** **

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**U.S.SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-QSB**

**ý****  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934.**

**Forthe quarterly period ended June 30, 2001.**

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934.**

**Forthe transition period from ________________ to _______________.**

**CommissionFile Number 0-25115**

**TERAGLOBAL****COMMUNICATIONS CORP.**(Exact name ofsmall business issuer as specified in its charter)

| **Delaware**                                   | **33-0827963**                       |
|------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
|                                           |                                 |
| **9171 Towne Centre Drive,  Suite 600**        |
| **San Diego, California 92122**                |
| (Address of principal executive offices)       |
|                                           |                                 |
| **(858) 404-5500**                             |
| (Issuer's  telephone number)                   |

Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or 15 (d)of the Securities Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. ý Yes o No

State thenumber of shares outstanding of each of the issuer's classes of common equity,as of the latest practicable date: As of August 1, 2001, there were 26,906,982shares of the issuer's common stock outstanding.

Transitional Small Business DisclosureFormat (Check One): o Yes  ý No

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**TERAGLOBAL****COMMUNICATIONS CORP. ANDSUBSIDIARIESForm 10-QSB for the period ended June 30, 2001**

 

| COVER PAGE                       |
|----------------------------------|
|                             |   |   |
| INDEX                            |
|                             |   |   |
| PART I.  FINANCIAL INFORMATION   |
|                             |
|                             | ITEM 1.  Financial Statements |
|                             |   |
|                             |   | Condensed  Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31,  2000 (audited) |
|                             |   |   |
|                             |   | Condensed  Consolidated Statements of Operations – Six Months and Three Months Ended  June 30, 2001 and June 30, 2000 (unaudited) |
|                             |   |   |
|                             |   | Condensed  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2001 and  June  30, 2000 (unaudited) |
|                             |   |   |
|                             |   | Notes  to Condensed Consolidated Financial Statements – June 30, 2001 |
|                             |   |   |
|                             | ITEM  2. Management's Discussion and Analysis of Financial Condition and Results of  Operations |
|                             |   |   |
| PART II.  OTHER INFORMATION |
|                             | ITEM 1. Legal  Proceedings |
|                             | ITEM 2. Change in  Securities |
|                             | ITEM  3. Defaults upon Senior Securities |
|                             | ITEM  4. Submission of Matters to a Vote of Security Holders |
|                             | ITEM 5. Other  Information |
|                             | ITEM  6. Exhibits and Reports on Form 8-K |
| SIGNATURES                       |
|                                  |  |  |  |  |

 

TeraGlobal® andTeraMedia® are registered trademarks ofTeraGlobal Communications Corp.

**PART I.**           **FINANCIALINFORMATION****Item1  *.***            **FinancialStatements**
| **TERAGLOBAL COMMUNICATIONS CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE  SHEETS  June 30, 2001 (unaudited) and December 31, 2000** |
|----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                         |
| ****                                                                                                                                         |
|                                                                                                                                         |
| **ASSETS**                                                                                                                                   |
|                                                                                                                                         | June 30, |   | December 31, |   |
|                                                                                                                                         | 2001 |   | 2000 |   |
|                                                                                                                                         |  |   |  |   |
|                                                                                                                                         | (Unaudited) |   |   |   |
|                                                                                                                                         |   |   |   |   |
| **Current  assets**                                                                                                                          |   |   |   |   |
|                                                                                                                                         | Cash  and cash equivalents | $ | 3,580,453 |   | $ | 467,383 |   |
|                                                                                                                                         | Accounts  receivable | 109,397 |   | 117,543 |   |
|                                                                                                                                         | Notes  receivable - related parties | 236,095 |   | 377,901 |   |
|                                                                                                                                         | Inventory | 37,630 |   | 186,071 |   |
|                                                                                                                                         | Prepaid  expenses and other current assets, including $5,948 and $23,874,  respectively, to related parties | 115,063 |   | 260,770 |   |
|                                                                                                                                         |  |   |  |   |
|                                                                                                                                         | Total  current assets | 4,078,638 |   | 1,409,668 |   |
|                                                                                                                                         |   |   |   |   |
|                                                                                                                                         |   |   |   |   |
|                                                                                                                                         |   |   |   |   |
| **Furniture  and equipment**,  net                                                                                                           | 1,172,940 |   | 1,947,936 |   |
|                                                                                                                                         |   |   |   |   |
| **Other  asset – deposits**                                                                                                             | 567,000 |   | 680,000 |   |
|                                                                                                                                         |  |   |  |   |
| **Total  assets**                                                                                                                            | $ | 5,818,578 |   | $ | 4,037,604 |   |
|                                                                                                                                         |  |   |  |   |
|                                                                                                                                         |   |   |   |   |
| **LIABILITIES AND  SHAREHOLDERS' EQUITY**                                                                                                    |
|                                                                                                                                         |
| **Current  liabilities**                                                                                                                     |   |   |   |   |
|                                                                                                                                         | Accounts  payable | $ | 843,832 |   | $ | 869,789 |   |
|                                                                                                                                         | Short-term  loans | 65,889 |   | 66,658 |   |
|                                                                                                                                         | Accrued  expenses | 16,912 |   | 68,293 |   |
|                                                                                                                                         | Accrued  cost of preferred stock issuance | 125,000 |   | - |   |
|                                                                                                                                         | Accrued  severance pay | 295,138 |   | 178,879 |   |
|                                                                                                                                         | Accrued  interest on convertible promissory note | - |   | 98,681 |   |
|                                                                                                                                         | Accrued  vacation | 98,498 |   | 150,555 |   |
|                                                                                                                                         | Convertible  promissory note | - |   | 475,000 |   |
|                                                                                                                                         | Deferred  revenue | 76,295 |   | - |   |
|                                                                                                                                         |   |  |   |  |   |
|                                                                                                                                         | Total  current liabilities | 1,521,564 |   | 1,907,855 |   |
|                                                                                                                                         |   |  |   |  |   |
| **Commitments  and contingencies**                                                                                                           | - |   | - |   |
|                                                                                                                                         |   |   |   |   |
| **Series  A redeemable convertible preferred stock**                                                                                         |   |   |   |   |
|                                                                                                                                         | $ 0.001 par  value, 13,000,000 shares authorized, 7,468,661 shares issued and outstanding | 3,108,248 |   | - |   |
|                                                                                                                                         |   |   |   |   |
| **Shareholders'  equity**                                                                                                                    |   |   |   |   |
|                                                                                                                                         | Common  stock, $0.001 par value |   |   |   |   |
|                                                                                                                                         | 200,000,000  shares authorized |   |   |   |   |
|                                                                                                                                         | 22,706,922  shares issued and outstanding at December 31, 2000 |   |   |   |   |
|                                                                                                                                         | 26,906,982  shares issued and outstanding at June 30, 2001 | 26,907 |   | 22,707 |   |
|                                                                                                                                         | Additional  paid-in capital | 41,079,718 |   | 37,449,327 |   |
|                                                                                                                                         | Other  comprehensive loss | 14,171 |   | (11,181 | ) |
|                                                                                                                                         | Accumulated  deficit | (39,932,030 | ) | (35,331,104 | ) |
|                                                                                                                                         |   |  |   |  |   |
|                                                                                                                                         | Total  shareholders' equity | 1,188,766 |   | 2,129,749 |   |
|                                                                                                                                         |   |  |   |  |   |
| **Total  liabilities and shareholders’ equity**                                                                                         | $ | 5,818,578 |   | $ | 4,037,604 |   |
|                                                                                                                                         |  |   |  |   |
|                                                                                                                                              |  |  |  |  |  |  |  |  |  |

