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 month period ended June 30, 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 Identification No.)
 incorporation or organization)

          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:  12,855,120 shares of common stock on
July 27, 2001.

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

<PAGE>

                     COMPUTONE CORPORATION AND SUBSIDIARIES

                                      INDEX

                         PART I - FINANCIAL INFORMATION

ITEM 1.   Consolidated Financial Statements:

          Consolidated Balance Sheets as of June 30, 2001
               and March 31, 2001                                              3

          Consolidated Statements of Operations for the three months
               ended June 30, 2001 and June 30, 2000                           4

          Consolidated Statements of Cash Flows for the three
               months ended June 30, 2001 and June 30, 2000                    5

          Notes to Consolidated Financial Statements                           6

ITEM 2.   Management's Discussion and Analysis for the three
               months ended June 30, 2001 compared to the three months
               ended June 30, 2000                                            11

                           PART II - OTHER INFORMATION

ITEM 1.   Legal Proceedings                                                   14

ITEM 2.   Changes in Securities                                               14

ITEM 3.   Defaults Upon Senior Securities                                     14

ITEM 4.   Submission of Matters to a Vote of Security Holders                 14

ITEM 5.   Other Information                                                   14

ITEM 6.   Exhibits and Reports on Form 8-K                                    14

SIGNATURES                                                                    15

                                       2
<PAGE>

                    PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

<TABLE>
<CAPTION>
                                                                             June 30, 2001   March 31, 2001
                                                                             ------------     ------------
ASSETS                                                                                         (unaudited)
Current assets:
<S>                                                                          <C>              <C>
    Cash and cash equivalents                                                $        616     $        264
    Receivables, net of allowance for doubtful accounts
       of $140 as of June 30, 2001 and $150 as of March 31, 2001                    1,191            1,297
    Inventories, net                                                                1,926            2,173
    Prepaid expenses and other                                                        147              163
                                                                             ------------     ------------
Total current assets                                                                3,880            3,897

Property and equipment, net                                                           545              606

Goodwill                                                                            8,078            8,078

Software development costs, net of accumulated amortization
   of $440 as of June 30, 2001 and $687 as of March 31, 2001                          215              242

Other                                                                                  84              127
                                                                             ------------     ------------

TOTAL ASSETS                                                                 $     12,802     $     12,950
                                                                             ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable, trade                                                  $      1,809     $      2,056
    Accrued liabilities:
         Deferred maintenance revenue                                                 936              848
         Deferred enterprise management revenue                                       461               --
         Deferred gross profit                                                         72              112
         Interest                                                                     123              163
         Other                                                                        511              621
   Line of credit                                                                      --              587
   Notes payable to stockholders                                                      637              495
   Current maturities of long-term debt, net of discount of
     $467 as of June 30, 2001 and $691 as of March 31, 2001                         2,033            1,809
                                                                             ------------     ------------
Total current liabilities                                                           6,582            6,691
                                                                             ------------     ------------

Commitments and contingencies

Series A redeemable convertible preferred stock, $10 stated value;
  400,000 shares authorized; 78,600 and no shares issued and outstanding,
  as of June 30, 2001 and March 31, 2001, respectively                                694               --
                                                                             ------------     ------------

Stockholders' equity:
  Common stock, $.01 par value; 25,000,000 shares authorized;
   12,855,120 and 12,853,577 shares issued and outstanding,
   as of June 30, 2001 and March 31, 2001, respectively                               129              129
  Additional paid-in capital                                                       59,340           59,150
  Accumulated deficit                                                             (53,943)         (53,020)
                                                                             ------------     ------------
Total stockholders' equity                                                          5,526            6,259
                                                                             ------------     ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $     12,802     $     12,950
                                                                             ============     ============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>

                         PART I - FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                             For the three months ended
                                                           -----------------------------
                                                          June 30, 2001    June 30, 2000
                                                           ------------     ------------
                                                                    (unaudited)
Revenues:
<S>                                                        <C>              <C>
     Connectivity products                                 $      1,077     $      1,178
     Service and support                                          1,737               60
                                                           ------------     ------------
                                                                  2,814            1,238
                                                           ------------     ------------
Expenses:
     Cost of connectivity products                                  724              890
     Cost of service and support                                  1,138               37
     Selling, general and administrative                          1,025              804
     Product development                                            386              357
                                                           ------------     ------------
                                                                  3,273            2,088
                                                           ------------     ------------

