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 January 1, 1999


[ ]  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  [ ]       No [X]


                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  [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:  7,734,444 shares of common stock on
February 4, 1999.

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 January 1, 1999 and April 3, 1998               3

          Statements of Operations for the three months ended
          January 1, 1999 and January 2, 1998 As Restated (Note 2)             4

          Statements of Operations for the nine months ended
          January 1, 1999 and January 2, 1998 As Restated (Note 2)             5

          Statements of Cash Flows  for the nine months ended
          January 1, 1999 and January 2, 1998 As Restated (Note 2)             6

          Notes to Financial Statements                                        7


ITEM 2.   Management's Discussion and Analysis or Plan of Operation
          for the three and nine months ended January 1, 1999 compared
          to the three and nine months ended January 2, 1998                  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>
                                                                 January 1, 1999   April 3, 1998
                                                                 ---------------   -------------
                                                                   (unaudited)
ASSETS
Current assets:
<S>                                                                 <C>              <C>
    Cash and cash equivalents                                       $     53         $    146
    Receivables, net of allowance for doubtful
            accounts of $590 at January 1, 1999
            and $668 at April 3, 1998                                  1,437            2,540
    Inventories, net                                                   2,050            3,752
    Prepaid expenses and other                                            80              102
                                                                    --------         --------
Total current assets                                                   3,620            6,540

Property, equipment and improvements, net                                574              594

Intangible assets, net                                                   440              506

Advance (See Note 7)                                                     450               --

Other                                                                     40               27
                                                                    --------         --------

TOTAL ASSETS                                                        $  5,124         $  7,667
                                                                    ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable, trade                                         $  2,605         $  2,600
    Accrued liabilities:
         Payroll                                                          78               97
         Deferred sales                                                  353              523
         Professional fees                                                16              153
         Other                                                           563              504
   Line of credit                                                        432            1,252
   Notes payable to stockholders                                         450              460
   Current maturities of long-term debt                                   25               76
                                                                    --------         --------
Total current liabilities                                              4,522            5,665

Notes payable to stockholders                                            565               10

Long-term debt, less current maturities                                   --              116
                                                                    --------         --------

Total liabilities                                                      5,087            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; 7,734,444 and 7,382,622 shares outstanding              77               74
  Additional paid-in capital                                          45,967           45,062
  Accumulated deficit                                                (46,007)         (43,260)
                                                                    --------         --------
Total stockholders' equity                                                37            1,876
                                                                    --------         --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $  5,124         $  7,667
                                                                    ========         ========
</TABLE>

   The accompanying notes are an integral part of these 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
                                               ---------------------------------
                                               January 1, 1999   January 2, 1998
                                               ---------------   ---------------
                                                                   As Restated
                                                                     (Note 2)

Net sales                                          $  1,922          $  2,569
                                                   --------          --------
Expenses:
     Cost of products sold                            1,212             2,118
     Selling, general and administrative              1,109             1,338
     Product development                                518               304
                                                   --------          --------
                                                      2,839             3,760
                                                   --------          --------

Operating loss                                         (917)           (1,191)

Other  income (expense):
     Other income (expense)                              --               (50)
     Interest expense - affiliates                      (23)              (12)
     Interest expense - other                           (37)              (29)
                                                   --------          --------

Loss before income taxes                               (977)           (1,282)

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

Net loss                                           $   (977)         $ (1,282)
                                                   ========          ========
Loss per common share:
            Basic                                  $  (0.13)         $  (0.17)
                                                   ========          ========
            Diluted                                $  (0.13)         $  (0.17)
                                                   ========          ========

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

                                       4
<PAGE>
                        PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

                                                     Nine Months Ended
                                              ---------------------------------
                                              January 1, 1999   January 2, 1998
                                              ---------------   ---------------
                                                                  As Restated
                                                                    (Note 2)
Net sales                                         $  7,574          $  8,809
                                                  --------          --------
Expenses:
     Cost of products sold                           5,092             6,043
     Selling, general and administrative             3,635             3,377
     Product development                             1,475               872
                                                  --------          --------
                                                    10,202            10,292
                                                  --------          --------

Operating loss                                      (2,628)           (1,483)

Other income (expense):
     Other income                                        2               247
     Interest expense - affiliates                     (51)              (36)
     Interest expense - other                          (70)              (79)
                                                  --------          --------

Loss before income taxes                            (2,747)           (1,351)

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

Net loss                                          $ (2,747)         $ (1,351)
                                                  ========          ========