The accompanying notes are an integral part ofthese financial statements.**TERAGLOBAL COMMUNICATIONS  CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED  STATEMENTS OF OPERATIONS  For the three months and the six months ending June 30, 2001 and 2000  (Unaudited)**      ****       **Three months  ended June 30,** **Six months ended  June 30,**  **2001** **2000** **2001** **2000**  **** **** **** ****  **(unaudited)** **(unaudited)** **(unaudited)** **(unaudited)**   ** ** ** ** ** ** ** ****Net Sales**$251,448 $118,180 $426,301 $224,728          **Cost of sales**43,441 75,660 160,236 143,792  ****** ******** ******** ******** **         **Gross profit**208,007 42,520 266,065 80,936  ****** ******** ******** ******** ****Operating expenses**         General and administrative1,478,879 1,960,730 2,905,121 4,787,897  Sales and marketing175,970 403,364 482,014 711,402  Research and development371,177 911,309 808,799 2,059,966           **** **** **** ****  Total operating expenses2,026,026 3,275,403 4,195,934 7,559,265  **** **** **** ****          **Loss from operations**(1,818,019)(3,232,883)(3,929,869)(7,478,329) **** **** **** ****          **Other income (expenses)**         Interest income24,718 42,638 39,703 126,419  Interest expense(4,833)(12,870)(11,906)(24,506) Other income (loss)65,987 - 68,089 -           **** **** **** **** Total other income (expense)85,872 29,768 95,886 101,913  **** **** **** ****          **Loss before beneficial conversion**(1,732,147)(3,203,115)(3,833,983)(7,376,416)     Beneficial conversion feature  granted on preferred stock766,941 - 766,941 -   ** ** ** ** ** ** ** ****Net loss available to common shareholders****$****(2,499,089****)****$****(3,203,115****)****$****(4,600,925****)****$****(7,376,416****)** ****** ******** ******** ******** **         **Basic and fully diluted loss per common share****$****(0.09****)****$****(0.16****)****$****(0.18****)****$****(0.37****)** **** **** **** ****          **Weighted-average common shares outstanding****26,906,397**** ****20,134,498**** ****25,214,532**** ****19,928,166**** ** ****** ******** ******** ******** **
The accompanying notes are an integral part ofthese financial statements.

 
**TERAGLOBAL COMMUNICATIONS  CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS  For the six months ended June 30, 2001 and 2000 (Unaudited)**     **Six Months Ended  June 30**  **2001** **2000**** ** **** **** **Cash flows from operating activities**     Net loss before beneficial  conversion$(3,833,983)$(7,376,416) Adjustments to reconcile net loss  to net cash used in operating activities     Stock issued for legal settlement15,625 –  Stock issued for services rendered- 1,059,625  Stock issued for TechnoVision2,000 -  Loss on sale of property and  equipment80,062 –  Depreciation603,137 629,506  Amortization of goodwill– 381,809       (Increase) decrease in     Accounts receivable8,146 89,611  Prepaid expenses and other current  assets145,708 95,150  Inventory148,440 (19,197) Increase (decrease) in     Accounts payable(25,958)(779,610) Accrued expenses73,618 40,355  Accrued vacation(52,057)27,397  Accrued severance258,065 -  Accrued interest8,200 -  Customer deposits76,295 -          Net cash used in operating  activities(2,492,702)(5,851,770)        **Cash flows from investing activities**     Notes receivable - related parties- (118,115) Purchase of furniture and  equipment(12,798)(827,200) Proceeds from sale of furniture  and equipment104,595 -  Proceeds from redemption of  Certificate of Deposit113,000 -          Net cash provided by (used in)  investing activities204,797 (945,315)        **Cash flows from financing activities**     Payments on capital lease  obligations- (708,636) Proceeds (payments) on short-term  loans(769)(265) Proceeds from issuance of common  stock, net of fees1,501,000 4,610,000  Proceeds from issuance of  convertible preferred stock, net of fees2,375,000 -  Proceeds from issuance of  convertible promissory notes1,500,000 -  Proceeds from exercise of stock  options392 250,957            Net cash provided by financing  activities5,375,623 4,152,056           **Cumulative translation adjustment**25,352 3,111        Net increase (decrease) in cash  and cash equivalents3,113,070 (2,641,917)      **Cash and cash equivalents, beginning of period**467,383 7,893,036           **Cash and cash equivalents, end of period**$3,580,453 $5,251,119           **Supplemental disclosure of cash flow  information**          **Interest paid**$4,543 $2,055          **Income taxes paid**$1,600 $1,600     
The accompanying notes are an integral part ofthese financial statements.

