----

----

**SECURITIESAND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

----

**FORM10-Q**

** (Mark One)**
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For the quarterly period endedJune 30, 2001**

**OR**
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

** **

**For the transition period from___________ to ____________**

**Commission File No. 000-23221**

**TEKGRAF, INC.**(Exact name of Registrant as specified inits charter)

| **Georgia**                                                         | **58-2033795**           |
|---------------------------------------------------------------------|--------------------------|
| *(State or other jurisdiction*                                      | *(IRS Employer*          |
| *of incorporation or organization)*                                 | *Identification Number)* |
|                                                                |                     |
|                                                                |                     |
| **980 Corporate Woods Parkway, Vernon Hills, Illinois  60061** |
|                                                                |
| (Address of Principal Executive Offices, including Zip Code)        |
|                                                                |
|                                                                |
| **(847) 913-5888**                                                  |
| (Registrant’s  telephone number, including area code)          |

             Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes:   ý   No:  o

             Thenumber of shares outstanding of the Registrant’s common stock, par value$.001,  as of August 11, 2001, the latestpracticable date, was 4,956,535 shares.

----

----

**TEKGRAF, INC.TABLE OF CONTENTS**

| **ITEM**           |                                                                                                     |
|--------------------|----------------------------------------------------------------------------------------------------------|
| **PART I**         | **FINANCIAL INFORMATION**                                                                                |
|               |                                                                                                     |
| Item  1.           | Consolidated  Financial Statements (unaudited):                                                          |
|               |                                                                                                     |
|               | Consolidated Balance Sheets  as of June 30, 2001 and December 31, 2000                                   |
|               |                                                                                                     |
|               | Consolidated  Statements of Operations for the three months and six months ended June 31,  2001 and 2000 |
|               |                                                                                                     |
|               | Consolidated  Statements of Cash Flows for the six months ended June 30, 2001 and 2000                   |
|               |                                                                                                     |
|               | Notes to  Consolidated Financial Statements                                                              |
|               |                                                                                                     |
| Item  2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |
|               |                                                                                                     |
| Item  3.           | Quantitative  and Qualitative Disclosures about Market Risk                                              |
|               |                                                                                                     |
| **PART II**        | **OTHER INFORMATION**                                                                                    |
|               |                                                                                                     |
| Item  2.           | Changes  in Securities and Use of Proceeds                                                               |
|               |                                                                                                     |
| Item  4.           | Submissions  of Matters to a Vote of Security Holders                                                    |
|               |                                                                                                     |
| Item 5.            | Other Information                                                                                        |
|               |                                                                                                     |
| Item 6.            | Exhibits and  Reports on Form 8-K                                                                        |
|               |                                                                                                     |
| Signatures         |
|               |
| Index of  Exhibits |

 

**PART I – FINANCIAL INFORMATION**

TEKGRAF, INC.

CONSOLIDATEDBALANCE SHEETS($ in thousands)

|                                                                                                                                                 | **June 30,**                                                                                                                     |       | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
|                                                                                                                                                 | **2001**                                                                                                                         |       | **2000**         |       |
|                                                                                                                                                 | **(unaudited)**                                                                                                                  |       |             |       |
|                                                                                                                                                 | ****                                                                                                                             |       | ****             |       |
| ASSETS                                                                                                                                               |                                                                                                                             | ** ** |             | ** ** |
| Current  assets:                                                                                                                                     |                                                                                                                             |       |             |       |
|                                                                                                                                                 | Cash  and cash equivalents                                                                                                       | $          | 509              |       | $ | 491 |   |
|                                                                                                                                                 | Accounts  receivable, less allowance for doubtful accounts of $433 and $512 at June 30,  2001 and December 31,2000, respectively | 9,688      |             | 17,882     |   |
|                                                                                                                                                 | Inventories,  net                                                                                                                | 8,787      |             | 9,681      |   |
|                                                                                                                                                 | Prepaid  expenses and other assets                                                                                               | 656        |             | 431        |   |
|                                                                                                                                                 | Income  taxes receivable                                                                                                         | 783        |             | 783        |   |
|                                                                                                                                                 | Deferred  income taxes                                                                                                           | 624        |             | 624        |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 | Total  current assets                                                                                                            | 21,047     |             | 29,892     |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| Property  and equipment, net                                                                                                                         | 3,479                                                                                                                            |       | 2,822            |       |
| Goodwill,  net                                                                                                                                       | 2,035                                                                                                                            |       | 2,128            |       |
| Deferred  income taxes                                                                                                                               | 622                                                                                                                              |       | 337              |       |
| Other  assets                                                                                                                                        | 101                                                                                                                              |       | 91               |       |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 | Total  assets                                                                                                                    | $          | 27,284           |       | $ | 35,270 |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| LIABILITIES                                                                                                                                          |                                                                                                                             |       |             |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| Current  liabilities:                                                                                                                                |                                                                                                                             |       |             |       |
|                                                                                                                                                 | Current  debt                                                                                                                    | $          | 8,465            |       | $ | 11,142 |   |
|                                                                                                                                                 | Current  note payable                                                                                                            | 448        |             | 1,705      |   |
|                                                                                                                                                 | Accounts  payable                                                                                                                | 8,096      |             | 10,274     |   |
|                                                                                                                                                 | Accrued  expenses                                                                                                                | 1,202      |             | 2,072      |   |
|                                                                                                                                                 | Contract  obligation and deferred income                                                                                         | 1,935      |             | 2,238      |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 | Total  current liabilities                                                                                                       | 20,146     |             | 27,431     |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
|                                                                                                                                                 | Total  liabilities                                                                                                               | 20,146     |             | 27,431     |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| Commitments  and contingencies                                                                                                                       | 0                                                                                                                                |       | 0                |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| STOCKHOLDERS' EQUITY                                                                                                                                 |                                                                                                                             |       |             |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
| Class  A Common Stock $.001 par value, 35,000,000 shares authorized; 4,956,535  shares issued and outstanding at June 30, 2001 and December 31, 2000 | 5                                                                                                                                |       | 5                |       |
| Preferred  Stock, $.001 par value, 5,000,000 shares authorized; no shares issued and  outstanding at June 30, 2001 and December 31, 2000             | 0                                                                                                                                |       | 0                |       |
| Due  from stockholder                                                                                                                                | (2,030                                                                                                                           | )          | (1,941           | )          |
| Additional  paid-in capital                                                                                                                          | 19,521                                                                                                                           |       | 19,521           |       |
| Accumulated  deficit                                                                                                                                 | (10,358                                                                                                                          | )          | (9,746           | )          |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
|                                                                                                                                                 | Total  stockholders' equity                                                                                                      | 7,138      |             | 7,839      |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                 |                                                                                                                             |       |             |       |
|                                                                                                                                                 | Total  liabilities and stockholders' equity                                                                                      | $          | 27,284           |       | $ | 35,270 |   |
|                                                                                                                                                 |                                                                                                                                  |       |                  |       |
|                                                                                                                                                      |                                                                                                                                  |            |                  |            |  |  |  |  |

