** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-QSB**

 

 

**ý****QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934.**

 

**For the quarterlyperiod ended September 30, 2001.**

 

**o****TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934.**

 

**For the transitionperiod from ________ to ________.**

 

**Commission FileNumber 0-25115**

 

**TERAGLOBAL****COMMUNICATIONS CORP.**

(Exact name of small business issuer asspecified 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 whether theissuer (1) filed all reports required to be filed by Section 13 or 15 (d) ofthe 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. ýYes 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 November 2, 2001, there were26,906,982 shares of the issuer's common stock outstanding.

 

Transitional Small Business Disclosure Format(Check One): o Yes ýNo

 

 

 

**TERAGLOBAL COMMUNICATIONS CORP.AND SUBSIDIARIES**

##### **Form 10-QSB for the period ended September 30, 2001**

 

 
|                                                                                                       |                                                                                                                                              |   |
|------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| COVER PAGE                                                                                                 |                                                                                                                                              |
|                                                                                                       |                                                                                                                                              |
| INDEX                                                                                                      |                                                                                                                                              |
|                                                                                                       |                                                                                                                                              |
| PART I. FINANCIAL  INFORMATION                                                                             |                                                                                                                                              |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       | ITEM 1. Financial  Statements                                                                                                                     |   |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       | Condensed  Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December  31, 2000 (audited)                                      |   |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       | Condensed Consolidated Statements of  Operations – Three Months and Nine Months Ended September 30, 2001 and  September 30, 2000 (unaudited) |   |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       | Condensed Consolidated Statements of Cash  Flows – Nine Months Ended September 30, 2001 and September 30, 2000  (unaudited)                  |   |
|                                                                                                       |                                                                                                                                              |   |
|                                                                                                       | Notes to Condensed Consolidated Financial  Statements – September 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® and TeraMedia® are registered trademarks of  TeraGlobal Communications Corp. |

 

 

**PART I.         FINANCIAL INFORMATION**

**Item 1*.*                        Financial Statements**

 

 

**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

#### **September 30, 2001(unaudited) and December 31, 2000**

 

 

 

**ASSETS**
|                                                                                                       |   | **September 30,** |           | **December 31,** |           |
|------------------------------------------------------------------------------------------------------------|--------|-------------------|----------------|------------------|----------------|
|                                                                                                       |   | **2001**          |           | **2000**         |           |
|                                                                                                       |   | **(Unaudited)**   |           |             |           |
|                                                                                                       |   |              |           |             |           |
| **Current assets**                                                                                         |   |              |           |             |           |
| Cash and cash equivalents                                                                                  |   | $                 | 1,344,871      |             | $              | 467,383 |   |
| Accounts receivable                                                                                        |   | 52,645            |           | 117,543          |           |
| Notes receivable - related parties                                                                         |   | 236,095           |           | 377,901          |           |
| Inventory                                                                                                  |   | 16,548            |           | 186,071          |           |
| Prepaid expenses and other current assets,  including $6,548 and $23,874, respectively, to related parties |   | 133,794           |      | 260,770          |      |
|                                                                                                       |   |              |           |             |           |
| Total current assets                                                                                       |   | 1,783,953         |           | 1,409,668        |           |
|                                                                                                       |   |              |           |             |           |
|                                                                                                       |   |              |           |             |           |
|                                                                                                       |   |              |           |             |           |
| **Furniture and equipment**, net                                                                           |   | 1,001,104         |           | 1,947,936        |           |
|                                                                                                       |   |              |           |             |           |
| **Other Asset - deposits**                                                                                 |   | 567,000           |           | 680,000          |           |
|                                                                                                       |   |              |           |             |           |
| **Total assets**                                                                                           |   | $                 | 3,352,057      |             | $              | 4,037,604 |   |
|                                                                                                       |   |              |           |             |           |

 

The accompanying notes are anintegral part of these financial statements.

 

 

##### **LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)**

 
|                                                                                                                                                                                         |   | **September 30,** |           | **December 31,** |           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|----------------|------------------|----------------|
|                                                                                                                                                                                         |   | **2001**          |           | **2000**         |           |
|                                                                                                                                                                                         |   | **(Unaudited)**   |           |             |           |
| **Current liabilities**                                                                                                                                                                      |   |              |           |             |           |
| Accounts payable                                                                                                                                                                             |   | $                 | 490,871        |             | $              | 869,789 |   |
| Short-term loans                                                                                                                                                                             |   | 63,331            |           | 66,658           |           |
| Accrued expenses                                                                                                                                                                             |   | 64,212            |           | 68,293           |           |
| Accrued severance pay                                                                                                                                                                        |   | 117,194           |           | 178,879          |           |
| Accrued interest on convertible promissory  note                                                                                                                                             |   | --                |           | 98,681           |           |
| Accrued vacation                                                                                                                                                                             |   | 120,454           |           | 150,555          |           |
| Convertible promissory note                                                                                                                                                                  |   | --                |           | 475,000          |           |
| Deferred revenue                                                                                                                                                                             |   | 2,925             |           | --               |           |
|                                                                                                                                                                                         |   |              |           |             |           |
| Total current liabilities                                                                                                                                                                    |   | 858,987           |           | 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 (dividends of $103,096 in  arrears)                                                                 |   | 2,935,753         |      | --               |      |
|                                                                                                                                                                                         |   |              | ** **     |             | ** **     |
| **Shareholders'  equity (deficit)**                                                                                                                                                          |   |              | ** **     |             | ** **     |
| 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 September 30, 2001 |   | 26,907            |           | 22,707           |           |
| Additional paid-in capital                                                                                                                                                                   |   | 40,963,351        |           | 37,449,327       |           |
| Other comprehensive  gain (loss)                                                                                                                                                             |   | 52,648            |           | (11,181          | )              |
| Accumulated deficit                                                                                                                                                                          |   | (41,485,589       | )              | (35,331,104      | )              |
|                                                                                                                                                                                         |   |              |           |             |           |
| Total shareholders' equity (deficit)                                                                                                                                                         |   | (442,683          | )              | 2,129,749        |           |
|                                                                                                                                                                                         |   |              |           |             |           |
| **Total liabilities and shareholders’ equity (deficit)**                                                                                                                                |   | $                 | 3,352,057      |             | $              | 4,037,604 |   |
|                                                                                                                                                                                         |   |              |           |             |           |

 

The accompanying notes are anintegral part of these financial statements.