**Supplementalschedule of non-cash investing and financing activities**

During thethree months ended March 31, 2001, the Company entered into an agreement toconvert a promissory note into shares of common stock. The principal amount ofthe promissory note of $475,000 and accumulated interest of $103,680 wereconverted into 1,157,360 shares of the Company's common stock and 120,000warrants to purchase shares of common stock at a price of $0.60 per share for aperiod of two years.  None of thesewarrants were exercised as of June 30, 2001. No expense has been recorded in connection with the warrants asmanagement considers the effect on the financial statements to be immaterial.

** **

**TERAGLOBAL COMMUNICATIONS CORP.AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJune 30, 2001**
****
**NOTE1 –****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

Basis of Presentation

The unaudited condensed consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.  Operating results for the sixmonth period ended June 30, 2001, are not necessarily indicative of the resultsthat may be expected for the fiscal year ending December 31, 2001.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes thereto included in the Company's Annual Report onForm 10-KSB for the fiscal year ended December 31, 2000.

Principles of Consolidation

The consolidated financial statements includethe accounts of TeraGlobal Communications Corp. and its wholly ownedsubsidiaries, ATI Access Technologies, Inc., TGC Acquisition, Inc., TeraGlobalCommunications (Canada) Corporation, and TechnoVision Communications, Inc.  All inter-company accounts and transactionshave been eliminated.

**NOTE 2 – FURNITURE ANDEQUIPMENT**

Furniture and equipment consisted of the following:
 June 30,  2001 December 31,  2000  (Unaudited)        Furniture  and fixtures$446,635 $446,635 Office  equipment1,073,119 1,123,271 Computers  and software2,239,960 2,308,266 TeraMedia®  networks145,409 334,290     3,905,123 4,212,462 Less  accumulated depreciation2,732,183 2,264,526    **Total**$1,172,940 $1,947,936    
Depreciation expense for the six months endedJune 30, 2001, and the year ended December 31, 2000, was $603,137 (unaudited)and $1,203,721, respectively.  Duringthe six months ended June 30, 2001, the Company recognized a loss of $80,062 inconjunction with the disposition of certain non-core assets and TeraMedia®network assets as it transitioned from a service provider business model to onethat focuses on the sale and licensing of TeraMedia® software.

**NOTE 3 - OTHER ASSET - DEPOSITS**

The Company entered into a standby letter ofcredit agreement with a bank for $500,000 as collateral for the lease of theoffice space at the Company’s headquarters in San Diego, California. Under theterms of the lease agreement, the amount of the standby letter of credit can bereduced annually over the five-year term of the lease.  The Company reduced the letter of credit by$113,000 during the three months ended March 31, 2001.

**NOTE 4 - CONVERTIBLE PROMISSORYNOTES**

In a series of transactions taking place in Mayand June 2001, the Company received $1.5 million, in exchange for convertiblepromissory notes and warrants from a group of accredited investors, includingcertain members of the Company's Board of Directors.  No sales commissions or underwriting discounts were paid inconnection with the offering.  Theconvertible promissory notes bore interest at 8 percent per annum and maturedin June 2003. Both the convertible promissory notes and the warrants were to beautomatically converted into the Company's next equity financing in excess of$2 million.  The convertible promissorynotes and the warrants were converted as part of the Company’s issuance ofconvertible preferred stock and warrants on June 28, 2001.

**NOTE 5 - COMMITMENTS ANDCONTINGENCIES**

*LarryJernigan v. TeraGlobal Communications Corp., et al*During thethree months ended March 31, 2001, the Company paid Mr. Jernigan a total of$15,000 and issued 25,000 shares of common stock, valued at $15,625, inexchange for a release of all claims, including any interest in TeraGlobal andTechnoVision stocks or stock options.

The Company has no material litigationpending against it at this time.

**NOTE 6 - SERIES A REDEEMABLECONVERTIBLE PREFERRED STOCK**

Effective June 28, 2001, the Company issued4,664,180 shares of Series A Convertible Preferred Stock and warrants topurchase 2,374,762 shares of common stock to WallerSutton 2000, L.P., aninsitutional investor, for proceeds of $2.375 million, net of $125,000 infees.  Of the $2.375 million, $481,202has been allocated to the issuance of the warrants.  Of the 2,374,762 warrants, 1,624,838 are exercisable at $0.536per share, 374,963 at $1.00 per share and 374,963 are exercisable at $1.50 pershare. 

In addition, as a result of this preferred stockissuance, the convertible promissory notes from the May and June financing,plus accrued interest of $3,200 on the notes were converted into 2,804,481shares of Series A Convertible Preferred Stock and warrants to purchase975,000, 225,000 and 225,000 shares of common stock exercisable at $0.536,$1.00, and $1.50 per share, respectively. The warrants from the May and June2001 financing were converted into warrants to purchase 1,399,256 shares ofcommon stock exercisable at $0.536 per share. Of the $1.5 million received inthe May and June financing, $544,609 was allocated to the issuance of thewarrants.  The warrants vest immediatelyand expire on June 30, 2007.

The Series A Convertible Preferred Stock isentitled to cumulative dividends payable in cash at a rate of 10 percent perannum, which accrue until paid and are compounded semi-annually. It isredeemable at the election of the holders of the majority of the shares ofSeries A Convertible Preferred Stock, commencing on the third anniversary ofthe closing of the transaction.  TheSeries A Convertible Preferred Stock is convertible into one fully paid shareof the Company’s common stock, subject to anti-dilution, at any time at theholder’s discretion.  After the fifthanniversary of the closing, the Series A Convertible Preferred Stock willautomatically convert into common stock, or when the closing bid price for theCompany’s common stock exceeds $10.00 per share for 20 consecutive tradingdays.

