Imaginon 10QSB 2001 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 0-25114

IMAGINON, INC.

(Exact name of registrant as specified in its charter)

Delaware 84-1217733
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)

1313 Laurel Street, San Carlos, CA 94070
----------------------------------------
(Address of principal executive offices) (Zip Code)

(650) 596-9300
--------------
(Registrants telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such report(s) and
(2) has been subject to such filing requirements for the past 90 days. YES [X]
NO [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 71,947,943 common shares, par value
$.01 per share, outstanding at November 14, 2001.

Transitional Small Business Disclosure Format (Check One) YES ___ NO X
---

IMAGINON, INC. AND SUBSIDIARIES

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements - Unaudited

Independent Accountants' Report

Condensed Consolidated Balance Sheet - September 30, 2001

Condensed Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 2001 and 2000

Condensed Consolidated Statement of Shareholders' Deficit - Nine
Months Ended September 30, 2001

Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2001 and 2000

Notes to Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis

PART II. - OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

INDEPENDENT ACCOUNTANTS' REPORT

Board of Directors
ImaginOn, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of
ImaginOn, Inc. and subsidiaries as of September 30, 2001, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2001 and 2000, the condensed consolidated statement of
shareholders' deficit for the nine months ended September 30, 2001, and the
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 2001 and 2000. These condensed consolidated financial statements
are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.

/s/Gelfond Hochstadt Pangburn, P.C.
GELFOND HOCHSTADT PANGBURN, P.C.

Denver, Colorado
November 16, 2001

IMAGINON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheet
September 30, 2001
(Unaudited)

Assets
Current assets:
Cash ........................................................ $ 509
Accounts receivable, less allowance for doubtful
accounts of $31,500 ........................................ 43,353
Inventories ................................................. 27,142
Prepaid expenses ............................................ 14,500
------------
Total current assets .................................... 85,504
------------

Other receivable .............................................. 19,922
Furniture and equipment, net of accumulated
depreciation of 237,977 .................................... 167,912
Other assets, net of accumulated amortization of $292 ......... 53,039
------------
240,873
------------

$ 326,377
============

Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable ............................................ $ 644,660
Accrued expenses ............................................ 137,360
Deposits .................................................... 2,500
Notes and advances payable .................................. 693,000
------------
Total liabilities (all current) ......................... 1,477,520
------------

Commitments and contingencies

Mandatory redeemable Series G, 8% convertible preferred
stock; 13.1 shares issued and outstanding; liquidation
preference $1,426,360 ........................................ 1,426,360
Common stock issued upon conversion of Series G
preferred stock; 12,846,660 shares subject to
redemption ................................................... 1,129,368
Mandatory redeemable subsidiary preferred stock, 8%
convertible; 278 shares issued and outstanding; liquidation
preference $282,110 .......................................... 282,110
------------
2,837,838
------------
Shareholders' deficit:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; 13.1 shares issued and outstanding ....... --
Common stock, $0.01 par value; authorized 100,000,000
shares; 66,947,943 shares issued and outstanding ........... 669,479
Warrants and options ........................................ 1,720,479
Capital in excess of par .................................... 15,041,138
Accumulated deficit ......................................... (21,420,077)
------------
Total shareholders' deficit ............................. (3,988,981)
------------

$ 326,377
============

See notes to condensed consolidated financial statements.

IMAGINON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 and 2000
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------

Revenues ........................ $ 706 $ 69,250 $ 3,127 $ 161,424
Cost of revenues ................ 15 9,410 589 31,498
------------- ------------ ------------ ------------
Gross profit .................... 691 59,840 2,538 129,926
------------- ------------ ------------ ------------

Operating expenses:
Research and development ...... 102,399 405,250 583,622 968,978
Sales and marketing ........... 129,554 748,810 412,431 2,585,432
General and administrative .... 679,540 804,992 1,614,339 2,771,320
Impairment of intangible assets 498,266
------------- ------------ ------------ ------------
911,493 1,959,052 3,108,658 6,325,730
------------- ------------ ------------ ------------
Loss from operations ............ (910,802) (1,899,212) (3,106,120) (6,195,804)
------------- ------------ ------------ ------------

Other income (expense):
Interest, net ................. (113,474) 4,813 (170,564) 110,969
Other ......................... 1,509 48,814 1,509 49,614
------------- ------------ ------------ ------------
(111,965) 53,627 (169,055) 160,583
------------- ------------ ------------ ------------

Loss from continuing operations . (1,022,767) (1,845,585) (3,275,175) (6,035,221)
------------- ------------ ------------ ------------

Discontinued operations:
Loss from operations of INOW .. (41,640) (84,585) (153,157)
Loss on disposal of INOW ...... (6,040)
------------- ------------ ------------ ------------
(41,640) (90,625) (153,157)
------------- ------------ ------------ ------------

Net loss ........................ (1,022,767) (1,887,225) (3,365,800) (6,188,378)

Series F preferred stock dividend (36,667)
Series F redemption premium ..... (200,000)
Amortization of discount on
preferred stock ................. (102,000)
Series G preferred stock dividend (26,200) (89,322)
------------- ------------ ------------ ------------

Net loss applicable to common
shareholders .................... $(1,048,967) $(1,887,225) $(3,557,122) $(6,425,045)
============= ============ ============ ============

Basic and diluted loss per
common share
from continuing operations .... $ (.02) $ (.04) $ (.06) $ (.14)
============= ============ ============ ============

Basic and diluted loss per
common share
from discontinued operations ... $ .* $ * $ * $ *
============= ============ ============ ============

Basic and diluted loss per
common share .................... $ (.02) $ (.04) $ (.06) $ (.14)
============= ============ ============ ============

Weighted average number of
common shares outstanding ...... 66,947,943 44,677,116 60,594,070 44,625,154
============= ============ ============ ============

* Less than $(0.01) per common share

See notes to condensed consolidated financial statements.

