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

                                   FORM 10-QSB

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

     For the three months ended December 31, 2001

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

          Commission file number 0-16172

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

             Delaware                                    23-2472952
-----------------------------------          -----------------------------------
  (State or other jurisdiction of                       (IRS Employer
   incorporation or organization)                    Identification No.)

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

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

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

                                  Yes  X     No
                                      ---       ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  14,121,741 shares of common stock on
February 11, 2002.

Transitional Small Business Disclosure Format (check one):  Yes        No  X
                                                                ---       ---

<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES

                                      INDEX

                         PART I - FINANCIAL INFORMATION

ITEM 1.  Financial Statements:

         Unaudited Consolidated Balance Sheets as of December 31, 2001
            and March 31, 2001                                                 3

         Unaudited Consolidated Statements of Operations for the three
            months ended December 31, 2001 and December 31, 2000               4

         Unaudited Consolidated Statements of Operations for the nine
            months ended December 31, 2001 and December 31, 2000               5

         Unaudited Consolidated Statements of Cash Flows for the nine
            months ended December 31, 2001 and December 31, 2000               6

         Notes to Unaudited Consolidated Financial Statements                  7

ITEM 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                               14

                           PART II - OTHER INFORMATION

ITEM 2.  Changes in Securities                                                18

ITEM 3.  Defaults Upon Senior Securities                                      18

ITEM 4.  Submission of Matters to a Vote of Security Holders                  18

ITEM 6.  Exhibits and Reports on Form 8-K                                     19

SIGNATURES                                                                    20

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

                     Computone Corporation and Subsidiaries
                      Unaudited Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                          December 31, 2001  March 31, 2001
                                                                          -----------------  --------------
ASSETS
Current assets:
<S>                                                                          <C>              <C>
    Cash and cash equivalents                                                $         41     $        264
    Receivables, net of allowance for doubtful accounts
       of $97 as of December 31, 2001 and $150 as of March 31, 2001                   713            1,297
    Inventories, net                                                                1,589            2,173
    Prepaid expenses and other                                                         60              163
                                                                             ------------     ------------
Total current assets                                                                2,403            3,897

Property and equipment, net                                                           449              606

Goodwill                                                                            8,078            8,078

Software development costs, net of accumulated amortization
   of $327 as of December 31, 2001 and $687 as of March 31, 2001                      242              242

Other                                                                                   8              127
                                                                             ------------     ------------

Total assets                                                                 $     11,180     $     12,950
                                                                             ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable, trade                                                  $      1,792     $      2,056
    Accrued liabilities:
         Deferred maintenance revenue                                                 914              848
         Interest                                                                     132              163
         Other                                                                        714              733
   Line of credit                                                                      62              587
   Notes payable to stockholders                                                      413              495
   Current maturities of long-term debt, net of discount of
     $0 as of December 31, 2001 and $691 as of March 31, 2001                       2,500            1,809
                                                                             ------------     ------------
Total current liabilities                                                           6,527            6,691
                                                                             ------------     ------------

Commitments and contingencies

Series A redeemable convertible preferred stock, $10 stated value;
  400,000 shares authorized; 92,343 and no shares issued and outstanding,
   as of December 31, 2001 and March 31, 2001, respectively                           831               --
                                                                             ------------     ------------

Stockholders' equity:
  Common stock, $.01 par value; 25,000,000 shares authorized;
   14,121,741 and 12,853,577 shares issued and outstanding,
   as of December 31, 2001 and March 31, 2001, respectively                           141              129
  Additional paid-in capital                                                       60,749           59,150
  Accumulated deficit                                                             (57,068)         (53,020)
                                                                             ------------     ------------
Total stockholders' equity                                                          3,822            6,259
                                                                             ------------     ------------

Total liabilities and stockholders' equity                                   $     11,180     $     12,950
                                                                             ============     ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                        3
<PAGE>

                         PART I - FINANCIAL INFORMATION

                     Computone Corporation and Subsidiaries
                 Unaudited Consolidated Statements of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              For the three months ended
                                                                          -----------------------------------
                                                                          December 31, 2001 December 31, 2000
                                                                          ----------------- -----------------
Revenues:
<S>                                                                          <C>              <C>
     Connectivity products                                                   $        806     $      2,113
     Service and support                                                            1,281            1,647
                                                                             ------------     ------------
                                                                                    2,087            3,760
                                                                             ------------     ------------
Expenses:
     Cost of connectivity products                                                    464            1,355
     Cost of service and support                                                      826            1,165
     Amortization of goodwill                                                          --              216
     Selling, general and administrative                                            1,269            1,383
     Product development                                                              337              318
                                                                             ------------     ------------
                                                                                    2,896            4,437
                                                                             ------------     ------------

Operating loss                                                                       (809)            (677)

Other income (expense):
     Loan discount amortization                                                      (237)            (212)
     Interest expense - affiliates                                                     (7)             (25)
     Interest expense - other                                                         (79)             (98)
     Other income (expense)                                                            (1)              19
                                                                             ------------     ------------

Loss before income taxes                                                           (1,133)            (993)

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

Net loss                                                                           (1,133)            (993)

Preferred stock dividend                                                              (16)              --

Dividend associated with preferred stock beneficial
  conversion feature                                                                  (38)              --
                                                                             ------------     ------------

Net loss available to common stockholders                                    $     (1,187)    $       (993)
                                                                             ============     ============

Loss per common share - basic and diluted                                    $      (0.09)    $      (0.08)
                                                                             ============     ============

Weighted average shares outstanding - basic and diluted                            13,752           12,138
                                                                             ============     ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                        4
<PAGE>

                         PART I - FINANCIAL INFORMATION

                     Computone Corporation and Subsidiaries
                 Unaudited Consolidated Statements of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               For the nine months ended
                                                                          -----------------------------------
                                                                          December 31, 2001 December 31, 2000
                                                                          ----------------- -----------------
Revenues:
<S>                                                                          <C>              <C>
     Connectivity products                                                   $      2,712     $      4,826
     Service and support                                                            4,452            3,112
                                                                             ------------     ------------
                                                                                    7,164            7,938
                                                                             ------------     ------------
Expenses:
     Cost of connectivity products                                                  1,769            3,246
     Cost of service and support                                                    2,894            2,161
     Amortization of goodwill                                                          --              436
     Selling, general and administrative                                            4,250            3,443
     Product development                                                            1,129            1,007
                                                                             ------------     ------------
                                                                                   10,042           10,293
                                                                             ------------     ------------

Operating loss                                                                     (2,878)          (2,355)

Other  income (expense):
     Loan discount amortization                                                      (692)            (418)
     Interest expense - affiliates                                                    (43)             (69)
     Interest expense - other                                                        (223)            (235)
     Other income                                                                       7               24
                                                                             ------------     ------------

