** **

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

**Washington, D.C.20549**

 

**FORM 10-QSB**

 
|   | **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|--------|------------|-----------------------------------------------------------------------------------------|

 

**For the quarterlyperiod ended June 30, 2002.**

 
|   | **o** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE  ACT OF 1934.** |
|--------|-------|------------------------------------------------------------------------------------------------|

 

 

**For the transitionperiod from**               **to**               

 

**Commission FileNumber 0-25115**

 

 

 

 

| **TERAGLOBAL** COMMUNICATIONS CORP.                                          |
|------------------------------------------------------------------------------|
| ** (Exact name of small 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 whether the issuer  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports, and (2) has been subject to such filing requirements for the past90 days.

 

ý Yes  o   No

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: As of June 30, 2002, 2,376,765shares of the issuer’s common stock were issued and outstanding.

 

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

 

 

----

 

**TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES**

**Form 10-QSB for the period ended June 30,2002**

 
|                             |                                                                                                                       |
|----------------------------------|----------------------------------------------------------------------------------------------------------------------------|
| COVER PAGE                       |
|                             |                                                                                                                       |
| INDEX                            |                                                                                                                       |
|                             |
| PART I. FINANCIAL INFORMATION    |
|                             |
|                             | ITEM 1. Financial Statements                                                                                               |
|                             |                                                                                                                       |
|                             | Consolidated Balance Sheets as of June 30,  2002 (unaudited) and December 31, 2001 (audited)                               |
|                             |                                                                                                                       |
|                             | Consolidated Statement of Operations —  Three Months and Six Months Ended June 30, 2002 and June 30, 2001 (unaudited) |
|                             |                                                                                                                       |
|                             | Consolidated Statements of Cash Flows — Six  Months Ended June 30, 2002 and June 30, 2001 (unaudited)                 |
|                             |                                                                                                                       |
|                             | Notes to Condensed Consolidated Financial  Statements — June 30, 2002                                                 |
|                             |                                                                                                                       |
|                             | 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                       |
|                                  |                                                                                                                            |  |

 

2

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**PARTI.                 FINANCIAL INFORMATION**

 

In its Quarterly Report on Form 10-QSB forthe period ended March 31, 2002, TeraGlobal announced that it had (1) enteredinto an assignment of all of its operating assets to Wave Three Software, Inc.and (2) filed a Schedule 13e-3 Transaction Statement with the SEC announcingits intention to reorganize in a “going private” transaction involving areverse split of TeraGlobal’s outstanding common stock and a merger ofTeraGlobal into a subsidiary of Wave Three.

 

As discussed below, the net effect of thistransaction, if and when it is completed, is that holders of less than 1,000shares of TeraGlobal’s common stock will receive $0.29 in cash for each shareof common stock they hold before the split. Stockholders that own more than 1,000 shares of common stock before thesplit will receive new common stock, which will be converted into shares ofWave Three common stock in the merger. Wave Three’s common stock is not publicly traded and no market isexpected to develop for it in the foreseeable future.  As a result, stockholders who retain an equity interest in WaveThree must be prepared to hold an illiquid investment for an indefinite periodof time.

 

At June 30, 2002, TeraGlobal had completedthe assignment of assets to Wave Three, but had not completed the reverse splitor the merger.  The resulting financial statements forthe period ended June 30, 2002 differ materially from TeraGlobal’s financialstatements for prior periods.  They alsodiffer materially from what the financial statements of Wave Three will befollowing completion of the reverse split and the merger.  The following discussion summarizes thebackground of the transactions and their impact on TeraGlobal’s currentfinancial statements.

 

The assignment of assets and going privatetransactions arose out of TeraGlobal’s need to secure additional capital tofund operations.  Since late 2001TeraGlobal has reported that it would need to secure additional capital inorder to continue operations as a going concern.  Its Annual Report on Form 10-KSB for the year ended December 31,2001 contained an opinion of its independent auditors expressing substantialdoubt as to TeraGlobal’s ability to continue as a going concern.  Beginning in late 2001 TeraGlobal sought toobtain financing that would allow it to continue its operations.  Despite substantial efforts, it was not ableto secure long term financing through the sale of its own securities.

 

While TeraGlobal sought long term financingfrom December 2001 through May 2002, it funded its operations by borrowing $2.8million under short-term secured convertible promissory notes.  The convertible promissory notes, issuedprimarily to WallerSutton 2000, L.P., were secured by a first lien on all ofTeraGlobal’s assets.  These notes hadoriginally gone into default on January 12, 2002.  That default had been waived, but the waiver expired as of March1, 2002.  Accordingly, WallerSutton2000, L.P. and the other holders of these notes had the right, from and afterMarch 1, 2002, to foreclose on TeraGlobal’s assets and force itsliquidation.  In a foreclosure andliquidation proceeding, WallerSutton 2000, L.P. would have the right to demandthat TeraGlobal’s assets be sold to pay off the convertible promissorynotes.  Holders of TeraGlobal’s commonstock would only receive payment on their common stock after the proceeds fromthe sale of the assets were applied to pay (a) $3.1 million of convertiblepromissory notes (including accrued and unpaid interest), (b) $0.9 million ofaccounts payable and other liabilities, and (c) $4.2 million of liquidationpreference and accrued but unpaid dividends on TeraGlobal’s series A preferredstock.

 

In April 2002, TeraGlobal secured a termsheet for investment in Wave Three from WallerSutton 2000, L.P.  The term sheet contemplated an investment ofapproximately $1.5 million of new capital into Wave Three, if TeraGlobalproceeded with the assignment of assets and liabilities to Wave Three.  TeraGlobal simultaneously sought investmentproposals from twelve potential investors that had indicated a willingness toreview an investment opportunity in a privately held entity that ownedTeraGlobal’s technology.  None of thosepotential investors was willing to make a separate investment proposal,although one party did agree to join with WallerSutton 2000, L.P. andparticipate in its investment proposal. This 

 

3

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financing transaction is not expected to fill all of Wave Three’scapital requirements.  However, it has enabledWave Three to continue the business operations of TeraGlobal and TeraGlobalbelieves, based on its size and current state of business development, that aprivately held entity will be more attractive to the venture capital marketsand more likely to secure any additional funding it requires.  After reviewing available alternatives, theboard of directors determined that the assignment of assets and going-privatetransaction was the best available alternative to provide liquidity to some ofTeraGlobal’s investors, and to preserve the opportunity for a going concernvalue for others.

 

On May 14, 2002, TeraGlobal assigned all ofits operating assets to Wave Three Software, Inc. in exchange for shares ofWave Three class B common stock and Wave Three’s agreement to assume certain ofTeraGlobal’s liabilities.  At the sametime, WallerSutton 2000, L.P. agreed to cause the convertible promissory notesto be assigned to Wave Three and the principal and accrued interest under thoseconvertible promissory notes to be converted into shares of Wave Three’s seriesA preferred stock.  The transfer of theconvertible promissory notes and their conversion to preferred stock removedthe immediate threat of foreclosure on its assets and of a liquidation ofTeraGlobal.  WallerSutton 2000, L.P. and anotherinvestor also purchased shares of Wave Three series A preferred stock andwarrants to purchase common stock in a private placement transaction.