 

 

**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**Forthe three months and the nine months ending September 30, 2001 and 2000(Unaudited)**

 

 
|                                                              |   | **Three months ended September  30,** |           | **Nine months ended September 30,** |       |
|-------------------------------------------------------------------|--------|---------------------------------------|----------------|-------------------------------------|------------|
|                                                              |   | **2001**                              |           | **2000**                            |       | **2001** |   | **2000** |   |
|                                                              |   | **(unaudited)**                       |           | **(unaudited)**                     |       | **(unaudited)** |   | **(unaudited)** |   |
|                                                              |   |                                  | ** **     |                                | ** ** |   | ** ** |   | ** ** |
| **Net Sales**                                                     |   | $                                     | 154,678        |                                | $          | 37,020 |   | $ | 580,979 |   | $ | 261,748 |   |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| **Cost of sales**                                                 |   | 65,153                                |           | 69,609                              |       | 225,389 |   | 213,401 |   |
|                                                              |   |                                  | ** **     |                                | ** ** |   | ** ** |   | ** ** |
| **Gross profit (loss)**                                           |   | 89,525                                |           | (32,589                             | )          | 355,590 |   | 48,347 |   |
|                                                              |   |                                  | ** **     |                                | ** ** |   | ** ** |   | ** ** |
| **Operating expenses**                                            |   |                                  |           |                                |       |   |   |   |   |
| General and  administrative                                       |   | 1,271,275                             |           | 2,533,702                           |       | 4,176,395 |   | 7,321,599 |   |
| Sales and marketing                                               |   | 232,862                               |           | 390,419                             |       | 714,876 |   | 1,101,821 |   |
| Research and development                                          |   | 500,730                               |           | 752,198                             |       | 1,309,529 |   | 2,812,164 |   |
| Impairment of excess cost  overfair  value of net assets acquired |   | --                                    |           | 3,133,215                           |       | -- |   | 3,133,215 |   |
| Total operating expenses                                          |   | 2,004,867                             |           | 6,809,534                           |       | 6,200,800 |   | 14,368,799 |   |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| **Loss from operations**                                          |   | (1,915,342                            | )              | (6,842,123                          | )          | (5,845,210 | ) | (14,320,452 | ) |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| **Other income (expenses)**                                       |   |                                  |           |                                |       |   |   |   |   |
| Interest income                                                   |   | 25,069                                |           | 112,614                             |       | 64,772 |   | 239,033 |   |
| Interest expense                                                  |   | (85,401                               | )              | (22,483                             | )          | (489,986 | ) | (46,989 | ) |
| Other income (loss)                                               |   | 47,850                                |           | --                                  |       | 115,939 |   | -- |   |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| Total other income  (expense)                                     |   | (12,482                               | )              | 90,131                              |       | (309,275 | ) | 192,044 |   |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| **Net loss available to common****Shareholders**                  |   | **$**                                 | **(1,927,824** | **)**                               | **$**      | **(6,751,992** | **)** | **$** | **(6,154,485** | **)** | **$** | **(14,128,408** | **)** |
|                                                              |   |                                  | ** **     |                                | ** ** |   | ** ** |   | ** ** |
| **Basic and fully diluted loss  perCommon  share**                |   | **$**                                 | **(0.07**      | **)**                               | **$**      | **(0.30** | **)** | **$** | **(0.24** | **)** | **$** | **(0.68** | **)** |
|                                                              |   |                                  |           |                                |       |   |   |   |   |
| **Weighted-average common****shares outstanding**                 |   | **26,906,982**                        | ** **     | **22,691,004**                      | ** ** | **25,784,881** | ** ** | **20,855,834** | ** ** |

 

The accompanying notes are anintegral part of these financial statements.

 

**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**Forthe nine months ended September 30, 2001 and 2000 (Unaudited)**