Operating loss                                                     (459)            (850)

Other income (expense):
     Loan discount amortization                                    (224)              --
     Interest expense - affiliates                                  (16)             (19)
     Interest expense - other                                       (77)             (54)
     Other income (expense)                                           4               (2)
                                                           ------------     ------------

Loss before income taxes                                           (772)            (925)

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

Net loss                                                           (772)            (925)

Preferred stock dividend                                             (8)              --

Dividend associated with preferred stock beneficial
  conversion feature                                               (143)              --
                                                           ------------     ------------

Net loss attributable to common stockholders               $       (923)    $       (925)
                                                           ============     ============

Loss per common share - basic and diluted                  $      (0.07)    $      (0.09)
                                                           ============     ============

Weighted average shares outstanding - basic and diluted          12,855           10,024
                                                           ============     ============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       4
<PAGE>

                          PART I - FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                              For the three months ended
                                                                             -----------------------------
                                                                            June 30, 2001    June 30, 2000
                                                                             ------------     ------------
                                                                                      (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>              <C>
  Net loss                                                                   $       (772)    $       (925)
  Adjustments to reconcile net loss to net cash
     provided by (used in) operations:
       Depreciation and amortization                                                  327              135
       Provision for uncollectible accounts receivable                                  6               31
       Provision for inventory reserve                                                 50               45
       Changes in current assets and current liabilities,
        net of effects from business acquired
          Receivables                                                                 100              252
          Inventories                                                                 197               61
          Prepaid expenses and other                                                   59             (134)
          Accounts payable and accrued liabilities                                    205              211
                                                                             ------------     ------------

Net cash provided by (used in) operations                                             172             (324)
                                                                             ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of business                                                             --           (4,145)
   Capitalization of software costs                                                    (8)             (23)
   Capital expenditures                                                                (7)            (140)
                                                                             ------------     ------------

Net cash used in investing activities                                                 (15)          (4,308)
                                                                             ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from the issuance of debt                                                  200            2,500
  Repayment of debt                                                                   (58)            (347)
  Net repayments under lines of credit                                               (587)            (843)
  Capital contribution                                                                 --              250
  Proceeds from issuance of preferred stock                                           686               --
  Cost associated with the issuance of preferred stock                                (46)              --
  Proceeds from issuance of common stock                                               --            4,062
  Cost associated with the issuance of common stock                                    --             (325)
  Proceeds from exercise of common stock options                                       --               24
                                                                             ------------     ------------

Net cash provided by financing activities                                             195            5,321
                                                                             ------------     ------------

Net increase in cash and cash equivalents                                             352              689
Cash and cash equivalents, beginning of year                                          264              197
                                                                             ------------     ------------
Cash and cash equivalents, end of period                                     $        616     $        886
                                                                             ============     ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period for:
        Interest                                                             $         77     $         54
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
    Preferred stock issued for settlement of accounts payable                $         50     $         --
    Preferred stock issued for settlement of accrued liabilities                       50               --
    Warrants associated with the issuance of preferred stock                           46               --
    Divided associated with preferred stock beneficial conversion feature             143               --
    Accrued preferred stock dividend                                                    8               --
    Common stock issued for settlement of accounts payable                              1               --
    Common stock issued for business acquired                                          --            3,800
</TABLE>

         See accompanying notes to the consolidated financial statements.

                                       5
<PAGE>

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

     All statements  contained in this Form 10-QSB Quarterly Report that are not
historical  facts  are  based  on  current  expectations.  Such  statements  are
forward-looking  (as defined in the Private Securities  Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties.  Actual results
could vary  materially.  The  factors  that could cause  actual  results to vary
materially  include:  the ability of the Company to obtain and maintain adequate
working capital, 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").  Undue reliance should not
be placed on any such forward-looking statements.

1.   BASIS OF PRESENTATION

     The  consolidated   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 consolidated financial statements
should be read in conjunction  with the  consolidated  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 consolidated  financial statements presented herein as of June 30, 2001
reflect,  in the opinion of  management,  all  adjustments  necessary for a fair
presentation of financial position and the results of operations for the periods
presented.  The results of operations for any interim period are not necessarily
indicative of the results for the full year.

