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

                                  FORM 10-KSB
                            ------------------------

(MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

     [ ]  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 000-30701

                                     OZ.COM
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     95-4560875
       (STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
       INCORPORATION OR ORGANIZATION)

     SNORRABRAUT 54, REYKJAVIK, ICELAND                           IS-105
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)

             011 (354) 535-0000
         (ISSUER'S TELEPHONE NUMBER)
</TABLE>

           SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE

       SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: COMMON STOCK

     Check whether the issuer: (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 (or for such shorter time that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.  Yes [X]  No [ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [ ]

     The Registrant's revenues for the fiscal year ended December 31, 2000 were
$8,303,885.

     The aggregate market value of the common stock held by non-affiliates of
Registrant as of March 31, 2001 was $9,782,209.

     As of March 31, 2001 89,779,596 shares of Registrant's common stock were
outstanding.

     Transitional Small Business Disclosure Format:  Yes [ ]  No [X]

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                       NOTE ON FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-KSB ("Annual Report") contains various
forward-looking statements with respect to our financial condition, results of
operations and business. The words "believe," "expect," "anticipate," "intend,"
"may," "will," "should," "could," "potential," "continue," "estimate,"
"predict," and "plan" and similar expressions or the negative of such
expressions, identify forward-looking statements. These forward-looking
statements are subject to numerous assumptions, risks and uncertainties and a
number of factors could cause actual results to differ materially from those
projected or implied in such forward-looking statements. These factors include,
but are not limited to, the risk factors disclosed in this Annual Report.

     Further, certain forward-looking statements are based upon assumptions of
future events that may not prove to be accurate. Due to such uncertainties and
risks, you should not place undue reliance on such forward-looking statements
that speak only as of the date of this Annual Report. We do not undertake to
publicly update, review or revise any forward-looking statements to reflect any
change in our expectations with regard thereto or to reflect events or
circumstances occurring after the date hereof.

                                  RESTATEMENT

     Subsequent to the issuance of our consolidated financial statements for the
year ended December 31, 1999, our management determined that the fair value of
certain warrants should have been allocated to additional paid-in capital,
certain previously recognized license revenue should have been amortized, and
accrued interest expense related to the conversion of bonds payable to common
stock should have been recognized as additional paid in capital rather than a
reduction in interest expense. As a result, the consolidated financial
statements for the year ended December 31, 1999 have been restated from amounts
previously reported.

     The effects of the restatement for the year ended December 31, 1999 are
presented in note 16 of the notes to the consolidated financial statements and
have been reflected herein.

     In addition to the restatements reflected herein, we have also restated our
previously issued consolidated financial statements for the three months ended
March 31, 1999 and 2000, the six months ended June 30, 1999 and 2000 and the
nine months ended September 30, 1999 and 2000. See our Registration Statement on
Form 10-SB/A for the financial statements for the three months ended March 31,
1999 and 2000 and our Quarterly Reports on Form 10-QSB/A for the periods ended
June 30, 2000 and September 30, 2000 for the financial statements for the three
and six months ended June 30, 2000 and the three and nine months ended September
30, 2000.
<PAGE>   3

                                     OZ.COM

                                2000 FORM 10-KSB

                               TABLE OF CONTENTS

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<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    1
Item 2.   Facilities..................................................   25
Item 3.   Legal Proceedings...........................................   25
Item 4.   Submission of Matters to a Vote of Security Holders.........   25

                                  PART II
Item 5.   Market for Registrant's Common Equity and Related              26
          Shareholder Matters.........................................
Item 6.   Management's Discussion and Analysis or Plan of Operation...   26
Item 7.   Financial Statements and Supplementary Data.................   36
Item 8.   Changes in and Disagreements with Accountants on Accounting    58
          and Financial Disclosure....................................

                                  PART III
Item 9.   Directors, Executive Officers, Promoters and Certain           58
          Persons.....................................................
Item 10.  Executive Compensation......................................   61
Item 11.  Security Ownership of Certain Beneficial Owners and            65
          Management..................................................
Item 12.  Certain Relationships and Related Transactions..............   67
Item 13.  Exhibits, Lists and Reports on Form 8-K.....................   72
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

OVERVIEW OF BUSINESS

     OZ.COM was incorporated in the state of California in 1995. We are a
developer and business-to-business vendor of software and services that enable
the delivery of certain Internet-based services over wireless telecommunications
networks. Our software and services enable wireless network operators and
Internet businesses to provide Internet-based services to their wireless
subscribers and to offer these services across a spectrum of Internet-access
devices. See "Our Products and Services" below for further discussion of our
value-added services.

INDUSTRY BACKGROUND

GROWTH OF INTERNET BUSINESSES

     The increased use of the Internet, intranets and extranets has fostered the
growth of a variety of Internet businesses, such as Internet service providers,
Internet content providers, portals and search engines and Internet communities.
In addition, a growing number of businesses, including retailers, auction houses
and financial institutions are creating or exploring the possibilities of
establishing a presence on the Internet as a means of attracting and retaining
customers and generating new revenue streams.

GROWTH OF WIRELESS COMMUNICATIONS

     Worldwide use of wireless communications has grown rapidly as cellular and
other emerging wireless communications services have become more widely
available and affordable for businesses and consumers. Advances in technology,
changes in telecommunications regulations and the allocation and licensing of
additional radio spectra have contributed to this growth. As a result, the
competitive environment among wireless network operators in major markets
worldwide has intensified.

CONVERGENCE OF THE INTERNET AND WIRELESS COMMUNICATIONS

     We believe that wireless Internet-access devices have become increasingly
popular tools as a result of the accelerating use of e-mail services, remote
access to corporate intranets and other Internet-based services. The convergence
of wireless communications with the Internet and the launch of General Packet
Radio Service in markets that currently use the Global System for Mobile
communications ("GSM") are expected by some industry analysts to be the main
drivers behind an anticipated surge in the growth of wireless Internet access in
2001 and in subsequent years.

GROWTH OF WIRELESS DATA SERVICES AND APPLICATIONS

     We believe that the growth of the Internet and the proliferation of
wireless Internet-access devices have created a demand for wireless data
services. We believe that this demand may grow with increasingly inexpensive
wireless communications, increased bandwidth and increased security. Wireless
data services not only include simple functions like e-mail and messaging, but
also enable gaming, information updates, online trading, location-based
services, such as electronic maps and directions and personalized service
delivery, and "anytime, anywhere" m-commerce transactions (that is,
Internet-based commerce transactions conducted through a mobile communications
device).

MARKET OPPORTUNITY

     Wireless network operators now face potential competition from Internet
portals and media companies such as AOL and Yahoo! that have announced
strategies to bring their brands to all devices "anytime, anywhere." Wireless
network operators risk seeing their brands subsumed under their content
partner's or portal partner's superior consumer brand, which we believe might
force the wireless network operator lower in the value chain. We believe that
the emerging wireless data services market represents a new competitive

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arena for wireless network operators, for whom wireless data communication is a
rapid and cost-effective way to provide their services to subscribers. We
believe that wireless network operators are seeking to deliver Internet-based
services to their mobile subscribers in order to generate revenues from new
sources, differentiate their service offerings and reduce subscriber turnover
and operating costs. We believe that to accomplish this, wireless network
operators require an innovative, high-quality software and services solution to
deliver Internet-based services and content to their mobile subscribers.

     Internet businesses are also tailoring their strategies to enter the
wireless data market, which is viewed by some industry analysts as the next
Internet frontier. We believe that Internet businesses are seeking to retain and
increase customers, and generate brand awareness and loyalty by providing
selected services to customers by means of wireless access in addition to
traditional PC-based access. Also, we believe that the convergence of the
Internet with wireless telecommunications provides Internet businesses with new
opportunities to obtain additional revenues from m-commerce transactions and
advertising. As a result, we believe that Internet businesses require a software
and services solution that links them to the wireless telecommunications
networks.

OUR PRODUCTS AND SERVICES

     We are developing various integrated products that are intended to provide
a package of services for our customers. As of April 30, 2001, we have had
commercial sales only in the category of client services. Our products include:

     - the mPresence(TM) communications and service framework;

     - value-added services;

     - client services, such as customization of products and system
       integration; and

     - operations of the framework and value-added services.

MPRESENCE(TM)

     The mPresence(TM) framework is designed to quickly establish our customers'
presence in the mobile economy. The mPresence(TM) framework enables delivery of
various types of communications, information and lifestyle services to end users
in a more convenient way than is possible today. This is accomplished by adding
a layer of intelligence to the framework and making use of information about a
user's presence to deliver and control delivery of communications and services
to the user. The mPresence(TM) framework is built on top of an industry standard
J2EE (Java 2 Enterprise Edition) application server platform with modification
and proprietary additions to facilitate easy integration and deployment of
value-added services. The mPresence(TM) framework is tightly linked with
iPulse(TM), a product we co-developed for Ericsson Telecom AB and/or its
affiliates ("Ericsson"). See "iPulse(TM)" below for a discussion of this
product. The mPresence(TM) framework relies on iPulse(TM) for presence
management and intelligent routing of messages and communications between
different end-user devices.

VALUE-ADDED SERVICES

     We offer our customers a suite of value-added services that can be
independently branded and deployed to our customers' user base. These services
enable groups of people to communicate together, socialize, and be entertained
and informed. These services are built on top of mPresence(TM), our
communications and service framework. In the future, we may license applications
from partners to integrate on top of the mPresence(TM) framework.

