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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








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FORM 10-Q








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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934








For the quarter ended June 30, 2002








Commission file number 001-15837








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WORLD WIRELESS COMMUNICATIONS, INC.


(Exact Name
of Registrant As Specified In Its Charter)








Nevada

87-0549700(State of other jurisdiction of incorporation or organization)

(I.R.S. employer identification No.)








5670 Greenwood Plaza Boulevard,
Penthouse


Greenwood Village, Colorado 80111


(Address of
principal executive offices)(Zip Code)





Registrants telephone number (303) 221-1944








Indicate by check mark whether registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ̈ .





As of August 31, 2002 there were 31,459,945 shares of the Registrants Common Stock, par value $0.001, issued and outstanding.








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TABLE OF CONTENTS





PART I.

Financial InformationItem 1.

Financial Statements:Statement Regarding Forward-Looking Disclosure

3Unaudited Condensed Consolidated Balance Sheetsas of June 30, 2002 and December 31, 2001

3Unaudited Condensed Consolidated Statements of Operationsfor the Three Months Ended June 30, 2002 and June 30, 2001 and for the Six Months Ended June 30, 2002 and June 30, 2001

5Unaudited Condensed Consolidated Statements of Cash Flowfor the Six Months Ended June 30, 2002 and June 30, 2001

6Notes to Unaudited Condensed Consolidated Financial Statements

8Item 2.

Managements Discussion and Analysis of Results of Operation and Financial Condition

16PART II.

Other InformationItem 1.

Legal Proceedings

21Item 2.

Changes in Securities and Use of Proceeds

21Item 4.

Submission of Matters to a Vote of Security Holders

28Item 5.

Other Events

29Item 6.

Exhibits and Reports on Form 8-K

30Signatures

31







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PART IFINANCIAL INFORMATION





STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE





This report includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Act or the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), which represent the expectations or beliefs of World Wireless Communications, Inc. and our subsidiaries (collectively the Company, we or us) concerning future events that involve risks
and uncertainties, including, without limitation, (i) those associated with the ability of the Company to obtain financing for our current and future operations, to manufacture (or arrange for the manufacturing of) our products, to market and sell
our products, and our ability to establish and maintain our sales of X-traWeb TM products, (ii) general
economic conditions and (iii) technological developments by us, our competitors and others. All statements other than statements of historical facts included in this Report including, without limitation, the statements under Managements
Discussion and Analysis of Results of Operations and Financial Condition and elsewhere herein, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot
assure you that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations (Cautionary Statements) are disclosed in this Report, including, without
limitation, in connection with the forward-looking statements included in this report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.





Item 1.    Financial Statements





WORLD WIRELESS COMMUNICATIONS, INC.





UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS





June 30, 2002

December 31, 2001(As restated, see Note 3)ASSETSCURRENT ASSETSCash and cash equivalents

$
231,102

$
223,738Investment in securities available-for-sale


1,564


688Trade receivables, net of allowance for doubtful accounts


52,546


68,002Other receivables


19,218


19,502Inventory


415,146


445,976Prepaid expenses


187,631


69,526Total current assets


907,207


827,432Equipment, net of accumulated depreciation and impairments


270,219


369,453Deferred debt placement fees





477,650Other assets, net of accumulated amortization


13,131


12,337Total assets

$
1,190,557

$
1,686,872





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







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LIABILITIES AND STOCKHOLDERS EQUITY





June 30, 2002


December 31, 2001(As restated, see Note 3)CURRENT LIABILITIESTrade accounts payable

$
688,101



746,699Accrued liabilities


399,317



281,578Accrued interest


511,135



174,892Notes payable


62,500



Notes payablerelated party, net of discount


5,535,000



3,098,216Deferred revenue


30,000



30,000Obligation under capital leasescurrent portion


5,076



5,076Total Current Liabilities


7,231,129



4,336,461Long-term Obligation Under Capital Leases


1,600



4,009Mandatorily Redeemable 8% Preferred Stock$0.001 par value; 1,000 shares authorized; 0 shares issued and
outstanding; liquidation preference of $0






STOCKHOLDERS DEFICITCommon stock to be issued


2,136,000



Common stock$0.001 par value; 225,000,000 and 50,000,000 shares authorized; issued and outstanding: 31,459,945
shares at June 30, 2002 and 31,447,087 shares at December 31, 2001


31,459



31,447Additional paid-in capital


48,349,178



48,023,183Accumulated other comprehensive loss


(6,534
)


(7,409
)Accumulated deficit


(56,552,275
)


(50,700,819
)Total Stockholders Deficit


(6,042,172
)


(2,653,598
)Total Liabilities and Stockholders Deficit

$
1,190,557


$
1,686,872





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




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WORLD WIRELESS COMMUNICATIONS, INC.





UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





For the Three Months Ended June 30


For the Six Months EndedJune 302002


2001


2002


2001REVENUES:Services

$
15,000


$
62,218


$
15,000


$
81,218Royalties






7,062







16,441Product sales


225,713



273,089



428,835



503,201Total Revenue


240,713



342,369



443,835



600,860COST OF SALES:Services


5,542



41,557



5,542



57,904Products


82,531



121,200



166,830



235,324Total Cost of Sales


88,073



162,757



172,372



293,228Gross Profit


152,640



179,612



271,463



307,632EXPENSESResearch and development expense


176,707



120,378



323,304



274,177Selling, general and administrative expenses


1,077,997



1,956,208



2,210,799



3,525,570Amortization of goodwill






42,858







85,716Total Expenses


1,254,704



2,119,444



2,534,103



3,885,463Loss From Operations


(1,102,064
)


(1,939,832
)


(2,262,640
)


(3,577,831
)Other Income/(Expense):Interest expense


(2,599,969
)


(118,102
)


(3,616,579
)


(119,554
)Other income


802



5,633



27,763



29,678Net Loss


(3,701,231
)


(2,052,301
)


(5,851,456
)


(3,667,707
)Net Loss Applicable To Common Stockholders

$
(3,701,231
)

$
(2,052,301
)

$
(5,851,456
)

$
(3,667,707
)Basic and Diluted Net Loss Per Common Share


(0.12
)


(0.07
)


(0.19
)


(0.12
)Weighted Average Number of Common Shares Used in Per Share Calculations


31,459,945



31,284,859
*


31,453,516



31,279,107
*


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|* |  | As restated, see Note 3.
|- |  | ------------------------




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







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WORLD WIRELESS COMMUNICATIONS, INC.





UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





For the Six Months Ended June
30,2002


2001CASH FLOW FROM OPERATING ACTIVITIESNet Loss

$
(5,851,456
)

$
(3,667,707
)Adjustments to reconcile net loss to net cash used in operating activities:Amortization of goodwill






85,716Depreciation


110,730



65,013Compensation expense from stock options






(37,169
)Loss on sale of securities






3,290Amortization of debt discount


426,542



95,514Amortization of debt placement fees


710,150



Debt extension chargerelated party


2,136,000



Consulting services paid with stock


11,250



12,000Provision for doubtful accounts receivable


(6,900
)


11,545Changes in operating assets and liabilities:Accounts receivable


22,640



34,850Inventory


30,830



(64,276
)Prepaid expenses/other assets


(118,898
)


(277,630
)Deferred revenue






30,000Accounts payable


(58,598
)


(91,086
)Accrued liabilities


117,739



(199,984
)Accrued interest


336,243



20,342Net Cash Used in Operating Activities


(2,133,728
)


(3,979,582
)CASH FLOW FROM INVESTING ACTIVITIESPayments for the purchase of property and equipment


(11,497
)


(64,594
)Proceeds from sale of securities






7,324Net Cash Provided (Used) by Investing Activities


(11,497
)


(57,270
)





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







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For the Six Months Ended June 30,2002


2001CASH FLOW FROM FINANCING ACTIVITIESProceeds from exercise of options

$



$
17,467Proceeds from borrowings and issuance of warrants


2,437,500



1,190,600Deferred debt placement fees


(232,500
)


Principal payments on notes payable


(50,000
)


(28,477
)Principal payments on obligation under capital lease


(2,409
)


(14,201
)Net cash provided by financing activities


2,152,591



1,165,389Effect of exchange rate on cash and cash equivalents






(28,484
)Net (decrease) increase in cash and cash equivalents


7,365



(2,899,947
)Cash and cash equivalentsbeginning of period


223,737



3,097,624Cash and cash equivalentsend of period

$
231,102


$
197,677





SUPPLEMENTAL CASH FLOW INFORMATION





Cash paid for interest was $7,584 and $3,871 in 2002 and 2001 respectively.





NON-CASH INVESTING AND FINANCING ACTIVITIESNOTES 4 AND 7





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




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WORLD WIRELESS COMMUNICATIONS, INC.





NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1    SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Interim Condensed Consolidated Financial StatementsThe
accompanying condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position, results of
operations and cash flows for the periods presented. Certain information and note disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or
omitted. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the operating results to be expected for the full year.





Major CustomersSales to major customers are defined as sales to any one customer which exceeded 10% of total sales in any of the two reporting periods.





Sales to the major customers during each of the three months ended June 30, 2002 and 2001 are as follows:
Customer A represented 24.3% and 0% of sales, respectively; Customer B represented 16.3% and 0% of sales respectively, and Customer C represented 0% and 19.3% respectively.





For the six months ended June 30, 2002 and 2001, sales to major customers were: Customer A represented 22.3% and 0%
respectively, Customer B represented 18.8% and 0% respectively, Customer C represented 0% and 11.0% respectively, and Customer D represented 0% and 17.1% respectively.





InventoryInventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Reserves for inventory valuation are reviewed periodically, and adjusted accordingly. As of June 30, 2002 and December 31, 2001 inventory consisted of the following:





June 30, 2002

December 31, 2001Materials

$
196,234

$
148,957Work in process


16,257


23,255Finished goods


202,655


273,764Total

$
415,146

$
445,976





Loss Per ShareBasic loss per common share is computed
by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and
options or convertible notes payable and resulted in the issuance of common stock. Diluted loss per share is the same as basic loss per share because the inclusion of potentially issuable common shares at June 30, 2002 and 2001, respectively, would
have decreased the loss per share and have been excluded from the calculation. For the quarters ended June 30, 2002 and 2001 124,795,725 and 7,927,711 potentially dilutive securities from common stock options, warrants and convertible debt have been
excluded from the weighted-average number of common shares outstanding for the diluted net loss per share computations as they are antidilutive.