IMAGINON, INC., AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders' Deficit
Nine Months Ended September 30, 2001
(Unaudited)

Common Stock Warrants Capital in Total
------------------------ and Excess Shareholders'
Shares Amount Options of Par Deficit Deficit
---------- ---------- ---------- ----------- ------------ -----------

Balances, January 1, 2001 52,434,617 $ 524,346 $1,720,479 $14,680,003 $(18,054,277) $(1,129,449)

Issuance of common stock in
private placement 1,666,666 16,666 27,434 44,100

Conversion of Series G
preferred stock to common
stock 12,846,660 128,467 (128,467)

Subsidiary warrants and
warrants to be issued in
exchange for services and in
connection with notes payable 138,000 138,000

Conversion of subsidiary
warrants to subsidiary common
stock 7,000 7,000

Subsidiary common stock
issued in exchange for
services and in exchange for
rent concessions 410,600 410,600

Deemed dividends on Series G
preferred
stock and subsidiary
preferred stock (93,432) (93,432)

Net loss (3,365,800) (3,365,800)
---------- ---------- ---------- ----------- ------------ -----------

Balances, September 30, 2001 66,947,943 $ 669,479 $1,720,479 $15,041,138 $(21,420,077) $(3,988,981)
========== ========== ========== =========== ============ ===========

See notes to condensed consolidated financial statements.

IMAGINON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows
Nine Months Ended September 30, 2001 And 2000
(Unaudited)

2001 2000
Cash flows from operating activities:
Net loss $(3,365,800) $(6,188,378)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating
activities from continuing operations:
Loss from discontinued operations 84,585 153,157
Depreciation and amortization 206,187 729,860
Provision for losses on accounts receivable 22,000 17,000
Impairment of intangible assets 498,266
Loss on disposal of assets 6,040
Expense incurred upon issuance of common stock 72,151
Expense incurred upon issuance of subsidiary
stock and warrants 496,600
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 19,443 (57,337)
Decrease (increase) in inventories 190 (9,950)
Decrease (increase) in prepaid expenses 598 (909)
Increase in accounts payable 198,280 31,435
Increase in accrued expenses 68,715 369,725
Decrease in deposits (8,000) 10,500
----------- -----------
Total adjustments 1,592,904 1,315,632
----------- -----------
Net cash used in operating activities
of continuing operations (1,772,896) (4,872,746)
----------- -----------

Cash flows from investing activities:
Capital expenditures (3,500) (127,393)
Proceeds on disposal of assets 25,000
----------- -----------
Net cash provided by (used in) investing
activities of continuing operations 21,500 (127,393)
----------- -----------

Cash flows from financing activities:
Proceeds from note payables and advances 1,142,000 1,200,000
Payments on notes payable and advances (112,000) (1,200,000)
Dividends on Series F preferred stock (2,200,000)
Redemption of Series F preferred stock (194,000)
Proceeds from issuance of Series G preferred stock 315,900
Proceeds from collection of receivable from sale of
common stock 2,000,000
Proceeds from issuance of common stock and warrants,
net 44,100 958,201
----------- -----------
Net cash provided by financing activities
of continuing operations 1,390,000 564,201
----------- -----------

Net cash used in discontinued operations (134,902) (113,497)
----------- -----------

Net decrease in cash (496,298) (4,549,435)
Cash, beginning 496,807 4,959,694
----------- -----------

Cash, ending $ 509 $ 410,259
=========== ===========

(Continued)

See notes to condensed consolidated financial statements.

IMAGINON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows
Nine Months Ended September 30, 2001 And 2000
(Unaudited)

Nine months Nine months
ended ended
September 30, September
2001 30, 2000

Supplemental disclosure of non-cash investing and
financing activities:

Sale of INOW:
Assets sold $ (68,900)
Liabilities assumed 37,860
Cash received ----------
25,000
----------
Loss on disposal $ (6,040)
==========

Subsidiary common stock and warrants issued in
exchange for reduction in notes payable
and advances $ 59,000
==========

Deemed preferred stock dividends $ 93,432
==========

See notes to condensed consolidated financial statements.

IMAGINON, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2001 and 2000
(Unaudited)

1. Organization and Basis of Presentation

The interim financial statements have been prepared by Imaginon, Inc. (the
"Company"), and in the opinion of management, reflect all adjustments which are
necessary to present fairly the financial position, results of operations, and
cash flows of the Company for the interim periods presented. Those adjustments
consist only of normal and recurring adjustments except for those described in
Note 4.

Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is the Company's opinion that, when the interim financial statements
are read in conjunction with the December 31, 2000 Annual Report on Form 10-KSB,
the Company's disclosures are adequate to make the information presented not
misleading. The results of operations for the nine months ended September 30,
2001 are not necessarily indicative of the operating results to be expected for
the full year.

The accompanying unaudited condensed consolidated financial statements include
the accounts of Imaginon, Inc., and its wholly-owned subsidiaries, Imaginon
Digital Productions, Inc. ("IDP"), and Imaginon Network Specialists, Inc.
("INOW") through May 2001, the date of disposition (Note 4), as well as its
majority-owned subsidiary, Vizario, Inc., formerly known as Wireless Web Data,
Inc. ("WWDI") (Note 2). Intercompany transactions have been eliminated in
consolidation.

Going Concern and Management's Plans

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The
Company reported a net loss of $3,365,800 for the nine months ended September 30,
2001, the Company has an accumulated deficit of $21,420,077 as of September 30,
2001, and the Company is subject to certain contingencies at September 30, 2001.
The Company has not recognized any substantial revenues from its broadband
Internet television systems and expects to incur continued cash outflows, which
are expected to result in a working capital deficiency within the next year. As
a result, the Company has experienced, and may continue to experience difficulty
and uncertainty in meeting its liquidity needs during the next fiscal year.

These factors raise substantial doubt about the Company's ability to continue as
a going concern. The condensed consolidated financial statements do not include
any adjustments relating to the recoverability and classification of assets or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

To address its current cash flow concerns, the Company, primarily through its
subsidiary Vizario ("Vizario"), has raised limited funds in exchange for demand
notes and advances, some of which have been converted into Vizario preferred
stock (Notes 3 and 7). In addition, in November 2001, the Company issued 5
million shares of common stock in exchange for $50,000. Currently, the Company
does not have a revolving loan agreement with any financial institution, nor can
the Company provide any assurance that it will be able to enter into any such
agreement in the future, or be able to raise funds through a further issuance of
debt or equity in the Company. The Company continues to develop, market and
license its products, which may provide additional funds to address the
Company's capital requirements.

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is prohibited after
that date. SFAS No. 142 changes the accounting for goodwill and intangible
assets with indefinite lives from an amortization method to an impairment-only
approach and requires intangible assets with finite lives to be amortized over
their useful lives. Thus amortization of goodwill and intangible assets with
indefinite lives will cease upon adoption of this statement. SFAS No. 142 is
required to be applied in fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact, if any, that SFAS No. 141 and SFAS No.
142 may have on its financial condition and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which addresses accounting and financial reporting
for the impairment or disposal of long-lived assets. This statement is effective
for fiscal years beginning after December 15, 2001. The Company is currently
assessing the impact, if any, that SFAS No. 144 may have on its financial
condition and results of operations.