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     We are focusing on services that provide immediate revenues to our
customers, e.g., by increasing network usage such as wireless application
protocol airtime and short message service, and that provide benefits to
customers, including end-user customer retention, attraction and branding. We
offer the following communication services today by means of the iPulse(TM)
application:

     - Instant messaging between users -- the ability to send a text message to
       other users independent of the sender's or the receiver's device;

     - Text conference -- the ability to connect a group of people for an online
       chat conference;

     - PC-to-PC voice chat -- the ability to communicate securely using voice
       over the Internet from one PC to another;

     - File transfer -- the ability to send files immediately and securely from
       one end user to another;

     - PC-to-phone voice calls -- the ability to initiate a telephone call from
       a PC;

     - Creation of forwarding profile for messages -- the ability to customize
       how messages are delivered. For example, text messages can trigger
       immediate notification, be delivered to a message box, or be forwarded to
       a mobile phone; and

     - Status list -- the ability to access the presence information of other
       end users on a contact list.

     We are in the process of developing end-user lifestyle services on top of
our mPresence(TM) framework that will enable groups of people to communicate,
socialize and be entertained across various devices as a group of people rather
than as individual users. We recently completed Tactica(TM), our first
application to support group interaction. Tactica(TM) is a multi-player game
built on the mPresence(TM) framework with game play that extends between PCs and
mobile phones. We are also developing a second community-type application for
Microcell Telecommunications Inc., a Canadian GSM operator. We intend to partner
with leading technology companies and service providers to provide additional
services that will be integrated into our overall product offering. However, we
cannot be sure that we will be able to partner successfully with such companies
or that such services will be integrated successfully into our product offering.

     Services are accessible through the different clients that we support,
including SMS, WAP, HDML, Windows, and HTML. The capabilities of these clients
differ, however, which means that the user experience is tailored to the
capabilities of the specific device.

CLIENT SERVICES

     We provide consulting, custom development, iPulse(TM) customization and
system integration services. These services build on our intimate understanding
of iPulse(TM) and its software developer kit. For example, we have developed a
customized iPulse(TM) interface and additional functionality for oCen
Communication Inc.'s CommPortal(TM) offering. We believe that almost every
customer of iPulse(TM) or mPresence(TM) and its value-added services will
require some level of consultation, customization and system integration and we
intend to offer these services to these customers. We will compete with the
customer itself, which can use the iPulse(TM) software developer kit without our
assistance, and with a number of third-party consulting companies and system
integrators. We hope to leverage our extensive background with iPulse(TM) to
distinguish ourselves from these competitors.

OPERATIONS OF THE FRAMEWORK AND VALUE-ADDED SERVICES

     We can deliver mPresence(TM) and its value-added services as a hosted or
managed care service. These forms of delivery shorten the time to market for
customers. They also eliminate the need for our customers to build up the
know-how needed to operate a communications and service framework and allow them
to integrate value-added services onto such a framework. Our customers have the
ability to place their own branding on all of our services and to maintain the
customer relationship with their end users.

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     We are currently able to deliver mPresence(TM) and value-added services to
customers in two ways:

     - Hosted services -- we host the services, including the mPresence(TM)
       framework and the various value-added services. In some cases, our
       technology partners provide the hosting of their own services.

     - Managed care -- we monitor and operate the framework and services from a
       centralized operations center, even though the actual hardware is located
       at the customer's premises.

     We expect that in some cases a sale of mPresence(TM) and value-added
services may include a mixture of both types of delivery, i.e., both a managed
care service and full hosting of some services. Whether this occurs will depend
on the customer's needs and current infrastructure.

IPULSE(TM)

     iPulse(TM) is a carrier-class services application that we jointly
developed with Ericsson on top of our proprietary technology, which we have
licensed to Ericsson. Our technology related to a server architecture that
allowed us to manage many simultaneous user interactions in a shared state. This
technology serves as the core of iPulse(TM). However, the resulting iPulse(TM)
product and the iPulse trademark are wholly owned by Ericsson. iPulse(TM) is a
communications and intelligent routing application that bridges the worlds of
telephony and the Internet, providing end users with a simple and secure way to
establish communications sessions and access value-added services running either
over IP networks or other networks, such as the public switch telephone or
wireless networks. iPulse(TM) consists of client software that resides on mobile
phones, PCs, and other Internet devices and connects to a centralized cluster of
servers, where corresponding server software stores and manages all end-user
communications. iPulse(TM) connects end users to each other by computer, phone,
pager, mobile phone or other communication device through a simple
point-and-click contact menu. We receive 15% royalties of gross worldwide
iPulse(TM) sales as a result of the specific co-operation and development
agreement we entered into with Ericsson in February 1999. In addition, pursuant
to the value-added license distribution agreement concluded with Ericsson in
November 2000, we have the right to offer iPulse(TM) as a hosted application to
our mPresence(TM) customers.

     We believe that iPulse(TM) allows wireless network operators to leverage
their existing communications networks while tapping into the power of the
Internet and new forms of voice and data communications. Internet businesses can
leverage their existing Internet expertise and infrastructure while extending
their reach to wireless devices and telecommunications networks. iPulse(TM)
offers a secure connection to a growing number of communications services that
provide greater convenience for end users and increased revenues for wireless
network operators and Internet businesses. iPulse(TM) provides end users with
one simple, secure way to use and link their communications.

     iPulse(TM) 1.5 includes the following main features:

     Access Management. End users may customize their communications by setting
     up individual profiles that indicate when, by whom and how they want to be
     reached. For example, an end user can be available to his family at anytime
     and anywhere, but can arrange to have all business calls routed to his
     voicemail. Because this information is centrally stored, end users can
     change their availability or update information, such as with new phone
     numbers or email addresses, system-wide at any time.

     Accessibility. End users are able to build a personal directory of other
     iPulse(TM) users and access information as to their availability at a
     particular point in time. They are then able to connect to the persons in
     their directory with a click of the mouse or keys on their mobile phone or
     other device. We expect that future versions of iPulse(TM) will be able to
     show not just what device another end user is using, but will provide
     information as to the end user's location.

     Anonymity. End users may choose to keep their personal information
     confidential from other end users. The system will not reveal IP addresses,
     phone numbers, or other information unless the end user wants all or only
     some of that information made available.

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OUR STRATEGY

     Our objective is to be a leading developer and vendor of software and
services that enable wireless network operators and Internet businesses to
deliver the familiar benefits of the Internet to the wireless world. We intend
to accomplish this by capitalizing on our experience, expertise and strategic
relationships, our value-added services and mPresence(TM) framework, and
iPulse(TM) and its other resources. The key elements of our strategy include
expansion of our platform, leveraging our strategic relationships with Ericsson
and Microcell Telecommunications, Inc. and/or its affiliates ("Microcell"),
building additional strategic partnerships, strengthening our mPresence(TM)
brand through sales and marketing efforts, and strategic acquisitions.

EXPANSION OF PLATFORM

     mPresence(TM) is designed to be extendable in order to offer additional
on-line services across a variety of protocols, applications, operating systems,
networks and devices that have developed rapidly in recent years as a result of
the convergence of wireless communications with the Internet. mPresence(TM) will
support short message service, ("SMS") wireless application protocol ("WAP")
services and wideband code division multiple access ("WCDMA"). We expect to
further expand our reach by supporting additional devices and broadening our
functionality by introducing new services, such as increased m-commerce
capability and location-based services. We believe that the convergence of the
Internet and wireless telecommunications will ultimately result in the
"disappearance of the Internet," by which we mean that the term "Internet" will
no longer be used to categorize services that now are Internet-based. We expect
that the Internet as a communications platform will ultimately be taken for
granted, much as electricity is today. We believe that a rapidly increasing
number of devices and consumer electronics equipment will have Internet or IP
addresses and will be integrated seamlessly to each other over wireless and
fixed networks. We intend to capitalize on this growing trend in order to be a
leading provider of technology and services in the new integrated mobile
economy.

LEVERAGING OF STRATEGIC RELATIONSHIP WITH ERICSSON

     The agreements that we have entered into with Ericsson have been crucial to
our growth and continue to be significant to our future development. Pursuant to
the terms of the agreements, Ericsson serves as an investor, customer, supplier
and sales channel for our products and services. In turn, we serve Ericsson by
being a technology provider, developer and sales agent.

Ericsson as Investor

     Pursuant to a warrant and stock purchase agreement entered into in February
1999, Ericsson acquired 10,052,431 shares of our Series A Preferred stock. In
November 2000, Ericsson acquired 5,069,271 shares of our common stock in
connection with our acquisition of MCE Holding Corporation. On an as-converted
basis and assuming conversion by all holders of Series A Preferred stock,
Ericsson owns approximately 21.2% of our issued and outstanding common stock as
of December 31, 2000. A nominee of Ericsson holds a seat on our board of
directors.

Ericsson as Customer and OZ as Technology Provider and Developer

     On November 1, 2000, we entered into a general co-operation and development
agreement with Ericsson. The agreement superseded the earlier document by the
same name that the parties entered into in February 1999. Pursuant to this
agreement, the companies agreed to cooperate in the area of Internet-based
technologies, applications and services, including, but not limited to,
development, testing, integration, marketing, sales, distribution, support and
maintenance of solutions based on the technologies and services of each company.
Under the terms of the agreement, as long as Ericsson owns shares representing
5% or more of our capital stock, we must inform Ericsson of any proposal to
license or sell any of the technology covered in the agreement to any principal
competitor of Ericsson. Ericsson may opt to enter into the proposed transaction
on the same terms and conditions. The initial term of the agreement ends on
December 31, 2003, but the agreement will be automatically renewed on a yearly
basis unless terminated by written notice of either party.