 

TeraGlobal’s directors and stockholders haveapproved the reverse split, and TeraGlobal has filed a preliminary informationstatement with the SEC describing the transaction.  Once the SEC completes its review of the information statement,it will be mailed to stockholders.  Thereverse split is expected to take place approximately 20 days following themailing of the final information statement to stockholders.  TeraGlobal will not issue fractional sharesin connection with the reverse split. Stockholders that hold less than 1,000 shares at the time of the splitwill receive cash in the amount of $0.29 per share for each share they heldbefore the split.  Stockholders that ownmore than 1,000 shares at the time of the split will receive one new share ofTeraGlobal common stock in exchange for each 1,000 pre-split shares.  The purpose of the reverse split is toreduce the number of holders of TeraGlobal common stock to a level whereTeraGlobal can discontinue its public reporting obligations under theSecurities Exchange Act of 1934, as amended. Following the reverse split, TeraGlobal intends to merge with and into asubsidiary of Wave Three.  As a resultof that merger, the TeraGlobal stockholders remaining after the reverse splitwill receive shares of Wave Three common stock, and TeraGlobal will become awholly owned subsidiary of Wave Three.

 

Wave Three was initially formed as a whollyowned subsidiary of TeraGlobal, and following the assignment of assets,TeraGlobal’s principal asset has been the common stock of Wave Three.  However, as a result of the subsequent sale ofWave Three’s series A preferred stock and warrants, TeraGlobal’s ownership ofWave Three currently amounts to less than 20 percent of Wave Three’s totalcapital stock.  The current ownershipstructure has significant impacts on TeraGlobal’s financial statements.

 

First, because TeraGlobal andWave Three are related parties, transactions between them have been recorded asinter-company transactions.  The WaveThree common stock that TeraGlobal received in connection with the formation ofWave Three and the assignment of assets is reflected onTeraGlobal’s financial statements at its par value of $0.001 per share.  If the transfer had transpired betweenunrelated parties, the stock would be valued at fair market value, whichTeraGlobal believes is substantially higher than par value.  In addition, TeraGlobal’s balance sheetreflects an amount due to Wave Three. This amount is generated because the book value of the liabilities thatWave Three assumed exceeded the book value of the assets it received.  While this amount is recorded as aninter-company amount due, there is no contractual obligation for TeraGlobal topay any additional amount to Wave Three. Upon completion of the merger the inter-company amount due would be eliminatedin the consolidation with Wave Three.

 

4

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Second, because TeraGlobal ownsless than 20 percent of Wave Three’s capital stock at this point in time, theaccounts of Wave Three have not been consolidated into the financialstatements, and the inter-company accounts and transactions between TeraGlobaland Wave Three have not been eliminated. Under generally accepted accounting principals, TeraGlobal’s statementof operations provides detail only for those operations that arecontinuing.  The results of operationsthat TeraGlobal incurred through May 14, 2002 in connection with the businessthat was transferred to Wave Three is recorded as a net loss from discontinuedoperations.  A more detailed discussionof the operating expenses that TeraGlobal incurred during the period, includingthe operations through May 14, 2002 has been included as supplementaldisclosure in Item 2 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.  TeraGlobal’s financialstatements do not include the results of Wave Three’s operations for the periodfrom May 14, 2002 to June 30, 2002.

 

This summary is not a completediscussion of the assignment of assets, the reverse split or the merger andshould be read in conjunction with the more detailed information contained inthis report.  Additional informationconcerning the assignment of assets can be found in TeraGlobal’s QuarterlyReport on Form 10-QSB for the period ended March 31, 2002, which is availableon the SEC’s EDGAR database at www.sec.gov.  Additional information concerning the proposed reverse split and themerger can be found in TeraGlobal’s preliminary information statement onSchedule 14C and going private Transaction Statement on Schedule 13e-3, each ofwhich are also available on the SEC’s EDGAR database at www.sec.gov.

 

5

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**Item 1*.*    FinancialStatements**

 

**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

#### **CONDENSEDCONSOLIDATED BALANCE SHEET**

#### **June 30, 2002(unaudited) and December 31, 2001**

** **

**ASSETS**

 
|                                      |   | **June 30,  2002** |   | **December  31,  2001** |   |
|-------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                      |   | **(Unaudited)**    |   |                    |   |
|                                      |   |               |   |                    |   |
| **Current assets**                        |   |               |   |                    |   |
| Cash and cash equivalents                 |   | $                  | — |                    | $      | 133,175 |   |
| Accounts receivable                       |   | —             |   | 30,925                  |   |
| Notes receivable - related parties        |   | —             |   | 236,095                 |   |
| Inventory                                 |   | —             |   | —                  |   |
| Prepaid expenses and other current assets |   | 44,439             |   | 137,997                 |   |
|                                      |   |               |   |                    |   |
| Total current assets                      |   | 44,439             |   | 538,192                 |   |
|                                      |   |               |   |                    |   |
| **Furniture and equipment**, net          |   | —             |   | 845,090                 |   |
|                                      |   |               |   |                    |   |
| **Other assets**                          |   |               |   |                    |   |
| Deposits                                  |   | —             |   | 537,011                 |   |
| Investment in Wave Three                  |   | 75                 |   | —                  |   |
|                                      |   |               |   |                    |   |
| **Total assets**                          |   | $                  | 44,514 | ** **              | **$**  | 1,920,293 | ** ** |

 

6

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##### **LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
|                                                                                                                                                                                 |   | **June 30,  2002** |       | **December  31,  2001** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                                                 |   | **(Unaudited)**    |       |                    |       |
| **Current liabilities**                                                                                                                                                              |   |               |       |                    |       |
| Accounts payable                                                                                                                                                                     |   | $                  | 128,571    |                    | $          | 570,843 |   |
| Short-term loans                                                                                                                                                                     |   | —             |       | 62,790                  |       |
| Accrued expenses                                                                                                                                                                     |   | 202,814            |       | 195,903                 |       |
| Accrued severance pay                                                                                                                                                                |   | —             |       | 58,502                  |       |
| Accrued interest on convertible promissory  note                                                                                                                                     |   | —             |       | 6,473                   |       |
| Accrued vacation                                                                                                                                                                     |   | —             |       | 118,779                 |       |
| Convertible promissory note                                                                                                                                                          |   | —             |       | 216,193                 |       |
| Deposit on sales                                                                                                                                                                     |   | —             |       | 1,062                   |       |
| **Total Current Liabilities**                                                                                                                                                        |   | 331,385            |       | 1,230,545               |       |
|                                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **Long term  liabilities**                                                                                                                                                           |   |               | ** ** |                    | ** ** |
|                                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| Net deficit in cost method  investee                                                                                                                                                 |   | 2,265,779          |       | —                  |       |
|                                                                                                                                                                                 |   |               |       |                    |       |
| **Total Liabilities**                                                                                                                                                                |   | 2,597,164          |       | 1,230,545               |       |
|                                                                                                                                                                                 |   |               |       |                    |       |
|                                                                                                                                                                                 |   |               |       |                    |       |
| **Series A Convertible Preferred Stock**                                                                                                                                             |   |               |       |                    |       |
|                                                                                                                                                                                 |   |               |       |                    |       |
| $ 0.001 par value, 13,000,000 shares  authorized 7,468,661 shares issued and outstanding (dividends of $411,148 in  arrears)                                                         |   | 3,191,956          |       | 3,021,154               |       |
|                                                                                                                                                                                 |   |               | ** ** |                    | ** ** |
| **Stockholders’  Deficit**                                                                                                                                                      |   |               | ** ** |                    | ** ** |
|                                                                                                                                                                                 |   |               |       |                    |       |
| Common stock, $0.001 par value  200,000,000 shares authorized 2,376,765 shares issued and outstanding at June  30, 2002 1,076,279 shares issued and outstanding at December 31, 2001 |   | 2,377              |       | 1,077                   |       |
| Additional paid-in capital                                                                                                                                                           |   | 42,023,189         |       | 41,857,059              |       |
| Cumulative foreign currency  translation adjustment                                                                                                                                  |   | —             |       | 47,802                  |       |
| Accumulated deficit                                                                                                                                                                  |   | (47,770,172        | )          | (44,237,344             | )          |
|                                                                                                                                                                                 |   |               |       |                    |       |
| Total stockholders’ deficit                                                                                                                                                     |   | (5,744,606         | )          | (2,331,406              | )          |
|                                                                                                                                                                                 |   |               |       |                    |       |
| **Total liabilities and stockholders’ deficit**                                                                                                                                 |   | $                  | 44,514     |                    | $          | 1,920,293 |   |

