** **

**U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-QSB/A**

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

**For the quarterly period ended June 30, 2001.**

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

**For the transition period from________________ to _______________.**

**Commission File Number 0-25115**

**TERAGLOBAL****COMMUNICATIONS CORP.**(Exact name of small business issuer as specified in itscharter)
| **Delaware**                                    | **33-0827963**                        |
|-------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation) | (I.R.S. Employer Identification  No.) |
|                                            |                                  |
| **9171 Towne Centre Drive, Suite 600**          |
| **San Diego, California 92122**                 |
| (Address of principal executive  offices)       |
|                                            |                                  |
| **(858) 404-5500**                              |
| (Issuer's telephone number)                     |

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

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

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

 

 

 

**TERAGLOBALCOMMUNICATIONS CORP. AND SUBSIDIARIES****Form 10-QSB for the periodended June 30, 2001**

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

 

TeraGlobal® and TeraMedia® are registered trademarks ofTeraGlobal Communications Corp.

**PART I.**                **FINANCIAL INFORMATIONItem 1*.***                    **Financial Statements**
| **TERAGLOBAL  COMMUNICATIONS CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE  SHEETS  June 30, 2001 (unaudited) and December 31, 2000** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                          |
| ****
                                                                                                                                    |
|                                                                                                                                          |
|                                                                                                                                          | June 30, |   | December 31, |   |
|                                                                                                                                          | 2001 |   | 2000 |   |
|                                                                                                                                          |  |   |  |   |
|                                                                                                                                          | (Unaudited) |   |   |   |
| **ASSETS**                                                                                                                                    |
| **Current assets**                                                                                                                            |   |   |   |   |
|                                                                                                                                          | Cash and  cash equivalents | $ | 3,580,453 |   | $ | 467,383 |   |
|                                                                                                                                          | Accounts  receivable | 109,397 |   | 117,543 |   |
|                                                                                                                                          | Notes  receivable - related parties | 236,095 |   | 377,901 |   |
|                                                                                                                                          | Inventory | 37,630 |   | 186,071 |   |
|                                                                                                                                          | Prepaid  expenses and other current assets, including $5,948 and $23,874,  respectively, to related parties | 115,063 |   | 260,770 |   |
|                                                                                                                                          |   |   |   |   |
|                                                                                                                                          | Total  current assets | 4,078,638 |   | 1,409,668 |   |
|                                                                                                                                          |   |   |   |   |
|                                                                                                                                          |   |   |   |   |
|                                                                                                                                          |   |   |   |   |
| **Furniture and equipment**, net                                                                                                              | 1,172,940 |   | 1,947,936 |   |
|                                                                                                                                          |   |   |   |   |
| **Other asset – deposits**                                                                                                               | 567,000 |   | 680,000 |   |
|                                                                                                                                          |   |   |   |   |
| **Total assets**                                                                                                                              | $ | 5,818,578 |   | $ | 4,037,604 |   |
|                                                                                                                                          |   |   |   |   |
|                                                                                                                                          |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                      |
|                                                                                                                                          |
| **Current liabilities**                                                                                                                       |   |   |   |   |
|                                                                                                                                          | Accounts  payable | $ | 843,832 |   | $ | 869,789 |   |
|                                                                                                                                          | Short-term  loans | 65,889 |   | 66,658 |   |
|                                                                                                                                          | Accrued  expenses | 16,912 |   | 68,293 |   |
|                                                                                                                                          | Accrued cost  of preferred stock issuance | 125,000 |   | - |   |
|                                                                                                                                          | Accrued  severance pay | 295,138 |   | 178,879 |   |
|                                                                                                                                          | Accrued  interest on convertible promissory note | - |   | 98,681 |   |
|                                                                                                                                          | Accrued  vacation | 98,498 |   | 150,555 |   |
|                                                                                                                                          | Convertible  promissory note | - |   | 475,000 |   |
|                                                                                                                                          | Deferred  revenue | 76,295 |   | - |   |
|                                                                                                                                          |   |   |   |   |   |
|                                                                                                                                          | Total  current liabilities | 1,521,564 |   | 1,907,855 |   |
|                                                                                                                                          |   |   |   |   |   |
| **Commitments and contingencies**                                                                                                             | - |   | - |   |
|                                                                                                                                          |   |   |   |   |
| **Series A redeemable convertible preferred stock**                                                                                           |   |   |   |   |
|                                                                                                                                          | $ 0.001 par value, 13,000,000 shares authorized, 7,468,661 shares  issued and outstanding (dividends of $2,194 in arrears) | 2,850,352 |   | - |   |
|                                                                                                                                          |   |   |   |   |
| **Shareholders' equity**                                                                                                                      |   |   |   |   |
|                                                                                                                                          | Common  stock, $0.001 par value |   |   |   |   |
|                                                                                                                                          | 200,000,000  shares authorized |   |   |   |   |
|                                                                                                                                          | 22,706,922  shares issued and outstanding at December 31, 2000 |   |   |   |   |
|                                                                                                                                          | 26,906,982  shares issued and outstanding at June 30, 2001 | 26,907 |   | 22,707 |   |
|                                                                                                                                          | Additional  paid-in capital | 40,963,351 |   | 37,449,327 |   |
|                                                                                                                                          | Other  comprehensive loss | 14,171 |   | (11,181 | ) |
|                                                                                                                                          | Accumulated deficit | (39,557,766 | ) | (35,331,104 | ) |
|                                                                                                                                          |   |   |   |   |   |
|                                                                                                                                          | Total  shareholders' equity | 1,466,663 |   | 2,129,749 |   |
|                                                                                                                                          |   |   |   |   |   |
| **Total liabilities and shareholders’ equity**                                                                                           | $ | 5,818,578 |   | $ | 4,037,604 |   |
|                                                                                                                                          |   |   |   |   |
|                                                                                                                                               |  |  |  |  |  |  |  |  |  |