Related to the issuance of the Company’sPreferred Stock, the Company recorded an imputed preferred dividend, whichrepresented the difference between the trading price of the Company’s commonstock on the date of issuance of the preferred stock and the conversion rate ofthe preferred stock after deducting the amount allocated to the warrants.  The dividend amounted to $766,941, which isreflected as an increase in the net loss available to common shareholders on theaccompanying statement of operations.

**NOTE 7 - SHAREHOLDERS' EQUITY**

Common Stock

During the three months ended March 31, 2001,the Company converted all outstanding convertible promissory notes into commonstock.  The Company had $475,000 inprincipal and $103,680 in interest outstanding, all of which were exchanged foran aggregate of 1,157,360 shares of common stock and 120,000 warrants topurchase shares of common stock at a price of $0.60 per share for a period oftwo years. No expense has been recorded in connection with the warrants asmanagement considers the effect on the financial statements to be immaterial.

During the three months ended March 31, 2001,the Company sold 3,015,000 shares of common stock in a private placement,receiving $1,501,000, net of offering costs of $6,500.

During the three months ended March 31, 2001,the Company issued 25,000 shares of common stock valued at $15,625, pursuant tothe settlement of certain litigation against the Company.

During the three months ended March 31, 2001,the Company issued 2,000 shares of common stock valued at $2,000 as payment forthe acquisition of additional shares of TechnoVision.  The TechnoVision shares were tendered pursuant to the Company'sexchange offer, which was consummated on August 10, 1998; however, the shareswere never issued at the time of the exchange offer.

Stock Options

During the three months ended March 31, 2001,the Company granted employees an aggregate of 122,000 options under its 1999Stock Option Plan (the “1999 Plan”), at an exercise price of $0.56 per share.

During the three months ended March 31, 2001,the Company entered into an employment agreement with Robert Randall to act asthe Chief Executive Officer of the Company. In connection with that employment agreement, the Company also grantedMr. Randall a nonqualified stock option to purchase up to 1,000,000 shares ofcommon stock, subject to time and performance-based vesting. The term of theemployment agreement is two years, subject to annual renewal by the parties onthe anniversary date of the agreement.

During the three months ended June 30, 2001, theCompany granted employees an aggregate of 531,500 options under its 1997 StockOption Plan, at exercise prices ranging from $0.30 to $0.86.  An employee exercised 700 options at a priceof $0.56 during the same period.

The following schedule summarizes the stockoptions transactions:
 Stock  Options  Outstanding Weighted  Average  Exercise Price   Outstanding, December 31, 20002,083,250 $5.57       Granted1,653,500 $0.55  Forfeited(556,670)$5.75  Exercised(700)$0.56     Outstanding, June 30, 20013,179,380 $3.35         Exercisable, June 30, 20011,520,237       
**Item2.**             **Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

             *The mattersdiscussed in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and other sections of this report containforward-looking statements that are based on current expectations, estimates,forecasts and projections about the Company and the industry in which itoperates.  These forward-lookingstatements involve risks and uncertainties and are not guarantees of future performance.  Forward-looking statements include, but arenot limited to, statements concerning the timing and amount of revenues fromthe sale of the Company's TeraMedia® collaboration software both from directsales as well as strategic alliances, expectations concerning trends in theCompany's operating expenses, and the release dates for future versions of theTeraMedia® collaboration software or other solutions.  The Company's actual results could differ materially from theresults discussed in such forward-looking statements based on a number offactors including those set forth under “Factors That May Affect Future Resultsand Financial Condition” below and more completely in the Company’s AnnualReport on Form 10-KSB for the fiscal year ended December 31, 2000.  The Company undertakes no obligation toupdate publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise. The following discussion of the Company's financial condition andresults of operations should be read in conjunction with the Company'sfinancial statements and the related notes thereto appearing elsewhere in thisreport.*

**Overview**

             Since 1997, the Company has beenengaged in the development of networking software for real-time collaborationand communication over computer networks. The Company's first applicationsuite, TeraMedia® collaboration software, is industry-leading technology forcollaboration, combining application sharing and extensive collaboration tools,with integrated Voice over IP, and Video over IP communications. TeraMediaallows co-workers, educators or government authorities to see and talk to oneanother, individually and in groups, and simultaneously collaborate overdocuments, spreadsheets, audio, video and print media, all from a desktopcomputer.  TeraMedia's integratedcommunications features full-screen, 30 frames per second video and puredigital audio.

             The Company entered in to thesecond quarter of 2001 with two principal challenges: increasing revenues andresulting gross margins and securing additional financing.  During the quarter, the Company continuedits direct sales of TeraMedia® into the government, education, media andtechnology markets.  Sales for theperiod increased modestly from $174,853 in total revenues in the first quarterto $251,448 for the second quarter. Gross profit margin for those periods increased from 33 percent to 83percent, respectively, primarily due to the transition from service basedrevenue to revenue generated from the sale of TeraMedia software.  The Company plans to increase the number ofemployees devoted to sales over the next two quarters, in an effort to increasesales of its TeraMedia® collaboration software.

             The Company is also focusing onindirect sales of its TeraMedia® collaboration software, and entered into twosignificant distribution agreements during the quarter.  In April the Company entered into aStrategic Alliance Agreement with Motorola's Integrated Information Systemsgroup to pursue opportunities related to several defense industry projects, includingthe Global Information Grid and the Navy/Marine Corps Intranet.  The Company will recognize initial revenuesof $73,369 from this relationship in the third quarter in connection with apilot demonstration project for the Global Information Grid.  The timing and amount of any additionalrevenues will depend upon Motorola and the Company's success in securingcontracts under those projects.