Loss before income taxes                                                           (3,829)          (3,053)

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

Net loss                                                                           (3,829)          (3,053)

Preferred stock dividend                                                              (38)              --

Dividend associated with preferred stock beneficial
  conversion feature                                                                 (181)              --
                                                                             ------------     ------------

Net loss available to common stockholders                                    $     (4,048)    $     (3,053)
                                                                             ============     ============

Loss per common share - basic and diluted                                    $      (0.31)    $      (0.27)
                                                                             ============     ============

Weighted average shares outstanding - basic and diluted                            13,214           11,431
                                                                             ============     ============
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                        5
<PAGE>

                         PART I - FINANCIAL INFORMATION

                     Computone Corporation and Subsidiaries
                 Unaudited Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                               For the nine months ended
                                                                          -----------------------------------
                                                                          December 31, 2001 December 31, 2000
                                                                          ----------------- -----------------
Cash flows from operating activities:
<S>                                                                          <C>              <C>
  Net loss                                                                   $     (3,829)    $     (3,053)
  Adjustments to reconcile net loss to net cash used in operations:
       Common stock issued for consulting services                                  1,071               --
       Depreciation and amortization                                                  985            1,210
       Provision for uncollectible accounts receivable                                 27               52
       Provision for inventory reserve                                                110              237
       Changes in current assets and current liabilities, net of effects
        from business acquired
          Receivables                                                                 557             (458)
          Inventories                                                                 474              307
          Prepaid expenses and other                                                  103               63
          Other assets                                                                119              (99)
          Accounts payable and accrued liabilities                                    (59)            (114)
                                                                             ------------     ------------

Net cash used in operations                                                          (442)          (1,855)
                                                                             ------------     ------------

Cash flows from investing activities:
   Acquisition of business                                                             --           (4,150)
   Capitalization of software costs                                                   (98)             (44)
   Capital expenditures                                                               (39)            (232)
                                                                             ------------     ------------

Net cash used in investing activities                                                (137)          (4,426)
                                                                             ------------     ------------

Cash flows from financing activities:
  Proceeds from the issuance of debt                                                  200            2,500
  Repayment of debt                                                                   (58)            (382)
  Net repayments under lines of credit                                               (525)            (225)
  Capital contribution                                                                 --              250
  Proceeds from issuance of preferred stock, net of issuance cost of $46              739               --
  Proceeds from issuance of common stock, net of issuance cost of $325                 --            3,987
  Proceeds from exercise of common stock options                                       --               48
                                                                             ------------     ------------

Net cash provided by financing activities                                             356            6,178
                                                                             ------------     ------------

Net decrease in cash and cash equivalents                                            (223)            (103)
Cash and cash equivalents, beginning of year                                          264              197
                                                                             ------------     ------------
Cash and cash equivalents, end of period                                     $         41     $         94
                                                                             ============     ============

Supplemental disclosures of cash flow information:
    Cash paid during the period for:
        Interest                                                             $        154     $        166
Supplemental disclosures of non-cash financing and investing activities:
    Preferred stock issued for settlement of accounts payable
      and accrued liabilities                                                $        100     $         --
    Warrants associated with the issuance of preferred stock                           46               --
    Divided associated with preferred stock beneficial conversion feature             181               --
    Preferred stock issued for dividends                                               38               --
    Common stock issued for settlement of loans and accrued interest
      payable to shareholders                                                         303               --
    Common stock issued for settlement of accounts payable                              8               10
    Common stock issued for business acquired                                          --            3,800
    Common stock issued for consulting services                                     1,071               --
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.

                                        6
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
              UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     All statements  contained in this Form-10QSB  Quarterly Report that are not
historical  facts  are  based  on  current  expectations.  Such  statements  are
forward-looking  (as defined in the Private Securities  Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties.  Undue reliance
should  not be placed on any such  forward-looking  statements.  Actual  results
could vary  materially.  The  factors  that could cause  actual  results to vary
materially  include:  the ability of the Company to obtain and maintain adequate
working capital,  the ability of the Company to extend the maturity dates of its
debt, the ability of the Company to continue as a going concern,  the ability of
the Company to fund  operations,  expand sales volume and sales  personnel,  the
ability of the Company to improve  revenue  throughout  the  remainder of fiscal
2002, future supply and demand for the Company's  products,  changes in business
and economic  conditions,  availability  of raw materials  and parts,  and other
risks that may be described  from time to time in reports the Company files with
the Securities and Exchange Commission ("SEC").

1.   BASIS OF PRESENTATION

     The financial statements included in this Form 10-QSB Quarterly Report have
been  prepared  by  the  Company,  without  audit,  pursuant  to the  rules  and
regulations of the SEC. Certain information and footnote  disclosures,  normally
included in financial  statements prepared in accordance with generally accepted
accounting principles,  have been condensed, or omitted,  pursuant to such rules
and regulations.  These financial  statements should be read in conjunction with
the  financial  statements  and related notes  included in the Company's  Annual
Report on Form 10-KSB for its fiscal year ended March 31, 2001.

     The financial  statements presented herein as of December 31, 2001 reflect,
in the  opinion  of  management,  all  adjustments  (consisting  only of  normal
recurring  adjustments)  necessary for a fair presentation of financial position
and the  results  of  operations  for the  periods  presented.  The  results  of
operations for any interim period are not necessarily  indicative of the results
for the full year.

2.   GOING CONCERN UNCERTAINTY

     The accompanying  consolidated financial statements as of and for the three
and nine months ended  December 31, 2001 have been  prepared  assuming  that the
Company will continue as a going concern,  which contemplates the realization of
assets and the  settlement  of  liabilities  in the normal  course of  business.
During fiscal 2001,  the Company  incurred a net loss of  $4,423,000,  operating
cash flow deficiency of $1,279,000,  and as of March 31, 2001, the Company had a
working capital deficit of $2,794,000.  As of March 31, 2001, the Company was in
violation of the working capital ratio covenant of its line of credit  ("Line").
In April 2001, the lender demanded  payment of the Line's  $587,000  outstanding
balance and  terminated  the Line. As of March 31, 2001, the Company was also in
violation of the cross  default  provision of its 11%  $2,500,000  note payable.
During the nine months ended December 31, 2001, the Company  incurred a net loss
of  $3,829,000  and as of December 31, 2001,  the Company had a working  capital
deficit of  $4,124,000.  In addition,  as of December 31, 2001,  the Company had
$2,913,000  in  outstanding  principal  on  long-term  debt  including  the  11%
$2,500,000  note payable  which became due in December  2001 and is currently in
default.  These matters raise  substantial  doubt about the Company's ability to
continue as a going concern.  Management's  plans  concerning  these matters are
described  below.  The accompanying  consolidated  financial  statements for the
three and nine months  ended  December  31, 2001 do not include any  adjustments
that might result from the outcome of this uncertainty.