Deferred RevenueDeferred revenue represents amounts invoiced and paid by customers for which products have not yet been shipped.





Comprehensive Income/(Loss)Comprehensive income/(loss) provides a measure of overall Company performance that includes all
changes in equity resulting from transactions and events other than capital transactions. The Companys comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001 are as follows:




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For the Three Months Ended June 30,


For the Six Months Ended June
30,2002


2001


2002


2001Net loss

$
(3,701,231
)

$
(2,052,301
)

$
(5,851,456
)

$
(3,667,707
)Unrealized loss on marketable equity securities


(1,939
)


6,360



875



23,998Effect of foreign currency translation






2,497







(28,484
)Comprehensive loss for the period

$
(3,703,170
)

$
(2,043,444
)

$
(5,850,581
)

$
(3,672,193
)





NOTE 2    GOING CONCERN





The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has sustained recurring losses from operations, and has a working capital deficiency, a stockholders deficit and does not have the necessary funds to repay its debt,
which is all due September 30, 2002. As operations have not generated sufficient amounts of cash, the Company has relied upon debt financing to fund its current period operations. The financing has been obtained from affiliates of the Companys
largest shareholder who extended the due dates of the notes several times during 2001 and 2002. There is no guarantee that the due dates of the notes will continue to be extended. The Companys attainment of profitable operations and sufficient
additional financing cannot be determined at this time. These conditions among others raise substantial doubt about the Companys ability to continue as a going concern. See also Notes 7 and 10.





The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its
efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described below.





Managements PlansBased on the Companys current cash position and its plans for 2002, management believes that additional capital will be required by mid-September 2002,
including an additional extension of the debt that is due to mature on September 30, 2002. The Companys financing agreement with Lancer Offshore, Inc. and Lancer Partners L.P. allowed for such loans to be increased to a total of their current
outstanding principal amount of $6,285,000, an increase over the prior loan ceiling of $6,135,000 (see Note 7 and Note 10). Although both lenders can agree to increase such loans again, provided the Company agrees to do so, the Company has no
assurance of such mutual agreement. The Company is currently seeking funding from other sources. There can be no assurance that the Company will be successful in such efforts.





NOTE 3    RESTATEMENT OF FINANCIAL STATEMENTS





Subsequent to the issuance of the Companys consolidated financial statements for the quarter ended March 31, 2002, the Company determined that a transaction involving the issuance of common stock for services that occurred in
the quarter ended March 31, 2000 had not been accounted for in the Companys financial statements . The transaction involved the issuance of 60,000 shares of common stock effective January 3, 2000, valued at $195,300.





As a result, the condensed consolidated balance sheet as of December 31, 2001 presented herein has been restated from the
amounts previously reported to give effect to the issuance of the common stock. A summary of the significant effects of the restatement is as follows:





As of December 31, 2001:





As previously reported


As restatedCommon stock, $0.001 par value

$
31,387


$
31,447Additional paid-in capital


47,827,943



48,023,183Accumulated deficit


(50,505,519
)


(50,700,819
)





The restatement of the December 31, 2001 balance sheet has no net
effect on total stockholders deficit.




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NOTE 4    STOCKHOLDERS EQUITY





Options for 13,334 shares were exercised in March 2001 at a price of $1.31 per share, for proceeds of $17,467.





NOTE 5    MANDATORILY REDEEMABLE PREFERRED STOCK





Pursuant to the authority vested in the Board of Directors, the Board on June 8, 2001 resolved to issue up to 1,000 shares of a series of 8% cumulative,
convertible senior preferred stock. The shares, if and when issued, will be convertible into shares of common stock at a rate of 16,667 shares of common stock for each share of preferred stock. The Company has not issued any of such shares as
of the date hereof.





NOTE 6    COMMITMENTS AND CONTINGENCIES





On February 20, 2001 certain parties filed a lawsuit against the Company with respect to their purchase of a total of 230,000 shares of
common stock of the Company at $3.00 per share in a private placement transaction in February 2000. The plaintiffs seek rescission of the transaction and/or damages, including treble damages, which they allege arise out of the Companys failure
to file a registration statement on or before December 31, 2000. The lawsuit is currently pending and in the discovery stage in the United States District Court for the district of Utah.





In December 2001, the United States District Court in Utah approved the plaintiffs motion for leave to amend their pleading to commence a lawsuit against five
individual defendants (David D. Singer, an officer-director, Donald I. Wallace, a former officer-director, Malcolm Thomas, a director, Charles Taylor, a director, and a former officer, Kevin Childress) and to assert an additional cause of action
against the Corporation for breach of the implied covenant of good faith and fair dealing and promissory estoppel, and a new cause of action for fraud against Mr. Singer. The plaintiffs continue to seek the same relief originally sought by them. The
Corporation and the individual defendants recently filed answers in the case.





The Corporation believes that it
has meritorious defenses to such action and intends to prosecute its defenses of the action vigorously, but there can be no assurance as to the outcome thereof. An estimate of potential losses, if any, cannot be made at this time. The Corporation
will also vigorously contest these new additional claims and believes it has meritorious defenses to these new claims, and it is anticipated that the individual defendants named in the lawsuit will do the same, although the Corporation cannot assure
the results of such lawsuit.





In May 2002. the Business Software Alliance, a trade association representing
various software companies rights under the Federal Copyright Act, (BSA) asserted a claim against us alleging that we had unauthorized or unlicensed copies of certain software products published by BSA member companies (in this case,
Adobe Systems Incorporated and Microsoft Corporation) installed on our computers. BSA alleged that we could be held liable for statutory damages on a per product basis of between $30,000 and $150,000 per product, plus reasonable attorneys fees
and court costs.





In August, 2002 the Company reached a tentative settlement of the claim that would require the
Company to pay $54,710 and to acquire various software licenses. The tentative settlement amount has been accrued as of June 30, 2002. The Company is working with BSA to finalize the agreement.





NOTE 7    NOTES PAYABLERELATED PARTY





On May 17, 2001 the Company issued senior secured convertible debt (the 2001 Notes) for $1,125,000 to affiliates of its largest shareholder. The notes bear interest at the rate of 15% per year and were originally to
mature on September 15, 2001, unless they were mandatorily converted into shares of the Companys Common Stock prior to the maturity date. The mandatory conversion was conditional, and provided for the debt to convert into shares of common
stock at a rate below the then market price of the stock. The 2001 Notes are secured by a first security interest in substantially all of the Companys assets. The Company issued a warrant to purchase 562,500 shares of Common Stock in
connection with the notes, and agreed to pay a finders fee of 10%. The value of the warrants was accounted for as discount on the notes, and the amortization of the discount and the placement fee were accounted for as additional interest expense.
Under the terms of the 2001 Notes, the Company and the lender




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could mutually agree to increase the amount of the loan to a total of $5,000,000 with a pro rata increase in the amount of warrants issuable by
the Company. The notes contain a default provision that would increase the annual interest rate to 16%, and would require the Company to issue a certain number of shares of Common Stock, up to a certain limit.





During the rest of 2001, the Company borrowed an additional $2,085,000 and issued additional warrants to purchase 3,042,500 shares of
Common Stock, including a warrant to purchase 2,000,000 shares of stock issued as an additional placement fee. The Company did not meet the conditions required to convert the debt into shares of Common Stock, and the maturity date of the notes was
extended first to December 15, 2001, and again to February 28, 2002. In consideration for the additional borrowings and other modifications to the original terms of the 2001 Notes, the contingent conversion rate, warrant stock purchase price,
default terms and other terms of the notes were modified so that on December 31, 2001 the notes bore the following terms:





The entire principal amount of $3,210,000 comprising the 2001 Notes became mandatorily convertible into shares of Common Stock at the rate of one share for each $0.05 of debt (A) upon receipt of approval of the Companys
shareholders at a meeting of such conversion and (B) upon receipt of $3,210,000 in equity from sources other than the Companys largest shareholder or his affiliates on or before February 28, 2002.




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Because the contingent conversion rate was below the market value of the stock,
the value of the contingent beneficial conversion feature on each of the notes is as follows:





Note Date

Value of Beneficial Conversion Feature at One Share for Each $0.05 of DebtMay 17, 2001

$
866,051August 7, 2001


285,864September 6, 2001


100,000September 18, 2001


157,233October 03, 2001


93,418October 09, 2001


147,992October 29, 2001


150,473November 14, 2001


852,515Total

$
2,653,546





The beneficial conversion feature will be recognized in the
Companys financial statements if and when the related contingencies are resolved.





The exercise price of the
warrant to purchase shares of Common Stock was reduced to $0.30 per share which term will also apply to any additional warrants issued in such the financing transactions;





The maturity date of the entire principal amount of $3,210,000 comprising the 2001 Notes was extended until February 28, 2002 (unless mandatorily converted into shares
of the Companys Common Stock prior to such date)





The Company agreed to give the lender full
antidilution protection in the event the Company sold shares of its Common Stock at a price less than $0.05 per share during the oneyear period commencing on November 14, 2001;





The amount of shares issuable in the event of a default was 1,605,000 shares of Common Stock, and on January 25, 2002 was increased
to 1,780,000 shares of Common Stock, for each month in which a default exists and continuing until such default is cured, up to a maximum of 12,500,000 shares.





The Company agreed to reduce its operating budget to a monthly burn rate (i.e. the excess of its expenditures over revenues received, in each case determined on a cash
basis) of not greater than $250,000 effective for the month of September 2001 and $375,000 for each month thereafter, and to curtail all its discretionary spending until additional equity is raised.





During 2002 the Company received additional loans of $3,075,000 from affiliates of its largest stockholder, bringing the total amount of
the 2001 Notes to $6,285,000. At a special shareholders meeting held on March 15, 2002, the shareholders of the Company approved the mandatory conversion of the 2001 Notes up to the then applicable ceiling amount of $5,000,000 into shares
of Common Stock, although the terms of the Notes now require the Company to raise an additional $6,285,000 in equity from sources other than its largest shareholder and his affiliates on or before September 30, 2002 before such conversion may
occur. At such meeting, the Companys shareholders approved the issuance of up to the then applicable ceiling amount of 2,500,000 shares of the Companys Common Stock upon the exercise of warrants to purchase such shares held by such
affiliates. The Company could pay the 2001 Notes in whole or in part if it obtains additional debt financing and thereby avoid the mandatory conversion thereof.