             In May, the Company entered into anagreement with Marconi Communications Federal, Inc. to sublicense TeraMedia intofederal government agencies.  TheCompany has participated in two trade shows with Marconi and is scheduled toattend another in the third quarter. The Company has also completed the initial training of selected Marconisales representatives and systems engineers. The Company expects sales activities from this relationship tocontribute to revenues beginning in the fourth quarter of 2001.  In the meantime, the Company is pursuingjoint sale or reseller relationships with telephone carriers, network equipmentproviders, desktop equipment providers, system integrators and softwareproviders.

             The Company's development effortsin the second quarter centered on cross-platform versions of its software.  TeraMedia® was initially released as aclient/server software package.  Theregistry server software was written for the Sun Solaris operating system.  The remaining multi-point server and clientsoftware were written for the Mac OS 9 operating system based on the Company'swork with the Motorola processor.  TheCompany is currently developing a point-to-point version of its software thatdoes not require a server.  In addition,the Company is working on a Lightweight Data Access Protocol ("LDAP")implementation of its server software that will operate on all standard serverplatforms.  With respect to the clientsoftware, the Company is developing a Windows 2000 version of its TeraMedia®software.  That release is scheduled forDecember 2001.  The Company is alsoplanning for a Mac OS X version, and is evaluating Unix and Linuximplementations based on customer demand. Each of these developments is aimed toward broadening the addressablemarket for the Company's products.

 

             Aside from ongoing operations, theCompany's major focus for the second quarter was to secure additional fundingto finance its continued operations.  Ina series of transactions taking place in May and June 2001, the Company sold anaggregate of $1.5 million in Convertible Promissory Notes and Warrants to agroup of accredited investors, including WallerSutton 2000, L.P., Spencer TraskInvestment Partners, LLC and certain members of the Company's Board ofDirectors.  On June 28, 2001, theCompany consummated a Series A Convertible Preferred Stock financingtransaction with WallerSutton 2000, L.P., a private investment fund with assetsin excess of $150 million that specializes in media and telecommunicationsinvestments. The Series A Convertible Preferred Stock financing also triggeredconversion of the Convertible Promissory Notes and Warrants from the May andJune 2001 placements into Series A Convertible Preferred Stock and Warrants.

             The net effect of thesetransactions was the infusion of $3.875 million in working capital, net of$125,000 in offering costs, in exchange for an aggregate of 7,468,661 shares ofSeries A Convertible Preferred Stock, 3,999,094 Common Stock Purchase Warrantsexercisable at $0.536 per share, 599,963 Common Stock Purchase Warrantsexercisable at $1.00 per share and 599,963 Common Stock Purchase Warrants,exercisable at $1.50 per share.

             The Series A Convertible PreferredStock is entitled to cumulative dividends payable in cash at a rate of 10percent per annum, which accrue until paid and are compoundedsemi-annually.  It is redeemable at theelection of the holders of a majority of the shares of Series A PreferredStock, commencing on the third anniversary of the closing of the transaction.Each share of Series A Convertible Preferred Stock is convertible into onefully paid share of Company’s Common Stock, subject to anti-dilution, at anytime at the holder's discretion.  Afterthe fifth anniversary of the closing, the Series A Preferred Stock willautomatically convert into Common Stock when the closing bid price for theCompany’s Common Stock exceeds $10.00 per share for 20 consecutive tradingdays.  A more complete discussion of therights, privileges and preferences associated with the Series A ConvertiblePreferred Stock is contained in the Certificate of Designations and the SeriesA Convertible Preferred Stock and Warrant Purchase Agreement, each of which areattached as Exhibits to this report.

             As a result of the financingtransaction, WallerSutton 2000, L.P. is now the Company’s single largestshareholder, holding 20 percent of the Company's outstanding voting securitieson a fully-diluted basis.  In addition,holders of the Series A Convertible Preferred Stock have the right to appointtwo members to the Company’s Board of Directors, as well as the right to approvecertain significant transactions, such as (i) the sale, merger or acquisitionof the Company or substantially all of its assets, (ii) any recapitalization orrestructuring of the Company’s outstanding shares of capital stock, (iii)incurring any significant debt, excluding trade debt, and (iv) the issuance ofany preferred stock ranking senior to or on a parity with the Series APreferred Stock.  Finally, as long as 50percent of the Series A Preferred Stock remains outstanding, WallerSutton 2000,L.P. has the right to maintain its percentage ownership of shares of CommonStock computed on a fully-diluted basis.

             The financing transaction providesthe Company with the capital to continue direct and indirect sales of isApple-based TeraMedia software, and to deliver the initial version of its Windows2000-based product. In addition, under the terms of the purchase agreement forthe Series A Convertible Preferred Stock transaction, WallerSutton 2000, L.P.is committed to purchase an additional $2 million of Series A Preferred Stockand Warrants if the Company reaches definitive financial commitments for $1million in sales revenues, license fees, development fees or equitycontributions from one or more strategic partners.  That additional funding, if secured, would be adequate to supportthe Company's operations at current levels through most of 2002.

**Results of Operations**

             The following table sets forth theselected unaudited results of operations for the six months ending June 30,2001, and June 30, 2000.
**Statements of Operations Data:****Six Months Ending  June 30, 2001  (Unaudited)** **Six Months Ending  June 30, 2000  (Unaudited)**    Sales$426,301 224,728 Cost of sales160,236 143,792      General and administrative2,905,121 4,787,897 Sales and marketing482,014 711,402 Research and development808,799 2,059,966      Net Loss available to common  shareholders$(4,600,925)$(7,376,416)     Basic loss per common share$(0.18)$(0.37)     Weighted average common shares  outstanding25,214,532 19,928,166 
**Second Quarter 2001 Compared toSecond Quarter 2000.**

             *Sales.*Sales for the three monthsended June 30, 2001, and June 30, 2000, were $251,448 and $118,180,respectively, an increase of 113 percent. Sales for the six months ended June 30, 2001, and June 30, 2000, were$426,301 and $224,728, respectively, an increase of 90 percent.  Sales during the three months ended June 30,2001, were primarily related to one-time licenses of the Company's TeraMediasoftware. Sales during the three and six months ended June 30, 2000, wereprimarily attributable to revenues generated under service contracts with earlyadopters of the Company’s TeraMedia service, which bundled TeraMedia licensefees together with network connectivity and equipment as an integrated service.