     During the nine months ended  December 31, 2001,  the Company raised equity
capital  through sales of its Series A redeemable  convertible  preferred  stock
("Preferred Stock") in the amount of $739,000, net of issuance costs of $46,000,
to help fund  operations.  During this period,  the Company  also issued  10,000
shares of  Preferred  Stock in  settlement  of $100,000 in accounts  payable and
accrued  interest due to an officer and a director.  In August 2001, the Company
reached an agreement to convert $100,000 of debt and $28,000 of accrued interest
into 217,514 shares of common stock.  In November  2001, the Company  reached an
agreement  to convert  $124,000  of debt and  $51,000 of accrued  interest  into
172,765  shares of common  stock.  Although the Company  continues to attempt to
extend the due dates on a portion of its remaining  debt,  no assurances  can be
given that such extensions will be obtained.

                                        7
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   GOING CONCERN UNCERTAINTY, CONTINUED

     The Company  continues to seek additional equity capital,  as required,  to
fund its operations in fiscal 2002 and to reduce indebtedness. Also, the Company
is pursuing  financing  alternatives  for its $2.5 million  note  payable  which
became due in December 2001 and is currently in default. The Company has entered
into  discussions with the lender regarding  strategic  alternatives  that would
restructure  or repay this  indebtedness.  There can be no assurances  that such
discussions  will be successful or that the lender will not take legal action to
collect  amounts due.  Furthermore,  no assurances can be given that the Company
will be able to obtain  additional  equity capital or  alternative  financing in
sufficient  amounts and/or under terms favorable to the Company.  The Company is
also considering opportunities to sell certain assets or license its technology.

     On June 22, 2001,  the Company paid in full all  obligations  due under its
line of credit and the line was terminated.  As a result,  the default under the
cross  default  provision  of the  Company's  11%  $2,500,000  note  payable was
eliminated.  On October 29, 2001, the Company entered into a $750,000  factoring
agreement  with a  lender.  At  December  31,  2001,  the  Company  had  $62,000
outstanding under this factoring agreement. The agreement enables the Company to
sell  selected  accounts  receivable  invoices to the lender with full  recourse
against the Company.  Although the Company has  established  this new  borrowing
facility, no assurances can be given that the Company has enough capital to fund
its operations.

3.   ACQUISITION

     On April 12, 2000, the Company entered into an agreement to acquire 100% of
the stock of Multi-User Solutions,  Ltd. ("Multi-User"),  a Georgia-based system
support and integration  company,  for an initial  purchase price of $7,945,000,
including  $145,000 in expenses,  consisting  of  $4,145,000 in cash and 800,000
shares of the Company's common stock valued at $3,800,000.  On June 28, 2000 the
Company  consummated  the  acquisition  and placed into escrow initial  purchase
consideration  of $200,000 in cash and 100,000  shares of the  Company's  common
stock valued at $475,000  pending  resolution of certain  matters as detailed in
the purchase  agreement.  On March 9, 2001,  upon  resolution of the above noted
matters,  the $200,000 escrow cash was paid to the Multi-User  shareholders  and
the 100,000  escrow  shares were returned to the Company in exchange for 500,000
new shares of the  Company's  common  stock  valued at  $359,000.  The  purchase
consideration  is subject to increase by up to $1,500,000,  payable half in cash
and half in the Company's common stock, contingent upon Multi-User's achievement
of  specified   performance   objectives  through  June  2003.  The  performance
objectives had not been achieved through December 31, 2001.

     The cash portion of the acquisition was financed through the issuance of an
11%, $2,500,000 note payable (see Note 8) and a portion of the $3,736,000 in net
proceeds  received  from  the  issuance  of  the  Company's  common  stock.  The
acquisition has been accounted for using the purchase method of accounting.  The
Company  recorded  goodwill of  $8,730,000 as a result of the  acquisition.  The
Company  amortized  $652,000 of this goodwill thru March 31, 2001 (see Note 12).
The consolidated statements of operations include the operations of the business
since the acquisition date.

                                        8
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.   ACQUISITION, CONTINUED.

     The  following  unaudited pro forma  information  for the nine months ended
December 31, 2000 gives effect to the  acquisition  of  Multi-User  as if it had
occurred on April 1, 2000 (in thousands, except per share data):

                                                           Nine months ended
                                                           December 31, 2000
                                                           =================
     Net sales                                              $          9,583
                                                            ================
     Net loss                                               $         (3,363)
                                                            ================
     Net loss per share - basic and diluted                 $          (0.28)
                                                            ================

4.   REVENUE RECOGNITION

     The Company  generally  recognizes  revenue  when  products are shipped and
services are performed, net of an allowance for estimated sales returns. At this
point,  persuasive evidence of a sale arrangement exists, delivery has occurred,
the Company's price to the buyer is fixed and  collectibility  of the associated
receivable is reasonably assured.  The Company's  recognition policy is to defer
recognition  of revenue and cost of products  sold on sales to customers who are
not end users of the Company's  products until such time as the  distributor has
sold the  product.  The Company  receives  non-refundable  advance  payments for
operating system and hardware  support service  contracts for varying periods of
no more than one year. The Company defers these payments and recognizes  revenue
on these  contracts  on a  straight-line  basis  over  the  term of the  related
contract.

     The Company  generally  provides a warranty  of five years on all  products
originally  manufactured  by the  Company.  A warranty  reserve of less than one
percent of sales, to cover the estimated costs of correcting product defects, is
accrued at the date of shipment.

5.   INVENTORIES

     Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out method. Raw materials that have no planned production
life or exceed 18 months of  anticipated  supply are deemed excess and are fully
reserved.  Reserves are also established,  as management deems appropriate,  for
obsolete,   excess  and  non-salable   inventories,   including  finished  goods
inventories.

     Inventories,  net of a reserve for obsolete,  excess and non-salable items,
consisted  of the  following  at  December  31,  2001  and  March  31,  2001 (in
thousands):

                                           December 31,         March 31,
                                               2001                2001
                                           ------------        ------------
     Inventories:
       Finished goods                      $        437        $        540
       Work in process                              114                 147
       Raw materials                              1,038               1,486
                                           ------------        ------------
                                           $      1,589        $      2,173
                                           ============        ============

                                        9
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.   EARNINGS PER SHARE

     Basic  earnings  per share  ("EPS")  excludes  dilution  and is computed by
dividing income (loss) available to common  shareholders by the weighted average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common  stock were  exercised or converted  into common  stock.  For purposes of
computing  diluted EPS, the Company  excluded the effects of outstanding  common
stock options, warrants and the conversion of Preferred Stock totaling 4,573,066
and 2,349,047 as of December 31, 2001 and 2000, respectively, as their effect is
anti-dilutive.  As a result of the sale of  Preferred  Stock  (see Note 9),  the
Company paid in  Preferred  Stock  $16,000 and $38,000 in  dividends  during the
three and nine months ended  December 31,  2001,  respectively,  and $38,000 and
$181,000  in  dividends   associated  with  the  Preferred  Stock's   beneficial
conversion  feature  during the three and nine months  ended  December 31, 2001,
respectively.  The beneficial conversion feature was accounted for as a debit to
accumulated  deficit offset against additional paid-in capital.  These Preferred
Stock dividends increased the net loss available to common stockholders.

