $872,000 or 10% of product
sales revenue for the nine months ended January 2, 1998 compared to $851,000 or
9% of product sales revenue for the comparable nine month period of the prior
fiscal year.

         The Company recorded $132,000 in net non-operating income for the nine
months ended January 2, 1998. This non-operating income was the net of $313,000
in investment income resulting from the Company's sales of shares in another
company's initial public offering, $115,000 in interest expense, the write-off
of $46,000 in prepaid license fees and $15,000 in one-time late charges. This
total compares to $66,000 in net non-operating expenses, predominately interest
expense, during the same nine month period fiscal year.

LIQUIDITY

         In response to the Company's working capital needs, on June 20, 1997,
the Company entered into a funding arrangement with Heller Financial to provide
a term loan in the amount of $254,000, which is collateralized by the Company's
inventory, and a line of credit of up to $2,500,000, based on the available
borrowing base, collateralized by the Company's accounts receivable. As of
January 2, 1998, $102,356 was available for borrowing under the line of credit.
The Company believes that the working capital provided by Heller Financial,
together with anticipated funds expected to be generated by operating
activities, should be reasonably sufficient to cover operating expenses to be
incurred during the remainder of fiscal 1998. Cash commitments for
non-cancelable long-term operating real and personal property leases during
fiscal 1998 are approximately $262,000. The Company has no plans for any major
capital improvements. Relationships with major vendors are satisfactory,
although the Company is on a "Cash On Delivery" status with a significant number
of raw materials vendors.

                                       9
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY (CONTINUED)

         Cash used in continuing operations amounted to $2,009,00 for the nine
months ended January 2, 1998 compared to cash used in continuing operations of
$817,000 for the comparable nine months ended January 3, 1997. The increase in
cash used in continuing operations compared to the prior year fiscal period
reflects primarily the loss from continuing operations. Accounts payable and
accrued liabilities decreased by $1,035,000 as a result of the working capital
that was made available by the line of credit and private placement proceeds.
Accounts receivable increased by approximately $363,000, prepaid expenses
increased by $112,000 and inventories decreased by $261,000.

         On October 11, 1997, the Company completed the relocation to its new
headquarters in Alpharetta, Georgia. The new facility is located in a new office
park in the suburbs of Atlanta. The Company has a ten-year lease on 22,000
square feet of a new 40,000 square foot one-story brick building and expects to
save approximately $170,000 per year in total occupancy costs compared to the
Company's prior lease arrangement.

         Cash used in investing activities amounted to $210,000 for the nine
month ended January 2, 1998 compared with $194,000 used in financing activities
for the comparable nine months of the prior fiscal year. This increase from the
same period of the prior fiscal year can be attributable to the decrease in
other assets along with an increase in capitalized software development costs.

         Cash provided by financing activities during the nine months ended
January 2, 1998 was $2,145,000 compared to $1,243,000 of cash provided by
financing activities for the nine months ended January 3, 1997. This change is
attributable to the Company's aforementioned new financing arrangement with
Heller Financial along with the proceeds from the private placement that was
completed in mid-October.

         Working capital amounted to $3,296,000 at January 2, 1998 an increase
of $773,000, since April 4, 1997. The ratio of current assets to current
liabilities at January 2, 1998 was 1.96 to 1.00 compared to 1.60 to 1.00 at
April 4, 1997.

OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998

SALES BY PRODUCT LINE

         The Company continues to experience growth in its sales of remote
access products following its decision to strategically aligned its sales focus
towards this marketplace versus sales of input\output devices. The sales
information for the second quarter of fiscal 1998 ended January 2, 1998 is
listed below. Management is fairly optimistic that the level of sales of remote
access products as a percentage of net revenue will continue to increase over
the remainder of the current fiscal year and should approach the level of 50% of
net revenues by the end of the fiscal year.

<TABLE> 
<CAPTION> 
                             Remote Access Servers                Input\Output Devices             Total
                        Sales $ (000's)     % of Total       Sales $ (000's)    % of Total     Sales $ (000's)   % of Total
                        ---------------    -----------       ---------------    ----------     ---------------   ----------
<S>                     <C>                    <C>                  <C>             <C>            <C>               <C>
Third Quarter:
         98              $  782                42%                  $1,081          58%            $ 1,863           100%
         97               1,344                39                    2,133          61               3,477           100

First Nine Months:
         98              $4,142                47%                  $4,726          53%            $ 8,868           100%
         97               3,426                34                    6,580          66              10,006           100
</TABLE> 

                                       10
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998

LIQUIDITY AND CAPITAL RESOURCES

         During the three months ended January 2, 1998, the Company initiated a
private placement of 500,000 shares of Common Stock. As of January 2, 1998, the
Company raised $934,400 and an additional $724,800 through October 16, 1997. The
proceeds from this private placement are to be used to fund new product
development and provide additional working capital. The proceeds from the
private placement along with the working capital provided by Heller Financial,
and the funds expected to be generated by operating activities, should be
reasonably sufficient to cover operating expenses to be incurred during fiscal
1998. Cash commitments for non-cancelable long-term operating real and personal
property leases during fiscal 1998 are approximately $262,000. The Company has
no plans for any major capital improvements.