The Company also received a four-month extension of the maturity date of the 2001 Notes from its creditors, and agreed to give such creditors 7,120,000 shares of Common Stock as consideration
therefore, subject to the approval of the Companys shareholders at a meeting with respect to such issuance in accordance with applicable American Stock Exchange rules. On June 28, 2002 the Companys shareholders approved the
potential issuance of up to 12,500,000 shares of Common Stock to its lenders, including the 7,120,000 shares discussed above. If shareholder approval was not obtained, the Company would have been obligated to pay its lenders $356,000 in cash,
in lieu of issuing the 7,120,000 shares. The $356,000 was amortized over the modified term of the Notes. Upon getting shareholder approval to issue the shares, the contingency related to their issuance was resolved. Accordingly, the Company
recorded interest expense of $1,780,000, equal to the fair value of the shares on June 28,




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2002, less the $356,000 previously recorded. The fair value of the Common Stock to be issued is recorded in the balance sheet as a separate
element of stockholders deficit.





On July 23, 2002 the Company reached agreement with its lenders to
extend the due date of the 2001 Notes to September 30, 2002 and to confirm to the Company that no events of default existed. The Company agreed to issue an additional 5,380,000 shares of Common Stock to its lenders in consideration for the
modification of terms. The fair value of these shares, $1,102,900, will be recognized as non-cash interest expense over the term of the modified debt. The Notes also provide for the conversion of the debt into shares of common stock as a remedy
available to the lenders in the event of a default.





On July 23, 2002 the maximum amount of shares issuable in the
event of a default was increased to up to a maximum of 25,000,000 shares.




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The contingent beneficial conversion feature on each of the notes issued during
the six months ended June 30, 2002 is as follows:





Note Date

Value of Beneficial Conversion Feature at One Share for Each $0.05 of DebtJanuary 25, 2002

$
264,051February 8, 2002


211,149March 8, 2002


175,747March 11, 2002


88,261March 27, 2002


139,147April 12, 2002


245,755April 25, 2002


886,132Total

$
2,010,242





The beneficial conversion feature will be recognized in the
Companys financial statements if and when the related contingencies are resolved.





NOTE 8    RECENT
ACCOUNTING PRONOUNCEMENTS





In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Under SFAS No. 145, gains and losses from extinguishment of
debt shall be classified as extraordinary items only if they meet certain criteria for classification as extraordinary items in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to require sale-leaseback
accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and also makes various technical corrections to existing pronouncements that are not substantive in nature. The provisions of SFAS
No. 145 related to the rescission of SFAS No. 4 are effective in fiscal years beginning after May 15, 2002, with early application encouraged. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May
15, 2002, with early application encouraged. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002, with early application encouraged. This amendment and other issues addressed in SFAS No. 145
are not expected to have a material effect on the financial position or results of operations of the Company.





In
May 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146, addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for an exit cost or disposal activity be recognized when the liability is incurred, whereas under EITF No. 94-3, a liability was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 is
not expected to have a material impact on the Companys operations.





The Company adopted SFAS 142
Goodwill and Other Intangible Assets on January 1, 2002 and there was no effect.





NOTE 9    BUSINESS
SEGMENT INFORMATION





As of June 30, 2002 the Companys operations are classified into two reportable
business segments: X-traWeb products and radio products. Corporate includes income, expenses, and assets that are not allocable to a specific business segment, or relate to activities no longer being pursued.





Segment operating income is total segment revenue reduced by operating expenses identifiable with or allocable to that business segment.
The Company evaluates performance of its segments based on revenues and operating income.





For the Three Months Ended June 30,


For the Six Months Ended June 30,2002


2001


2002


2001Revenues:X-traWeb

$
15,000


$
87,775


$
15,000


$
191,938Radio products


225,713



247,532



428,835



392,482Corporate






7,062







16,440Total sales

$
240,713


$
342,369


$
443,835


$
600,860For the Three Months Ended June 30,


For the Six Months Ended June 30,2002


2001


2002


2001Operating loss:X-traWeb

$
(398,518
)

$
(982,330
)

$
(879,834
)

$
(2,048,388
)Radio products


(703,546
)


(964,604
)


(1,382,806
)


(1,599,164
)Corporate






7,102







69,721Total operating loss

$
(1,102,064
)

$
(1,939,832
)

$
(2,262,640
)

$
(3,577,831
)




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##### Table of Contents




June 30, 2002

December 31, 2001Assets:X-traWeb

$
213,014

$
293,442Radio products


756,715


1,184,904Corporate


220,828


208,526Total assets

$
1,190,557

$
1,686,872





NOTE 10    SUBSEQUENT EVENTS





In July, August, and September 2002, affiliates of the Companys largest shareholder loaned the Company an additional $750,000,
bringing the total to $6,285,000. As a result, the Company issued notes comprising part of the 2001 Notes and issued additional warrants to purchase 375,000 shares of the Companys Common Stock, at an exercise price of $0.30 per share, expiring
on July 22, 2007, August 19, 2007 and September 3, 2007.







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##### Table of Contents




ITEM 2.    MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL


CONDITION





Subsequent to the issuance of the
Companys consolidated financial statements for the quarter ended March 31, 2002, the Company determined that a transaction involving the issuance of common stock for services that occurred in the quarter ended March 31, 2000 had not been
accounted for in the Companys financial statements . The transaction involved the issuance of 60,000 shares of common stock effective January 3, 2000, valued at $195,300. As a result, the condensed consolidated balance sheet as of
December 31, 2001 presented herein has been restated from the amounts previously reported to give effect to the issuance of the common stock. A summary of the restatement is as follows:





As of December 31, 2001:








As previously reported


As restatedCommon stock, $0.001 par value

$
31,387


$
31,447Additional paid-in capital


47,827,943



48,023,183Accumulated deficit


(50,505,519
)


(50,700,819
)





The restatement of the December 31, 2001 balance sheet has no net
effect on total stockholders deficit.





The Company intends to amend its Annual Report on Form 10-K for the
year ended December 31, 2001 and its quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2002 and September 30, 2001 to include the restated financial statements as of September 30, 2001 and December 31, 2000 for the year ended
December 31, 2000 and for the nine months ended September 30, 2000 as soon as practicable. A summary of the significant effects of the restatement on these financial statements is as follows:





For the year ended December 31, 2000:





As previously reported


As restatedGeneral and administrative expenses

$
5,614,732


$
5,810,032Total operating expenses


5,591,861



5,787,161Loss from operations


(5,090,455
)


(5,285,755
)Net loss


(4,574,504
)


(4,769,804
)Loss applicable to common shareholders

$
(4,580,904
)

$
(4,776,204
)Weighted average common shares outstanding


29,447,488



29,507,160





The restatement for the year ended December 31, 2000 does not
affect loss per common share.





As of December 31, 2000:





As previously reported


As restatedCommon stock, $0.001 par value

$
31,209


$
31,269Additional paid-in capital


46,500,157



46,695,397Accumulated deficit


(42,458,847
)


(42,654,147
)





As of September 30, 2001:





As previously reported


As restatedCommon stock, $0.001 par value

$
31,386


$
31,446Additional paid-in capital


46,880,965



47,076,205Accumulated deficit


(48,126,027
)


(48,321,327
)





For the nine months ended September 30, 2000:





As previously reported


As restatedGeneral and administrative expenses

$
4,190,564


$
4,385,864Total operating expenses


3,702,232



3,897,532Loss from operations


(3,321,134
)


(3,516,434
)Net loss

$
(3,073,343
)

$
(3,268,643
)Weighted average common shares outstanding


28,856,083



28,915,424








The restatement for the
nine months ended September 30, 2000 does not affect loss per common share.





In addition, subsequent to the
issuance of the Companys financial statements for the quarter ended March 31, 2002 the Company determined that $356,000 of interest expense for fees related to a modification of debt terms (see Note 7) should have been amortized over
the period from March 1, 2002 through June 30, 2002.





As of March 31, 2002:





As previously reported


As restatedBalance SheetDeferred debt placement fees

$
38,532


$
305,532Total assets


1,228,578



1,495,578Common stock, $0.001 par value


31,387



31,447Additional paid-in capital


47,999,588



48,194,828Accumulated deficit


(52,922,744
)


(52,851,044
)Total liabilities and stockholders deficit


1,228,578



1,495,578For the three months ended March 31, 2002:Interest expense

$
(1,283,610
)

$
(1,016,610
)Net loss


(2,417,225
)


(2,345,525
)Basic and diluted net loss per common share


(0.08
)


(0.07
)Weighted average common shares outstanding


31,387,087



31,447,087





The following management discussion and analysis takes into account
the effects of the restatement.





When used in this discussion, the words expect(s),
feel(s), believe(s), will, may, anticipate(s) and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward- looking statements, and are urged to carefully review and consider the various disclosures elsewhere in
this Report which discuss factors which affect our business.





The following discussion should be read in
conjunction with our Consolidated Financial Statements and respective notes thereto.





RESULTS OF OPERATIONS





Three Months Ended June 30, 2002 and Three Months Ended June 30, 2001





We incurred a net loss of $3,701,231 for the three-month period ended June 30, 2002, or a $0.12 loss per share, compared to a
net loss of $2,052,301 or a $0.07 loss per share, for the three months ended June 30, 2001. The increased loss is attributable to $2,599,969 in interest expense related to our debt financing, partially off-set by a $864,740 reduction in
operating expenses.





Sales for the three-month period ended June 30, 2002 totaled $240,713 compared to $342,369
during the three months ended June 30, 2001, or a decrease of $101,656 or 29.7%. During the second quarters of 2002 and 2001, we derived our revenue as follows:





For the Three Months Ended June 30,2002

2001Summary of Revenue by ActivityX-traWeb

$
15,000

$
87,775Radio products


225,713


247,532Corporate





7,062Total Revenue

$
240,713

$
342,369





During the second quarter of 2002, we continued to implement our
strategic plan to focus our efforts on the X-traWeb TM product line, and specifically on applying our
technology to automated meter reading solutions for the utilities industry. The decline in revenue from X-traWeb TM products and services in 2002 compared to 2001 resulted primarily from the completion of two non-recurring customer contracts in the vending and facilities management industry, and from our shift to the development and
sale of products for the automated meter reading market. As of June 30, 2002, we have generated $15,000 in revenue from such activities.