7.   INCOME TAXES

     At  March  31,  2001,  the  Company  had net  operating  and  capital  loss
carryforwards totaling $39.0 million which expire at various dates through 2015,
including a predecessor company preacquisition operating loss carryforward. As a
result of  several  ownership  changes,  which  have  occurred  since the losses
started  to  accumulate,  statutory  provisions  will  substantially  limit  the
Company's future use of these loss carryforwards.

8.   LONG-TERM DEBT AND LINE OF CREDIT

     Through March 31, 2001,  the Company had a revolving  line of credit with a
bank that provided for  borrowings  of up to  $1,400,000  based on the available
borrowing base, as defined (the "Line"). Borrowings under the Line bore interest
at prime plus 2%. As of March 31, 2001,  the Company had $587,000 in outstanding
borrowings  under  the  Line.  The  Line  was  collateralized  primarily  by the
Company's  accounts  receivable  and inventory.  The Line contained  minimum net
working  capital and tangible net worth covenants and, as of March 31, 2001, the
Company was in violation of the minimum net working capital  covenant.  In April
2001, the lender made demand for immediate  payment of all outstanding  balances
under the Line and terminated the Line. On June 22, 2001, the Company repaid all
remaining Line borrowings.

     On  October  29,  2001,  the  Company  entered  into a  $750,000  factoring
agreement with a lender.  The agreement  enables the Company to factor  selected
accounts  receivable  invoices  with the lender with full  recourse  against the
Company and bears interest at prime plus 3% with a minimum  interest rate of 8%.
The Company will factor the selected  invoices for an initial advance of 80% the
total  invoice  balance  and will be  charged a .30% to 3.00%  factoring  charge
depending on the number of days the invoices remain outstanding. At December 31,
2001,  the Company  had  $62,000 in  outstanding  borrowings  leaving  less than
$10,000 available under the factoring agreement.

     On June 28, 2000,  the Company  entered into an agreement  with a lender to
issue a  $2,500,000,  11% note  payable  that became due in  December  2001 (the
"Note") the proceeds of which were used to fund the Multi-User  acquisition  and
the Company's  general working capital needs. The Note also required the Company
to issue a warrant to purchase 392,577 shares of its common stock exercisable at
$3.25 per share.  The warrant is currently  exercisable  in whole or in part and
expires in June 2003. The agreement  called for the warrant exercise price to be
adjusted in the event the Company issued any additional  shares of common stock,
warrants  or  options  exercisable  at less the  $3.25 per  share  price.  As of
December  31,  2001,  the  adjusted  exercise  price of the  warrant  was $2.54.
Exercise of the warrant may be either in cash or by  surrender of the warrant to
the Company in exchange for the Company's common stock equal to the value of the
warrants as defined in the warrant  agreement.  The fair value of the warrant of
$1,328,000,  determined through the use of the Black Sholes valuation model, was
accounted for as additional  paid-in-capital (debt discount) in the accompanying
consolidated balance sheet.

                                       10
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.   LONG-TERM DEBT AND LINE OF CREDIT, CONTINUED

     Through June 22, 2001,  the Note was  subordinated  to the Company's  Line.
Effective October 29, 2001, the Note is subordinated to the Company's  factoring
agreement. The Note is guaranteed by the Company and its wholly-owned subsidiary
and places  restrictions  on the  Company's  ability to sell its business or its
product  lines,  incur  additional  indebtedness,   declare  or  pay  dividends,
consolidate,  merge or sell its business and make  investments.  The note became
due in  December  2001 and is  currently  in  default.  The  Company is pursuing
financing  alternatives  and has  entered  into  discussions  with the lender to
consider   strategic   alternatives   that  would   restructure  or  repay  this
indebtedness.  No  assurances  can be  given  that the  Company  will be able to
complete financing or strategic  alternatives in sufficient amounts and/or under
terms acceptable to the Company.

9.   REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK

     In March 2001, the Company's board of directors  authorized the issuance of
up to  400,000  shares  of  its  Preferred  Stock.  The  Preferred  Stock  has a
liquidation  preference of $10 per share plus accrued but unpaid dividends.  The
Preferred  Stock  provides for dividends  equal to $.60 per share per annum paid
quarterly  commencing June 30, 2001,  increasing to $.80 per share per annum 120
days  after  issuance  of the  Preferred  Stock  if  the  shares  issuable  upon
conversion to common stock are not then  registered  for resale and remaining at
$.80 per share until such common stock is registered. Between March 31, 2001 and
February 28, 2003,  the Company has the option to pay dividends in shares of the
Company's  Preferred  Stock at $10 per share.  Dividends are cumulative and have
preference over payments on any of the Company's other equity securities.

     Each share of Preferred Stock is convertible  upon issuance,  at the option
of the  holder,  into 17  shares  of the  Company's  common  stock,  subject  to
adjustment  as provided in the  certificate  of  designation  for the  Preferred
Stock.  Each share of Preferred  Stock has voting  rights equal to the number of
common shares on an as converted basis.

     The Company has the option to redeem the Preferred Stock  commencing  March
1, 2003 for $11.50 per share,  March 1, 2004 for $11.00 per share, March 1, 2005
for $10.50 per share, and March 1, 2006 and thereafter for $10.00 per share. The
Company  also has the option to redeem the  Preferred  Stock at $10.00 per share
commencing  one year after  issuance if the fair value of the  Company's  common
stock equals or exceeds  $2.00 for any 20  consecutive  days  subsequent to that
date and the shares issuable upon conversion are  registered.  In addition,  the
Preferred  Stock  holders  have the option to require  the Company to redeem the
Preferred  Stock upon a change of control if the market  value of the  Company's
common  stock is less than the  Conversion  Price,  as defined in the  Preferred
Stock agreement, for $11.50 per share.

