GENERAL MAGIC INC, 10-Q, 2000-11-14

GENERAL MAGIC INC
10-Q, 2000-11-14
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<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2000

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

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission file number 000-25374

GENERAL MAGIC, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 77-0250147
(State of incorporation) (IRS Employer Identification Number)
</TABLE>

420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-4000
(Address and telephone number of principal executive offices)

Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]

61,184,634 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of October 31, 2000.

================================================================================
<PAGE> 2

GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FORM 10-Q, SEPTEMBER 30, 2000

CONTENTS

PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
----------- ----
<S> <C>
Item 1. Financial Statements (unaudited)
a. Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3
b. Condensed Consolidated Statements of Operations - Three-Month and Nine-Month periods
ended September 30, 2000 and 1999 4
c. Condensed Consolidated Statements of Cash Flows - Nine-Month periods ended
September 30, 2000 and 1999 5
d. Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23

PART II: OTHER INFORMATION

Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
Exhibits 25
</TABLE>

<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 13,629 $ 23,045
Short-term investments ................................................... 2,481 2,490
Other current assets ..................................................... 2,659 767
--------- ---------
Total current assets ................................................. 18,769 26,302
--------- ---------
Property and equipment, net ............................................... 10,098 11,869
Other assets .............................................................. 2,352 3,534
--------- ---------
Total assets ......................................................... $ 31,219 $ 41,705
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

Current liabilities:
Accounts payable ......................................................... $ 1,689 $ 2,780
Accrued expenses ......................................................... 4,180 8,018
Deferred revenue and other current liabilities ........................... -- 5,895
--------- ---------
Total current liabilities ............................................ 5,869 16,693
Other long-term liabilities ............................................... 2,231 2,692
--------- ---------
Total liabilities .................................................... 8,100 19,385
========= =========
Commitments
Redeemable, convertible Series D preferred stock, $0.001 par value
Stated at involuntary liquidation preference;
Authorized: 2 shares; issued and outstanding: 2000 -- 0; 1999 -- 1 ..... 2,000 10,274
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 55 shares; issued and outstanding: 2000 -- 55; 1999 -- 53... 2 2
Preferred stock, $0.001 par value
Authorized: 427 shares; issued and outstanding: 2000 -- 0; 1999 -- 0... -- --
Common stock, $0.001 par value; authorized: 150,000 shares;
Issued and outstanding: 2000--- 61,157; 1999 -- 43,248 ................. 61 43
Additional paid-in capital ............................................... 326,788 282,861
Accumulated other comprehensive loss ..................................... (3) (3)
Deficit accumulated during development stage ............................. (305,526) (270,654)
--------- ---------
21,322 12,249
Less treasury stock, at cost: 2000 -- 46; 1999 -- 46 ..................... (203) (203)
--------- ---------
Total stockholders' equity ........................................... 21,119 12,046
--------- ---------
$ 31,219 $ 41,705
========= =========
</TABLE>

The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.

3
<PAGE> 4
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Service revenue ............................... $ 3,133 $ 210 $ 7,984 $ 511
Licensing revenue ............................. 50 1,503 57 1,537
-------- -------- -------- --------
Total revenue .................................... 3,183 1,713 8,041 2,048
-------- -------- -------- --------
Operating expenses:
Cost of service revenue ........................ 975 -- 3,505 --
Network operations ............................. 1,291 1,905 7,319 5,405
Research and development ....................... 1,817 2,863 4,809 9,612
Selling, general and administrative ............ 2,792 5,321 14,616 17,502
Depreciation and amortization .................. 1,588 1,320 4,596 3,438
Compensation expense associated with stock ..... (7) -- 246 --
-------- -------- -------- --------
Total costs and expenses ......................... 8,456 11,409 35,091 35,957
-------- -------- -------- --------
Loss from operations ............................. (5,273) (9,696) (27,050) (33,909)
Total other income (expense), net ................ (748) (205) (80) (2,715)
-------- -------- -------- --------
Loss before income taxes ......................... (6,021) (9,901) (27,130) (36,624)
Income taxes ..................................... 6 1 32 23
-------- -------- -------- --------
Net loss ......................................... (6,027) (9,902) (27,162) (36,647)
Dividends on preferred stock ..................... (84) (223) (339) (857)
Warrants issuance on Series D preferred stock .... -- -- -- (251)
Favorable conversion rights on convertible
Series F preferred stock ......................... -- (485) -- (485)
Favorable conversion rights on Series H
preferred stock .................................. -- -- (7,366) --
Loss applicable to common stockholders ........... $ (6,111) $(10,610) $(34,867) $(38,240)
======== ======== ======== ========
Basic and diluted loss per share ................. $ (0.10) $ (0.25) $ (0.65) $ (1.00)
======== ======== ======== ========
Shares used in computing per share amounts ....... 59,716 41,170 53,240 38,277
======== ======== ======== ========
</TABLE>

The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.

4
<PAGE> 5
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $(27,162) $(36,647)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...................................... 4,596 3,438
Equity in net loss of unconsolidated affiliate ..................... -- 3,407
Write down on investment in unconsolidated affiliate ............... 1,083 --
Compensation expense associated with stock options ................. 246 --
Deferred revenue ................................................... (5,895) --

Changes in items affecting operations:
Other current assets ............................................... (1,893) 274
Accounts payable and accrued expenses .............................. (4,370) (1,313)
-------- --------
Net cash used in operating activities ............................... (33,395) (30,841)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments ............................... (13,791) (6,545)
Proceeds from sales and maturities of short-term investments ...... 13,800 15,152
Purchases of property and equipment ............................... (2,694) (7,543)
Disposition of property and equipment ............................. 22 --
Other assets ...................................................... (189) (2,780)
-------- --------
Net cash used in investing activities ............................... (2,852) (1,716)
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations ............................ -- (30)
Repayment of debt ................................................. -- (6,110)
Proceeds from sale of common stock and warrants ................... 4,825 991
Proceeds from exercise of Series E warrant ........................ 1,000 --
Proceeds from sale of Series D preferred stock .................... -- 20,000
Proceeds from sale of Series E preferred stock .................... -- 5,967
Proceeds from sale of Series H Preferred Stock .................... 20,640 --
Other long-term liabilities ....................................... 366 570
-------- --------
Net cash provided by financing activities ........................... 26,831 21,388
-------- --------
Net decrease in cash and cash equivalents ........................... (9,416) (11,169)
-------- --------
Cash and cash equivalents, beginning of period ...................... 23,045 21,845
-------- --------
Cash and cash equivalents, end of period ............................ $ 13,629 $ 10,676
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period ............................... 33 23
Interest paid during the period ................................... -- 327

Non-cash financing activity:
Preferred stock dividends ......................................... 339 857
Conversion of Series B preferred stock into common stock .......... -- 7,695
Favorable conversion rights on Series F preferred stock issuance .. -- 485
Stock issued in conjunction with equity line of credit ............ -- 200
Conversion of Series C preferred stock into common stock .......... -- 20,924
Exchange of Series D preferred stock for Series F preferred stock.. -- 10,223
Conversion of Series H Preferred Stock into common stock .......... 10,848 --
Conversion of Series D preferred stock into common stock .......... 8,411 --
Conversion of Series A Preferred Stock into common stock .......... 8,128 --
Favorable Conversion rights on Series H Preferred Stock ........... 7,366 --
Conversion of Series E preferred stock into common stock .......... 5,656 --
Conversion of Series F preferred stock into common stock .......... 4,363 --
</TABLE>

The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.

5
<PAGE> 6

GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
considered necessary for the fair presentation of financial condition, results
of operations and cash flows of General Magic, Inc. (the "Company") for the
periods presented. These financial statements should be read in conjunction with
the consolidated balance sheets as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1999, and for the period from May 1, 1990 (inception) to December 31, 1999,
including notes thereto, included in the Company's Annual Report on Form 10-K/A
which was filed with the SEC on April 28, 2000.

The results of operations for the nine-month period ended September 30,
2000, are not necessarily indicative of the results expected for the current
year or any other period.

