Cost	Gross Unrealized	Estimated Fair
	Basis	Losses	Value
December 30, 2001
New York Regional Rail Corporation
Stock Options	$250,000	$(250,000)	$0
June 30, 2001
New York Regional Rail Corporation
Stock Options	$250,000	$(250,000)	$0

4.     Property and Equipment:

In March 2000, the Company entered into an agreement with Qwest Communications in which the Company purchased 504 miles of conduit installed along the CSX railroad track from New Orleans, Louisiana to Mobile, Alabama and from Pensacola, Florida to Jacksonville, Florida.  Fiber optic cable has not yet been installed within such conduit purchased from Qwest Communications.  The agreement with Qwest calls for payments by the Company of approximately $15 million over the course of the agreement, all of which is currently past due.  Qwest declared a default in October 2001, but has not initiated arbitration or other proceedings.  The $15 million became due and payable on March 31, 2001.  Previously, the Company had recorded a discount on the note payable of $723,109, which was fully amortized into expense at March 31, 2001.  The Company is negotiating with Qwest and anticipates a settlement, reference is made to Note 12 for information regarding settlement of the Qwest obligation.

The Company has installed 24 miles of fiber optic conduit, of which approximately 8 miles was sold to Bell South in February 2001, providing fiber optic access to the Company's enterprise data center in Iuka, Mississippi.

5.     Other Assets:

Other assets consist of the following items as of:

 

In July 2000, the Company and Global Fiber Optic and Wireless Communications, Ltd. ("Global") each advanced $200,000 for developing a joint venture to provide a 4,000 mile fiber optic communications and Internet network in Turkey.  The Company and Global plan to have a fifty (50%) percent interest in the joint venture.  The Company will be required to provide electronic and communications technologies, while Global will provide rights-of-way and other real estate as needed in Turkey.  Currently, the advances are being used by the proposed joint venture to purchase rights-of-way and other assets to be utilized in the future operations of the joint venture.  The advance is guaranteed by the majority shareholder and repayment is secured by certain Company payables to the majority shareholder.

 

In August 2001, the Company reached an agreement with Infusion Software Group, LLC ("Infusion") to form Global PTX, LLC.  The Company and Infusion have established an Application Service Provider business to design, develop and implement data warehousing and data mining applications.  Global PTX will establish Private Trade Exchanges focusing on providing customers with an "end-to-end" solution for their business strategies.  Initial development activities will be designed to target the Manufacturing and Retail Business Industry Sectors, specifically focused on vendor/customer supply chain management.  Infusion is a specialized software and marketing service provider to enterprises throughout the United States.  During the quarter ended December 31, 2001, the Company invested $177,500 in this venture (See Note 7) and recorded its proportionate share of Global PTX's losses totaling $51,896.

 

6.     Commitments:

 

In March 2001, the Company agreed to a new 20-year lease, effective January 1, 1999, with the State of Mississippi for its main facilities in Iuka, Mississippi.  This lease provides the Company with 25,000 square feet of office and equipment space at the former National Aeronautics and Space Administration facility.  The State, acting through the Mississippi Development Authority (MDA), has also granted the Company a 10-year right of first refusal to lease an additional 75,000 square feet at the Iuka facility, to accommodate the Company's expansive business plan.

 

The Company has agreed to sell to the majority shareholder up to 5,000 shares of Series B Preferred Stock at $1,000 per share.  As of December 31, 2001, 2,278 such shares were sold to the shareholder.

 

7.     Supplemental Cash Flow Information:

 

For purposes of the consolidated statements of cash flows, cash and cash equivalents consists of cash on hand, demand deposit accounts and short-term investments in certificates of deposit with maturities of three months or less.

 

Noncash investing and financing activities during the six-month period ended December 31, 2001:

 

December 31, 2001

Noncash investment in Global PTX, LLC from notes payable            $93,000

 

Noncash equity transactions during the six-month period ended December 31, 2001 and 2000:

 

	No. of Shares		Dollar Amount
December 31, 2001
Issuance of stock for services	2,899,595		$         398,324
Payable to officer converted to preferred stock	26		$           25,662
Conversion of preferred dividends payable to  preferred stock	56		$           55,950
Issuance of stock for services	90,000		$           12,600
Issuance of stock for equipment	40,000		$           10,000
Issuance of stock for settlement of claims (Note 9)	250,000		$           25,625
Issuance of stock options	0		$             8,000
Issuance of preferred stock in exchange for investment in Global PTX, LLC	85		$           84,500
December 31, 2000
Issuance of stock for services	54,225		$         115,032

8.     Litigation:

On March 26, 2001, the Company was served with a summons and complaint entitled Tom Epperson, Freddie Wilson and Omega Shelters, Inc. v. North American DataCom, Inc. and North American Infotech, LLC, (U.S.D.C. Northern District of Mississippi, Case No. 1:02CV105-D-D).  By decision of the Court dated June 28, 2001, the matter was dismissed without prejudice for lack of subject matter jurisdiction.  No further action has been filed.