The Corporate category represents revenue not directly attributable to a specific segment, or those business activities no longer being pursued. Corporate revenues reported in the second quarter of
2001 represent royalty fees paid under an agreement that has since expired.





Our decline in revenue from radio
products, which totaled $225,713 for the three months ended June 30, 2002, compared to $247,532 for the comparable quarter in 2001, resulted from a small downturn in unit sales. Antenna sales fell 21.0%; radio sales dropped 0.005%.




16




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##### Table of Contents




Our cost of sales for the three-month period ended June 30, 2002 declined to
$88,073 from a total of $162,757 for the three months ended June 30, 2001, a reduction of $74,684 or 45.9%. The resulting gross profit was $152,640, or 63.4% of sales, for the three-month period ended June 30, 2002 compared to $179,612, or 52.5%,
for the three months ended June 30, 2001. This improvement in gross profit margin reflects the absence of revenue from two non-recurring customer contracts in the vending and facilities management industry, where our margins were very low.





Our research and development expenses increased to $176,707 from $120,378, or by $56,329, or 46.8%, for the
comparable three month periods ended June 30, 2002 versus June 30, 2001. The increase over the comparable period is attributable to development projects relating to our radio product line. We believe the resulting radio frequency technology
improvements will enhance our automated meter reading solution through improved performance, and reduced system cost.





Our total selling, general, and administrative expenses amounted to $1,077,997 for the three-month period ended June 30, 2002 compared to $1,956,208 for the three months ended June 30, 2001, representing a decrease of $878,211, or
44.9%. Selling and marketing expenses decreased by $152,566, or 51.7%, during the three-month period ended June 30, 2002 over the three months ended June 30, 2001 and represents a decrease in advertising, consulting, and expenses for marketing our
X-traWeb TM products overseas. Total general and administrative expenses for the comparable June 30, 2002
and June 30, 2001 period decreased by $725,645, or 43.7%, and resulted from (1) decreased expenses of $106,000 from the former X-traWeb TM Europe offices, (2) decreases of $238,506 in compensation expense and $227,750 in consulting and outside services and (3) $66,675 in decreased travel related expenses. We also realized lower occupancy costs for
the three-month period ended June 30, 2002 versus the comparable three-month period ended June 30, 2001 as the result of the close of our Kansas City facility in the third quarter of 2001.





Interest expense increased to $2,599,969 during the three-month period ended June 30, 2002 compared to $118,102 for the three months ended June 30, 2001. This increase is
directly related to our issuance of units of secured notes and warrants beginning in the second quarter of 2001, and represents the amortization of discounts related to the warrants, placement fees, fees incurred for the extension of the debt, and
accrued interest on the Notes. On June 28, 2002 the Companys shareholders approved the potential issuance of up to 12,500,000 shares of common stock to its lenders. Prior to June 28, 2002, the Company had committed to issue 7,120,000 share of
common stock to its lenders for debt extension, which was subject to shareholder approval. The fair value of the 7,120,000 shares, or $2,136,000, net of $89,000 recognized during the first quarter of 2002, accounts for most of the increase in
interest expense over the comparable quarter in the prior year.





Six Months Ended June 30, 2002 and Six Months
Ended June 30, 2001





We incurred a net loss of $5,851,456 for the six-month period ended June 30, 2002, or a $0.19
loss per share, compared to a net loss of $3,667,707 or a $0.12 loss per share, for the six months ended June 30, 2001. The increased loss is attributable to $3,616,579 in interest expense related to our debt financing, partially off-set by a
$1,351,360 reduction in operating expenses.





Sales for the six-month period ended June 30, 2002 totaled $443,835
compared to $600,860 during the six months ended June 30, 2001, or a decrease of $157,025 or 26.1%. During the first half of 2002 and 2001, we derived our revenue as follows:





For the Six Months Ended June 30,2002

2001Summary of Revenue by ActivityX-traWeb

$
15,000

$
191,938Radio products


428,835


392,482Corporate





16,440Total Revenue

$
443,835

$
600,860




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##### Table of Contents




During the first half of 2002, we continued to implement our strategic plan to
focus our efforts on the X-traWeb TM product line, and specifically on applying our technology to
automated meter reading solutions for the utilities industry. The decline in revenue from X-traWeb TM products and services in 2002 compared to 2001 resulted primarily from the completion of two non-recurring customer contracts in the vending and facilities management industry, and from our shift to the development and sale of products for the
automated meter reading market. As of June 30, 2002, we have generated $15,000 in revenue from such activities.





The Corporate category represents revenue not directly attributable to a specific segment, or those business activities no longer being pursued. Corporate revenues reported in the second quarter of 2001 represent royalty fees paid
under an agreement that has since expired.





Our increase in revenue from radio products, which totaled $428,835
for the six months ended June 30, 2002, compared to $392,482 for the comparable quarter in 2001, resulted from a strong sales in the first quarter of 2002, partially offset by a small down turn in unit sales during the second quarter. The
decline in sales during the second quarter occurred primarily in our antenna products.





Our cost of sales for the
six-month period ended June 30, 2002 declined to $172,372 from a total of $293,228 for the six months ended June 30, 2001, a reduction of $120,856 or 41.2%. The resulting gross profit was $271,463, or 61.2% of sales, for the six-month
period ended June 30, 2002 compared to $307,632, or 51.2%, for the six months ended June 30, 2001. This improvement in gross profit margin reflects the absence of revenue from two non-recurring customer contracts in the vending and
facilities management industry, where our margins were very low.





Our research and development expenses increased
to $323,304 from $274,177, or by $49,127, or 17.9%, for the comparable six month periods ended June 30, 2002 versus June 30, 2001. The increase over the comparable period is attributable to development projects relating to our radio
product line. We believe the resulting radio frequency technology improvements will enhance our automated meter reading solution through improved performance, and reduced system cost.





Our total selling, general, and administrative expenses amounted to $2,210,799 for the six-month period ended June 30, 2002 compared to $3,525,570 for the six months
ended June 30, 2001, representing a decrease of $1,314,771, or 37.3%. Selling and marketing expenses decreased by $277,368, or 47.3%, during the six-month period ended June 30, 2002 over the six months ended June 30, 2001 and
represents a decrease in advertising, consulting, and expenses for marketing our X-traWeb TM products
overseas. Total general and administrative expenses for the comparable June 30, 2002 and June 30, 2001 period decreased by $1,037,403, or 34.7%, and resulted from (1) decreased expenses of $185,950 from the former X-traWeb TM Europe offices, (2) decreases of $534,166 in compensation expense and $299,580 in consulting and outside
services, and (3) $113,050 in decreased travel related expenses. We also realized lower occupancy costs for the six-month period ended June 30, 2002 versus the comparable six-month period ended June 30, 2001 as the result of the close
of our Kansas City facility in the third quarter of 2001. These cost savings were offset in part by increased legal and accounting fees, and increased insurance costs.





Our interest income for the six-month period ended June 30, 2002 was $883 compared to $29,554 for the six months ended June 30, 2001, with the decrease of $28,671
directly attributable to decreased available funds in overnight interest bearing accounts. Interest expense increased to $3,616,579 during the six-month period ended June 30, 2002 compared to $119,554 for the six months ended June 30,
2001. This increase is directly related to our issuance of units of secured notes and warrants beginning in the second quarter of 2001, and represents the amortization of discounts related to the warrants, placement fees, fees incurred for the
extension of the debt, and accrued interest on the Notes. On June 28, 2002 the Companys shareholders approved the potential issuance of up to 12,500,000 shares of common stock to its lenders. Prior to June 28, 2002, the Company had
committed to issue 7,120,000 share of common stock to its lenders for debt extension, which was subject to shareholder approval. The fair value of the 7,120,000 shares accounts for $2,136,000 of the increase in interest expense over the
comparable period in the prior year.




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##### Table of Contents




Recent Accounting Pronouncements





In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Under SFAS No. 145, gains and losses from extinguishment of debt shall be classified as extraordinary items only if they meet certain criteria for
classification as extraordinary items in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and also makes various technical corrections to existing pronouncements that are not substantive in nature. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective in fiscal years beginning
after May 15, 2002, with early application encouraged. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of SFAS No. 145 are
effective for financial statements issued on or after May 15, 2002, with early application encouraged. This amendment and other issues addressed in SFAS No. 145 are not expected to have a material effect on our financial position or results of
operations.





In May 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146, addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for an exit cost or disposal activity be recognized when the liability is incurred, whereas
under EITF No. 94-3, a liability was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 is not expected to have a material impact on our operations.





We adopted SFAS 142 Goodwill and Other Intangible Assets on January 1, 2002 and there was no impact.





LIQUIDITY AND CAPITAL RESOURCES





Our liquidity at June 30, 2002 consisted of cash and cash equivalents was $231,102, which represents a increase of $7,365 over our cash and cash equivalents of $223,738 as of December 31, 2001. Our current assets were
$907,207 as of June 30, 2002, an increase of $79,775 from our current assets of $827,432 as of December 31, 2001.





As of June 30, 2002, our total liabilities were $7,232,729, which was an increase of $2,892,259 from our total liabilities of $4,340,470 as of December 31, 2001. Substantially all of our liabilities are current, including
debt from affiliates totaling $5,535,000, which is due September 30, 2002.





Cash used in operating activities
was $2,133,728 during the six months ended June 30, 2002, which was financed primarily by additional borrowings from affiliates of $2,092,500 (net of placement fees). In addition, on July 23, 2002 the Company reached agreement with its
lenders to extend the due date of the 2001 Notes to September 30, 2002 and to confirm to the Company that no events of default existed. The Company agreed to issue an additional 5,380,000 shares to its lenders in consideration for the
modification of terms. The fair value of these shares, $1,102,900, will be recognized as non-cash interest expense over the term of the modified debt. Cash used in operating activities was $3,717,728 less than our net loss, attributable primarily to
non-cash interest expenses and net changes in working capital.