The accompanyingnotes are an integral part of these consolidated financial statements.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

($ in thousands)

|                                                              | **Three months ended**                                   |   | **Three months ended** |   | **Six months ended** |   | **Six months ended** |       |
|-------------------------------------------------------------------|----------------------------------------------------------|--------|------------------------|--------|----------------------|--------|----------------------|------------|
|                                                              | **June 30, 2001**                                        |   | **June 30, 2000 ***    |   | **June 30, 2001**    |   | **June 30, 2000 ***  |       |
|                                                              | ****                                                     |   | ****                   |   | ****                 |   | ****                 |       |
|                                                              | **(unaudited)**                                          |   | **(unaudited)**        |   | **(unaudited)**      |   | **(unaudited)**      | ** ** |
| Net  sales                                                        | $                                                        | 18,340 |                   | $      | 23,636               |   | $                    | 37,524     |   | $ | 45,534 |   |
| Cost  of goods sold                                               | 15,260                                                   |   | 20,394                 |   | 31,414               |   | 38,463               |       |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              | Gross  profit                                            | 3,080  |                   | 3,242  |                 | 6,110  |                 | 7,071      |   |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Operating  expenses:                                              |                                                     |   |                   |   |                 |   |                 |       |
|                                                              | Selling,  general and administrative                     | 3,146  |                   | 3,842  |                 | 6,161  |                 | 7,643      |   |
|                                                              | Depreciation                                             | 141    |                   | 131    |                 | 329    |                 | 226        |   |
|                                                              | Amortization  of goodwill                                | 47     |                   | 47     |                 | 93     |                 | 95         |   |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Loss  from continuing operations before interest and income taxes | (254                                                     | )      | (778                   | )      | (473                 | )      | (893                 | )          |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Interest  expense, net                                            | 189                                                      |   | 85                     |   | 424                  |   | 119                  |       |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
|                                                              | Loss  before benefit for income taxes                    | (443   | )                      | (863   | )                    | (897   | )                    | (1,012     | ) |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Benefit  for income taxes                                         | (145                                                     | )      | (288                   | )      | (285                 | )      | (322                 | )          |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
|                                                              | Loss  from continuing operations                         | (298   | )                      | (575   | )                    | (612   | )                    | (690       | ) |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
|                                                              | Loss  from discontinued operations  (net of tax benefit) | 0      |                   | (10    | )                    | 0      |                 | (41        | ) |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Net  loss                                                         | $                                                        | (298   | )                      | $      | (585                 | )      | $                    | (612       | ) | $ | (731 | ) |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Basic  and diluted weighted average shares outstanding            | 4,929,906                                                |   | 6,161,664              |   | 4,995,952            |   | 6,161,664            |       |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              |                                                     |   |                   |   |                 |   |                 |       |
| Loss  applicable to common shares:                                |                                                     |   |                   |   |                 |   |                 |       |
|                                                              | Continuing  operations                                   | $      | (0.06                  | )      | $                    | (0.10  | )                    | $          | (0.12 | ) | $ | (0.11 | ) |
|                                                              | Discontinued  operations                                 | $      | 0.00                   |   | $                    | (0.00  | )                    | $          | (0.00 | ) | $ | (0.01 | ) |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                              | Net  loss                                                | $      | (0.06                  | )      | $                    | (0.10  | )                    | $          | (0.12 | ) | $ | (0.12 | ) |
|                                                              |                                                          |   |                        |   |                      |   |                      |       |
|                                                                   |                                                          |        |                        |        |                      |        |                      |            |  |  |  |  |  |  |  |

----

*As reclassifiedfor discontinued operations.