         The Company expects continued growth in the sales of its remote access
products. At January 2, 1998, the Company had open orders of approximately
$89,000. Management believes that the additional funding raised through the
private placement along with the funding available from the Heller Financial
relationship should provide the Company with the working capital required to
grow the Company through new product development and marketing activities.

         The Company's management believes that the financial results for the
third quarter that ended on January 2, 1998 was not indicative of the
anticipated financial results for the fourth quarter of this fiscal year. The
Company has resolved the problems that it had with its major outsourcing vendor
and has subsequently entered into a relationship directly with a manufacturer of
the products that the outsourcing vendor had manufactured. As of February 12,
1998, the Company is in receipt of purchase orders from a major customer
totaling in excess of $2,000,000 for products that the Company believes it will
be able to ship during the fourth quarter of this fiscal year. Management
believes that sales to VAR's and international customers are on-track to exceed
sales to these customers during the third quarter. The Company has sufficient
inventory available to meet these anticipated increases in sales.

                                       11
<PAGE>
 
                          PART II - OTHER INFORMATION


ITEM 1.           LEGAL PROCEEDINGS

                  Not Applicable


ITEM 2.           CHANGES IN SECURITIES

                  Not Applicable


ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

                  Not Applicable.


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

                  The Company held, on November 25, 1997, its Annual Meeting of
                  Stockholders at which the following actions were taken:

                  1. Four directors were elected to serve until the 1998 Annual
                  Meeting of Stockholders and until their successors are
                  elected:

                  Name                       For                   Withheld
                  ----                       ---                   --------
                  Thomas J. Anderson         3,765,267             1,000
                  Richard A. Hansen          3,765,267             1,000
                  John D. Freitag            3,765,267             1,000
                  William C. Lovely          3,765,267             1,000

                  2. A proposal to adopt the Company's Equity Incentive Plan for
                  officers, directors, employees and consultants was approved:

                  For                 Against                    Abstain
                  ---                 -------                    -------
                  3,757,487           7,280                       1,500

                  3. A proposal to amend the Company's Certificate of
                  Incorporation to reduce the number of shares of Common Stock
                  the Company is authorized to issue from 50,000,000 shares to
                  25,000,000 was approved:

                  For                Against                    Abstain
                  ---                -------                    -------
                  3,764,054          1,214                       1,000

                  4. BDO Seidman, LLP was elected as independent public
                  accountants for the Company for its 1998 fiscal year:

                  For                Against                    Abstain
                  ---                -------                    -------
                  3,752,085          1,172                      13,010

                                       12
<PAGE>
 
                           PART II - OTHER INFORMATION



ITEM 5.           OTHER INFORMATION

                  Not Applicable.


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  a.  Exhibit Number    Description of Exhibit
                      --------------    ----------------------
                      3.1(i)            Restated Certificate of 
                                        Incorporation of Registrant as amended

                      27                Financial Data Schedule

                  b. On November 12, 1997, the filed Form 8-K reporting that on
                  October 16, 1997, the Company sold an aggregate of 187,500
                  shares of common stock, par value $.01, for an aggregate
                  purchase price of $600,000. The shares were placed through
                  Pennsylvania Merchant Group Ltd., which received a commission
                  in the aggregate amount of $37,500.

                  The Company sold the shares to one investor, The Tailwind Fund
                  Ltd. Pursuant to the exemption from registration afforded by
                  Regulation S under the Securities Act of 1933, as emended.

                                       13
<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: February 13, 1998            By:  \s\ Thomas J. Anderson
                                        ----------------------
                                        President and Chief Executive Officer
                                        (Principal Operating Officer)


                                   By:  \s\ Gregory A. Alba
                                        -------------------
                                        Gregory A. Alba
                                        Vice President of Finance &
                                          Administration and
                                          Chief Financial Officer
                                        (Principal Accounting Officer)

                                       14
<PAGE>
 
                                  EXHIBIT INDEX

Exhibit Number      Description of Exhibit

3.1 (i)             Restated Certificate of Incorporate of Registrant as amended

27                  Financial Data Schedule

                                       15