     During the nine months ended  December 31, 2001,  the Company issued 88,570
shares of Preferred Stock valued at $885,000 for cash proceeds of $739,000,  net
of issuance  costs of $46,000,  and for settlement of $100,000 due to an officer
and a director.  During the nine months ended  December  31,  2001,  the Company
issued 3,773  shares of  Preferred  Stock to pay  dividends  earned  during that
period.  The  issuance of  Preferred  Stock  resulted  in the Company  recording
$38,000 and  $181,000 in dividends  associated  with the  beneficial  conversion
feature in the three and nine months ended December 31, 2001, respectively.  The
beneficial  conversion  feature  was  accounted  for as a debit  to  accumulated
deficit offset  against  additional  paid-in  capital.  In conjunction  with the
issuance of the Preferred  Stock,  the Company  granted a warrant to PMG Capital
Corp.,  ("PMG"), an affiliated entity acting as the placement agent, to purchase
38,335 shares of its common stock  exercisable at $.5883 per share.  The warrant
is currently exercisable in whole or in part and expires in March 2006. The fair
value of the warrant of $46,000,  determined through the use of the Black Sholes
valuation  model, was accounted for as a reduction in the Preferred Stock and an
increase in additional  paid-in-capital in the accompanying consolidated balance
sheet.

                                       11
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.   REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK, CONTINUED.

     During  September  2001,  the Company issued 600,000 shares of common stock
valued at $855,000 as compensation  for consulting  services to be provided over
future periods. During October 2001, the Company issued 268,000 shares of common
stock valued at $216,000 to another  consultant as compensation  for services to
be provided over future periods. The Company recorded the expense in the periods
the shares were issued. The consultants provide services concerning  management,
marketing, consulting, strategic planning, corporate organization and structure,
financial  matters in  connection  with the  operation  of the  business  of the
Company,  expansion of services,  acquisitions and business  opportunities,  and
shall review and advise the Company  regarding its overall  progress,  needs and
condition.

10.  SEGMENT INFORMATION

     The Company  identifies  its  reportable  segments  based on the  segment's
product  offerings.  Prior to June 28, 2000, the Company had only one reportable
segment,  Connectivity Products. As a result of the June 28, 2000 acquisition of
Multi-User,  the Company created an additional segment associated with operating
system support,  systems integration and on site hardware  maintenance  (Service
and Support  segment).  Segment  information for the three and nine months ended
December 31, 2001 and 2000, respectively, is as follows:

<TABLE>
<CAPTION>
                                             Connectivity       Service        Consolidated
                                               Products       and Support         Totals
                                             ------------     ------------     ------------

     Three Months Ended December 31, 2001
<S>                                          <C>              <C>              <C>
     Revenue                                 $        806     $      1,281     $      2,087
     Operating income (loss)                         (893)              84             (809)
     Total assets                                   2,329            8,851           11,180

     Nine Months Ended December 31, 2001
     Revenue                                 $      2,712     $      4,452     $      7,164
     Operating income (loss)                       (3,448)             570           (2,878)
     Total assets                                   2,329            8,851           11,180

     Three Months Ended December 31, 2000
     Revenue                                 $      2,113     $      1,647     $      3,760
     Operating income (loss)                         (519)            (158)            (677)
     Total assets                                   4,910            9,716           14,626

     Nine Months Ended December 31, 2000
     Revenue                                 $      4,826     $      3,112     $      7,938
     Operating income (loss)                       (2,051)            (304)          (2,355)
     Total assets                                   4,910            9,716           14,626
</TABLE>

11.  CONTINGENCIES AND RELATED PARTY TRANSACTIONS

     On January 22, 2002, the SEC issued an interpretive  release on disclosures
related  to  liquidity  and  capital  resources,   including  off-balance  sheet
arrangements.  The Company does not have material off-balance sheet arrangements
or related  party  transactions.  The  Company is not aware of factors  that are
reasonably  likely to adversely  affect  liquidity  trends,  other than the risk
factors presented in this and other Company filings with the SEC.  However,  the
following  additional  information  is  provided to assist  financial  statement
users.

                                       12
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  CONTINGENCIES AND RELATED PARTY TRANSACTIONS, CONTINUED.

OPERATING   LEASES  -  These  leases   generally   are  entered  into  only  for
non-strategic  investments (e.g., warehouse and office space) where the economic
profile is favorable.  The Company has  $1,100,000 due on the lease through 2007
for its primary office space.

PURCHASE  COMMITMENTS  - The Company has  purchase  commitments  for  materials,
supplies,  services,  and property,  plant and equipment as part of the ordinary
conduct of business.  In the aggregate,  such  commitments  are not at prices in
excess of current  markets.  The Company does not believe such  commitments will
have a materially adverse affect on the Company.

OTHER  CONTRACTUAL  OBLIGATIONS - The Company does not have  material  financial
guarantees  or other  contractual  commitments  that are  reasonably  likely  to
adversely affect liquidity. However, the Company does have a contingent purchase
price provision associated with the prior acquisition of Multi-User.  The merger
consideration  paid to the Multi-User  shareholders is subject to increase by up
to  $1,500,000,  payable half in cash and half in the  Company's  common  stock,
contingent upon  Multi-User's  achievement of specified  performance  objectives
through  June 2003.  Based on results  through  December  31,  2001,  management
believes  that is  unlikely  that  Multi-User  will  achieve  these  performance
objectives.

RELATED PARTY TRANSACTIONS - During the nine months ended December 31, 2001, the
Company  issued  common  stock  valued at $303,000 to settle  notes  payable and
accrued interest due to two shareholders.  At December 31, 2001, the Company had
notes payable due to shareholders of $413,000.  The Company incurred $43,000 and
$69,000 in interest  expense on related party notes payables for the nine months
ending December 31, 2001 and 2000, respectively.

12.  NEW ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards No. ("SFAS") 142,  "Accounting for
Goodwill and Other  Intangible  Assets",  effective  for fiscal years  beginning
after  December 15, 2001.  SFAS 142  establishes  new  accounting  standards for
goodwill and  continues to require the  recognition  of goodwill as an asset but
does not permit  amortization  of goodwill as previously  required by Accounting
Principles  Board Opinion No.  ("APB") 17,  "Intangible  Assets".  SFAS 142 also
establishes  a new  method of  testing  goodwill  for  impairment.  It  requires
goodwill to be separately  tested for impairment at a reporting unit level.  The
amount of  goodwill  determined  to be  impaired  would be  expensed  to current
operations.  As of April  1,  2001,  the  Company  adopted  SFAS  No.  142.  The
provisions  of  this  accounting  standard  also  require  the  completion  of a
transitional impairment test within six months of adoption, with any impairments
identified  treated as a cumulative effect of a change in accounting  principle.
The Company  performed a transitional  fair value based  impairment  test on its
goodwill and determined that the fair value exceeded the recorded value at April
1,  2001.  In  accordance  with  SFAS No.  142,  the  Company  discontinued  the
amortization of goodwill effective April 1, 2001. The net loss for the three and
nine  months  periods  ended  December  31,  2000 would have been  decreased  by
approximately  $216,000 and  $436,000,  respectively,  if the recorded  goodwill
amortization  were  reversed.  Basic and diluted  loss per share would have been
decreased by $0.02 and $0.04 for both the three and nine months  ended  December
31, 2000, respectively, if the recorded goodwill amortization were reversed.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal  of  Long-Lived  Assets".  The  pronouncement  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets and  supersedes  SFAS No.  121 and APB  Opinion  No. 30.  SFAS No. 144 is
effective  beginning  April 1, 2002 for the  Company's  first  quarter of fiscal
2003,  and  is  not  expected  to  have  a  material  impact  on  the  Company's
consolidated financial statements.