The accompanyingnotes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTSOF CASH FLOWS

($in thousands)

|                                              | **Six months ended**                                         |       | **Six months ended** |       |
|---------------------------------------------------|--------------------------------------------------------------|------------|----------------------|------------|
|                                              | **June 30, 2001**                                            |       | **June 30, 2000**    |       |
|                                              | **(unaudited)**                                              |       | **(unaudited)**      |       |
|                                              | ****                                                         | ****       | ****                 |       |
| **Cash flows from operating activities:**         |                                                         | ** ** |                 | ** ** |
| Net loss                                          | $                                                            | (612       | )                    | $          | (731 | ) |
| Adjustments to  reconcile net loss to             |                                                         |       |                 |       |
|                                              | Cash provided by (used  in) operating activities:            |       |                 |       |   |
|                                              | Provision for doubtful  accounts receivable                  | 156        |                 | 120        |   |
|                                              | Provision /write-down  of inventory                          | 25         |                 | 150        |   |
|                                              | Imputed interest on  note payable                            | 52         |                 | 0          |   |
|                                              | Depreciation                                                 | 329        |                 | 262        |   |
|                                              | Amortization and  impairment of goodwill                     | 93         |                 | 95         |   |
|                                              | Deferred taxes                                               | (285       | )                    | (347       | ) |
|                                              | Changes in net assets  and liabilities, net of acquisitions: |       |                 |       |   |
|                                              | Accounts receivable                                          | 8,038      |                 | 1,158      |   |
|                                              | Inventories                                                  | 869        |                 | 3,063      |   |
|                                              | Prepaid expenses and  other assets                           | (235       | )                    | 303        |   |
|                                              | Accounts payable and  accrued expenses                       | (3,048     | )                    | (3,344     | ) |
|                                              | Deferred income and  contract obligation                     | (303       | )                    | (631       | ) |
|                                              | Income taxes                                                 | 0          |                 | 0          |   |
|                                              |                                                         |            |                 |            |   |
| Total adjustments                                 | 5,691                                                        |       | 829                  |       |
|                                              |                                                              |       |                      |       |
| **Cash provided by operating activities**         | 5,079                                                        |       | 98                   |       |
|                                              |                                                              |       |                      |       |
|                                              |                                                         |       |                 |       |
| **Cash flows from investing activities:**         |                                                         |       |                 |       |
| Purchase of property  and equipment               | (986                                                         | )          | (427                 | )          |
|                                              |                                                              |       |                      |       |
| **Cash used in investing activities**             | (986                                                         | )          | (427                 | )          |
|                                              |                                                              |       |                      |       |
|                                              |                                                         |       |                 |       |
| **Cash flows from financing activities:**         |                                                         |       |                 |       |
| Proceeds/(repayment)  from debt, net              | (2,677                                                       | )          | (206                 | )          |
| Loan to stockholder                               | (89                                                          | )          | 5                    |       |
| Payments for  Dissenters’ settlement         | (1,309                                                       | )          | 0                    |       |
|                                              |                                                              |       |                      |       |
| **Cash used in financing activities**             | (4,075                                                       | )          | (201                 | )          |
|                                              |                                                              |       |                      |       |
|                                              |                                                         |       |                 |       |
| (Decrease)/Increase in  cash and cash equivalents | 18                                                           |       | (530                 | )          |
| Cash and cash  equivalents, beginning of year     | 491                                                          |       | 1,704                |       |
|                                              |                                                              |       |                      |       |
| Cash and cash  equivalents, end of period         | $                                                            | 509        |                 | $          | 1,174 |   |
|                                              |                                                              |       |                      |       |
|                                                   |                                                              |            |                      |            |  |  |  |  |

The accompanying notes are an integralpart of these consolidated financial statements.

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**          **BASIS OF PRESENTATION**

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America that affect theamounts reported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates.  In the opinion of management,all adjustments considered necessary for a fair presentation have beenincluded.  Operating results for thethree months ended June 30, 2001 and the six months ended June 30, 2001 are notnecessarily indicative of the results that may be expected for the full yearending December 31, 2001.  For furtherinformation, refer to the consolidated financial statements and the footnotesincluded in the Form 10-K for the year ended December 31, 2000.

**2.          INVENTORIES**

Inventories,net of reserves, at June 30, 2001 and December 31, 2000 consist of thefollowing:

|             | **June 30,  2001** |   | **December 31,  2000** |   |
|------------------|--------------------|--------|------------------------|--------|
|             | ($  in thousands)  |   | ($  in thousands)      |   |
|             |                    |   |                        |   |
|             | (unaudited)        |   |                   |   |
| Service parts    | $                  | 2,014  |                   | $      | 1,970 |   |
| Finished goods   | 6,773              |   | 7,711                  |   |
|             |                    |   |                        |   |
|             |               |   |                   |   |
| Inventories, net | $                  | 8,787  |                   | $      | 9,681 |   |
|             |                    |   |                        |   |

**3.          NET LOSS PER COMMON SHARE**

Basicand diluted net loss per common share are computed by dividing net loss by theweighted average number of common shares and common share equivalentsoutstanding during the period.  Therewere no common share equivalents that were dilutive during any of the periodspresented.  At June 30, 2001, the basicand diluted weighted average shares were as follows:

Basicand diluted weighted average shares                  4,956,535

**4.          INCOME TAXES**

TheCompany’s effective tax rate was a benefit of 32.7% and 33.4% for the threemonths ended June 30, 2001 and 2000, respectively.  The Company’s effective tax rate was a benefit of 31.8% for boththe six months ended June 30, 2001 and 2000. The difference between the Company’s effective and statutory tax ratesfor those periods was primarily due to the amortization of non-deductiblegoodwill and state taxes, net of the federal benefit.

**5.          CURRENT DEBT**

TheCompany was below the fixed charge coverage and leverage ratios required underthe bank agreement and has obtained a waiver from the bank for the three monthsended June 30, 2001.  In connection withthe waiver, the Company has agreed that the financial covenants contained inthe bank agreement will be tested on a monthly basis.  The Company has paid the bank a fee of$50,000 in connection with the waiver and will owe an additional fee of$200,000 on October 31, 2001, unless the Company has refinanced the loan bythat date. 