During the quarter ended June 30, 2002, we
received an additional $1,275,000 in loans from such affiliates comprising part of the 2001 Notes and issued additional detachable five-year warrants to purchase 637,500 shares of our Common Stock at $0.30 per share, expiring on various
dates in 2007, to such creditors as part of such financing. In July, August and September 2002, we received an additional $750,000 in loans from one of such affiliates comprising part of the 2001 Notes and issued additional detachable five-year
warrants to purchase 375,000 shares of our Common Stock at $0.30 per share, expiring on varying dates in 2007, to such creditor, bringing the total loans, from such affiliates to $6,285,000 as of September 4, 2002. For a further
description of this financing, see Senior Secured Indebtedness Financing in Item 2 of Part 2 of this Report.




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Based on our current cash position, we believe that additional capital will be
required by mid-September, 2002. We recently obtained financing proceeds from Lancer Offshore, Inc. and Lancer Partners L.P., affiliates of our largest stockholder, which management believes is adequate to fund our operations at least through
mid-September, 2002. Our agreement with Lancer Offshore, Inc. and Lancer Partners L.P. allowed for such loan to be increased to a current outstanding principal amount of $6,285,000 (an increase over the prior loan ceiling amount of $6,135,000).
Although both lenders can agree to increase such loan again, provided we agree to do so, we cannot assure you of such mutual agreement. Since the $6,285,000 loan from the Lancer entities matures on September 30, 2002, we are currently seeking
funding from other sources.





See Note 2 to the accompanying financial statements for a discussion of the
Companys status as a going concern.





SUMMARY





While we believe that (i) a number of our pending proposals for projects or products will be accepted in whole or in part, (ii) we will develop additional sources
of sales in the United States, Italy and other foreign countries and (iii) we will derive substantial revenues therefrom in 2002 and thereafter, we cannot assure you that any such sales will be made or the amount thereof, although we anticipate
that X-traWeb TM product sales will constitute the bulk of our revenues during the year 2002 and
thereafter. We also believe that we will derive significant revenues from the sale of our proprietary radio products in the future, but we cannot assure you as to the amount of such sales or when such sales will occur.





In summary, we are fully aware that anticipated revenue increases from sales of our X-traWeb TM products and our proprietaryradios are by no means assured, and that our requirements for capital are substantial. If significant revenues with
adequate margins are not generated and/or the additional financing is not obtained, our ability to continue as a going concern is dependent on continued support from our lenders.




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PART II.





OTHER INFORMATION





ITEM 1.Legal Proceedings





On February 20, 2001 the Pinnacle Fund L.P., Barry
M. Kitt and Tom and Denise Hunse filed a lawsuit against us with respect to the purchase of a total of 230,000 shares of our common stock at $3.00 per share in a private placement transaction in February 2000. The plaintiffs seek
rescission of the transaction and/or damages, including treble damages, which they allege arise out of our failure to file a registration statement on or before December 31, 2000. The lawsuit is currently pending in the United States District
Court for the District of Utah. The case is in the discovery stage; the parties have exchanged documents and written responses to questions asked and depositions of the parties have been taken.





In December, 2001 the District Court in Utah approved the plaintiffs motion for leave to amend their pleadings to commence a lawsuit against five individual
defendants (David D. Singer, an officer-director, Donald I. Wallace, a former officer-director, Malcolm Thomas, a director, Charles Taylor, a director and a former officer, Kevin Childress) and to assert an additional cause of action
against them for the underlying state law securities claim against the Company, and new causes of action against the Company for breach of the implied covenant of good faith and fair dealing and promissory estoppel, and a new cause of action for
fraud against Mr. Singer. The Company and individual defendants filed answers to these new claims in the case.





We believe that we have meritorious defenses to such action and intend to prosecute our defense of the action vigorously, but there can be no assurance as to the outcome thereof. We will also vigorously contest these new additional
claims and believe we have meritorious defenses to these new claims, and the individual defendants named in the lawsuit will do the same, although we cannot assure you of the result in such lawsuit.





ITEM 2.Changes in Securities and Use of Proceeds





Senior Secured Indebtedness
Financing





The Company modified its Senior Secured Convertible Notes during the quarter ended June 30,
2002, which had the general effect of increasing the equity amount needed for the mandatory conversion of such notes and extending the due date thereof until September 30, 2002. A detailed description of such financing through September 4, 2002
is set forth below.





(a)  May 17, 2001 Financing





On May 17, 2001, the Company sold an investment unit consisting of (a) $2,250,000 principal amount of its Senior Secured Convertible
Notes (the 2001 Notes) and (b) warrants to purchase 1,125,000 shares of Common Stock of the Company to Lancer Offshore, Inc., an affiliate of the Companys largest stockholder, in a private placement transaction exempt
from registration under the Securities Act of 1933, as amended (the Act), subject to the following terms and conditions.





1.    The 2001 Notes bear simple interest at the rate of 15% per annum and were to mature on September 15, 2001, unless they were mandatorily converted into shares of the
Companys Common Stock prior to such date.





2.    Under the 2001 Notes,
the Company received the principal amount of $1,125,000 on May 17, 2001 and the holder agreed to loan the additional amount of $1,125,000 on or before July 15, 2001, provided that the Company raised a minimum of $2,000,000 in equity from
persons other than Michael Lauer and his affiliates, including Lancer Offshore Inc., Lancer Partners L.P., and The Orbiter Fund Ltd.





3.    The 2001 Notes are secured by a first security interest of substantially all of the Companys assets, including its machinery, equipment, automobiles, fixtures,
furniture, accounts receivable and general intangibles, including patents, patent applications and any stock in any subsidiary.




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4.    Under the 2001 Notes, the Company and
Lancer Offshore, Inc. may jointly agree to increase the amount of the loan to a total of $5,000,000 with a pro rata increase in the amount of Warrants issuable by the Company.





5.    The 2001 Notes were mandatorily convertible into shares of our Common Stock at the rate of $0.50 per share (i.e. one share
for each $0.50 of debt) upon (i) our receipt of approval of our shareholders at a meeting of such conversion and (ii) our receipt of $2,000,000 in equity from persons other than Michael Lauer and his affiliates on or before
December 31, 2001.





6.    The Company agreed to give Lancer Offshore,
Inc. registration rights with respect to the shares issuable upon conversion of the 2001 Notes and upon exercise of the warrants granted to it.





7.    Any event of default under the 2001 Notes will require the issuance of 1,000,000 shares of our Common Stock commencing with the month in which such default first occurs
and thereafter in each such month in which such default is not cured, up to a maximum amount of 10,000,000 shares of our Common Stock.





8.    The warrants issued and potentially issuable to Lancer Offshore Inc. had an exercise price of $0.50 per share, expire on the fifth anniversary date of the date of
issuance and may be exercised in whole or in part, but the shares subject thereto are issuable only upon the approval of such issuance by our shareholders at a meeting. The Company issued a warrant to purchase 562,500 shares of its Common
Stock, expiring on May 16, 2006, as a result of the loan of $1,125,000 to us.





9.    The Company agreed to pay a finders fee to Capital Research Ltd. and Sterling Technology Partners of a total of 10% of the gross proceeds received by us on the sale of the 2001 Notes payable on each
closing of a tranche of the financing under the 2001 Notes.





10.    In the
event of a default, the lender has as an additional remedy the right to convert its outstanding obligations into shares of Common Stock at the rate of one share for each $0.20 of debt in full satisfaction of such obligations.





On May 17, 2001, the average of the high and low price per share of the Companys Common Stock was $0.675, which was
higher than the conversion rate of one share for each $0.50 of debt and the exercise price of each warrant of $0.50 per share.





(b)  August 7, 2001 Financing





The Company failed to
meet the conditions described in item 2 above on the May 17, 2001 financing by July 15, 2001. As a result, on August 7, 2001, Lancer Partners L.P., another affiliate of our largest stockholder, agreed to loan us an
additional $875,000 as part of the 2001 Notes on the following terms and conditions:





1.    Lancer Partners L.P. agreed to loan the Company the additional amount of $350,000 on August, 2001 provided our Board approved the terms of the August 7, 2001 financing (which it did). The Company
issued an additional 2001 Note for the $350,000 loan.





2.    Lancer
Partners L.P. agreed to loan the Company $275,000 on or about September 15, 2001 and $250,000 on or about October 15, 2001, provided that the Company raised a minimum of $1,500,000 in equity from persons other than Michael Lauer and
his affiliates, including Lancer Offshore Inc., Lancer Partners L.P. and The Orbiter Fund Ltd., on or before September 15, 2001. Each of these additional loans would mature on December 15, 2001 unless mandatorily converted
into shares of our Common Stock.





3.    This tranche of $875,000 comprising
the 2001 Notes is mandatorily convertible into shares of our Common Stock at the rate of $0.20 per share (i.e. one share for each $0.20 of debt) upon (a) the receipt of approval of our stockholders at a meeting of such conversion
and (b) our receipt of $2,000,000 of equity from nonLancer entities or affiliates by December 31, 2001.





4.    The Company agreed to issue additional warrants to purchase up to an additional 562,500 shares of our Common Stock if the entire $875,000 is loaned by Lancer Partners L.P. to the Company. As a
result of the $350,000 loan made on August 7, 2001, the Company issued a warrant to purchase an additional 225,000 shares of our Common Stock, expiring on August 6, 2006, at an exercise price of $0.30 per share.





5.    The Company agreed as a condition to the August 7, 2001 financing to reduce its
operating budget to a monthly burn rate (i.e. the excess of its expenditures over revenues received, in each case determined on a cash basis) of not greater than $250,000 effective September 1, 2001 and to curtail all its discretionary
spending of funds until additional equity is raised.





6.    The Company agreed
to provide Lancer Partners L.P. with fully executed loan agreements, Uniform Commercial Code and other filings and warrant agreements by August 15, 2001, which were executed and delivered by both parties on August 21, 2001.





7.    The terms set forth in the May 17, 200 financing described
in 1, 3, 4, 6, 7 and 9 apply with the same force and effect to the August 7, 2001 financing.