 
|                                                                        |   | **Nine Months Ended September 30** |            |
|-----------------------------------------------------------------------------|--------|------------------------------------|-----------------|
|                                                                        |   | **2001**                           |            | **2000** |   |
| **Cash flows from operating  activities**                                   |   |                               |            |   |   |
| Net loss                                                                    |   | $                                  | (6,154,485      | ) | $ | (14,128,408 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities |   |                               |            |   |   |
| Stock issued for legal  settlement                                          |   | 15,625                             |            | -- |   |
| Stock issued for  services rendered                                         |   | --                                 |            | 1,059,625 |   |
| Stock issued for  TechnoVision exchange offer                               |   | 2,000                              |            | -- |   |
| Gain on settlement of debt                                                  |   | 39,202                             |            |   |   |
| Loss on sale of property  and equipment                                     |   | (135,480                           | )               | -- |   |
| Depreciation                                                                |   | 811,290                            |            | 942,359 |   |
| Accretion of debt  discount                                                 |   | 478,080                            |            | -- |   |
| Amortization of goodwill                                                    |   | --                                 |            | 572,714 |   |
| Impairment of excess  cost over fair value of  netnet assets acquired  |   | --                                 |            | 3,133,215 |   |
| (Increase) decrease in                                                      |   |                               |            |   |   |
| Accounts receivable                                                         |   | 64,898                             |            | 127,662 |   |
| Prepaid expenses and  other current assets                                  |   | 126,976                            |            | 60,386 |   |
| Inventory                                                                   |   | 169,523                            |            | (47,825 | ) |
| Increase (decrease) in                                                      |   |                               |            |   |   |
| Accounts payable                                                            |   | (378,919                           | )               | (577,215 | ) |
| Accrued expenses                                                            |   | (4,081                             | )               | 282,035 |   |
| Accrued vacation                                                            |   | (30,101                            | )               | 24,926 |   |
| Accrued severance                                                           |   | (61,685                            | )               | -- |   |
| Accrued interest                                                            |   | 8,199                              |            | -- |   |
| Customer deposits                                                           |   | 2,925                              |            | -- |   |
| Net cash used in  operating activities                                      |   | (5,046,033                         | )               | (8,550,526 | ) |
|                                                                        |   |                               |            |   |   |
| **Cash flows from investing  activities**                                   |   |                               |            |   |   |
| Notes receivable -  related parties                                         |   | 102,604                            |            | (30,708 | ) |
| Purchase of furniture  and equipment                                        |   | (49,114                            | )               | (954,844 | ) |
| Proceeds from sale of  furniture and equipment                              |   | 320,137                            |            | -- |   |
| Proceeds from redemption  (purchase of) Certificate of Deposit              |   | 113,000                            |            | (180,000 | ) |
| Net cash provided by  (used in) investing activities                        |   | 486,627                            |            | (1,165,552 | ) |
|                                                                        |   |                               |            |   |   |
| **Cash flows from financing  activities**                                   |   |                               |            |   |   |
| Payments on capital  lease obligations                                      |   | --                                 |            | (708,636 | ) |
| Proceeds (payments) on  short-term loans                                    |   | (3,327                             | )               | (1,508 | ) |
| Proceeds from common  stock committed                                       |   | --                                 |            | 15,000 |   |
| Proceeds from issuance  of common stock, net of fees                        |   | 1,501,000                          |            | 6,852,559 |   |
| Proceeds from issuance  of preferred stock, net of fees                     |   | 2,375,000                          |            | -- |   |
| Proceeds from  convertible promissory notes                                 |   | 1,500,000                          |            | -- |   |
| Proceeds from exercise  of stock options                                    |   | 392                                |            | 291,232 |   |
| Net cash provided by  financing activities                                  |   | 5,373,065                          |            | 6,448,647 |   |
|                                                                        |   |                               |            |   |   |
| **Cumulative translation  adjustment**                                      |   | 63,829                             |            | 21,540 |   |
|                                                                        |   |                               |            |   |   |
| Net increase (decrease)  in cash and cash equivalents                       |   | 877,488                            |            | (3,245,891 | ) |
|                                                                        |   |                               |            |   |   |
| **Cash and cash equivalents,  beginning of period**                         |   | 467,383                            |            | 7,893,036 |   |
|                                                                        |   |                               |            |   |   |
| **Cash and cash equivalents, end  of period**                               |   | $                                  |  1,344,871 |   | $ |  4,647,145 |   |
|                                                                        |   |                               |            |   |   |
|                                                                        |   |                               |            |   |   |
| **Supplemental disclosure of cash  flow information**                       |   |                               |            |   |   |
|                                                                        |   |                               |            |   |   |
| **Interest paid**                                                           |   | $                                  |  4,543     |   | $ |  2,055 |   |
|                                                                        |   |                               |            |   |   |
| **Income taxes paid**                                                       |   | $                                  |  1,600     |   | $ |  1,600 |   |
|                                                                             |        |                                    |                 |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these financial statements.

 

 

###### **Supplemental schedule of non-cash investing andfinancing activities**

 

During the three months ended March 31, 2001, the Company entered intoan agreement to convert a promissory note into shares of common stock. Theprincipal amount of the promissory note of $475,000 and accumulated interest of$103,680 were converted into 1,157,360 shares of the Company's common stock and120,000 warrants to purchase shares of common stock at a price of $0.60 pershare for a period of two years.  Noneof these warrants were exercised as of September 30, 2001.  No expense has been recorded in connectionwith the issuance of the warrants as management considers the effect on thefinancial statements to be immaterial.

 

During the three months ended March 31, 2001, the Company issued 2,000shares of common stock valued at $2,000 as payment for the acquisition ofadditional shares of TechnoVision Communications, Inc.  The TechnoVision Communications, Inc. shareswere tendered pursuant to the Company’s exchange offer which was consummated onAugust 10, 1998; however, due to administrative error, the Company’s shareswere never issued at the time of the exchange offer.

 

**TERAGLOBALCOMMUNICATIONS CORP.**

**AND SUBSIDIARIES**

** NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**September30, 2001**

** **

 

###### ** **

###### **NOTE 1 –**SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim 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 thenine month period ended September 30, 2001, are not necessarily indicative ofthe results that 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

 

Theconsolidated financial statements include the accounts of TeraGlobalCommunications Corp. and its current and former subsidiaries.  The Company's wholly owned subsidiaries haveincluded ATI Access Technologies, Inc., a Canadian corporation, which wasdissolved in April 2001, as well as TGC Acquisition, Inc., a Californiacorporation and TeraGlobal Communications Corporation, a Canadian corporation.None of these entities have substantial assets or operations and the Company isin the process of dissolving both TGC Acquisition, Inc. and TeraGlobalCommunications Corporation, the Canadian subsidiary. The financial statementsalso include the accounts of TechnoVision Communications, Inc., a Georgiacorporation that was 99% owned by the Company. TechnoVision Communications, Inc. and was dissolved in February2001.  All inter-company accounts andtransactions have been eliminated in the consolidation.

 

**NOTE 2 – GOING CONCERN ISSUES**

 

In connectionwith the audit for the year ended December 31, 2000, the Company received areport from its independent certified public accountants that includes anexplanatory paragraph describing uncertainty in its ability to continue as agoing concern.  The condensedconsolidated financial statements included herein contemplate the Company'sability to continue and as such do not include any adjustments that mightresult from this uncertainty.

 

**NOTE 3 –REVENUE RECOGNITION**

 

The Companyrecognizes revenues in accordance with the provisions of the American Instituteof Certified Public Accountants’ Statement of Position 97-2, "SoftwareRevenue Recognition."  The Companylicenses its software products under nonexclusive, nontransferable licenseagreements. For those agreements that require modest or no significantproduction, modification, or customization, revenue is recognized when alicense agreement has been signed, delivery, installation and acceptance of thesoftware product has occurred, the related fee is fixed or determinable, andcollectability is probable. For software arrangements that require significantproduction, modification, or customization, the entire arrangement is accountedfor in conformity with Accounting Research Bulletin No. 45, "Long-termConstruction-Type Contracts," using the relevant guidance Statement ofPosition 81-1, "Accounting for Performance of Construction-Type Contractsand Certain Production-Type Contracts."

 

Incidental to the licensing of software, theCompany enters into software maintenance and service agreements and acts as areseller for third party hardware. Under the software maintenance and serviceagreements, the fee is collected under a one-year contract and revenue isdeferred and recognized ratably over the contract period. Under the resellerarrangements, the Company recognizes revenue upon installation and acceptanceof the hardware.

