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

                                   FORM 10-Q



[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     For the Quarterly period ended September 30, 1998.


                                      or


[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from __________ to __________.


Commission file number 0-15512.



                                 ALPNET, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)



                 Utah                                        87-0356708
----------------------------------------         -------------------------------
    (State or other jurisdiction of                       (I.R.S. Employer
     incorporation or organization)                      Identification No.)



 4460 South Highland Drive, Suite #100
       Salt Lake City, Utah                                  84124-3543
----------------------------------------         -------------------------------
(Address of principal executive offices)                     (Zip Code)



                                (801) 273-6600
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)



                                Not applicable
--------------------------------------------------------------------------------
             (Former name, former address and former fiscal year,
                         if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                                       Yes   X       No
                                                           -----        -----

The number of shares outstanding of the registrant's no par value Common Stock
as of November 4, 1998 was 24,201,472.
<PAGE>
 
ALPNET, INC. AND SUBSIDIARIES

                                     INDEX

<TABLE> 
<CAPTION> 

PART I.  FINANCIAL INFORMATION
------------------------------
<S>                                                                                          <C>       
Item 1.  Consolidated Financial Statements (Unaudited):

         Consolidated Statements of Operations--Three months ended September 30, 1998
          and 1997 and Nine months ended September 30, 1998 and 1997........................  3
 
         Consolidated Balance Sheets--September 30, 1998 and December 31, 1997..............  4
 
         Consolidated Statements of Cash Flows--Nine months ended September 30, 1998
          and 1997..........................................................................  6
 
         Notes to Consolidated Financial Statements--September 30, 1998.....................  7
 
Item 2.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations............................................................. 10
 

PART II.   OTHER INFORMATION
----------------------------

Item 1.  Legal Proceedings.................................................................. 18

Item 6.  Exhibits and Reports on Form 8-K................................................... 18


SIGNATURES.................................................................................. 19
----------                                                      
</TABLE> 

                                       2
<PAGE>
 
ITEM 1:  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-------  ---------------------------------------------

ALPNET, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

<TABLE> 
<CAPTION> 

                                                Three Months Ended    Nine Months Ended
                                                   September 30          September 30
Thousands of dollars, except per share data        1998       1997       1998      1997
----------------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>       <C> 
SALES OF SERVICES                               $11,413    $10,231    $36,960   $29,445
 
OPERATING EXPENSES:
  Cost of services sold                           9,438      7,434     28,524    22,752
  Selling, general and administrative
     expenses                                     2,060      1,664      5,794     4,872   
  Development costs                                 225         94        519       297  
  Amortization of goodwill                          107         96        293       293  
                                                -------    -------    -------   -------  
Total operating expenses                         11,830      9,288     35,130    28,214  
                                                -------    -------    -------   -------  
OPERATING INCOME (LOSS)                            (417)       943      1,830     1,231  
                                                                                         
Interest expense, net                                65         61        216       201  
                                                -------    -------    -------   -------  
Income (loss) before income taxes                  (482)       882      1,614     1,030  
Income taxes                                         65        140        625       245  
                                                -------    -------    -------   -------  
NET INCOME (LOSS)                               $  (547)   $   742    $   989   $   785  
                                                =======    =======    =======   ======= 

Income (loss) per share - basic                 $ (.023)   $  .040    $  .042   $  .043
                                                =======    =======    =======   =======  

Income (loss) per share - assuming dilution     $ (.023)   $  .029    $  .037   $  .031 
                                                =======    =======    =======   =======  
</TABLE> 

See accompanying notes.

                                       3
<PAGE>
 
ALPNET, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

<TABLE> 
<CAPTION> 

                                                 September 30         December 31
Thousands of dollars                                1998                 1997
----------------------------------------------------------------------------------
<S>                                              <C>                  <C>        
ASSETS
 
CURRENT ASSETS:
  Cash and cash equivalents                      $ 1,614              $ 1,711
  Trade accounts receivables, less allowance           
     of $439 in 1998 and $338 in 1997              9,581                9,772
  Work-in-process                                  1,605                1,040
  Prepaid expenses and other                         917                  747
                                                 -------              ------- 
Total current assets                              13,717               13,270

PROPERTY, EQUIPMENT AND LEASEHOLD
  IMPROVEMENTS:
     Office facilities and leasehold
       improvements                                  264                  226           
     Equipment                                     6,384                5,003          
                                                 -------              -------  
                                                   6,648                5,229          
                                                 -------              -------  
     Less accumulated depreciation and                                                  
       amortization                                4,017                3,402          
                                                 -------              -------  
Net property, equipment and leasehold                                                   
  improvements                                     2,631                1,827  
                                                                               
OTHER ASSETS:                                                                   
  Goodwill, less accumulated amortization                                       
     of $3,988 in 1998 and $3,544 in 1997          5,618                5,698      
  Other                                              275                  245  
                                                 -------              -------  
Total other assets                                 5,893                5,943      
                                                 -------              -------  
                                                                                
TOTAL ASSETS                                     $22,241              $21,040  
                                                 =======              =======   
</TABLE> 

See accompanying notes.