David Cray, former Vice President and Corporate Treasures, departed the Company effective March 5, 2001, upon his return from a leave of absence.  Mr. Cray and the Company have reached an agreement to settle outstanding differences regarding expenses and compensation.  The Company and Mr. Cray have agreed to terms, but final agreement has not been completely executed.  The terms of the settlement will not materially affect the finances of the Company. 

On June 13, 2001, the Company was served with a summons and complaint in the matter known as OptiCom v. North American DataCom, Inc., (County Court of Tishomingo, State of Mississippi, Cause No. CV01-0077(G)(T).  Plaintiff OptiCom has alleged that the Company has failed to pay $28,000 for optical conduit provided for the last mile access along the Tishomingo Railroad.  The Company is defending the lawsuit and has engaged OptiCom in settlement negotiations. 

On December 18, 2001, the Company was served with a summons and complaint in the matter known as Portal v. North American DataCom, Inc., (Superior Court of the State of California, County of Santa Clara, Cause No. CV803226).  Plaintiff Portal has alleged that the Company has failed to pay $439,816 for software and maintenance.  The Company is defending the lawsuit.

The Company does not believe that ultimate outcome of the aforementioned matters will have a significant impact on the Company's financial position and results of operations or liquidity.

9.     Stockholders' Equity:

In December 2001, the Company sold 276 shares of Series B Convertible Preferred Stock to a principal shareholder for $275,735.  In September 2001, the Company sold 191 shares of Series B Convertible Preferred Stock to a principal shareholder for $190,990.  In July 2001, the cumulative dividends payable on the Series B Convertible Preferred Stock totaling $55,950 from fiscal 2001 were exchanged for 56 additional shares of Series B Convertible Preferred Stock.  The conversion ratio was amended by action of the Board of Directors to 8,333 shares of restricted common stock for each share of Series B Convertible Preferred Stock that was issued after June 30, 2001, to reflect recent changes in the price of its shares of common stock on the OTC:BB.

In August 2001, the Company issued 90,000 shares of common stock totaling $12,600 for electrical services rendered to the Company in providing power to the wireless bandwidth system the Company constructed.

In August 2001, the Company issued 40,000 shares of common stock totaling $10,000 in exchange for Internet service equipment.

In August 2001, the Company issued 250,000 shares of common stock totaling $25,625 to a former employee for services rendered to the Company for design of its fiber optic network.

In November 2001, the Company issued 150,232 shares of common stock totaling $20,702 for services rendered to the Company in conjunction with building the Company's wireless bandwidth system.

In November 2001, the Company issued 2,740,363 shares of common stock totaling $377,622 for DS-3 communication services rendered to the Company and to continue through December 2003, of which $152,906 is reflected in other assets as a prepaid.

The value of the shares issued to non-employees for services is determined by the amount of the invoice provided to the Company by the non-employee party.  The price per share is determined by negotiation with the third party.  Normally, the 5-day average closing price of the Company's common stock at the time of the settlement of the transaction is utilized for valuation.

10.     Notes Payable:

In September 2001, a note was issued to Citrus Springs Trust, a significant shareholder, in the amount of $100,000 due on or before August 31, 2002.  Interest will accrue at a rate of one and one half percent (1.50%) per month on the unpaid balance of this note after the maturity date.  The note holder was granted an option to acquire a block of 100,000 shares of restricted common stock for ten cents ($0.10) a share, which is exercisable until December 31, 2003.

In September 2001, a note was issued to Jack Freeman, President, in the amount of $40,000 due on or before August 31, 2002.  Interest will accrue from September 1, 2001 at a rate of three quarters of a percent per month until maturity and at one and one half percent (1.5%) per month on the unpaid balance of this note after the maturity date.  The note holder was granted an option to acquire a block of 100,000 shares of restricted common stock for sixteen cents ($0.16) a share, which is exercisable until December 31, 2003.

In October 2001, a note was issued to Jack Freeman, President, in the amount of $75,000 due on or before August 31, 2002.  Interest will accrue from October 1, 2001 at a rate of three quarters of a percent per month until maturity and at one and one half percent (1.5%) per month on the unpaid balance of this note after the maturity date.  The note holder was granted an option to acquire a block of 100,000 shares of restricted common stock for sixteen cents ($0.16) a share, which is exercisable until December 31, 2003.

Collectively, the stock options were valued at $8,000 and deferred as financing costs.

11.     Liquidity:

The accompanying financial statements have been prepared on a going concern basis, which contemplates continuity of operations and realization of assets and satisfaction of liabilities in the normal course of business.  At December 31, 2001, the Company has negative working capital totaling $16,914,289.  The Qwest obligation, discussed earlier in Note 4, accounts for $15.1 million of this amount.  As discussed in Note 4, the Company believes that the Qwest obligation will not present a liquidity problem in the future (Refer to Note 12).  The Company has an arrearage of certain federal tax liabilities of approximately $700,000, including payroll liabilities.  In addition, the Company incurred losses totaling $6,942,230 since inception (September 1, 1998).  While these matters raise substantial doubt about the Company's ability to continue on as a going concern, the Company has significantly reduced its losses in this fiscal year and plans to be profitable in the next fiscal year.  The continuation of the Company as a going concern is dependent upon the Company raising additional capital, and attaining and maintaining profitable operations.