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     We entered into a specific co-operation and development agreement with
Ericsson in February 1999, which is an agreement under the general co-operation
and development agreement. Under the specific development and co-operation
agreement, the companies formed a "virtual" company to jointly develop the
product now known as iPulse(TM). Both companies contribute personnel to the
project, both at the management and board level and in the day-to-day
development work. However, we perform the development work on assignment from
Ericsson and Ericsson's decisions prevail in cases of differences of opinion.
Pursuant to the agreement, Ericsson is responsible for 95% of the expenses
relating to sales and marketing and general and administrative costs, as well as
66% of customer support expenses, whereas we are responsible for 5% of any
expenses relating to sales and marketing and general and administrative costs
and 34% of customer support expenses. In addition, we are responsible for 100%
of any expenses relating to the development of the application platform. Under
the agreement, Ericsson receives 85% of revenues and we receive 15% of revenues
from sales of iPulse(TM). The agreement is effective until December 31, 2001,
and will then be automatically renewed for additional one-year periods, unless
terminated by either party.

     There is no fixed maximum or minimum amount payable to us for our
development work and services under the specific co-operation and development
agreement. Rather, Ericsson has an internal budget that is determined partially
by the success of iPulse(TM) in the market. To the extent iPulse(TM) is
successful, more funds may be allocated to its development. Conversely, funding
may be reduced or eliminated if iPulse(TM) is unsuccessful. Ericsson and we have
defined a product roadmap for iPulse(TM) for the next few years with specific
product features and enhancements.

     OZ.COM Canada Company ("OZ.COM Canada"), our wholly owned subsidiary that
we acquired in connection with our acquisition of MCE Holding Corporation,
entered into a specific co-operation and development agreement with Ericsson
Canada Inc. ("Ericsson Canada") dated November 8, 2000, under which OZ.COM
Canada will provide consulting and development services in the areas of mobile
Internet applications for third-generation ("3G") mobile telephony platforms.
The agreement gives us access to Ericsson Canada's 3G laboratories and up to
6,000 hours of assistance from qualified 3G experts for testing our 3G products.
Under the agreement, minimum payments totaling $6 million over two years will be
made to OZ.COM Canada for development work and services, of which $2 million
will be allocated to additional iPulse(TM) development. The agreement has a
two-year term.

     As a result of the level of Ericsson's ownership in us at the inception of
any specific development agreements between Ericsson Canada and OZ.COM Canada,
all payments received from Ericsson Canada for research and development work
under such agreements are not immediately recognizable as revenue according to
generally accepted accounting principles. The expenses associated with our
performance of these obligations to Ericsson Canada would be recognized as
current research and development expenses and the payments from Ericsson Canada
for the work performed would be characterized as deferred revenues on our
balance sheet. We would recognize all of the deferred revenues as current
revenues at the termination of the particular agreement under which we performed
the work.

Ericsson as Supplier

     We entered into a value-added distribution license agreement with Ericsson
on November 1, 2000, which superseded the value-added reseller agreement entered
into with Ericsson in February 2000. The agreement gives us unrestricted
perpetual rights to offer iPulse(TM) as a hosted service to our mPresence(TM)
customers in exchange for certain royalties. Either party to the agreement may
terminate the agreement if the other party commits a material breach of its
obligations under the agreement or if any of the representations of such other
party are materially untrue, and such default is not cured within thirty days of
notice of such breach. Notwithstanding the termination of the agreement, we will
retain the right to provide hosting services based on the then current version
of iPulse(TM). After November 2003, and provided all royalties due Ericsson
under the agreement have been paid, Ericsson will no longer be able to terminate
the agreement.

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Ericsson as Sales Channel

     Pursuant to the mPresence(TM) agency agreement also concluded with Ericsson
on November 1, 2000, we granted Ericsson a nonexclusive right to promote our
mPresence(TM) framework and value added services. In the absence of a contrary
agreement with respect to any particular customer, we will pay to Ericsson 5% of
the net sales price of any sales occurring as a result of a referral made by
Ericsson and up to 15% of the net sales price if Ericsson concludes the sale as
an agent. The agreement has a two-year term and will be automatically renewed
for an indefinite period unless earlier terminated in accordance with its
provisions. Joint marketing efforts for mPresence(TM) have been initiated and we
intend to maintain these efforts in the future.

OZ as Sales Agent

     Pursuant to an iPulse(TM) agency agreement also concluded with Ericsson on
November 1, 2000, we have obtained a nonexclusive right to promote iPulse(TM).
In the absence of a contrary agreement with respect to any particular customer,
we are entitled to receive a certain percentage of the net sales price of any
sales made by Ericsson as a result of a referral we may make and a greater
percentage of the net sales price if we conclude the sale as an agent. Any
payments made to us under the agreement will be in addition to our 15% royalty
payment under the specific co-operation and development agreement entered into
with Ericsson on February 4, 1999. The iPulse(TM) agency agreement has a
two-year term and automatically will be renewed for an indefinite period unless
earlier terminated in accordance with its provisions. Joint marketing efforts
for iPulse(TM) have been initiated and we intend to maintain these efforts in
the future. We believe that our active participation in the distribution of
iPulse(TM) will enable us to build up the base of iPulse(TM) end users more
rapidly. We intend to be recognized as the co-developers of iPulse(TM) and to
ensure that our brand is strongly associated with Ericsson in the marketplace.

Importance of Relationship with Ericsson

     Under the terms of our agreements with Ericsson, Ericsson is able to exert
a significant amount of influence over us. The termination of our agreements or
the failure to renew some or all of our agreements with Ericsson would have a
material adverse effect on our business, operating results and financial
condition. Through its control of the Series A Preferred stock, Ericsson has
veto power with respect to matters requiring the approval of the holders of the
Series A Preferred stock. Ericsson is able to maintain its level of ownership in
us as a result of a right to purchase its pro rata portion of any of our
securities offered by us until we make an initial public offering, which right
was granted to it under the terms of the shareholder rights agreement among us,
Ericsson, Skuli Mogensen, Guojon Mar Guojonsson and OZ Holdings LLC dated
February 4, 1999. Under the shareholder rights agreement, the parties also have
agreed to vote a sufficient number of shares in favor of a board nominee
designated by Ericsson until we close and initial public offering. Ericsson
Canada also acquired 5,069,271 shares of Common Stock on November 8, 2000, and
is able to maintain its current level of ownership as a result of a right, with
some exceptions, to purchase its pro rata portion of any of our securities
offered by us under a shareholder agreement among us, Ericsson Canada, Skuli
Mogensen and Guojon Mar Guojonsson dated November 8, 2000.

     Furthermore, the revenues received from Ericsson have been our primary
source of revenues for the past two years, and are expected to be a source of a
large percentage of all of our revenue. In fiscal year 2000, revenues from
Ericsson accounted for most of our development revenues. We currently anticipate
that revenues from Ericsson will constitute approximately 75% of our development
revenues for 2001. Consequently, the termination of the specific co-operation
and development agreement dated February 4, 1999 and the specific co-operation
and development agreement dated November 8, 2000 with Ericsson would result in
the loss of our main source of revenues. In addition, under the February 1999
specific co-operation and development agreement, Ericsson is able to make the
final decision on all issues in the event of a dispute between us and Ericsson
relating to iPulse(TM) development work. With respect to revenues to be received
by us under the iPulse(TM) agency agreement for referrals to customers, Ericsson
is able to decide whether to sell iPulse(TM) to a customer that is referred by
us; we are only an agent and as such cannot accept orders or set pricing.
Accordingly, we would lose a significant potential source of revenues if
Ericsson did not accept our referrals or if the agreement were terminated. In
addition, the volume of mPresence(TM) sales may be negatively

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affected if Ericsson were to no longer serve as a sales channel under the
mPresence(TM) agency agreement. In addition, although we may offer iPulse(TM) as
a hosted service to our customers, iPulse(TM) may fail to achieve market
penetration without Ericsson's marketing efforts, in which case we would not
have a market for our products as developed to this date.

LEVERAGING OF STRATEGIC RELATIONSHIP WITH MICROCELL

     We have developed a strategic relationship with Microcell as a result of
our acquisition of MCE Holding Corporation, which was formed as a strategic
alliance between Ericsson and Microcell. Microcell had a 9.6% ownership interest
in us as of March 31, 2001 (assuming conversion by all holders or Series A
Preferred stock), and we expect that payments under the general co-operation and
development agreement with Microcell will be a significant source of cash
payments over the next three years. We also expect to gain from Microcell's
experience as an operator in helping us define products and services that will
meet the needs of other operators.

Microcell as Investor

     In connection with our acquisition of MCE Holding Corporation, Microcell
acquired 11,405,860 shares of Common Stock. We also entered into a shareholder
agreement with Microcell and two of our directors and officers, Skuli Mogensen
and Guojon Mar Guojonsson. This agreement gives Microcell the right to
participate in any sales of our shares by either Mr. Mogensen or Mr. Guojonsson
and, with some exceptions, to purchase pro rata shares of our securities offered
by us. In addition, Messrs. Mogensen and Guojonsson have agreed to vote a
sufficient number of our shares to enable a nominee of Microcell to sit on our
board of directors.

     The acquisition agreement with Microcell grants Microcell the right, during
the period from February 15, 2002 until April 15, 2002, to require us to
repurchase the 11,405,860 shares delivered to Microcell Capital in connection
with the acquisition at the price of $4,500,000, if prior to February 15, 2002,
we fail to complete a firmly underwritten public offering pursuant to a
registration statement under the Securities Act, or a public offering in which
our shares are listed or designated for trading on any "designated offshore
securities market" as such term is defined in Regulation S under the Securities
Act, which offering, in either case, results in a market capitalization of not
less than $225 million.