 

In December 1999, Securities and Exchange Commission(“SEC”) Staff Accounting Bulletin ("SAB") No. 101, "RevenueRecognition in Financial Statements," was issued. SAB No. 101 provides theSEC staff's views in applying generally accepted accounting principlesto selected revenue recognition issues, including software revenuerecognition.  The Company adopted SABNo. 101 in the fourth quarter of year ended December 31, 2000.  Management does not expect the adoption ofSAB No. 101 will have a material effect on the Company's financial position orresults of operations.

 

 

**NOTE 4 –FURNITURE AND EQUIPMENT**

 

                 Furniture and equipmentconsisted of the following:

 
|                           |   | **September  30, 2001** |          | **December  31, 2000** |   |
|--------------------------------|--------|-------------------------|---------------|------------------------|--------|
|                           |   | **(Unaudited)**         |          |                   |   |
|                           |   |                    |          |                   |   |
| Furniture and fixtures         |   | $                       | 446,635       |                   | $      | 446,635 |   |
| Office equipment               |   | 1,078,967               |          | 1,123,271              |   |
| Computers and software         |   | 2,270,428               |          | 2,308,266              |   |
| TeraMedia® networks       |   | 145,409                 |          | 334,290                |   |
|                           |   | 3,941,439               |          | 4,212,462              |   |
| Less accumulated  depreciation |   | 2,940,335               |          | 2,264,526              |   |
| **Total**                      |   | **$**                   | **1,001,104** | ** **             | **$**  | **1,947,936** | ** ** |

 

 

Depreciation expense for the nine months endedSeptember 30, 2001, and the year ended December 31, 2000, was $811,290(unaudited) and $1,203,721, respectively. During the nine months ended September 30, 2001, the Company recognizeda loss of $135,480 in conjunction with the disposition of certain non-coreassets and TeraMedia® network assets as it transitioned from a service providerbusiness model to one that focuses on the sale and licensing of TeraMedia®software.

 

 

**NOTE 5 - 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 6 - CONVERTIBLE PROMISSORY NOTES**

 

In a series oftransactions taking place in May and June 2001, the Company received $1.5million in exchange for convertible promissory notes and warrants from a groupof accredited investors, including certain members of the Company's Board ofDirectors.  No sales commissions orunderwriting discounts were paid in connection with the offering.  The convertible promissory notes boreinterest at 8 percent per annum and matured in July 2003 unless the Companycompleted an equity financing prior to the maturity date. The convertiblepromissory notes were to be automatically converted into the Company's nextequity financing in excess of $2 million using a conversion price equal to theper share price in the Company’s next equity financing.  The convertible promissory notes wereconverted into convertible preferred stock and warrants as part of theCompany’s issuance of convertible preferred stock and warrants on June 28,2001.  

 

In accordancewith generally accepted accounting principles, the difference between theconversion price and the Company's stock price on the date of issuance of thenotes is considered to be interest expense. It is to be recognized in the statement of operations during the periodfrom the issuance of the debt to the time at which the debt first becomesconvertible.  In connection with theissuance of the notes, the Company recorded a debt discount of $130,784.  As a result of the conversion of the noteson June 28, 2001, the discount was recognized as interest expense in thestatement of operations for the three months ended June 30, 2001.

 

The number of warrantsissued with the convertible promissory notes was calculated as 1,399,256 andwas based on the price per share in the Company’s next equity financing.  Each warrant entitles the holder to purchaseone share of the Company's common stock at a price equal to the Company’s nextequity financing, or $0.536 per share. The warrants vested immediately and expire on June 30, 2007.  The Company allocates the proceeds receivedfrom debt or convertible debt with detachable warrants using the relative fairvalue of the individual elements at the time of issuance.  The amount allocated to the warrants as adebt discount was calculated at $261,895 using the Black-Scholes option pricingmodel and will be recognized as interest expense over the period until thenotes mature or are converted.  As aresult of the conversion of the notes on June 28, 2001, the discount wasrecognized as interest expense in the statement of operations for the threemonths ended June 30, 2001.

 

** **

**NOTE 7 - COMMITMENTSAND CONTINGENCIES**

 

*Larry Jernigan v. TeraGlobal Communications Corp., et al*

During the three months ended March 31, 2001,the Company paid Mr. Jernigan a total of $15,000 and issued 25,000 shares ofcommon stock, valued at $15,625, in exchange for a release of all claims,including any interest in TeraGlobal and TechnoVision stocks or stock options.

 

The Company isaware of a pending investigation by the criminal division of the U.S.Attorney's office in connection with a securities offering conducted by theCompany's former TechnoVision Communications, Inc. subsidiary.  The Company has and will continue to fullycooperate with and support the U.S. Attorney's investigation.  The Company cannot say at this time whetherit is a subject of the investigation, or what liabilities it may incur, if any,in connection with the investigation. See Part II, Item 1 Litigation below.

 

 

 

**NOTE 8 - SERIES A REDEEMABLE CONVERTIBLE 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., aninstitutional investor, for proceeds of $2.375 million, net of $125,000 infees.  Of the $2.375 million, $403,530has 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.  The warrants vest immediatelyand expire on June 30, 2007. 

 

In addition, as a result of this preferredstock issuance, the convertible promissory notes from the May and Junefinancing, plus accrued interest of $3,200 on the notes, were converted into2,804,481 shares of Series A Convertible Preferred Stock and warrants topurchase 975,000, 225,000 and 225,000 shares of common stock exercisable at$0.536, $1.00, and $1.50 per share, respectively. Of the $1.5 million convertedin the May and June financing, $241,708 was allocated to the issuance of thewarrants.  The warrants vest immediatelyand expire on June 30, 2007. 

 

The Series A Convertible Stock is entitled tocumulative dividends payable in cash at a rate of 10 percent per annum, whichaccrue until paid and are compounded semi-annually. It is redeemable at theelection of the holders of the majority of the shares of Series A PreferredStock, commencing on the third anniversary of the closing of thetransaction.  Each share of Series AConvertible Preferred Stock is convertible into one fully paid share of theCompany’s Common Stock, subject to anti-dilution, at any time at the holder’sdiscretion.  After the fifth anniversaryof the closing, the Series A Preferred Stock will automatically convert intoCommon Stock, or when the closing bid price for the Company’s Common Stockexceeds $10.00 per share for 20 consecutive trading days.