2.   GOING CONCERN UNCERTAINTY

     The  accompanying  consolidated  financial  statements  for the three month
period  ended June 30, 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.  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 three
months ended June 30, 2001,  the Company  incurred a net loss of $772,000 and as
of June 30, 2001, the Company has a working  capital  deficit of $2,702,000.  In
addition,  as of June 30,  2001,  the  Company  has  $3,137,000  in  outstanding
principal on  long-term  debt  (exclusive  of debt  discount of  $467,000)  that
matures  during fiscal 2002.  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-month  period  ended June 30, 2001 do not include any
adjustments that might result from the outcome of this uncertainty.

     During the three  months  ended June 30, 2001,  the Company  raised  equity
capital in the amount of  $640,000,  net of issuance  costs of $46,000,  to help
fund  operations.  During this period,  the Company also issued 10,000 shares of
its Series A  redeemable  convertible  preferred  stock  ("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  $224,000 of debt and  $77,000 of accrued  interest  into 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.

     The Company intends to seek additional equity capital, as required, to fund
its operations in fiscal 2002 and to repay indebtedness.  However, no assurances
can be given that the Company will be able to obtain  additional  equity capital
in sufficient amounts and/or under terms favorable to the Company.

                                       6
<PAGE>

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

2.   GOING CONCERN UNCERTAINTY, CONTINUED

     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.  The Company is currently in discussions with prospective lenders to
establish  a new  line of  credit.  Although  the  Company  believes  it will be
successful in  establishing a new line of credit in the second quarter of fiscal
2002,  no  assurances  can be given that the Company  will be able to obtain the
line of credit in sufficient amount and/or under terms favorable to the Company.

     During June 2001,  the Company  received an advance  payment of $627,000 on
its first order for its new Enterprise Management System ("EMS"). The EMS system
is a hybrid product that combines  consulting,  integration,  installation,  and
support  offered by the Company's  Service and Support segment with hardware and
software  solutions  offered by the  Company's  Connectivity  Products  segment.
During the three months ended June 30, 2001, the Company recognized  $166,000 in
revenue associated with the delivered  hardware component of this order.  During
the first quarter of fiscal 2002, the Company has shipped initial units of the 4
port and 8 port versions of its remote access server  ("RAS") and remote console
management ("RCM") products.  Additionally, the Company shipped initial units of
the RCM  product  available  in 16,  32, 48 and 64 port  versions.  Several  new
customers  have placed orders for these products and  evaluations  continue with
several other new and existing  customers.  The Company  believes that net sales
will increase throughout the remainder of fiscal 2002. The Company will continue
to identify new  opportunities  to expand sales volume by adding sales personnel
and  leveraging  the  Company's  existing  distribution  channels.  However,  no
assurances  can be given that the Company  will  increase its revenues in fiscal
2002 to generate sufficient cash flow to fund its operations.

3.   ACQUISITION OF BUSINESS

     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 June 30, 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  acquistion.  The
Company  amortized  $652,000 of this  goodwill thru March 31, 2001 (see Note 9).
The consolidated statements of operations include the operations of the business
since the acquisition date.

                                       7
<PAGE>

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

3.   ACQUISITION OF BUSINESS, CONTINUED

     The following  unaudited pro forma  information  for the three months ended
June 30,  2000  gives  effect  to the  acquisition  of  Multi-User  as if it had
occurred on April 1, 2000 (in thousands, except per share data):

                                                        2000
                                                    ------------

          Net sales                                 $      2,884
                                                    ============
          Net loss                                  $     (1,237)
                                                    ============
          Net loss per share - basic and diluted    $      (0.11)
                                                    ============

4.   REVENUE RECOGNITION

     The Company generally  recognizes product revenue upon shipment,  net of an
allowance for sales returns, and service revenue when services are performed. At
these points,  persuasive  evidence of a sale arrangement  exists,  delivery has
occurred for product  sales and services,  the  Company's  price to the buyer is
fixed and  determinable,  and  collectibility  of the  associated  receivable is
reasonably assured.  The Company's policy is to defer recognition of revenue and
cost of products  sold on product sales to  distributors  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 two  years.  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 limited hardware warranty of three or five
years on all  products  originally  manufactured  by the  Company.  The  Company
provides a limited 90-day warranty on developed software.  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 average cost 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 June 30, 2001 and March 31, 2001 (in thousands):