                                       4
<PAGE>
 
ALPNET, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)-continued

<TABLE> 
<CAPTION> 

                                                 September 30         December 31
Thousands of dollars and shares                     1998                 1997
----------------------------------------------------------------------------------
<S>                                              <C>                  <C>        
LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES:
  Notes payable to banks                         $ 2,359              $ 3,037 
  Accounts payable                                 2,626                2,338 
  Accrued payroll and related benefits             1,123                1,187 
  Other accrued expenses                           1,292                1,354 
  Deferred revenue                                   180                  732 
  Income taxes payable                               802                  462 
                                                                              
  Current portion of long-term debt                  424                  350  
                                                 -------              -------  
Total current liabilities                          8,806                9,460
 
Long-term debt, less current portion                 521                  489

Commitments and contingencies (note 5)

SHAREHOLDERS' EQUITY:
  Convertible Preferred Stock, no par value;
     authorized 2,000 shares; issued and
     outstanding 87 shares in 1998 and 1997          242                  242   
  Common Stock, no par value; authorized                                        
     40,000 shares; issued and outstanding                                      
     24,200 shares in 1998 and 23,293 shares                                    
     in 1997                                      42,502               42,080   
  Accumulated deficit                            (28,156)             (29,145)  
  Equity adjustment from foreign currency                                       
     translation                                  (1,674)              (2,086)  
                                                 -------              -------  
Total shareholders' equity                        12,914               11,091   
                                                 -------              -------  

TOTAL LIABILITIES AND SHAREHOLDERS'
  EQUITY                                         $22,241              $21,040
                                                 =======              =======
</TABLE> 

See accompanying notes.

                                       5
<PAGE>
 
ALPNET, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

<TABLE> 
<CAPTION> 

                                                 Nine Months Ended September 30   
Thousands of dollars                                1998                 1997
----------------------------------------------------------------------------------
<S>                                              <C>                  <C>        
OPERATING ACTIVITIES:
  Net income                                     $   989              $   785
  Adjustments to reconcile net income 
   to net cash provided by operating 
   activities:
     Depreciation and amortization of 
      property, equipment and leasehold 
      improvements                                   629                  499
     Amortization of goodwill                        293                  293
     Other                                          (249)                  33
     Changes in operating assets and 
      liabilities, net of effect of 
      acquisition in 1997:
        Trade accounts receivable                    338               (1,976)  
        Accounts payable and accrued 
         expenses                                    310                  795      
        Other                                       (929)                 110    
                                                 -------              -------   
Net cash provided by operating activities          1,381                  539

INVESTING ACTIVITIES:
  Purchase of property, equipment and 
   leasehold improvements                         (1,366)                (590)
  Payment for acquisition, net of cash 
   acquired                                            -                 (508)
                                                 -------              -------    
Net cash used in investing activities             (1,366)              (1,098)
 
FINANCING ACTIVITIES:
  Proceeds from notes payable to banks               128                  917    
  Principal payments on notes payable to                                        
   banks                                            (814)                (126)  
  Proceeds from long-term debt                       394                  624   
  Principal payments on long-term debt              (297)                (211)  
  Proceeds from exercise of stock options            422                    1   
                                                 -------              -------    
Net cash provided by (used in) financing                                        
 activities                                         (167)               1,205    
 
Effect of exchange rate changes on cash               55                  (70)
                                                 -------              -------    
NET INCREASE (DECREASE) IN CASH AND CASH 
 EQUIVALENTS                                         (97)                 576

Cash and cash equivalents at beginning of 
 period                                            1,711                1,034
                                                 -------              -------    

CASH AND CASH EQUIVALENTS AT END OF PERIOD       $ 1,614              $ 1,610
                                                 =======              =======

CASH PAID DURING THE PERIOD FOR:
  Interest                                       $   218              $   194
  Income taxes                                       270                   16
</TABLE> 

See accompanying notes.

                                       6
<PAGE>
 
ALPNET, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

September 30, 1998

1. BASIS OF PRESENTATION

   ALPNET, Inc. (the "Company") is a United States publicly-owned multinational
   corporation. The Company provides language translation, product localization,
   and multilingual publishing solutions to businesses engaged in international
   trade. The principal markets for the Company's services are North America,
   Western Europe and Asia.

   The accompanying unaudited consolidated financial statements have been
   prepared in accordance with the rules and regulations of the Securities and
   Exchange Commission. Accordingly, they do not include all of the information
   and footnote disclosures required by generally accepted accounting principles
   for complete financial statements. In the opinion of management, all
   adjustments (consisting of normal recurring adjustments) considered necessary
   for a fair presentation have been included. Operating results for the periods
   presented are not necessarily indicative of the results that may be expected
   for the respective complete years. For further information, refer to the
   Consolidated Financial Statements and notes thereto included in the Company's
   Annual Report on Form 10-K for the year ended December 31, 1997.

   The preparation of financial statements in conformity with generally accepted
   accounting principles requires management to make estimates and assumptions
   that affect the reported amounts of assets and liabilities and disclosure of
   contingent liabilities at the date of the financial statements, and the
   reported amounts of revenues and expenses during the reporting periods.
   Actual results could differ from those estimates.