 

In accordance with generally acceptedaccounting principles, the difference between the conversion price and theCompany's stock price on the date of issuance of the convertible preferredstock is considered to be interest expense. It is to be recognized in the statement of operations during the periodfrom the issuance of the convertible preferred stock to the time at which theconvertible preferred stock first becomes redeemable, or June 28, 2004.  In connection with the issuance of theconvertible preferred stock, the Company recorded a debt discount of $379,569,and recognized interest expense of $31,631 during the three months endedSeptember 30, 2001 related to the amortization of the debt discount.  

 

Related to the issuanceof the Company’s Preferred Stock, the Company allocates the proceeds receivedfrom debt, convertible debt or convertible preferred stock with detachablewarrants using the relative fair value of the individual elements at the timeof issuance.  The amount allocated tothe warrants as a debt discount of $645,235 was calculated using theBlack-Scholes option pricing model and will be recognized as interest expenseover the period until the notes mature or become redeemable.  The Company recognized interest expense of$53,770 during the three months ended September 30, 2001 related to theamortization of the debt discount.

 

 

**NOTE 9 - SHAREHOLDERS' EQUITY**

 

                Common Stock

 

During the three months ended March 31, 2001,the Company converted all then outstanding convertible promissory notes intocommon stock.  The Company had $475,000in principal and $103,680 in interest outstanding, all of which were exchangedfor an 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 issuance of thewarrants as management considers the effect on the financial statements to beimmaterial.

 

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, due toadministrative error, the shares were never issued at the time of the exchangeoffer.

 

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 theagreement is for a period of two years, subject to annual renewal by theparties on the anniversary date of the agreement.

 

During the three months ended June 30, 2001,the Company granted employees an aggregate of 531,500 options under its 1997Stock Option Plan, at exercise prices ranging from $0.30 to $0.86. An employeeexercised 700 options at a price of $0.56 during the same period.

 

 

During the three months ended September 30,2001, the Company granted employees an aggregate of 325,500 options under its1999 Stock Option Plan, at exercise prices ranging from $0.27 to $0.52.

 

The following schedule summarizes the stock optionstransactions:

 

 
|                             |   | **Stock Options  Outstanding** |   | **Weighted Average   Exercise Price** |   |
|----------------------------------|--------|--------------------------------|--------|---------------------------------------|--------|
|                             |   |                           |   |                                  |   |
| Outstanding, December  31, 2000  |   | 2,083,250                      |   | $                                     | 5.57   |   |
|                             |   |                           |   |                                  |   |
| Granted                          |   | 1,979,000                      |   | $                                     | 0.53   |   |
| Forfeited                        |   | (635,300                       | )      | $                                     | 5.74   |   |
| Exercised                        |   | (700                           | )      | $                                     | 0.56   |   |
| Outstanding, September  30, 2001 |   | 3,426,250                      |   | $                                     | 3.05   |   |
|                             |   |                           |   |                                  |   |
| Exercisable, September  30, 2001 |   | 1,754,117                      |   |                                  |   |

 

**Recently Issued Accounting Pronouncements**

 

In July 2001,the FASB issued SFAS No. 141, “Business Combinations.”  This statement addresses financialaccounting and reporting for business combinations and supersedes AccountingPrinciples Bulletin (“APB”) Opinion No. 16, “Business Combinations,” and SFASNo. 38, “Accounting for Pre-Acquisition Contingencies of PurchasedEnterprises.” All business combinations in the scope of this statement are tobe accounted for using one method, the purchase method.  The provisions of this statement apply toall business combinations initiated after June 30, 2001.  Use of the pooling-of-interests method forthose business combinations is prohibited. This statement also applies to all business combinations accounted forusing the purchase method for which the date of acquisition is July 1, 2001 orlater.

 

In July 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  This statement addresses financialaccounting and reporting for acquired goodwill and other intangible assets andsupersedes APB Opinion No. 17, “Intangible Assets.”  It addresses how intangible assets that are acquired individuallyor with a group of other assets (but not those acquired in a businesscombination) should be accounted for in financial statements upon theiracquisition.  This statement alsoaddresses how goodwill and other intangible assets should be accounted forafter they have been initially recognized in the financial statements.  It is effective for fiscal years beginningafter December 15, 2001.  Earlyapplication is permitted for entities with fiscal years beginning after March15, 2001, provided that the first interim financial statements have not beenissued previously.

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  This statement applies tolegal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development, and/or the normaloperation of long-lived assets, except for certain obligations of lessees.  This statement is not applicable to theCompany.

 

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  This statementaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets.  This statementsupercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed of,” and the accounting and reportingprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions,” for the disposal of a segment of a business, and amendsAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” toeliminate the exception to consolidation for a subsidiary for which control islikely to be temporary.  The Companydoes not expect adoption of SFAS No. 144 to have a material impact, if any, onits financial position or results of operations.

**Item 2.                 Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The matters discussed in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and other sections of this reportcontain forward-looking statements that are based on current expectations,estimates, forecasts and projections about the Company and the industry inwhich it operates.  Theseforward-looking statements involve risks and uncertainties and are notguarantees of future performance. Forward-looking statements include, but are not limited to, statementsconcerning the timing and amount of revenues from the sale of the Company'sTeraMedia® collaboration software both from direct sales as well as strategicalliances, expectations concerning trends in the Company's operating expenses,and the release dates for future versions of the TeraMedia® collaborationsoftware or other solutions.  TheCompany's actual results could differ materially from the results discussed insuch forward-looking statements based on a number of factors including thoseset forth under “Factors That May Affect Future Results and FinancialCondition” below and more completely in the Company’s Annual Report on Form10-KSB for the fiscal year ended December 31, 2000.  The Company undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  The followingdiscussion of the Company's financial condition and results of operationsshould be read in conjunction with the Company's financial statements and therelated notes thereto appearing elsewhere in this report.*

 

###### **Overview**

 

The Companydevelops software for real-time collaboration and communication over computernetworks, turning packet-switched networks into next generation communicationsand collaboration solutions.