NOTE 2: CONSOLIDATED FINANCIAL STATEMENT DETAILS

PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Network operations center ........................ $ 14,892 $ 13,020
Office equipment and computers ................... 7,806 8,225
Furniture and fixtures ........................... 2,240 2,303
Leasehold improvements ........................... 1,425 1,062
-------- --------
26,363 24,610
Less accumulated depreciation and amortization ... (16,265) (12,741)
-------- --------
$ 10,098 $ 11,869
======== ========
</TABLE>

ACCRUED EXPENSES

A summary of accrued expenses follows (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
<S> <C> <C>
Employee compensation ............................ 2,583 3,511
Other ............................................ 1,597 2,380
Prepaid royalty payment and accrued interest ..... -- 2,127
------ ------
$4,180 $8,018
====== ======
</TABLE>

6
<PAGE> 7

TOTAL OTHER INCOME (EXPENSE), NET

A summary of other income (expense) follows (in thousands):

<TABLE>
<CAPTION>
THREE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income ....................................... $ 325 $ 261 $ 1,004 $ 836
Other ................................................. 10 (1) (1) 23
Equity in net loss of DSI ............................. -- (540) -- (3,557)
Loss on investment in DSI ............................. (1,083) -- (1,083) --
Gain on sale of investment in Starfish, Inc. .......... -- 177 -- 339
Interest expense ...................................... -- (102) -- (356)
------- ------- ------- -------
Total other income (expense), net ..................... $ (748) $ (205) $ (80) $(2,715)
======= ======= ======= =======
</TABLE>

NEW PRONOUNCEMENTS

In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities, Deferral
of the Effective Date of SFAS No. 133," which amends the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment to SFAS No. 133." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value would
be accounted for based on the intended use of the derivative and whether it is
designated and qualifies for hedge accounting. SFAS No. 138 addresses a limited
number of issues causing implementation difficulties for companies that are
required to apply SFAS No. 133. The Company has not determined the impact that
the adoption of SFAS No. 133, as amended by SFAS No. 138, will have on its
financial statements and believes that such determination will not be meaningful
until closer to January 1, 2001, the date of the initial adoption.

In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25" ("FIN No. 44"). The interpretation clarifies the application of
Opinion No. 25 for certain issues such as the following: (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Company was required to adopt
FIN No. 44 by July 1, 2000. The adoption of FIN No. 44 did not have a material
effect on the Company's results of operations, financial position or liquidity.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company is required to adopt SAB 101 in the fourth
quarter of fiscal 2000. The Company is currently evaluating the impact that the
adoption of SAB 101 will have on its financial statements.

NOTE 3: COMPREHENSIVE LOSS

Comprehensive loss includes all changes in equity during a period except
those resulting from investments by and distributions to the Company's
stockholders. For the three and nine-month periods ended September 30, 2000 and
1999, there were no significant differences between the Company's comprehensive
loss and reported net loss.

7
<PAGE> 8

NOTE 4: NET LOSS PER SHARE (in thousands)

The computation of diluted loss per share does not include common stock
issuable upon (i) the exercise of outstanding stock options and stock purchase
warrants and (ii) the conversion of preferred stock, because the inclusion of
these securities would have an anti-dilutive effect.

<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
------ ------
<S> <C> <C>
Stock options .................................................................. 8,405 8,070
Warrants for the purchase of common stock ...................................... 5,766 780
Shares of common stock issuable upon conversion of Series A preferred stock .... -- 3,629
Shares of common stock issuable upon conversion of Series D preferred stock .... 1,187 6,088
Shares of common stock issuable upon conversion of Series E preferred stock .... -- 1,839
Shares of common stock issuable upon conversion of Series F preferred stock .... 3,340 7,440
Shares of common stock issuable upon conversion of Series G preferred stock .... 8,907 --
Shares of common stock issuable upon conversion of Series H Preferred stock .... 1,883 --
------ ------
29,488 27,846
</TABLE>

NOTE 5: PREFERRED AND COMMON STOCK

On September 7, 2000, the Company and the investment banking firm of
Ladenburg Thalmann & Co. Inc.("Ladenburg Thalmann") executed a letter agreement
whereby Ladenburg Thalmann agreed to act as the Company's exclusive placement
agent for the offering of up to $45,000,000 worth of the Company's common stock,
par value $0.001 per share, on a "reasonable best efforts" basis (the
"Agreement"). Ladenburg Thalmann has agreed that it will seek to identify
institutional investors who may wish to purchase the Company's common stock from
time to time on specific terms to be negotiated between the Company and such
institutional investors. The securities will be offered by the Company under a
prospectus to be delivered pursuant to its pre-existing "shelf" registration
statement on Form S-3 (File No. 333-79857) under which the Company, during the
summer of 1999, registered 10,000,000 shares of its common stock for sale.
Ladenburg Thalmann is not committed to purchase any of the Company's securities,
regardless of whether Ladenburg Thalmann does or does not successfully identify
others to purchase the Company's securities. The Company, in turn, is not
obligated to sell any of its securities to any prospective purchaser
successfully identified by Ladenburg Thalmann.

The Company has agreed to pay Ladenburg Thalmann a cash placement fee for
its services equal to 3% of the gross proceeds to the Company from each such
sale. The Company has also agreed to issue Ladenburg Thalmann a warrant to
purchase 100,000 shares of its common stock at $8.677.

The Company has agreed to provide to Ladenburg Thalmann a $35,000
non-accountable expense allowance, of which one-half was paid on the initiation
of its engagement of Ladenburg Thalmann and one-half is payable upon the closing
of the first sale procured through Ladenburg Thalmann under the terms of the
Agreement. In addition, the Company has agreed to indemnify Ladenburg Thalmann
against certain liabilities under the Securities Act of 1933, as amended.

On March 29, 2000, the Company entered into a private financing transaction
with a group of existing investors to provide $22,000,000 in cash to the Company
from the sale of 2,200 shares of its Series H Convertible Preferred Stock (the
"Series H Preferred Stock") and warrants to acquire 1,883,200 shares of the
Company's common stock (the "Warrants"). The Warrants have a three-year term and
are immediately exercisable. The financing transaction closed on April 20, 2000.

Holders of Series H Preferred Stock generally have no voting rights, except
as may be required by Delaware law. However, the vote of two-thirds (2/3) of the
then outstanding shares of Series H Preferred Stock is required to change the
powers, designations, preferences and rights of the Series H Preferred Stock or
to issue any shares of Series H Preferred Stock not provided for initially in
the Series H financing transaction.

The Series H Preferred Stock will not bear any dividends.

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<PAGE> 9

"Conversion Rate") obtained by dividing the liquidation preference by $5.97 (the
"Conversion Price"). The Conversion Price is subject to adjustment from time to
time upon the occurrence of certain events, including, without limitation, the
subdivision or combination of the Company's common stock, the reorganization,
reclassification, consolidation, or merger of the Company, or the sale of all or
substantially all of the Company's assets. The Conversion Price was set at an 8%
discount to the average closing bid prices of the Company's common stock for the
ten trading days immediately following March 31, 2000. The Company recorded a
beneficial conversion amount in the second quarter of 2000 to account for the
beneficial conversion feature.

The Company may, subject to certain conditions, require that all of the
outstanding shares of Series H Preferred Stock be converted at the Conversion
Price then in effect at any time after June 19, 2000. Should any of the shares
of Series H Preferred Stock remain outstanding on April 20, 2002 (subject to
extension under certain circumstances) the Company may either redeem each of the
outstanding shares of Series H Preferred Stock at the liquidation preference or
require their conversion at the then applicable Conversion Price, subject to
certain conditions. The Company also may, subject to certain conditions, redeem
the Series H Preferred Stock upon a consolidation, merger or other business
combination of the Company at a price equal to 115% of the liquidation
preference.

The holders of Series H Preferred Stock may require the Company to redeem
any or all of their shares at a price per share equal to the greater of (i) 130%
of the liquidation preference and (ii) a price based upon a multiple of the then
applicable Conversion Rate and the closing bid prices of the Company's common
stock on certain dates, upon the occurrence of any of the following events: (a)
the notification by the Company to any holder of the Series H Preferred Stock of
its intention not to comply with proper requests for conversion of the Series H
Preferred Stock into shares of the Company's common stock or (b) the failure of
the Company to timely convert any shares of the Series H Preferred Stock.

Adjustments to accumulated deficit of approximately $7.7 million were
recorded in the nine-month period ended September 30, 2000 related to issuances
of preferred stock with beneficial conversion and redemption rights and
dividends on preferred stock for the period. Adjustments to accumulated deficit
of approximately $1.6 million were recorded in the nine-month period ended
September 30, 1999 related to issuances of preferred stock with beneficial
conversion and redemption rights and dividends on preferred stock for the
period.