Microcell as Customer and OZ as Technology Provider and Developer

     In connection with the acquisition, OZ.COM Canada and Microcell entered
into a general co-operation and development agreement on November 8, 2000
pursuant to which Microcell committed to purchasing $9 million in consulting and
development services and technology licenses during the three year term of the
agreement. OZ.COM Canada will have full ownership of the products developed
under the agreement and their related intellectual property rights. However, if
the products are unrelated to OZ.COM Canada's product offerings or if the
products are completed by Microcell as a result of OZ.COM Canada's breach of the
agreement, Microcell will own the product and its related intellectual property
rights, with OZ.COM Canada retaining the right to use, sell and distribute the
product outside of Canada for three years. Microcell will have a license to use,
sell and distribute all products developed under the agreement. The license will
be royalty-free, except that Microcell will pay to OZ.COM Canada 10% of
Microcell's net revenues attributable to the sale or license of the products
during the three-year term after the commercial launch of such products. OZ.COM
Canada will pay to Microcell 10% of all of OZ.COM's net revenues attributable to
the sale or license of products developed under the agreement during the
three-year term following the commercial launch of such products.

     OZ.COM Canada also concluded a specific development and consulting
agreement with Microcell on November 8, 2000 pursuant to which OZ.COM Canada
granted to Microcell a non-exclusive, non-transferable, non-revocable license to
use iPulse(TM) 1.5 on the terms and conditions set forth in the agreement.
Except for the revenue sharing payments required to be paid to us by Microcell
under the general co-operation and development agreement with Microcell dated
November 8, 2000, the license is royalty-free. Ericsson had

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<PAGE>   12

granted to MCE Holding Corporation the right to grant a license to iPulse(TM)
1.5 and agreed to the assignment of this right to OZ.COM Canada.

     As a result of the level of Microcell's ownership in us at the inception of
the agreements with Microcell, all payments received from Microcell under such
agreements are not immediately recognizable as revenue according to generally
accepted accounting principles. In the fourth quarter of 2000, we received
payments of $1 million for consulting services under the general co-operation
and development agreement with Microcell and $750,000 for development work
rendered to Microcell under the specific development and consulting agreement
that was not recognized as revenue. The expenses associated with our performance
of this work have been recognized as cost of revenues in the case of the payment
for consulting services and as research and development expenses in the case of
development work, and the payments from Microcell for the work performed have
been characterized as deferred revenues on our balance sheet. We will recognize
all of the deferred revenues as current revenues at the termination of the
particular agreement under which we perform the work.

BUILDING ADDITIONAL STRATEGIC PARTNERSHIPS

     In addition to our strategic relationships with Ericsson and Microcell, we
are currently seeking to enter into strategic relationships with large
participants in the Internet and wireless telecommunications markets, as well as
with smaller, emerging participants and third-party developers. We intend to
concentrate on the communications and commerce technology components of
mPresence(TM) and to use strategic relationships or licensing arrangements to
access the best of end-user solutions from leading Internet software developers.

STRENGTHENING THE MPRESENCE(TM) BRAND THROUGH ENHANCED SALES AND MARKETING
EFFORTS

     For the balance of 2001 we intend to commit our existing sales resources
primarily to support Ericsson market units in the sale of iPulse(TM) licenses to
wireless network operators. We intend to begin promoting the mPresence(TM) brand
more aggressively to wireless network operators and Internet businesses in the
beginning of 2002, and intend to increase our sales and marketing expenditures
significantly. Our enhanced sales and marketing efforts will include
advertising, public relations, tradeshows, participation in major conferences,
and online marketing. We will also target enterprise customers indirectly
through partnerships with application service providers and other service
providers. See "Sales and Marketing." Our branding program focuses on ensuring
integrity and recognition for our vision of mobilizing customers, partners and
technology contemporaries to wireless services.

STRATEGIC ACQUISITIONS

     Through acquisitions, we aim to reduce time-to-market when either
introducing new services or entering a new market. Our strategy is to leverage
our experience to identify companies that have complementary technology,
resources, products or service offerings. We cannot be certain, however, that we
will be able to acquire these companies or to integrate them successfully into
our business. When evaluating new technologies and services to build into our
own products and services offering, we plan not only to license third-party
technology, but also to pursue opportunities for strategic investments.

     On November 8, 2000, we completed an acquisition of all of the outstanding
voting capital stock of MCE Holding Corporation. MCE Holding Corporation was a
strategic alliance between Microcell and Ericsson formed to hold all of the
issued and outstanding capital stock of 3044016 Nova Scotia Company, a recently
organized company based in Montreal, Canada that was formed to develop mobile
Internet applications for network operators in Canada. The name of 3044016 Nova
Scotia Company was changed to OZ.COM Canada Company following the closing of the
transaction. The transaction was closed pursuant to two share exchange
agreements dated November 8, 2000 between us and each of Microcell and Ericsson
as the former stockholders of MCE Holding Corporation.

     The acquisition was structured as a stock-for-stock exchange in which we
issued an aggregate of 16,475,131 shares of our common stock to Microcell and
Ericsson in exchange for all of the issued and outstanding stock of MCE Holding
Corporation. Total consideration given, including direct acquisition costs,
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aggregated approximately $18.4 million. We have accounted for the acquisition
using the purchase method of accounting. MCE Holding Corporation and 3044016
Nova Scotia Company had no operations prior to the acquisition. The excess of
the purchase price over the estimated fair value of tangible net assets acquired
amounted to approximately $16.4 million, with $15.5 million attributable to
goodwill and $0.9 million attributable to a fully paid-up iPulse(TM) 1.5 license
for the benefit of Microcell and its affiliates. We are amortizing the goodwill
on a straight-line basis over an estimated useful life of five years and the
iPulse(TM) 1.5 license on a straight-line basis over an estimated useful life of
3.5 years. The acquired assets consist of licensed technology and cash to be
used in the business of developing and marketing Internet application technology
for wireless service providers.

SALES AND MARKETING

     As of April 30, 2001, we had 5 persons in sales and 1 person in marketing
based in the United States, and 8 persons in sales and 3 persons in marketing
based in Europe. We feel that we are at approximately the right level in the
area of sales and marketing for current market conditions and do not expect to
expand this group significantly over the next twelve months. In addition, we
have a joint marketing and distribution relationship with Ericsson.

SALES

     We presently have established sales offices in San Diego, Stockholm and
Reykjavik. Each sales office is responsible for mPresence(TM) sales in its
assigned geographic areas and will work alongside Ericsson in selling iPulse(TM)
when applicable.

     We believe that our success depends in large part on our ability to
increase sales of our products and services through value-added resellers and
other indirect distribution channels. We will approach potential customers as
partners, introducing them to a business concept with new revenue streams,
increased customer loyalty and increased brand recognition.

     We will offer our value-added services to our customers on a fixed-price
per user basis and also on a revenue-sharing basis. The revenue-sharing
structure includes a fixed component along with a percentage of the revenues
derived from various end-user services, such as increased short message service
and airtime usage, and advertising.

MARKETING

     Our corporate marketing objectives focus on ensuring integrity and
recognition for our vision of mobilizing customers, consumers, partners and
technology contemporaries to embrace wireless services. Programs will initially
span both European and North American markets. Our future success in marketing
requires that certain objectives be prioritized in corporate communication, such
as achieving industry and market recognition for our company as a leading expert
and pioneer of presence enabled communication services, making mPresence(TM) a
highly regarded mobile Internet service offering among wireless network
operators, ensuring that we are recognized as a co-developer of iPulse(TM),
supporting our ability to attract and retain highly skilled and experienced
professionals, and expressing our dynamic and internationally diverse company
culture.

     We are not currently investing heavily in corporate communication programs
because of our short-term focus on supporting Ericsson's sales of iPulse(TM).
However, we expect to begin dedicating significant resources to the promotion of
mPresence(TM) by early 2002.

     Corporate marketing activities are intended to build on our strategic
partnership with Ericsson. Our plan is that our association with the globally
recognized Ericsson brand will bring greater market exposure to our innovations
in mobile Internet technology and services. We intend to collaborate and partner
closely with Ericsson in joint marketing programs for iPulse(TM) that include
public relations, customer account marketing, worldwide tradeshow participation
and any other applicable marketing activities. We believe that the market

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success of iPulse(TM) is a key priority of our marketing objectives. With
industry and customer acceptance of iPulse(TM), we hope to expand on our
business opportunities for mPresence(TM) and our value-added services.

     Independently, we participate in selected industry and technology related
events and conferences in order to increase our visibility and our technology,
addressing topics such as wireless Internet, presence management, wireless
application protocol, intelligence of IP networks and security. We also intend
to participate in co-marketing efforts with our customers to promote
mPresence(TM) and our value-added services in the marketplace.

CUSTOMERS

     We are focusing nearly all of our current efforts on mobile operators and
virtual mobile network operators. Our sales strategy is to target the
established major mobile operators mainly through the Ericsson sales channel but
also to market directly to virtual mobile network operators. Although we believe
that Internet businesses such as portals and e-commerce sites are likely
customers of our products and services, we believe our limited resources are
better spent selling to mobile operators, especially those that have already
acquired an iPulse(TM) license from Ericsson.

MOBILE OPERATORS

     An important element in our strategy is to complement Ericsson's sales of
iPulse(TM) to mobile operators. In conjunction with Ericsson's sales efforts, we
are able to offer:

     - Initial hosting or extended hosting of iPulse(TM), reducing the
       time-to-market for either a commercial trial or a commercial launch.

     - Value-added services that are already integrated onto and into the
       iPulse(TM) application to some extent as a part of the mPresence(TM)
       offering and that provide a unified value for the mobile operator and its
       customers.

VIRTUAL MOBILE NETWORK OPERATORS

     Virtual mobile network operators are new market entrants that require
immediate competitive advantages. These customers basically offer all services
traditionally offered by mobile operators, but buy the network access from
established mobile operators. These customers, however, need services and
solutions that are hosted and managed for them and, more importantly, are driven
by an effort to differentiate themselves in the marketplace. The substantial
costs of licenses for third-generation mobile telephony platforms will further
enable this market because holders of such licenses look toward selling network
access to various participants in the wireless market.