 

 

7

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**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**Forthe three months and six months ending June 30, 2002 and 2001 (Unaudited)**

 

 
|                                                                                                   |   | **Three  months ended June 30,** |         | **Six months  ended June 30,** |       |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------------|--------------------------------|------------|
|                                                                                                   |   | **2002**                         |         | **2001**                       |       | **2002** |   | **2001** |   |
|                                                                                                   |   | **(unaudited)**                  |         | **(unaudited)**                |       | **(unaudited)** |   | **(unaudited)** |   |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Net Sales**                                                                                          |   | $                                | —       |                           | $          | — |   | $ | — |   | $ | — |   |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| **Cost of sales**                                                                                      |   | —                           |         | —                         |       | — |   | — |   |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Gross profit (loss)**                                                                                |   | —                           |         | —                         |       | — |   | — |   |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Operating expenses**                                                                                 |   |                             |         |                           |       |   |   |   |   |
| General and administrative                                                                             |   | 5,829                            |         | 70,333                         |       | 43,785 |   | 162,864 |   |
| Sales and marketing                                                                                    |   | —                           |         | —                         |       | — |   | — |   |
| Research and development                                                                               |   | —                           |         | —                         |       | — |   | — |   |
| Total operating expenses                                                                               |   | 5,829                            |         | 70,333                         |       | 43,785 |   | 162,864 |   |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| **Loss from operations**                                                                               |   | (5,829                           | )            | (70,333                        | )          | (43,785 | ) | (162,864 | ) |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| **Other income (expenses)**                                                                            |   |                             |         |                           |       |   |   |   |   |
| Interest income                                                                                        |   | —                           |         | —                         |       | — |   | — |   |
| Interest expense                                                                                       |   | (85,401                          | )            | (392,679                       | )          | (170,940 | ) | (392,679 | ) |
| Other income (loss)                                                                                    |   | —                           |         | —                         |       | — |   | — |   |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| Total other income (expense)                                                                           |   | (85,401                          | )            | (392,679                       | )          | (170,940 | ) | (392,679 | ) |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| **Net loss from continuing operations**                                                                |   | **(91,230**                      | **)**        | **(463,012**                   | **)**      | **(214,725** | **)** | **(555,543** | **)** |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Net loss from discontinued operations, net  of estimated income tax expense of $0, $0, $0, and $0.** |   | **(731,139**                     | **)**        | **(1,661,814**                 | **)**      | **(3,365,505** | **)** | **(3,671,119** | **)** |
|                                                                                                   |   |                             |         |                           |       |   |   |   |   |
| **Net loss**                                                                                           |   | **$**                            | **(822,369** | **)**                          | **$**      | **(2,124,826** | **)** | **$** | **(3,580,230** | **)** | **$** | **(4,226,662** | **)** |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Basic and fully diluted loss per****Common  share**                                                  |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Continuing operations**                                                                              |   | **$**                            | **(0.04**    | **)**                          | **$**      | **(0.43** | **)** | **$** | **(0.10** | **)** | **$** | **(0.57** | **)** |
| **Discontinued operations**                                                                            |   | **(0.31**                        | **)**        | **(1.54**                      | **)**      | **(1.59** | **)** | **(3.77** | **)** |
| **Net loss**                                                                                           |   | **$**                            | **(0.35**    | **)**                          | **$**      | **(1.97** | **)** | **$** | **(1.69** | **)** | **$** | **(4.34** | **)** |
|                                                                                                   |   |                             | ** **   |                           | ** ** |   | ** ** |   | ** ** |
| **Weighted-average common****shares outstanding**                                                      |   | **2,376,765**                    | ** **   | **1,076,253**                  | ** ** | **2,117,700** | ** ** | **974,779** | ** ** |

 

8

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**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**Forthe Six Months ended June 30, 2002 and 2001 (Unaudited)**

 
|                                                                                                   |   | **Six months  ended June 30,** |       |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                   |   | **2002**                       |       | **2001** | ** ** |
| **Cash flows from operating activities**                                                               |   |                           |       |   |   |
| Net loss from continuing operations                                                                    |   | $                              | (214,725   | ) | $ | (555,543 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash used in operating activities |   |                           |       |   |   |
| Interest charges on fixed conversion  features                                                         |   | 170,940                        |       | 392,679 |   |
| Increase (decrease) in accrued expenses                                                                |   | 26,553                         |       | 53,240 |   |
| Net cash provided by (used in) continuing  operating activities                                        |   | (17,232                        | )          | (109,624 | ) |
| Net cash provided by (used in) discontinued  operating activities                                      |   | (2,139,954                     | )          | (2,383,078 | ) |
| Net cash provided by (used in) operating  activities                                                   |   | (2,157,186                     | )          | (2,492,702 | ) |
|                                                                                                   |   |                           |       |   |   |
| **Cash flows from investing activities**                                                               |   |                           |       |   |   |
| Other assets                                                                                           |   | 159,225                        |       | 113,000 |   |
| Proceeds from sale of furniture and equipment                                                          |   | 104,595                        |       |   |   |
| Purchase of furniture and equipment                                                                    |   | (23,497                        | )          | (12,798 | ) |
| Cash and cash equivalents transferred to  Wave Three                                                   |   | (84,212                        | )          | — |   |
| Net cash provided by (used in) investing  activities                                                   |   | 51,516                         |       | 204,797 |   |
|                                                                                                   |   |                           |       |   |   |
| **Cash flows from financing activities**                                                               |   |                           | ** ** |   | ** ** |
| Proceeds (payments) on short term loans                                                                |   | (62,790                        | )          | (769 | ) |
| Proceeds from issuance of common stock, net  of fees                                                   |   | —                         |       | 1,501,000 |   |
| Proceeds from issuance of preferred stock,  net of fees                                                |   | —                         |       | 2,375,000 |   |
| Proceeds from issuance of convertible  promissory notes                                                |   | 2,035,285                      |       | 1,500,000 |   |
| Proceeds from exercise of stock options                                                                |   | —                         |       | 392 |   |
| Net cash provided by (used in) financing  activities                                                   |   | 1,972,495                      |       | 5,375,623 |   |
|                                                                                                   |   |                           |       |   |   |
| **Cumulative translation adjustment**                                                                  |   | —                         |       | 25,352 |   |
|                                                                                                   |   |                           |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                  |   | (133,175                       | )          | 3,113,070 |   |
|                                                                                                   |   |                           |       |   |   |
| **Cash and cash equivalents, beginning of period**                                                     |   | 133,175                        |       | 467,383 |   |
|                                                                                                   |   |                           |       |   |   |
| **Cash and cash equivalents, end of period**                                                           |   | $                              | 0          |   | $ | 3,580,453 |   |
|                                                                                                   |   |                           |       |   |   |
| **Supplemental disclosure of cash flow information**                                                   |   |                           |       |   |   |
| Interest paid                                                                                          |   | $                              | 0          |   | $ | 4,543 |   |
| Income taxes paid                                                                                      |   | $                              | 0          |   | $ | 1,600 |   |

###### ** **

9

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**TERAGLOBALCOMMUNICATIONS CORP.**

**ANDSUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2002**

 

**NOTE 1 — SUMMARY OF SIGNIFICANTACCOUNTING 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 andfootnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring adjustments) considered necessary for a fair presentationhave been included.  Operating resultsfor the three-month period ended June 30, 2002, are not necessarily indicativeof the results that may be expected for the fiscal year ending December 31,2002.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and related notes thereto included in TeraGlobal’s AnnualReport on Form 10-KSB for the fiscal year ended December 31, 2001.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts ofTeraGlobal Communications Corp. and its wholly owned subsidiary TGCAcquisition, Inc.  All inter-companyaccounts and transactions have been eliminated.