During the nine-month period ended September 30, 2000, 50,000 shares of the
Series A preferred stock were converted into 3.6 million shares of common stock,
804 shares of the Series D preferred stock were converted into 5.0 million
shares of common stock, 599 shares of the Series E preferred stock were
converted into 1.6 million shares of common stock, the Series E warrant was
exercised for 100 shares of Series E preferred stock, which was converted into
263 thousand shares of common stock, 416 shares of the Series F preferred stock
were converted into 3.6 million shares of common stock, and 1,620 shares of the
Series H Preferred Stock were converted into 2.7 million shares of common stock.

As of September 30, 2000, no shares of Series A, Series B, Series C, or
Series E preferred stock were outstanding. As of September 30, 2000, 186 shares
of Series D preferred stock were outstanding, 428 shares of Series F preferred
stock were outstanding, 1,500 shares of Series G preferred stock were
outstanding, and 580 shares of Series H Preferred Stock were outstanding.

NOTE 6: OTHER ASSETS

During the three-month period ended September 30, 2000, the Company
recorded a write down of $1.1 million on its investment in DataRover Mobile
Systems, Inc., which has since changed its name to Icras, Inc. ("DSI"). The
write-down was based on the current financial condition of DSI and represents
the amount the Company would expect to recover in the event of liquidation based
on certain rights the Company has related to DSI's product inventory.

NOTE 7: COMMITMENTS

PURCHASE COMMITMENTS

In April 1998, the Company entered into an agreement with Qwest
Communications International, Inc. to purchase telecommunications services at
fixed prices for an initial term of three years. The Company was obligated to
purchase $13 million in telecommunications services during the three-year period
ending April 30, 2001, of which $4.9 million had been purchased as of September
30, 2000. Based on the terms of the contract, Qwest's level of performance under
the contract, and the Company's discontinuation of the myTalk service, the
Company has renegotiated the terms of

9
<PAGE> 10

the contract. The resulting amendment to the agreement revises the purchase
commitment to $5.1 million over the same three-year term.

<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in the Risk Factors section below and
elsewhere in this report on Form 10-Q, that could cause actual results to differ
materially from historical results or those anticipated. In this report, words
such as "anticipates," "believes," "expects," "future," "intends," "plans,"
"potential," "may," "could," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.

General Magic is a voice application services provider. The Company offers
its customers premier voice-enabled applications developed on its VoiceXML-based
magicTalk(TM) platform. Primary applications for General Magic's patent-pending
magicTalk platform include customer relationship management interactions, value
added telecommunication services, Internet voice portal services, and eCommerce
transactions. General Magic develops and deploys magicTalk voice applications
through the efforts of its professional services organization and offers its
customers around-the-clock hosting services in its network operations center
("NOC"). Each General Magic voice application features a personality-rich,
socially-engineered voice user interface ("VUI") that responds to ordinary
speech, all but eliminating the need to punch buttons or enter codes when using
technology such as email, voice mail, telephone, fax and the Internet.

General Magic's target markets are businesses with high volume customer
interactions, including telecommunication providers, enterprises, and Internet
companies. To support its customers General Magic provides a full range of
professional services to assist in the planning, design, development, deployment
and support of voice solutions developed with magicTalk. For customers who
require rapid time-to-market and elect to deploy end-to-end voice solutions
without investing in a separate hosting facility, General Magic provides
customers cost-effective hosting services through its NOC. General Magic's NOC
allows the Company to optimize the return on investment for each of its
customers by optimizing service performance, managing growth and taking
advantage of efficiencies of scale.

On November 6, 2000, General Magic announced an agreement with Ask Jeeves,
Inc. Pursuant to the agreement, General Magic will build the voice user
interface and provide hosting services for Ask Jeeves Business Solutions, which
currently serve over 125 corporate customers.

In July 2000, General Magic concluded an agreement with IBM contemplating
the integration of General Magic's magicTalk platform with IBM DirectTalk and
IBM WebSphere Voice Server. General Magic and IBM will market and sell voice
solutions integrating the companies' technologies. In August 2000, General
Magic announced that IBM's Via Voice Automated Speech Recognition engine is now
available to customers of General Magic's magicTalk voice solutions. General
Magic's open standards-based magicTalk platform currently supports speech
recognition technologies from Nuance Communications, Inc. In September 2000,
General Magic announced that it had signed a letter of intent to extend the
magicTalk platform to support speech recognition as well as text-to-speech
technologies from SpeechWorks International, Inc. SpeechWorks, in turn, intends
to offer its customers a hosted voice solution through General Magic. General
Magic and SpeechWorks currently plan to jointly market and sell their combined
product offering.

In November 1999, General Magic entered into a licensing and technology
agreement with General Motors Corporation through what is now its OnStar
Corporation subsidiary ("OnStar"). The agreement licenses General Magic's
magicTalk platform and custom VUI for OnStar's Virtual Advisor, which provides
hands-free voice-activated access to Internet-based information services in
vehicles manufactured by General Motors, as well as other international auto
makers. General Magic is designing, developing and hosting the OnStar Virtual
Advisor service. General Magic delivered Phase I of the OnStar Virtual Advisor
for testing in June 2000.

In June 1999, General Magic launched myTalk, which was an advertising
sponsored service that let people access email over the phone, reply to email
messages using their own spoken words and make short calls anywhere in the
United States. myTalk attracted more than one million subscribers which
management believes provided a successful proof point and demonstrated the
appeal of magicTalk-based services and the potential for widespread adoption of
voice-enabled services. In June 2000, General Magic discontinued the myTalk
consumer service in order to more effectively focus on the development of custom
voice solutions on the magicTalk platform. Customized components similar to
those offered through the myTalk service are part of General Magic's current
offerings.

In June 1999, Excite@Home launched the Excite Voicemail service, a free
advertising-supported service that allows Excite users to receive voicemail and
faxes in their Excite email accounts. Excite Voicemail employs General Magic's
communications platform and voice user interface technologies to guide callers
in leaving voicemail messages and faxes for registered Excite members.

Although we have made significant progress in our strategy to develop and
market voice application services and products, we are subject to all of the
risks inherent in the establishment of a new business enterprise. To succeed, we
must, among other things, secure adequate financial and human resources to meet
our requirements; achieve market acceptance for our voice application services
and products; establish and maintain relationships with businesses with high
volume customer interactions; establish and maintain alliances with companies
that offer technology solutions for businesses with high volume customer
interactions; respond effectively to

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<PAGE> 12

competitive developments; meet the challenges inherent in the timely development
and deployment of complex technologies; generate sufficient revenues from our
services and products to permit us to operate profitably; and protect our
intellectual property. Any failure to achieve these objectives could have a
material adverse effect on our business, operating results and financial
condition.

RESULTS OF OPERATIONS

For the three-month period ended September 30, 2000, the Company incurred a
net loss of $6.1 million, or $0.10 per share, compared to a net loss of $10.6
million, or $0.25 per share, for the three-month period ended September 30,
1999. The net loss per share applicable to stockholders for the three-month
period ended September 30, 2000, included the net loss for the period and $84
thousand in adjustments to accumulated deficit related to dividends on preferred
stock. The net loss per share applicable to stockholders for the three-month
period ended September 30, 1999, included the net loss for the period and $708
thousand in adjustments to accumulated deficit related to preferred stock and
warrants issued during the period with beneficial conversion rights and
dividends on preferred stock.

For the nine-month period ended September 30, 2000, the Company incurred a
net loss of $34.9 million, or $0.65 per share, compared to a net loss of $38.2
million, or $1.00 per share, for the nine-month period ended September 30, 1999.
The net loss per share for the nine-month period ended September 30, 2000,
included the net loss for the period and $7.7 million in adjustments to
accumulated deficit related to preferred stock and warrants issued during the
period with beneficial conversion rights and dividends on preferred stock. The
net loss per share for the nine-month period ended September 30, 1999, included
the net loss for the period and $1.6 million in adjustments to accumulated
deficit related to warrants issued during the period with beneficial exercise
rights and dividends on preferred stock.