Loss per common share:
            Basic                                 $  (0.36)         $  (0.18)
                                                  ========          ========
            Diluted                               $  (0.36)         $  (0.18)
                                                  ========          ========

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

                                       5
<PAGE>

                            PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                            Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                      Nine Months Ended
                                                              --------------------------------
                                                              January 1, 1999  January 2, 1998
                                                              ---------------  ---------------
                                                                                 As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:                                              (Note 2)
<S>                                                              <C>              <C>
  Net loss from operations                                       $ (2,747)        $ (1,351)
  Adjustments to reconcile loss from operations
     to net cash provided by (used in) operations:
       Depreciation and amortization                                  336              389
       Provision for uncollectible accounts                           110              154
       Provision for inventory reserve                                 70              100
       Changes in current assets and current liabilities:
          Accounts receivable                                         993             (304)
          Inventories                                               1,632              150
          Prepaid expenses and other                                   22             (112)
          Accounts payable and accrued liabilities                   (275)          (1,035)
                                                                 --------         --------
Net cash provided by (used in) operations                             141           (2,009)
                                                                 --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Decrease in other assets                                            --               63
   Advance (See Note 7)                                              (450)              --
   Capitalization of software costs                                  (136)            (185)
   Capital expenditures                                              (114)             (88)
                                                                 --------         --------
Net cash used in investing activities                                (700)            (210)
                                                                 --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings from affiliates                                          545               35
  Repayment of debt - net                                            (167)            (500)
  Net borrowings under term loan                                       --              180
  Net (repayments) borrowings under lines of credit                  (820)             663
  Exercise of common stock options and warrants                         3               25
  Issuance of common stock                                            905            1,742
                                                                 --------         --------
Net cash provided by financing activities                             466            2,145
                                                                 --------         --------

Net decrease in cash and cash equivalents                             (93)             (74)
Cash and cash equivalents, beginning of period                        146               88
                                                                 --------         --------
Cash and cash equivalents, end of period                         $     53         $     14
                                                                 ========         ========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
        Interest                                                 $     70         $    115
</TABLE>

   The accompanying notes are an integral part of these 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 a
Securities and Exchange Commission ("SEC")  investigation,  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 Quarterly Report have
been  prepared  by  the  Company,  without  audit,  pursuant  to the  rules  and
regulations of the SEC. 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
Annual Report for its fiscal year ended April 3, 1998.

     The financial statements presented herein as of January 1, 1999 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  January  2,  1998  (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 FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)

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

     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:


                                        Three Month Period Ended January 2, 1998
                                        ----------------------------------------
                                            As Reported          As Restated
                                            -----------          -----------
                                          (In thousands except per share amount)
Revenues                                      $  1,863             $  2,569
Operating Income (Loss)                       $ (1,603)            $ (1,191)
Net Income (Loss)                             $ (1,694)            $ (1,282)


                                         Nine Month Period Ended January 2, 1998
                                         ---------------------------------------
                                            As Reported          As Restated
                                            -----------          -----------
                                          (In thousands except per share amount)
Revenues                                      $  8,868             $  8,809
Operating Income (Loss)                       $ (1,435)            $ (1,483)
Net Income (Loss)                             $ (1,303)            $ (1,351)
Basic and Diluted Earnings (Loss) Per Share   $ ( 0.18)            $ ( 0.18)

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 nine months ended
January 1, 1999 was to increase  revenue by  approximately  $80,000 and decrease
operating loss by approximately $30,000.

     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.

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 $738,000 and $851,000 at January 1, 1999 and April 3, 1998, respectively.

                                       8
<PAGE>

                              COMPUTONE CORPORATION
                    NOTES TO FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)

3.   INVENTORIES, CONTINUED
     ----------------------

     Inventories,  net of a reserve for obsolete,  excess and non-salable items,
consisted of the following at January 1, 1999 and April 3, 1998 (in thousands):

                                         January 1, 1999    April 3, 1998
                                         ---------------    -------------

    Finished goods                           $     785         $   1,375
    Work in progress                               612               533
    Raw materials                                  653             1,844
                                             ---------         ---------
                                             $   2,050         $   3,752
                                             =========         =========

5.   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  ($0.13)  for the three  months  ended  January 1, 1999 and
($0.17) for the three  months ended  January 2, 1998.  The basic and diluted EPS
for the nine  months  ended  January 1, 1999 is ($0.36) and ($0.18) for the nine
months ended January 2, 1998.  For purposes of computing  diluted EPS during the
three and nine month  periods ended  January 1, 1999,  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.