 

Stock Split

 

On March 15, 2002, TeraGlobal effected a one-for-25 reverse split ofits common stock.  All share and pershare data have been retroactively restated to reflect this reverse stocksplit.

 

###### **NOTE 2 — ASSIGNMENT OF ASSETS AND GOING PRIVATETRANSACTION**

 

Assignment of Assets

 

Effective May 14, 2002,TeraGlobal assigned substantially all of its operating assets and certain ofits liablities to Wave Three Software, Inc., a subsidiary corporation, inexchange for Common Stock of that corporation and the assumption of certainliabilities.  TeraGlobal assigned toWave Three substantially all of its operating assets, including cash, accountsreceivable, furniture and equipment and certain deposits, as well as itsintellectual property.  In exchange forthose assets, Wave Three issued TeraGlobal shares of its class B common stockand agreed to assume certain of TeraGlobal’s liabilities.  Those liabilities included primarily theobligations under the senior secured convertible notes, certain lease obligations,certain accounts payable and accrued expenses for employee vacation.  WallerSutton 2000, L.P., is the principalshareholder of TeraGlobal and owned 96% of the senior secured notes.

###### ** **

10

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###### **NOTE 2-ASSIGNMENT OF ASSETS AND GOING PRIVATETRANSACTION**(continued)

 

Concurrently with the assignmentof assets, Wave Three sold shares of its series A preferred stock and warrantsto purchase common stock to WallerSutton 2000, L.P. and another investor,Lawrence Lacerte, in a private placement transaction.  It also agreed to convert the senior secured convertible notesinto series A preferred stock and warrants. As a result of the sale of Wave Three’s series A preferred stock andwarrants, TeraGlobal’s ownership of Wave Three amounts to less than 20 percent.

 

Accordingly, the accounts ofWave Three have not been consolidated into the financial statements.  Since WallerSutton 2000, L.P. controls bothTeraGlobal and Wave Three, transactions between them have been treated asinter-company transactions.  Inter-companyaccounts and transactions have not been eliminated in the financial statements.

 

The results of operations forthe three and six month periods ended June 30, 2002 reflect TeraGlobal’soperations through the date of assignment of assets to Wave Three on May 14,2002 as a net loss from discontinued operations.

 

Going Private Transaction

 

Also on May 14, 2002, TeraGlobalannounced plans to effect a 1-for-1000 reverse split of its outstanding commonstock as part of a going private transaction. TeraGlobal will not issue fractional shares in connection with thereverse split.  The purpose of thereverse split is to reduce the number of holders of TeraGlobal common stock toa level where TeraGlobal can discontinue its public reporting obligations underthe Securities Exchange Act of 1934, as amended.

 

Following the reverse split,TeraGlobal intends to merge with and into a subsidiary of Wave Three.  WallerSutton 2000, L.P., controls the votingpower of each class of TeraGlobal’s outstanding capital stock and will continueto do so after the reverse split. WallerSutton 2000, L.P., plans to approve the merger with the effectthat the TeraGlobal stockholders remaining after the reverse split will receiveshares of Wave Three common stock, and TeraGlobal will become a wholly ownedsubsidiary of Wave Three.  The financial statements do not reflect theimpact of the proposed reverse split or the merger.

 

**NOTE 3 - OTHER ASSETS**

 

During the year ended December31, 1999, TeraGlobal entered into a standby letter of credit agreement with abank for $500,000, which bears interest at the prime rate (4.75% at December31, 2001) and matures in June 2004. This deposit is used as collateral for thelease of the office space at TeraGlobal’s headquarters in San Diego, California.  A portion of this deposit is released duringeach year of the term of the lease.  TheCompany reduced the letter of credit by $113,603 during the three months endedMarch 31, 2002.  The balance held underthis standby letter of credit agreement at June

 

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30, 2002 amounted to$273,397.  The letter of creditagreement was transferred to Wave Three in connection with Wave Three’sassumption of the lease obligations for the headquarters in San Diego.

 

During the year ended December 31, 2000,TeraGlobal placed $180,000 into a long-term certificate of deposit, which bearsinterest at the prime rate.  Thecertificate of deposit was used as collateral for TeraGlobal’s corporate creditcard program.  During the year endedDecember 31, 2001, $33,912 of this balance held was released.  During the three months ended March 31, 2002an additional $46,479 was released. Amounts held under this certificate of deposit at June 30, 2002 amountedto $101,001.  The certificate of depositwas transferred to Wave Three in connection with Wave Three’s assumption ofcertain of TeraGlobal’s liabilities.

 

**NOTE 4 - CONVERTIBLEPROMISSORY NOTES**

 

On January 22, 2002, TeraGlobal received $250,286 in exchange for twosecured convertible promissory notes and warrants.  During the period ended March 31, 2002, TeraGlobal received anadditional $1,465,000 in exchange for five secured convertible promissorynotes.  During the period ended June 30,2002, TeraGlobal received an additional $320,000 in exchange for anothersecured convertible promissory note. The notes all bear interest at 20% per annum, payable at maturity, andwere secured by a first lien on all of TeraGlobal’s assets. Unless converted,the notes were to mature at the earlier of June 10, 2002, the consummation of acorporate transaction, or an event of default as defined in the terms of thenote agreements, with the loan to be repaid in cash.

 

An event of default occurred under the notes on January 6, 2002.  The default triggered the issuance ofadditional default warrants to the holders of the notes. The number of defaultwarrants issued was equal to 50% of the outstanding shares of common stock onthe date of the default. A total of 1,482,425 default warrants were issued. Thewarrants have an exercise price of $0.025 per share and expire on December 10,2004.  A total of 1,338,482 defaultwarrants were exercised on a net issue basis for 1,332,503 shares of commonstock on March 31, 2002.

 

TeraGlobal allocates theproceeds received from debt or convertible debt with detachable warrants usingthe relative fair value of the individual elements at the time of issuance. Theamount allocated to the bridge and default warrants as a debt discount wascalculated at $227,430 using the Black-Scholes option-pricing model and will berecognized as interest expense over the period until the notes mature or areconverted. Because of the default, the Company recognized interest expense of$534,093 and $227,430 during the three months ended March 31, 2002 related tothe amortization of the debt discount related to the warrants issued with theConvertible Promissory Notes issued in December 2001 and January 2002,respectively.

 

In connection with theassignment of assets to Wave Three, all of the outstanding secured convertiblepromissory notes were converted into shares of Wave Three series A preferredstock and warrants.

## *** ***

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## ***NOTE 5 — COMMITMENTS ANDCONTINGENCIES***

 

## ***Litigation***

 

The Company was among the defendants in the class action civillitigation Norinne Lam & Clifton Kees et al. v. Video StreamInternational, Inc. et al.  That litigation arose out of a securitiesoffering conducted by Grey Venture Capital, Inc. on behalf of TeraGlobal’sTechnoVision Communications, Inc. subsidiary prior to its acquisition byTeraGlobal.  The suit was brought against Grey Venture Capital, Inc.,TechnoVision Communications, TeraGlobal and certain officers and directors ofeach.  The Company voluntarily settled all civil claims in connection withthe litigation in August 2000, and that lawsuit was dismissed.  Inaddition, TeraGlobal sued Grey Venture Capital, Inc. and received a negotiatedsettlement in connection with that litigation.  For additional informationconcerning the litigation, see TeraGlobal’s annual reports on Form 10-KSB forthe years ended December 31, 2000 and 1999.