COMPETITION

     The market for our products and services includes a large number of
participants, is subject to rapid changes and is highly competitive. Although no
competitor offers exactly the same type of wireless Internet product offering as
ours, our competitors currently offer or have the potential to offer either a
total end-user product offering to wireless network operators and Internet
businesses or compete with various components of the mPresence(TM) product
offering. In addition, our clients and strategic partners may eventually offer
products or services that directly compete with those we offer. We expect to
compete primarily on the basis of time-to-market, functionality, quality, price
and breadth of product and service offerings. Our current and potential
competitors include the following:

     - Infrastructure and service providers. Companies that provide browsers for
       digital mobile phones and the infrastructure to link devices to network
       service providers and provide advanced presence management applications,
       such as Openwave and Jabber.com, are positioning themselves for the
       growth of wireless data services.

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<PAGE>   15

     - Instant messaging providers and Internet portals. Instant messaging
       providers such as AOL offer a total solution for messaging and
       information services with its ICQ and AOL Instant Messenger Services.
       Microsoft's Mobile Explorer platform is expected to offer an integrated
       mobile MSN messenger in the future and Yahoo! and Exite@Home also intend
       to offer their users total solutions for mobile instant messaging and
       information services.

     - Wireless service providers. Companies offering wireless data services
       such as e-mail, calendar access, aggregation of content and a mobile
       e-commerce platform include InfoSpace.com and Wireless Knowledge (a joint
       venture between Qualcomm and Microsoft).

     - Telecommunications operators. Companies such as Sonera, through its
       affiliate Sonera Zed, are developing mobile portal solutions with
       functionality that partially resembles that of our product offering.

     - Mobile equipment manufacturers. Nokia and others are developing and
       marketing server, browser and application software products that may
       compete with our product and service offering. These companies already
       sell billions of dollars worth of mobile handsets and other
       telecommunications products to wireless service providers, which are our
       existing and potential customers.

     In contrast to the services offered by many of our competitors, our value
added services are fully owned and branded by the wireless network operators and
Internet businesses, which gives them total control over their subscriber base
and customers. Many of our competitors, however, claim end-user ownership to
various extents. We believe that this distinguishes us from these competitors.

RESEARCH AND DEVELOPMENT

     Our future success depends on a number of factors, including our ability to
identify and respond to emerging technological trends in the target markets, to
develop and maintain competitive products, to enhance existing products by
adding features and functionality that differentiate them from those of our
competitors, and to bring products to market on a timely basis and at
competitive prices. As a result, we intend to continue to invest significantly
in research and product development of applications that further provide us with
a unique position in the market based on the underlying intelligent
functionality of the mPresence(TM) framework and iPulse(TM). We are attempting
to reduce some of our risk in the area of research and development by working
with key customers such as Microcell to develop product concepts and then to
develop commercial versions of those concepts with the understanding that the
key customers will implement them. We invested approximately $0.5 million and
$3.2 million in research and development in 1999 and 2000, respectively, none of
the cost of which was borne directly by our customers.

PRODUCT DEVELOPMENT

     Following the strategic approval and key customer validation of research
projects concerning software development, and appropriate preparation by product
marketing and product management, projects are finalized by the engineering
unit. The engineering unit undertakes system management, configuration
management and testing. System management is responsible for keeping total
system design both sound and complete. Configuration management is responsible
for identification of software items, controlling changes to them throughout the
software life cycle and managing releases of the items. Configuration management
is also responsible for defining and implementing company-wide configuration
processes according to international standards and best practices. Testing is
performed in our test lab. The testing group verifies all requirements against
the deliverable product.

     Project teams are formed for each software development project, with a team
leader responsible for resource allocation, deadlines and the overall progress
of each project. We make an effort to outsource well-defined projects to
qualified and pre-approved partners. In such cases, we also appoint a dedicated
team leader responsible for relations to the partner and project progress. The
delivery of finished products involves system integration that consists of
customer-oriented project teams performing the consulting and custom software
development required by individual customers deploying our products. As such,
each project is typically

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<PAGE>   16

shorter than a core technology development and makes use of our rapid
development processes. Systems operations concern the administration of the
hosted services, installations and customer support.

RECRUITING AND RETENTION

     As of April 30, 2001, we had approximately 165 full-time employees, of whom
7 were located in the United States, 82 were located in Iceland, 49 were located
in Canada and 27 were located in Sweden. Twelve of the employees located in
Iceland are members of trade unions, including the Iceland Commerce Union, the
Union of Electricians, the Graphic Designer Union and the Iceland Naturalists
Union. Eleven of the employees located in Sweden are members of trade unions.

     Our success will largely depend on our ability to attract, identify,
recruit, hire, professionally develop and retain highly qualified employees.
Competition for such personnel is intense, and we may not be able to retain our
senior management or other key personnel in the future.

     We work to ensure that recruiting efforts do not negatively impact the
nurturing of current employees and their working environment. The Chief
Operating Officer is responsible for developing recruitment strategies and
retention programs, while departmental directors are responsible for filling
open positions in their local departments. Local administration directors are
responsible for surveying job satisfaction levels, employee development and
employee-related services in each office.

     We have established a stock option program and a competitive compensation
program to attract new personnel. See the descriptions of our 1995 Stock Option
Plan and the 1998 Incentive Stock Plan in Part III, Item 10.

INTELLECTUAL PROPERTY RIGHTS

     Our success depends significantly upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright and
trademark laws, patents, trade secrets, confidentiality agreements with
employees and third parties and protective contractual provisions. All of our
employees are subject, either by contract or statute, to confidentiality and
non-use restrictions that transfer particular rights that they may have in
copyrightable works or patentable technologies to us. In addition, prior to
entering into discussions with potential affiliates regarding our business and
technologies, we generally require that such parties enter into a nondisclosure
agreement with us. If these discussions result in a license or other business
relationship, we also generally require that a written agreement be made setting
forth the parties' respective rights and obligations, including provisions for
the protection of our intellectual property rights.

     We own the technology upon which iPulse(TM) was developed, while the iPulse
trademark and the rights to the iPulse(TM) solution are the property of
Ericsson. We have applied for registration of the mPresence trademark as well as
various other trademarks in the United States and Europe. We have registered the
trademark "OZ" in the United States and we own several domain name registrations
including our company name and related products. Suites of mobile concepts
relating to mPresence(TM), such as MCOMMERCE and MBUSINESS, are the subjects of
pending trademark registrations. We will seek to register additional service
marks and trademarks, as appropriate. However, we may not be successful in
obtaining the service marks and trademarks for which we have applied.

     We have filed several patent applications that are pending and relate to
innovative solutions including server, audio and agent technology relating to
the Internet and multi-user technologies. Additional patent applications are in
preparation on other features of our technology. We have instituted an employee
incentive program for patent filing and anticipate increased patent application
activity in the future. However, patents with respect to our technology may not
be granted, and, if granted, patents may be challenged or invalidated. In
addition, issued patents may not provide us with any competitive advantages and
may be challenged.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.

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RISK FACTORS

     See also "Note on Forward-Looking Statements" regarding the uncertainties
and risks inherent in our forward-looking statements presented under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere herein.

RISK FACTORS RELATING TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY; HISTORY OF NET LOSSES AND NO ASSURANCE OF
FUTURE PROFITABILITY

     We were incorporated in California in 1995. Although communications and the
Internet were central to our operations since our incorporation, we did not
begin developing our core products until 1996. In February 2000, we announced
the commercial availability of mPresence(TM). The first commercial sale of
iPulse(TM) was made by Ericsson in November 1999. Accordingly, we have only a
limited operating history upon which you can base an evaluation of our business.
Furthermore, as discussed in note 1 to our consolidated financial statements,
our recurring losses from operations, negative cash flows, and future need for
additional capital raise substantial doubt about our ability to continue as a
going concern, and our financial statements have been prepared assuming that we
will continue as a going concern. We have incurred significant net losses since
inception, including losses of $2,932,118 and $13,965,880, for the fiscal years
1999 and 2000, respectively and had received no revenue from our core products
through the end of 2000. Over time we intend to increase expenditures in order
to fund the continued expansion of our operations in North America and Europe
through an increased sales and marketing force and a higher number of
technically skilled professional staff. To the extent such expenditures are
incurred and revenues do not correspondingly increase, our operating results
would be materially and adversely affected. In addition, future operating
results will depend on many other factors, including the growth of the market
for wireless Internet-based services, competition, and our success in expanding
our direct sales and marketing organizations and in attracting and retaining
additional skilled professional staff, as well as general economic conditions
and other factors. Accordingly, we cannot be sure that we will be profitable in
future periods. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Overview."

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL NEEDED CAPITAL

     We have experienced negative cash flow from operations since our inception
and we expect to continue to experience significant negative cash flow from
operations for the foreseeable future. We believe that our existing capital
resources will be sufficient to meet our presently anticipated cash requirements
for the next three months. In addition, we expect that it will be necessary to
obtain additional capital to meet adequately management's growth objectives and
to implement fully our business plan. We may seek additional debt or equity
financing through public or private placements of our securities or through
banks, financial institutions or companies. We cannot be sure that any such
financing will be obtained or, if obtained, will be adequate to meet our needs.
If we are not able to obtain additional financing on satisfactory terms when
needed, our business, operating results and financial condition may be
materially and adversely affected.

WE HAVE A CONCENTRATION OF REVENUES FROM A SINGLE CUSTOMER AND MAY BE DEPENDENT
ON A LIMITED NUMBER OF CUSTOMERS

     We derive a significant portion of our revenues from a single customer.
During 2000, Ericsson accounted for approximately 93.7% of our total revenues.
In addition, we believe that a major part of our revenues in the foreseeable
future will be derived from a limited number of customers. The termination of
business relations with Ericsson or any future agreement with a significant
customer could have a material adverse effect on our business, operating results
and financial condition. Furthermore, a decision by any large customer not to
proceed with a project to the stage we anticipate could have a material adverse
effect on our business, operating results and financial condition.