2. WWDI transactions

On May 24, 2001, pursuant to a Stock Exchange Agreement and Plan of
Reorganization (the "Agreement"), WWDI, a wholly owned subsidiary of the
Company, completed a merger with Vizario, a publicly-held Nevada corporation
previously known as Gallagher Research Corporation. WWDI, a development stage
company, was formed as a Delaware corporation on July 17, 2000 by the Company
for the purpose of continuing development and commercialization of Internet and
intranet database processing software for wireless applications. Immediately
prior to the merger, Vizario had no operations and limited assets, and its plan
of operation was to seek and acquire an operating business by entering into a
business combination.

The Company sold to Vizario all of the issued and outstanding capital stock of
WWDI in exchange for Vizario's issuance of 20,000,000 of its authorized but
unissued common stock to the Company. Vizario acquired ownership of all
6,000,000 issued and outstanding capital shares of WWDI, and as a result, WWDI
became a wholly owned subsidiary of Vizario. The Company, as the sole
shareholder of WWDI, became the holder of 20,000,000 shares out of 24,768,000
shares issued, or 80.7% of the issued and outstanding common stock of Vizario.
Subsequently, 920,000 shares of the 20,000,000 shares were then transferred to
officers and directors of the Company, reducing the Company's ownership
percentage to 77%. The Company's ownership percentage has been reduced to
approximately 75% as of September 30, 2001, as a result of Vizario subsidiary
stock transactions (Note 7).

3. Notes and Advances Payable

During the nine months ended September 30, 2001, the Company borrowed $339,000
from investors in exchange for unsecured promissory notes payable on demand.
These promissory notes accrue interest at 15% during the first month, and 18%
thereafter. The Company repaid $112,000 of these notes through September 30,
2001, and one investor exchanged a $52,000 promissory note in connection with a
consulting services agreement for Vizario common stock (Note 7). In October
2001, the Company issued an additional $35,000 of notes payable.

During the nine months ended September 30, 2001, the Company also received
$803,000 of non-interest bearing advances from investors, of which one investor
converted $278,000 of advances into 278 shares of Vizario preferred stock and
warrants (Note 7), and another investor exchanged $7,000 of advances and warrants
for 70,000 shares of Vizario common stock. Advances payable of $518,000 at
September 30, 2001 are due on demand.

4. Discontinued operations

In April 2001, the Company made a decision to abandon further efforts in
developing and marketing INOW products and services and in May 2001, the Company
entered into an agreement to sell its INOW subsidiary, which was the sole
business in the Internet service provider segment. Accordingly, INOW is reported
as a discontinued operation in the accompanying statements of operations. Based
on the terms of the sale, the Company concluded that an impairment charge of
$498,266 was necessary to write off the carrying amount of goodwill related to
the Company's acquisition of INOW. The impairment charge was recorded during the
quarter ended March 31, 2001. In May 2001, the Company sold all of its issued
and outstanding shares of INOW for $25,000.

5. Commitments and Contingencies

Leases

The Company leases office space under various non-cancelable operating lease
agreements expiring at various dates through 2007. Certain lease agreements
provide for annual incremental rent increases. In July 2001, the Company entered
into an agreement for certain lease concessions in exchange for 100,000 shares of
Vizario common stock (Note 7).

Litigation

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations, financial
position or cash flows of the Company.

6. Redeemable Series G Preferred Stock and Common Stock Issued Upon Conversion of
Series G Preferred Stock

At December 31, 2000, the Company had 22 shares of Series G preferred stock
issued and outstanding. The Series G preferred stock has a par value of $0.01
per share, a stated value of $100,000 per share, and a liquidation preference
equal to the stated value plus unpaid dividends. During the nine months ended
September 30, 2001, the Company issued an additional .6 shares of Series G
preferred stock along with 1,666,666 shares of common stock for total proceeds of
$60,000. Of the total proceeds, $15,900 was allocated to preferred stock and
$44,100 was allocated to common stock. In addition, 3 shares of Series G
preferred stock were issued for $300,000. During the nine months ended September
30, 2001, the Company converted 12.5 shares of Series G preferred stock into
12,846,660 shares of the Company's common stock.

The Series G preferred stock is convertible into shares of the Company's common
stock at the lower of $0.60 per share, or 80% of the market price of the
Company's common stock on the conversion date, subject to a minimum conversion
price limit of $0.10 per share. The Series G preferred stock is convertible, at
any time, for five years from the issue date. Shares of Series G preferred stock
that have not been converted within five years of the original issue date are to
be redeemed by the Company at a price equal to the stated value of the shares
plus accumulated unpaid dividends. Dividends are cumulative at 8% per year and
are payable semiannually. Dividends not paid when due are subject to an 18% late
fee, payable in cash. Cumulative dividends through September 30, 2001, are
$34,780.

The conversion feature was "in the money" at the date of issue (a "beneficial
conversion feature"). The Company allocated $102,500 of the proceeds, equal to
the intrinsic value of the beneficial conversion feature, to capital in excess of
par during the nine months ended September 30, 2001, and allocated the entire
portion to the Series G preferred stock.

The Series G preferred stock has voting rights consistent with the voting rights
of the common shareholders. Each share of Series G preferred stock is entitled to
166,666 votes. The Series G preferred stock contains a provision that if the
Company issues or sells shares of common stock at a price per share lower than
the Series G preferred stock conversion price during the period that any of the
Series G preferred stock is outstanding, the Series G preferred stock conversion
price shall be adjusted downward to equal that price, subject to terms and
conditions as defined in the agreement.

The Series G preferred stock is also subject to a mandatory redemption provision
upon the triggering of certain events, as defined, the majority of which were
satisfied in connection with a registration of common shares underlying the
Series G preferred stock in February 2001. In addition, in connection with the
private placement of the Series G preferred stock in October 2000, the Company
paid $75,000 to an entity which was not registered as a broker-dealer; however,
it may have been required to be registered as a broker-dealer in connection with
the Series G preferred stock transaction. If the entity acted as a broker-dealer
in connection with the private placement, it would have been required to be
registered with the Securities Exchange Act (the "Act") unless it was exempt from
the broker-dealer registration requirements under the Act.

If the entity was not properly exempt from the broker-dealer registration
requirements, various parties could potentially assert claims, including perhaps
the following: the investors could assert claims for rescission of their
investment in the Company; and the Company, or its shareholders, could have a
claim against the entity for rescission of the $75,000 payment. In response to a
possible rescission by the investors, the Company believes it has defenses and
other legal rights, and would vigorously defend itself in such an action.