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 at a rate of
prime plus  1.50%,  which was  collateralized  by the  Company's  inventory.  In
addition,  a  line  of  credit  agreement  existed  with  the  lender  for up to
$2,500,000  and was based on the  available  borrowing  base, at a rate of prime
plus 1.25% which was collateralized by the Company's accounts receivable.

                                       9
<PAGE>

                              COMPUTONE CORPORATION
                    NOTES TO FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)

7.   DEBT, CONTINUED
     ---------------

     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  due to the  Company's  violation  of the
minimum  net  worth  covenant.  The  Company  and  the  lender  entered  into  a
forbearance agreement while the Company sought to find another lender.

     On November 17, 1998, the Company and a new lender entered into a financing
arrangement  which  provides  for a line of  credit up to  $1,800,000  ($432,000
outstanding at January 1, 1999) and is based on the available borrowing base, at
rate of prime plus 2.00%. A portion of the proceeds from this line of credit was
used to retire the debt borrowed  under the June 20, 1997  financing  agreement.
The  line of  credit  is  primarily  collateralized  by the  Company's  accounts
receivable and inventory. The financing arrangement contains various affirmative
and negative  covenants and, as of January 1, 1999, the Company was in violation
of the minimum  consolidated  tangible  net worth  covenant  and the minimum net
working  capital  covenant.  The company has  obtained  from the lender a waiver
through March 31, 1999 regarding compliance with these two covenants.

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 have  agreed in  principle  on a  renegotiation  of
certain terms of the  Agreement.  Under the terms  negotiated,  members of Ladia
would receive  approximately 40% of the ownership interests of LCTI. The Company
cannot currently predict when a revised definitive Agreement will be executed or
when the transactions contemplated by the Agreement as renegotiated in principle
will be consummated.

     Under  the   renegotiated   terms,  it  is  contemplated   that  would  use
commercially reasonable efforts to raise additional equity financing of up to $4
million for Ladia.  During the nine months  period ending  January 1, 1999,  the
Company made available to Ladia $450,000 in proceeds from the private  placement
of Common Stock by the Company,  and has made an additional  $250,000  available
subsequent to January 1, 1999. 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 NINE MONTHS ENDED  JANUARY 1, 1999 COMPARED TO THE THREE AND
          NINE MONTHS ENDED JANUARY 2, 1998.

SEE NOTE 2 IN ITEM 1 - RESTATEMENT OF FINANCIAL DATA

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

FOR THE THREE  MONTHS ENDED  JANUARY 1, 1999  COMPARED TO THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
JANUARY 2, 1998
---------------

     The Company  reported a loss from  operations for the quarter ended January
1, 1999 of $917,000 compared to a loss of $1,191,000 for the comparable  quarter
of the prior fiscal year. The Company's  operating  results for the three months
ended  January 1, 1999 were  favorably  affected by increased  gross  margins on
sales and decreased general and administrative expenses.

     Product  sales  revenue  for the  quarter  ended  January  1, 1999  totaled
approximately  $1,922,000  compared to $2,569,000 for the comparable  quarter of
the prior  fiscal year, a decrease of  $647,000,  or 25%.  This  decrease in net
product sales revenue is  attributable to lower sales to the Company's VAR's and
international customers.

     Cost of products  sold for the quarter  ended  January 1, 1999  amounted to
$1,212,000,  or 63% of product sales revenues versus $2,118,000, or 82%, for the
comparable quarter of the prior year. The decrease in cost of products sold as a
percentage  of  revenues  is   attributable   to  the  write-off  of  previously
capitalized  manufacturing  overhead  costs in the prior  fiscal year as well as
increased gross margins on sales to the Company's domestic customers.

     Selling, general and administrative expenses amounted to $1,109,000, or 58%
of product  sales  revenue,  for the three months  ended  January 1, 1999 versus
$1,338,000,  or 52%, for the  comparable  three months of the prior fiscal year.
The decrease in selling,  general and administrative expenses during the quarter
ended  January  1, 1999  versus  the same  period of the  prior  fiscal  year is
attributable to decreases in compensation  costs due to staff  reductions  which
were partially offset by increased legal costs.

     Product development expenses amounted to $518,000,  or 27% of product sales
revenue, for the three months ended January 1, 1999 versus $304,000, or 12%, 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 complete the Company's new product  release dates
for the current fiscal year.


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

FOR THE NINE MONTHS  ENDED  JANUARY 1, 1999  COMPARED  TO THE NINE MONTHS  ENDED
--------------------------------------------------------------------------------
JANUARY 2, 1998
---------------

     The Company reported a loss from operations for the nine month period ended
January 1, 1999 of $2,628,000  compared to a loss from  operations of $1,483,000
for the  comparable  period of the prior fiscal year.  The  Company's  operating
results  for the nine  month  period  ended  January  1, 1999  were  unfavorably
affected by depressed  sales volume,  and increased  general and  administrative
expenses and product development costs.