In
addition, under the August 7, 2001 financing, the Company agreed to amend the May 17, 2001 financing as follows:





(i)  The $1,125,000 principal amount comprising a portion of the 2001 Notes became mandatorily convertible into shares of our Common Stock at the rate of $0.20 per share (i.e. one share for each
$0.20 of debt);





(ii)  The Company agreed to give Lancer Offshore Inc. and
Lancer Partners L.P. full antidilution protection in the event the Company sold shares of its Common Stock at a price of less than $0.20 per share during the oneyear period commencing on May 12, 2001;




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(iii)  The exercise price of the warrant to purchase
562,500 shares of our Common Stock was reduced to $0.30 per share which term will also apply to any additional warrants issued in such the financing transactions; and





(iv)  The maximum amount of shares of our Common Stock issuable in the event of continuing monthly defaults was increased to 12,500,000 from
10,000,000.





On August 7, 2001, the average of the high and low price per share of the Companys Common
Stock was $0.38, which was higher than the conversion rate of one share for each $0.20 of debt and the exercise price of each warrant at $0.30 per share.





(c)  September 2001 Financing





The Company failed to meet the condition described in Item 2 above on the August 7, 2001 financing by September 15, 2001. Despite such failure, Lancer Partners L.P. loaned the Company an additional $100,000 and
$175,000 on September 6, 2001 and September 18, 2001, respectively, which loans mature on December 15, 2001. As a result thereof, the Company issued a separate note comprising part of the 2001 Notes to such party (which collectively
are mandatorily convertible into 1,375,000 shares of our Common Stock at $0.20 per share) and also issued a warrant to purchase 87,500 shares of our Common Stock at $0.30 per share.





In addition, the parties amended the August 7, 2001 financing as follows:





(i)  The maturity date of the two tranches of the 2001 Notes totaling $1,475,000 in principal amount was extended from September 15, 2001
until October 15, 2001; and





(ii)  The creditors extended the time for the Company
to raise $1,500,000 until October 15, 2001 as a condition to the issuance of the $250,000 loan on or about October 15, 2001.





Also, the holders of the 2001 Notes acknowledged that there was no default of any kind as of September 14, 2001.





On September 8, 2001 and September 16, 2001, the average of the high and low price per share of the Companys Common Stock was $0.255 and $0.235,
respectively, which was higher than the conversion rate of one share for each $0.20 of debt, but lower than the exercise price of each warrant at $0.30 per share.





(d)  October and November, 2001 Financing





The Company again failed to meet the condition to raise additional equity financing of $1,500,000 on or before October 15, 2001. Despite such failure, Lancer Partners L.P. loaned the Company an additional $25,000 (bringing its
total loan to the Company to $650,000 in principal amount) and Lancer Offshore, Inc. loaned the Company an additional $85,000 on October 3, 2001, $175,000 on October 9, 2001, $175,000 on October 29, 2001 and $1,000,000 on
November 14, 2001 (bringing its total loan to the Company to $2,560,000 in principal amount), or a total loan from such parties of $3,210,000. As a result, the Company issued separate notes comprising part of the 2001 Notes and issued
additional warrants to such parties to purchase 730,000 shares of the Companys Common Stock at an exercise price of $0.30 per share, expiring in each case on a date in 2006 five years after the date of their respective issuance.





In addition, the parties agreed on November 14, 2001 to amend the entire 2001 Note financing as follows:





(i)  The entire principal amount of $3,210,000 comprising the 2001 Notes became
mandatorily convertible into shares of our Common Stock at the rate of one share for each $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion and (B) upon our receipt of $3,210,000 in
equity from sources other than Michael Lauer, Lancer Offshore, Inc., Lancer Partners L.P. and The Orbiter Fund Ltd. on or before February 28, 2002.




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(ii)  The maturity date of the entire principal amount
of $3,210,000 comprising the 2001 Notes was extended until February 28, 2002 (unless mandatorily converted into shares of the Companys Common Stock prior to such date);





(iii)  The amount of shares issuable in the event of a default was then increased to 1,605,000 shares of our Common Stock for each month in which
a default exists and continuing until such default is cured, up to a maximum of 12,500,000 shares;





(iv)  The Company agreed to give Lancer Offshore Inc. and Lancer Partners L.P. full anti-dilution protection in the event the Company sold shares of its Common Stock at a price less than $0.05 per share during the
one-year period commencing on November 14, 2001 (which was changed from May 12, 2001); and





(v)  The finders fee payable on the transaction was increased by requiring the Company to issue a fiveyear warrant to Capital Research Ltd. to purchase 2,000,000 shares of the Companys Common Stock at an
exercise price of $0.05 per share, which expires on November 13, 2006.





(e)  January and
February, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional $350,000 on January 25,
2002 and $250,000 on February 8, 2002 (bringing its total loan to the Company to $3,160,000 in principal amount). As a result, the Company issued separate notes comprising part of the 2001 Notes and issued additional warrants to Lancer
Offshore, Inc. to purchase 300,000 shares of the Companys Common Stock at an exercise price of $0.30 per share, expiring in each case on a date in 2007 five years after the date of their respective issuance.





In addition, the parties agreed on January 25, 2002 to amend the entire 2001 Note financing as follows:





(i)  The entire principal amount of $3,810,000 comprising the 2001 Notes became mandatorily convertible into
shares of our Common Stock at the rate of one share for each $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion and (B) upon our receipt of $3,810,000 in equity from sources other than Michael Lauer,
Lancer Offshore, Inc., Lancer Partners L.P. and The Orbiter Fund Ltd. on or before February 28, 2002.





(ii)  The amount of shares issuable in the event of a default was now increased to 1,780,000 shares of our Common Stock for each month in which a default exists and continuing until such default is cured, up to a maximum of
12,500,000 shares; and





(iii)  The Company agreed to give Lancer Offshore Inc. and
Lancer Partners L.P. full antidilution protection in the event the Company sold shares of its Common Stock at a price less than $0.05 per share during the oneyear period commencing on the date of the making of the last loan from such
parties to the Company (which was changed from November 14, 2001 to February 8, 2002).





(f)  March, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional
$200,000 on March 8, 2002 (bringing its total loan to the Company to $3,360,000 in principal amount) and Lancer Partners L.P. loaned the Company an additional $100,000 on March 11, 2002 and $150,000 on March 27, 2002 (bring its total
loan to the Company to $900,000 in principal amount). As a result, the Company issued separate notes comprising part of the 2001 Notes and issued additional warrants to Lancer Offshore, Inc. and Lancer Partners L.P. to purchase
100,000 shares and 125,000 shares of the Companys Common Stock, respectively, at an exercise price of $0.30 per share, expiring in each case on a date in 2007, five years after the date of their respective issuance.





In addition, the parties agreed on February 28, 2002 to amend the entire 2001 Note financing as follows:





(i)  The maturity date of the entire principal amount of $3,810,000 comprising the 2001
Notes was extended until June 30, 2002 (unless mandatorily converted into shares of the Companys Common Stock prior to such date).




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(ii)  The entire principal amount of $3,810,000
comprising the 2001 Notes became mandatorily convertible into shares of our Common Stock at the rate of one share to $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion (which was given on
March 15, 2002) and (B) upon our receipt of $3,810,000 in equity from sources other than Michael Lauer and his affiliates, including, without limitation, Lancer Offshore, Inc., Lancer Partners L.P. and The Orbiter Fund Ltd., on
or before June 30, 2002.





(iii)  The Company agreed to issue 7,120,000 shares of
its Common Stock to Lancer Offshore, Inc. and Lancer Partners L.P., to be divided pro rata between them based on their respective share of the total loans of $3,810,000 to us as of February 28, 2002, subject to the approval of such
issuance by our stockholders at a meeting in accordance with applicable American Stock Exchange rules. In the event that (i) such stockholder approval is not obtained on or before July 31, 2002 or (ii) the Company fails to issue such
shares within 30 days after such approval is obtained due to its fault, the Company agreed to pay the sum of $356,000 to such creditors, pro rata as set forth above, in full satisfaction thereof, with such payment to be made within 30 days
after the later to occur of such two events.





Furthermore, the parties agreed on March 27, 2002 to amend the
entire 2001 Note financing as follows: the entire principal amount of $4,260,000 comprising the 2001 Notes became mandatorily convertible into shares of our Common Stock at the rate of one share to $0.05 of debt (A) upon our receipt of approval
of our shareholders at a meeting of such conversion (which was given on March 15, 2002) and (B) upon our receipt of $4,260,000 in equity from sources other than Michael Lauer and his affiliates, including, without limitation, Lancer
Offshore, Inc., Lancer Partners L.P. and The Orbiter Fund Ltd., on or before June 30, 2002.





(g)  April, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional
$275,000 on April 12, 2002. As a result, the Company issued a note comprising part of the 2001 Notes and issued an additional warrant to Lancer Offshore, Inc. to purchase 137,500 shares of the Companys Common Stock, at an
exercise price of $0.30 per share, expiring on April 11, 2007. In addition, Lancer Offshore, Inc. loaned the Company an additional $700,000 on April 25, 2002 (bringing its total loan to the Company to $4,335,000 in principal
amount), and Lancer Partners L.P. loaned the Company an additional $300,000 on such date (bringing its total loan to the Company to $1,200,000 in principal amount). As a result, the Company issued separate notes comprising part of the 2001
Notes and issued additional warrants to Lancer Offshore, Inc. and Lancer Partners L.P. to purchase 350,000 and 150,000 shares of the Companys Common Stock, respectively, at an exercise price of $0.30 per share, expiring on
April 24, 2007.





In addition, the parties agreed on April 25, 2002 to amend the entire 2001 Note
financing as follows:





(i)  The maturity date of the entire principal amount of
$5,535,000 comprising the 2001 Notes was extended until June 30, 2002 (unless mandatorily converted into shares of the Companys Common Stock prior to such date).





(ii)  The entire principal amount of $5,535,000 comprising the 2001 Notes became mandatorily convertible into shares of our Common Stock at the
rate of one share to $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion (which was given on March 15, 2002) and (B) upon our receipt of $5,535,000 in equity from sources other than
Michael Lauer and his affiliates, including, without limitation, Lancer Offshore, Inc., Lancer Partners L.P. and The Orbiter Fund Ltd., on or before June 30, 2002.