 

The Company'sinitial product, TeraMedia® collaboration software, is a standards-based suiteof IP applications that combines extensive collaboration tools with integratedIP voice and video communications. Collaboration applications include application sharing, media sharing,whiteboard, presentations and assessment applications.  Communications applications feature Voiceover IP with pure digital audio, and Video over IP with full screen broadcastquality running at 30 frames per second. The Company is presently selling TeraMedia through direct and indirectchannels into the government, education and enterprise markets.

 

TeraMedia®runs over any network that delivers IP packets, including Intranets, Extranetsor the public Internet.  It operatesover IP, Ethernet, ATM, ISDN, DSL, Cable Modem, LMDS, MMDS and 802.11 wirelessnetworks.  Its integrated communicationscapabilities eliminate the need for special purpose hardware for audio or videoconferencing, reducing them to simple desktop applications.  Intuitive interfaces let users reach, teachand engage at the click of a mouse. Group sessions, like conference calls, are handled automatically insoftware, without the need for dial in numbers, Multi-point Control Units,scheduling or outside services.

 

In today'sbusiness environment resources and expertise are often decentralized.  For that reason effective collaboration,bringing those resources and expertise together to solve a problem, isfundamental to every organization regardless of its purpose.  Recent activities have caused increasinginterest in alternatives to face to face meetings.  Commercial enterprises facing a slowing economy were looking toreduce travel-related operating expenses. Now they are re-evaluating the downtime and uncertainty related totravel, and questioning how much is truly necessary.  Similarly government agencies are rapidly evaluating solutionsfor increasing coordination between remote facilities.  Finally, the network service providers whohave developed extensive packet-switched networks over the past decade arelooking for "killer applications" to drive demand for their embeddedinfrastructure.  TeraGlobal is seeingincreased interest in its real-time collaboration software from enterprise andgovernment customers as well as network service providers.

 

The Companyentered the third quarter of fiscal 2001 having completed a significant roundof financing with an investment fund specializing in telecommunicationsinvestments.  On June 28, 2001, the Companyentered into a Series A Preferred Stock and Warrant Purchase Agreement withWallerSutton 2000, L.P. and certain other investors.  With the proceeds of that offering, the Company focused its thirdquarter efforts on building its direct and indirect sales channels, and thedevelopment of a Windows version of its TeraMedia® software.

 

In the third quarter, the Company completely rebuiltis direct sales infrastructure with (i) six regional sales managers coveringthe Northwest, Southwest, Northcentral, Southcentral, Northeast andSoutheast portions of the United States, (ii) three regional channel managersfor the Western, Central and Eastern portions of the United States, and (iii) aseparate sales manager and systems engineer in Washington D.C. for federalgovernment accounts.  Based on theactivities of these individuals, the Company would expect to see increasingrevenues from direct sales activities beginning in the fourth quarter.

 

The Companyalso continues to focus on indirect channels. During the quarter the Company signed up an additional five Value AddedResellers, including GTSI.  GTSI is alarge reseller and systems integrator primarily for the government market.  The Company has worked with GTSI to listTeraMedia® solutions packages on federal purchasing schedules to facilitatesales and fulfillment of orders to the federal government.

 

The Companyhas made significant advances in its port to Windows 2000 operating system, andcan demonstrate two-way live video running under its software at 30 frames persecond on a Pentium 4 processor. The Company expects to launch a beta versionof the audio and video communications features for Windows 2000 during thefourth quarter.  The Company iscontinuing to port its collaboration software and call signaling software tothe Windows platform and, based on achievement of interim milestones, expectsan initial product launch will take place in the first quarter of 2002.

 

**Results of Operations**

The following table sets forth the selected unaudited results ofoperations for the nine months ending September 30, 2001, and September 30,2000.
| **Statements of Operations Data:**         |   | **Nine Months EndingSeptember 30, 2001(Unaudited)** |       | **Nine Months EndingSeptember 30, 2000(Unaudited)** |   |
|--------------------------------------------|--------|-----------------------------------------------------|------------|-----------------------------------------------------|--------|
|                                       |   |                                                |       |                                                |   |
| Sales                                      |   | $                                                   | 580,979    |                                                | $      | 261,748 |   |
| Cost of sales                              |   | 225,389                                             |       | 213,401                                             |   |
|                                       |   |                                                |       |                                                |   |
| General and  administrative                |   | 4,176,395                                           |       | 7,321,599                                           |   |
| Sales and marketing                        |   | 714,876                                             |       | 1,101,821                                           |   |
| Research and development                   |   | 1,309,529                                           |       | 2,812,164                                           |   |
|                                       |   |                                                |       |                                                |   |
| Net Loss available to  common shareholders |   | $                                                   | (6,154,485 | )                                                   | $      | (14,128,408 | ) |
|                                       |   |                                                |       |                                                |   |
| Basic loss per common  share               |   | $                                                   | (0.24      | )                                                   | $      | (0.68 | ) |
| Weighted average common  sharesoutstanding |   | 25,784,881                                          |       | 20,855,834                                          |   |
|                                       |   |                                                |       |                                                |   |

**Three and Nine MonthPeriods Ended September 30, 2001 and 2000.**

*Sales.*Sales forthe three months ended September 30, 2001 were $154,678 compared to $37,020 forthe three months ended September 30, 2000, an increase of 318 percent.  Sales for the nine months ended September30, 2001 and September 30, 2000, were $580,979 and $261,748, respectively, anincrease of 121 percent.  During thethree and nine months ended September 30, 2001 the Company recognized revenuefrom the licensing of TeraMedia software, the resale of computer hardware,cameras and microphones to support the use of TeraMedia and fees associatedwith the customization of its TeraMedia software. During fiscal 2000 theCompany was pursuing a service model and offered its software as part of thebundled solution that included network connectivity and computer hardware.  The Company's revenues were derived frommonthly fees charged under service contracts with early adopters of theTeraMedia service

The Company has increased sales by concentrating its direct salesefforts on customers with the existing network infrastructure and hardwarenecessary to support its TeraMedia software. The Company has also contracted with Preferred Systems Integrators(PSI's) to manage the implementation of its software for those customers thatneed additional support, and is focusing on accelerating its channel sales byrecruiting additional Value Added Resellers (VAR's) and licensing its softwareto Original Equipment Manufacturers (OEM's). The Company realized revenue from all of these sources during the threemonths ended September 30, 2001.