TOTAL REVENUE

Total revenue for the three-month period ended September 30, 2000, was $3.2
million compared to $1.7 million for the three-month period ended September 30,
1999. Total revenue for the nine-month period ended September 30, 2000, was $8.0
million compared to $2.0 million for the nine-month period ended September 30,
1999. Total revenue consists primarily of development fees for the Virtual
Advisor for OnStar and subscription fees for the Portico service. The Company
expects to recognize revenue related to the OnStar development agreement and
other customers through fiscal year 2000. These revenues include development
fees, licensing fees, hosting fees, professional services fees, and support
fees. If the market for voice application services does not develop or if the
Company is unable to capture a significant portion of that market, the Company's
revenues and results of operations will be materially adversely affected.

COST OF SERVICE REVENUE

Cost of service revenue for the three-month period ended September 30,
2000, was $975 thousand compared to none for the three-month period ended
September 30, 1999. Cost of service revenue for the nine-month period ended
September 30, 2000, was $3.5 million compared to none for the nine-month period
ended September 30, 1999. Cost of service revenue consists of costs related to
the development of the Virtual Advisor for OnStar.

NETWORK OPERATIONS

Network operations expense for the three-month period ended September 30,
2000, was $1.3 million compared to $1.9 million for the three-month period ended
September 30, 1999. Network operations expense for the nine-month period ended
September 30, 2000, was $7.3 million compared to $5.4 million for the nine-month
period ended September 30, 1999. Network operations expense consists of
personnel and related costs associated with running the network operations
center and providing customer support and billing, access costs associated with
the telephony and data network, and royalties paid to software and content
providers. The increase for the nine-month period ended September 30, 2000
compared to the same period ended September 30, 1999, was due primarily to
increased telecommunication billings associated with the myTalk service which
was discontinued in June 2000. The Company expects network operations expense to
increase modestly through 2000 as it adds network infrastructure to increase its
hosting capacity.

RESEARCH AND DEVELOPMENT

Research and development expense for the three-month period ended September
30, 2000, was $1.8 million, compared to $2.8 million for the three-month period
ended September 30, 1999. Research and development expense for the nine-month
period ended September 30, 2000, was $4.8 million, compared to $9.6 million for
the nine-month period ended September 30, 1999. The decrease

12
<PAGE> 13

for the three and nine-month periods ended September 30, 2000, compared to the
same periods ended September 30, 1999, was due to reduced spending on outside
consultants and a decrease in headcount. The Company expects research and
development expenses to increase slightly through the remainder of 2000.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expense for the three-month period
ended September 30, 2000, was $2.8 million, compared to $5.3 million for the
three-month period ended September 30, 1999. Selling, general and administrative
expense for the nine-month period ended September 30, 2000, was $14.6 million,
compared to $17.5 million for the nine-month period ended September 30, 1999.
The selling, general and administrative expense for the three-month and
nine-month periods ended September 30, 2000 compared to the same periods ended
September 30, 1999 decreased due to a decrease in headcount and reduced
marketing and advertising expenses associated with the discontinuation of the
myTalk service.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the three-month period ended
September 30, 2000, was $1.6 million, compared to $1.3 million for the
three-month period ended September 30, 1999. Depreciation and amortization
expense for the nine-month period ended September 30, 2000, was $4.6 million,
compared to $3.4 million for the nine-month period ended September 30, 1999. The
increase in both periods was due to equipment purchases and facility
improvements related to the expansion of the Company's network operations center
and amortization of intangible assets associated with a prior acquisition. The
Company expects depreciation and amortization expense to increase modestly
through the remainder of 2000 as the network operations center continues to
expand to increase hosting capacity.

TOTAL OTHER INCOME (EXPENSE), NET

The Company had other expense of $748 thousand in the three-month period
ended September 30, 2000, and other expense of $205 thousand in the three-month
period ended September 30, 1999. The Company had other expense of $80 thousand
in the nine-month period ended September 30, 2000, and other expense of $2.7
million in the nine-month period ended September 30, 1999. During the
three-month period ended September 30, 2000, the Company recorded a write-down
of $1.1 million on the investment in DataRover Mobile Systems, Inc., now known
as Icras, Inc. ("DSI"). During the three-month period ended September 30, 1999,
the Company recorded a loss of $540 thousand to account for net losses of its
equity investment in DSI and $3.6 million to account for net losses of its
equity investment in DSI for the nine-month period ended September 30, 1999.
Excluding the losses associated with DSI, other income (expense), net consisted
primarily of interest income and expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investment balances that totaled $16.1 million as of September
30, 2000, down $9.4 million from $25.5 million as of December 31, 1999.

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<PAGE> 14

"shelf" registration statement on Form S-3 (File No. 333-79857) under which the
Company, during the summer of 1999, registered 10,000,000 shares of its common
stock for sale. Ladenburg Thalmann is not committed to purchase any of the
Company's securities, regardless of whether Ladenburg Thalmann does or does not
successfully identify others to purchase the Company's securities. The Company,
in turn, is not obligated to sell any of its securities to any prospective
purchaser successfully identified by Ladenburg Thalmann.

The Company has agreed to provide to Ladenburg Thalmann a $35,000
non-accountable expense allowance, of which one-half was paid on the initiation
of its engagement of Ladenburg Thalmann and one-half is payable upon the closing
of the first sale procured through Ladenburg Thalmann under the terms of the
Agreement. In addition, the Company agreed to indemnify Ladenburg Thalmann
against certain liabilities under the Securities Act of 1933, as amended.

The Series H Preferred Stock will not bear any dividends.

The liquidation preference of the Series H Preferred Stock, which is
payable pari passu with the Series A, Series D, Series E, Series F and Series G
preferred stock and in preference to the holders of common stock, is $10,000 per
share plus, on a per share basis, the result of the following formula:
(.02)(N/365)($10,000). Each share of Series H Preferred Stock is convertible at
any time at the option of the holder, subject to certain limitations relating to
the number of shares of common stock that a holder of Series H Preferred Stock
or its affiliates are deemed to beneficially own, into common stock of the
Company at a conversion rate (the "Conversion Rate") obtained by dividing the
liquidation preference by $5.97 (the "Conversion Price"). The Conversion Price
is subject to adjustment from time to time upon the occurrence of certain
events, including, without limitation, the subdivision or combination of the
Company's common stock, the reorganization, reclassification, consolidation, or
merger of the Company, or the sale of all or substantially all of the Company's
assets. The Conversion Price was set at an 8% discount to the average closing
bid prices of the Company's common stock for the ten trading days immediately
following March 31, 2000. The Company recorded a beneficial conversion amount in
the second quarter of 2000 to account for the beneficial conversion feature.

<PAGE> 15
period. Adjustments to accumulated deficit of approximately $1.6 million were
recorded in the nine-month period ended September 30, 1999 related to issuances
of preferred stock with beneficial conversion and redemption rights and
dividends on preferred stock for the period.

In April 1998, the Company entered into an agreement with Qwest
Communications International, Inc. to purchase telecommunications services at
fixed prices for an initial term of three years. The Company was obligated to
purchase $13 million in telecommunications services during the three-year period
ending April 30, 2001, of which $4.8 million had been purchased as of June 30,
2000. Based on the terms of the contract, Qwest's level of performance under the
contract, and the Company's discontinuation of the myTalk service, the Company
initiated and has completed negotiations with Qwest to renegotiate the terms of
the contract. The resulting amendment to the agreement revises the purchase
commitment to $5.1 million over the same three-year term.

In connection with its prior strategy, the Company entered into Magic Cap
master license agreements with eight of its stockholders. The Company has
satisfied its obligations under six of these agreements, and is subject to the
following obligations under the remaining two agreements. In December 1999, the
Company compromised its obligation to refund one licensee a prepaid royalty,
together with interest, totaling $2.3 million in consideration of the issuance
to the licensee of 267,559 shares of the Company's common stock and an agreement
to pay a total of $1,250,000 in five quarterly installments commencing January
2000. As of September 30, 2000, $500 thousand remains to be paid under this
arrangement and is classified in accounts payable. 267,559 shares of common
stock were issued to the licensee during the nine-month period ended September
30, 2000. The Company has agreed to refund the second remaining licensee any
amount of a $2.0 million prepaid royalty not recouped by January 1, 2003, plus
accrued interest. The amount of any such refund is payable on or before December
31, 2003. As of September 30, 2000, this obligation was classified in other
long-term liabilities. The Company does not expect the second licensee to
develop or manufacture additional products that incorporate the Company's Magic
Cap technology.