The accompanying notes are an integral part of these financialstatements.
| **TERAGLOBAL  COMMUNICATIONS CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS  OF OPERATIONS  For the three months and the six months ending June 30, 2001 and 2000  (Unaudited)** |                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|
|                                                                                                                                                                                       |                             |   |   |   |
| ****
                                                                                                                                                                                 |                             |
|                                                                                                                                                                                       |                             |   |   |   |
|                                                                                                                                                                                       | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|                                                                                                                                                                                       | **2001**                         |   | **2000** |   | **2001** |   | **2000** |   |
|                                                                                                                                                                                       | ****
                       |   | ****
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  |   |
|                                                                                                                                                                                       | **(unaudited)**                  |   | **(unaudited)** |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                                                                                                                                       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net Sales**                                                                                                                                                                              | $                                | 251,448 |   | $ | 118,180 |   | $ | 426,301 |   | $ | 224,728 |   |
|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Cost of sales**                                                                                                                                                                          | 43,441                           |   | 75,660 |   | 160,236 |   | 143,792 |   |
|                                                                                                                                                                                       | ****
                       | ** ** | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Gross profit**                                                                                                                                                                           | 208,007                          |   | 42,520 |   | 266,065 |   | 80,936 |   |
|                                                                                                                                                                                       | ****
                       | ** ** | ****
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  | ** ** |
| **Operating expenses**                                                                                                                                                                     |                             |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | General  and administrative      | 1,478,879 |   | 1,960,730 |   | 2,905,121 |   | 4,787,897 |   |
|                                                                                                                                                                                       | Sales  and marketing             | 175,970 |   | 403,364 |   | 482,014 |   | 711,402 |   |
|                                                                                                                                                                                       | Research  and development        | 371,177 |   | 911,309 |   | 808,799 |   | 2,059,966 |   |
|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | ****
                       |   | ****
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  |   |
|                                                                                                                                                                                       | Total  operating expenses        | 2,026,026 |   | 3,275,403 |   | 4,195,934 |   | 7,559,265 |   |
|                                                                                                                                                                                       | ****
                       |   | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Loss from operations**                                                                                                                                                                   | (1,818,019                       | ) | (3,232,883 | ) | (3,929,869 | ) | (7,478,329 | ) |
|                                                                                                                                                                                       | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Other income (expenses)**                                                                                                                                                                |                             |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | Interest  income                 | 24,718 |   | 42,638 |   | 39,703 |   | 126,419 |   |
|                                                                                                                                                                                       | Interest  expense                | (397,512 | ) | (12,870 | ) | (404,585 | ) | (24,506 | ) |
|                                                                                                                                                                                       | Other  income (loss)             | 65,987 |   | - |   | 68,089 |   | - |   |
|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | ****
                       |   | ****
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| Total  other income (expense)                                                                                                                                                              | (306,807                         | ) | 29,768 |   | (296,793 | ) | 101,913 |   |
|                                                                                                                                                                                       | ****
                       |   | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
|                                                                                                                                                                                       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net loss available to common shareholders**                                                                                                                                              | **$**                            | **(2,124,826** | **)** | **$** | **(3,203,115** | **)** | **$** | **(4,226,662** | **)** | **$** | **(7,376,416** | **)** |
|                                                                                                                                                                                       | ****
                       | ** ** | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Basic and fully diluted loss per common share**                                                                                                                                          | **$**                            | **(0.08** | **)** | **$** | **(0.16** | **)** | **$** | **(0.17** | **)** | **$** | **(0.37** | **)** |
|                                                                                                                                                                                       | ****
                       |   | ****
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|                                                                                                                                                                                       |                             |   |   |   |   |   |   |   |
| **Weighted-average common shares outstanding**                                                                                                                                             | **26,906,320**                   | ** ** | **20,134,498** | ** ** | **24,369,477** | ** ** | **19,928,166** | ** ** |
|                                                                                                                                                                                       | ****
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|                                                                                                                                                                                            |                                  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

The accompanying notes are an integral part of these financial statements.