*Cost of sales.*Cost of sales for the three months ended September 30, 2001 was $65,153,resulting in a gross margin of $89,525, or 57 percent. Cost of sales for thethree months ended September 30, 2000 was $69,609, resulting in a negativegross margin. Cost of sales for the nine months ended September 30, 2001 was$225,389, with a gross margin of $355,590, or 61 percent. Cost of sales for thenine months ended September 30, 2000 was $213,401, with a gross margin of 18percent. Cost of sales for the three and nine months ended September 30, 2001consisted primarily of the sale of computer equipment, cameras and microphonesused in conjunction with the Company's TeraMedia software. Cost of sales forthe nine months ended September 30, 2000, included the costs associated withproviding network connectivity, network infrastructure and desktop hardwareassociated with sales under service contracts.

                The Company'scontinued focus on driving revenue through the licensing of its software,rather than the deployment of its software under the service model, has allowedit to improve gross margins over prior periods.  The Company will continue to focus its efforts on the licensingof software and providing installation, support and training services inconjunction with the license of its software. It will, however, continue to resell hardware required to facilitate theimplementation of its software in select deployments. Gross margins forhardware sales are lower than margins received under licensing agreements.  Consequently, cost of sales and resultinggross margins will vary from transaction to transaction, and period to period,based on the mix of products and services the Company sells at any time.

                *General and Administrative*. Generaland administrative expenses were $1,271,275 for the three months endedSeptember 30, 2001 compared to $2,533,702 for the three months ended September30, 2000, a reduction of $1,262,427, or 50 percent.  General and administrative expenses for the nine months endedSeptember 30, 2001, were $4,176,396 compared to $7,321,599 for the nine monthsended September 30, 2000, a reduction of $3,145,204, or 43 percent.

                The Companycontinues to experience lower general and administrative expenses as a resultof its cost cutting measures in the first two quarters of the fiscal year2001.   The transition from the servicemodel has significantly reduced expenses associated with network infrastructureand bandwidth as well as depreciation expenses as those assets are retired orre-deployed.  In addition, the Companydid not have any outstanding material litigation during the quarter,significantly reducing legal expenses over the prior period.

                 *Research and Development*. Research andDevelopment expenses were $500,730 for the three months ended September 30,2001, as compared to $752,198 for the three months ended September 30, 2000, areduction of $251,468, or 33 percent. Research and development expenses for the nine months ended September30, 2001 and 2000, were $1,309,529 and $2,812,164, respectively, a reduction of$1,502,635, or 53 percent.  Thereduction in research and development expenses is due primarily to reducedcapital expenditures for equipment, as the Company uses previously expensedequipment in its current development activities.  Additionally, the Company has experienced generally lower costsof hardware and software while developing on the Windows platform.

                The Company'sresearch and development focus continues to be the introduction of a productcompatible with the Windows operating system. The Company began accelerating its engineering efforts in the threemonths ended September 30, 2001 by increasing its engineering personnel by 5engineers. It will also purchase additional equipment necessary to performtesting and analysis of the Windows based product.  Consequently, the Company expects research and developmentexpenses to increase modestly during the fourth quarter of fiscal 2001 comparedto expenditures during the first three quarters.

                *Sales andMarketing*. Sales and marketing expenses were $232,862 for thethree months ended September 30, 2001, as compared to $390,419 for the threemonths ended September 30, 2000, a reduction of $157,557 or 40 percent. Salesand marketing expenses for the nine months ended September 30, 2001, and September30, 2000, were $714,876 and $1,101,821, respectively, or a reduction of 35percent.  The Company has been able toreduce its sales and marketing expenses while increasing sales and marketingpersonnel.  The Company added eightadditional employees in sales and marketing during the third quarter.  It reduced overall sales and marketingexpenses by decreasing attendance to trade shows and related travel.  In addition, faster portable computers andprevalent broadband connectivity have allowed the Company to effectivelydemonstrate its product with a laptop computer and an Internet connection. Thisportable collaboration station significantly reduces the Company's costs byavoiding shipping expenses and charges for temporary broadband connectivity.

                Looking to the fourth quarter,the Company expects increased salary and overhead costs associated with theincrease in its sales and marketing personnel. Those increases will continue to be offset by reduced costs from tradeshows and demonstrations.  The Company doesnot anticipate significant increases in direct sales personnel over existinglevels for the next two quarters.  Itwill, however, continue to focus on increasing its indirect sales channels andindirect sales activities.  In addition,the Company expects to incur some additional marketing expenses late in thefourth quarter and into the first quarter of 2002 in connection with theanticipated launch of the Windows version of its TeraMedia collaborationsoftware.

                *InterestRevenue and Interest Expense*. Interest revenue for the threemonths ended September 30, 2001, and September 30, 2000, was $25,069 and$112,614 respectively, a decrease of $87,545, or 77 percent. Interest revenuefor the nine months ended September 30, 2001, and 2000, was $64,772 and $239,033,respectively, a decrease of 73 percent. Interest revenue is generated from short-term investments of availablecash. Interest expense for the three months ended September 30, 2001 was$85,401 compared to interest expense of $22,483 for the three months endedSeptember 30, 2000.  Interest expensefor the nine months ended September 30, 2001, and September 30, 2000, was$489,986 and $46,989, respectively. Interest expense for the three and nine month periods ended September30, 2001 was primarily attributable to an accretion of debt discount inconnection with the issuance of the Series A Preferred Stock.  Interest expense for the three and ninemonths ended September 30, 2000, was primarily due to interest related to$475,000 in convertible notes.  TheCompany entered into an agreement to convert the notes to shares of theCompany's common stock in the three months ended March 31, 2001.  Interest expense in the three months endedSeptember 30, 2001, included interest associated with bridge financing notes,as further described in liquidity and capital resources.

 

**Liquidityand Capital Resources**

# **                As ofSeptember 30, 2001, the Company had cash and cash equivalents totaling$1,344,871.  The Company had a workingcapital surplus of $924,966.**

# ** **

For the threemonths ended September 30, 2001, net cash used in operating activities was$2,553,331.  Net cash used in the sameperiod ended September 30, 2000, was $2,698,756, a reduction of five percent.  Net cash used in operating activities forthe nine months ended September 30, 2001 and September 30, 2000, was $5,046,033and $8,550,526, respectively, a reduction of 41 percent.  The decline in net cash used in operatingactivities in the nine months ended September 30, 2001, is primarily due tomanagement's efforts to minimize monthly expenses and reduced costs associatedwith a software licensing revenue model compared to implementing a moreresource intensive service solution. The Company does not anticipate significant increases in operatingexpenses over the next few quarters.  Asa result, net cash used in operating activities during that period will dependupon the Company success in generating revenues from the sale of its softwareand related services.