Since the Company's inception, it has generated only minimal revenues and
has relied principally on third party financing to fund its operations. The
Company has incurred significant losses and has substantial negative cash flow.
As of September 30, 2000, the Company had an accumulated deficit of $305.5
million, which includes a net loss of $27.2 million for the nine-month period
ended September 30, 2000. The Company expects to incur significant losses at
least for the next twelve months.

The Company expects that its cash, cash equivalents and short-term
investment balances of $16.1 million as of September 30, 2000, the cash expected
to be available under the Company's equity line of credit arrangement, and the
cash expected to be available pursuant to its agreement with Ladenburg Thalmann,
will be adequate to fund the Company's operations through the year 2001.
However, there are a number of conditions and limitations on the Company's right
to draw down under the equity line of credit, including that the closing bid
price of the common stock on the business day immediately preceding a draw down
notice must be at least $2.00 per share and that the common stock is listed on
The American Stock Exchange ("AMEX"), The New York Stock Exchange ("NYSE"), The
Nasdaq National Market or The Nasdaq SmallCap Market. In addition, the dollar
amount specified in any draw down notice will be decreased by one twentieth
(1/20) for each business day during the twenty business days immediately
following delivery of the draw down notice on which the weighted average price
of the common stock is less than $2.062. The weighted average price of our
common stock was less than $2.062 on each business day through much of
September, October and the first half of November of 1999. It is uncertain that
the Company will be able consistently to meet the closing bid price condition,
the listing condition or any other condition. In addition, although the Company
may request drawdowns in increments of up to $5,000,000, the actual dollar
amount is subject to limitations based on the daily trading volumes, the market
price of the common stock as well as the investor's percentage ownership of
General Magic. Also, Ladenburg Thalmann is not committed to purchase any of the
Company's securities, regardless of whether Ladenburg Thalmann does or does not
successfully identify others to purchase the Company's securities. The Company,
in turn, is not obligated to sell any of its securities to any prospective
purchaser successfully identified by Ladenburg Thalmann.

The Company's capital requirements will depend on many factors, including,
but not limited to, the market acceptance and competitive position of its voice
application services and products; the Company's ability to attract and secure
key business relationships; the Company's ability to generate licensing fees and
royalties, professional services fees, hosting services fees, and other revenue
from its services; the equipment required to support the network operations for
these services; the levels of promotion and advertising required to market the
Company's products and services and attain a competitive position in the
marketplace; the extent to which the Company invests in new technology and
management and staff infrastructure to support its business; and the response of
competitors to the Company's services and technology.

<PAGE> 16

Company or its stockholders. If adequate funds are not available to satisfy the
Company's short-term or long-term capital requirements, the Company may be
required to significantly limit its operations, which would have a material
adverse effect on the Company's business, financial condition and results of
operation. In the event the Company raises additional equity financing, further
dilution to the Company's stockholders will result.

As part of its business strategy, the Company assesses opportunities to
enter joint ventures, to acquire or sell businesses, products or technologies
and to engage in other like transactions. The Company has made no significant
commitment or agreement with respect to any such transaction at this time.

RISK FACTORS

In this section we summarize certain risks regarding our business and
industry. Readers should carefully consider the following risk factors in
conjunction with the other information included in this report on Form 10-Q.

WE HAVE A HISTORY OF LOSSES. WE EXPECT TO CONTINUE TO INCUR LOSSES, AND WE MAY
NEVER ACHIEVE AND SUSTAIN PROFITABILITY.

Since our inception, we have incurred significant losses, including a loss
of $27.2 million for the nine-month period ended September 30, 2000. As of
September 30, 2000, we had an accumulated deficit of $305.5 million. We expect
to have net losses and negative cash flow for at least the next twelve months.
We plan to continue to spend significant amounts to develop, enhance and
maintain our voice application services and products and to expand our marketing
and sales efforts. As a result, we will need to generate significant revenues to
achieve profitability. Even if we achieve profitability, we may be unable to
sustain or increase profitability on a quarterly or annual basis. If we fail to
achieve and sustain profitability, the price of our stock may decline
substantially.

OUR LIMITED FUNDING MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO EXECUTE OUR
BUSINESS STRATEGY, AND THE AVAILABILITY OF ADDITIONAL FINANCING IS UNCERTAIN.

Our business model requires us to devote significant financial resources to
the development, enhancement and maintenance of magicTalk, our platform for
delivery of voice application services and products, to the expansion of our
sales and professional services organizations and to the buildout of our network
operations center. If we are not able to successfully manage our existing
resources or to secure additional financing in a timely manner, our ability to
generate sufficient revenues may be restricted and our business curtailed.

Effective July 30, 1999, we entered into a common stock investment agreement
with an institutional investor providing for an equity line of credit. The
common stock investment agreement permits us to require the investor to purchase
from time to time an aggregate of up to $20,000,000 of our common stock in
increments of up to $5,000,000. In addition, the investor has the right to
purchase in its sole discretion up to an aggregate of an additional $6,000,000
of common stock during the term of the common stock investment agreement. On
March 10, 2000, we agreed to amend the common stock investment agreement to
provide the institutional investor with the option to purchase additional shares
of our common stock equal to up to 100% of the amount specified in our put
notice to the investor. The aggregate amount of the equity line, however, was
not increased by this amendment. There are numerous conditions on our right to
draw down under the equity line, including that the closing bid price of the
common stock on the business day immediately preceding a draw down notice must
be at least $2.00 per share and that the common stock is listed on AMEX, NYSE,
The Nasdaq National Market or The Nasdaq SmallCap Market. In addition, the
dollar amount specified in any draw down notice will be decreased by one
twentieth (1/20) for each business day during the twenty business days
immediately following delivery of the draw down notice on which the weighted
average price of the common stock is less than $2.062. The weighted average
price of our common stock was less than $2.062 on each business day through much
of September, October and the first half of November of 1999. It is uncertain
that we will be able consistently to meet the closing bid price condition, the
listing condition or any other condition. In addition, although we may request
drawdowns in increments of up to $5,000,000, the actual dollar amount is subject
to limitations based on the daily trading volumes, the market price of our
common stock as well as the investor's percentage ownership of General Magic.

Ladenburg Thalmann is not committed to purchase any of the Company's
securities, regardless of whether Ladenburg Thalmann does or does not
successfully identify others to purchase the Company's securities. The Company,
in turn, is not obligated to sell any of its securities to any prospective
purchaser successfully identified by Ladenburg Thalmann.

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<PAGE> 17

No assurance can be given that financing will be available under the equity
line or the Agreement with Ladenburg Thalmann or otherwise or that, if
available, it will be available on terms favorable to General Magic or its
stockholders. The unavailability or timing of revenues and financing may require
us to curtail our operations. In addition, if we are not able to generate
revenues or obtain funding, we may be unable to meet The Nasdaq National
Market's continued listing requirements, and our common stock could be delisted
from that market. See "-- Our common stock may be delisted from The Nasdaq
National Market if we are not able to demonstrate compliance with the continued
listing requirements."

THE MARKET FOR OUR VOICE APPLICATION SERVICES AND PRODUCTS MAY NOT DEVELOP,
WHICH WOULD SUBSTANTIALLY IMPEDE OUR ABILITY TO GENERATE REVENUES.

Our future financial performance depends on growth in demand for voice
application services and products. If the market for voice application services
and products does not develop or if we are unable to capture a significant
portion of that market, either directly or through our partners, our revenues
and our results of operations will be adversely affected.

The market for voice application services and products is relatively new
and still evolving. Currently, there are a limited number of products and
services in this industry. The adoption of voice application services and
products could be hindered by the perceived cost, quality and reliability of
this new technology, as well as the reluctance of businesses that have invested
substantial resources in existing systems, such as touch-tone-based systems, to
replace their current systems with this new technology. Accordingly, in order to
achieve commercial acceptance, we will have to educate prospective customers,
including large, established companies, about the uses and benefits of
voice-driven applications in general and our products in particular. If these
efforts fail, or if our voice application services and products do not achieve
commercial acceptance, our business would be harmed.