The Company and its principal shareholder and chief executive officer, Robert Crawford, plan to continue to fund the Company through quarterly sales of Series B Preferred Stock as needed.  Additional financing is being planned.  The Company has identified potential sources of capital and believes that the Company will be able to secure the necessary capital to put their business plan into operation.  The capital requirements for the Global PTX are included in the earlier announced capital planning.  This is part of the EDS Center investment of Segment 1 of the bandwidth network.  In March 2001, the Company entered into an agreement with IFG Private Equity LLC.  Under this agreement IFG will purchase up to $50 million of the Company's common stock through February 2003.  The agreement is planned to operate in a manner similar to a line of credit, allowing the Company to draw upon funds periodically, when and if desired.  The funding is planned to provide the underlying support to proceed with the business plan.  The funding is subject to the effectiveness of a registration statement to be filed with the SEC.  The Company intends to use the financing to immediately expand its application services and related data storage operations.  As of December 31, 2001, the registration filing has not been submitted to the SEC for review, and the Company can make no assurance that such registration statement will become effective when filed.

12.     Subsequent Events:

An agreement was finalized with Qwest Communications, Inc. and signed on February 1, 2002.  Qwest acquired from the Company 505 miles of fiber optic conduit from New Orleans to Jacksonville, FL  for a purchase price of $15.12 million.  The conduit had a book asset value of $14,396,891.  The Company reduced its trade payables by $15.12 million.   The Company will record a non-operating gain of $723,109 from this transaction.  The Company has no further obligation under the agreements with Qwest. 

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q, the term the "Company" means North American DataCom, Inc. and its subsidiaries.

Forward-Looking Statements

The discussion in this report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including statements regarding its expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof. The Company’s actual results could differ materially from those described in its forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, its negative working capital, its ability to raise additional capital at terms and conditions satisfactory to the Company, its limited operating history in a new and rapidly evolving industry; its ability to implement its business plan; and its ability to successfully market its products and services. See the discussion under "Risks Affecting Future Results" below. Reference is made to Exhibit 99.1, "Private Securities Litigation Reform Act of 1995, Safe Harbor Compliance Statement for Forward-Looking Statements".

The Company makes forward-looking statements in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report. These forward-looking statements include, but are not limited to, statements about its plans, objectives, expectations, intentions and assumptions and other statements that are not historical facts. The Company generally intend the, words "expect", anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.

Acquisitions

The Company was organized in September 1998 as North American Software Associates, Limited, a Delaware corporation. It was organized to provide a variety of telecommunications services. On April 1, 1999, the Company acquired all of the assets of Freedom 2000, a local Internet Service Provider (ISP), in exchange for 577,123 restricted shares of its common stock. On December 3, 1999, the Company acquired all of the common stock of Action Communications, Inc. ("Action"), a provider of digital and alpha numeric paging services, in exchange for 1,731,339 restricted shares of its common stock. The Action transaction has been treated for accounting purposes as a purchase of assets and liabilities.  Accordingly, revenues and expenses of Action prior to December 3, 1999 have not been consolidated. Effective December 21, 1999, North American Software Associates, Limited ("NAS") was acquired by Pierce International, Inc. in a share exchange transaction and in March 2000, the Company changed its name to North American DataCom, Inc. The transaction with Pierce International, Inc. has been accounted for as a reverse acquisition since the former shareholders of NAS owned controlling interest in the Company immediately following the transaction and management of Pierce International, Inc. was replaced by management of NAS.

Overview

The Company also provides Internet access services and digital and alphanumeric paging services. To date, substantially all of the Company’s revenues have been derived from its Internet access services, paging services, the sale of fiber optic conduit, and data storage to consumers and small businesses.

The Company currently has a 150 mega byte per second (mbs) broadband fiber optic and redundant wireless connectivity into its headquarters in Iuka, MS.   The Company has planned to deploy a 3,000 mile 192 giga byte per second (gbs) broadband network in the states of Tennessee, Mississippi, Louisiana, Alabama, Georgia and Florida, to provide application services, communications and information technology services with an emphasis on wideband fiber optic and wireless telecommunications services that support Enterprise Data Storage (EDS) and Application Service solutions. This network is expandable by several orders of magnitude, as needed in the future. The Company plans to utilizes advanced, state-of-the-art technology for its network to provide a wide range of services to telecommunication companies, ISPs and large organizations, including government agencies and departments. Its plan is to provide superior quality and secure broadband communications in connection with its data storage services.

The Company is currently operating a 5,000 square foot Data Storage Center at its Iuka facility. The Company’s Enterprise Data Storage business (EDS) enables it to archive data.  The Company plans to develop two highly secure "Major Center" at its headquarters in Iuka, MS.  The  Company also plans to operate five co-location data storage "Satellite Centers" to provide mirroring and archiving services that are directly connected by its fiber optic network at its Major Center in Iuka, MS.