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WE RELY ON STRATEGIC RELATIONSHIPS

     We have established a strategic relationship with a business partner,
Ericsson, that we believe is important to the development of our business. We
signed a general co-operation and development agreement with Ericsson in
November 2000, which superseded an agreement of the same name dated February 4,
1999. The agreement sets forth the general terms of the development work that we
perform for Ericsson. We entered into a specific co-operation and development
agreement with Ericsson in February 1999, which is an agreement under the
general co-operation and development agreement, to jointly develop the
iPulse(TM) application based on our server technology. The iPulse(TM)
application is a part of Ericsson's product offering to telecommunications
operators. The iPulse(TM) application and the iPulse(TM) trademark are wholly
owned by Ericsson. As a result of the specific co-operation and development
agreement, we receive 15% royalties of gross worldwide iPulse(TM) sales. OZ.COM
Canada entered into a specific co-operation and development agreement with
Ericsson Canada on November 8, 2000 under the terms of which OZ.COM Canada will
provide consulting and development services in the areas of mobile Internet
applications for third-generation ("3G") mobile telephony platforms. The
November 2000 specific co-operation and development agreement gives OZ.COM
Canada access to Ericsson Canada's 3G laboratories and up to 6,000 hours of
assistance from qualified 3G experts for testing of 3G products. The agreement
calls for minimum payments to us totaling $6 million over two years and
anticipates that $2 million of this amount will be allocated to additional
iPulse(TM) development in the first year of the agreement.

     As a result of the level of Ericsson's ownership in us at the inception of
the specific development agreements between Ericsson Canada and OZ.COM Canada,
all payments received from Ericsson Canada for research and development work
under such agreements are not immediately recognizable as revenue according to
generally accepted accounting principles. The expenses associated with our
performance of these obligations to Ericsson Canada would be recognized as
current research and development expenses and the payments from Ericsson Canada
for the work performed would be characterized as deferred revenues on our
balance sheet. We would recognize all of the deferred revenues in the statement
of operations at the end of the particular agreement under which we performed
the work.

     Furthermore, we have entered into agreements with Ericsson with respect to
the sale and distribution of iPulse(TM) and our product mPresence(TM). Pursuant
to a value-added distribution license agreement entered into with Ericsson on
November 1, 2000, we may offer iPulse(TM) to our customers as an integral part
of the mPresence(TM) framework and value-added services in exchange for
royalties payable to Ericsson. Under the terms of the mPresence(TM) agency
agreement also entered into with Ericsson on November 1, 2000, Ericsson has the
right to promote our mPresence(TM) framework and services and, in the absence of
a contrary agreement with respect to a specific customer, to receive from us 5%
of the net sales price of mPresence(TM) from any sale resulting from a referral
by Ericsson or up to 15% of the net sales price from any sale of mPresence(TM)
that Ericsson concludes as an agent. We also concluded the iPulse(TM) agency
agreement on November 1, 2000 through which we obtained the right to promote
iPulse(TM). In the absence of a contrary agreement with respect to a specific
customer, Ericsson will pay to us a certain percentage of the net sales price
from any sale of iPulse(TM) to a customer referred by us and a greater
percentage of the net sales price from any sale of iPulse(TM) that we conclude
as an agent.

     The general co-operation and development agreement and the February 1999
specific co-operation and development agreement terminate on December 31, 2003,
but will be automatically renewed on a yearly basis unless terminated by written
notice of either party. The November 2000 specific co-operation and development
agreement for 3G development work has a two-year term until November 8, 2002.
The mPresence(TM) agency agreement and iPulse(TM) agency agreement have two-year
terms and will be automatically renewed for an indefinite period unless earlier
terminated in accordance with their provisions. The value-added distribution
license agreement may be terminated by either party upon a material breach of
the provisions of the agreement or any representations contained therein that is
not cured by the other party. Notwithstanding the termination of the agreement,
we will retain the right to provide hosting services based on the then current
version of iPulse(TM). In November 2003, and provided that we have paid all
royalties due under the agreement, Ericsson may no longer terminate the
agreement

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     Between June and October 1999 Ericsson acquired 10,052,431 shares of our
Series A Preferred stock. On November 8, 2000, Ericsson acquired 5,069,271
shares of our Common Stock in connection with our acquisition of MCE Holding
Corporation, which was formed as a strategic alliance between Ericsson and
Microcell. MCE Holding Corporation was the parent company of OZ.COM Canada. As a
result of these acquisitions of our securities, Ericsson holds approximately a
21.2% ownership interest in us as of December 31, 2000 (assuming conversion by
all holders of Series A Preferred stock).

     Although regarded by us as an advantage, the current ties with Ericsson
may, at the same time, deter potential customers or categories of customers, in
particular current and future competitors of Ericsson, from entering into or
extending business relations with us. Under the terms of the general
co-operation and development agreement dated November 1, 2000, as long as
Ericsson owns shares representing 5% or more of our capital stock we must inform
Ericsson of any proposal to license or sell any of the technology covered in the
agreement or to enter into any transaction with any principal competitor of
Ericsson. Ericsson may opt to enter into the proposed transaction on the same
terms and conditions.

     We also have developed a strategic relationship with Microcell through our
acquisition of MCE Holding Corporation. In connection with the acquisition,
Microcell acquired 11,405,860 shares of Common Stock on November 8, 2000, which
equals approximately a 9.6% ownership interest in us as of March 31, 2001
(assuming conversion by all holders of Series A Preferred stock). In addition,
OZ.COM Canada had entered into a general co-operation and development agreement
with Microcell prior to the acquisition, under which Microcell agreed to
purchase $9 million of development work and consulting services. OZ.COM Canada
also had entered into a specific development and consulting agreement with
Microcell whereby OZ.COM Canada granted a license to use, sell and distribute
iPulse(TM) to Microcell under the terms and conditions set forth in the
agreement. Our acquisition of MCE Holding Corporation and our relationship with
Microcell is discussed in further detail in Part I, Item 1 "Our Future Growth
Depends, in Part, on Acquisitions."

     As a result of the level of Microcell's ownership in us at the inception of
the agreements with Microcell, payments received from Microcell under such
agreements may not be immediately recognizable as revenue according to generally
accepted accounting principles. In the fourth quarter of 2000, we received
payments of $1 million for consulting services under the general co-operation
and development agreement with Microcell and $750,000 for development work
rendered to Microcell under the specific development and consulting agreement
that was not recognized as revenue. The expenses associated with our performance
of this work have been recognized as cost of revenues in the case of the payment
for consulting services and as research and development expenses in the case of
development work, and the payments from Microcell for the work performed have
been characterized as deferred revenues on our balance sheet. We will recognize
all of the deferred revenues as current revenues at the termination of the
particular agreement under which we perform the work.

     We believe that our strategic relationships with Ericsson and Microcell
represent advantages to our business and that our relationship with Ericsson has
been a significant factor in our success to date. We also may establish more
strategic business relationships with other business partners in the future. The
failure to maintain our existing strategic relationships or the inability to
develop new relationships, particularly in the new markets we are seeking to
enter, could have a material adverse effect on our business, operating results
and financial condition. In particular, we may not be able to survive
termination of our agreements with Ericsson.

We May Have to Repurchase Shares

     We may be obligated to purchase the 11,405,860 shares of Common Stock
issued to Microcell pursuant to a share exchange agreement dated November 8,
2000 between Microcell and us that we entered into in connection with our
acquisition of MCE Holding Corporation. The share exchange agreement with
Microcell grants Microcell the right, during the period from February 15, 2002
until April 15, 2002, to require us to repurchase the 11,405,860 shares
delivered to Microcell at the price of $4,500,000, if prior to February 15,
2002, we fail to complete a firmly underwritten public offering pursuant to a
registration statement under the Securities Act of 1933, as amended ("Securities
Act"), or a public offering in which our shares are listed or

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<PAGE>   20

designated for trading on any "designated offshore securities market" as such
term is defined in Regulation S under the Securities Act, which offering, in
either case, results in a market capitalization of not less than $225 million. A
repurchase by us of the shares owned by Microcell could have a material, adverse
effect on our business, operating results, and financial condition.

OUR REVENUES AND OPERATING RESULTS ARE EXPECTED TO VARY FROM QUARTER TO QUARTER

     Our revenues and operating results are expected to vary, sometimes
substantially, from quarter to quarter. These fluctuations may result in
volatility in the price at which shares of our stock may trade. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including:

     - the timing of large transactions;

     - our estimated initial sales cycle of six to nine months;

     - the proportion of revenues attributable to revenue-sharing or fixed per
       end-user fees versus revenues from software sales;

     - changes in the level of operating expenses;

     - the utilization rate of our professional services employees;

     - demand for our products and services;

     - the introduction of new products and product enhancements by us or our
       competitors;

     - changes in customer budgets;

     - competitive conditions in the industry; and

     - general economic conditions.

     Further, the purchase of our products and services often involves a
significant commitment of capital by our customers with the attendant delays
frequently associated with large capital expenditures and authorization
procedures within an organization. Accordingly, we expect that the sales cycles
for our products and services will be lengthy, with an estimated initial sales
cycle of six to nine months, and subject to a number of significant risks over
which we have little or no control, including customers' budgetary constraints
and internal authorization reviews.

     In addition, our quarterly operating results are also subject to seasonal
fluctuations. We do not yet see a pattern in licensing revenues (i.e., from the
sales of iPulse(TM) licenses or our mPresence(TM) framework and services), but
we have observed seasonality in our service businesses. Our revenues and
operating results from development contracts and client services are typically
lower in the second and third quarters than the remainder of the year because
these revenues are to some extent dependent on the availability of professional
staff and a disproportionate number of holidays or vacation days typically fall
in these quarters.