   Certain amounts for the nine-month period ended September 30, 1997 have been
   reclassified to conform to the 1998 presentation.

2. COMPREHENSIVE INCOME

   As of January 1, 1998, the Company adopted Statement of Financial Accounting
   Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
   establishes new rules for the reporting and display of comprehensive income
   and its components; however, the adoption of this Statement had no impact on
   the Company's net income or shareholders' equity. FAS 130 requires the
   Company's foreign currency translation adjustments, which prior to adoption
   were reported separately in shareholders' equity, to be included in other
   comprehensive income. For the three months ended September 30, 1998 and 1997,
   total comprehensive income (loss) was $(139,000) and $504,000 respectively.
   For the first nine months of 1998 and 1997, total comprehensive income
   amounted to $1,401,000 and $47,000, respectively.

                                       7
<PAGE>
 
3. INCOME PER SHARE

   In 1997, the Financial Accounting Standards Board issued Statement No. 128,
   "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
   and fully diluted income per share with basic and diluted income per share.
   Unlike primary income per share, basic income per share excludes any dilutive
   effects of options and convertible securities. Diluted income per share is
   similar to the previously reported fully diluted income per share. All income
   per share amounts for all periods have been presented, and where appropriate,
   restated to conform to the FAS 128 requirements.

   The following table sets forth the computation of basic and diluted income
   per share.

<TABLE> 
<CAPTION> 

                                             Three Months Ended  Nine Months Ended
                                                September 30        September 30
     Thousands of dollars and shares            1998      1997      1998     1997
     -----------------------------------------------------------------------------
     <S>                                     <C>       <C>       <C>      <C> 
     Numerator for basic and diluted
      income per share - net income (loss)   $  (547)  $   742   $   989  $   785
                                             =======   =======   =======  =======
     Denominator:
      Denominator for basic income (loss) 
       per share - weighted-average shares    24,108    18,537    23,703   18,367
         Effect of dilutive securities:
           Convertible Preferred Stock             -     5,535       786    5,704
           Employee stock options                  -     1,558     2,133    1,456
                                             -------   -------   -------  -------
         Dilutive potential common shares          -     7,093     2,919    7,160
                                             -------   -------   -------  -------
      Denominator for diluted income 
       (loss) per share - adjusted 
       weighted-average shares and 
       assumed conversions                    24,108    25,630    26,622   25,527
                                             =======   =======   =======  =======

     Income (loss) per share - basic         $ (.023)  $  .040   $  .042  $  .043
                                             =======   =======   =======  =======

     Income (loss) per share - assuming
      dilution                               $ (.023)  $  .029   $  .037  $  .031
                                             =======   =======   =======  =======
</TABLE> 

4. INCOME TAXES

   The Company files a consolidated U.S. Federal income tax return which
   includes all domestic operations. Tax returns for states within the U.S. and
   for foreign subsidiaries are filed in accordance with applicable laws.
   Fluctuations in the amount of income taxes arise primarily from the varying
   combinations of income and losses of the Company's subsidiaries in the
   various domestic and foreign tax jurisdictions, including the utilization of
   net operating loss carryforwards in many of these jurisdictions.

5. COMMITMENTS AND CONTINGENCIES

   In 1997, the Company's French subsidiary terminated certain of its employees,
   some of whom initiated immediate legal actions in the French legal system
   which handles employment-related matters. Subsequently, other former
   employees also initiated similar actions. In 1997, $220,000 was expensed
   related to the legal actions taken by specific employees. Approximately
   $90,000 remains accrued at September 30, 1998.

                                       8
<PAGE>
 
   The Company believes it complied with all aspects of applicable French labor
   regulations in terminating the employees and intends to defend these actions
   vigorously. While the ultimate outcome of this matter cannot be determined,
   management, based on the opinion of its French legal counsel, does not expect
   that the outcome of the legal actions will have a material adverse effect on
   the Company's results of operations or financial position.

   On February 23, 1998, the Company was named as one of several defendants in
   two civil actions. In these actions, each of the named plaintiffs, all of
   whom are German nationals, seek to recover monetary damages, in amounts to be
   proven at trial, including punitive damages, interest, and costs, allegedly
   sustained as a result of securities transactions the plaintiffs entered into
   with several of the other named defendants. The Company is vigorously
   defending the lawsuits. The Company has filed a Motion to Dismiss both legal
   actions, which actions were subsequently combined. The U.S. District Court
   which has jurisdiction over this matter has not yet ruled on the Motion to
   Dismiss. Except for legal defense costs of approximately $60,000 through
   September 30, 1998, no expense has been accrued in the financial statements
   for these actions.

6. NEW ACCOUNTING STANDARD

   In June 1997, Statement of Financial Accounting Standards No. 131,
   "Disclosures about Segments of an Enterprise and Related Information" ("FAS
   131"), was issued. FAS 131 requires public companies to report financial and
   descriptive information about its reportable operating segments on the basis
   that is used internally for evaluating segment performance. The Company will
   adopt FAS 131 at the end of 1998. It is not anticipated that the adoption of
   this statement will have a material effect on the financial statements of the
   Company.