In August 2001, the Company reached an agreement with Infusion Software Group, LLC (Infusion) to form Global PTX, LLC. The Company and Infusion have established an Application Service Provider business to design, develop and implement data warehousing and data mining applications. Global PTX will establish Private Trade Exchanges focusing on providing customers with an “end-to-end” solution for their business strategies. Initial development activities will be designed to target the Manufacturing and Retail Business Industry Sectors, specifically focused on vendor/customer supply chain management. Infusion is a specialized software and marketing service provider to enterprises throughout the United States. During the quarter ended December 31, 2001, the Company invested $177,500 in this venture (See Note 7) and recorded its proportionate share of Global PTX's losses totaling $51,896.

Revised Business Plan Information

On October 24, 2001, the Company announced its approved revised Business Plan. The revised plan is focusing on immediate revenue growth and immediate reduction of investment and expenses associated with delayed broadband infrastructure development. This Plan that had been formulated last year with Cap Gemini Ernst and Young, calls for the construction of a 3,000-mile fiber optic network throughout the Southeast United States. The Company has divided the proposed fiber optic network construction into six discreet segments. The Company now plans to complete the first segment (roughly 550 route miles, extending from Atlanta to Memphis) by late 2002. The original 5-year Plan identified a $700 million capital investment for seven EDS centers, plus the 3,000-route-mile broadband network. The current market pricing has reduced the estimated capital investment to under $400 million. Revenues at the end of 5 years were projected to be over $500 million.

The Company’s revised business plan continues to project operating cash flow to be breakeven by the end of this fiscal year, June 30, 2002. The revenues and net income in the next fiscal year are estimated at approximately $60 million and $10 million, respectively. Under the revised plan, the Company still expects to have a positive cash flow by June 2002, and profits in August 2002.  Due to economic conditions the Company will soon announce a modification to its business plan that will effectively add 6 to 9 months to its complete implementation.  This will not change the short term cash flow and profit objectives, but will reduce Revenue and net income by at least 50 percent in fiscal year 2003.

Results of Operations

For the Three-Month Period Ended December 31, 2001 Compared to the Three-Month Period Ended December 31, 2000

For the three-month period ended December 31, 2001, the Company had net service revenues of $105,936, of which 81% were from Internet revenues and 19% from paging revenues, compared to $85,366, of which 78% were from Internet revenues and 22% from paging revenues, for the comparable period of the prior year.  This represents an increase of $20,570 or 24%, which is directly attributable to an increase in Internet revenues.

Cost of services were $41,739 during the three-month period ended December 31, 2001 compared to $48,212 for the three-month period ended December 31, 2000.  Cost of services were composed of cost of goods sold, paging airtime, postage expense and a 5% allocated overhead expense of total expenses.  The decrease in cost of service is a reflection of control of incremental costs and results of cost reduction efforts further described below.  The Company's gross profit margins were 39% and 56%, respectively.

The Company incurred selling, general and administrative expenses of $574,471 during the three-month period ended December 31, 2001 compared to $798,090 for the same period of the prior year. This decrease was primarily attributed to the expense reduction program put in place in June 2001, which decreased labor expense by $73,000, travel expense by $31,000, professional fees by $146,000, advertising by $21,000 and legal expenses by $71,000. In effect, its operating loss decreased from $760,936 during the three-month period ended December 31, 2000 to $510,274 for the three-month period ended December 31, 2001 or a decrease of 33%.

The Company had other expense of $51,850 for the three-month period ended December 31, 2001 compared to other expense of $172,848 for the three-month period ended December 31, 2000. The other expense during the three-month period ended December 31, 2001, was attributable to the loss in equity investment of $51,896. The other expense during the three-month period ended December 31, 2000, was largely attributable to the imputed interest expense relating to a contract to acquire rights-of-way and fiber conduit.

The Company had a net loss of $562,124 for the three-month period ended December 31, 2001 compared to a net loss of $933,784 for the same period of the prior year.  This 40% reduction in the net loss is directly attributable to the expense reduction program put in place in June 2001, described above.

For the Six-Month Period Ended December 31, 2001 Compared to the Six-Month Period Ended December 31, 2000

For the six-month period ended December 31, 2001, the Company had net service revenues of $198,893, of which 80% were from Internet revenues and 20% from paging revenues, compared to $156,373, of which 75% were from Internet revenues and 24% from paging revenues, for the comparable period of the prior year, excluding PixSell revenues of $45,966 for the six-month period ended December 31, 2001.  This represents an increase of $42,520 or 27%, which is directly attributable to an increase in Internet revenues.

Cost of services was $72,074 during the six-month period ended December 31, 2001 compared to $96,226 for the six-month period ended December 31, 2000.  Cost of services were composed of cost of goods sold, paging airtime, postage expense and a 5% allocated overhead expense of total expenses. The decrease in cost of services is a reflection of control of incremental costs and results of cost reduction efforts further described below.  The Company's gross profit margins, excluding PixSell, were 36% and 62%, respectively.

