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 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)


            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


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:

          Balance Sheets as of January 2, 1998, As Restated
          (Note 2) and April 4, 1997, As Restated (Note 2)                     3

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

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

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

          Notes to 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
                                 Balance Sheets
              (in thousands except par value and number of shares)

<TABLE>
<CAPTION>
                                                            January 2, 1998   April 4, 1997
                                                            ---------------   -------------
                                                              (unaudited)      As Restated
                                                              As Restated        (Note 2)
                                                                (Note 2)
ASSETS
Current assets:
<S>                                                             <C>              <C>
    Cash and cash equivalents                                   $     14         $     88
    Receivables, net                                               1,847            1,636
    Inventories, net                                               4,429            4,740
    Prepaid expenses and other                                       282              170
                                                                --------         --------
Total current assets                                               6,572            6,634

Property, equipment and improvements, net                            466              276

Intangible assets, net                                               600              655

Other                                                                 28               90
                                                                --------         --------

TOTAL ASSETS                                                    $  7,666         $  7,655
                                                                ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable, trade                                     $  1,794         $  2,647
    Accrued liabilities:
         Payroll                                                      88              112
         Deferred sales                                               --                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               10

Long-term debt, less current maturities                              129              110
                                                                --------         --------

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                                            (41,145)         (39,794)
                                                                --------         --------
Total stockholders' equity                                         3,973            3,304
                                                                --------         --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $  7,666         $  7,655
                                                                ========         ========
</TABLE>

               See accompanying notes to the financial statements.

                                       3
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

                                                      Three Months Ended
                                               ---------------------------------
                                               January 2, 1998   January 3, 1997
                                               ---------------   ---------------
                                                 As Restated       As Restated
                                                   (Note 2)          (Note 2)
                                                   --------          --------
Revenues:
    Net sales                                      $  2,569          $  3,304
                                                   --------          --------
Expenses:
     Cost of products sold                            2,118             1,864
     Selling, general and administrative              1,338             1,090
     Product development                                304               312
                                                   --------          --------
                                                      3,760             3,266
                                                   --------          --------

Operating income (loss)                              (1,191)               38

Other  income (expense):
     Other net                                          (50)               23
     Interest expense                                   (41)              (27)
                                                   --------          --------

Income (loss) before income taxes                    (1,282)               34

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

Net income (Loss)                                  $ (1,282)         $     34
                                                   ========          ========

Earnings (loss) per common share                      (0.17)             0.00
                                                   ========          ========

Weighted average common shares and
   common share equivalents outstanding               7,672             6,848
                                                   ========          ========

               See accompanying notes to the financial statements.

                                       4
<PAGE>

                  PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

                                                       Nine Months Ended
                                               ---------------------------------
                                               January 2, 1998   January 3, 1997
                                               ---------------   ---------------
                                                 As Restated       As Restated
                                                   (Note 2)          (Note 2)

Revenues:
Net sales                                          $  8,809          $  9,833
                                                   --------          --------
Expenses:
     Cost of products sold                            6,043             5,775
     Selling, general and administrative              3,377             2,824
     Product development                                872               851
                                                   --------          --------
                                                     10,292             9,450
                                                   --------          --------

Operating income (loss)                              (1,483)              383

Other  income (expense):
     Other net                                          247                28
     Interest expense                                  (115)              (94)
                                                   --------          --------

Income (loss) before income taxes                    (1,351)              317

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

Net income (loss)                                  $ (1,351)         $    317
                                                   ========          ========

Net income (loss) per share - basic                   (0.18)             0.05
                                                   ========          ========

Weighted average common shares and
   common share equivalents outstanding               7,362             6,848
                                                   ========          ========

               See accompanying notes to the financial statements.

                                       5
<PAGE>

                     PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Computone Corporation
                            Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                    Nine Months Ended
                                                             ---------------------------------
                                                             January 2, 1998   January 3, 1997
                                                             ---------------   ---------------
                                                               As Restated       As Restated
                                                                 (Note 2)          (Note 2)

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                              <C>               <C>
  Net loss from operations                                       $ (1,351)         $    317
  Adjustments to reconcile loss from operations
     to net cash provided by (used in) operations:
       Depreciation and amortization                                  389               515
       Provision for uncollectible accounts                           154                70
       Provision for inventory reserve                                 --                --
       Changes in current assets and current liabilities:
          Accounts receivable                                        (304)             (891)
          Inventories                                                 250              (603)
          Prepaid expenses and other                                 (112)                4
          Accounts payable and accrued liabilities                 (1,035)             (229)
                                                                 --------          --------
Net cash provided by (used in) operations                          (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:
  Net borrowings from affiliates                                       35               250
  Repayment of debt - net                                            (500)             (429)
  Net borrowings under term loan                                      180                --
  Net (repayments) borrowings under lines of credit                   663                --
  Exercise of common stock options and warrants                        25                 4
  Issuance of common stock                                          1,742             1,418
                                                                 --------          --------
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 financial statements.