**6.          ESCROWSHARES**

The number of outstanding shares does not include228,266 shares held in escrow in connection with an acquisition by the Companypursuant to a Pledge, Security and Escrow Agreement dated June 2,1997.  All of the interest in and titleto these 228,266 shares was transferred to Anita Ltd. and then subsequentlytransferred to the Company as part of a Settlement Agreement and MutualReleases dated as of December 21, 2000. These shares will ultimately be released from the escrow to the Companyand will be cancelled.  Therefore, theCompany has, for accounting purposes, treated these shares as cancelledeffective as of December 21, 2000.

**7.          PATENTAPPLICATION**

OnMarch 21, 2001, the Company filed a patent application with the United StatesPatent and Trademark Office relating to a sign creation and delivery managementsystem for creating point of purchase signage. The Centiv business will market and sell this system, which allows auser access to an information database for selecting sign templates, inputtingdata for the sign templates and selecting signage products for production ofthe sign templates.  The user can thenorder the created sign templates having data input and selected signageproducts for delivery to the user.

**8.          IMPAIRMENTOF GOODWILL AND RESTRUCTURING CHARGES AND OTHER EXPENSES**

Managementof the Company has continually reviewed the recoverability of the goodwillrecorded in connection with the Company’s acquisitions, as events and changesin circumstances have warranted, to determine whether or not any of thegoodwill associated with the acquisitions has been impaired.

Inconnection with the acquisitions, many functions formerly performed in regionaloffices have been in transition and have been consolidated and centralized,resulting in certain office or warehouse locations no longer being necessary tothe Company’s business operations.

Thefollowing table provides a roll forward of the liabilities incurred inconnection with the 2000 business restructuring.

($in thousands)

|                 | **December 31,****2000** |       | **Three months   ended June 30,   2001** |       | **Six months ended   June 30, 2001** |       | **June 30,****2001** |       |
|----------------------|--------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **Type of Cost**     | **Balance**              |       | **Activity**                             |       | **Activity**                         |       | **Balance**          |       |
| ****                 |                     |
|                 |                     | ** ** |                                     | ** ** |                                 | ** ** |                 | ** ** |
| Employee Separations | $                        | 157        |                                     | $          | (10                                  | )          | $                    | (87        | ) | $ | 70 |   |
|                 |                     |       |                                     |       |                                 |       |                 |       |
| Facility Closings    | 399                      |       | (126                                     | )          | (194                                 | )          | 205                  |       |
|                 |                          |       |
|                 | Total                    | $          | 556                                      |       | $                                    | (136       | )                    | $          | (281 | ) | $ | 275 |   |
|                 |                          |       |                                          |       |                                      |       |                      |       |
|                      |                          |            |                                          |            |                                      |            |                      |            |  |  |  |  |  |

Forthe three months ended and six months ended June 30, 2001, restructuringreserve balances were reduced by $136,000 and $281,000, respectively.  Employee separations of $10,000 and $87,000were charged against the restructuring reserve for the three months and sixmonths ended June 30, 2001, respectively. Facility closings of $126,000 and $194,000 were charged against therestructuring reserve for the three months and six months ended June 30, 2001,respectively.   The restructuringreserve balance is $275,000 as of June 30, 2001.

**9.          SEGMENTDISCLOSURES**

Duringthe year ended December 31, 2000, the Company reevaluated its current segmentreporting.  In previous years, theCompany had three business units: Graphics, Technology and Services. The Company's management now segments the business into three businessunits:  Channels, Centiv (POP) andServices.  All prior year results havebeen restated to be comparative to the current year’s results.  These business units are revenue producingcomponents of the Company about which separate financial information isproduced internally and operating decisions are made.  For the Channels Business net sales, no one customer accounted formore than 10% of the sales for the three months and the six months ended June30, 2001 and June 30, 2000, respectively. For the Centiv Business net sales, no one customer accounted for morethan 10% of the sales for the three months and six months ended June 30, 2001,and one customer accounted for 92% and 97% of the sales for the three monthsand six months ended June 30, 2000, respectively.  No one customers accounted for more than 10% of net sales for theServices Business for three months ended and six months ended June 30, 2001, orthe three months ended and the  sixmonths ended June 30, 2000. International sales for all three business units were insignificant forthe three months ended and six months ended June 30, 2001 and the three monthsand six months ended June 30, 2000.  Thefollowing segment information is for the three months ended and six monthsended June 30, 2001 and 2000:

 