 
| **TERAGLOBAL  COMMUNICATIONS CORP.  AND SUBSIDIARIESCONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS  For the six months ended June 30, 2001 and 2000 (Unaudited)** |                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|
|                                                                                                                                                                |                                                                        |
|                                                                                                                                                                |                                                                        |
|                                                                                                                                                                | **Six Months Ended  June 30**                                               |   |
|                                                                                                                                                                | **2001**                                                                    |   | **2000** | ** ** |
|                                                                                                                                                                | ****
                                                                  |   | ****
  |   |
| **Cash flows from operating activities**                                                                                                                            |                                                                        |   |   |   |
|                                                                                                                                                                | Net  loss                                                                   | $ | (4,226,662 | ) | $ | (7,376,416 | ) |
|                                                                                                                                                                | Adjustments  to reconcile net loss to net cash used in operating activities |   |   |   |   |
|                                                                                                                                                                | Stock  issued for legal settlement                                          | 15,625 |   | – |   |
|                                                                                                                                                                | Stock  issued for services rendered                                         | - |   | 1,059,625 |   |
|                                                                                                                                                                | Stock  issued for TechnoVision                                              | 2,000 |   | - |   |
|                                                                                                                                                                | Loss  on sale of property and equipment                                     | 80,062 |   | – |   |
|                                                                                                                                                                | Depreciation                                                                | 603,137 |   | 629,506 |   |
|                                                                                                                                                                | Accretion  of debt discount                                                 | 392,679 |   | – |   |
|                                                                                                                                                                | Amortization  of goodwill                                                   | – |   | 381,809 |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                | (Increase)  decrease in                                                     |   |   |   |   |
|                                                                                                                                                                | Accounts  receivable                                                        | 8,146 |   | 89,611 |   |
|                                                                                                                                                                | Prepaid  expenses and other current assets                                  | 145,708 |   | 95,150 |   |
|                                                                                                                                                                | Inventory                                                                   | 148,440 |   | (19,197 | ) |
|                                                                                                                                                                | Increase  (decrease) in                                                     |   |   |   |   |
|                                                                                                                                                                | Accounts  payable                                                           | (25,958 | ) | (779,610 | ) |
|                                                                                                                                                                | Accrued  expenses                                                           | 73,618 |   | 40,355 |   |
|                                                                                                                                                                | Accrued  vacation                                                           | (52,057 | ) | 27,397 |   |
|                                                                                                                                                                | Accrued  severance                                                          | 258,065 |   | - |   |
|                                                                                                                                                                | Accrued  interest                                                           | 8,200 |   | - |   |
|                                                                                                                                                                | Customer  deposits                                                          | 76,295 |   | - |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                | Net  cash used in operating activities                                      | (2,492,702 | ) | (5,851,770 | ) |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
| **Cash flows from investing activities**                                                                                                                            |                                                                        |   |   |   |
|                                                                                                                                                                | Notes  receivable - related parties                                         | - |   | (118,115 | ) |
|                                                                                                                                                                | Purchase  of furniture and equipment                                        | (12,798 | ) | (827,200 | ) |
|                                                                                                                                                                | Proceeds  from sale of furniture and equipment                              | 104,595 |   | - |   |
|                                                                                                                                                                | Proceeds  from redemption of Certificate of Deposit                         | 113,000 |   | - |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                | Net  cash provided by (used in) investing activities                        | 204,797 |   | (945,315 | ) |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
| **Cash flows from financing activities**                                                                                                                            |                                                                        |   |   |   |
|                                                                                                                                                                | Payments  on capital lease obligations                                      | - |   | (708,636 | ) |
|                                                                                                                                                                | Proceeds  (payments) on short-term loans                                    | (769 | ) | (265 | ) |
|                                                                                                                                                                | Proceeds  from issuance of common stock, net of fees                        | 1,501,000 |   | 4,610,000 |   |
|                                                                                                                                                                | Proceeds  from issuance of convertible preferred stock, net of fees         | 2,375,000 |   | - |   |
|                                                                                                                                                                | Proceeds  from issuance of convertible promissory notes                     | 1,500,000 |   | - |   |
|                                                                                                                                                                | Proceeds  from exercise of stock options                                    | 392 |   | 250,957 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                | Net  cash provided by financing activities                                  | 5,375,623 |   | 4,152,056 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
| **Cumulative translation adjustment**                                                                                                                               | 25,352                                                                      |   | 3,111 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                | Net  increase (decrease) in cash and cash equivalents                       | 3,113,070 |   | (2,641,917 | ) |
|                                                                                                                                                                |                                                                        |   |   |   |   |
| **Cash and cash equivalents, beginning of period**                                                                                                                  | 467,383                                                                     |   | 7,893,036 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
| **Cash and cash equivalents, end of period**                                                                                                                        | $                                                                           | 3,580,453 |   | $ | 5,251,119 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
| **Supplemental disclosure of cash flow information**                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                | **Interest paid**                                                           | $ | 4,543 |   | $ | 2,055 |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                |                                                                        |   |   |   |
|                                                                                                                                                                | **Income taxes paid**                                                       | $ | 1,600 |   | $ | 1,600 |   |
|                                                                                                                                                                |                                                                        |   |   |   |   |
|                                                                                                                                                                     |                                                                             |  |  |  |  |  |  |  |

The accompanying notes are an integral part of these financialstatements.

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

During the threemonths ended March 31, 2001, the Company entered into an agreement to convert apromissory note into shares of common stock. The principal amount of thepromissory note of $475,000 and accumulated interest of $103,680 were convertedinto 1,157,360 shares of the Company's common stock and 120,000 warrants topurchase shares of common stock at a price of $0.60 per share for a period oftwo years.  None of these warrants wereexercised as of June 30, 2001.  Noexpense has been recorded in connection with the warrants as managementconsiders the effect on the financial statements to be immaterial.

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

** **

**TERAGLOBALCOMMUNICATIONS CORP.AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSJune 30, 2001**

----

**NOTE 1 – SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

Basis ofPresentation

The unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  Operating results for the six month periodended June 30, 2001, are not necessarily indicative of the results that may beexpected for the fiscal year ending December 31, 2001.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes thereto included in the Company's Annual Report onForm 10-KSB for the fiscal year ended December 31, 2000.

Principles ofConsolidation

Theconsolidated financial statements include the accounts of TeraGlobalCommunications Corp. and its current and former subsidiaries. The Company’swholly owned subsidiaries have included ATI Access Technologies, Inc., aCanadian corporation, which was dissolved in April 2001, as well as TGCAcquisition, Inc., a California corporation and TeraGlobal CommunicationsCorporation, a Canadian corporation. None of these entities have substantialassets or operations and the Company is in the process of dissolving both TGCAcquisition, Inc. and TeraGlobal Communications Corporation, the Canadiansubsidiary. The financial statements also include the accounts of TechnoVisionCommunications, Inc., a Georgia corporation that was 99% owned by the Company.TechnoVision Communications, Inc. and was dissolved in February 2001. Allinter-company accounts and transactions have been eliminated in theconsolidation.

**NOTE2 – REVENUE RECOGNITION**

The Companyrecognizes revenues in accordance with the provisions of the American Instituteof Certified Public Accountants’ Statement of Position 97-2, “Software RevenueRecognition.” The Company licenses its software products under nonexclusive,nontransferable license agreements. For those agreements that require modest orno significant production, modification, or customization, revenue isrecognized when a license agreement has been signed, delivery, installation andacceptance of the software product has occurred, the related fee is fixed ordeterminable, and collectability is probable. For software arrangements thatrequire significant production, modification, or customization, the entirearrangement is accounted for in conformity with Accounting Research BulletinNo. 45, “Long-term Construction-Type Contracts,” using the relevant guidanceStatement of Position 81-1, “Accounting for Performance of Construction-TypeContracts and Certain Production-Type Contracts.”