                                       9
<PAGE>
 
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS
-------------

The following Management's Discussion and Analysis should be read in conjunction
with the accompanying unaudited Consolidated Financial Statements and Notes
thereto.

FOREIGN OPERATIONS

The Company serves its customers from more than 30 wholly-owned offices in 16
countries.  The operations of the Company are predominantly located outside the
U.S.  Accordingly, the Company is subject to the effects of foreign currency
exchange rate fluctuations.  For all of the Company's foreign subsidiaries, the
functional currency has been determined to be the local currency.  Accordingly,
assets and liabilities are translated at period-end exchange rates, and
operating statement items are translated at weighted-average exchange rates
prevailing during the periods presented.  The resulting cumulative foreign
currency translation adjustments to the assets and liabilities are recorded as a
separate component of shareholders' equity.  The foreign currency equity
adjustment for the first nine months of 1998 was a positive $412,000 compared to
a negative adjustment of $738,000 for the first nine months of 1997.  Generally,
when the U.S dollar strengthens against the major foreign currencies affecting
the Company, the shareholders' equity adjustment is negative since the net
assets denominated in foreign currencies are translated into fewer U.S. dollars.
This occurred in 1997, but in 1998 the U.S. dollar has weakened.  As of
September 30, 1998, the cumulative net effect of the equity adjustment from
movements in foreign currency exchange rates was a reduction of $1.7 million in
shareholders' equity. A significant portion of the cumulative foreign currency
adjustment relates to changes in the recorded amount of goodwill.

In the first nine months of 1998, the Company recorded a net benefit of $32,000
for gains on foreign exchange transactions.  In the first nine months of 1997,
the Company recorded a net benefit of $169,000 for gains on foreign exchange
transactions.  Most of the 1997 benefit was recorded in the U.K. and a majority
of that U.K. gain resulted from a weakening of the UK(Pounds) from December 31,
1996 to September 30, 1997.

Because most of the Company's operations are located outside the U.S. and its
foreign operations' financial results must be translated into U.S. dollars, the
Company's actual and reported financial results and financial condition are
susceptible to movements in foreign currency exchange rates.  The Company has
relatively few long-term monetary assets and liabilities denominated in
currencies other than the U.S. dollar and does not have any ongoing hedging
programs in place to manage currency risk.

RESULTS OF OPERATIONS

The following paragraphs discuss results of operations for the three- and nine-
month periods ended September 30, 1998 as compared with the three- and nine-
month periods ended September 30, 1997, including the significant effects of
fluctuating foreign currency exchange rates.

The Company reported a net loss of $547,000 for the three months ended September
30, 1998, compared to net income of $742,000 for the three months ended
September 30, 1997.  If foreign currency exchange rates for 1998 had remained
unchanged from 1997, the Company would have recorded substantially the same net
loss and, therefore, currency exchange rate fluctuations had little effect on
reported third quarter 1998 results.

                                       10
<PAGE>
 
The Company reported net income of $989,000 for the nine months ended September
30, 1998, compared to net income of $785,000 for the nine months ended September
30, 1997.  If foreign currency exchange rates for 1998 had remained unchanged
from 1997, the Company would have recorded net income of $1,137,000 instead of
$989,000.

Sales of services were $11.4 million for the three months ended September 30,
1998, compared to $10.2 million for the three months ended September 30, 1997.
The $1.2 million increase in reported sales for 1998 consisted almost entirely
of an increase in sales with little effect due to fluctuating currency exchange
rates.

Sales of services were $37.0 million for the nine months ended September 30,
1998 compared to $29.4 million for the nine months ended September 30, 1997.
The $7.6 million increase in reported sales for 1998 consisted of an increase in
sales volume of $8.5 million and a $.9 million decrease due to fluctuating
currency exchange rates. The increases in sales volume in 1998 over 1997 are due
to increases in sales in several countries, but most particularly in the
Company's North American, German and Netherlands offices.  Most of this increase
in sales is a result of very high growth rates during the first six months of
1998, as compared to the first six months of 1997.

Sales growth in the third quarter of 1998 over the same quarter in 1997 slowed
considerably as compared to the growth achieved in prior quarters of the year.
This slower growth was caused primarily by delays and cancellations of orders
from major clients, most particularly in the U.S., the U.K. and the Netherlands.
Most of the clients that delayed or cancelled orders are in the computer
hardware and software industries.  These project delays and cancellations, most
of which were unexpected, were the major cause of the net loss experienced in
the third quarter, since the Company increased production capacity in
anticipation of sales growth which did not materialize.

The increase in sales volume for the nine months ended September 30, 1998 is a
result of generally expanding needs for language-related services in an
increasingly global marketplace where more and more businesses are entering
foreign markets and becoming involved in worldwide trade.  Examples of this are
the software and automotive industries which have significant and increasing
needs for product localization services provided by the Company.  Also having a
beneficial effect on sales levels is the Company's increasing emphasis on
turnkey multilingual publishing solutions and the Company's global account
strategy, which focuses on the development of long-term partnering relationships
with major clients that have ongoing translation and localization needs.