     Product  sales  revenue  for the nine month  period  ended  January 1, 1999
totaled  approximately  $7,574,000  compared to  $8,809,000  for the  comparable
period of the prior fiscal year, a decrease of $1,235,000, or 14%. This decrease
in product sales revenue is  attributable to the continued delay in the delivery
of new products,  reorganization of the Company's sales force to utilize more of
the distribution  channel and delay in the receipt of product from the Company's
suppliers due to the Company's working capital shortages.

                                       11
<PAGE>

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF  OPERATIONS  FOR THE
          THREE AND NINE MONTHS ENDED  JANUARY 1, 1999 COMPARED TO THE THREE AND
          NINE MONTHS ENDED JANUARY 2, 1998, CONT.

     Cost of  products  sold for the nine  month  period  ended  January 1, 1999
amounted to $5,092,000,  or 67% of product sales revenues versus $6,043,000,  or
69% of product sales revenues,  for the comparable period of the prior year. The
high dollar  volume of low margin sales to the  Company's  major  customer and a
reduction in sales  volumes were  substantially  offset by sales at higher gross
margins to the  Company's  other  customers  and a reduction in the write-off of
previously capitalized manufacturing overhead costs.

     Selling, general and administrative expenses amounted to $3,635,000, or 48%
of product sales revenue, for the nine month period ended January 1, 1999 versus
$3,377,000,  or 38%, for the  comparable  period of the prior  fiscal year.  The
increase in selling,  general and  administrative  expenses is  attributable  to
increases in legal costs, trade  shows/advertising  costs and bad debt expenses,
partially offset by a decrease in compensation costs due to staff reductions.

     Product  development  expenses  amounted to  $1,475,000,  or 19% of product
sales revenues, for the nine month period ended January 1, 1999 versus $872,000,
or 10%, 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 complete 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 has raised and continues to seek additional  equity capital
by offering for sale, to accredited  investors,  shares of the Company's  common
stock under Regulation D of the Securities Act of 1993. Management believes that
sufficient  funds can be raised 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), short-term debt ($907,000) and
investments in research and development  ($1,475,000 in the first nine months of
fiscal year 1999).  Relationships  with major vendors are satisfactory  although
the  Company  is on a "Cash On  Delivery"  status  with  several  raw  materials
vendors.  Of the  $907,000  outstanding  as of January  1,  1999,  approximately
$475,000 is due to related  parties,  the maturity of which the Company believes
can be extended as needed.

     On November 17, 1998, the Company and a new lender entered into a financing
arrangement  which  provides  for a line of  credit up to  $1,800,000  ($432,000
outstanding at January 1, 1999) and is based on the available borrowing base, at
rate of prime plus 2.00%. The line of credit is primarily  collateralized by the
Company's accounts receivable and inventory.  The financing arrangement contains
various  affirmative  and  negative  covenants  and, as of January 1, 1999,  the
Company was in violation of the minimum consolidated tangible net worth covenant
and the minimum net working capital covenant.  The company has obtained from the
lender a waiver  through  March 31,  1999  regarding  compliance  with these two
covenants.

     Cash provided by operations  amounted to $141,000 for the nine months ended
January 1, 1999 compared to cash used in  operations of $2,009,000  for the nine
months  ended  January 2, 1998.  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 $700,000 for the nine months
ended January 1, 1999 compared  with $210,000 used in financing  activities  for
the nine months ended January 2, 1998. This increase from the same period of the
prior fiscal year is attributable to funds raised from the private  placement of
common stock,  a  substantial  portion of which was used to fund an advance (See
Note 8 for further information).

                                       12
<PAGE>

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF  OPERATIONS  FOR THE
          THREE AND NINE MONTHS ENDED  JANUARY 1, 1999 COMPARED TO THE THREE AND
          NINE MONTHS ENDED JANUARY 2, 1998, CONT.


     Cash provided by financing  activities during the nine months ended January
1, 1999 was $466,000  versus  $2,145,000  for the nine months  ended  January 2,
1998. This decrease is partially due to the Company's repayments on the June 20,
1997 financing  arrangement  during the nine months ended January 1, 1999 versus
borrowings under that arrangement  during the nine months ended January 2, 1998.
In  addition,  issuance of common  stock was  $905,000 in the nine months  ended
January 1, 1999 versus  $1,742,000 in the nine months ended January 2, 1998 (See
Note 7).