Incidental tothe licensing of software, the Company enters into software maintenance andservice agreements and acts as a reseller for third party hardware. Under thesoftware maintenance and service agreements, the fee is collected under aone-year contract and revenue is deferred and recognized ratably over thecontract period. Under the reseller arrangements, the Company recognizesrevenue upon installation and acceptance of the hardware.

In December1999, Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin(“SAB”) No. 101, “Revenue Recognition in Financial Statements,” was issued. SABNo. 101 provides the SEC staff’s views in applying generally acceptedaccounting principles to selected revenue recognition issues, includingsoftware revenue recognition. The Company adopted SAB No. 101 in the fourthquarter of year ended December 31, 2000. Management does not expect theadoption of SAB No. 101 will have a material effect on the Company’s financialposition or results of operations.

**NOTE3 – FURNITURE AND EQUIPMENT**

Furniture andequipment consisted of the following:
|                          | June 30,  2001 |      | December 31,  2000 |   |
|-------------------------------|----------------|-----------|--------------------|--------|
|                          | (Unaudited)    |      |               |   |
|                          |           |      |               |   |
| Furniture and fixtures        | $              | 446,635   |               | $      | 446,635 |   |
| Office equipment              | 1,073,119      |      | 1,123,271          |   |
| Computers and software        | 2,239,960      |      | 2,308,266          |   |
| TeraMedia® networks      | 145,409        |      | 334,290            |   |
|                          |                |      |                    |   |
|                          |           |      |               |   |
|                          | 3,905,123      |      | 4,212,462          |   |
| Less accumulated depreciation | 2,732,183      |      | 2,264,526          |   |
|                          |                |      |                    |   |
|                          |           |      |               |   |
| **Total**                     | $              | 1,172,940 |               | $      | 1,947,936 |   |
|                          |                |      |                    |   |

Depreciation expensefor the six months ended June 30, 2001, and the year ended December 31, 2000,was $603,137 (unaudited) and $1,203,721, respectively.  During the six months ended June 30, 2001,the Company recognized a loss of $80,062 in conjunction with the disposition ofcertain non-core assets and TeraMedia® network assets as it transitioned from aservice provider business model to one that focuses on the sale and licensingof TeraMedia® software.

**NOTE 4 - OTHER ASSET - DEPOSITS**

The Companyentered into a standby letter of credit agreement with a bank for $500,000 ascollateral for the lease of the office space at the Company’s headquarters inSan Diego, California. Under the terms of the lease agreement, the amount ofthe standby letter of credit can be reduced annually over the five-year term ofthe lease.  The Company reduced theletter of credit by $113,000 during the three months ended March 31, 2001.

**NOTE5 - CONVERTIBLE PROMISSORY NOTES**

In a series oftransactions taking place in May and June 2001, the Company received $1.5million in exchange for convertible promissory notes and warrants from a groupof accredited investors, including certain members of the Company’s Board ofDirectors. No sales commissions or underwriting discounts were paid inconnection with the offering. The convertible promissory notes bore interest at8 percent per annum and matured in July 2003 unless the Company completed anequity financing prior to the maturity date. The convertible promissory noteswere to be automatically converted into the Company’s next equity financing inexcess of $2 million using a conversion price equal to the per share price inthe Company’s next equity financing. The convertible promissory notes wereconverted into convertible preferred stock and warrants as part of theCompany’s issuance of convertible preferred stock and warrants on June 28,2001.

In accordancewith generally accepted accounting principles, the difference between theconversion price and the Company’s stock price on the date of issuance of thenotes is considered to be interest expense. It is to be recognized in thestatement of operations during the period from the issuance of the debt to thetime at which the debt first becomes convertible. In connection with theissuance of the notes, the Company recorded a debt discount of $130,784. As aresult of the conversion of the notes on June 28, 2001, the discount wasrecognized as interest expense in the statement of operations for the threemonths ended June 30, 2001.

The number ofwarrants issued with the convertible promissory notes was calculated as1,399,256 and was based on the price per share in the Company’s next equityfinancing. Each warrant entitles the holder to purchase one share of theCompany’s common stock at a price equal to the Company’s next equity financing,or $0.536 per share. The warrants vested immediately and expire on June 30,2007. The Company allocates the proceeds received from debt or convertible debtwith detachable warrants using the relative fair value of the individualelements at the time of issuance. The amount allocated to the warrants as adebt discount was calculated at $261,895 using the Black-Scholes option pricingmodel and will be recognized as interest expense over the period until thenotes mature or are converted. As a result of conversion of the notes on June28, 2001, the discount was recognized as interest expense in the statement ofoperations for the three months ended June 30, 2001.

**NOTE6 - COMMITMENTS AND CONTINGENCIES**

*Larry Jernigan v. TeraGlobal Communications Corp., et al*During the three months ended March 31, 2001, theCompany paid Mr. Jernigan a total of $15,000 and issued 25,000 shares of commonstock, valued at $15,625, in exchange for a release of all claims, includingany interest in TeraGlobal and TechnoVision stocks or stock options.

The Company has no material litigation pending against itat this time.

**NOTE7 - SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK**

Effective June28, 2001, the Company issued 4,664,180 shares of Series A Convertible PreferredStock and warrants to purchase 2,374,762 shares of common stock to WallerSutton2000, L.P., an insitutional investor, for proceeds of $2.375 million, net of$125,000 in fees.  Of the $2.375 million,$403,530 has been allocated to the issuance of the warrants. Of the 2,374,762warrants, 1,624,838 are exercisable at $0.536 per share, 374,963 at $1.00 pershare and 374,963 are exercisable at $1.50 per share. The warrants vestimmediately and expire on June 30, 2007.