(h)  July, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional $300,000 on July 23, 2002 (bringing its total loan to the Company to $4,635,000). As a result, the Company issued a note comprising part of the 2001 Notes and issued an
additional warrant to Lancer Offshore, Inc. to purchase 150,000 shares of the Companys Common Stock, at an exercise price of $0.30 per share, expiring on July 22, 2007.





Furthermore, the parties agreed on July 23, 2002 to amend the entire 2001 Note financing as follows:




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(i)  The maturity date of the entire principal amount
of $5,835,000 comprising the 2001 Notes was extended from June 30, 2002 until September 30, 2002 (unless mandatorily converted into shares of the Companys Common Stock prior to such date).





(ii)  The entire principal amount of $5,835,000 comprising the 2001 Notes became mandatorily convertible into
shares of our Common Stock at the rate of one share for each $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion (which was given on March 15, 2002, up to then applicable ceiling amount of
$5,000,000) and (B) upon our receipt of $5,835,000 in equity from sources other than Michael Lauer and his affiliates, including, without limitation, Lancer Offshore, Inc., Lancer Partners L.P. and the Orbiter Fund Ltd., on or
before September 30, 2002.





(iii)  The total amount of shares issuable in the event
of continuing monthly defaults was increased to 25,000,000 from 12,500,000.





(iv)  In
the event of a default, the lenders additional remedy to convert its outstanding obligations into shares of Common Stock became convertible at the rate of one share for each $0.05 of debt (a decrease from the prior rate of one share for
each $0.20 of debt) in full satisfaction of such obligations.





(v)  The Company agreed
to issue 5,380,000 shares of its Common Stock to Lancer Offshore, Inc. and Lancer Partners L.P., to be divided pro rata between them based on their respective share of the total loans of $5,585,000 to us as of July 23, 2002, subject to the
approval of such issuance by our stockholders at a meeting in accordance with applicable American Stock Exchange rules. In the event that (i) such stockholder approval is not obtained on or before July 31, 2002 (which approval was given on
June 28, 2002) or (ii) the Company fails to issue such shares due to its fault within 30 days after the later of (A) the receipt of such stockholder approval or (B) the receipt of approval of an amended American Stock Exchange
listing application covering, among other things, the 12,500,000 shares issuable to such creditors, the Company agreed to pay the sum of $356,000 to such creditors, pro rata as set forth above, in full satisfaction thereof, with such payment to
be made within 30 days after the later to occur of such two events.





(i)  August, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional $300,000 on August 20, 2002 (bringing its total loan
to the Company to $4,935,000). As a result, the Company issued a note comprising part of the 2001 Notes and issued an additional warrant to Lancer Offshore, Inc. to purchase 150,000 shares of the Companys Common Stock, at an exercise
price of $0.30 per share, expiring on August 19, 2007.





Furthermore, the parties agreed on August 20,
2002 to amend the entire 2001 Note financing as follows:





The entire principal amount of $6,135,000 comprising the
2001 Notes became mandatorily convertible into shares of our Common Stock at the rate of one share for each $0.05 of debt (A) upon our receipt of approval of our shareholders at a meeting of such conversion (which was given on March 15,
2002, up to then applicable ceiling amount of $5,000,000) and (B) upon our receipt of $6,135,000 in equity from sources other than Michael Lauer and his affiliates, including, without limitation, Lancer Offshore, Inc., Lancer
Partners L.P. and the Orbiter Fund Ltd., on or before September 30, 2002.





(j)  September
4, 2002 Financing





Lancer Offshore, Inc. loaned the Company an additional $150,000 on September 4, 2002
(bringing its total loan to the Company to $5,085,000). As a result, the Company issued a note comprising part of the 2001 Notes and issued an additional warrant to Lancer Offshore, Inc. to purchase 75,000 shares of the Companys
Common Stock, at an exercise price of $0.30 per share, expiring on September 3, 2007.





Furthermore, the
parties agreed on September 4, 2002 to amend the entire 2001 Note financing as follows:





The entire principal
amount of $6,285,000 comprising the 2001 Notes is now mandatorily convertible into shares of our Common Stock at the rate of one share for each $0.05 of debt (A) upon our receipt of approval of our




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shareholders at a meeting of such conversion (which was given on March 15, 2002, up to then applicable ceiling amount of $5,000,000) and
(B) upon our receipt of $6,285,000 in equity from sources other than Michael Lauer and his affiliates, including, without limitation, Lancer Offshore, Inc., Lancer Partners L.P. and the Orbiter Fund Ltd., on or before
September 30, 2002.





On and after October 1, 2001, on the date of the issuance of each of the additional
notes comprising part of the 2001 Notes and the warrants to purchase shares of our Common Stock, the average of the high and low price of a share of the Companys Common Stock was higher than the conversion rate of each Note in question, and,
at times, was higher or lower than the exercise price of each Warrant.





(j)  American
Stock Exchange Rules





Under applicable American Stock Exchange Rules, we are required to obtain the approval of
our stockholders if we propose to issue shares of our Common Stock (i) to a controlling stockholder at a per share price less than the market value thereof and (ii) such issuance involves an amount of shares that is more than 5% of the
number of the corporations then issued and outstanding shares of Common Stock in any one year. Such rule applies to our recent financing transaction with Lancer Offshore, Inc. and Lancer Partners L.P Accordingly, we obtained the approval
of our stockholders at a special meeting held on March 15, 2002 in order to permit the mandatory conversion of the 2001 Notes owned by Lancer Offshore, Inc. and Lancer Partners L.P. into shares of our Common Stock (up to the then
applicable ceiling amount of $5,000,000), and the issuance of the shares of our Common Stock upon the exercise of the warrants granted to Lancer Offshore, Inc. and Lancer Partners L.P. (up to the then applicable amount of 2,500,000 shares)
in connection with the above financing, which approval satisfies one of the two conditions to the mandatory conversion of the 2001 Notes.





We contemplate that we will seek stockholder approval for the balance of any shares issuable pursuant to such financing to the extent that such approval has not yet been obtained.





(k)  Risk of Default Under Our Senior Secured Indebtedness.





While we are attempting to raise the amount needed in additional equity as a further condition for the mandatory conversion of the 2001
Notes into our shares of Common Stock or to pay the 2001 Notes in whole or in part and thereby eliminate or reduce the extent of the mandatory conversion of the 2001 Notes, we cannot assure you of such result. Moreover, we cannot assure you that we
will not commit a default under the 2001 Notes in the future when they mature on September 30, 2002. In the event that the holders of the 2001 Notes sell our assets securing the 2001 Notes following any future default by us, a remedy available under
the 2001 Notes, such sale would materially and adversely affect our business and financial condition




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ITEM 4.Submission of Matters to a Vote of Security Holders





Our shareholders
approved the following matters at the annual shareholders meeting for 2002 held on June 28, 2002:





(1)  The election of four directors to serve for a one-year term and until their successors are duly elected and qualified by a vote as follows:





(a)  David D. Singer





For:  19,329,112        Against:  222,220        Abstain:  42,733





(b)  Charles Taylor





For:  19,330,782        Against:  220,550        Abstain:  42,733





(c)  Malcolm P. Thomas





For:  19,311,182        Against:  240,150        Abstain:  42,733





(d)  M. Robert Carr





For:  19,310,982        Against:  240,350        Abstain:  42,733





(2)  The ratification of the appointment of Deloitte & Touche LLP as our independent auditors by a vote as follows:





For:  19,569,625        Against:  16,040        Abstain:  8,400





(3)  The potential issuance of up to 12,500,000 shares of the Common Stock to a group comprising our largest stockholder, Michael Lauer, Lancer Offshore, Inc. and
Lancer Partners L.P., and their affiliates under the senior secured financing with such group (including the 7,120,000 issuable to such group as of February 28, 2002, subject to stockholder approval, as a result of the agreement to issue the same as
consideration for the four-month extension of the maturity date of the Senior Secured Notes issued to such group to June 30, 2002) by a vote as follows:





For:  9,161,607        Against:  658,060        Abstain:  9,060        Not
Voted:  9,767,038





(4)  (a)  The mandatory conversion of up to an additional
$2,000,000 principal amount of the Senior Secured Notes pursuant to a new secured financing into up to 40,000,000 shares of the Common Stock potentially issuable to any purchasers of such notes (none of which has been sold as of the date hereof) and
(b) the issuance of up to 1,000,000 shares of the Common Stock pursuant to the exercise of the warrants which may be granted to such potential creditors in connection with such financing (none of which has been granted as of the date hereof) by a
vote as follows:





For:  9,163,650        Against:  631,267        Abstain:  33,810        Not
Voted:  9,767,038




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ITEM 5.Other Events





1.    We made sales of shares of our
securities during the second quarter of 2002, each of which is exempt from registration under the Act, as set forth below:





(a)  As of April 12, 2002, we issued (i) a Senior Secured Note in the principal amount of $275,000 (described immediately above) and (ii) a warrant to purchase 137,500 shares of our Common Stock at an exercise price of
$0.30 per share, expiring on April 11, 2007, to Lancer Offshore, Inc., an affiliate of our largest stockholder. We believe that Lancer Offshore, Inc. is an accredited investor within the meaning of Regulation D issued under
the Act. We issued such securities in reliance upon Section 4(2) of the Act.





(b)  As of April 25,
2002, we issued (i) a Senior Secured Note in the principal amount of $700,000 (described immediately above) and (ii) a warrant to purchase 350,000 shares of our Common Stock at an exercise price of $0.30 per share, expiring on
April 24, 2007, to Lancer Offshore, Inc., an affiliate of our largest stockholder. We believe that Lancer Offshore, Inc. is an accredited investor within the meaning of Regulation D issued under the Act. We issued such securities
in reliance upon Section 4(2) of the Act.





(c)  As of April 25 2002, we issued (i) a Senior
Secured Note in the principal amount of $300,000 (described immediately above) and (ii) a warrant to purchase 150,000 shares of our Common Stock at an exercise price of $0.30 per share, expiring on March 7, 2007, to Lancer
Partners L.P., an affiliate of our largest stockholder. We believe that Lancer Partners L.P. is an accredited investor within the meaning of Regulation D issued under the Act. We issued such securities in reliance upon
Section 4(2) of the Act.