As a result of this contingency and other redemption features of the Series G
preferred stock, the Company has not included the Series G preferred stock or the
value of the 12,846,660 shares of common stock issued during the nine months
ended September 30, 2001 upon the conversion of 12.5 shares of Series G preferred
stock in shareholders' equity (deficit).

7. Subsidiary equity transactions

Subsidiary mandatory redeemable preferred stock

In July 2001, Vizario issued 278 shares of Series A, 8% mandatory redeemable
convertible preferred stock (the "Subsidiary Preferred Stock") and warrants to
purchase 55,600 shares of Vizario common stock, in satisfaction of advances from
an investor of $278,000. The Subsidiary Preferred Stock has a $.001 par value, a
stated value of $1,000 per share, and is convertible into shares of Vizario
common stock at the option of the holder. The number of Vizario common shares
issuable upon conversion of each share of Subsidiary Preferred Stock is equal to
the sum of the stated value per share, and at the holder's election, unpaid
dividends on each share divided by the conversion price, which is based on 65% of
the average of the three lowest closing bid prices of the Vizario common stock,
as defined. Shares of Subsidiary Preferred Stock that have not been converted
within five years of the original issue date are to be redeemed by Vizario at a
price equal to the stated value of the shares plus accumulated unpaid dividends,
which are cumulative at 8% per year and are payable quarterly, commencing
December 31, 2001. Cumulative dividends at September 30, 2001 are $4,110. The
Subsidiary Preferred Stock also has a liquidation preference equal to the stated
value of the Subsidiary Preferred Stock plus accumulated dividends.

The Subsidiary Preferred Stock is subject to a mandatory redemption provision
upon the triggering of certain events, as defined, including failure to register
shares of common stock underlying the Subsidiary Preferred Stock within 60 days
of the issue date. Vizario did not comply with the registration provision, and
as a result, the Subsidiary Preferred Stock balance has been presented outside of
shareholders' equity (deficit) in the September 30, 2001, condensed consolidated
balance sheet. In connection with the Company's failure to register the shares,
the Company received notice in November 2001 from the preferred shareholder of a
claim for late-filing penalties of $11,120, to be satisfied through the issuance
of additional shares of Subsidiary Preferred Stock.

Subsidiary common stock

In July 2001, the Company entered into an agreement with a third party lessor
whereby certain facility lease concessions were received by the Company in
exchange for 100,000 shares of Vizario common stock. These lease concessions
included a reduction in monthly base rental payments for 12 months and a change
in the annual escalation provision from a 5% annual increase to an increase equal
to the Consumer Price Index. The lease concessions were valued at the market
price of Vizario's common stock at the date of the agreement. In exchange for
the issuance of Vizario common stock, the Company recognized general and
administrative expense of $109,000.

In September 2001, Vizario issued 520,000 shares of its common stock in exchange
for consulting services and in satisfaction of a $52,000 note payable to the
consultant. Based on the quoted market price of Vizario's common stock at the
date of issuance, the Company recognized general and administrative expense of
$249,600. In November 2001, Vizario issued an additional 400,000 shares of its
common stock to this consultant for additional services. These shares were
valued at $160,000, based on the quoted market price of Vizario common stock at
the date of issuance.

In October 2001, Vizario issued an additional 406,100 shares of common stock in
exchange for legal, marketing and other consulting services provided to, and in
satisfaction of certain liabilities of the Company. The total value of the
shares issued, based on the quoted market price of the common stock on the date
of issuance, was $132,000.

Subsidiary warrants, warrants to be issued and options

Warrants issued in connection with the Subsidiary Preferred Stock transaction are
exercisable immediately and have a term of five years from the date of issuance.
The exercise price of the warrants is based on 65% of the average of the three
lowest closing bid prices of Vizario's common stock, as defined. At the date of
issuance of the Subsidiary Preferred Stock and warrants, the warrants were valued
at $15,600 utilizing the Black Scholes pricing model, and therefore $15,600 was
allocated to the warrants resulting in an imputed dividend rate of 8.5%.

During the three months ended September 30, 2001, in conjunction with the
issuance of $138,000 of promissory notes, Vizario entered into an agreement to
issue to the note holder three-year warrants to purchase 138,000 shares of
Vizario common stock at an exercise price of $.10 per share, exercisable
immediately. The fair value of the warrants, based on the Black Scholes pricing
model, was determined to be $106,000. This discount was allocated to warrants to
be issued and the discount on the demand notes was immediately charged to
interest expense.

In September 2001, warrants were exercised for the purchase of 70,000 shares of
Vizario common stock in satisfaction of $7,000 of advances to the Company.

In June 2001, Vizario granted options to employees to purchase up to 440,000
shares of Vizario common stock at $.10 per share, which was based on the
estimated market value of Vizario's stock at the date of the grant. These
options vest over a one-year period and are exercisable through 2011.

Equity line of credit agreement

Effective July 30, 2001, Vizario entered into a $5 million Private Equity Line of
Credit Agreement (the "Subsidiary Equity Line"), whereby subject to terms and
conditions of the Subsidiary Equity Line, Vizario may sell to an investor up to
$5 million of Vizario common stock during a two-year commitment period, as
defined, which commences upon the effective date of a registration statement
registering the common stock to be sold under the Subsidiary Equity Line.
Vizario is required to register the shares issuable under the Subsidiary Equity
Line pursuant to a related Registration Rights Agreement, which requires Vizario
to register the shares no later than 180 days after July 30, 2001. In the event
Vizario fails to obtain an effective registration statement within this time
period, Vizario is subject to penalties. As of September 30, 2001, Vizario has
not filed a registration statement and no common stock of Vizario has been issued
under the Subsidiary Equity Line.

8. Shareholders' equity (deficit)

Common stock

In November 2001, the Company issued 5 million shares of common stock to an
investor for $50,000.

Options

In May 2001, the Company granted options to purchase up to 800,000 shares of the
Company's common stock to employees and an officer of the Company. The options
vest over a one-year period and expire in December 2009. The options' exercise
price is $.10 per share, which is equivalent to the market price of the Company's
common stock on the date of the grant.