In addition,as a result of this preferred stock issuance, the convertible promissory notesfrom the May and June financing, plus accrued interest of $3,200 on the notes,were converted into 2,804,481 shares of Series A Convertible Preferred Stockand warrants to purchase 975,000, 225,000 and 225,000 shares of common stockexercisable at $0.536, $1.00, and $1.50 per share, respectively. Of the $1.5million converted, $241,708 was allocated to the issuance of the warrants. Thewarrants vest immediately and expire on June 30, 2007.

The Series AConvertible Preferred Stock is entitled to cumulative dividends payable in cashat a rate of 10 percent per annum, which accrue until paid and are compoundedsemi-annually. It is redeemable at the election of the holders of the majorityof the shares of Series A Convertible Preferred Stock, commencing on the thirdanniversary of the closing of the transaction. Each share of Series AConvertible Preferred Stock is convertible into one fully paid share of theCompany’s Common Stock, subject to anti-dilution, at any time at the holder’sdiscretion. After the fifth anniversary of the closing, the Series A PreferredStock will automatically convert into Common Stock, or when the closing bidprice for the Company’s Common Stock exceeds $10.00 per share for 20consecutive trading days.

In accordancewith generally accepted accounting principles, the difference between theconversion price and the Company’s stock price on the date of issuance of theconvertible preferred stock is considered to be interest expense. It is to berecognized in the statement of operations during the period from the issuanceof the convertible preferred stock to the time at which the convertiblepreferred stock first becomes redeemable, or June 28, 2004. In connection withthe issuance of the convertible preferred stock, the Company recorded a debtdiscount of $379,568.

Related to theissuance of the Company’s Preferred Stock, the Company allocates the proceedsreceived from debt, convertible debt or convertible preferred stock withdetachable warrants using the relative fair value of the individual elements atthe time of issuance. The amount allocated to the warrants as a debt discountof $645,235 was calculated using the Black-Scholes option pricing model andwill be recognized as interest expense over the period until the notes matureor become redeemable.

**NOTE 8 - SHAREHOLDERS' EQUITY**

Common Stock

During thethree months ended March 31, 2001, the Company converted all outstandingconvertible promissory notes into common stock.  The Company had $475,000 in principal and $103,680 in interestoutstanding, all of which were exchanged for an aggregate of 1,157,360 sharesof common stock and 120,000 warrants to purchase shares of common stock at aprice of $0.60 per share for a period of two years. No expense has beenrecorded in connection with the warrants as management considers the effect onthe financial statements to be immaterial.

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

During thethree months ended March 31, 2001, the Company issued 25,000 shares of commonstock valued at $15,625, pursuant to the settlement of certain litigationagainst the Company.

During thethree months ended March 31, 2001, the Company issued 2,000 shares of commonstock valued at $2,000 as payment for the acquisition of additional shares ofTechnoVision.  The TechnoVision shareswere tendered pursuant to the Company's exchange offer, which was consummatedon August 10, 1998; however, the shares were never issued at the time of theexchange offer.

Stock Options

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

During thethree months ended March 31, 2001, the Company entered into an employmentagreement with Robert Randall to act as the Chief Executive Officer of theCompany.  In connection with thatemployment agreement, the Company also granted Mr. Randall a nonqualified stockoption to purchase up to 1,000,000 shares of common stock, subject to time andperformance-based vesting. The term of the employment agreement is two years,subject to annual renewal by the parties on the anniversary date of theagreement.

During thethree months ended June 30, 2001, the Company granted employees an aggregate of531,500 options under its 1997 Stock Option Plan, at exercise prices ranging from$0.30 to $0.86.  An employee exercised700 options at a price of $0.56 during the same period.

The followingschedule summarizes the stock options transactions:
|                            | Stock Options  Outstanding |      | Weighted Average  Exercise Price |   |
|---------------------------------|----------------------------|-----------|----------------------------------|--------|
|                            |                            |      |                                  |   |
|                            |                       |      |                             |   |
| Outstanding,  December 31, 2000 | 2,083,250                  |      | $                                | 5.57   |   |
|                            |                       |      |                             |   |
|                            | Granted                    | 1,653,500 |                             | $      | 0.55 |   |
|                            | Forfeited                  | (556,670  | )                                | $      | 5.75 |   |
|                            | Exercised                  | (700      | )                                | $      | 0.56 |   |
|                            |                       |      |                             |   |   |
| Outstanding,  June 30, 2001     | 3,179,380                  |      | $                                | 3.35   |   |
|                            |                       |      |                             |   |
|                            |                       |      |                             |   |
| Exercisable,  June 30, 2001     | 1,520,237                  |      |                             |   |
|                            |                       |      |                             |   |

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

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

**Overview**

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

                The Company entered in to the second quarterof 2001 with two principal challenges: increasing revenues and resulting grossmargins and securing additional financing. During the quarter, the Company continued its direct sales of TeraMedia®into the government, education, media and technology markets.  Sales for the period increased modestly from$174,853 in total revenues in the first quarter to $251,448 for the secondquarter.  Gross profit margin for thoseperiods increased from 33 percent to 83 percent, respectively, primarily due tothe transition from service based revenue to revenue generated from the sale ofTeraMedia software.  The Company plansto increase the number of employees devoted to sales over the next twoquarters, in an effort to increase sales of its TeraMedia® collaborationsoftware.