 

The Company is aware of a pending investigation by the criminaldivision of the United States Attorney’s office, which likely concerns GreyVenture Capital, Inc.’s offering of TechnoVision Communications, Inc.’ssecurities.  The Company has and will continue to fully cooperate with andsupport the United States Attorney’s investigation.  The Company does notknow at this time whether it is a subject of the investigation or whatliabilities it may incur, if any, in connection with the investigation.

 

**NOTE 6 -SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK**

 

TeraGlobalrecognized interest expense of $170,802 during the six months ended June 30,2002 related to the amortization of the debt discount related to the warrantsissued with TeraGlobal’s series A preferred stock in June 2001.

 

**NOTE 7 -SHAREHOLDERS’ DEFICIT**

 

Common Stock

 

On February 5, 2002, WallerSutton 2000, L.P. exercised its defaultwarrants issued in connection with the convertible promissory note financing ona cashless basis in exchange for 1,332,503 shares of common stock.  After the exercise of the warrants,WallerSutton owned 56% of the outstanding common stock and 75% of TeraGlobal’sseries A convertible preferred stock outstanding.

 

Preferred Stock

 

On March 15, 2002, inconjunction with the 1-for-25 reverse stock split, the Board of Directorsauthorized 1,000,000 shares of $0.001 par value, “blank check” preferred stock.

 

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**NOTE 7 -SHAREHOLDERS’ DEFICIT (Continued)**

 

Stock Options

 

During the six months ended June 30, 2002, TeraGlobal did not grantemployees any options under its 1997 or 1999 Stock Option Plan. However, a numberof options were forfeited under the plans, based upon termination ofemployment.

 

The following schedule summarizes the stock options transactions:

 

|                           |   | **Stock  Options Outstanding** |   | **Weighted  Average Exercise Price** |   |
|--------------------------------|--------|--------------------------------|--------|--------------------------------------|--------|
|                           |   |                           |   |                                 |   |
| Outstanding, December 31, 2001 |   | 136,010                        |   | $                                    | 76.25  |   |
|                           |   |                           |   |                                 |   |
| Granted                        |   | —                         |   | $                                    | — |   |
| Forfeited                      |   | 38,088                         |   | $                                    | 89.50  |   |
| Exercised                      |   | —                         |   | $                                    | — |   |
|                           |   |                           |   |                                 |   |
| Outstanding, June 30, 2002     |   | 97,922                         |   | $                                    | 63.00  |   |
|                           |   |                           |   |                                 |   |
| Exercisable, June 30, 2002     |   | 48,768                         |   |                                 |   |

 

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

 

*With the exception of historical matters, the matters discussed in thisQuarterly Report are forward-looking statements that involve risks anduncertainties. Forward-looking statements include, but are not limited to,statements concerning the anticipated timing and effect of the reverse splitand the merger.  TeraGlobal’s actualresults could differ materially from the results discussed in suchforward-looking statements. The following discussion of TeraGlobal’s financialcondition and results of operations should be read in conjunction withTeraGlobal’s financial statements and the related notes thereto appearingelsewhere in this Report.*

 

###### **Overview**

 

TeraGlobal beganfiscal 2002 as a developer of real-time collaboration software for standardcomputer networks, with two primary goals: (i) release the initial version ofSessionTM collaboration software for the Windows 2000 and Windows XP operatingsystems, and (ii) secure approximately $6 million to finance operations duringthe year.  While it was successful in releasing itSessionTM software, securing additional capital proved more difficult.

 

TeraGlobalbegan soliciting capital sources for investment in the third quarter of 2001,contacting investment bankers, venture capital funds and other accreditedinvestors.  However, the amount ofcapital being invested in the technology and communications markets haddeclined significantly from prior years. TeraGlobal found that few investment banking firms were interested inraising capital for communications software companies.  TeraGlobal entered into a letter of intentwith Spencer Trask Ventures, Inc., an investment banker, in October 2001 for a$6.6 to $9.9 million “best efforts” financing to take place in the firstquarter of 2002.

 

On December10, 2001 TeraGlobal entered into a Convertible Promissory Note and WarrantPurchase Agreement providing for the sale and issuance of senior convertiblepromissory notes and warrants. WallerSutton 2000, L.P., the holder of 75% of TeraGlobal’s outstandingseries A preferred stock, was the principal investor in the convertiblepromissory note financing.  During thefourth quarter of 2001 and the first half of 2002, TeraGlobal received anaggregate of $2,785,286 in net proceeds from the sale and issuance of suchsenior convertible promissory notes and warrants under that agreement.  The proceeds from the sale of those notesand warrants enabled TeraGlobal to continue to fund its operations during thatperiod.  TeraGlobal’s obligation torepay the senior convertible promissory notes was secured by a first prioritysecurity interest on all of TeraGlobal’s assets.

 

In January2002, Spencer Trask Ventures withdrew from the $6.6 to $9.9 million “bestefforts” financing.   Shortly thereafterTeraGlobal defaulted under the Convertible Promissory Note and Warrant PurchaseAgreement, causing certain default warrants issued under the agreement tobecome exercisable.  WallerSutton 2000,L.P. exercised its default warrants on February 5, 2002 and as a result becamethe beneficial owner of 56% of TeraGlobal’s common stock, excluding any commonstock issuable to WallerSutton 2000, L.P. in connection with its conversionrights in TeraGlobal’s series A  preferred stock.

 

Following thewithdrawal of Spencer Trask Ventures and the default under the convertiblepromissory notes, the board of directors recognized that TeraGlobal needed toexplore all available alternatives for raising additional capital and avoidingforeclosure on the convertible promissory notes.  It took several actions designed to give it the flexibility tooffer securities that would appeal to different types of prospective investors.  Each of these activities was aimed atincreasing TeraGlobal’s options for, and the likelihood of, a futurefinancing.  TeraGlobal’s board ofdirectors and stockholders approved: (1) an amendment to TeraGlobal’scertificate of incorporation to (a) authorize 1,000,000 shares of “blank check”preferred stock; and (b) effect a 1-for-25 reverse split of TeraGlobal’s issuedand outstanding common stock; and (2) the formation of Wave Three Software,Inc. as a subsidiary corporation, and the authorization to transfer all ofTeraGlobal’s operating assets and certain of its liabilities to Wave Three.

 

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Theauthorization of the “blank-check” preferred stock was intended to provideTeraGlobal with the flexibility to issue securities with unique rights,privileges and preferences. Accordingly, TeraGlobal would be able to match an investor’s uniqueneeds or investment profile.  TeraGlobalspecifically hoped to attract investment from venture capitalists or otherinvestors that invest in early stage companies and typically purchase preferredstock.

 

TeraGlobalauthorized the 1-for-25 reverse split of its common stock to increase the pershare price of its common stock and reduce the number of sharesoutstanding.  An increased per shareprice was intended to make common stock more attractive as an investmentvehicle for an investment banker or a strategic alliance partner.  Prior to the 1-for-25 reverse split,TeraGlobal’s stock traded at $.01 to $.02 per share with approximately 70 millionshares outstanding.  The board of directorsbelieved that a significant number of potential investors would not invest in astock that traded at only $.01 or $.02 per share.  In addition, TeraGlobal’s amended certificate of incorporationauthorizes the issuance of 200 million shares of common stock.  At a price of $.01 per share, selling theremaining 130 million authorized shares would have raised only $1.3million.  Accordingly, the board ofdirectors determined that the 1-for-25 reverse split was necessary to make thesale of the common stock a viable alternative for securing TeraGlobal’s capitalrequirements.  The authorization of theblank check preferred stock and the 1-for-25 reverse stock split of the commonstock was effected on March 15, 2002.