     Working  capital  was a deficit  of  $902,000  at  January  1, 1999  versus
positive working capital of $875,000 at April 3, 1998, a decrease of $1,777,000.
The ratio of current  assets to current  liabilities at January 1, 1999 was 0.80
to 1.00 compared to 1.15 to 1.00 at April 3, 1998.

YEAR 2000 RISKS
---------------

     The year  2000  issue  relates  to  computer  programs  and  systems  which
recognize dates using two digit year data rather than four digit year data. As a
result, such programs and systems may fail or provide incorrect information when
using dates after December 31, 1999.

     The Company has  conducted a review of its internal  computer  programs and
operating  systems  to assess  the impact of the year 2000  issue.  The  Company
believes  that its  internal  computer  programs  and  systems  are  capable  of
addressing the year 2000 issue,  and that no material  expenditures are required
in this regard.  The Company is in the process of assessing year 2000 compliance
with its key vendors and other  companies  doing business with it.  Although the
Company is optimistic that it will able to timely address any year 2000 problems
that it identifies, the failure of the Company's or third parties' systems to be
year 2000  compliant  could  have a  material  adverse  effect on the  Company's
business, financial condition or results of operations.

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.
Additionally,  during the fourth  quarter of fiscal 1999,  the Company  plans to
introduce two new product  families,  the Powergate and the Powerrack  RAS-2000.
The  Powergate  family of products  are high  performance,  cost  effective  PCI
controller products specifically designed to meet the needs of the remote access
market. The Powerrack RAS-2000 is a redesign of the Powerrack family of products
and will add additional features such as Ethernet "Plug `n Play" connectivity.

     The Company's backlog was approximately $403,000 and $995,000 at January 1,
1999  and  January  31,  1999,   respectively.   The  Company  anticipates  that
substantially  all of its backlog will be shipped  during the fourth  quarter of
the 1999 fiscal year.

     During January 1999, the Company received  proceeds from the sale of common
stock  under  Regulation  D of the  Securities  Act of  1933  in the  amount  of
$710,000.

                                       13
<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

          During  the  third  quarter  of fiscal  1999,  the  Company  reached a
          settlement with Edward T. Lack, Jr. in the matter  described in Item 3
          to the Company's Annual Report on Form 10-KSB for the year ended April
          3, 1998. The settlement calls for the Company to issue Mr. Lack 50,000
          shares of the  Company's  Common  Stock.  Such  shares  will be issued
          during the fourth quarter of 1999. In exchange,  Mr. Lack will release
          all claims against the Company.

          During  the  third  quarter  of fiscal  1999,  the  Company  reached a
          settlement  with Capella  Worldwide  and  Comerica  Bank in the matter
          described in Item 3 to the Company's  Annual Report on Form 10-KSB for
          the year ended April 3, 1998. The settlement  calls for the Company to
          pay both  parties an  aggregate  amount of  $150,000.  The Company had
          adequate  amounts  accrued  to cover the cost of this  settlement.  In
          exchange, both parties will release all claims in against the Company.

          During  February 1999,  the Company  reached an agreement in principle
          with Marshall  Industries to settle the matter  described in Item 3 to
          the Company's  Annual Report of Form-10KSB for the year ended April 3,
          1998.  This agreement  will not have a material  adverse affect on the
          Company.

ITEM 2.   CHANGES IN SECURITIES

          In December  1998, the Company sold 36,000 shares of Common Stock at a
          price of $2.10  per  share to one  accredited  investor  in a  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
          $75,600 were used for working  capital items and to partially fund the
          Company's loss from  operations of $917,000  during the fiscal quarter
          ended January 1, 1999.

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 December 2, 1998, the Company's  Common Stock was delisted from the
          Nasdaq SmallCap  Market for failure to satisfy the Nasdaq  requirement
          that the  Company  maintain  net  tangible  assets of not less that $3
          million.  The  Company's  Common  Stock is now being traded on the OTC
          Bulletin  Board.  On  December  3, 1998,  the  Company  issued a press
          release  reporting  the  delisting,  a copy of  which is  included  as
          Exhibit 99.1 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         December 3, 1998 press release of      Filed Herewith
                         the Company relating to Nasdaq
                         delisting.

          (b)  Reports on 8-K:

          Current  report on Form 8-K Report dated  November 17, 1998  reporting
          the Company's new financing agreement.

                                       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 Executive 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              December 3, 1998 press release of        Filed Herewith
                      the Company relating to Nasdaq
                      Delisting