2.    Business Software Alliance (BSA), a trade
association, asserted a claim against us during May, 2002 alleging that we had without authorization or license installed on our computers unlicensed copies of certain products published by members of BSA (in this case, Adobe Systems Incorporated
and Microsoft Corporation), and that such unauthorized use constituted copyright infringement under the Federal Copyright Act. BSA alleged that we could be held liable for statutory damages on a per product basis of between $30,000 and $150,000 per
product, plus reasonable attorneys fees and court costs.





We and BSA agreed to settle such claims by our payment
of the sum of $54,710 in three unequal installments and our purchase of new software for the items in question. We expect such settlement agreement to be signed by BSA in the near future, although we cannot assure you of such result. If such
settlement is achieved amicably, our liability thereunder will not have a material adverse effect on our business and financial condition. If such settlement is not achieved and the matter were litigated and we lost such litigation, such loss would
have a material adverse effect on our business and financial condition.




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ITEM 6.Exhibits and Reports on Form 8-K





(a)  The following documents are filed as part of this report: Financial Statements of the Company (unaudited), including Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operation, Condensed
Consolidated Statements of Cash Flow and Notes to Condensed Consolidated Financial Statements as at and for the three months ended June 30, 2002 and the Exhibits which are listed on the Exhibit Index.





Exhibit Index10.49

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
April 12, 2002.10.50

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
April 25, 2002.10.51

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc., and Lancer Partners L.P. dated as of
July 23, 2002.10.52

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc., and Lancer Partners L.P. dated as of
August 20, 2002.10.53

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc, and Lancer Partners L.P. dated as of
September 4, 2002.99.1

Certification of Chief Executive Officer99.2

Certification of Vice President of Finance and Chief Financial Officer





(b)  The following reports on Form 8-K
were filed by the Registrant during the quarter ended June 30, 2002:





None




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized.





Date: September 13, 2002





WORLD WIRELESS COMMUNICATIONS, INC.By:

/s/    DAVID D.
SINGERDavid D. Singer President,
Chief Executive OfficerBy:

/s/    ROBERT W. HATHAWAYRobert W. Hathaway Vice
President Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)







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CERTIFICATION





I, David D. Singer, the President of World Wireless Communications, Inc. (the Company), certify that:





1.    I have reviewed this quarterly report on Form 10-Q of the Company;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    [Intentionally Omitted] 1





5.    [Intentionally Omitted] 1





6.    [Intentionally
Omitted] 1





Date: September 13, 2002





/s/    DAVID D. SINGERDavid D. Singer President


|1 |  | Intentionally omitted pursuant to Section V (Transition Provisions) of SEC Release No. 34-46427.
|- |  | ------------------------------------------------------------------------------------------------



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CERTIFICATION





I, Robert W. Hathaway, the Vice President of Finance and Chief Financial Officer of World Wireless Communications, Inc. (the Company), certify that:





1.    I have reviewed this quarterly report on Form 10-Q of the Company;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    [Intentionally Omitted] 1





5.    [Intentionally Omitted] 1





6.    [Intentionally Omitted] 1





Date: September 13, 2002


/s/    ROBERT W. HATHAWAYRobert W. Hathaway Vice President of Finance and Chief Financial Officer


|1 |  | Intentionally omitted pursuant to Section V (Transition Provisions) of SEC Release No. 34-46427.
|- |  | ------------------------------------------------------------------------------------------------



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EXHIBIT INDEX





EXHIBIT NUMBER

DESCRIPTION3.1

Articles of Incorporation of the Company and all amendments thereto*3.2

Bylaws of the Company*4.1

Form of Common Stock Certificate*4.2

Form of Subscription Agreement used in private financing providing for registration rights*5.1

Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding the legality of securities being
registered*5.2

Opinion of Law Offices of Stephen R. Field as to the legality of the securities being registered*10.1

1997 Stock Option Plan*10.2

DRCC Omnibus Stock Option Plan*10.3

Development and License Agreement dated April 4, 1997, between DRCC and Kyushu Matsushita Electric Co.,
Ltd.*10.4

Amended and restated Technical Development and Marketing Alliance Agreement dated September 15, 1997, between the
Company and Williams Telemetry Services, Inc.*10.5

Lease Agreement dated May 17, 1995, between DRCC and Pracvest Partnership relating to the Companys American
Fork City offices and facility*10.6

Lease Agreement dated February 12, 1996, between the Company the Green/Praver, et al., relating to the
Companys Salt Lake City offices*10.7

Shareholders Agreement dated May 21, 1997 between the Company, DRCC, Philip A. Bunker and William E. Chipman,
Sr.*10.8

Asset Purchase Agreement dated October 31, 1997, between the Company and Austin Antenna, Ltd.*10.9

Stock Exchange Agreement dated October 31, 1997, between the Company, TWC, Ltd. and the shareholders of TWC,
Ltd.*10.10

Settlement Agreement, Mutual Waiver and Release of All Claims dated November 11, 1997 between Digital Radio
Communications Corp. and Digital Scientific, Inc.*10.11

Agreement (undated) between the Company, Xarc Corporation and Donald J. Wallace relating to the Companys
acquisition of Xarc Corporation*10.12

Promissory Note dated December 4, 1997, by the Company, payable to William E. Chipman, Sr. in the principal amount
of $125,000*10.13

Promissory Note dated November 13, 1997, by the Company, payable to T. Kent Rainey in the principal amount of
$200,000*




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##### Table of Contents




EXHIBIT NUMBER

DESCRIPTION10.14

Investment Banking Services Agreement dated November 19, 1997, between the Company and PaineWebber
Incorporated*10.15

$400,000 Promissory Note dated December 24, 1997, payable to Electronic Assembly Corporation*10.16

$400,000 Promissory Note dated January 8, 1998, payable to Tiverton Holdings Ltd.*10.17

Loan Agreement by and among the Registrant and the Bridge Noteholders* dated as of May 15, 1998*10.18

Amendment and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated August 7,
1998*10.19

Amendment and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated September 11,
1998*10.20

Loan Agreement by and among the Registrant and the Bridge Noteholders dated as of May 15, 1998 (Previously filed),
together with the Notes, Pledge/Security Agreement, Pledgee/Representative Agreement, Subordination, and Registration Rights Agreement*10.21

Separation and Mutual Release Agreement between the Registrant and William E. Chipman, Sr. dated as of May 26,
1998*10.22

Registration Rights Agreement by and among the Registrant and the purchasers of common stock issued pursuant to the
Registrants Confidential Private Placement Memorandum dated September 9, 1998, as amended*10.23

Employment Agreement between the Registrant and James OCallaghan dated May 20, 1998*10.24

Lease agreement between the Registrant and NP#2 dated as of July 29, 1998 relating to the premises at 2441 South
3850 West, West Valley City, Utah 84120*10.25

Agreement between KME and the Registrant dated October 19, 1998 relating to the Registrants providing of
technical assistance and development relating to the Gigarange telephone*10.26

Agreement between KME and the Registrant dated as of March 1, 1998 relating to the Panasonic MicroCast
System*10.27

General and Mutual Release Agreement between the Registrant and Phil Acton dated November 2, 1998*10.28

Agreement and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated November 25,
1998*10.29

1998 Employee Incentive Stock Option Plan*10.30

1998 Non-qualified Stock Option Plan*10.31

Amendment of Agreement by and among the Registrant and the Bridge Noteholders dated as of March 26,
1999*10.32

Loan Agreement by and among the Registrant and the Senior Secured Noteholders dated as of May 14, 1999, together
with the Notes, Pledge/Security Agreement, Pledgee Representative Agreement, Subordination and Registration Rights Agreement*




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EXHIBIT NUMBER

DESCRIPTION10.33

Two separate Agreements by and among the Registrant and the 1999 Bridge Noteholders dated August 19,
1999*10.34

Waiver Agreement by and among the Registrant and the Bridge Noteholders dated as of December 7, 1999*10.35

Registration Rights Agreement by and among the Registrant and the purchasers of common stock issued pursuant to the
Registrants Confidential Private Placement Memorandum dated January 12, 2000 as amended*10.36

Settlement Agreement and Mutual Release between Internet Telemetry Corp. and the Registrant, dated as of August 7,
2000.*10.37

Financing Commitment Letter between the Registrant and Insight Capital LLC dated April 2, 2001.*10.38

Loan Agreement by and among the Registrant and Lancer Offshore,Inc. Noteholders dated as of May 17, 2001, together
with the Notes, Warrant, Pledge/Security Agreement, Subordination Agreement, and Registration Rights Agreement.*10.39

Amended and Restated Loan Agreement by and among the Registrant, Lancer Offshore, Inc. and Lancer Partners L.P.
dated as of August 7, 2001, together with the Note, Warrant, Amended and Restated Pledge / Security Agreement, Subordination Agreement, Pledgee Representation Agreement and the Amended and Restated Registration Rights Agreement.*10.40

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated
September 14, 2001.*10.41

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
October 12, 2001.*10.42

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
November 14, 2001. *10.43

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
January 25, 2002.*10.44

Amendment to Warrant Nos. T-1A, T-5, T-6, T-7 and T-8 held by Lancer Offshore, Inc. *10.45

Amendment to Warrant Nos. T-2, T-3 and T-4 held by Lancer Partners L.P. *10.46

Amendment to Warrant No. T-9 held by Capital Research Ltd. *10.47

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
February 28, 2002. *10.48

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
March 27, 2002. *10.49

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
April 12, 2002. **




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EXHIBIT NUMBER

DESCRIPTION10.50

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
April 25, 2002. **10.51

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
July 23, 2002. **10.52

Amendment of Agreements by and Among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
August 20, 2002. **10.53

Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated as of
September 4, 2002.**16.1

Letter from Hansen, Barnett & Maxwell regarding change in Certifying Accountant.*99.1

Certification of Chief Executive Officer. **99.2

Certification of Vice President of Finance and Chief Financial Officer. **


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|* |  | Filed previously
|- |  | ----------------

|** |  | Filed herewith.
|-- |  | ---------------

|+ |  | Management contract or compensatory plan or arrangement filed previously.
|- |  | -------------------------------------------------------------------------



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