9. Business Segment Information

As of, and during the periods ended, September 30, 2001 and September 30, 2000,
segment results were as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Computer software
products:
ImaginOn.com
Revenues $ $ 69,250 $ 1,248 $ 148,704
Segment loss (417,846) (1,828,663) (2,293,756) (5,978,440)
Total assets 292,884 553,133 292,884 553,133

IDP
Revenues 1,453 12,719
Segment loss (6,069) (23,297) (30,814) (61,104)
Total assets 7,916 29,845 7,916 29,845

Internet service:
Vizario
Revenues 346 426
Segment loss (598,852) (6,903) (950,605) (6,903)
Total assets 5,655 5,655

Corporate:
Segment income (loss) - 13,276 - 11,226
Total assets 19,922 156,777 19,922 156,777

Net loss all segments
and corporate from
continuing operations $(1,022,767) $(1,845,585) $(3,275,175) $(6,035,221)

Except for the discontinued operations and presentation of INOW, there are no
differences in the basis of segmentation or in the basis of measurement of
segment loss from the Company's last annual report.

IMAGINON, INC. AND SUBSIDIARIES

PART 1 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENTS

This report may contain certain "Forward-Looking Statements" as such term is
defined in the private securities litigation reform act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represents Imaginon, Inc. expectations or beliefs, including but not limited to,
statements concerning Imaginon, Inc. operations, economic performance, financial
condition, growth and acquisition strategies, investments, and operational plans.
For this purpose, any statements contained from here on that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intent", "could", "estimate", "might" or "continue"
or the negative or other variations or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond Imaginon's
control, and actual results may differ materially depending on a variety of
important factors, including uncertainty related to acquisitions, governmental
regulation, managing and maintaining growth, volatility of stock price and any
other factors discussed in this and other Imaginon, Inc. filings with the
Securities and Exchange Commission.

OVERVIEW

The independent auditors' report on the Company's consolidated financial
statements as of December 31, 2000, and for each of the years in the two-year
period ended December 31, 2000 includes a "going concern" paragraph that
describes substantial doubt about the Company's ability to continue as a going
concern.

On January 20, 1999 Imaginon, Inc., formerly known as California Pro Sports, Inc.
(the "Company" or "Imaginon"), through Imaginon Acquisition Corp., a wholly owned
subsidiary of Imaginon, completed a merger with ImaginOn.com of San Carlos,
California. Imaginon is a publicly held company with common stock currently
trading on the Over the Counter Bulletin Board under the symbol "IMON". Imaginon
has three operating units.

Imaginon designs, manufactures and sells software products for the Internet and
telecommunications markets. Imaginon's proprietary technology, called
"Transformational Database Processing and Playback" ("TDPP"), enables the
creation of new business and consumer products that provide user-friendly and
entertaining access to multimedia databases. Imaginon's founders were granted a
U.S. patent on May 18, 1999 for its "TDPP" technology. The Company test marketed
its first four products, WebZinger, WorldCities 2000, sellONstream and ImOn.comTV
between January 1999 and July 2000. These products are trademarked and are
protected under two U. S. Patents issued to the founders of Imaginon, which they
have assigned to the Company.

Beginning January 2000, Imaginon focused upon its information technology and
developing and marketing broadband Internet television systems to businesses and
institutions. Imaginon's Internet television system, Imon.comTV, now upgraded and
renamed "ImaginVideo", a software system and licensed turnkey package that
enables any Website to present interactive television within a standard browser
window on any suitably connected computer. The ImaginVideo interactive virtual
console offers its users video on demand, video that branches under user command,
automated Web searching, and many additional features that can be customized for
each licensee.

During the third quarter 2000, in order to initiate a presence of Imaginon's
ImaginVideo interactive Internet television to multiple markets, the Company
began new installations of this product to a broad range of clients. While some
clients were charged at the full list price of the ImaginVideo stations, others
were charged at less than full-list price. Some of these sales were made for
strategic key marketing positions rather than for income. The Company's
clientele is made up of magazine publishers, colleges, communication companies
and sports franchises. ImaginVideo offers a complete turnkey product that turns
any existing Website into an interactive TV station on the broadband Internet.
Imaginon implemented a seven-channel sales and marketing strategy targeting
broadcast, education, e-commerce, publishing, corporate training, telemedicine,
and adult entertainment.

Also in the third quarter 2000, Imaginon aggressively marketed and presented its
Interactive Internet Television, Imaginvideo, also referred to as a "television
station in a box" at conferences such as Syllabus 2000, one of the education
industry's largest gathering of teachers, administrators, and consultants in San
Jose, California. The Company also attended the European Market Debut at IBC
2000, Europe's single largest broadcasters' conference in Amsterdam, and
introduced ImOn.comTV to a pan-European audience and began building a network of
distributors in the major markets. Imaginon, served as a Silver Sponsor of the
year 2000 Intel Developer Forums where Imaginon demonstrated the corporate
training, educational and e-commerce applications of ImaginVideo.

In July 2000, Imaginon formed a new wholly owned subsidiary, Wireless Web Data,
Inc. ("WWDI"), with the intention that WWDI would purchase assets, a patent
license and proprietary knowledge from Imaginon, Inc. WWDI was formed to develop
and commercialize a new application of Imaginon technology targeted at wireless
Web data acquisition, formatting and delivery. On May 24, 2001, pursuant to a
Stock Exchange Agreement and Plan of Reorganization, the Company merged its
subsidiary WWDI with Vizario, Inc. (formerly Gallagher Research Corporation), a
publicly-held Nevada corporation ("Vizario"). Under the terms of the agreement,
the Company transferred all of the outstanding shares of WWDI common stock it
owns to Vizario, and in exchange, Vizario issued an aggregate of 20,000,000
shares of its common stock to the Company and certain of its officers and
directors. Immediately following this transaction, Vizario had 24,768,000 shares
of issued and outstanding common stock, and the Company held 19,080,000 shares,
or 77%, of the issued and outstanding shares of Vizario common stock. WWDI
changed its name to Vizario, Inc. in May 2001.

In January 2001, Imaginon management and directors evaluated the assets and
direction of the Company, seeking to optimize the use of resources. The goal of
the Company remains unchanged: to create a profitable business based on
Imaginon's proprietary software technology. However, the strategy for reaching
this goal has substantially changed.

Imaginon management and directors' analysis of the results of the year 2000
marketing and sales efforts concluded that the ImOn.comTV product offering itself
was too complex, too expensive, too difficult to deploy, and outside the
mainstream market for Internet and intranet software products. Consequently, a
new strategy was devised to achieve entry into the mainstream of Internet and
intranet software. Imaginon's year 2001 strategy includes simplifying the
product offering, integrating closely with Microsoft's software systems, and
unbundling Imaginon's core technology from hardware, media content and Internet
hosting services.