                                  JUNE 30,        MARCH 31,
                                    2001            2001
                                ------------    ------------
          Inventories:
             Finished goods     $        551    $        540
             Work in process             165             147
             Raw materials             1,210           1,486
                                ------------    ------------
                                $      1,926    $      2,173
                                ============    ============

                                       8
<PAGE>

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

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 4,904,417
and 1,711,047 in the three months ended June 30, 2001 and 2000, respectively. As
a result of the sale of  Preferred  Stock (see Note 10),  the  Company  recorded
$8,000 in dividends on the outstanding  preferred shares and a one-time $143,000
dividend  associated with the Preferred Stock's beneficial  conversion  feature.
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. The Company is currently negotiating with prospective
lenders to provide working capital financing.

     On June 28, 2000,  the Company  entered into an agreement  with a lender to
issue a  $2,500,000,  11% note payable due on December 28, 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 June 30, 2001, the
adjusted exercise price of the warrant was $2.89. 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.

     Through March 31, 2001 the Note was  subordinated  to the Company's line of
credit.  The Note is guaranteed by the Company and its wholly owned subsidiaries
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 also
includes a cross default  provision whereby a default on the Note would occur if
the  Company  was in  default  of any  covenants  of any of its other  financing
arrangements in excess of $50,000.

                                       9
<PAGE>

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

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

     As of March 31,  2001,  the Company was in  violation  of the Note's  cross
default  provision.  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

9.   NEW ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial  Accounting Standards Board 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. In accordance with SFAS No. 142, the
Company discontinued the amortization of goodwill effective April 1, 2001.

10.  REDEEMABLE CONVERTIBLE PREFERRED 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 options 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 three  months  ended June 30, 2001,  the Company  issued  78,600
shares of Preferred Stock valued at $786,000 for cash proceeds of $640,000,  net
of issuance  costs of $46,000,  and for settlement of $100,000 due to an officer
and a director. The Preferred Stock contains a beneficial conversion feature. In
conjunction  with this  issuance,  the  Company  recorded  a  one-time  $143,000
dividend  associated with the Preferred Stock's beneficial  conversion  feature.
The  beneficial  conversion  feature was accounted for as a debit to accumulated
deficit offset against additional paid-in capital.

                                       10
<PAGE>

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

10.  REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONTINUED

     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  remaining  terms of the warrant  have not been
finalized. 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
Preferred   Stock  and  an  increase  in  additional   paid-in-capital   in  the
accompanying consolidated balance sheet.

11.  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 and an  additional  segment  associated  with
operating system support,  systems integration and on site hardware  maintenance
(Service and Support  segment).  Segment  information for the three months ended
June 30, 2001 and 2000, respectively, is as follows:

                                  CONNECTIVITY     SERVICE     CONSOLIDATED
                                    PRODUCTS     AND SUPPORT      TOTALS
                                   -----------    ----------    ----------

     QUARTER ENDED JUNE 30, 2001
     Revenue                       $    1,077     $    1,737    $    2,814
     Operating Income (Loss)             (766)           307          (459)
     Total Assets                       3,545          9,257        12,802

     QUARTER ENDED JUNE 30, 2000
     Revenue                       $    1,178     $       60    $    1,238
     Operating Income (Loss)             (853)             3          (850)
     Total Assets                       5,570         10,233        15,803


ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
          30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000.

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

     During the three  months ended June 30,  2001,  the Company  incurred a net
loss of $772,000 on  revenues  of  $2,814,000  compared to a net loss during the
three months ended June 30, 2000 of $925,000 on revenues of $1,238,000.

     Net sales of Connectivity  Products  decreased from  $1,178,000  during the
three  months  ended June 30, 2000 to  $1,077,000  during the three months ended
June 30, 2001. The slight decrease in Connectivity  Products sales was primarily
due to a decline in sales of its legacy products  resulting in reduced  revenues
due to  erosion  in the  asynchronous  product  market.  The net sales  from the
Service and Support  segment were $1,737,000 for the three months ended June 30,
2001 with minimal revenues in the prior year period.