 

TeraGlobalalso authorized the transfer of its assets to Wave Three, a newly-organizedwholly-owned subsidiary, as an alternative strategy for obtaining newfinancing, in the event that it was unable to attract an investor for itspreferred stock or common stock.  Basedon management’s discussions with a number of investment bankers and venturecapitalists during the period from September 2001 through March 2002,TeraGlobal found that investors in early stage companies more frequently investin privately held enterprises. TeraGlobal caused Wave Three to be formed, as a potential operatingsubsidiary, on April 2, 2002, although no assets were transferred to it at thattime and the board of directors continued to explore other financingalternatives.  Shortly thereafter, theboard of directors formed a special committee to evaluate and decide upon acourse of action that represented the best alternative for TeraGlobal and allof its stockholders.

 

In connectionwith its efforts to secure financing, TeraGlobal approached dozens ofinvestment bankers, venture capitalists and early stage investors.  Despite these efforts it was unable tosecure any commitment for additional capital. The majority of those entities declined the investment opportunity forthe stated reason that (a) they were not making new investments, (b) they didnot like the industry, (c) TeraGlobal was in too early a stage of development,or (d) they had already invested in a potential competitor.  A smaller number of investors indicated thatthey were not interested because they or their investment fund did not investin publicly traded entities.  Managementinformed this group of potential investors that one of its financingalternatives would be to transfer TeraGlobal’s assets to a privately heldentity.  Approximately 10 to 12 unaffiliatedinvestors orally indicated a willingness to review the opportunity to invest inTeraGlobal’s technology if it was owned by a privately held entity.  However, they stated they wanted to see thatan operating subsidiary had been formed and capitalized before they wouldinitiate a more complete review of the opportunity.

 

In April 2002,TeraGlobal secured a term sheet for investment in Wave Three from WallerSutton2000, L.P.  The term sheet contemplatedan investment of approximately $1.5 million of new capital into Wave Three, ifTeraGlobal proceeded with the assignment of assets and liabilities to WaveThree.  TeraGlobal simultaneously soughtinvestment proposals from twelve potential investors that had indicated awillingness to review an investment opportunity in a privately held entity thatowned TeraGlobal’s technology.  None ofthose potential investors was willing to make a separate investment proposal,although one party did agree to join with WallerSutton 2000, L.P. andparticipate in its investment proposal.

 

Effective May14, 2002, TeraGlobal assigned substantially all of its assets and liabilitiesto Wave Three, in exchange for the assumption of certain liabilities and 75,000shares of Wave Three’s Series B Common Stock. In addition, the holders of the$2.8 million of convertible promissory notes agreed to the

 

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assignment of those convertiblepromissory notes to Wave Three and to convert the principal and accruedinterest under those convertible promissory notes into shares of Wave Threeseries A preferred stock.

 

This financingtransaction and the related transfer of assets to Wave Three occurred on May14, 2002.  This financing is notexpected to fill all of Wave Three’s capital requirements.  However, it has enabled Wave Three tocontinue the business operations of TeraGlobal and TeraGlobal believes, basedon its size and current state of business development, that a privately heldentity will be more attractive to the venture capital markets and more likelyto secure any additional funding it requires.

 

Immediatelyfollowing the assignment of assets TeraGlobal filed a Schedule 13e-3Transaction Statement with the SEC, announcing its intention to reorganize in a“going private” transaction. The first step of the going private transaction isa 1-for-1000 reverse split of its outstanding common stock.  TeraGlobal will not issue fractional sharesin connection with the reverse split. Instead, TeraGlobal will pay fractional stockholders a pro rata portionof $290 per share ($0.29 per share on a pre-split basis) in cash. The reversesplit is being effected with the specific intent to reduce the number ofstockholders of TeraGlobal’s common stock to a level where TeraGlobal is nolonger obligated to file public reports under the Securities Act of 1934, asamended. A preliminary information statement describing the reverse split wasfiled with the SEC on May 14, 2002. Following review, TeraGlobal intends to file a final informationstatement with the SEC and mail the information statement to stockholders.  The reverse split will be effectedapproximately 20 days after the final information statement is mailed tostockholders.

 

Following the reverse split, TeraGlobal intends to merge with and intoa subsidiary of Wave Three. WallerSutton 2000, L.P., controls the voting power of each class ofTeraGlobal’s outstanding capital stock and will continue to do so after thereverse split.  WallerSutton 2000, L.P.,plans to approve the merger with the effect that the TeraGlobal shareholdersremaining after the reverse split will receive shares of Wave Three commonstock, and TeraGlobal will become a wholly owned subsidiary of Wave Three.

 

The assignmentof assets and the going private transaction will enable TeraGlobal to avoidforeclosure, liquidation and/or bankruptcy. Management and the board of directors believes that it is the bestavailable alternative to provide liquidity for some investors and preservegoing concern value for others.  Thegoing private transaction will also allow TeraGlobal to save money being spentbecause of its status as a reporting company, which TeraGlobal believesprovides a limited benefit to a small company like TeraGlobal.  Continuing as a public company would providecertain benefits, namely a public market for sale and exchange of shares,stockholder liquidity, and readily accessible financial, business andmanagement information about TeraGlobal. The reason for terminating these benefits is that they are expensive andof limited effect for small, public companies like TeraGlobal.  Over the past several months, very littletrading has taken place in TeraGlobal’s securities, affording stockholderslittle liquidity for their shares. TeraGlobal’s market capitalization is so small that it does not attractsubstantial investment activity.  Itspersistent losses and going-concern qualifications make it unattractive topublic markets.  TeraGlobal has no analystcoverage and no institutional ownership. Consequently, the benefits that generally accompany status as a publiclytraded company provide little practical benefit to TeraGlobal.  As a result, the board of directors hasdetermined that costs of remaining a publicly traded entity outweigh thebenefits for a company in TeraGlobal’s stage of development.

 

Additionalinformation concerning the proposed reverse split and the merger can be foundin TeraGlobal’s preliminary information statement on Schedule 14C and goingprivate Transaction Statement on Schedule 13e-3, each of which are available onthe SEC’s EDGAR database at www.sec.gov.

 

# **Results of Operations**

 

Effective May 14, 2002 TeraGlobal transferred substantially all of itsoperations to Wave Three.  Undergenerally accepted accounting principles, TeraGlobal’s consolidated statementof operations included in the financial statements with this report reflectsdetailed information only for ongoing operations. It

 

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includesa single line entry for “Net loss from discontinued operations” to reflect theresults of TeraGlobal’s operations from the business that was transferred toWave Three.

 

In order to provide moremeaningful disclosure, the table and discussion below provides a detailedanalysis of TeraGlobal’s results of operations, both continuing anddiscontinued, for the three and six month periods ended June 30 2002.   As a result, this discussion includes theresults of operations associated with the business transferred to Wave Three throughthe assignment of assets on May 14, 2002. It also includes expenses incurred by TeraGlobal following theassignment of assets.   Following theassignment of assets, TeraGlobal incurred general and administrative expensesassociated with maintaining its public reporting obligations and its obligationsunder certain leases that were not assumed by Wave Three.  In addition, TeraGlobal incurred additionalnon-cash interest expenses associated with its outstanding series A preferredstock.  This discussion does not includeWave Three’s results of operations following its receipt of the assets and itsassumption of TeraGlobal’s business for the period from May 14, 2002 to June30, 2002.