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

                In May, the Company entered into an agreementwith Marconi Communications Federal, Inc. to sublicense TeraMedia into federalgovernment agencies.  The Company hasparticipated in two trade shows with Marconi and is scheduled to attend anotherin the third quarter.  The Company hasalso completed the initial training of selected Marconi sales representativesand systems engineers.  The Companyexpects sales activities from this relationship to contribute to revenuesbeginning in the fourth quarter of 2001. In the meantime, the Company is pursuing joint sale or resellerrelationships with telephone carriers, network equipment providers, desktopequipment providers, system integrators and software providers.

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

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

                The net effect of these transactions was theinfusion of $3.875 million in working capital, net of $125,000 in offeringcosts, in exchange for an aggregate of 7,468,661 shares of Series A ConvertiblePreferred Stock, 3,999,094 Common Stock Purchase Warrants exercisable at $0.536per share, 599,963 Common Stock Purchase Warrants exercisable at $1.00 per shareand 599,963 Common Stock Purchase Warrants, exercisable at $1.50 per share.

                The Series A Convertible Preferred Stock isentitled to cumulative dividends payable in cash at a rate of 10 percent perannum, which accrue until paid and are compounded semi-annually.  It is redeemable at the election of theholders of a majority of the shares of Series A Preferred Stock, commencing onthe third anniversary of the closing of the transaction. Each share of Series AConvertible Preferred Stock is convertible into one fully paid share ofCompany’s Common Stock, subject to anti-dilution, at any time at the holder'sdiscretion.  After the fifth anniversaryof the closing, the Series A Preferred Stock will automatically convert intoCommon Stock when the closing bid price for the Company’s Common Stock exceeds$10.00 per share for 20 consecutive trading days.  A more complete discussion of the rights, privileges andpreferences associated with the Series A Convertible Preferred Stock iscontained in the Certificate of Designations and the Series A ConvertiblePreferred Stock and Warrant Purchase Agreement, each of which are attached asExhibits to this report.

                As a result of the financing transaction,WallerSutton 2000, L.P. is now the Company’s single largest shareholder,holding 20 percent of the Company's outstanding voting securities on afully-diluted basis.  In addition,holders of the Series A Convertible Preferred Stock have the right to appointtwo members to the Company’s Board of Directors, as well as the right toapprove certain significant transactions, such as (i) the sale, merger oracquisition of the Company or substantially all of its assets, (ii) anyrecapitalization or restructuring of the Company’s outstanding shares ofcapital stock, (iii) incurring any significant debt, excluding trade debt, and(iv) the issuance of any preferred stock ranking senior to or on a parity withthe Series A Preferred Stock.  Finally,as long as 50 percent of the Series A Preferred Stock remains outstanding,WallerSutton 2000, L.P. has the right to maintain its percentage ownership ofshares of Common Stock computed on a fully-diluted basis.

                The financing transaction provides theCompany with the capital to continue direct and indirect sales of isApple-based TeraMedia software, and to deliver the initial version of itsWindows 2000-based product. In addition, under the terms of the purchaseagreement for the Series A Convertible Preferred Stock transaction,WallerSutton 2000, L.P. is committed to purchase an additional $2 million ofSeries A Preferred Stock and Warrants if the Company reaches definitivefinancial commitments for $1 million in sales revenues, license fees,development fees or equity contributions from one or more strategic partners.  That additional funding, if secured, wouldbe adequate to support the Company's operations at current levels through mostof 2002.

**Resultsof Operations**

                The following table sets forth the selectedunaudited results of operations for the six months ending June 30, 2001, andJune 30, 2000.

| **Statements of Operations Data:**          | **Six Months Ending  June 30, 2001  (Unaudited)** |       | **Six Months Ending  June 30, 2000  (Unaudited)** |    |
|---------------------------------------------|---------------------------------------------------|------------|---------------------------------------------------|---------|
|                                        |                                              |       |                                              |    |
| Sales                                       | $                                                 | 426,301    |                                              | 224,728 |   |
| Cost  of sales                              | 160,236                                           |       | 143,792                                           |    |
|                                        |                                              |       |                                              |    |
| General  and administrative                 | 2,905,121                                         |       | 4,787,897                                         |    |
| Sales  and marketing                        | 482,014                                           |       | 711,402                                           |    |
| Research  and development                   | 808,799                                           |       | 2,059,966                                         |    |
|                                        |                                              |       |                                              |    |
| Net  Loss available to common shareholders  | $                                                 | (4,226,662 | )                                                 | $       | (7,376,416 | ) |
|                                        |                                              |       |                                              |    |
| Basic  loss per common share                | $                                                 | (0.17      | )                                                 | $       | (0.37 | ) |
|                                        |                                              |       |                                              |    |
| Weighted  average common shares outstanding | 24,369,477                                        |       | 19,928,166                                        |    |

**SecondQuarter 2001 Compared to Second Quarter 2000.**

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

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

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

                The Company's costs of sales and resultinggross margins have fluctuated significantly from quarter to quarter based onthe relatively small size of the Company's revenues and the Company's changingproduct and service mix.  Over thebalance of the fiscal year, the Company intends to generate revenues primarilyfrom the licensing of its TeraMedia collaboration software. The mostsignificant costs associated with developing the TeraMedia software have beenrecognized as research and development costs in prior periods. As such, grossmargin from the sale of TeraMedia software will be high.  The Company does, from time to time, resellthird party hardware such as computers, cameras, microphones and speakers inconnection with a sale of TeraMedia software. Margins on the resale of third party hardware are generally low.  Finally, the Company has entered intodiscussions with certain potential partners for specific product developmentand product enhancement contracts. Those contracts will generally involve an up-front license fee, fees forcontract development work, and a royalty fee on sales of the finalproduct.  Margins on those efforts willvary on a project by project basis.  Asa result, costs of sales and related gross margins will vary in the futurebased on the level and mix of the products and services that the Company sells.