             The Company recorded its firstsignificant sale of software during the quarter ended June 30, 2001.  The Company sold its TeraMedia software andan incidental amount of equipment to the Anthony Wayne School District in theState of Ohio for $150,000. The Company has discontinued the service model andexpects to generate revenues going forward from three principal sources: thelicense of software and related maintenance fees, the resale of third partyhardware in connection with a software sale, or contract development fees inconnection with custom development projects.

             *Cost of sales.* Cost of sales for thethree months ended June 30, 2001, were $43,441, resulting in a gross margin of83 percent.  Cost of sales for the threemonths ended June 30, 2000, were $75,660, resulting in a gross margin of 36percent. Cost of sales for the six months ended June 30, 2001, were $160,236,resulting in a gross margin of 62 percent. Cost of sales for the six months ended June 30, 2000, were $143,792,resulting in a gross margin of 36 percent. Cost of sales for the six months ended June 30, 2001 consisted ofperipheral hardware such as cameras, speakers and microphones used with theCompany's TeraMedia software. Cost of sales for the six months ended June 30,2000, included the costs associated with providing bandwidth and thedepreciation of computer and network hardware associated with sales underservice contracts.

             The Company's costs of sales andresulting gross margins have fluctuated significantly from quarter to quarterbased on the relatively small size of the Company's revenues and the Company'schanging product and service mix.  Overthe balance of the fiscal year, the Company intends to generate revenuesprimarily from the licensing of its TeraMedia collaboration software. The mostsignificant costs associated with developing the TeraMedia software have beenrecognized as research and development costs in prior periods. As such, grossmargin from the sale of TeraMedia software will be high.  The Company does, from time to time, resellthird party hardware such as computers, cameras, microphones and speakers inconnection with a sale of TeraMedia software. Margins on the resale of third party hardware are generally low.  Finally, the Company has entered into discussionswith certain potential partners for specific product development and productenhancement contracts.  Those contractswill generally involve an up-front license fee, fees for contract developmentwork, and a royalty fee on sales of the final product.  Margins on those efforts will vary on aproject by project basis.  As a result,costs of sales and related gross margins will vary in the future based on thelevel and mix of the products and services that the Company sells.

 

             *General and Administrative*. Generaland administrative expenses were $1,478,879 for the three months ended June 30,2001, compared to $1,960,730 for the three months ended June 30, 2000, areduction of $481,851, or 25 percent. General and administrative expenses for the six months ended June 30,2001, were $2,905,121, compared to $4,787,897 for the six months ended June 30,2000, a reduction of $1,882,776, or 39 percent. Non-cash charges includeddepreciation expense of $212,155 for the three months ended June 30, 2001,compared to $370,035 for the same period ended June 30, 2000.  Depreciation for the six months ended June30, 2001, was $603,137, compared to $567,735 for the three months ended June30, 2000, an increase of 6 percent.

             The Company intentionally reducedgeneral and administrative expenses in the first half of the fiscal year.During the first quarter, the Company reduced its work force by over 60percent, including a substantial reduction in the number of general andadministrative positions. During the second quarter, the Company sublet excessoffice space in Logan, Utah to reduce real estate costs. Further the Companyhas significantly reduced all capital expenditures, and depreciation expensewill be lower in the third and fourth quarters of this year.  Going forward, the Company will continue tominimize general and administrative expenses. However, as the Company matures its product offering, it will incurexpenses in maintaining and supporting the TeraMedia collaboration software andother expenses.  Charges related tomaintaining existing products will be charged to general and administrativeexpenses, and not to research and development.

             *Research and Development*. Research andDevelopment expenses were $371,177 for the three months ended June 30, 2001, ascompared to $911,309 for the three months ended June 30, 2000, a reduction of$540,132, or 59 percent.  Research anddevelopment expenses for the six months ended June 30, 2001, and 2000, was$808,799 and $2,059,966, respectively, a reduction of 61 percent.

             The Company's recent research anddevelopment expenses have been attributable to the development of a Windows2000 version of its software, which the Company anticipates completing by theend of the current fiscal year. The decline in research and developmentexpenses from prior periods is the result of decreased expenditures for networkbandwidth, equipment and software expenses, as the Company has established itscore infrastructure needs for its current development efforts. The Company alsoscaled back its research and development staff during the six months ended June30, 2001. The Company anticipates accelerating its Windows 2000 development byadding additional engineers.  Also, thetransition to the Windows 2000 platform will require hardware purchases forsystems qualifications and testing, as well as additional software anddevelopment tools.  For these reasons,research and development costs are expected to increase modestly over thebalance of the fiscal year.

             *Salesand Marketing*. Sales and marketing expenditures were $175,970for the three months ended June 30, 2001, as compared to $403,364 for the threemonths ended June 30, 2000, a reduction of $227,394 or 56 percent. Sales andmarketing expenses for the six months ended June 30, 2001, and June 30, 2000,were $482,014 and $711,402, respectively, or a reduction of 32 percent.

             Sales and marketing expensesconsist primarily of advertising, marketing events and trade shows, andsalaries.  During 2000 the Companyfocused significant resources on advertising and attendance at tradeshows.  For 2001, the Company is workingto increase sales and awareness of its TeraMedia collaboration software throughthe establishment of channel distribution partners and OEM licensingagreements, as well as continuing to focus on end user sales into thegovernment and education markets.  TheCompany has reduced its spending on general marketing and advertising and isattending co-sponsored tradeshows with strategic partners.  The Company will increase its spending on salespersonnel and demonstrations, over current levels, over the balance of thefiscal year.