The revamped, simplified version of ImOn.comTV is now "ImaginVideo for Windows
2000 Server." As the name implies, this product is a software application for
Microsoft's server operating system. As such, bundling of Imaginon software with
hardware is unnecessary, so Imaginon is not selling software and hardware as
turnkey systems. The close integration of Imaginon software with Microsoft's
systems has earned Imaginon "Microsoft Gold Certified Partner" status, as well as
"Certified for Windows 2000 Server" approval. With these certifications,
Imaginon qualifies for a wide range of co-marketing opportunities with Microsoft.

ImaginVideo for Windows 2000 Server is accompanied by ImaginAuthor for Windows
2000, an intuitive authoring tool for interactive streaming video. This tool
makes it easy for any corporate training department or educator to create content
for ImaginVideo, without relying on Imaginon content production and support. As
a result, Imaginon no longer needs a video production and editing department.

Since most Windows 2000 servers are hosted by their owners, or large service
companies, Imaginon no longer needs to offer hosting or Internet service
provisioning to sell its ImaginVideo software. The INOW subsidiary of Imaginon
was sold in May 2001, which will result in a reduction of operating losses for
Imaginon.

Going forward, Imaginon will market ImaginVideo for Windows 2000 Server, and
seek to license its technology to other companies.

ImaginVideo, WebZinger, ImaginAuthor and sellONstream are trademarks of ImaginOn
and are protected under U.S. patents.

The server and client software to be developed by Vizario is designed to enable
new data services for digital cell phones, personal digital assistants and pocket
PCs. The first new software developed by Vizario was the multimedia data access
system, "Vizario," for the Nokia 9210. This software is in the Alpha testing
phase. One of the code modules of this Vizario system is the Vizario Video
Condenser ("V V C"), which condenses digital video files so they can be rapidly
accessed on small wireless devices with limited bandwidth. V V C is presently
available for downloading from Vizario's website.

Vizario is utilizing the technology purchased from Imaginon to develop and
commercialize new applications for wireless Web data acquisition, formatting,
storage, delivery and presentation. The Vizario server and client software being
developed by the Company is designed to enable the emerging wireless market with
applications that make smart phones and pocket PCs as valuable and useful as
desktop PCs hard-wired to the Internet. The primary target customers will be
businesses that supply wireless devices to their employees, a market of over 30
million users in the USA. The business wireless market is the initial target
mainly because it allows Vizario to leverage Imaginon's Gold Certified Partner
relationship with Microsoft on the server side of the client-server system. The
secondary market target customers are wireless service providers, Internet
service providers and media properties serving 522 million Internet users and 9
million Web-connected cell phone and mobile device users.

Working closely with Microsoft, Vizario is presently developing the Vizario
Smartphone and Vizario Server systems for the next generation of digital cell
phones and pocket PC's that will use the Windows.NET operating system.

COMPETITION

In the Internet software and services industry segment, Imaginon competes with
numerous companies, large and small, that offer similar services. Imaginon's
competitive advantage in this area is derived from its unique proprietary
technology that implements interactive video combined with media-intensive data
mining and embedded web links.

In the high bandwidth interactive streaming video authoring and playback software
business, Imaginon does not yet have a direct competitor. Several companies
offer components that can be used to implement portions of a networked system,
but no other company offers a complete turnkey solution like Imaginon.

In the Internet television systems industry segment, there is currently no direct
competition. In the high bandwidth interactive streaming video authoring and
playback software business, there are no direct competitors as of this time.

Numerous companies, offer some portion of the services or capabilities of
ImaginVideo, but there are no other single vendor integrated solutions.
Imaginon's competitive advantage in this field is derived from the Company's
unique proprietary technology that integrates interactive video playback with
media-intensive data mining. Imaginon anticipates that revenues will be
generated by license agreements for its technology and sales of its software.

New products created with Imaginon technology are characterized by seamless
real-time access to video, audio, graphics, text, HTML and 3D objects from
multiple remote or local databases. Imaginon will license tool sets to
businesses for building e-commerce, data mining, interactive entertainment and
training applications.

The market in which Vizario intends to sell its products is rapidly evolving and
intensely competitive, and management expects competition to intensify further in
the future. Vizario believes that principal competitive factors in its market
are consumers' willingness to pay for add-on services over the Internet such as a
fee for the use of the Vizario System, the desire of cellular telephone companies
and Internet operators to build their own wireless data services, that demand for
alliances and agreements with cellular telephone companies may exceed the supply
thereby pushing prices down, the ability of data and content owners to restrict
access to their data and content and relatively low barriers to entry into the
relevant markets by search engine companies and others. Certain of Vizario's
current and many of its potential competitors have significantly greater
financial, marketing, technical and other resources than those of Vizario. This
competition may result in reduced operating margins, loss of market share and
diminished value in Vizario's brand. There can be no assurance that Vizario will
be able to compete successfully against current and future competitors. Further,
as a strategic response to changes in the competitive environment, Vizario may,
from time to time, make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business, results
of operations and financial condition.

RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's condensed
consolidated financial statements and notes.

The following table sets forth certain consolidated operating results from
continuing operations of the Company for the periods as indicated below.

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------

Net revenues .................. $ 706 $ 69,250 $ 3,127 $ 161,424
Cost of revenues .............. 15 9,410 589 31,498
Gross profit .................. 691 59,840 2,538 129,926
Research and development ...... 102,399 405,250 583,622 968,978
Sales and marketing ........... 129,554 748,810 412,431 2,585,432
General and administrative .... 679,540 804,992 1,614,339 2,771,320
Impairment of intangible assets 498,266

Net loss ...................... $(1,022,767 $(1,887,225 $(3,365,800) $(6,188,378)
=========== =========== =========== ===========

Net loss applicable to common
shareholders ................. $(1,048,967) $(1,887,225) $(3,557,122) $(6,425,045)
=========== =========== =========== ===========

NET REVENUES

Consolidated net revenues from continuing operations were $706 and $3,127 for the
three-month and nine-month periods ended September 30, 2001, respectively, as
compared with $69,250 and $161,424 in the corresponding periods in 2000. The
decreases in overall revenues for the Company are due largely to the sale of the
INOW subsidiary in May 2001. These decreases reflect management's focus on the
development of the Company's revised business strategy to simplify product
offerings, achieve entrance into the mainstream of Internet and intranet
software, and to continue development of new and more profitable software tools.