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

                The Company intentionally reduced general andadministrative expenses in the first half of the fiscal year. During the firstquarter, the Company reduced its work force by over 60 percent, including asubstantial reduction in the number of general and administrative positions.During the second quarter, the Company sublet excess office space in Logan,Utah to reduce real estate costs. Further the Company has significantly reducedall capital expenditures, and depreciation expense will be lower in the thirdand fourth quarters of this year.  Goingforward, the Company will continue to minimize general and administrativeexpenses.  However, as the Companymatures its product offering, it will incur expenses in maintaining andsupporting the TeraMedia collaboration software and other expenses.  Charges related to maintaining existingproducts will be charged to general and administrative expenses, and not toresearch and development.

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

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

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

                Sales and marketing expenses consistprimarily of advertising, marketing events and trade shows, and salaries.  During 2000 the Company focused significantresources on advertising and attendance at trade shows.  For 2001, the Company is working to increasesales and awareness of its TeraMedia collaboration software through the establishmentof channel distribution partners and OEM licensing agreements, as well ascontinuing to focus on end user sales into the government and educationmarkets.  The Company has reduced itsspending on general marketing and advertising and is attending co-sponsoredtradeshows with strategic partners.  TheCompany will increase its spending on sales personnel and demonstrations, overcurrent levels, over the balance of the fiscal year.

                *Interest Revenue and Interest Expense*. Interest revenue for the three monthsended June 30, 2001, and June 30, 2000, was $24,718 and $42,638, respectively,a decrease of $17,920, or 42 percent. Interest revenue for the six months endedJune 30, 2001,and 2000, was $39,703 and $126,419, respectively, a decrease of69 percent.  Interest revenue isgenerated from short-term investments of available cash. Interest expense forthe three months ended June 30, 2001, and June 30, 2000, was $397,512 and$12,870, respectively, an increase of 2,989 percent.  Interest expense for the six months ended June 30, 2001, and June30, 2000, was $404,585 and $24,506, respectively. Interest expense for thethree and six months ended June 30, 2000, was primarily due to interest relatedto $475,000 in convertible notes.  TheCompany entered into an agreement to convert the notes to shares of theCompany's common stock in the three months ended March 31, 2001.  Interest expense in the three months endedJune 30, 2001, included interest expense associated with the conversion of theConvertible Promissory Notes from the May and June financing.

**Liquidity and Capital Resources**

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

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

                For the three months ended June 30, 2001, theCompany made capital expenditures of $12,798. Capital expenditures for the same period ended June 30, 2000, were$240,923, a decrease of 95 percent.  Netcash provided by investing activities for the six months ended June 30, 2001,was $204,797, due to the disposition of non-core assets and the partialredemption of a Certificate of Deposit used to secure the Company's corporateoffices.  Net cash used in investingactivities was $945,314 for the six months ended June 30, 2000. The Companywill keep capital expenditures to a minimum over the balance of the fiscal year.

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

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

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

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

                Potentialrisks and uncertainties that could affect the Company’s future results andfinancial condition include the following. The Company is an early stagecompany moving from research and development to operations and as such issubject to the uncertainties of any new enterprise including the ability toeffectively establish a market for its products and services and competentlyservice and support its customers. Because the Company is dealing in high technology and rapidly evolvingmarkets, it is subject to risks associated with uncertain market demand,intense competition, short product cycles and the possibility of productdefects.  To date the Company has reliedon external financing activities to support its operations.  If the Company does not successfullygenerate adequate revenues to meet operating expenses in the future, theCompany will be forced to seek additional external financing or curtailoperations.  Due to the Company'soperating losses and working capital deficiency, Singer, Lewak, Greenbaum &Goldstein LLP, the Company's independent auditors have included an explanatoryparagraph in their report to the Company's Financial Statements for the yearended December 31, 2000, that expresses substantial doubt as to the Company'sability to continue as a going concern. Subsequent to June 30, 2001, the Company received notification that itscommon stock would be de-listed from the NASDAQ National Market exchange.  The Company’s stock is now traded as anOver-The-Counter Stock on the Bulletin Board, which is managed by the NASD. Fora discussion of these and other factors affecting the Company's future resultsand financial condition, see "Item 6 - Management's Discussion andAnalysis - Risk Factors That May Affect Operating Results" in theCompany's Annual Report on Form 10-KSB for the year ended December 31, 2001

 

**PAR****T II             OTHER INFORMATION**

##### **ITEM 1.**             LEGAL PROCEEDINGS

                There is currently no material litigationpending against the Company.

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

                In a series of transactions taking place inMay and June 2001, the Company received $1.5 million in exchange forconvertible promissory notes and warrants from a group of accredited investors,including certain members of the Company’s Board of Directors. No salescommissions or underwriting discounts were paid in connection with theoffering. The convertible promissory notes bore interest at 8 percent per annumand matured in July 2003 unless the Company completed an equity financing priorto the maturity date. The convertible promissory notes were to be automaticallyconverted into the Company’s next equity financing in excess of $2 millionusing a conversion price equal to the per share price in the Company’s nextequity financing. The convertible promissory notes were converted intoconvertible preferred stock and warrants as part of the Company’s issuance ofconvertible preferred stock and warrants on June 28, 2001.  The offering was conducted as a privateplacement, exempt from registration under the Securities Act of 1933, asamended, in accordance with Regulation D and Rule 506 promulgated thereunder.  The offering was not conducted by means ofany public solicitation, and each of the investors represented that they are"accredited investors" as that term is defined in Regulation D.  The Company will use the proceeds from theoffering for general working capital purposes.