# ** **

# **For the three months ended September 30, 2001, the Companymade capital expenditures of $36,317. Capital expenditures for the same period ended September 30, 2000, were$127,644, a reduction of 72 percent. Net cash provided by investing activities for the nine months endedSeptember 30, 2001, was $486,627 due to the disposition of non-core assets andthe partial redemption of a Certificate of Deposit used to secure the Company'scorporate offices. Net cash used in investing activities for the nine monthsended September 30, 2000 was $1,165,552. The Company expects to keep capitalexpenditures to a minimum over the balance of the fiscal year.**

 

For the ninemonths ended September 30, 2001, the Company raised an aggregate of $5,376,000,net of $125,000 in fees, from financing activities.  During the nine months ended September 30, 2000, the Companyraised an aggregate of $6,448,647 from financing activities.

 

The Companyexpects that it will need additional capital in December in order to sustainits operations.  Under the terms of theSeries A Preferred Stock and Warrant Purchase Agreement entered into inconnection with the June 2001 financing, WallerSutton 2000, L.P. agreed toinvest an additional $2 million in Series A Preferred Stock, if the Companysuccessfully received an aggregate of $1 million from a strategic investor orinvestors in the form of license purchases, equity investment or developmentfees.  The Company has made diligentefforts to secure the $1 million investment, but has not succeeded to date.  Accordingly the Company has been and istaking steps to secure additional third party financing.

 

The Companyhas entered into a term sheet with an investment banker to conduct a "bestefforts" private offering of the Company's securities. That term sheet isnon-binding and subject to the investment banker's due diligence and ability tosuccessfully market and sell the offering. The Company is also approaching third parties to provide interimfinancing for the Company until it can implement a longer term financingplan.  Despite these activities, no firmcommitments exist for any financing, whether interim or long-term, and noassurances can be given that it will be completed prior to the end of thecurrent fiscal year.

 

Ourindependent certified public accountants have included an explanatory paragraphin their report of Independent Certified Public Accountants included in ourAnnual Report on Form 10-K for the year ended December 31, 2000, to the effectthat our losses from operations for the year ended December 31, 2000, and theworking capital deficit and the retained deficit at December 31, 2000, raisesubstantial doubt about our ability to continue as a going concern.

# **FactorsThat May Affect Future Results and Financial Condition**

 

The Companyoperates in a rapidly changing environment that involves a number ofuncertainties, some of which are beyond the Company's control. In addition tothe uncertainties described elsewhere in this report, there are many factorsthat will affect the Company's future results and business, which may cause theactual results to differ from those currently expected. The Company's futureoperating results and financial condition are dependent upon the Company'sability to effectively market its existing products and services, and tomigrate those products to additional software platforms and markets in order toincrease its market opportunities. Inherent in this process are a number offactors that the Company must successfully manage in order to achieve favorablefuture operating results and a favorable financial condition.

 

Potentialrisks and uncertainties that could affect the Company’s future results andfinancial condition include the following. The Company is an early stagecompany moving from research and development to operations and as such issubject to the uncertainties of any new enterprise including the ability toeffectively establish a market for its products and services and competentlyservice and support its customers. Because the Company is dealing in high technology and rapidly evolvingmarkets, it is subject to risks associated with uncertain market demand,intense competition, short product cycles and the possibility of productdefects.  To date the Company has reliedon external financing activities to support its operations. The Company mustobtain additional external financing in order to sustain its operations. For adiscussion of these and other factors affecting the Company's future resultsand financial condition, see "Item 6 - Management's Discussion andAnalysis - Risk Factors That May Affect Operating Results" in theCompany's Annual Report on Form 10-KSB for the year ended December 31, 2001.

 

###### **PART II                                OTHERINFORMATION**

 

**ITEM 1.                                 LEGALPROCEEDINGS**

The Companywas among the defendants in a class action civil litigation styled NorinneLam & Clifton Kees et al. v. Video Stream International, Inc. et al.  That litigation arose out of a securitiesoffering conducted by Grey Venture Capital, Inc. on behalf of the Company'sTechnoVision Communications, Inc. subsidiary prior to its acquisition by the Company.  The suit was brought against Grey VentureCapital, Inc., TechnoVision Communications, as well as the Company and certainofficers and directors of each.  TheCompany voluntarily settled all civil claims in connection with the litigationin August 2000 and the lawsuit was dismissed. In addition, the Company sued Grey Venture Capital, Inc. and received anegotiated settlement in connection with that litigation.  For additional information concerning thelitigation see the Company's annual reports on form 10-KSB for the years endedDecember 31, 1999 and 2000.  The Companyis aware of a pending investigation by the criminal division of the U.S.Attorney's office which likely concerns Grey Venture Capital's offering ofTechnoVision Communications, Inc.'s securities.  The Company has and will continue to fully cooperate with andsupport the U.S. Attorney's investigation. The Company cannot say at this time whether it is a subject of theinvestigation, or what liabilities it may incur, if any, in connection with theinvestigation.

 

**ITEM 2.                                CHANGEIN SECURITIES**

None

**ITEM 3.                                DEFAULTS UPONSENIOR SECURITIES**

                None

**ITEM 4.                                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

                None

**ITEM 5.                                OTHERINFORMATION**

                None

**ITEM 6.                                EXHIBITS ANDREPORTS ON FORM 8K**

                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 be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| DATED:  November 14, 2001 | TERAGLOBAL  COMMUNICATIONS CORP.             |
|--------------------------------|----------------------------------------------|
|                           |                                         |
|                           | By: /S/  JAMES A MERCER III                  |
|                           | James A  Mercer III, Chief Financial Officer |
|                           |                                         |
|                           |                                         |
|                           | By: /S/  ROBERT RANDALL                      |
|                           | Robert  Randall, Chief Executive Officer     |