|                                                                   | **Three months ended**                  |   | **Six months ended**  |   |
|------------------------------------------------------------------------|-----------------------------------------|--------|-----------------------|--------|
|                                                                   | **June 30,**                            |   | **June 30, 2000**     |   | **June 30,** |   | **June 30, 2000** |   |
|                                                                   | ****                                    |   |
|                                                                   | **2001**                                |   | ***As Restated**      |   | **2001** |   | ***As Restated** |   |
|                                                                   | ****                                    |   |
| Net sales:                                                             | **($ in  thousands)**                   |   | **($ in  thousands)** |   | **($ in  thousands)** |   | **($ in  thousands)** |   |
|                                                                   | Channels                                | $      | 13,553                |   | $ | 18,581 |   | $ | 27,999 |   | $ | 35,499 |   |
|                                                                   | Centiv (POP)                            | 2,999  |                  | 3,148  |   | 5,933 |   | 5,695 |   |
|                                                                   | Services                                | 2,125  |                  | 2,326  |   | 4,265 |   | 4,745 |   |
|                                                                   | Eliminations                            | (338   | )                     | (419   | ) | (673 | ) | (405 | ) |
|                                                                   |                                    |        |                  |        |   |  |   |  |   |
|                                                                   | Total net sales                         | $      | 18,340                |   | $ | 23,636 |   | $ | 37,524 |   | $ | 45,534 |   |
|                                                                   |                                    |        |                  |        |   |  |   |  |   |
|                                                                   |                                    |   |                  |   |   |   |   |   |
|                                                                   | Net Sales from  discontinued operations | $      | 0                     |   | $ | 2,397 |   | $ | 0 |   | $ | 4,202 |   |
|                                                                   |                                    |   |                  |   |   |   |   |   |
| Operating income  (loss) from continuing operations:                   |                                    |   |                  |   |   |   |   |   |
|                                                                   | Channels                                | $      | 213                   |   | $ | (584 | ) | $ | 306 |   | $ | (1,001 | ) |
|                                                                   | Centiv (POP)                            | (519   | )                     | (386   | ) | (933 | ) | (475 | ) |
|                                                                   | Services                                | 52     |                  | 192    |   | 154 |   | 583 |   |
|                                                                   |                                    |        |                  |        |   |  |   |  |   |
| Net loss from  continuing operations before interest and income taxes  | $                                       | (254   | )                     | $      | (778 | ) | $ | (473 | ) | $ | (893 | ) |
|                                                                   |                                         |   |                       |   |  |   |  |   |
|                                                                   |                                    |   |                  |   |   |   |   |   |
| Total operating income  (loss) for discontinued operations, net of tax | $                                       | 0      |                  | $      | (10 | ) | $ | 0 |   | $ | (41 | ) |
|                                                                   |                                         |   |                       |   |  |   |  |   |
|                                                                   |                                    |   |                  |   |   |   |   |   |
| Identifiable assets:                                                   |                                    |   |                  |   |   |   |   |   |
|                                                                   | Channels                                | $      | 20,410                |   | $ | 25,315 |   | $ | 20,410 |   | $ | 25,315 |   |
|                                                                   | Centiv (POP)                            | 2,792  |                  | 2,935  |   | 2,792 |   | 2,935 |   |
|                                                                   | Services                                | 4,082  |                  | 4,183  |   | 4,082 |   | 4,183 |   |
|                                                                   |                                    |        |                  |        |   |  |   |  |   |
|                                                                   |                                    |   |                  |   |   |   |   |   |
|                                                                   | Total identifiable  assets              | $      | 27,284                |   | $ | 32,433 |   | $ | 27,284 |   | $ | 32,433 |   |
|                                                                   |                                    |        |                  |        |   |  |   |  |   |
|                                                                        |                                         |        |                       |        |  |  |  |  |  |  |  |  |  |  |

----

* As restated for discontinued operations

**10.        RECLASSIFICATIONS**

Certainamounts in the June 30, 2000 financial statements have been reclassified toconform to the June 30, 2001 presentation.

**11.        DISCONTINUEDOPERATIONS – TEKGRAF TECHNOLOGY SERVICES DIVISION**

Inresponse to the Company’s reclassification of its Class B Common Stock, whichwas approved by shareholders, certain shareholders exercised dissenters’rights.  As the dissenting shareholdersand the Company could not reach agreement as to the fair value of the shares asof the relevant date, in May 2000, the Company filed a petition in the SuperiorCourt of Fulton County, Georgia for a determination of the fair value of theshares (the “Dissenters’ Lawsuit”).

Asof October 31, 2000, the Company sold the assets of its Tekgraf Systemsdivision to Micro Environments, LLC, a limited liability company controlled byAnita, Ltd., one of the dissenting shareholders in the Dissenters’Lawsuit.  As consideration for theassets of the Tekgraf Systems division, Anita, Ltd. transferred to the Company375,752 shares of Class A Common Stock in partial settlement of the Dissenter’sLawsuit.  Tekgraf Systems is anintegrator of desktop PC’s and servers. The division produced  $6.0million in revenue and had an pre-tax operating loss of $(190,000) for the tenmonths ended October 31, 2000.

TheCompany’s 2000 consolidated financial statements have been reclassified toreport separately the results of operations for the Tekgraf Technology ServicesDivision.  The operating results (inthousands) for the three months ended and six months ended June 30, 2000 of thediscontinued Tekgraf Technology Services Division consist of:

 

|                               | **Three  months ended  June 30,**         |   | **Six  months ended  June 30,** |   |
|------------------------------------|-------------------------------------------|--------|---------------------------------|--------|
|                               | ****                                      |   | ****                            |   |
|                               | **2000**                                  |   | **2000**                        |   |
|                               | ****                                      |   | ****                            |   |
|                               | **($ in  thousands)**                     |   | **($ in  thousands)**           |   |
|                               | **(unaudited)**                           |   | **(unaudited)**                 |   |
| Net sales:                         | $                                         | 2,397  |                            | $      | 4,202 |   |
|                               |                                           |   |                                 |   |
|                               |                                      |   |                            |   |
|                               | Loss from operations  before income taxes | (16    | )                               | (66    | ) |
|                               | Benefit from income  taxes                | 6      |                            | 25     |   |
|                               |                                           |   |                                 |   |
|                               |                                      |   |                            |   |
| Loss from discontinued  operations | $                                         | (10    | )                               | $      | (41 | ) |
|                               |                                           |   |                                 |   |

**ITEM 2.  MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion should be readin conjunction with the information contained in the Consolidated FinancialStatements, including the related notes.

**Overview**

In 1997, Tekgraf, Inc. was created from amerger of five wholesale distributors. Tekgraf integrated the businesses and distribution systems allowing forthe development of an unparalleled network of distribution channels. Thesechannels have helped Tekgraf become a leader in the distribution of computergraphics technologies through value-added resellers, system integrators,retailers, mass merchandisers and direct marketers.

Utilizing the Company’s expertise in thecomputer graphics market and innovation, Tekgraf expanded its service offeringto provide clients a unique opportunity to increase the visibility of theirproducts at the retail level and make the greatest impact on the consumerthrough digital “Point-of-Purchase” (POP) merchandising.