COST OF REVENUES AND GROSS PROFIT

Consolidated cost of revenues from continuing operations were $15 and $589 for
the three-month and nine-month periods ended September 30, 2001, respectively, as
compared with $9,410 and $31,498 in the corresponding periods in 2000. The
decrease in cost of revenues is consistent with the decrease in revenues and the
revision of the Company's business strategy in the three and nine month periods
ended September 30, 2001 compared to the same periods ended September 30, 2000.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenditures for continuing operations for the three
months ended September 30, 2001 decreased to $102,399, compared to $405,250 for
the three months ended September 30, 2000. During the third quarter of 2001,
76% of research and development expenses were due to payroll for engineers and
outside consultants, 10% was for other related ImaginVideo and Vizario project
expenses, and the remaining 14% was for office rent, utilities, communications,
computer equipment and supplies. For the nine months ended September 30, 2001,
expenses decreased to $583,622 compared to $968,978 for the nine months ended
September 30, 2000. In August 2001, Imaginon and Vizario reduced the size of
their engineering staff, in an effort to most efficiently utilize the Company's
assets.

SALES AND MARKETING EXPENSES

For the three months ended September 30, 2001, sales and marketing expenses for
continuing operations decreased to $129,554 compared to $748,810 for the three
months ended September 30, 2000. During the third quarter of 2001, nearly 12%
was attributable to the marketing, advertising, sales promotions and materials,
trade shows and presentations, and public relations of Imaginon's ImaginVideo
product, 13% was for marketing, advertising, public relations and business wires
for Vizario project, 55% was for employee payroll (which included employer taxes)
and consultants, and the remaining 20% was for general office supplies, rent,
utilities, communications and computer equipment, travel and accommodations. For
the nine months ended September 30, 2001, expenses decreased to $412,431 compared
to $2,585,432 for the nine months ended September 30, 2000. This decrease
compared to the prior year was primarily attributable to reducing the sales and
sales-support staff, however, the Company is continuing its ongoing efforts to
build strategic relationships and market the Company and its products to
potential customers.

GENERAL AND ADMINISTRATIVE EXPENSES

For the three months ended September 30, 2001, general and administrative
expenses for continuing operations decreased to $679,540 compared to $804,992 in
the three months ended September 30, 2000. Of the general and administrative
expenses for the third quarter of 2001, nearly 13% was for professional legal and
accounting services, corporate filings and reporting, and costs for legal
proceedings, approximately 57% was for stock-based compensation expense for
consulting services, and 18% was for employee payroll (including employer taxes).
The remaining 12% was for rent, utilities, communications, computer equipment and
supplies, office supplies, depreciation, bad debts, public relations and business
wires, travel and accommodations, and for general liability and directors &
officers insurance. For the nine months ended September 30, 2001, expenses
decreased to $1,614,339 compared to $2,771,320 for the nine months ended
September 30, 2000. This decrease was largely attributable to the goodwill from
the acquisitions of INOW and IDP having been fully amortized by March 31, 2001,
and the reduction in employees during the development of the Vizario technology.

OTHER INCOME (EXPENSE)

Interest income of $1,836 was earned in the nine months ended September 30, 2001,
as compared to $121,484 of interest earned in the nine months ended September 30,
2000 from money market and CD deposits primarily from the private placements.
Interest expense for this same period increased to $172,399, as compared to
$10,515 in 2000, due to increased use of debt financing by the Company.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001, Imaginon's cash was $509 and it had a working capital
deficit of $1,392,016, as compared to $410,259 and a deficit of $848,669, on
September 30, 2000. This decrease in cash and working capital was primarily
related to the use of cash in meeting the capital expenditures for the three
primary categories of General and Administrative, Sales and Marketing, and
Research and Development.

On December 30, 1999, the Company issued 1,873,360 shares of common stock and
warrants to purchase an additional 749,344 shares of common stock for a total of
$5,000,000. The Company received $3,000,000 on December 30, 1999, and received
the remaining $2,000,000 on January 3, 2000. In connection with this
transaction, the Company incurred $280,000 of issuance costs, which were paid in
January 2000.

In January 2000, the Company issued 374,672 shares of common stock and warrants
to purchase an additional 149,869 shares of common stock for a total of
$1,000,000. In connection with this transaction, the Company incurred issuance
costs of $50,000.

In September 2000, the Company signed a non-binding letter of intent with
third-party investors for a multi-stage, $12 million equity financing, in which
the Company agreed to issue up to $3 million of Series G, 8% cumulative
convertible preferred stock (the "Series G Preferred Stock") and up to $9 million
of the Company's common stock.

The Series G Preferred Stock has a par value of $0.01 per share, a stated value
of $100,000 per share, and is convertible into shares of the Company's common
stock at the lower of $0.60 per share, or 80% of the market price of the
Company's common stock on the conversion date, subject to a minimum conversion
price limit of $0.10 per share (Note 6). The Series G Preferred Stock is
convertible at the option of the holder, at any time, for five years from the
issue date. Shares of Series G Preferred Stock that have not been converted
within five years of the original issue date are to be redeemed by the Company at
a price equal to the stated value of the shares plus accumulated unpaid
dividends. Dividends are cumulative at 8% per year and are payable semiannually.

The Series G Preferred Stock is subject to a mandatory redemption provision upon
the triggering of certain events, as defined, including failure to register
shares of common stock underlying the Series G Preferred Stock within 120 days of
the issue date. The Series G Preferred Stock also has a liquidation preference
equal to stated value of the Series G Preferred Stock.

In October 2000, the Company issued 15 shares of Series G Preferred Stock for
$1.2 million cash (net of $100,000 of offering costs and in satisfaction of a
$200,000 payable to the investor). The Company also issued 7 shares of Series G
Preferred Stock valued at $700,000 to another investor in exchange for $233,000
cash and in satisfaction of a $467,000 payable.

In February 2001, the Company issued 1.5 shares of Series G Preferred Stock for
$150,000 cash. Also in February 2001, Series G Preferred stockholders converted
10 shares of Series G Preferred stock into 10,266,110 common shares of the
Company. Because of the redemption features of the Series G Preferred Stock, the
Company has not included the Series G Preferred shares in shareholders' equity
(deficit).

In April 2001, the Company issued .6 shares of Series G Preferred Stock and
1,666,666 shares of common stock to an investor for $60,000. In addition, 2.5
shares of Series G Preferred Stock were converted by a stockholder into 2,580,550
shares of common stock.

In June 2001, the Company issued .5 shares of Series G Preferred Stock to an
investor for $50,000.