             *Interest Revenue and Interest Expense*.Interest revenue for the three months ended June 30, 2001, and June 30, 2000,was $24,718 and $42,638, respectively, a decrease of $17,920, or 42 percent.Interest revenue for the six months ended June 30, 2001,and 2000, was $39,703and $126,419, respectively, a decrease of 69 percent.  Interest revenue is generated from short-term investments ofavailable cash. Interest expense for the three months ended June 30, 2001, andJune 30, 2000, was $4,833 and $12,870, respectively, a reduction of 62percent.  Interest expense for the sixmonths ended June 30, 2001, and June 30, 2000, was $11,906 and $24,506,respectively. Interest expense for the three and six months ended June 30,2000, was primarily due to interest related to $475,000 in convertiblenotes.  The Company entered into anagreement to convert the notes to shares of the Company's common stock in thethree months ended March 31, 2001. Interest expense in the three months ended June 30, 2001, includedinterest associated with Bridge financing notes, as further described inliquidity and capital resources.

**Liquidity and Capital Resources**

             As of June 30, 2001, the Company hadcash and cash equivalents totaling $3,580,453. The Company had a working capital surplus of $2,557,074

             For the three months ended June 30,2001, net cash used in operating activities was $795,949.  Net cash used in the same period ended June30, 2000, was $2,983,261, a reduction of 73 percent.  Net cash used in operating activities for the six months endedJune 30, 2001, and June 30, 2000, was $2,492,702 and $5,851,770, respectively,a decrease of 57 percent.  The declinein net cash used in operating activities is due primarily to a reduction instaff.  In addition, the Companyseverely restricted cash payments during the second quarter pending completionof the Series A Convertible Preferred Stock financing transaction.  The Company expects net cash used inoperating activities to remain consistent or modestly increase over the secondquarter number for the balance of the fiscal year.  The Company expects to hire additional personnel in sales andengineering positions, and offset the increased operating expenses withadditional revenues.

             For the three months ended June 30,2001, the Company made capital expenditures of $12,798.  Capital expenditures for the same periodended June 30, 2000, were $240,923, a decrease of 95 percent.  Net cash provided by investing activitiesfor the six months ended June 30, 2001, was $204,797, due to the disposition ofnon-core assets and the partial redemption of a Certificate of Deposit used tosecure the Company's corporate offices. Net cash used in investing activities was $945,314 for the six monthsended June 30, 2000. The Company will keep capital expenditures to a minimumover the balance of the fiscal year.

             For the three months ended June 30,2001, the Company raised an aggregate of $3,875,000, net of $125,000 in fees,from financing activities.  Of theseproceeds, $1.5 million was derived from the sale of Convertible PromissoryNotes and Warrants in May and June 2001, and $2.375 million was raised from thesale of the Series A Convertible Preferred Stock and Warrants in the June 28,2001 transaction.  The ConvertiblePromissory Notes and Warrants were converted into Series A ConvertiblePreferred Stock and Common Stock Purchase Warrants, effective June 28, 2001.

             The Company expects cash flows fromoperating activities to remain negative over the balance of the fiscal year,but anticipates that existing capital will sustain its operations through theend of the current fiscal year.  Whetherthe Company's capital resources will be adequate to sustain its operations into2002 depends upon its ability to increase sales and gross margin over the nextseveral quarters. In the near term the Company is working on severalinitiatives with strategic partners to secure one or more financial commitmentsfor an aggregate of $1 million to trigger the additional funding of $2 millionof Series A Convertible Preferred Stock. However, no firm agreement orcommitment for such a transaction exists at this time.

**Factors That May Affect FutureResults and Financial Condition**

             The Company operates in a rapidlychanging environment that involves a number of uncertainties, some of which arebeyond the Company's control. In addition to the uncertainties describedelsewhere in this report, there are many factors that will affect the Company'sfuture results and business, which may cause the actual results to differ fromthose currently expected. The Company's future operating results and financialcondition are dependent upon the Company's ability to effectively market itsexisting products and services, and to migrate those products to additionalsoftware platforms and markets in order to increase its market opportunities.Inherent in this process are a number of factors that the Company mustsuccessfully manage in order to achieve favorable future operating results anda favorable financial condition.

             Potential risks and uncertaintiesthat could affect the Company’s future results and financial condition includethe following. The Company is an early stage company moving from research anddevelopment to operations and as such is subject to the uncertainties of anynew enterprise including the ability to effectively establish a market for itsproducts and services and competently service and support its customers.  Because the Company is dealing in hightechnology and rapidly evolving markets, it is subject to risks associated withuncertain market demand, intense competition, short product cycles and thepossibility of product defects.  To datethe Company has relied on external financing activities to support itsoperations.  If the Company does notsuccessfully generate adequate revenues to meet operating expenses in thefuture, the Company will be forced to seek additional external financing orcurtail operations.  Due to theCompany's operating losses and working capital deficiency, Singer, Lewak,Greenbaum & Goldstein LLP, the Company's independent auditors have includedan explanatory paragraph in their report to the Company's Financial Statementsfor the year ended December 31, 2000, that expresses substantial doubt as tothe Company's ability to continue as a going concern.  Subsequent to June 30, 2001, the Company received notificationthat its common stock would be de-listed from the NASDAQ National Marketexchange.  The Company’s stock is nowtraded as an Over-The-Counter Stock on the Bulletin Board, which is managed bythe NASD. For a discussion of these and other factors affecting the Company'sfuture results and financial condition, see "Item 6 - Management'sDiscussion and Analysis - Risk Factors That May Affect Operating Results"in the Company's Annual Report on Form 10-KSB for the year ended December 31,2001.

**PART II**            **OTHERINFORMATION**

**ITEM 1.**           **LEGALPROCEEDINGS**

             There is currently no materiallitigation pending against the Company.