Today, the Company is organized intothree distinct business units:

| • | Channels  Business:  This division specializes  in the value-added wholesale distribution of computer graphics technologies  throughout North America.                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                |
| • | The  Centiv Business:  This division offers  digital merchandising services utilizing both Internet-based services and  turnkey systems to retail and manufacturing customers who wish to produce  high-resolution, full color posters, banners and other custom POP signage.                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                |
| • | CalGraph  Technology Services, Inc.:  This  wholly owned subsidiary of Tekgraf is a leading provider of on-site service  and preventative maintenance services specializing in wide-format printing  devices.  CalGraph’s U.S. and Canadian  service operations include field service technicians, customer support call  center, component repair and refurbishment facilities and parts logistics. |

As of October 31, 2000, the Company soldthe assets of its Tekgraf Systems Division to a company controlled by adissenting shareholder.

**ThreeMonths Ended June 30, 2001 Compared With Three Months Ended June 30, 2000**

**ContinuingOperations:**

***Net Sales.***  Total net sales from continuing operationsdecreased $5.3 million, or 22.4%, to $18.3 million for the three months endedJune 30, 2001, compared to $23.6 million for the three months ending June 30,2000.  The decrease in sales wasprimarily in the Channels Business due to the economic slowdown in the US economy for capital equipment purchasesas well as a strategic emphasis on selling higher margin products into thesales channel.  We expect the sales togrow in the Channels Division as a result of the newly announced productintroductions with Eastman Kodak Company, Techsage and Screen (USA), LLC.

***Gross Profit.***  The gross profit as a percentage of salesimproved 3.1% to 16.8% for the three months ended June 30, 2001  from 13.7% for the three months ended June30, 2000.  The margin improvementrelates to new higher margin product offerings in both the Channels and CentivDivisions.  Gross profit from continuingoperations decreased $162,000 or 4.9% to $3.1 million for the three monthsended June 30, 2001 as compared to $3.2 million for the three months ended June30, 2000.

***SG&A Expenses.***   SG&A expenses from continuingoperations decreased $696,000 or 18.1% to $3.1 million for the three monthsended June 30, 2001 compared to $3.8 million for the three months ended June30, 2000.  SG&A expenses as apercentage of sales were 17.2% and 16.3% for the three months ended June 30,2001 and 2000, respectively.  Thedecrease in SG&A expenses relates to the cost-cutting measures the Companyimplemented during the fourth quarter of 2000 to reduce overhead expenses.  In addition, the prior year containedone-time unusual expenses associated with the settlement of legal disputesassociated with the dissenting shareholder’s claim, relocation of the Company’sheadquarters and the establishment of a new management team.   The SG&A expenses for the three monthsended June 30, 2001 also included approximately $0.5 million of product launchof the Centiv Division’s new online digital merchandizing point-of-purchase forthe custom signage business.

***Depreciation Expense.  ***Depreciation expensefrom continuing operations increased $10,000, or 7.6%, to $141,000 for thethree months ended June 30, 2001, as compared to $131,000 for the three monthsended June 30, 2000.

***Amortizationof Goodwill.***  Amortization expense from continuingoperations remained constant at $47,000 for the three months ended June 30,2001 and June 30, 2000, respectively.

***InterestExpense, net.***  Interest expense from continuing operationsincreased $104,000 or 122% to $189,000 for the three months ended June 30,2001, as compared to $85,000 million for the three months ended June 30,2000.  The increase is due to the increasein the Company’s net debt from  $4.1 millionas of June 30, 2000 to $8.9 million as of June 30, 2001.  However, the Company’s net debt hasdecreased $3.9 million, from $12.8 million as of December 31, 2000 to $8.9million as of June 30, 2001.

***Income Taxes.*** The Company’s effective tax rate forcontinuing operations was a benefit of 32.7% for the three months ended June30, 2001 compared to a benefit of 33.4% for the three months ended June 30,2000.

***Net Loss.**** *The Company’s net lossfrom continuing operations of $298,000 for the three months ended June 30, 2001improved 49% over the net loss of $585,000 for the three months ended June 30,2000.  The decrease in net loss isattributable to reductions of SG&A expenses, offset by new productdevelopment and launch expenses associated with the Centiv business as well ashigher net interest expenses.

**DiscontinuedOperations:**

The Company had a net after tax loss fromdiscontinued operations of $10,000 for the three months ended June 30, 2000relating to the Tekgraf Technology Systems Division.

**Six MonthsEnded June 30, 2001 Compared With Six Months Ended June 30, 2000**

**ContinuingOperations:**

***Net Sales.***  Total net sales from continuing operationsdecreased $8.0 million, or 17.6%, to $37.5 million for the six months endedJune 30, 2001, compared to $45.5 million for the six months ending June 30,2000.  The decrease in sales wasprimarily in the Channels Division due to the slowdown in the US economy forcapital equipment purchases as well as a strategic emphasis on selling highermargin products into the sales channel. We expect the sales to grow in the Channels Division as a result of thenewly announced product introductions with Eastman Kodak Company, Techsage andScreen (USA), LLC.

***Gross Profit.***  The gross profit as a percentage of salesimproved 0.8% points to 16.3% for the six months ended June 30, 2001  from 15.5% for the six months ended June 30,2000.  The margin improvement relates tonew higher margin product offerings in both the Channels and CentivDivisions.  Gross profit from continuingoperations decreased $1.0 million or 13.6% to $6.1 million for the six monthsended June 30, 2001 as compared to $7.1 million for the six months ended June30, 2000.