     Cost of products sold totaled $724,000,  or 67% of product sales (33% gross
margin),  for the three months ended June 2001  compared to $890,000,  or 76% of
product  sales (24% gross  margin),  for the three months  ended June 2000.  The
increase in gross  margin in the current  year period on  Connectivity  Products
compared to the prior

                                       11
<PAGE>

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

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
          30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000, CONTINUED.

year  period is  primarily  due to  increased  margins  on the  Company's  newer
products.  Cost of sales for Service and Support for the three months ended June
2001 was $1,138,000 resulting in a gross margin of 34%.

     Selling,  general and  administrative  ("SGA") expenses for the three-month
period  ended June 30, 2001  totaled  $1,025,000  compared  to $804,000  for the
three-month  period ended June 30, 2000.  SGA expenses  related to  Connectivity
Products  decreased by $52,000 or 7% in the current year's  three-month  period.
This decrease is primarily  attributable  to cost  containment  efforts,  and is
partially offset by increases in sales  personnel.  SGA expenses for Service and
Support were $292,000 for the three-month period ended June 30, 2001.

     Product  development  costs  charged to expense for the three month  period
ended June 30, 2001  totaled  $386,000,  or 14% of total net sales,  compared to
$357,000,  or 29% of total net sales for the three month  period  ended June 30,
2000. This increase of $29,000,  or 8%, is primarily due to increases in product
development personnel.

     Interest  expense charged by others for the  three-month  period ended June
30, 2001 totaled $77,000  compared to $54,000 for the  three-month  period ended
June 30, 2000.  This increase of $23,000 is due primarily to the issuance of new
debt.  During the three month period ended June 30, 2001,  the Company  expensed
$224,000  related to  amortization  of the discount on the 11%,  $2,500,000 note
payable.

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 of
credit.  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 three months ended June 30, 2001, the Company incurred a net
loss of $772,000  and as of June 30,  2001,  the  Company has a working  capital
deficit of  $2,702,000.  In  addition,  as of June 30,  2001,  the  Company  has
$3,137,000  in  outstanding  principal  on  long  term-debt  (exclusive  of debt
discount of $467,000)  that matures  during  fiscal 2002.  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 three months ended June 30, 2001, the Company raised $640,000 in
equity capital, net of issuance costs of $46,000, to fund its operations. During
this period,  the Company also issued 10,000  shares of its  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  $224,000 of debt and  $77,000 of accrued  interest  into 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.

     The Company intends to seek additional equity capital, as required, to fund
its  operations  in  fiscal  2002 and to repay  its  indebtedness.  However,  no
assurances  can be given  that the  Company  will be able to  obtain  additional
equity  capital in  sufficient  amounts  and/or  under  terms  favorable  to the
Company.

     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.  The Company is currently in  discussions  with several  prospective
lenders to establish a new line of credit. Although the Company believes it will
be successful in establishing a new line of credit in the second

                                       12
<PAGE>

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

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
          30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000, CONTINUED.

quarter of fiscal 2002, no assurances can be given that the Company will be able
to obtain the line of credit in sufficient  amount and/or under terms  favorable
to the Company.

     During June 2001,  the Company  received an advance  payment of $627,000 on
its first order for its Enterprise  Management System ("EMS"). The EMS system is
a hybrid  product  that  combines  consulting,  integration,  installation,  and
support  offered by the Company's  Service and Support segment with hardware and
software  solutions  offered by the  Company's  Connectivity  Products  segment.
During the three months ended June 30, 2000, the Company recognized  $166,000 in
revenue associated with the delivered  hardware component of this order.  During
the first quarter of fiscal 2002, the Company has shipped initial units of the 4
port and 8 port versions of its remote access server  ("RAS") and remote console
management ("RCM") products.  Additionally, the Company shipped initial units of
the RCM  product  available  in 16,  32, 48 and 64 port  versions.  Several  new
customers  have placed orders for these products and  evaluations  continue with
several other new and existing  customers.  The Company  believes that net sales
will increase throughout the remainder of fiscal 2002. The Company will continue
to identify new  opportunities  to expand sales volume by adding sales personnel
and  leveraging  the  Company's  existing  distribution  channels.  However,  no
assurances  can be given that the Company  will  increase its revenues in fiscal
2002 to generate sufficient cash flow to fund its operations.