The Company competes on the basis of capability, quality, service and
geographical proximity to clients and potential clients.  The Company has opened
several new offices and expanded existing offices in recent years in order to
increase its market share, in what management believes has been and will
continue to be a growth industry.

The following table compares sales of services in each of the Company's
significant geographic areas for the nine months ended September 30, 1998 and
1997, along with the effect of foreign currency exchange rate fluctuations on
sales between periods.  Intercompany sales are normally billed on a margin-
sharing basis.  All intercompany sales are eliminated in determining the
reported totals.

                                       11
<PAGE>
 
<TABLE>
<CAPTION>
 
                                               Increase (Decrease) in 
                            Nine Months           Sales of Services      Total
                         Ended September 30     Sales      Currency     Increase
Thousands of dollars         1998       1997   Volume    Fluctuations  (Decrease)
----------------------  ---------  ---------  --------  -------------  ----------
<S>                     <C>        <C>        <C>       <C>            <C>
United States           $   6,861  $   5,373  $  1,488  $           -  $    1,488
Canada and South
   America                  6,507      4,800     2,111           (404)      1,707
Europe                     28,167     22,731     5,915           (479)      5,436
Asia                        4,462      3,037     2,120           (695)      1,425
Eliminations               (9,037)    (6,496)   (3,178)           637      (2,541)
                        ---------  ---------  --------  -------------  ----------
Total Sales             $  36,960  $  29,445  $  8,456  $        (941) $    7,515
                        =========  =========  ========  =============  ==========
</TABLE>

As shown in the above table, every major geographical region reported increased
sales in 1998 over 1997.

SALES OF SERVICES BY GEOGRAPHIC AREA

U.S. sales increased 28% in 1998 over 1997.  This increase was due to a rise in
the number and size of projects for both existing and new clients, especially
software localization services for companies in the computer hardware, software
development and computer-based training industries.  Much of this increase is
due to aggressive sales and marketing efforts, including a strategy of targeting
sales efforts at specific major global companies.  Long-term management
expectations for the U.S. are for a general continuation of growth in sales,
especially to the computer and computer-based training industries, but the
amount and timing of actual orders from clients is unpredictable.

Canada's reported sales for 1998 represent an increase over 1997 of 33%.  The
growth rate would have been 42% absent the effects from fluctuating foreign
currency exchange rates.  The increase in sales in Canada was due primarily to
ongoing aggressive marketing and sales efforts, the procurement of new large
long-term contracts, and revenues from a large interpretation project in March
1998 for which there were no comparable revenues in the first nine months of
1997.  These increases in sales have occurred despite continuing economic and
political challenges in Canada.  Due in part to several new large multi-year
contracts, some of which were negotiated in 1996, but which did not begin until
1997,  management believes it is likely that 1998 revenues in Canada will
continue to outpace 1997 levels.

In 1998, sales in Europe of $28.2 million represent approximately 61% of the
Company's consolidated sales (prior to elimination of intercompany sales).
European sales grew by $5.4 million over 1997 sales levels, or by 24% year over
year (26% absent the effects of fluctuating foreign currency exchange rates).
Sales increased in most European countries, but the majority of the increase in
1998 was the result of growth in Germany (45% growth rate, which would have been
50% absent the effects of foreign currency exchange rate fluctuations), and in
the Netherlands (where 1998 sales were more than double the 1997 level).  The
U.K. and Germany, the Company's two largest markets, accounted for 71% of
Europe's total sales in 1998, compared to 80% in 1997.

U.K. sales decreased 13% (14% decrease absent the effects of foreign currency
exchange rate fluctuations) in 1998 compared to 1997.  The decrease was due
largely to lower sales to the Company's largest client, a portion of which were
recorded as sales in other countries in 1998.  In Germany, a very high rate of
growth was achieved in 1998 over 1997.  The three primary reasons for this
increase are focused and intensive sales and marketing efforts, a new large
project completed in the first half of 1998 and, to a lesser extent, gradually

                                       12
<PAGE>
 
improving local economic conditions.  The Netherlands office has been open for
less than three years and the high growth rate experienced from 1997 to 1998 is
largely due to its small size in 1997 as compared to most of the Company's other
offices.  The rapid expansion of services for clients in the enterprise resource
planning (ERP) software industry has also been a significant contributing factor
to the growth in sales in the Netherlands.

Asia's reported sales for the first nine months of 1998 represent an increase
over 1997 of 47% (70% absent the effects of foreign currency exchange rate
fluctuations).  The Company has significantly expanded its Asian presence in
recent years by opening offices in new countries and expanding the capacities of
existing offices. The recently opened Thailand office also contributed to
increased revenues for Asia in 1998 as has the recording of significant sales in
Asia that in previous periods were recorded in the U.K. and the U.S.

Management expects the increased demand for Asian language services to continue.
The Company started operations in Thailand in late 1997 to meet increasing
client orders for into-Thai projects.  Many Asian countries are experiencing
very high economic growth rates and, despite the recent economic events in Asia,
demand for translation and localization for Asian markets from businesses in the
U.S. and Europe remains at a relatively high level.