The continued development of the market for our voice application services
and products will depend upon the:

o widespread adoption of voice-driven applications by businesses for use
in conducting transactions and managing relationships with their
customers;

o consumer acceptance of such applications; and

o continuing improvements in hardware and software technology that may
reduce the cost and improve the performance of voice solutions.

WE MUST ESTABLISH AND MAINTAIN RELATIONSHIPS WITH CUSTOMERS AND PARTNERS TO
GENERATE REVENUES.

Our business model for voice application services and products depends on
generation of revenue from licensing of our magicTalk communications platform
and from voice application development, support and hosting services. Our
success in generating these revenues depends on our ability to establish and
maintain relationships with organizations that engage in high-volume customer
interactions, such as companies with customer relationship management
applications, established eCommerce businesses, and value-added
telecommunications providers, and with partners that currently provide
technology solutions to these businesses. Competition for relationships with
companies such as these is extremely intense.

WE CURRENTLY RELY ON A LIMITED NUMBER OF LARGE ORDERS FOR SUBSTANTIALLY ALL OF
OUR REVENUES. AS A RESULT, OUR INABILITY TO SECURE ADDITIONAL SIGNIFICANT
CUSTOMERS DURING A GIVEN PERIOD OR THE LOSS OF ONE MAJOR CUSTOMER COULD CAUSE
OUR QUARTERLY RESULTS OF OPERATION TO SUFFER.

Due to the nature of our business, in any quarter we are dependent upon a
limited number of orders that are relatively large in relation to our overall
revenues. Our voice application products and services require significant
expenditures by our customers and typically involve lengthy sales cycles. We may
spend significant time and incur substantial expenses educating and providing
information to prospective customers. Any failure to complete a sale to a
prospective customer during a quarter could result in revenues and operating
results for the quarter that are lower than expected.

Our dependence on large customer orders

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<PAGE> 18

makes it difficult to forecast quarterly operating results. This could cause our
stock price to be volatile or to decline.

OUR VOICE APPLICATION SERVICES AND PRODUCTS CAN HAVE LONG SALES AND
IMPLEMENTATION CYCLES AND, AS A RESULT, OUR QUARTERLY OPERATING RESULTS AND OUR
STOCK PRICE MAY FLUCTUATE.

Purchase of our voice application services and products requires a
significant expenditure by a customer. Accordingly, the decision to purchase our
services and products typically requires significant pre-purchase evaluation. We
may spend many months educating and providing information to prospective
customers regarding the use and benefits of our voice application services and
products. During this evaluation period, we may expend substantial sales,
marketing and management resources.

After purchase, it may take substantial time and resources to implement our
solution and to integrate it with our customer's existing systems. If we are
performing significant professional services in connection with the
implementation, we do not recognize software revenue until after system
acceptance or deployment. In cases where the contract specifies milestones or
acceptance criteria, we may not be able to recognize services revenue until
these conditions are met. We have in the past and may in the future experience
unexpected delays in recognizing revenue. Consequently, the length of our sales
and implementation cycles may make it difficult to predict the quarter in which
revenue recognition may occur and may cause revenue and operating results to
vary significantly from period to period. These factors could cause our stock
price to be volatile or to decline.

WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE. IF OUR
QUARTERLY OPERATING RESULTS FAIL TO MEET THE EXPECTATIONS OF FINANCIAL ANALYSTS
AND INVESTORS, THE TRADING PRICE OF OUR COMMON STOCK MAY DECLINE.

Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

o the timing of sales of our products and services, particularly in
light of our dependence on a relatively small number of large orders,

o the timing of product implementations, particularly large client
design projects,

o unexpected delays in introducing new products and services,

o increased expenses, whether related to sales and marketing, product
development or administration,

o deferral of recognition of our revenue in accordance with applicable
accounting principles due to the time required to complete projects,

o the mix of product license and services revenue, and

o costs related to possible acquisitions of technology or businesses.

IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OR TO RETAIN KEY TECHNICAL,
PROFESSIONAL SERVICE, SALES, MARKETING AND OPERATIONAL PERSONNEL, OUR BUSINESS
COULD BE HARMED.

We intend to hire additional personnel, including engineers, professional
service, sales, marketing and operational personnel to support our business.
Competition for these individuals is keen, especially in the San Francisco Bay
Area. We may not be able to attract, assimilate or retain additional highly
qualified personnel. In addition, we rely upon the continued performance and
services of our existing employees, including key managerial, technical and
operational personnel. Our failure to attract, integrate, motivate and retain
additional employees or to motivate and retain existing employees could harm our
business.

INTENSE COMPETITION IN THE MARKET FOR VOICE APPLICATION SERVICES AND PRODUCTS
COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.

The market for voice application services and products is intensely
competitive. A number of companies have developed, or are expected to develop,
voice applications and/or platform technologies that compete with ours.
Competitors in the voice application and platform technologies markets include
companies that offer hosted or customer premise equipment-based voice-activated
solutions to the telecommunications market, such as AccessLine Communications
Corporation, Call Sciences Inc., Comverse Technology, Inc., InterVoice-Brite
Inc. and Webley Systems, Inc.; speech recognition vendors, such as Nuance
Communications Inc., SpeechWorks International and Vocalis Group plc, to the
extent that they engage in or support the development of voice applications;
value-added

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<PAGE> 19

resellers of speech recognition technology, such as NetbyTel.com, Inc. and
VocalPoint, Inc.; and companies in the voice portal category, such as BeVocal,
Inc., Lucent Technologies, Inc., Motorola Inc., and Tellme Networks Inc.
Wireless communications infrastructure companies, such as Telefonaktiebolaget LM
Ericsson or Phone.com Inc., may extend their offerings to provide the
capabilities of the magicTalk communications platform, as may software
developers such as Microsoft Corporation and Oracle Corp., or telecommunications
companies such as AT&T Corp. and Sprint Communications Company, L.P. Many of
these companies have longer operating histories, significantly greater
financial, technical, product development, marketing and sales resources,
greater name recognition, larger established customer bases, and
better-developed distribution channels than we do. Our present or future
competitors may be able to develop products that are comparable or superior to
those we offer, adapt more quickly than we do to new technologies, evolving
industry trends and standards or customer requirements, or devote greater
resources to the development, promotion and sale of their products than we do.
Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.

TECHNOLOGY CHANGES RAPIDLY IN OUR MARKET, AND OUR FUTURE SUCCESS WILL DEPEND ON
OUR ABILITY TO MEET THE NEEDS OF OUR CUSTOMERS.

The market for voice application services and products is characterized by
rapid technological change, changing customer needs, increasingly frequent new
product introductions and evolving industry standards. The introduction of
products or services embodying new technologies and the emergence of new
industry standards could render our voice application services and products
obsolete and unmarketable.

Our success will depend upon our ability to timely develop and introduce
new voice application services and products, as well as enhancements to our
existing services and products, to keep pace with technological developments and
emerging industry standards and address the changing needs of customers,
partners, users, sponsors, and advertisers. We may not be successful in
developing and marketing new services or products that respond to technological
changes or evolving industry standards. We may experience difficulties that
could delay or prevent the successful development, introduction and marketing of
new services or products. In addition, our new services and products may not
adequately meet the requirements of the marketplace or achieve market
acceptance.

WE MAY EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT, WHICH COULD ADVERSELY AFFECT
OUR REVENUES OR RESULTS OF OPERATIONS.

Any delays in product development or market launch could adversely affect
our revenues or results of operations. To be successful, we must continue to
develop and enhance technologies to enable us to offer voice application
services and other products deployed on our magicTalk communications platform.
Software product development schedules are difficult to predict because they
involve creativity and may require implementation of original, untried solutions
or the use of new development tools. Our software development efforts have been
delayed in the past. In addition to software development delays, we may also
experience delays in other aspects of product development. Any product
development delays could delay or prevent successful introduction or marketing
of new or improved services or products or the delivery of new versions of our
services or products.

THE FAILURE OR UNAVAILABILITY OF THIRD-PARTY TECHNOLOGIES AND SERVICES COULD
LIMIT OUR ABILITY TO GENERATE REVENUES.

We have incorporated technology developed by third parties in certain of
the voice application services and products offered to our customers, including
the following:

o email servers which process both emails and voice mails;

o calendar and contact software;

o voice recognition software;

o text-to-speech software;

o the billing system; and

o network operations center servers, routers and other equipment.