* *
|                                                  |   | **Results of  Operations for the  three month period ended June 30,** |         | **Results of  Operations for the  six month period ended June 30,** |       |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------|--------------|---------------------------------------------------------------------|------------|
|                                                  |   | **2002**                                                              |         | **2001**                                                            |       | **2002** |   | **2001** |   |
|                                                  |   | **(unaudited)**                                                       |         | **(unaudited)**                                                     |       | **(unaudited)** |   | **(unaudited)** |   |
|                                                  |   |                                                                  | ** **   |                                                                | ** ** |   | ** ** |   | ** ** |
| **Net Sales**                                         |   | $                                                                     | 66,815       |                                                                | $          | 251,448 |   | $ | 154,899 |   | $ | 426,301 |   |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| **Cost of sales**                                     |   | 1,479                                                                 |         | 43,441                                                              |       | 27,254 |   | 160,236 |   |
|                                                  |   |                                                                  | ** **   |                                                                | ** ** |   | ** ** |   | ** ** |
| **Gross profit (loss)**                               |   | 65,336                                                                |         | 208,007                                                             |       | 127,645 |   | 266,065 |   |
|                                                  |   |                                                                  | ** **   |                                                                | ** ** |   | ** ** |   | ** ** |
| **Operating expenses**                                |   |                                                                  |         |                                                                |       |   |   |   |   |
| General and administrative                            |   | 458,188                                                               |         | 1,478,879                                                           |       | 1,715,761 |   | 2,905,121 |   |
| Sales and marketing                                   |   | 55,198                                                                |         | 175,970                                                             |       | 328,454 |   | 482,014 |   |
| Research and development                              |   | 237,384                                                               |         | 371,177                                                             |       | 754,737 |   | 808,799 |   |
| Total operating expenses                              |   | 750,770                                                               |         | 2,026,026                                                           |       | 2,798,952 |   | 4,195,934 |   |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| **Loss from operations**                              |   | (685,434                                                              | )            | (1,818,019                                                          | )          | (2,671,307 | ) | (3,929,869 | ) |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| **Other income (expenses)**                           |   |                                                                  |         |                                                                |       |   |   |   |   |
| Interest income                                       |   | 926                                                                   |         | 24,718                                                              |       | 39,028 |   | 39,703 |   |
| Interest expense                                      |   | (145,258                                                              | )            | (397,512                                                            | )          | (1,053,509 | ) | (404,585 | ) |
| Other income (loss)                                   |   | 7,397                                                                 |         | 65,987                                                              |       | 105,558 |   | 68,089 |   |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| Total other income (expense)                          |   | (136,935                                                              | )            | (306,807                                                            | )          | (908,923 | ) | 296,793 |   |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| **Net loss available to common****Shareholders**      |   | **$**                                                                 | **(822,369** | **)**                                                               | **$**      | **(2,124,826** | **)** | **$** | **(3,580,230** | **)** | **$** | **(4,226,662** | **)** |
|                                                  |   |                                                                  | ** **   |                                                                | ** ** |   | ** ** |   | ** ** |
| **Basic and fully diluted loss per****Common  share** |   | **$**                                                                 | **(0.35**    | **)**                                                               | **$**      | **(1.97** | **)** | **$** | **(1.69** | ) | $ | **(4.34** | ) |
|                                                  |   |                                                                  |         |                                                                |       |   |   |   |   |
| **Weighted-average common****shares outstanding**     |   | **2,376,765**                                                         | ** **   | **1,076,253**                                                       | ** ** | **2,117,700** | ** ** | **974,779** | ** ** |

 

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**Three and six month periods ended June 30,2002 and 2001.**

 

*Sales*.  Sales for the three months ended June 30, 2002, were $66,815compared to $251,448 in the three months ended June 30, 2001, a decrease of$184,633 or 73 percent.  Sales for thesix months ended June 30, 2002, were $154,899 compared to $426,301 in the sixmonths ended June 30, 2001, a decrease of $271,402 or 63 percent.  Sales for the period ended June 30, 2002included $40,000 for contract development services and $19,000 for the resaleof third party hardware.  The balance ofsales related primarily to the sale of licenses for SessionTM and TeraMedia®software.  TeraGlobal stopped generatingsales in that period following the transfer of its operating assets to WaveThree effective May 14, 2002.  Sales forthe six month period ended June 30, 2001 related primarily to the sale oflicenses for TeraMedia® software.

 

*Cost of Sales*.Cost of sales for the three month period ended June 30, 2002, was $1,479, witha resulting gross profit margin of 98 percent. Cost of sales for the threemonth period ended June 30, 2001, was $43,441, with a resulting gross profitmargin of 83 percent. Cost of sales for the six month period ended June 30,2002, was $27,254, with a resulting gross profit margin of 83 percent. Cost ofsales for the six month period ended June 30, 2001, was $160,236, with aresulting gross profit margin of 62 percent. Cost of sales in each period consisted primarily of the cost ofequipment such as computers, cameras and microphones that were resold tocustomers in connection with their purchase of SessionTM or TeraMedia® software.

 

*General and Administrative*.General and administrative expenses were $458,188 for the three months endedJune 30, 2002, compared to $1,478,879 for the three months ended June 30, 2001,a decrease of $1,020,691, or 69 percent. General and administrative expenseswere $1,715,761 for the six months ended June 30, 2002, compared to $2,905,921for the six months ended June 30, 2001, a decrease of $1,190,160, or 40percent.  Since the beginning of 2002,TeraGlobal had taken aggressive steps to reduce general and administrative expensesto their lowest practical levels.  Inaddition, a substantial portion of the reduced general and administrativeexpenses is the result of the transfer of TeraGlobal’s operations to Wave Threeeffective May 14, 2002.

 

*Research and Development*.Research and Development expenses were $237,384 for the three months ended June30, 2002, compared to $371,177 for the three months ended June 30, 2001, adecrease of $133,793, or 36 percent. Research and Development expenses were$754,787 for the six months ended June 30, 2002, compared to $808,799 for thesix months ended June 30, 2001, a decrease of $54,012, or 7 percent.  Substantially all of the research anddevelopment expenses for the period ended June 30, 2002 related to payroll forsoftware engineers.  The reducedexpenses for research and development resulted from the elimination of allresearch and development payroll following May 14, 2002.

 

*Selling*.Sales and marketing expenditures were $55,198 in the three months ended June30, 2002, compared to $175,970 in the three months ended June 30, 2001, adecrease of $120,772, or 69 percent. Sales and marketing expenditures were $328,454 in the six months endedJune 30, 2002, compared to $482,014 in the six months ended June 30, 2001, adecrease of $153,560 or 32 percent. Selling and marketing expenses for the period ended June 30, 2002consisted primarily of salaries for sales and marketing employees through May14, 2002.

 

*Interest Expense. *Interest expense was $145,258 for thethree month period ended June 30, 2002, compared to $397,512 for the threemonth period ended June 30, 2001, a decrease of 252,254 or 63 percent.  Interest expense was $1,053,509 for the sixmonth period ended June 30, 2002, compared to $404,585 for the six month periodended June 30, 2001, a increase of $648,924 or 160 percent. The interestexpense for 2002 was primarily attributed to imputed interest charges incurredin connection with the bridge financing, which involved the sale of convertiblepromissory notes and warrants.  In accordancewith generally accepted accounting principals, TeraGlobal allocated a value tothe conversion feature of the convertible promissory notes and thewarrants.  This value is then treated asa discount from the face value of the convertible promissory note, and isrecognized as an interest expense during the term of the convertible promissorynote. When the default under the notes occurred in January 2002, TeraGlobal wasrequired under generally

 

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accepted accounting principlesto accelerate and recognize in full the imputed interest expense that arosefrom the discount.  For additionalinformation on the calculation of the interest charges see the Notes to the FinancialStatements included in this report and in TeraGlobal’s Annual Report on form10-KSB for the year ended December 31, 2001.

 

**Liquidity and Capital Resources**

 

The assignmentof assets and going private transactions arose out of TeraGlobal’s need tosecure additional capital to fund operations. Since late 2001 TeraGlobal has reported that it would need to secureadditional capital in order to continue operations as a going concern.  Its Annual Report on form 10-KSB for theyear ended December 31, 2001 contained an opinion of its independent auditorsexpressing substantial doubt as to TeraGlobal’s ability to continue as a goingconcern.  Beginning in late 2001TeraGlobal sought to obtain financing that would allow it to continue itsoperations.  Despite substantialefforts, it was not able to secure additional capital through the sale of itsown securities.