The Company incurred selling, general and administrative expenses of $995,669 during the six-month period ended December 31, 2001 compared to $1,513,954 for the same period of the prior year. This decrease was primarily attributed to the expense reduction program put in place in June 2001, which decreased labor expense by $119,000, travel expense by $58,000, professional fees by $195,000, advertising by $22,000 and legal expenses by $197,000. In addition, during the six-month period ended December 31, 2001 no employee relocation expense was incurred compared to $44,650 incurred during the same period of the prior year. In effect, its operating loss decreased from $1,453,807 during the six-month period ended December 31, 2000 to $822,686 for the six-month period ended December 31, 2001 or a decrease of 43%.

The Company had other expense of $51,808 for the six-month period ended December 31, 2001 compared to $349,063 for the six-month period ended December 31, 2000. The other expense during the six-month period ended December 31, 2001, was attributable to the loss in equity investment of $51,896. The other expense during the six-month period ended December 31, 2000, was largely attributable to the imputed interest expense relating to a contract to acquire rights-of-way and fiber conduit.

The Company had a net loss of $874,692 for the six-month period ended December 31, 2001 compared to a net loss of $1,802,870 for the period of the prior year.  This 51% reduction in the net loss is directly attributable to the expense reduction program put in place in June 2001, explained above.

Liquidity

Total current assets at December 31, 2001 were $108,147 compared to $103,247 at its fiscal year ended June 30, 2001, or an increase of 5%. The Company’s accounts receivable decreased by $18,947 from $76,230 at June 30, 2001 to $57,283 at December 31, 2001.

Fixed assets, consisting principally of property and equipment, was $16,182,166 at December 31, 2001 compared to $16,248,399 at June 30, 2001. This decrease was primarily due to the sale of a vehicle of $27,017. Other assets increased from $651,794 at June 30, 2001 to $868,282 at December 31, 2001. This increase was primarily attributable to the net investment in Global PTX, LLC of $125,604. Total assets at December 31, 2001 were $17,158,596 compared to $17,003,440 at June 30, 2001.

The current liabilities were $17,022,438 at December 31, 2001 compared to $16,944,152 at June 30, 2001. The Qwest obligation, discussed in Note 4 of the Condensed Consolidated Notes to Financial Statements, accounts for $15.1 million of these amounts (Refer to Note 12).  At December 31, 2001, the Company had accounts payable of $773,262 compared to $1,044,558 at June 30, 2001. This decrease is primarily due to the expense reduction program put in place in June 2001, which decreased travel expense and legal expenses, conversion of accounts payable to common stock and payment of accounts payable by notes payable. At December 31, 2001, the Company had accrued expenses and other liabilities of $1,131,176 compared to $781,594 at June 30, 2001. The increase in accrued expense and other liabilities is attributable to the increase in notes payable of $220,000, which was used to fund the Company’s working capital, and is partially offset by conversion of dividends payable and payable to officer to preferred stock.

For the six-month period ended December 31, 2001, the Company used $478,143 for its operating activities, of which $46,656 was attributable to a decrease in other assets and $197,826 increase in accounts payable and accrued expenses, compared to $613,162 cash used for operating activities, of which $92,680 was attributable to an decrease in other assets and $700,033 increase in accounts payable, during the same six-month period of the prior year. This improvement in cash flow from operating activities was principally the result of an increase in current liabilities. For the six-month period ended December 31, 2001, the Company’s cash flow used in investing activities was $1,230, from the purchase and sale of some property and equipment. The negative cash flow from operating activities was financed with proceeds from the sale of Series B Convertible Preferred Stock and proceeds from the issuance of convertible notes. The Company had $31,968 of cash at December 31, 2001 compared to cash of $78,141 for the same period of the prior year.

The Company has modified its business plan to accommodate prevailing capital market conditions and the difficulty in securing financing at acceptable terms. The Company estimates that its capital needs to be approximately $18,000,000 during the next twelve months. This will fund approximately $5,000,000 for network assets; $8,000,000 for data storage center construction and improvements; and $5,000,000 for working capital requirements. Actual costs and estimates may vary from its current expectations, which could materially adversely affect its business and financial conditions. These are included in the five-year capital plan discussed herein.

In addition, the Company’s liquidity is adversely affected by accounts payable from the purchase from Qwest of approximately 500 miles of fiber conduit from New Orleans, LA to Mobile, AL and from Pensacola, FL to Jacksonville, FL. The total purchase price under the bill of sale is approximately $15,120,000 (Refer to Note 12).

In August 2000, the Company entered into an agreement with a subsidiary of Norfolk Southern Company to lay fiber conduit between Atlanta, Georgia and Chattanooga, Tennessee and from Chattanooga to Memphis, Tennessee. The contractor did not complete the conduit installation. The Company did not make any payments under this agreement. This agreement was terminated due to changing in the schedule of installations. The Company plans to amend certain terms of the agreement based upon new schedules.