The Company has also financed its operations through funds received in exchange
for advances and notes payable to outside investors (the "Investors"). The
Investors have advanced funds to the Company, primarily in anticipation of the
issuance of Vizario Series A Preferred Stock. In the nine months ended September
30, 2001, net advances of $1,030,000 had been received from the Investors, of
which $59,000 was satisfied upon the exercise of warrants for 59,000 shares of
Vizario common stock, and $278,000 of which was satisfied in consideration of the
issuance of 278 shares of Vizario Series A Preferred Stock and warrants to
purchase 55,600 shares of Vizario common stock. Additional advances of $35,000
were received from Investors in October 2001.

In November 2001, the Company issued 5,000,000 shares of common stock to an
investor for $50,000.

Effective July 30, 2001, the Company's Vizario subsidiary entered into a $5
million Private Equity Line of Credit Agreement (the "Equity Line"), whereby
subject to terms and conditions of the Equity Line, Vizario may sell to the
investor up to $5 million of Vizario common stock during a two-year commitment
period, as defined, which commences upon the effective date of a registration
statement registering the common stock to be sold under the agreement. Vizario
is required to register the shares of common stock issuable under the Equity Line
pursuant to a related Registration Rights Agreement, in which Vizario is required
to register the shares no later than 180 days after July 30, 2001. In the event
Vizario fails to obtain an effective registration statement within this time
period, Vizario is subject to penalties.

The Company currently anticipates that its available funds, together with
additional advances from investors in the form of debt and/or a private placement
of preferred stock, will be sufficient to meet its anticipated needs for working
capital, capital expenditures and business expansion through at least the next
twelve months. Thereafter, the Company may need to raise additional funds. The
Company may need to raise additional funds sooner in order to fund more rapid
expansion, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, these instruments may have rights, preferences and
privileges senior to those of the Common Stock. There can be no assurance that
additional financing will be available, or that if available, will be on terms
favorable to the Company. If adequate funds are not available on acceptable
terms, the Company may not be able to fund its expansion, take advantage of
unanticipated acquisition opportunities, develop or enhance services or products
or respond to competitive pressures. Such inability could have a material
adverse effect on the Company's business, results of operations and financial
condition.

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is prohibited after
that date. SFAS No. 142 changes the accounting for goodwill and intangible
assets with indefinite lives from an amortization method to an impairment-only
approach and requires intangible assets with finite lives to be amortized over
their useful lives. Therefore, amortization of goodwill and intangible assets
with indefinite lives will cease upon adoption of this statement. SFAS No. 142
is required to be applied in fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact, if any, that SFAS No. 141 and SFAS No.
142 may have on its financial condition and results of operations.

PART II - OTHER INFORMATION

Item 1. Legal proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

None.

Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

None.

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

Not applicable.

Item 5. Other information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

3(i).1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-85108 as filed with the Securities
and Exchange Commission "SEC" on October 13, 1994 (the "1994
Registration Statement").)

3(i).2 Amendment to Certificate of Incorporation of the Registrant dated
July 22, 1998. (Incorporated by reference to Exhibit 3(I).5 of the
Registrant's registration statement on Form S-3A, Registration No.
333-71989 as filed with the Securities and Exchange Commission on
March 17, 1999 (the "1999 Form S-3/A.").)

3(i).3 Amendment to Certificate of Incorporation of the Registrant dated
December 17, 1998. (Incorporated by reference to Exhibit 3(I).6 of
the 1999 Form S-3/A).

3(i).4 Certificate of Designations, Preferences and Rights of Series G 8%
Convertible Preferred Stock dated August 3, 2000. (Incorporated by
reference to Exhibit 4.2 of the Registrant's September 30, 2000
10-QSB).

3(i).5 Amended certificate of Designations, Preferences and Rights of
Series G 8% Convertible Preferred Stock dated August 16, 2000.
(Incorporated by reference to Exhibit 4.3 of the Registrant's
September 30, 2000 10-QSB).

3(i).6 Amended Certificate of Designations, Preferences and Rights of
Series G 8% Convertible Preferred Stock dated October 16, 2000
(Incorporated by reference to Exhibit 4.4 of the Registrant's
September 30, 2000 10-QSB).

3(i).7 Amended Certificate of Designations, Preferences and Rights of
Series G 8% Convertible Preferred Stock dated October 16, 2000.
(Incorporated by reference to Exhibit 4.4 of the Registrant's
September 30, 2000 10-QSB).

3(ii) Bylaws as currently in effect. (Incorporated by reference to
Exhibit 3.2 to the 1994 Registration Statement.)

4.1 Specimen of Common Stock certificate. (Incorporated by reference to
Exhibit 4.1 to Amendment No. 4 to the 1994 Registration Statement,
filed with the SEC on December 22, 1994 ("1994 Amendment #4).)

10.1 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10.1
of the Registrant's Registration Statement on Form S-1, Registration
#333-88729, as filed with the SEC on October 8, 1999).

10.2(a) Form of Purchase Agreement dated December, 1999 by and among the
Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(a) of Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1999
filed with the SEC on March 15, 2000 (the "December 31, 1999
10-KSB")).

10.2(b) Form of Registration Rights Agreement dated December, 1999 by and
among the Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(b) of the December 31,
1999 10-KSB).

10.2(c) Form of Warrant dated December, 1999 by and among the Registrant and
investors in $6 million private placement. (Incorporated by
reference to Exhibit 10.23(c) of the December 31, 1999 10-KSB).

10.3 1999 Equity Incentive Plan. (Incorporated by reference to Exhibit A
to the Registrant's Definitive Proxy Statement for the 2000 annual
meeting on Schedule 14A as filed with the Securities and Exchange
Commission).

10.4 Form of Purchase Agreement date October 2000 by and among the
Registrant and the Series G Preferred investors. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2000).

10.5 Form of Registration Rights Agreement dated October, 2000 by and
among the Registrant and the Series G Preferred investors.
(Incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
2000).

Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant
and has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Carlos, State of California, on
November 19, 2001.

IMAGINON, INC.

By:/s/ David M. Schwartz
David M. Schwartz,
Chairman, Chief Executive Officer
and President

SIGNATURES TITLE DATE
---------- ----- ----
/s/ David M. Schwartz Chief Executive November 19, 2001
--------------------- Officer and
David M. Schwartz Director

/s/ James A. Newcomb Chief Financial November 19, 2001
-------------------- Officer and
James A. Newcomb Director

Imaginon (IMGIE) 10QSB2001 Q3 Quarterly report (small business)