In general, the Company's Asian capacity was underutilized in early 1997 and
contributed to the operating loss sustained in the first quarter of last year.
The Company is now in a normal utilization situation in Asia, due to increases
in customer orders for work to be produced into the major Asian languages.  The
Company closed its Hong Kong office in May 1997 as a result of operating losses
and declining strategic importance.  Sales of this office were not material in
1997, and expenses of approximately $50,000 were recorded in the first quarter
of 1997 to recognize the costs of closing the office.  Other Asian offices have
been producing the Chinese work historically done by the Hong Kong office.

The Company's business can be impacted dramatically by changes in the strength
of the economies of the countries in which it has a presence, and results of
operations are highly influenced by general economic trends.  Moreover, sales
and profitability are increasingly affected by the number and size of larger and
more complex multi-language projects.  The Company experiences fluctuations in
quarterly sales and profitability levels largely as a result of the increasing
number of such projects.  Management expects this trend to continue. The Company
expects to be able to capture increased sales in an expanding market resulting
in overall long-term sales growth.

COST OF SERVICES SOLD

Cost of services sold as a percentage of sales of services has fluctuated as a
result of capacity utilization, competition in the marketplace, and the volume
and nature of direct production costs of project sales in each period,
especially large projects covering several accounting periods.  It is also
affected by the ratio of fixed production-related costs to total fixed and
variable production costs.  This ratio has increased somewhat in 1998 over 1997
levels.  In the third quarter of 1998 and in early 1997, margins were negatively
affected by underutilization of capacity and, to a lesser extent, by a higher
proportion of low margin work in certain geographic areas.

Management expects competitive pricing pressures to continue in the foreseeable
future, and perhaps even intensify as a result of several recent mergers and
acquisitions of small and mid-sized translation companies. The Company is
continuing its efforts to control costs to offset the effects of these pricing
pressures.  These efforts include more effective utilization of the Company's
proprietary software on medium- to small-sized 

                                       13
<PAGE>
 
projects to improve the productivity of translators, and the development of
stronger "partnerships" with clients to enable the Company to provide higher-
margin, higher-value, solution-based services to clients. Also, the Company is
planning to better integrate its processes and systems in all of its operations
to achieve greater economies of scale across its global network. The Company has
announced that it plans to take steps in the fourth quarter to reduce fixed
costs. As a result of these plans, the Company expects an approximate 10%
reduction in fixed costs to be realized in 1999. These fixed costs consist of
certain production-related costs as well as other costs and expenses.

OTHER COSTS AND EXPENSES

Selling, general and administrative expenses were $5.8 million for the first
nine months of 1998, an increase over 1997 levels of 19% (an increase of 22%
absent the effect of currency exchange rate fluctuations).  The increase in the
third quarter of 1998 compared to 1997 was 24%.  These increases were due to
several factors, primarily the general growth of existing offices; increased
marketing and sales efforts in substantially all of the Company's markets; and
the effect of increased corporate overhead costs related to the Company's
growth. Costs of approximately $150,000 related to reorganizing and closing some
of the Company's underperforming offices were recognized in the first nine
months of 1997.  Similar costs recognized in the first nine months of 1998
totalled $75,000.

Development costs were $519,000 in the first nine months of 1998 compared to
$297,000 in the first nine months of 1997.  Third quarter 1998 costs increased
to $225,000 from $94,000 in 1997.  Development costs are related to the
upgrading and expansion of the Company's proprietary language translation
software developed in the early years of the Company's existence, including
enhancements to its software to make it compatible with more of the ever-
increasing types and versions of software being developed by the software
industry.  The Company expects 1998 development costs to exceed 1997 levels,
primarily because of the ongoing need to ensure the Company's technology is
compatible with software commonly used by clients.

Fluctuations in the amount of goodwill amortization result primarily from
foreign currency exchange rate fluctuations from period to period.  Net interest
expense was $216,000 in the first nine months of 1998, representing an increase
of $15,000 over 1997.  The increases in interest expense in 1998 for both the
three-month and nine-month periods were due primarily to higher average balances
outstanding under revolving lines of credit, caused by growth in sales and
related accounts receivable.  Interest expense in future periods could increase
over recent levels if the Company increases borrowings under revolving lines of
credit as sales grow.  Also, the Company plans to continue to use long-term debt
to finance certain equipment purchases. Any investments beyond modest
requirements related to sales growth could require additional debt financing
which would impact future levels of interest expense.

The U.S. parent company and each of its subsidiaries are separate legal and
taxable entities subject to the domestic or foreign taxes pertaining to
operations in their respective jurisdictions.  For tax purposes, the U.S. parent
company, and most of its subsidiaries, have unused net operating losses from
prior years which can be utilized to reduce their respective future taxable
income.  The availability of these net operating losses is governed by
applicable domestic and foreign tax rules and regulations, some of which limit
the utilization of such losses due to minimum tax requirements and other
provisions.  Income tax expense, as presented in the Consolidated Financial
Statements, represents the combined income tax expense and income tax credits of
all of the entities of the Company.