In order to fund working capital needs, the Company sold restricted securities (See Note 9, Stockholders' Equity, to the Notes to Condensed Consolidated Financial Statements) to Robert Crawford, Chairman of the Board, Chief Executive Officer, director and principal shareholder as follows: in December 2001, the Company sold 276 shares of Series B Convertible Preferred Stock for $275,735 and in September 2001, the Company sold 191 shares of Series B Convertible Preferred Stock for $190,990. In July 2001, the cumulative dividends payable on the Series B Convertible Preferred Stock totaling $55,950 for fiscal 2001 were exchanged for 56 additional shares of Series B Convertible Preferred Stock.

Continuing capital requirements are substantial, and the Company is planning to fund those needs. As reflected in the Company’s financial statements for its fiscal year ended June 30, 2001, which were filed with its Annual Report on Form 10-K, the accountant's opinion included a going-concern qualification. Reference is made to Note 10, Liquidity, to the Company’s Notes to Condensed Consolidated Financial Statements and the disclosure that as of December 31, 2001, the Company had negative working capital totaling $16,914,289. The Qwest obligation accounts for $15.1 million of this amount (See Note 4 in the Condensed Consolidated Notes to financial statements). The Company has an arrearage of certain federal tax liabilities of approximately $700,000, including payroll liabilities. In addition, the Company has sustained start-up losses of $6,942,230, since inception (September 1, 1998). The continuation of the Company as a going concern is dependent upon the Company raising additional capital, and attaining and maintaining profitable operations.

The Company has identified potential sources of capital and believes that it will be able to secure the necessary capital to implement its revised business plan. The capital requirements for the Global PTX are included in the earlier announced capital planning. This is part of the EDS Center investment of Segment 1 of the bandwidth network.

In March 2001, the Company entered into an agreement with IFG Private Equity, LLC. Under this agreement IFG will purchase up to $50 million of the Company’s common stock through February 2003. The agreement is planned to operate in a manner similar to a line of credit, allowing the Company to draw upon funds periodically, when and if desired. The funding is planned to provide the underlying support to proceed with the business plan. The funding is subject to the effectiveness of a registration statement to be filed with the SEC. The Company intends to use the financing to immediately expand its fiber optic and related data storage operations. As of November 2001, the registration filing has not been submitted to the SEC for review, and the Company can make no assurance that such registration statement will become effective when filed.

In the next two quarters the Company is planning to utilize the IFG PIPE financing depending on market conditions.  This funding will provide the capital to continue to expand the application service businesses and the data storage support infrastructure investments. 

Risks Affecting Future Results

A number of risk factors exist that may impair or prevent the Company from accomplishing the its proposed business plan in some or all respects. Those risk factors include the following matters among others:

The Company is a Start Up with Historical Losses.

Substantially all of the Company’s historical revenues have been derived from its Internet access provider services and digital and alpha paging services. The Company has experienced operating losses in each fiscal quarter since inception and will likely continue to experience such losses. Because the Company’s operating history is extremely limited, and has just commenced operations on its fiber optic and wireless broadband network and enterprise data storage (EDS) facility, it is difficult to evaluate the Company’s business operations and prospects.

The Company Needs Substantial Additional Capital – Insolvency.

Present cash flow from operations is not sufficient to pay certain of the Company’s debts as presently structured. At December 31, 2001, the Company had negative working capital of $16,914,289, and estimates that it will need to secure additional capital of approximately $18,000,000 to finance its operations and capital needs over the next twelve months. See the discussion under "Liquidity" above. The failure of the Company to obtain additional capital will significantly restrict its proposed operations and may make it impossible for the Company to fulfill the timing of its proposed business plan.

Default of Certain Obligations.

In March 2000, the Company entered into an agreement with Qwest Communications in which the Company purchased 504 miles of conduit installed along the CSX railroad track from New Orleans, Louisiana to Mobile, Alabama, and from Pensacola, Florida to Jacksonville, Florida. Fiber optic cable has not yet been installed within such conduit purchased from Qwest Communications. The agreement with Qwest calls for payments of approximately $15 million over the course of the agreement, all which is currently past due by the Company. Qwest declared a default in October 2001, but has not initiated arbitration or other proceedings. The Company is negotiating with Qwest and anticipates a settlement  (Refer to Note 12).

In August 2000, the Company entered into an agreement with a subsidiary of Norfolk Southern to lay fiber conduit between Atlanta, Georgia and Chattanooga, Tennessee and from Chattanooga to Memphis, Tennessee. The conduit installation was not completed. The Company has not made any payments under this agreement. This agreement was terminated due to changing in the schedule of installations. The Company plans to amend certain terms of the agreement based upon new schedules. The Company has installed 24 miles of conduit, of which approximately 8 miles was sold to Bell South in fiscal 2001, providing fiber optic access to the Company’s enterprise data center in Iuka, Mississippi.

The Company Leases its Facilities.

On March 7, 2001, the Company finalized a new 20-year lease with the State of Mississippi for its primary facility in Iuka, MS, for 25,000 square feet of office and equipment space. This facility is essential to the Company’s proposed business plan because it already contains many of the features necessary for the Company to establish an enterprise data storage (EDS) facility. The State of Mississippi, acting through the Mississippi Development Authority (MDA), has also granted the Company a 10-year right of first refusal to lease an additional 75,000 square feet at the Iuka facility, to accommodate the Company’s expansive business plan.