                                       13
<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES
        UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12.  NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED.

     In June  1998,  the  FASB  issued  SFAS  133,  "Accounting  For  Derivative
Instruments And Hedging Activities". The Company adopted SFAS 133 (as amended by
SFAS' 137 and 138) on April 1, 2001. This statement  establishes  accounting and
reporting  standards for derivative  instruments  including  certain  derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity  recognize all derivatives as either assets or liabilities in the
balance sheet  measured at fair value.  The Company's  April 1, 2001 adoption of
SFAS 133 had no  impact  on the  Company's  financial  position  or  results  of
operations as the Company has no derivative instruments.

ITEM 2.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF  FINANCIAL  CONDITION  AND
         RESULTS OF OPERATIONS

     All statements  contained in this Form-10QSB  Quarterly Report that are not
historical  facts  are  based  on  current  expectations.  Such  statements  are
forward-looking  (as defined in the Private Securities  Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties.  Undue reliance
should  not be placed on any such  forward-looking  statements.  Actual  results
could vary  materially.  The  factors  that could cause  actual  results to vary
materially  include:  the ability of the Company to obtain and maintain adequate
working capital,  the ability of the Company to extend the maturity dates of its
debt, the ability of the Company to continue as a going concern,  the ability of
the Company to fund  operations,  expand sales volume and sales  personnel,  the
ability of the Company to improve  revenue  throughout  the  remainder of fiscal
2002, future supply and demand for the Company's  products,  changes in business
and economic  conditions,  availability  of raw materials  and parts,  and other
risks that may be described  from time to time in reports the Company files with
the SEC.

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

THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2000

     During the three months ended December 31, 2001, the Company incurred a net
loss of $1,133,000 on net sales of $2,087,000 compared to a net loss of $993,000
during the three months ended December 31, 2000 on net sales of $3,760,000.

     Net sales of Connectivity  Products  decreased from  $2,113,000  during the
three months ended  December 31, 2000 to $806,000  during the three months ended
December 31, 2001.  This decrease in  Connectivity  Products sales was primarily
due to lower  sales to the  Company's  largest  non-distribution  customer.  The
Company  also  ended  its  relationship  with its  second  largest  distribution
customer, which accounted for $129,000 in revenues during the three months ended
December 31, 2000.  Additionally,  the Company continues to experience a decline
in sales of its legacy products  resulting in reduced revenues due to erosion in
the  asynchronous  product  market.  Net sales from Service and Support  segment
decreased  from  $1,647,000  during the three months ended  December 31, 2000 to
$1,281,000  during the three months ended  December 31, 2001.  This  decrease is
primarily due to lower sales to the Company's integration customers.

     Cost of  Connectivity  Products  totaled  $464,000,  or 58% of Connectivity
Product sales (42% gross  margin),  for the three months ended December 31, 2001
compared to $1,355,000, or 64% of Connectivity Product sales (36% gross margin),
for the three  months ended  December 31, 2000.  The increase in gross margin in
the current  year  period on  Connectivity  Products  compared to the prior year
period is primarily due to a change in the sales mix towards the Company's newer
products,  which  are sold at a higher  margin.  Cost of sales for  Service  and
Support  totaled  $826,000,  or 64% of Service  and Support  revenue  (36% gross
margin), for the three months ended December 31, 2001 compared to $1,165,000, or
70% of Service and Support  revenue  (30% gross  margin),  for the three  months
ended  December 31, 2000.  This  segment's  gross margin is dependent on product
costs,  product or service mix, and vendor costs,  all of which  fluctuate  from
period to period.

                                       14
<PAGE>

     In the three  months  ended  December  31,  2000,  the  Company  recorded a
non-cash  expense  of  $216,000  for  amortization  of  goodwill  related to the
acquisition of the Service and Support line of business. In accordance with SFAS
142, the Company  discontinued the  amortization of goodwill  effective April 1,
2001.  Instead,  goodwill was reviewed for  impairment  at April 1, 2001 with no
adjustment deemed necessary.

     Selling,  general and administrative  ("SGA") expenses for the three months
ended December 31, 2001 totaled $1,269,000  compared to $1,383,000 for the three
months ended December 31, 2000. SGA expenses  related to  Connectivity  Products
decreased  by $61,000  or 6% in the  current  year's  three-month  period.  This
decrease is  attributable  to the  Company's  cost  containment  efforts and was
partially  offset by the $216,000  non-cash charge the Company  recorded for the
issuance of 268,000 shares of common stock for consulting services. SGA expenses
for Service and Support were  $371,000  for the three months ended  December 31,
2001  compared to $424,000 for the three months  ended  December 31, 2000.  This
decrease of $53,000, or 13%, is also the result of cost containment efforts.

     Product  development  costs  charged to expense for the three  months ended
December  31,  2001  totaled  $337,000,  or 41% of total net sales,  compared to
$318,000,  or 15% of total net sales for the three month period  ended  December
31, 2000. This slight increase of $19,000,  or 6%, is primarily due to increases
in product development personnel.

     Interest  expense charged by others for the three months ended December 31,
2001 totaled $79,000 compared to $98,000 for the three months ended December 31,
2000.  This  decrease  of $19,000 is due to lower  levels of  outstanding  debt.
During the three months ended December 31, 2001, the Company  expensed  $237,000
related to  amortization  of the  discount on the 11%,  $2,500,000  note payable
compared to $212,000 during the three months ended December 31, 2000.

NINE MONTHS ENDED  DECEMBER 31, 2001 COMPARED TO THE NINE MONTHS ENDED  DECEMBER
--------------------------------------------------------------------------------
31, 2000
--------

     During the nine months ended December 31, 2001, the Company  incurred a net
loss  of  $3,829,000  on net  sales  of  $7,164,000  compared  to a net  loss of
$3,053,000  during  the nine  months  ended  December  31,  2000 on net sales of
$7,938,000.