After the utilization of net operating loss carryforwards, income tax expense
was $625,000 for the first nine months of 1998 ($65,000 for the third quarter)
compared to $245,000 for the first nine months of 1997 

                                       14
<PAGE>
 
($140,000 for the third quarter). Fluctuations in the amount of income taxes
arise primarily from the varying combinations of income and losses of the
Company's subsidiaries in various domestic and foreign tax jurisdictions,
including the utilization of net operating loss carryforwards in many of these
jurisdictions. The U.S. parent company has a net operating loss carryforward for
U.S. federal tax purposes but has no net operating loss carryforwards for state
income tax purposes. In addition, the Company's German subsidiary is expected to
utilize its remaining net operating loss carryforward for municipal tax purposes
in 1998.

LIQUIDITY AND SOURCES OF CAPITAL

In the first nine months of 1998, the Company had positive cash flow from
operations of approximately $1.4 million, compared with a positive cash flow
from operations in 1997 of $.5 million.  In each of these periods, the Company's
investing activities included the acquisition of equipment needed to maintain or
upgrade production capability. In 1997, the Company's investing activities also
included the acquisition of CompuType for approximately $.5 million (see note 3
to the Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).

Financing activities for both periods included fluctuations in the amounts
utilized under bank lines of credit to finance the Company's working capital
needs, and changes in outstanding debt used to finance equipment purchases.
Additionally, in 1997, the Company obtained a long-term loan of approximately
$330,000 to finance a portion of the CompuType acquisition.  In 1998, the
Company received $422,000 from the exercise of employee stock options.  In 1997,
the Company's non-cash financing activities included the conversion by certain
shareholders of the Company's series B and series C Convertible Preferred Stock
to Common Stock. See note 5 to the Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

At September 30, 1998, the Company's cash and cash equivalents were
approximately $1.6 million, which represents a decrease of $.1 million during
the first nine months of 1998.  At September 30, 1998, the Company had working
capital of approximately $4.9 million, compared to working capital of
approximately $3.8 million at December 31, 1997.  This increase is largely
attributable to the net income earned in the period.

The Company's primary working capital requirements relate to the funding of
accounts receivable.  The Company funds some of its working capital needs with
lines of credit from financial institutions in certain countries, primarily the
U.S., Canada, the U.K., and Germany.  Most of the lines of credit are secured by
accounts receivable and other assets of the Company or its subsidiaries.  As of
September 30, 1998, the Company had unused amounts under these lines of credit
of approximately $1.4 million.

Provided the Company is profitable, management believes the unused amounts under
lines of credit, combined with current working capital, are sufficient to fund
the Company's operations at current levels and enable the Company to grow at
current levels, without seeking significant new sources of capital.  Most of the
Company's credit facilities are subject to annual renewals and the Company
expects them to be renewed on substantially the same terms as currently exist.
In addition, the Company expects to be able to increase the maximum amounts that
can be borrowed under credit facilities if the Company's sales increase and the
Company is profitable over the long term.  Some of the financial institutions,
which have loaned funds to the Company's subsidiaries under the credit
facilities referred to above, have placed certain limits on the flow of cash
outside their respective countries.  Such limitations have not been an undue
burden to the Company in the past, nor are they expected to be unduly burdensome
in the foreseeable future.

                                       15
<PAGE>
 
The Company presently has no significant commitments for capital expenditures,
which generally consist of computer equipment and related peripheral hardware
and software. Levels of capital expenditures in future periods are expected to
vary according to the overall growth of the Company. The Company plans to
acquire equipment in the future as orders are received from clients. The Company
expects to finance a certain portion of future equipment costs under financing
arrangements with terms similar to those entered into in recent years.

In January 1997, the Company acquired CompuType for cash of approximately
$550,000, most of which was financed.  While there are no current commitments,
the Company may pursue other acquisitions worldwide or open additional offices
in strategic locations, as client demands dictate and opportunities arise. The
initial cost to open most offices has generally not been substantial and has
been primarily related to the procurement of computers and other translation-
related equipment, and office space.  The costs of any additional offices opened
or acquired in the future will vary based on size and location and could require
certain amounts of cash beyond the amount that can be generated through
operations, depending on profitability.

In May 1997, the Company closed its Hong Kong office.  A reorganization of the
Company's offices in France occurred during 1997.  The Company has also closed
two of its small U.K. offices in 1998.

The Company believes it has the ability to issue additional equity securities if
necessary, but does not currently plan to do so.  In order for the Company to
fund investments beyond current levels of growth, such as for significantly new
or expanded services or product lines, additional debt or equity funds will
likely be required.