     Cash provided by operating activities amounted to $172,000 during the three
month period ended June 30, 2001  compared to cash used by operating  activities
of $324,000  during the three month  period  ended June 30,  2000. A portion the
cash consumed by operating losses for the three month period ended June 30, 2001
was offset by a decrease in accounts  receivables and inventory and increases in
accounts  payables and accrued  liabilities as well as higher  depreciation  and
amortization expenses.

     Cash used in  investing  activities  amounted  to $15,000  during the three
month  period  ended June 30, 2001  compared to  $4,308,000  for the three month
period ended June 30,  2000.  The prior year amount was  consisted  primarily of
cash used in the June 28, 2000 acquisition of Multi-User.

     Cash provided by financing activities amounted to $195,000 during the three
month period ended June 30, 2001  compared to cash used in financing  activities
of $5,321,000 during the three month period ended June 30, 2000. The decrease in
net cash inflow  resulted from a reduction in from 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 $2,702,000 at June 30, 2001 compared to
$2,794,000 at March 31, 2001, an  improvement  of $92,000.  The ratio of current
assets to current liabilities at June 30, 2001 was 0.59 to 1.00 compared to 0.58
to 1.00 at March 31, 2001.

OUTLOOK FOR REMAINDER OF FISCAL YEAR 2002
-----------------------------------------

     The company began shipments on five new products in June 2001. Three of the
new  products  are the next  generation  of  console  management  products  with
In-Band,  Out-of-Band  and Remote  Console  Management  capabilities.  The other
products   strengthen  the  popular  line  of  the  Company's  server  products.
Additionally,  in June,  the Company signed an agreement with one of the largest
global broadband  Internet-based data, voice and image communications  companies
in North America.  Initial  deliveries  exceed  $600,000 and are scheduled to be
completed over a six-month period.  The Company has made significant  changes in
its  management  during  the last five  months  with a new  president  and chief
executive officer, a new executive vice president and chief technology  officer,
and a new vice  president of North  American  sales.  The Company has also added
members to the Board of

                                       13
<PAGE>

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

ITEM 2.   MANAGEMENT'S  DISCUSSION  AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE
          30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000, CONTINUED.

Directors  thereby  strengthening  its  financial  and advisory  resources.  The
Company has  doubled the size of its sales force and added four new  development
engineers.  Management  expects  improved  revenue  throughout  the remainder of
fiscal 2002.

                           PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

          Not Applicable.

ITEM 2.   CHANGES IN SECURITIES

(b)  See  Note  9 of  Notes  to  Consolidated  Financial  Statements,  which  is
     incorporated herein by reference,  for information  regarding the Company's
     Preferred  Stock.  Dividends  on  these  shares  are  cumulative  and  have
     preference over the common stock.

(c)  During the three  months  ended June 30, 2001,  the Company  issued  78,600
     shares of Preferred Stock to accredited investors,  who acquired the shares
     as investments.  See Note 10 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.

     On April 2, 2001, the Board of Directors  granted  options to acquire up to
     200,000 shares of Common Stock,  at a purchase price of $0.75 per share, to
     Monninkhof Holdings B.V., an entity owned by Erik Monninkhof, a director of
     the Company.  The option was granted  related to services to be provided by
     that entity.  The Company  relied on Section 4(2) of the  Securities Act of
     1933 in this  private  placement  of the  option  to a  company  owned by a
     director, which acquired the option as an investment.

     On June 13,  2001,  the Board of  Directors  granted  options to acquire an
     aggregate of up to 425,000  shares of the  Company's  common stock at $0.73
     per share to two  officers  and one  director of the  Company.  The Company
     relied  on  Section  4(2) of the  Securities  Act of 1933,  in the  private
     placement  of  the  option  to  officers  who  acquired  the  option  as an
     investment and without consideration other than continued employment.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

(a)  See  Note  2 of  Notes  to  Consolidated  Financial  Statements,  which  is
     incorporated herein by reference.

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

     Not Applicable.

ITEM 5.   OTHER INFORMATION

     Not Applicable.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     Not Applicable.

                                       14
<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:  August 14, 2001          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)

                                       15