     Net sales of Connectivity  Products  decreased from  $4,826,000  during the
nine months ended  December 31, 2000 to $2,712,000  during the nine months ended
December 31, 2001.  This decrease in  Connectivity  Products sales was primarily
due to lower  sales to the  Company's  largest  non-distribution  customer.  The
Company also ended in the third quarter of fiscal 2002 its relationship with its
second largest distribution  customer,  which accounted for $380,000 in revenues
during the nine  months  ended  December  31,  2000.  Additionally,  the Company
continues to experience a decline in sales of its legacy  products  resulting in
reduced  revenues due to erosion in the asynchronous  product market.  Net sales
from  Service and Support  segment  increased  from  $3,112,000  during the nine
months  ended  December  31, 2000 to  $4,452,000  during the nine  months  ended
December 31, 2001. Due to the June 28, 2000 acquisition of Multi-User, the prior
year  nine-month  period only included six months of operations from the Service
and Support segment.

     Cost  of  Connectivity   Products  sold  totaled  $1,769,000,   or  65%  of
Connectivity  Product  sales  (35%  gross  margin),  for the nine  months  ended
December 31, 2001 compared to $3,246,000,  or 67% of Connectivity  Product sales
(33% gross margin), for the nine months ended December 2000. The slight increase
in gross margin in the current year period on Connectivity  Products compared to
the prior year period is primarily  due to a change in the sales mix towards the
Company's newer products,  which are sold at a higher margin. This was offset by
the  continuation of certain fixed operating costs that were not affected by the
reduction  in sales  volume.  Cost of sales  for  Service  and  Support  totaled
$2,894,000,  or 65% of Service and Support  revenue (35% gross margin),  for the
nine months ended  December 31, 2001 compared to  $2,161,000,  or 69% of Service
and Support  revenue (31% gross margin),  for the nine months ended December 31,
2000.  Due to the June 28,  2000  acquisition  of  Multi-User,  the  prior  year
nine-month  period only included six months of  operations  from the Service and
Support segment.

     In the nine months ended December 31, 2000, the Company recorded a non-cash
expense of $436,000 for  amortization of goodwill  related to the acquisition of
the Service and Support  line of  business.  In  accordance  with SFAS 142,  the
Company  discontinued  the  amortization  of goodwill  effective  April 1, 2001.
Instead,  goodwill  was  reviewed  for  impairment  at  April  1,  2001  with no
adjustment deemed necessary.

                                       15
<PAGE>

     Selling,  general and  administrative  ("SGA") expenses for the nine months
ended December 31, 2001 totaled  $4,250,000  compared to $3,443,000 for the nine
months ended December 31, 2000. SGA expenses  related to  Connectivity  Products
increased  by $638,000  or 24% in the current  year's  nine-month  period.  This
increase is attributable to the $1,071,000 non-cash charges the Company recorded
for the issuance of 868,000 shares of common stock for consulting services. This
increase  was offset in part by the  Company's  cost  containment  efforts.  SGA
expenses  for Service  and  Support  were  $988,000  for the nine  months  ended
December 31, 2001  compared to $819,000  for the nine months ended  December 31,
2000.  Due to the June 28,  2000  acquisition  of  Multi-User,  the  prior  year
nine-month  period only included six months of  operations  from the Service and
Support segment.

     Product  development  costs  charged to expense for the nine  months  ended
December 31, 2001  totaled  $1,129,000,  or 16% of total net sales,  compared to
$1,007,000,  or 13% of total net sales for the nine months  ended  December  31,
2000.  This  increase of  $122,000,  or 12%, is  primarily  due to  increases in
product development personnel.

     Interest  expense  charged by others for the nine months ended December 31,
2001 totaled  $223,000  compared to $235,000 for the nine months ended  December
31, 2000. The decrease is primarily due to the repayment of the Company's  Line.
This was  offset  by the  issuance  of new  debt  related  to the June 28,  2000
acquisition of  Multi-User.  During the nine months ended December 31, 2001, the
Company  expensed  $692,000  related to amortization of the discount on the 11%,
$2,500,000  note  payable  compared  to $418,000  during the nine  months  ended
December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     During  fiscal  2001,  the  Company  incurred  a net  loss  of  $4,423,000,
operating  cash flow  deficiency of  $1,279,000,  and as of March 31, 2001,  the
Company had a working capital  deficit of $2,794,000.  As of March 31, 2001, the
Company was in violation of the working  capital ratio  covenant of its Line. In
April  2001,  the lender  demanded  payment of the Line's  $587,000  outstanding
balance and  terminated  the Line. As of March 31, 2001, the Company was also in
violation of the cross  default  provision of its 11%  $2,500,000  note payable.
During the nine months ended December 31, 2001, the Company  incurred a net loss
of  $3,829,000  and as of December 31, 2001,  the Company had a working  capital
deficit of  $4,124,000.  In addition,  as of December 31, 2001,  the Company had
$2,913,000  in  outstanding  principal  on  long-term  debt  including  the  11%
$2,500,000  note payable  which became due in December  2001 and is currently in
default.  These matters raise  substantial  doubt about the Company's ability to
continue as a going concern.  Management's  plans  concerning  these matters are
described below.

     During the nine months ended  December 31, 2001,  the Company raised equity
capital through sales of its Preferred  Stock in the amount of $739,000,  net of
issuance  costs of $46,000,  to help fund  operations.  During this period,  the
Company also issued 10,000  shares of Preferred  Stock in settlement of $100,000
in accounts  payable and accrued  interest due to an officer and a director.  In
August 2001,  the Company  reached an agreement to convert  $100,000 of debt and
$28,000 of accrued  interest into 217,514  shares of common  stock.  In November
2001, the Company  reached an agreement to convert  $124,000 of debt and $51,000
of accrued  interest into 172,765  shares of common stock.  Although the Company
continues  to attempt to  refinance  or extend the due dates on a portion of its
remaining  debt,  no  assurances  can be  given  that  such  extensions  will be
obtained.

     The  Company   financed  its  operations   and  met  its  working   capital
requirements  over the last nine  months  through  the  issuance  of $739,000 of
Preferred Stock and a $627,000 prepayment from one of its customers. The Company
believes that cash generated by operations  will be  insufficient to satisfy the
Company's  cash  requirements  for the remainder of the fiscal year ending March
31, 2002 by approximately $500,000.  Therefore,  the Company will be required to
consider other financing alternatives, such as selling additional equity or debt
securities or obtaining long or short-term credit facilities.  No assurances can
be given that the  Company  will be able to obtain such  financing.  Any sale of
additional  equity or  convertible  debt  securities  will result in  additional
dilution of the Company's stockholders.  Additionally, the Company will consider
opportunities to sell certain assets or license its technology.  A deterioration
in operating performance may make it more difficult to raise needed capital.