Management believes that current working capital, together with unused amounts
under lines of credit, will enable the Company to meet its financial obligations
in the foreseeable future.  It is difficult to assess the adequacy of cash flows
in the long-term.  The ability of the Company to meet its commitments without
additional sources of capital is directly related to the Company's operations
providing a positive cash flow. Should the Company's operations fail to provide
adequate funds to enable it to meet its future financial obligations, management
has the option, because of the Company's organizational structure, to cut costs
by selectively eliminating operations which are not contributing to the Company
financially.  This was done by closing the Switzerland and Hong Kong offices in
prior years and the small U.K. offices in 1998.  Because a majority of the
Company's fixed operating costs are for employees, the Company will need to cut
headcount to significantly reduce ongoing operating costs.  Headcount
reductions, while reducing long-term cash requirements, could actually increase
short-term cash requirements in many countries due to statutory and contractual
obligations related to severance pay.

Inflation has not been a significant factor in the Company's operations.
Competition, however, has been and is expected to remain a major factor.  To the
extent permitted by competition and general economic and market conditions, the
Company will pass on increased costs from inflation and operations to clients
through increased prices.

Due to prior years' operating losses, the Company and many of its subsidiaries
have net operating loss carryforwards available to offset future taxable income
in the various countries in which the Company operates.  As a result, the
Company historically has not had significant income tax liabilities requiring
the expenditure of cash.  The Company expects this trend to continue for certain
long-established offices that sustained large losses in previous years.  The
levels of net operating losses available to offset future taxable income are
generally much lower for newer offices opened in recent years.

Substantially all of the Company's deferred tax assets at September 30, 1998
were comprised of net operating loss carryforwards for which the Company has
provided allowances.  The ability of the Company to utilize 

                                       16
<PAGE>
 
these loss carryforwards in the future is dependent on profitable operations in
the various countries in which loss carryforwards exist, and the specific rules
and regulations governing the utilization of such losses, including the dates by
which the losses must be used.

YEAR 2000 ISSUE

The year 2000 issue refers to some computer systems' inability to recognize "00"
in the date field as the year 2000.  As a result of these shortcomings, some
computers may be unable to process year-date data accurately beyond the year
1999.  The Company has preliminarily assessed the potential impact of this issue
on its business and operations as being minor.  With the exception of the
operations administration system for one of the Company's foreign subsidiaries,
the Company believes the year 2000 issue will not have a material effect on the
Company's internal accounting and information systems, most of which consist of
relatively inexpensive off-the-shelf software packages.  In addition, the
Company's proprietary translation software, TSS, has been year 2000 compliant
since its development in the mid-1980's.

The Company has initiated a study as to whether its clients, suppliers and
service providers are year 2000 compliant and what effect, if any, noncompliance
could have on the Company's operations.  The Company's primary vendors consist
of individual translators and other service professionals who are not expected
to be materially impacted by the year 2000 issue.  The Company does have
relationships with various financial institutions, which could be materially
impacted by this problem.

The Company has budgeted less than $100,000 to purchase a new operations
administration system for its foreign subsidiary referred to above.  The Company
does not expect the costs to remediate the year 2000 problem to have a material
effect on the Company's financial statements.

NEW ACCOUNTING STANDARD

In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131"), was
issued.  The Company will adopt FAS 131 at the end of 1998.  It is not
anticipated that the adoption of this statement will have a material effect on
the financial statements of the Company.  Refer to note 6 to the Consolidated
Financial Statements for further information.

CAUTIONARY STATEMENT

The statements in this Management's Discussion and Analysis that are not based
on historical data are forward looking, including for example, information about
future sales growth in various countries in future periods; expected changes in
the levels of various expenses, including income taxes; the Company's plans for
future investments in new offices, services, or products; and financing plans
and expectations.

Forward looking statements contained in this Management's Discussion and
Analysis involve numerous risks and uncertainties that could cause actual
results to be materially different from estimated or expected results. Such
risks and uncertainties include, among many others, fluctuating foreign currency
exchange rates, changing levels of demand for the Company's services, the effect
of constantly changing general economic and political conditions in the
countries in which the Company has operations, the impact of competitive
services and pricing, uncertainties caused by clients (including the timing of
projects and changes in the scope of services requested), and other risks and
uncertainties that may be disclosed from time to time in future public
statements or in documents filed with the Securities and Exchange Commission.
As a result, no assurance can be given as to future results.

                                       17
<PAGE>
 
                          PART II:  OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS
-------  -----------------

         Reference is made to "Item 3: Legal Proceedings" in the Company's
         Annual Report on Form 10-K for the year ended December 31, 1997, filed
         on March 27, 1998. The Company has filed a Motion to Dismiss both legal
         actions, which were subsequently combined, discussed in the Form 10-K.
         The U.S. District Court which has jurisdiction over this matter has not
         yet ruled on the Motion to Dismiss.

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K
-------  --------------------------------

(a)      The following exhibits are included herein:

         21   Subsidiaries of Registrant
         27   Financial Data Schedule

(b)      No reports on Form 8-K were filed during the three months ended
         September 30, 1998.

                                       18
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           ALPNET, Inc.
                                           ------------
                                           Registrant



Date:  9 November 1998                     /s/ Michael F. Eichner
       ---------------                     ----------------------
                                           Michael F. Eichner
                                           Chairman of the Board



Date:  9 November 1998                     /s/ John W. Wittwer
       ---------------                     ----------------------
                                           John W. Wittwer
                                           Chief Financial Officer

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