The Company Experiences General Risks Associated with Business.

The future success of the Company is heavily dependent on its ability to develop, promote and sustain strong government relationships, reach agreements with certain third parties necessary for the telecommunications needs of its operations and attract and retain customers at suitable prices. The Company’s business involves competition with existing companies many of which have far greater capital resources and longer operating histories than the Company. There can be no assurance that the business of the Company will ever be profitable.

The Company will Likely Experience Customer Concentration.

Until and unless the Company secures multiple customer relationships, it is likely that the Company will experience periods during which it will be highly dependent on one or a limited number of customers. Dependence on a single or a few customers will make it difficult to satisfactorily negotiate attractive prices for the Company's services and will expose the Company to the risk of substantial losses if a single dominant customer stops conducting business with the Company.

The Company Must Comply with Telecommunications Regulations.

Most of the Company's proposed business services and products are subject to regulation at the federal and state levels. These regulations are in some cases uncertain and are often undergoing change. The failure of the Company to comply with these regulations could have a materially adverse effect on the Company.

The Company Must Comply with Environmental Regulations.

The Company's intended operations, especially the construction and operation of a fiber optic network, are subject to various federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations, which have become increasingly stringent, are implemented principally by the Environmental Protection Agency and comparable state agencies, and govern the management of hazardous wastes, the discharge of pollutants into the air and into surface and underground waters, and the manufacture and disposal of certain substances. There are no material environmental claims currently pending or, to the Company's knowledge, threatened against the Company. In addition, the Company believes that its operations are in material compliance with current laws and regulations. The Company estimates that any expenses incurred in maintaining compliance with current laws and regulations will not have a material effect on the Company's earnings or capital expenditures. However, there can be no assurance that current regulatory requirements will not change, that currently unforeseen environmental incidents will not occur, or that past non-compliance with environmental laws will not be discovered on the Company's properties.

The Company's Operating Results are Likely to Fluctuate Widely.

The Company expects that its operating results for the foreseeable future are likely to fluctuate widely from quarter to quarter and from year to year. This is especially true while the Company is building its fiber optic and wireless broadband network. Fluctuation of results may occur due to a variety of factors including, demand for and market acceptance of the Company's products and services, reliability of service and network availability, the ability to increase bandwidth as necessary, customer retention, capacity utilization of the Company's enterprise data storage facility, the timing of customer needs, the timing and magnitude of capital expenditures, changes in pricing policies or practices of competitors, and changes in governmental regulations.

The Company will Face Significant Competition.

The Company's market is intensely competitive. There can be no assurance that the Company will have the resources to compete successfully in the future. Current and potential competitors include national, foreign and regional Internet service providers, global, regional and local telecommunications companies and the Regional Bell Operating Companies, providers of server hosting and data storage services, and other technology services and products companies. Most of these competitors will have substantially greater resources than the Company.

The Company is Entering a New Market.

The market for Internet system and network management solutions has only recently begun to develop, is evolving rapidly and is characterized by an increasing number of market entrants. This market may not prove to be viable or, if it becomes viable, may not continue to grow. The Company currently incurs costs in excess of its revenues. If the Company cannot attract and retain a customer base, it will not be able to increase its sales and revenues nor create economies of scale to offset its fixed and operating costs.

The Company Must be able to Manage Growth.

In order for the Company to accomplish its proposed business plan, it must experience rapid growth in building its enterprise data storage facilities and network infrastructure, expand its service offering, expand its geographical coverage, expand its customer base and increase the number of employees. This growth is expected to place a significant strain on the Company's financial, management, operational and other resources, including its ability to ensure customer satisfaction. This expansion will require significant time commitments from senior management and involve the efficient management of multiple relationships with a growing number of third parties. The Company's ability to manage its growth effectively will require the Company to continue to expand operating and financial procedures and controls, to upgrade operational, financial and management information systems and to attract, train, motivate and retain key employees. The ability to attract, hire and retain qualified employees in today's competitive employment market is another significant challenge which the Company faces. If the Company's executives are unable to manage growth effectively, the Company's business could be materially adversely affected.

System Failures Could Lead to Significant Costs.

The Company must protect its network infrastructure and equipment against damage from human error, physical or electronic security breaches, power loss and other facility failures, fire, earthquake, flood, telecommunications failure, sabotage, vandalism and similar events. Despite extensive precautions the Company has taken, a natural disaster or other unanticipated problems at the Company's facilities could result in interruptions in services or significant damage to customer equipment or data. Any damage to or failure of the Company's systems or service providers could result in reductions in, or terminations of, services supplied to the Company's customers, which could have a material adverse effect on the Company's business.

The Company will Depend on Network Interconnections with Third Parties.

The Company will rely, in part, on a number of public and private network interconnections to allow its customers to connect to other networks. If the networks with which the Company interconnects were to discontinue their interconnections, the Company's ability to exchange traffic would be significantly constrained. Furthermore, the Company's business could be harmed if these networks do not add more bandwidth to accommodate increased traffic. Some of these networks will likely require the payment of fees for the right to maintain interconnections. There usually is nothing to prevent any networks from increasing fees or denying access. In such cases, the Company's ability to pursue the proposed business plan could be materially adversely affected.