 

TeraGlobal’sassignment of assets to Wave Three included all of its operating assets and allof its working capital.  As a result,TeraGlobal had no cash or cash equivalents at June 30, 2002, and a workingcapital deficit of $(286,946). TeraGlobal has no current plans to conduct further operations.

 

TeraGlobal’sprincipal tangible asset at this time is shares of Wave Three’s commonstock.  TeraGlobal owns 20,000 shares ofWave Three class A common stock and 55,000 shares of Wave Three class B commonstock.  There is no public market fortrading shares of Wave Three common stock and no market is expected todevelop.  As a result, TeraGlobal has nocurrent liquidity.

 

The totalamount of funds needed to purchase the fractional shares resulting from thereverse split is estimated to be $150,000. TeraGlobal will obtain these funds through the redemption of series Bcommon stock of Wave Three.  TeraGlobalhas entered into an agreement with Wave Three pursuant to which Wave Three willredeem certain shares of its class A and class B common stock held byTeraGlobal for cash.  TeraGlobal willthen use the funds to effect the reverse split and pay for related expenses.  Wave Three has obtained the funds from aprivate placement of its series A convertible preferred stock and common stockpurchase warrants to investors, including principally WallerSutton 2000,L.P.  There are no conditions toTeraGlobal’s right to cause Wave Three to redeem the Wave Three commonstock.  There are no alternativefinancing arrangements or plans in the event that Wave Three fails to providethe funds to TeraGlobal.

 

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**PART II OTHER INFORMATION**

** **

**ITEM1.  LEGAL PROCEEDINGS**

 

TeraGlobal hasbeen subject to legal proceedings in the past, and may become involved in newlegal proceedings in the future. Additional details concerning legal proceedings can be found in footnote5 to the consolidated financial statements included in this Report.  There are no material legal proceedingspending against TeraGlobal at this time.

 

**ITEM 2.  CHANGESIN SECURITIES**

 

None.

 

However, TeraGlobal has approved andannounced that it intends to complete a 1-for-1,000 reverse split of itsoutstanding common stock.  TeraGlobalhas filed a preliminary information statement with the SEC describing theproposed reverse split transaction, and the SEC is currently reviewing thatdisclosure.  Upon completion of thereview process, TeraGlobal will file a final information statement with the SECand will mail a copy to each shareholder of record.  The reverse split will be effected approximately 20 daysfollowing the mailing of the final information statement to stockholders.

 

On the effective date of the reverse spliteach 1,000 shares of existing common stock issued and outstanding will beautomatically converted into one (1) share of new common stock.  TeraGlobal will not issue fractional sharesor scrip resulting from the reverse split. Instead, TeraGlobal will purchase all fractional shares for cash, basedon a price of $290.00 for a full share of new common stock, which will beprorated based on the actual fractional percentage owned by eachstockholder.  This price is equivalentto $0.29 per share of existing common stock prior to the reverse split.

 

While it isthe board of directors’ present intention to affect the reverse split, theboard of directors may, at any time prior to the effective date of the reversesplit, abandon the filing of the certificate of amendment and the reverse splitwithout further action by the stockholders.

** **

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

 

WhileTeraGlobal sought long term financing from December 2001 through May 2002, itfunded its operations by borrowing $2.8 million under short-term securedconvertible promissory notes.  Theconvertible promissory notes, issued primarily to WallerSutton 2000, L.P., weresecured by a first lien on all of TeraGlobal’s assets.  These notes had originally gone into defaulton January 12, 2002.  That default hadbeen waived but the waiver expired as of March 1, 2002.  Therefore, from that date on, the notes wereunder default and were due and payable at the time of the assignment of assetsand liabilities to Wave Three. Accordingly, WallerSutton 2000, L.P. and the other holders of thesenotes had the right, from and after March 1, 2002, to foreclose on TeraGlobal’sassets and force its liquidation.

 

In aforeclosure and liquidation proceeding, WallerSutton 2000, L.P. would have theright to demand that TeraGlobal’s assets be sold to pay off the convertiblepromissory notes.  Holders ofTeraGlobal’s common stock would only receive payment on their common stockafter the proceeds from the sale of the assets were applied to pay (a) $3.1million of convertible promissory notes (including accrued and unpaidinterest), (b) $0.9 million of accounts payable and other liabilities, and (c)$4.2 million of liquidation preference and accrued but unpaid dividends onTeraGlobal’s series A preferred stock.

 

In connectionwith the formation of Wave Three, WallerSutton 2000, L.P. agreed to cause theconvertible promissory notes to be assigned to Wave Three and the principal andaccrued interest under those convertible promissory notes to be converted intoshares of Wave Three’s series A preferred stock.  The

 

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transfer of the convertiblepromissory notes and their conversion to preferred stock in connection with theMay 13, 2002 financing of Wave Three removed the immediate threat offoreclosure on its assets and of a liquidation of TeraGlobal.

 

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

During theperiod ended June 30, 2002, TeraGlobal secured stockholder approval to the1-for-1,000 reverse split pursuant to Section 228 of the Delaware GeneralCorporation Law by a written consent resolution signed by the holders ofapproximately fifty six percent (56%) of TeraGlobal’s outstanding votingpower.  Following that approval,TeraGlobal prepared and filed with the SEC a preliminary information statementdescribing the reverse split.  Thereverse split will be effected following the completion of its review by theSEC and the mailing of the final information statement to stockholders.

 

**ITEM5.  OTHER INFORMATION**

 

None

** **

**ITEM 6.  EXHIBITSAND REPORTS ON FORM 8K**

 

(a) Exhibits

 
| **Number** |   | **Description**                                                                                                                                                                               |   | **Method of Filing**                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|
| 2.1        |   | Assignment  and Assumption Agreement dated May 14, 2002,between TeraGlobal and Wave  Three.                                                                                                   |   | Incorporated    by reference(1) |
| 2.2        |   | Agreement  dated as of May 14, 2002, between TeraGlobal and Wave Three with respect to a  covenant to effect a “going private” transaction.                                         |   | Incorporated    by reference(1) |
| 2.3        |   | Preliminary  Information Statement relating to a planned 1-for-1,000 reverse split of TeraGlobal’s  outstanding Common Stock                                                             |   | Incorporated    by reference(2) |
| 2.4        |   | Schedule  13e-3 Transaction Statement                                                                                                                                                         |   | Incorporation   by reference(3)      |
| 4.1        |   | Amendment of  Convertible Promissory Notes dated May 14, 2002 between TeraGlobal and the  holders of the Convertible Promissory Notes concerning conversion into Wave  Three Preferred Stock. |   | Incorporated    by reference(1) |

 

(1)             Incorporated byreference to TeraGlobal’s Quarterly Report on Form 10-QSB for the period endedMarch 31, 2002, filed with the SEC on May 14, 2002.

(2)             Incorporated byreference to TeraGlobal’s amended preliminary Information Statement filed withthe SEC on June 26, 2002.

(3)             Incorporated byreference to TeraGlobal’s amended Schedule 13e-3 Transaction Statement filedwith the SEC on June 26, 2002.

 

(b) Reports on Form 8-K.

 

None.

 

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# **SIGNATURES**

 

In accordancewith the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| DATED:  August 14, 2002 | TERAGLOBAL  COMMUNICATIONS CORP.             |
|------------------------------|----------------------------------------------|
|                         |                                         |
|                         | By: /S/  JAMES A MERCER III                  |
|                         | James A  Mercer III, Chief Financial Officer |
|                         |                                         |
|                         |                                         |
|                         | By: /S/  ROBERT RANDALL                      |
|                         | Robert  Randall, President                   |