     In particular, our third fiscal quarter includes the months of July and
August, when billable service activity by professional staff, as well as
engagement decisions by customers, are reduced due to summer vacation schedules.

WE MAY NOT BE ABLE TO MANAGE GROWTH

     We are currently experiencing a period of rapid growth in personnel and
expenditures that is expected to continue to place a strain on our
administrative, financial and operational resources. In 2000, we opened a
Stockholm office, which we had staffed with 27 employees as of April 30, 2001,
and which we have subsequently decided to close. We also added a Montreal office
with a staff of 49 employees as of April 30, 2001. Our total number of employees
has increased from 97 employees as of April 1, 2000 to 165 employees as of April
30, 2001. Furthermore, we have increased our operating expenditures. In 1999, we
had operating expenses, not including cost of revenues, of nearly $4.7 million,
which represented a 25% increase from 1998. In 2000, we had operating expenses,
not including cost of revenues, of more than $16 million. We intend to

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<PAGE>   21

maintain or reduce our present number of employees for the balance of 2001,
except for some growth in the number of professional staff in Montreal, and then
to continue to expand on a selected basis in North America and Europe and to
continue to increase the number of our professional staff significantly in 2002.
Such expansion, if achieved, would place a further strain on our resources and
increase operating costs. Our ability to manage our growth effectively will
require us to continue to improve our operations, financial and management
controls, reporting systems and procedures, and to train, motivate and manage
our employees and consultants and, as required, to install new management
information and control systems. We cannot be certain that we will be able to
implement improvements to our management information and control systems in an
efficient and timely manner or that, if implemented, these improvements will be
adequate or sufficient to support our operations. Any inability to manage
successfully future expansion could have a material adverse effect on our
business, operating results or financial condition. We cannot be certain that
our contemplated growth rate will be achieved, or if achieved, be maintained or
that we will be successful in managing our growth.

OUR FUTURE GROWTH DEPENDS, IN PART, ON ACQUISITIONS

     We believe that our future growth depends, in part, on continuing to
identify and acquire complementary information technology service businesses.

     On November 8, 2000, we completed an acquisition of all of the outstanding
voting capital stock of MCE Holding Corporation. MCE Holding Corporation was a
strategic alliance between Microcell and Ericsson formed to hold all of the
issued and outstanding capital stock of 3044016 Nova Scotia Company, a recently
organized company based in Montreal, Canada that was formed to develop mobile
Internet applications for network operators in Canada. The name of 3044016 Nova
Scotia Company was changed to OZ.COM Canada Company following the closing of the
transaction.

     We plan to continue to explore the possibility of relationships with other
information technology service businesses that we may acquire. We cannot be
certain that we will be successful in identifying, acquiring and profitably
managing complementary information technology service businesses without
substantial delays, expenses or other operational or financial problems.
Expansion will require the commitment of significant capital, managerial and
other resources. Acquisitions may also expose us to particular risks, including
diversion of management's attention, failure to retain key acquired personnel,
assumption of legal liabilities, and amortization of goodwill and other acquired
intangible assets, some or all of which could have a material adverse effect on
our business, operating results and financial condition. Moreover, customer
dissatisfaction with, or problems caused by, the performance of any such
acquired business could have a material adverse impact on our reputation as a
whole. In addition, we cannot be certain that the acquired businesses, if any,
will achieve anticipated revenues and earnings. Depending on the value and
nature of the consideration to be paid by us for future acquisitions, such
acquisitions may have a dilutive effect on our earnings per share or an adverse
effect on our financial condition. Failure to implement our acquisition strategy
successfully could have a material adverse effect on our business, operating
results and financial condition.

WE MAY NOT SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES AND MAY INCUR INCREASED
COSTS AND OPERATING INEFFICIENCIES

     Given our acquisition strategy, management may be challenged to manage the
integration of acquired employees to eliminate redundancy and achieve operating
efficiencies. Workforce reductions must be made in compliance with all
applicable laws and resulting severance and retraining costs can be significant.
Frequently, the acquired company's management information systems, accounting
systems and operational systems are different from those of the acquiring
company, and the efficient integration of such systems may impose severe strains
on our own accounting, operational and control systems. Also, the acquisition of
a new company often requires that operations be consolidated, excess office
space subleased or existing leases renegotiated. We cannot be certain that the
failure to integrate effectively the operations of an acquired business in the
future will not adversely affect our business, operating results or financial
condition.

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<PAGE>   22

POSSIBLE FUTURE ACQUISITIONS COULD CREATE CHARGES TO EARNINGS THAT COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

     As a result of our acquisition of MCE Holding Corporation, we incurred
amortization expense in 2000 related to goodwill and a fully paid-up iPulse(TM)
1.5 license of approximately $0.4 million. We are amortizing the goodwill on a
straight-line basis over an estimated useful life of five years and the
iPulse(TM) license on a straight-line basis over an estimated useful life of 3.5
years. Any future acquisitions could result in amortization expense related to
goodwill and other intangible assets. If this should occur, our results of
operations would be adversely affected.

WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH MULTINATIONAL OPERATIONS

     We intend to expand our business in North America and Europe. The expansion
of our business to different geographical areas is subject to risks inherent in
traditional multinational business activities, including, in particular, foreign
currency exchange rate fluctuations, overlap of different tax structures,
management of an organization spread over various countries, different
regulatory regimens and unexpected changes in regulatory requirements,
compliance with a variety of foreign laws and regulations, including employment
law and practices, and longer accounts receivables payment cycles in some
countries. Any of the foregoing as well as other risks inherent in traditional
multinational business activities could have a material adverse effect on our
business, operating results and financial condition.

OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO ATTRACT AND RETAIN TECHNICALLY
SKILLED PROFESSIONAL STAFF WHO ARE IN GREAT DEMAND

     Our business involves the development of highly technical products and
services and relies on the ability to respond to rapid technological changes.
Accordingly, our success and future growth depend in part upon our ability to
attract, develop, motivate, integrate and retain highly skilled professional
staff, such as engineers, technical support persons, and sales and human
resources staff. Over time we intend to expand significantly our sales and
marketing force and the number of our technically skilled professional staff to
support our expansion. Although we believe that these expenditures will benefit
our business in the long term, we expect that such expenditures could materially
and adversely affect our operating results in the short term.

     Technically qualified professional staff is in great demand in Europe and
North America and are likely to remain a limited resource for the foreseeable
future. Competition for qualified personnel in the wireless software industry is
particularly fierce and competitors may in the future seek to recruit our
employees. We cannot be certain that we will be able to attract and retain
sufficient numbers of highly skilled professional staff in the future. The
inability to expand our organization and increase the size of our professional
staff at reasonable costs on a timely basis or the loss of highly skilled
professional staff could have a material adverse effect on our business,
operating results and financial condition.

OUR SUCCESS DEPENDS ON OUR KEY EXECUTIVES

     Our success is highly dependent upon the efforts and abilities of our
executive officers, in particular: Messrs. Skuli Mogensen, co-founder and Chief
Executive Officer; Guojon Mar Guojonsson, co-founder and Chief Visionary; and
Skuli Valberg Olafsson, Chief Operating Officer. Although these executives have
entered into employment agreements, these contracts may not be enforceable in
their entirety, and in any event do not guarantee that these individuals will
continue their employment with us. We do not maintain "key man" insurance with
respect to any of our executive officers. The loss of the services of any of
these key executives, for any reason, could have a material adverse effect upon
our business, operating results and financial condition.

WE MAY BE ADVERSELY AFFECTED BY POTENTIAL SOFTWARE DEFECTS OR ERRORS

     Our software is complex and must meet the stringent technical requirements
of our customers. We must develop our products quickly to keep pace with the
rapidly changing industry in which we operate. Software products that are as
complex as those that we produce generally contain undetected errors or defects,

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<PAGE>   23

particularly when first introduced or when new versions are released. In
addition, our software may not properly operate when integrated with the systems
of our customers, or when used to deliver services to a large number of a
customer's subscribers.

     While we continually test our products for errors and work with our
customers through our customer support services to identify and correct bugs,
errors in our products may be found in the future. Testing for errors is
complicated in part because it is difficult to simulate or anticipate the
computing environments in which our customers use our products. Our software may
not be free from errors or defects even after it has been tested, which could
result in the rejection of our products and damage to our reputation, as well as
lost revenue, diverted development resources, and increased support costs.

WE MAY INCUR RISK OF PRODUCT LIABILITY CLAIMS

     We may be subject to claims for damages related to any errors in our
software products. A major product liability claim could have a material adverse
effect on our business because of the costs of defending against these types of
lawsuits, diversion of key employees' time and attention from the business and
potential damage to our reputation. In the past, we have negotiated provisions
in our license agreements with our customers that were designed to limit
exposure to potential product liability claims. However, there is no assurance
that similar provisions will be included in any future agreements. Furthermore,
limitation of liability provisions contained in our license agreements may not
be effective under the laws of some jurisdictions if local laws treat them as
unenforceable. As a result, we could be required to pay substantial amounts of
damages in settlement or otherwise upon resolution of any of these types of
claims.

ENCRYPTION TECHNOLOGY RESTRICTIONS

     The United States government generally limits the export of encryption
technology that originates from the United States, and a variety of
cryptographic products generally require export approvals from certain United
States government agencies, such as the Bureau of Export Administration.
Currently, our products and solutions do not incorporate encryption technology
that is subject to United States export restrictions nor do we require export
approvals from United States agencies. We may in the future, however,
incorporate technology requiring export approval into our products and
solutions. If any export approval that is required is refused, if our software
is unlawfully exported or if the United States adopts new legislation or
regulations restricting exports of software and encryption technology, we may
not be able to distribute our solutions to potential customers, which will cause
a decline in our sales. We may need to incur significant costs and divert
resources to develop replacement technologies or may need to adopt inferior
substitute technologies to satisfy these export restrictions. These replacement
or substitute technologies may not be the preferred security technologies of
customers. This could lead to a lack of growth for our business. In addition, we
may suffer similar consequences if the laws of any other country limit the
ability of third parties to sell encryption technologies to us.