**ITEM 2.**           **CHANGE INSECURITIES**

             In a series of transactions takingplace in May and June 2001, the Company sold an aggregate of $1.5 million inConvertible Promissory Notes and Warrants to a group of accredited investors,including WallerSutton 2000, L.P., Spencer Trask Investment Partners, LLC, andcertain members of the Company's Board of Directors.  No sales commissions or underwriting discounts were paid inconnection with the offering.  TheConvertible Promissory Notes bore interest at 8 percent per annum. Both theConvertible Promissory Notes and the Warrants were automatically convertibleinto equity securities, on the same terms as, and effective upon, the Company'snext equity financing in excess of $2 million.   The offering was conducted as a private placement, exempt fromregistration under the Securities Act of 1933, as amended, in accordance withRegulation D and Rule 506 promulgated thereunder.  The offering was not conducted by means of any public solicitation,and each of the investors represented that they are "accreditedinvestors" as that term is defined in Regulation D.  The Company will use the proceeds from theoffering for general working capital purposes.

             Effective June 28, 2001, theCompany consummated the sale of 4,664,180 shares of Series A ConvertiblePreferred Stock and an aggregate of 2,374,762 Common Stock Purchase Warrants toWallerSutton 2000, L.P., an institutional investor, for an aggregate purchaseprice of $2.5 million.  Of the total of2,374,762 Common Stock Purchase Warrants, 1,624,838 are exercisable at $.536per share, 374,963 at $1.00 per share and 374,963 are exercisable for $1.50 pershare.  All of the Warrants expire June30, 2007.  No sales commissions orunderwriting discounts were paid in connection with this offering.  In addition, this transaction effectedconversion of the Convertible Promissory Notes and Warrants from the May andJune financing.  The $1.5 million ofConvertible Promissory Notes were converted into an aggregate of 2,804,481shares of Series A Convertible Preferred Stock, 975,000 Common Stock PurchaseWarrants exercisable at $.536 per share, 225,000 Common Stock Purchase Warrantsexercisable at $1.00 per share and 225,000 Common Stock Purchase Warrantsexercisable for $1.50 per share.  All ofthe Warrants expire June 30, 2007.  TheWarrants from the May and June financing were converted into 1,399,256 CommonStock Purchase Warrants, exercisable at $.536. The Series A ConvertiblePreferred Stock is convertible at any time at the holders election into a likenumber of shares of Common Stock, subject to standard anti-dilution protectionand a reset right on the first anniversary of the transaction.  The offering was conducted as a privateplacement, exempt from registration under the Securities Act of 1933, asamended, in accordance with Regulation D and Rule 506 promulgatedthereunder.  The offering was notconducted by means of any public solicitation, and each of the investorsrepresented that they are "accredited investors" as that term isdefined in Regulation D. The proceeds from the offering will be used forgeneral working capital purposes.

**ITEM 3.**           **DEFAULTSUPON SENIOR SECURITIES**

             None

**ITEM4.**           **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

             The Company held its annual meetingof shareholders on June 27, 2001.  Atthat meeting three items were voted on including the election of directors, theapproval of a Series A Convertible Preferred Stock financing transaction andthe ratification of the selection of the Company's independent auditors forfiscal 2001.  The votes as tabulated bythe Inspector of Elections at the meeting, was as follows.

             Proposal 1—Election ofDirectors.  The votes tabulated by theInspector of Elections for the election of Directors was as follows:
John F.A.V.  Cecil For 17,947,134 Withheld58,023Paul  Cox For 16,694,864 Withheld1,306,713Lawrence  Lacerte For 17,946,134 Withheld55,547Robert  E. Randall For 17,947,134 Withheld58,023William  Reddersen For 17,947,134 Withheld58,023
             Proposal 2—Approval of Series AConvertible Preferred Stock financing transaction. The second proposal wasapproval to enter into a proposed Series A Convertible Preferred Stockfinancing transaction, including approval to: (i) amend the Corporation’s Certificate of Incorporation to authorizethe issuance of up to 13 million shares of Preferred Stock; (ii) file aCertificate of Designation defining the rights, privileges and preferences ofthe Series A Convertible Preferred Stock; and (iii) complete the financialtransaction to sell the Series A Preferred Stock.  The votes tabulated by the Inspector of Elections for approval ofthe Series A Preferred Stock financing transaction was as follows:

                                        For     13,736,372                        Against    133,376        Abstain     4,026,916

             Proposal 3—Ratification ofSelection of Independent Auditors.  Thethird proposal was to ratify the Board of Directors’ selection of theaccounting firm of Singer Lewak Greenbaum & Goldstein LLP to act as independentauditors for the Company for fiscal 2001. The votes tabulated by the Inspectorof Elections for the ratification of the selection of Singer Lewak Greenbaum& Goldstein LLP as the independent auditors for fiscal 2001 was as follows:

                                        For    17,953,197                        Against     29,900                       Abstain     3,580

**ITEM 5.**           **OTHERINFORMATION**

             None

**ITEM 6.**           **EXHIBITS ANDREPORTS ON FORM 8K**
a)Exhibits.         NumberDescription Method of Filing      3.1Amendment to Certificate of Incorporation Filed herewith      4.1Series A Preferred Stock and Warrant Purchase  Agreement Filed herewith      4.2Certificate of Designation for Series A  Convertible Preferred Stock Filed herewith      4.3Form of Warrant Agreement from June 2001  Series A Convertible preferred Stock Financing transaction. Filed herewith      4.4Registration Rights Agreement Filed herewith      4.5Shareholders Agreement Filed herewith     b)Reports on Form 8-K        None.        
 

             Inaccordance with the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, the Registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
DATED:  August 13, 2001TERAGLOBAL  COMMUNICATIONS CORP.     By: /S/ JAMES A MERCER III  James A Mercer III, Chief Financial Officer     By: /S/ ROBERT RANDALL  Robert Randall, Chief Executive Officer