***SG&A Expenses.*** SG&A expenses from continuing operationsdecreased $1.5 million or 19.3% to $6.2 million for the six months ended June30, 2001 compared to $7.6 million for the six months ended June 30, 2000.  SG&A expenses as a percentage of saleswere 16.4% and 16.8% for the six months ended June 30, 2001 and 2000,respectively.   The decrease in SG&Aexpenses relates to the cost-cutting measures the Company implemented duringthe fourth quarter of 2000 to reduce overhead expenses.  In addition, the prior year containedone-time unusual expenses associated with the settlement of legal disputes associatedwith the dissenting shareholder’s claim, relocation of the Company’sheadquarters and  the establishment of anew management team.   The SG&Aexpenses for the three months ended June 30, 2001 also included approximately$1.0 million of product launch of the Centiv Division’s new online digitalmerchandizing point-of-purchase for the custom signage business.

***Depreciation Expense.***   Depreciation expense from continuingoperations increased $103,000 or 45.5%, to $329,000 for the six months endedJune 30, 2001, as compared to $226,000 for the six months ended June 30,2000.  The increase relates to theCompany implementing a new state of the art enterprise wide software package aswell as web development of the Centiv Division’s new online digital merchandizingpoint-of-purchase for the custom signage business.

***Amortizationof Goodwill.***  Amortization expense from continuingoperations remained relatively constant at $93,000 and $95,000 for the sixmonths ended June 30, 2001 and June 30, 2000, respectively.

***InterestExpense, net.***  Interest expense from continuing operationsincreased $305,000 to $424,000 for the six months ended June 30, 2001, ascompared to $119,000 for the six months ended June 30, 2000.  The increase is due to the increase in theCompany’s net debt from  $4.1 million asof June 30, 2000 to $8.9 million as of June 30, 2001.  However, the Company’s net debt has decreased $3.9 million, from$12.8 million as of December 31, 2000 to $8.9 million as of June 30, 2001.

***Income Taxes.***  The Company’s effective tax rate forcontinuing operations was a benefit of 31.8% for the six months ended June 30,2001 and June 30, 2000.

***Net Loss.***** **The Company had a netloss from continuing operations of $0.6 million for the six months ended June30, 2001, as compared to a net loss of $0.7 million for the three months endedJune 30, 2000.  The decrease in net lossis attributable to reductions of S,G,&A expenses, offset by new productdevelopment and launch expenses associated with the Centiv business as well ashigher net interest expenses.

**DiscontinuedOperations:**

The Company had a net after tax loss fromdiscontinued operations of $41,000 for the six months ended June 30, 2000relating to the Tekgraf Technology Systems Division.

**LIQUIDITYAND CAPITAL RESOURCES**

The Company generated $5.1 million ofcash from operations for the six months ended June 30, 2001 compared to cashgenerated of $0.1 million from operations for the six months ended June 30,2000.  During the six months ended June30, 2001, accounts receivable generated $8.0 million, inventory generated $0.9million and accounts payable used $3.0 million.  Cash generated from accounts receivables was a result ofimprovement in the collection period as well as lower sales in the period.  Cash generated from inventory wasmanagement’s focus on reducing inventory levels.  The use of cash for accounts payable was for the payment tovendors relating to inventory purchases associated with the strong fourthquarter 2000 sales.

On June 30, 2001, the Company had workingcapital of $1.2 million, compared to $2.5 million as of December 31, 2000.

For the six months ended June 30, 2001and June 30, 2000, the Company used $1.0 million and $0.4 million of cash,respectively, in investing activities due to the purchase of property andequipment.  The cash used for the sixmonths ended June 30, 2001 relates to the Company implementing a new state ofthe art enterprise wide software package as well as development costs relatedto the Centiv Division’s new on-line digital merchandizing systems for theproduction and sale point-of-purchase customized signage business.

For the six months ended June 30, 2001,cash was used from financing activities of $4.1 million to pay down the bankline of $2.7 million and to make a payment of $1.3 million on the note issuedin connection with the settlement of the Dissenters’ Lawsuit (see Note 11 ofNotes to Consolidated Financial Statements).  During the six months ended June 30, 2001 the Company had borrowings of$28.3 million and repayments of $30.9 million with the outstanding bank loan.

The Company was below the fixed chargecoverage and leverage ratios required under the bank agreement and has obtaineda waiver from the bank for the three months ended June 30, 2001.   In connection with the waiver, the Companyhas agreed that the financial covenants contained in the bank agreement will betested on a monthly basis.   The Companyhas paid the bank a fee of $50,000 in connection with the waiver and will owean additional fee of $200,000 on October 31, 2001, unless the Company hasrefinanced the loan by that date.

In December 1999, the SEC issued StaffAccounting Bulletin Number ("SAB") 101,  “Revenue  Recognition  in Financial   Statements,”  which provides  additional guidance in applying generally accepted accountingprinciples for revenue recognition. Adoption of SAB 101 was required in the fourth quarter of fiscal year2000.  The implementation of SAB 101 hasnot had a material impact on the Company’s financial statements for the threemonths ending June 30, 2001.

In June 1998,  the  Financial  Accounting Standards  Board (the  "FASB") issued  Statement of Financial  Accounting Standards  No. 133 as amended byFAS 138,  Accounting  for Derivative  Instruments and Hedging Activities  ("Statement 133"). Statement 133 provides  a comprehensive  and  consistent standard  for the  recognition and measurement of derivatives and hedging  activities.  The effective date of this statement  was delayed  in June 1999  through the  issuance  of  Statement  of FinancialAccounting Standards No. 137 ("Statement 137"). The effective datehas been  extended to fiscal  years beginning  after June 15,2000.  The implementation of FAS 133 hasnot had a material impact on the Company’s financial statements for the threemonths ending June 30, 2001.