19
<PAGE> 20

We will continue to incorporate third-party technologies in future voice
application services and products. We have limited control over whether or when
these third-party technologies will be enhanced. In addition, our competitors
may acquire interests in these third parties or their technologies, which may
render the technology unavailable to us. If a third party fails or refuses to
timely develop, license or support technology necessary to our services or
products, market acceptance of our services or products could be adversely
affected. Moreover, if these third-party technologies fail or otherwise prove to
be not viable, it may have a significant impact on our ability to provide our
services and/or to generate revenues. In addition, we rely and will continue to
rely on services supplied by third parties such as telecommunications, Internet
access and power for services hosted in our network operations center. If these
third-party services fail to meet industry standards for quality and
reliability, market acceptance of our services could be adversely affected.

CONVERSION OF PREFERRED STOCK OR ISSUANCE OF OTHER SECURITIES WOULD DILUTE
CURRENT STOCKHOLDERS.

As of September 30, 2000, we have 186 shares of Series D preferred stock,
428 shares of Series F preferred stock, 1,500 shares of Series G preferred stock
and 580 shares of Series H Preferred Stock outstanding, all of which are
convertible into common stock. In addition, we have outstanding a warrant to
purchase up to an additional 500 shares of Series G preferred stock and warrants
to purchase an aggregate, as of September 30, 2000, of 2,796,991 shares of
common stock outstanding. We also have an equity line of credit arrangement
under which we could issue up to $25,750,000 in common stock and an agreement
with Ladenburg Thalmann pursuant to which we may raise up to $45 million upon
the sale of our common stock. The holders of common stock could experience
substantial dilution to their investment upon conversion of the preferred
shares, exercise of the warrants, drawdowns under the equity line of credit
arrangement, or in the event we elect to raise capital pursuant to the Ladenburg
Thalmann agreement.. The number of shares of common stock issuable upon the
conversion of the Series D preferred stock and the Series F preferred stock,
upon exercise of the warrants issued in connection with the Series B, Series C
and Series D preferred stock transactions, and pursuant to the equity line of
credit arrangement, and the Ladenburg Thalmann arrangement depends in part on
future prices of our common stock on The Nasdaq National Market. The number of
shares of common stock issued pursuant to the equity line of credit arrangement
depends on the prices of common stock on The Nasdaq National Market shortly
before the date of issuance and sale. We cannot predict the price of the common
stock in the future. If the price of our common stock decreases over time, the
number of shares of common stock issuable upon conversion of the preferred
stock, exercise of the warrants issued in connection with the Series B, Series
C, and Series D preferred stock, drawdowns under the equity line of credit, and
sales of common stock pursuant to the Ladenburg Thalmann agreement will increase
and the holders of common stock would experience additional dilution of their
investment. Such dilution could cause the stock price of our common stock to
decrease further. A decrease in the stock price of our common stock could cause
our common stock to be delisted from The Nasdaq National Market. Our board of
directors may authorize issuance of up to 427,101 additional shares of preferred
stock that are convertible into common stock without any action by our
stockholders. In addition, our board of directors may authorize the sale of
additional shares of common stock or other equity securities that are
convertible into common stock without any action by our stockholders. The
issuance and conversion of any such preferred stock or equity securities would
further dilute the percentage ownership of our stockholders.

WE MAY BE REQUIRED TO REDEEM THE OUTSTANDING SERIES D PREFERRED STOCK AND SERIES
F PREFERRED STOCK, WHICH COULD SIGNIFICANTLY DEPLETE OUR CASH RESERVES AND
MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.

The holders of the Series D preferred stock, the Series F preferred stock
and the Series H Preferred Stock have redemption rights if we fail to meet the
requirements of the documents governing each. As of September 30, 2000, 186
shares of Series D preferred stock, 428 shares of the Series F preferred stock
580 shares of the Series H preferred stock were outstanding. The redemption
value of these shares could total as much as approximately $16.2 million. If we
were required to redeem these shares, such payments would significantly deplete
our cash balance, which could materially and adversely affect our financial
condition. In addition, such a decrease in our cash balance could cause our
common stock to be delisted from The Nasdaq National Market. We cannot guarantee
that we will be able to meet all of the requirements necessary to avoid a
redemption.

OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE NOT
ABLE TO DEMONSTRATE COMPLIANCE WITH THE CONTINUED LISTING REQUIREMENTS.

We are subject to the continued listing requirements of The Nasdaq National
Market. In the event that we are not able to maintain continued compliance with
The Nasdaq National Market's "net tangible assets" requirement or any other of
its listing requirements, we would be subject to a delisting process. In the
event that we are delisted, we will seek to list our common stock on other
markets such as The Nasdaq Small Cap Market and AMEX, Inc. We cannot guarantee
that we will be able to meet the

<PAGE> 21

listing requirements of these or any other markets. In the event that we are
delisted from The Nasdaq National Market or are not able to list on any other
market, the ability to sell shares of our common stock will be adversely
affected.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD IMPAIR OUR COMPETITIVE
POSITION.

Our future success and ability to compete depends in part upon our
proprietary technology and our trademarks, which we attempt to protect under a
combination of patent, copyright, trademark and trade secret laws, as well as
with confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and may be time-consuming and
expensive to obtain and/or maintain. Further, despite our efforts, we may be
unable to prevent third parties from infringing upon or misappropriating our
intellectual property.

We hold fifteen patents issued by the United States Patent and Trademark
Office ("PTO"). We have eight patent applications pending before the PTO, as
well as selected counterpart patent applications pending in foreign
jurisdictions. There is no guarantee that patents will be issued with respect to
our current or future patent applications. Any patents that are issued to us
could be invalidated, circumvented or challenged. If challenged, our patents
might not be upheld or their claims could be narrowed. Our intellectual property
may not be adequate to provide us with a competitive advantage or to prevent
competitors from entering the markets for our products or services.
Additionally, our competitors could independently develop non-infringing
technologies that are competitive with, equivalent to, and/or superior to our
technology. Monitoring infringement and/or misappropriation of intellectual
property can be difficult, and there is no guarantee that we would detect any
infringement or misappropriation of our proprietary rights. Even if we do detect
infringement or misappropriation of our proprietary rights, litigation to
enforce these rights could cause us to divert financial and other resources away
from our business operations. Further, we expect to license our products
internationally, and the laws of some foreign countries would not protect our
proprietary rights to the same extent as do the laws of the United States.

OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.

The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of intellectual property rights. Although we attempt to avoid
infringing proprietary rights of others, third parties may assert claims against
us from time to time alleging infringement, misappropriation or other violations
of proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease the use and
sale of allegedly infringing products and services, incur significant litigation
costs and expenses, and develop or acquire non-infringing technology or obtain
licenses to the alleged infringing technology. We may not be able to develop or
acquire alternative technologies or obtain such licenses on commercially
reasonable terms.

SECURITY PROBLEMS IN OUR VOICE APPLICATION SERVICES OR PRODUCTS WOULD LIKELY
RESULT IN SIGNIFICANT LIABILITY AND REDUCED REVENUES.

Security vulnerabilities and weaknesses may be discovered in our voice
application services or products, in the licensed technology incorporated in our
voice application services or products, in our network operations center hosting
environment, or in the media by which end users access our voice application
services or products. Any such security problems may require us to expend
significant capital and other resources to alleviate the problems. In addition,
these problems could result in the loss or misuse of personal information,
including credit card numbers, and may limit the number of customers or
subscribers for our voice application services or products. A decrease in the
number of customers could lead to decreased revenues. These problems may also
cause interruptions or delays in the development of enhancements to our voice
application services and products and may result in lawsuits against us.

We will continue to incorporate security technologies in our voice
application services and products. However, such technologies may not be
adequate to prevent break-ins. In addition, weaknesses in the media by which
users access our voice application services and products, including the
Internet, land-line telephones, cellular phones and other wireless devices, may
compromise the security of the electronic information accessed. We intend to
continue to limit our liability to end users and to our customers and partners,
including liability arising from failure of the security technologies
incorporated into our services and products, through contractual provisions.
However, we may not successfully negotiate such limitations with all our
customers and partners, nor may such limitations eliminate liability. We do not
currently have liability insurance to protect against risks associated with
forced break-ins or disruptions.