Some of the Company's Business may be Subject to International Risks.

The Company is pursuing international business opportunities, especially with respect to the Country of Turkey. Risks inherent in international operations include unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers; challenges in staffing and managing foreign operations; differences in technology standards; employment laws and practices in foreign countries; longer payment cycles and problems in collecting accounts receivable; political instability; changes in currency exchange rates and imposition of currency exchange controls and potentially adverse tax consequences.

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

The Company has not entered into any transaction using derivative financial instruments and believes that its exposure to market risk associated with other financial instruments is not material. The Company's cash equivalents are maintained primarily in money market risks maturing in less than three months. Accordingly, the Company does not believe that it has any significant exposure to interest rate risk. The Company currently operates only in the United States and all sales are made in U.S. dollars. Accordingly, the Company does not have any material exposure to foreign currency rate fluctuations.

PART II. OTHER INFORMATION 

Item 1.     Legal Proceedings 

Reference is made in Note 8 to the Notes to Condensed Consolidated Financial Statements.

On March 26, 2001, the Company was served with a summons and complaint entitled Tom Epperson, Freddie Wilson and Omega Shelters, Inc. v. North American DataCom, Inc. and North American Infotech, LLC, (U.S.D.C. Northern District of Mississippi, Case No. 1:02CV105-D-D).  By decision of the Court dated June 28, 2001, the matter was dismissed without prejudice for lack of subject matter jurisdiction. No further action has been filed.

David Cray, former Vice President and Corporate Treasures, departed the Company effective March 5, 2001, upon his return from a leave of absence.  Mr. Cray and the Company have reached an agreement to settle outstanding differences regarding expenses and compensation.  The Company and Mr. Cray have agreed to terms, but final agreement has not been completely executed.  The terms of the settlement will not materially affect the finances of the Company. 

On June 13, 2001, the Company was served with a summons and complaint in the matter known as OptiCom v. North American DataCom, Inc., (County Court of Tishomingo, State of Mississippi, Cause No. CV01-0077(G)(T).  Plaintiff OptiCom has alleged that the Company has failed to pay $28,000 for optical conduit provided for the last mile access along the Tishomingo Railroad.  The Company is defending the lawsuit and has engaged OptiCom in settlement negotiations. 

On December 18, 2001, the Company was served with a summons and complaint in the matter known as Portal v. North American DataCom, Inc., (Superior Court of the State of California, County of Santa Clara, Cause No. CV803226).  Plaintiff Portal has alleged that the Company has failed to pay $439,816 for software and maintenance.  The Company is defending the lawsuit.

Item 2.     Changes in Securities and Use of Proceeds

In August 2001, the Company issued the following restricted shares of common stock:

The Company issued 90,000 restricted shares of common stock to Magnolia Electric Company for services rendered to the Company in providing power to the wireless bandwidth system the Company constructed, totaling $12,600. These shares were valued at $0.14 per share, the closing bid price of its common stock at the day of issuance.

The Company issued 12,500 restricted shares of common stock to Jamie Wadkins, 20,000 restricted shares of common stock to Keith Barnett and 7,500 restricted shares of common stock to Edgar Earl Wadkins for $10,000 worth of Internet service equipment. These shares were valued at $0.25 per share, the closing bid price of its common stock at the day of issuance.

The Company issued 250,000 restricted shares of common stock to Bryan Forman for services rendered to the Company for design of its fiber optic network, totaling $25,625. These shares were valued at $0.10 per share, the closing bid price of its common stock at the day of issuance.

In November 2001, the Company issued the following restricted shares of common stock:

The Company issued 150,232 restricted shares of common stock to Microwave Transmission Systems, Inc. for services rendered to the Company in conjunction with building the Company's wireless bandwidth system, totaling$20,702.  These shares were valued at $0.1378 per share, the closing bid price of its common stock at the day of issuance.

The Company issued 2,740,363 restricted shares of common stock to Corban Communications, Inc. for services rendered to the Company and to continue to provide direct communications network through December 2003, totaling $377,622.  These shares were valued at $0.1378 per share, the closing bid price of its common stock at the day of issuance.

The sales and issuances of restricted securities in the transactions described above were deemed by the Company to be exempt from the registration requirements under the Act in reliance upon Section 4(2) of the Act, Regulation D promulgated there under, and, in the case of the issuance of common stock as a prize in a logo contest, on the basis that no "sale" as defined in the Act occurred.

Item 3.     Default Upon Senior Securities

None

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

None

Item 5.     Other Information

None

Item 6.     Exhibits and Reports on Form 8-K

During the quarter ended December 31, 2001, the Company did not file any Reports on Form 8-K.

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

North American DataCom, Inc.

By: /s/ Robert  R. Crawford

Robert R. Crawford, Chairman, Chief Executive Officer, Chief Financial and Accounting Officer and Sole Director

Dated: February 20, 2002

Iuka, MS