**DISCLOSURE REGARDING FORWARD—LOOKING STATEMENTS**

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  These statements appear in anumber of places in this report and include all statements that are nothistorical facts.  Some of the forward-lookingstatements relate to the intent, belief or expectations of the Company and itsmanagement regarding the Company’s strategies and plans for operations andgrowth.  Other forward-lookingstatements relate to trends affecting the Company’s financial condition andresults of operations, and the Company’s anticipated capital needs andexpenditures.

Investors are cautioned that suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and that actual results may differ materially fromthose that are anticipated in the forward-looking statements as a result of theimpact of competition and competitive pricing, business conditions and growthin the industry, general and economic conditions, and other risks.  Investors should review the more detaileddescription of these and other possible risks contained in the Company’sfilings with the Securities and Exchange Commission, including the Company’sForm 10-K.

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

Financial instruments that potentiallysubject the Company to significant concentrations of credit risk consistprincipally of trade accounts receivable. Credit risks with respect to trade receivables are limited due to thediversity of customers comprising the Company’s customer base.  The Company purchases credit insurance forall significant open accounts and the Company performs ongoing creditevaluations and charges uncollectible amounts to operations when they aredetermined to be uncollectible.

**PART II –  OTHER INFORMATION**

Item2.   Changes in Securities and Use ofProceeds

On June 20, 2001, the Company issued30,000 shares of its common stock to Piedmont Consulting, Inc. (“Piedmont”)under the terms of a Consulting Agreement dated as of April 30, 2001.  The Company has agreed to grant Piedmontcertain rights for the registration under the Securities Act of theseshares.  The issuance of common stockwas exempt from registration under the Securities Act of 1933, as amended, byvirtue of Section 4(2) thereof, no public sale having been involved.

Item4.   Submission of Matters to a Vote ofSecurity Holders

The Company’s 2001 Annual Meeting ofStockholders was held on May 17, 2001. The following votes for each proposal were as follows:

The following directors were elected forterms expiring at the 2002 Annual Meeting:

Proposal 1 – Election of Directors

|                | For       |   | Against |   | Abstain |   |
|---------------------|-----------|--------|---------|--------|---------|--------|
|                |           |   |         |   |         |   |
| William M. Rychel   | 4,534,729 |   | 103,117 |   | 0       |   |
| Thomas M. Mason     | 4,534,729 |   | 103,117 |   | 0       |   |
| Steven J. Carnevale | 4,534,729 |   | 103,117 |   | 0       |   |
| Frank X. Dalton     | 4,534,729 |   | 103,117 |   | 0       |   |
| Albert E. Sisto     | 4,534,729 |   | 103,117 |   | 0       |   |

Proposal 2 – Approval of Amendment to1997 Stock Option Plan

|       | For       |   | Against |   | Abstain |   |
|------------|-----------|--------|---------|--------|---------|--------|
|       |           |   |         |   |         |   |
| Proposal 2 | 4,447,796 |   | 182,150 |   | 7,900   |   |

Item 5. Other Information

NOTIFICATION FROM NASDAQ THAT THECOMPANY’S SECURITIES WILL CONTINUE TO BE LISTED ON THE SMALLCAP MARKET

On June 20, 2001 the Company was notifiedby Nasdaq that the Nasdaq Listing Qualifications Panel determined to continuethe listing of the Company’s securities on the Nasdaq SmallCap Market.  As a result,  the hearing file has been closed.  The notification further stated that the Company has evidencedcompliance with all requirements for continued listing on the Nasdaq SmallCapMarket over the long term.

Item 6.  Exhibits and Reports on Form 8-K

|    | (a)                                                                                             | Exhibits.                                                 |   |
|---------|-------------------------------------------------------------------------------------------------|-----------------------------------------------------------|--------|
|    |                                                                                            | The  following exhibits are filed as part of this Report. |   |
|    |                                                                                            |                                                      |   |
| Exhibit |                                                                                            |
| Number  | Description                                                                                     |
|         |                                                                                                 |
| 10.1    | Amended  and Restated 1997 Stock Option Plan of the Company                                     |
|    |                                                                                            |
| 10.2    | Consulting  Agreement dated April 30, 2001 between Tekgraf, Inc. and Piedmont Consulting,  Inc. |
|         |                                                                                                 |                                                           |        |  |

**SIGNATURES**

PURSUANT TO THE REQUIREMENTS OF THESECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ONFORM 10-Q TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULYAUTHORIZED THIS 11th DAY OF AUGUST, 2001.

TEKGRAF, INC.

|   | SIGNATURE             |   | Title                                |   |
|--------|-----------------------|--------|--------------------------------------|--------|
|   |                  |   |                                 |
| By:    | /s/ William M. Rychel |   | Chief Executive  Officer,            |
|   |                       |   | President and Director  (principal   |
|   | William M. Rychel     |   | executive officer)                   |
|   |                  |   |                                 |
|   |                  |   |                                 |   |
| By:    | /s/ Thomas M. Mason   |   | Chief Financial  Officer             |
|   |                       |   | (principal financial  and accounting |
|   | Thomas  M. Mason |   | officer and duly  authorized officer |
|   |                  |   | of the Registrant)                   |
|   |                  |   |                                 |

INDEX OF EXHIBITS

| Exhibit |                                                                                            |
|---------|-------------------------------------------------------------------------------------------------|
| Number  | Description                                                                                     |
|         |                                                                                                 |
| 10.1    | Amended  and Restated 1997 Stock Option Plan of the Company                                     |
|    |                                                                                            |
| 10.2    | Consulting  Agreement dated April 30, 2001 between Tekgraf, Inc. and Piedmont Consulting,  Inc. |