                                       6
<PAGE>

                              COMPUTONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

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

     The consolidated  financial  statements included in this Form 10-QSB/A have
been  prepared  by  the  Company,  without  audit,  pursuant  to the  rules  and
regulations of the Securities and Exchange  Commission.  Certain information and
footnote  disclosures,  normally  included in financial  statements  prepared in
accordance with generally accepted accounting  principles,  have been condensed,
or omitted, pursuant to such rules and regulations. These 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.   RESTATEMENT OF FINANCIAL DATA
     -----------------------------

     The Company has restated its financial statements for the fiscal quarter(s)
ended January 2, 1998 and Janaury 3, 1997 (as  presented  herein) as a result of
the ongoing  investigation  by the Securities and Exchange  Commission  (SEC) in
matters focused  principally on the Company's revenue  recognition  policies and
internal accounting controls. Since March 1996, the Company has been the subject
of  an  investigation  by  the  SEC  pursuant  to  a  Formal  Order  of  Private
Investigation  relating  to the  Company.  Since that date,  certain  former and
current officers of the Company have testified in the investigation. On June 22,
1998,  the Company was advised by the Staff of the SEC of the Staff's  intention
to recommend an enforcement action against the Company for alleged violations of
the  federal  securities  laws and to  recommend  the filing of a  complaint  in
federal court seeking a permanent  injunction against the Company for violations
arising  from the  Company's  reporting  of certain  revenues  in  violation  of
generally accepted accounting principles in periodic filings made during certain
of the  quarterly  and  annual  filings by the  Company in the five year  period
ending  April 3, 1998.  As a result of the  foregoing,  the Company is required,
among other things, to restate certain previously issued financial  information.
The  Company has advised the Staff of the  Company's  intention  to  negotiate a
mutually acceptable settlement of this matter.

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

     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 amounts)
Revenues                                       $  1,863          $  2,569
Operating Income (Loss)                        $ (1,603)         $ (1,191)
Net Income (Loss)                              $ (1,694)         $ (1,282)
Basic and Diluted Earnings (Loss) Per Share    $ ( 0.22)         $ ( 0.17)

                                       8
<PAGE>

                              COMPUTONE CORPORATION
                    NOTES TO FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)


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

                                         Nine Month Period Ended January 2, 1998
                                         ---------------------------------------
                                              As Reported       As Restated
                                              -----------       -----------
                                         (In thousands except per share amounts)
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)


                                        Three Month Period Ended January 3, 1997
                                        ----------------------------------------
                                              As Reported       As Restated
                                              -----------       -----------
                                         (In thousands except per share amounts)
Revenues                                       $  3,477          $  3,304
Operating Income                               $    130          $     38
Net Income                                     $    126          $     34
Basic and Diluted Earnings Per Share           $   0.02          $   0.00


                                         Nine Month Period Ended January 3, 1997
                                         ---------------------------------------
                                              As Reported       As Restated
                                              -----------       -----------
                                         (In thousands except per share amounts)
Revenues                                       $ 10,006          $  9,833
Operating Income                               $    475          $    383
Net Income                                     $    409          $    317
Basic and Diluted Earnings Per Share           $   0.06          $   0.05


3.   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
                                           ---------------   -------------
                                             As Restated      As Restated
                                               (Note 2)         (Note 2)
     Finished goods                            $  1,526         $  1,880
     Work in progress                               687              725
     Raw materials                                2,216            2,135
                                               --------         --------
                                               $  4,429         $  4,740
                                               ========         ========

4.   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.

                                       9
<PAGE>

                              COMPUTONE CORPORATION
                    NOTES TO FINANCIAL STATEMENTS, CONTINUED
                                   (UNAUDITED)

5.   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.

6.   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.


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

SEE NOTE  2 IN ITEM 1 - RESTATEMENT OF FINANCIAL DATA

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  $1,191,000  and net loss of
$1,282,000  for the three  months  ended  January 2, 1998  compared to operating
income of $38,000 and net income of $34,000 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  $2,569,000  compared to $3,304,000 for the comparable  quarter of
the prior fiscal year, a decrease of 22%.  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
$2,118,000  or 82% of product sales  revenues  compared to $1,864,000 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 52%
of product  sales revenue for the three months ended January 2, 1998 compared to
$1,090,000 or 33% 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

                                       10
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED

RESULTS OF OPERATIONS, CONTINUED
--------------------------------

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 12% 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  $1,483,000  and net loss of
$1,351,000  for the nine months  ended  January 2, 1998  compared  to  operating
income of $383,000 and net income of $317,000 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.

     Product  sales  revenue for the nine months  ended  January 2, 1998 totaled
approximately  $8,809,000  compared to $9,833,000 for the comparable nine months
of the prior  fiscal  year, a decrease of 10%.  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
$6,043,000  or 69% of product sales  revenues  compared to $5,775,000 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 29% 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.

                                       11
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS,  CONTINUED
          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.

     Cash used in  continuing  operations  amounted to  $2,009,000  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.

     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  $3,128,000 at January 2, 1998 an increase of
$725,000,  since  April  4,  1997.  The  ratio  of  current  assets  to  current
liabilities  at  January  2, 1998 was 1.91 to 1.00  compared  to 1.57 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  remain at the level of 50% of
net revenues.

<TABLE>
<CAPTION>
                      Remote Access Servers                Input\Output Devices                 Total
                  Sales $ (000's)     % of Total       Sales $ (000's)    % of Total     Sales $ (000's)    % of Total
                  ---------------    -----------       ---------------    ----------     ---------------    ----------
Third Quarter:
<S>      <C>          <C>                <C>                <C>               <C>              <C>              <C>
         98           $1,273             50%                $1,296            50%              $2,569           100%
         97            1,290             39                  2,014            61                3,304           100

First Nine Months:
         98           $4,142             47%                $4,667            53%              $8,809           100%
         97            3,372             34                  6,461            66                9,833           100
</TABLE>

                                       12
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED

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.

                                       13
<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

                                       14
<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 amended.

                                       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 28, 1999            By:  \s\ Perry J. Pickerign
                                    ----------------------
                                    Perry J. Pickerign
                                    President and Chief Executive Officer
                                    (Principal Operating Officer)


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


                                       16
<PAGE>

                                  EXHIBIT INDEX


Exhibit Number      Description of Exhibit
--------------      ----------------------

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

27                  Financial Data Schedule