1
                                Prospectus Supplement filed under Rule 424(b)(3)
                                   in connection with Registration No. 333-58970


                  PROSPECTUS SUPPLEMENT DATED SEPTEMBER 4, 2001
                      (To Prospectus Dated April 27, 2001)

                        TERAFORCE TECHNOLOGY CORPORATION

               41,416,630 shares of Common Stock, par value $0.01



         This Prospectus Supplement supplements information contained in that
certain Prospectus, dated April 27, 2001, as amended or supplemented (the
"Prospectus"), relating to the offer and sale by certain Selling Stockholders of
up to 41,416,630 shares of common stock, par value $0.01 per share (the "Common
Stock") of TeraForce Technology Corporation (the "Company"). This Prospectus
Supplement is issued in connection with and reflects the correction of certain
information regarding market listing and market-related risk factors reflected
in the Prospectus. This Prospectus Supplement is not complete without, and may
not be delivered or utilized except in connection with, the Prospectus,
including any amendments or supplements. Capitalized terms used herein but not
defined have the meanings assigned to such terms in the Prospectus.

         The Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "TERA." On August 31, 2001, the closing sales price of the Company's
Common Stock was $0.24 per share. All references to the Common Stock being
quoted or trading on the Nasdaq SmallCap Market are hereby supplemented and
amended to read that the quotation or trading of the Common Stock is on the OTC
Bulletin Board.

         The Risk Factor titled "We May be De-listed by Nasdaq" is hereby
supplemented and replaced in its entirety with the following:

         WE TRADE ON THE OTC BULLETIN BOARD.

         In June, 2001 our stock ceased trading on the Nasdaq SmallCap Market
and began trading on the OTC Bulletin Board ("OTCBB") under the ticker symbol
"TERA." The OTCBB is an electronic inter-dealer quotation system operated by the
National Association of Securities Dealers for securities not quoted on Nasdaq
or trading on a national securities exchange. It is not part of, and has no
business relationship with the Nasdaq Stock Market.

         The OTCBB generally provides less liquidity than Nasdaq and the
national securities exchanges. Further, certain institutional investors may not
purchase stocks listed on the OTCBB or invest capital in companies that are not
listed on Nasdaq or a national securities exchange. Such adverse effects in
liquidity and capital raising ability could materially adversely affect our
operating results and financial condition. We do not know when, if ever, we will
be re-listed on Nasdaq or listed on a national securities exchange and
anticipate to continue to be quoted on the OTCBB for the foreseeable future.

                   ------------------------------------------
             THIS PROSPECTUS SUPPLEMENT IS DATED SEPTEMBER 4, 2001.