                Effective June 28, 2001, the Company consummatedthe sale of 4,664,180 shares of Series A Convertible Preferred Stock and anaggregate of 2,374,762 Common Stock Purchase Warrants to WallerSutton 2000,L.P., an institutional investor, for an aggregate purchase price of $2.5million.  Of the total of 2,374,762Common Stock Purchase Warrants, 1,624,838 are exercisable at $.536 per share,374,963 at $1.00 per share and 374,963 are exercisable for $1.50 pershare.  All of the Warrants expire June30, 2007.  No sales commissions orunderwriting discounts were paid in connection with this offering.  In addition, this transaction effectedconversion of the Convertible Promissory Notes from the May and Junefinancing.  The $1.5 million ofConvertible Promissory Notes were converted into an aggregate of 2,804,481shares of Series A Convertible Preferred Stock, 975,000 Common Stock PurchaseWarrants exercisable at $.536 per share, 225,000 Common Stock Purchase Warrantsexercisable at $1.00 per share and 225,000 Common Stock Purchase Warrantsexercisable for $1.50 per share.  All ofthe Warrants expire June 30, 2007.  The1,399,256 Warrants from the May and June financing are exercisable at $.536 andexpire on June 30, 2007. The Series A Convertible Preferred Stock isconvertible at any time at the holders election into a like number of shares ofCommon Stock, subject to standard anti-dilution protection and a reset right onthe first anniversary of the transaction. The offering was conducted as a private placement, exempt fromregistration under the Securities Act of 1933, as amended, in accordance withRegulation D and Rule 506 promulgated thereunder.  The offering was not conducted by means of any publicsolicitation, and each of the investors represented that they are"accredited investors" as that term is defined in Regulation D. Theproceeds from the offering will be used for general working capital purposes.

**ITEM 3.****DEFAULTS UPONSENIOR SECURITIES**

                None

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

                The Company held its annual meeting of shareholderson June 27, 2001.  At that meeting threeitems were voted on including the election of directors, the approval of aSeries A Convertible Preferred Stock financing transaction and the ratificationof the selection of the Company's independent auditors for fiscal 2001.  The votes as tabulated by the Inspector ofElections at the meeting, was as follows.

                Proposal 1—Election of Directors.  The votes tabulated by the Inspector ofElections for the election of Directors was as follows:

| John F.A.V.  Cecil |   | For |   | 17,947,134 |   | Withheld | 58,023    |
|--------------------|--------|-----|--------|------------|--------|----------|-----------|
| Paul Cox           |   | For |   | 16,694,864 |   | Withheld | 1,306,713 |
| Lawrence Lacerte   |   | For |   | 17,946,134 |   | Withheld | 55,547    |
| Robert E. Randall  |   | For |   | 17,947,134 |   | Withheld | 58,023    |
| William Reddersen  |   | For |   | 17,947,134 |   | Withheld | 58,023    |

                Proposal2—Approval of Series A Convertible Preferred Stock financing transaction. Thesecond proposal was approval to enter into a proposed Series A ConvertiblePreferred Stock financing transaction, including approval to:  (i) amend the Corporation’sCertificate of Incorporation to authorize the issuance of up to 13 millionshares of Preferred Stock; (ii) file a Certificate of Designation defining therights, privileges and preferences of the Series A Convertible Preferred Stock;and (iii) complete the financial transaction to sell the Series A PreferredStock.  The votes tabulated by theInspector of Elections for approval of the Series A Preferred Stock financingtransaction was as follows:

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

                Proposal 3—Ratification of Selection ofIndependent Auditors.  The thirdproposal was to ratify the Board of Directors’ selection of the accounting firmof Singer Lewak Greenbaum & Goldstein LLP to act as independent auditorsfor the Company for fiscal 2001. The votes tabulated by the Inspector ofElections for the ratification of the selection of Singer Lewak Greenbaum &Goldstein LLP as the independent auditors for fiscal 2001 was as follows:

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

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

                None

**ITEM 6.****EXHIBITS ANDREPORTS ON FORM 8K**
| a)     | Exhibits.            |                                                                                                                                              |   |              |
|--------|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
|   |                 |                                                                                                                                              |   |              |
|   | Number               | Description                                                                                                                                       |   | Method of  Filing |
|   |                 |                                                                                                                                              |   |              |
|   | 3.1                  | Amendment to  Certificate of Incorporation                                                                                                        |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.1                  | Series A  Preferred Stock and Warrant Purchase Agreement                                                                                          |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.2                  | Certificate  of Designation for Series A Convertible Preferred Stock                                                                              |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.3                  | Form of  Warrant Agreement from June 2001 Series A Convertible Preferred Stock  Financing transaction.                                            |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.4                  | Registration  Rights Agreement                                                                                                                    |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.5                  | Shareholders  Agreement                                                                                                                           |   | *                 |
|   |                 |                                                                                                                                              |   |              |
|   | 4.6                  | Form of  Convertible Promissory Note and Warrant Purchase Agreement                                                                               |   | Filed  herewith   |
|   |                 |                                                                                                                                              |   |              |
|   | *                    | Prevously  filed with the Registrant's Quarterly Report on Form 10-QSB for the period  ended June 30, 2001, filed with the SEC on August 14, 2001 |
|   |                 |                                                                                                                                              |   |              |
| b)     | Reports on  Form 8-K |                                                                                                                                              |   |
|   |                 |                                                                                                                                              |   |              |
|   | None.                |                                                                                                                                              |   |              |
|   |                 |                                                                                                                                              |   |              |

 

                In accordance with the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, theRegistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| DATED:  December 4, 2001 | TERAGLOBAL COMMUNICATIONS CORP.              |
|-------------------------------|----------------------------------------------|
|                          |                                         |
|                          |                                         |
|                          | By: /S/  JAMES A MERCER III                  |
|                          |                                              |
|                          | James A  Mercer III, Chief Financial Officer |
|                          |                                         |
|                          |                                         |
|                          | By: /S/  ROBERT RANDALL                      |
|                          |                                              |
|                          | Robert  Randall, Chief Executive Officer     |