ANY SOFTWARE DEFECTS IN OUR PRODUCTS COULD HARM OUR BUSINESS AND RESULT IN
LITIGATION.

21
<PAGE> 22

Complex software products such as ours may contain errors, defects and
bugs. With the planned release of any product, we may discover these errors,
defects and bugs, and, as a result, our products may take longer than expected
to develop. In addition, we may discover that remedies for errors or bugs may be
technologically unfeasible. Delivery of products with undetected production
defects or reliability, quality or compatibility problems could damage our
reputation. Errors, defects or bugs could also cause interruptions, delays or a
cessation of sales to our customers. We could be required to expend significant
capital and other resources to remedy these problems. In addition, customers
whose businesses are disrupted by these errors, defects and bugs could bring
claims against us. Although our contracts typically contain provisions designed
to limit our exposure to liability claims, a claim brought against us, even if
unsuccessful, could be time-consuming, divert management's attention, result in
costly litigation and harm our reputation. Moreover, existing or future laws or
unfavorable judicial decisions could limit the enforceability of the limitation
of liability, disclaimer of warranty or other protective provisions contained in
our contracts.

A CLAIM FOR DAMAGES COULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

We may be subject to claims for damages related to system errors and other
defects in the services we host for our customers or in our General Magic
branded services. Agreements with end users of these services typically contain
provisions designed to limit exposure to potential product liability claims.
However, these provisions may not be sufficient to protect us from liability.
Moreover, a claim brought against us, even if unsuccessful, could be
time-consuming, divert management's attention, result in costly litigation and
harm our reputation. We currently have liability insurance to protect against
certain risks associated with system errors and other defects in our services.
However, we cannot guarantee that such insurance will be sufficient.

WE DEPEND ON THE INTEGRITY AND RELIABILITY OF OUR SOFTWARE, COMPUTER HARDWARE
SYSTEMS AND NETWORK INFRASTRUCTURE, AND ANY INADEQUACIES MAY RESULT IN
SUBSTANTIAL INTERRUPTIONS TO OUR SERVICE.

Our ability to host services for our customers depends on the integrity of
our software, computer hardware systems and network infrastructure, and the
reliability of software and services supplied by our vendors, including
providers of telecommunications and electric power. We have encountered, and may
encounter in the future, errors in our software or our system design, or
inadequacies in the software and services supplied by our vendors. Any such
errors or inadequacies may result in substantial interruptions to our services
or those we host for our customers. Our errors may be expensive or difficult to
correct in a timely manner, and we may have little or no control over whether
any inadequacies in software or services supplied to us by third parties are
timely corrected, if at all.

OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE, AND EXTREME PRICE FLUCTUATIONS
COULD ADVERSELY AFFECT YOUR INVESTMENT.

The market price of our common stock has been extremely volatile. From
January 1, 2000 to September 30, 2000, the closing price of our common stock has
varied significantly from a high of $17.313 to a low of $2.5938 per share.

Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, shortfalls in our revenue or net
income, conversions of preferred stock into common stock, delays in development
of our services or products, disruptions in our services, or announcements of
partnerships, technological innovations or new products or services by our
competitors could have the effect of temporarily or permanently driving down the
price of our common stock. In addition, the stock market from time to time
experiences extreme price and volume fluctuations that particularly affect the
market prices for emerging and technology companies, such as ours. Such price
and volume fluctuations are often unrelated or disproportionate to the operating
performance of the affected companies. These broad market fluctuations may
adversely affect your ability to sell your shares at a price equal to or above
the price you purchased them. In addition, a decrease in the stock price of our
common stock could cause our common stock to be delisted from The Nasdaq
National Market.

DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS MAY INHIBIT A
CHANGE OF CONTROL OF GENERAL MAGIC.

Delaware law and provisions of our charter documents may make it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, General Magic. We are subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could delay a merger,
tender offer or proxy contest or make such a transaction more difficult. In
addition, provisions of our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change in control or in

22
<PAGE> 23

management, or may limit the price that certain investors may be willing to pay
in the future for shares of our common stock. These provisions include:

o authority to issue "blank check" preferred stock, which is preferred
stock that can be issued by the board of directors without prior
stockholder approval, with rights senior to those of common stock;

o prohibition on stockholder action by written consent;

o requirement that a two-thirds vote of the stockholders is required to
amend the bylaws; and

o advance notice requirements for submitting nominations for election to
the board of directors and for proposing matters that can be acted
upon by stockholders at a meeting.

Furthermore, the Series D preferred stock and the Series F preferred stock
provide holders rights to redemption of their Series D preferred stock or Series
F preferred stock, as the case may be, or penalty payments upon a change in
control. In addition, the documents governing the Series D preferred stock and
Series F preferred stock prohibit changes of control unless the surviving entity
assumes all of our obligations under the Series D preferred stock or Series F
preferred stock, as the case may be, and is a publicly traded corporation traded
on The Nasdaq National Market, NYSE or AMEX. All of these rights could make an
acquisition even more difficult.

OUR FACILITY IS LOCATED NEAR KNOWN EARTHQUAKE FAULTS, AND THE OCCURRENCE OF AN
EARTHQUAKE OR OTHER NATURAL DISASTER COULD CAUSE SIGNIFICANT DAMAGE TO OUR
FACILITY THAT MAY REQUIRE US TO CEASE OR CURTAIL OPERATIONS.

Our facility is located in the San Francisco Bay Area near known earthquake
faults and is vulnerable to damage from earthquakes. In October 1989, a major
earthquake that caused significant property damage and a number of fatalities
struck this area. We do not have redundant, multiple site capacity, and so are
also vulnerable to damage from other types of disasters, including fire, floods,
power loss, communications failures and similar events. Any damage to our
facility could lead to interruptions in the services hosted in our network
operations center and loss of subscriber information, and could substantially if
not totally impair our ability to operate our business. The insurance we
maintain may not be adequate to cover our losses resulting from disasters or
other business interruptions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.

23
<PAGE> 24
Part II: Other Information

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS 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

(a) The following exhibits have been filed with this report:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Change of Control Plan and Summary Plan Description

10.1 First Amendment to Qwest Communications Corporation Services
Agreement dated September 29, 2000 between the Company and Qwest
Communications Corporation

10.2 Letter Agreement dated October 5, 2000 between the Company and
Steven Markman

10.3 Letter Agreement dated September 7, 2000 between the Company and
Ladenburg Thalmann & Co., Inc. is incorporated by reference to
Exhibit 1.1 to the Company's Report on Form 8-K filed on
September 14, 2000

27.1 Financial Data Schedule
</TABLE>

(b) (i) A report on Form 8-K was filed on August 8, 2000, to report under
Item 5, Other Events, the Company's operating results for the second
quarter ended June 30, 2000.

(ii)A report on Form 8-K/A was filed on August 10, 2000, to report
under Item 5, Other Events, a correction to an 8-K filed on March 31,
2000 regarding the pricing of the common stock warrants issued to the
investors of the Company's Series H Convertible Preferred Stock and
replacing the form of warrant issued to such investors filed as
Exhibit 4.5 to the March 31, 2000 8-K with the form of warrant
attached as Exhibit 4.1 to the August 10, 2000 8-K/A.

(iii) A report on Form 8-K was filed on August 16, 2000, to report
under Item 5, Other Events, the filing of a press release announcing
the execution of a definitive agreement with IBM and also announcing
the availability of IBM's speech recognition engine to customers of
General Magic's magicTalk voice solutions.

(iv) A report on Form 8-K was filed on September 14, 2000, to report
under Item 5, Other Events, the execution of an Engagement Agreement
on September 7, 2000 with Ladenburg Thalmann & Co., Inc. for the
placement of up to $45,000,000 of the Company's common stock.

24
<PAGE> 25
SIGNATURES

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

DATE: November 13, 2000 /s/ STEVEN MARKMAN
-------------------------
Name: Steven Markman

Title: President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)

DATE: November 13, 2000 /s/ ROSE MARCARIO
------------------------
Name: Rose M. Marcario
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

25
<PAGE> 26
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Change of Control Plan and Summary Plan Description

10.1 First Amendment to Qwest Communications Corporation Services
Agreement dated September 29, 2000 between the Company and Qwest
Communications Corporation

10.2 Letter Agreement dated October 5, 2000 between the Company and
Steven Markman

27.1 Financial Data Schedule
</TABLE>