                                       16
<PAGE>

     On June 22, 2001,  the Company paid in full all  obligations  due under its
line of credit and the line was terminated.  As a result,  the default under the
cross  default  provision  of the  Company's  11%  $2,500,000  note  payable was
eliminated.  On October 29, 2001, the Company entered into a $750,000  factoring
agreement  with a lender,  and at  December  31,  2001,  the Company had $62,000
outstanding under this factoring agreement. The agreement enables the Company to
sell  selected  accounts  receivable  invoices to the lender with full  recourse
against the Company.  Although the Company has  established  this new  borrowing
facility, no assurances can be given that the Company has enough capital to fund
its operations.

     Cash used by  operating  activities  amounted to  $442,000  during the nine
months ended  December 31, 2001  compared to  $1,855,000  during the nine months
ended December 31, 2000. A portion of the cash consumed by operating  losses for
the nine months  ended  December  31, 2001 was offset by  decreases  in accounts
receivables and inventory.

     Cash used in  investing  activities  amounted to  $137,000  during the nine
months ended  December 31, 2001 compared to $4,426,000 for the nine months ended
December 31, 2000. The prior year amount consisted primarily of cash used in the
June 28, 2000 acquisition of Multi-User.

     Cash provided by financing  activities amounted to $356,000 during the nine
months ended December 31, 2001 compared to cash provided by financing activities
of $6,178,000  during the nine months ended  December 31, 2000.  The decrease in
net cash  inflow  resulted  from a  reduction  in  proceeds  collected  from the
issuance  of stock and a note  payable in the prior  year  period as well as the
repayment of the Company's line of credit in the current year period.

     Working  capital  deficit  amounted  to  $4,124,000  at  December  31, 2001
compared to $2,794,000 at March 31, 2001. The ratio of current assets to current
liabilities  at December  31, 2001 was 0.37 to 1.00  compared to 0.58 to 1.00 at
March 31, 2001.

COMMITMENTS AND CONTINGENCIES
-----------------------------

     On January 22,  2002,  the  Securities  and Exchange  Commission  issued an
interpretive  release on disclosures related to liquidity and capital resources,
including  off-balance  sheet  arrangements.  The Company does not have material
off-balance sheet arrangements or related party transactions. The Company is not
aware of  factors  that are  reasonably  likely to  adversely  affect  liquidity
trends, other than the risk factors presented in other Company filings. However,
the following  additional  information is provided to assist financial statement
users.

OPERATING   LEASES  -  These  leases   generally   are  entered  into  only  for
non-strategic  investments (e.g., warehouse and office space) where the economic
profile is favorable.  The Company has  $1,100,000 due on the lease through 2007
for its primary office space.

PURCHASE  COMMITMENTS  - The Company has  purchase  commitments  for  materials,
supplies,  services,  and property,  plant and equipment as part of the ordinary
conduct of business.  In the aggregate,  such  commitments  are not at prices in
excess of current  markets.  The Company does not believe such  commitments will
have a materially adverse affect on the Company.

OTHER  CONTRACTUAL  OBLIGATIONS - The Company does not have  material  financial
guarantees  or other  contractual  commitments  that are  reasonably  likely  to
adversely affect liquidity. However, the Company does have a contingent purchase
price provision associated with the prior acquisition of Multi-User.  The merger
consideration  paid to the Multi-User  shareholders is subject to increase by up
to  $1,500,000,  payable half in cash and half in the  Company's  common  stock,
contingent upon  Multi-User's  achievement of specified  performance  objectives
through  June 2003.  Based on results  through  December  31,  2001,  management
believes  that is  unlikely  that  Multi-User  will  achieve  these  performance
objectives.

                                       17
<PAGE>

RELATED PARTY TRANSACTIONS - During the nine months ended December 31, 2001, the
Company  issued  common  stock  valued at $303,000 to settle  notes  payable and
accrued interest due to two shareholders.  At December 31, 2001, the Company had
notes payable due to shareholders of $413,000.  The Company incurred $43,000 and
$69,000 in interest  expense on related party notes payables for the nine months
ending December 31, 2001 and 2000, respectively.

                           PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

(c) During the three months ended  December 31, 2001,  the Company  issued 9,970
shares of Preferred Stock to an accredited investor,  who acquired the shares as
an investment.  See Note 9 of Notes to Consolidated Financial Statements,  which
is incorporated  herein by reference.  The Company relied on Section 4(2) of the
Securities Act of 1933 in the private placement.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     The Company's  $2,500,000  note payable became due during December 2001 and
is currently in default. Accrued interest owed on this note through February 12,
2002, is approximately  $101,000.  The Company has entered into discussions with
the lender regarding strategic alternatives that would restructure or repay this
indebtedness.  No  assurances  can be  given  that the  Company  will be able to
complete financing or strategic  alternatives in sufficient amounts and/or under
terms acceptable to the Company.

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

          The  Company  held,  on  January  29,  2002,  its  Annual  Meeting  of
          Stockholders at which the following actions were taken:

          1.   Five  directors  were  elected  to serve  until  the 2002  Annual
               Meeting of Stockholders and until their successors are elected:

          Name                             For                   Withhold
          ----                             ---                   --------
          John D. Freitag               7,528,972                 477,810
          E. Leo Bebeau                 7,528,972                 477,810
          Deborah Bailey                7,528,972                 477,810
          James Wilt                    2,113,859               5,892,923
          Frances DiPrete               5,080,249                       0

          Mr.  DiPrete  was  nominated  for  election  as a Director  during the
          meeting.  Mr.  Erik  Monninkhof  was not  elected as a  Director.  Mr.
          Monninkhof  received 1,314,771 votes FOR and 6,692,011 votes WITHHOLD.
          Subsequent to the meeting, Mr. Wilt resigned as a director.

          2.   A proposal  to amend the  Company's  Amended  and  Restated  1998
               Equity Incentive Plan for officers and key employees:

          For                           Against                 Abstain
          ---                           -------                 -------
          6,210,114                     1,790,501               2,833

          3.   A proposal  to approve  the  election of Deliotte & Touche LLP as
               independent public accountants for the 2002 fiscal year:

          For                           Against                 Abstain
          ---                           -------                 -------
          6,618,574                     1,385,112               3,096

                                       18
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          Number         Description of Exhibit

          3.1(i)         Certificate of Amendment of Registrant's Certificate of
                         Incorporation and amendments  thereto  (Incorporated by
                         reference to Exhibit 3.1(i) to the Registrant's  Report
                         on Form 10-QSB for the period ended January 2, 1998)

          3.1(ii)        By-laws of Registrant

On December 19, 2001, the Company filed Form 8-K updating the description of its
capital stock contained in its filings  pursuant to the Securities  Exchange Act
of 1934, as amended.

                                       19
<PAGE>

                                   SIGNATURES

     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              COMPUTONE CORPORATION


Date:  February 14, 2002      By:  /s/ E. Leo Bebeau
                                   -------------------
                                   E. Leo Bebeau
                                   President and Chief Executive Officer
                                   (Principal Executive Officer)


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

                                       20
<PAGE>