WE MAY NOT BE ABLE TO OBTAIN THIRD-PARTY SOFTWARE, TECHNOLOGY AND CONTENT

     We license or otherwise obtain access to the intellectual property of third
parties, such as Ericsson and Antares Systems. We have also entered into two
license agreements with the third-party content providers, iSyndicate, Inc., and
Moreover.com, Inc. and intend to enter into more such agreements. In addition,
we use and will use in the future, third-party software, such as GSM codec,
RogueWave Software programming libraries and Mp3 Producer, which may not be
available to us in the future on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain, any required intellectual property
could require us to use substitute technology, which could be more expensive or
of lower quality or performance, or force us to cease offering our products.
Moreover, we expect that some of our license agreements in the future may be
non-exclusive and, therefore, competitors may have access to the same
technology.

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OUR SUCCESS DEPENDS ON INTELLECTUAL PROPERTY RIGHTS

     Our success depends upon the use of patents, trademarks and other
proprietary intellectual property rights related to mPresence(TM). Although we
have applied for trademark registration of our marks and for patents on our
technologies such as those relating to real-time simulations over networks, no
trademark registrations or patents have yet been issued except for the trademark
"OZ." Further, we cannot be certain that any such trademark registrations or
patents will be issued or if issued will not be challenged or invalidated. We
rely upon a combination of nondisclosure and other contractual arrangements
together with trade secret, copyright and trademark laws to protect our
proprietary rights and the propriety rights of other parties from whom we
license intellectual property. We enter into confidentiality agreements with our
employees and limit distribution of proprietary information. We cannot be
certain that the steps taken by us in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights or that our competitors will not independently develop superior
technologies.

     Although we believe that our services do not infringe on the intellectual
property rights of others and that we will have all rights necessary to utilize
the intellectual property employed in our business, we are subject to the risk
of litigation alleging infringement of third-party intellectual property rights.
Any such claim could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of asserted infringement.

WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND MAY NOT COMPETE SUCCESSFULLY

     The wireless Internet software and application service market includes a
large number of participants, is subject to rapid changes and is highly
competitive. Although no competitor offers exactly the same type of wireless
Internet solution as we do, our competitors currently offer or have the
potential to offer either a total end-user solution to operators and service
providers or to compete with various components of our mPresence(TM) product
offering. Openwave is an example of one of our competitors. Many of our
competitors have substantially greater financial, technical and marketing
resources than we have. Several of these competitors also have greater name
recognition and more established relationships with the same companies that we
are targeting. Our competitors may be able to respond more quickly than we can
to new or emerging technologies and changes in customers' requirements or devote
greater resources than we can to the development, promotion and sale of new
service offerings. We cannot be certain that we will be able to compete
successfully with these competitors or that competition may not have a material
adverse effect on our business, operating results and financial condition.

     We also expect to face additional competition as other established and
emerging companies enter the wireless Internet software and application service
markets and new service offerings and technologies are introduced. Our current
and potential competitors include:

     - infrastructure service providers, such as Openwave and Jabber.com;

     - telecommunications operators' product initiatives, such as Sonera Zed and
       NTT DoCoMo;

     - wireless service providers, such as InfoSpace.com and Wireless Knowledge;

     - wireless equipment manufacturers, such as Nokia;

     - instant messaging providers that may team up with operators, such as AOL
       and Microsoft MSN; and

     - Internet portals that may team up with operators, such as Yahoo! and
       Excite@Home.

     Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their service offerings to address the needs
of our current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Increased competition could result in
lower utilization rates, billing rate reductions, fewer customer engagements,
reduced gross margins and loss of market share, any one of which could
materially and adversely affect our

                                        21
<PAGE>   25

business, operating results and financial condition. We cannot be certain that
we will be able to compete successfully with existing or new competitors and
competition could have a material adverse effect on our business, operating
results and financial condition.

WE MAY NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE

     The wireless Internet software and application service market is rapidly
evolving and is characterized by an increasing number of market entrants that
have introduced or developed, or are in the process of introducing or
developing, products and services that facilitate the delivery of Internet-based
services through wireless devices. As a result, the life cycle of our products
is difficult to estimate. We may not be able to develop and introduce new
products, services and enhancements that respond to technological changes or
evolving industry standards on a timely basis, which could have a material
adverse effect on our business operating results and financial condition.

OUR SUCCESS DEPENDS ON CONTINUED GROWTH OF INTERNET USE

     Our future success depends to a large extent on the continued growth in the
use of the Internet. We believe that a significant portion of our future
revenues will derive from sales of our mPresence(TM) framework and value-added
services, iPulse(TM) and related services to Internet communities. Our business
may be adversely affected if the number of Internet users does not increase or
if business over the Internet, particularly Internet-based business transactions
and applications involving business conducted through a mobile communications
device ("m-business") including Internet-based commerce conducted through a
mobile communications device ("m-commerce"), does not become more accepted and
widespread. In particular, we will be adversely affected if the number of
Internet communities or the number of members of existing Internet communities
does not increase. Rapid growth in the use of and interest in the Internet has
occurred only recently. As a result, acceptance and use of the Internet may not
continue to develop at historical rates and a sufficiently broad base of
consumers may not adopt, and continue to use, the Internet and other online
sources. The use and acceptance of the Internet, and Internet communities in
particular, may not increase for a number of reasons, including the cost and
availability of Internet access.

OUR SUCCESS DEPENDS ON THE SUCCESS OF WIRELESS NETWORK OPERATORS AND INTERNET
BUSINESSES

     We believe that a major part of our future revenues will derive from sales
of our mPresence(TM) framework and value-added services, and iPulse(TM) and
related services to existing and new wireless network operators and Internet
businesses. Therefore, our future success depends on the acceptance by wireless
network operators and Internet businesses of these new products and services
that we may not be able to achieve. This dependence is compounded by the fact
that there are a relatively small number of wireless network operators and
Internet businesses worldwide. To date, we currently have only one wireless
network operator customer that has agreed to implement mPresence(TM) and our
value-added services. We cannot be certain that wireless network operators or
Internet businesses will use our products widely. In addition, historically
wireless network operators have been relatively slow in implementing new complex
services such as Internet-based services, and Internet businesses may be slow in
implementing the use of wireless services as a means of expanding Internet-based
services. We have limited or no control over the pace at which wireless network
operators or Internet businesses implement these new services. The failure of
wireless network operators and Internet businesses to introduce and support
services utilizing our products on a timely and effective manner could have a
material adverse effect on our business, operating results and financial
condition.

     In addition, the success of our products once they have been implemented by
wireless network operators and Internet businesses will depend in significant
part on our continuing ability to develop and introduce new and improved
versions of existing products and service offerings. There can be no assurance
that we will be successful in developing, introducing on a timely basis and
marketing such products and service offerings. In addition, there can be no
assurance that wireless network operators and Internet businesses will not cease
to buy our products and to subscribe to our services, on account of technologies
or service offerings developed by others or the wireless network operators or
Internet businesses themselves that render our products and services
uncompetitive or obsolete. The failure of wireless network operators or Internet
businesses to continue
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<PAGE>   26

to purchase our products and subscribe to our services could have a material
adverse effect on our business, operating results and financial condition.

     Our pricing model for mPresence(TM) will in many cases be based on a
revenue sharing model in which we take a percentage of revenues resulting from
each end user who uses the services or is exposed to advertisements. Our future
revenues are therefore largely dependent on the number of subscribers to the
wireless network operators or the number of Internet businesses' members that
utilize our products and services. In addition, we can make no reasonable
estimate as to the rate of adoption by the subscribers of the particular
services offered through our products. It is therefore difficult to predict the
size of our future revenues, and such future revenues will be largely dependent
on the number of subscribers to the wireless network operators or Internet
businesses members, in general, and the subscription to the services offered
through our products, in particular. In addition, we have difficulty estimating
the price that subscribers will be willing to pay for these services. As a
result, it is difficult to estimate the pricing of these services and
consequently the future size of our revenues.

OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE OF WIRELESS TELEPHONES FOR WIRELESS
DELIVERY OF INTERNET-BASED SERVICES

     We have focused our efforts on the convergence of fixed and wireless
Internet-related communication. Our technological solutions, in particular
mPresence(TM), are not necessarily dependent on wireless devices for the
conveyance of the communication. However, we believe that the success of
mPresence(TM) is interlinked with the acceptance by the market of wireless
devices as a viable means for Internet-based services giving more wireless
network operators and Internet businesses incentive to adopt technological
solutions supporting such services. We cannot be sure of such market acceptance.
In any event, acceptance may be delayed for a number of reasons. These reasons
could include:

     - inadequate supply of the required hardware and software;

     - limitations to the performance and functionality of wireless devices;

     - conflicting technical standards and lack of interoperability;

     - lack of adequate Internet-based applications and content for such
       Internet-based services;

     - costs; and

     - inadequate security arrangements.

The lack of or delay in market acceptance for wireless devices as means for
wireless delivery of Internet-based services could have a material adverse
effect on our business, operating results and financial condition.

RISKS RELATING TO OUR SECURITIES

THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK

     Currently, there is no organized public trading market for our common
stock, and we cannot be certain that an active trading market will ever develop
or be sustained. Even if a market should develop there can be no assurance that
all market making activity may not cease at any time. If a market for our common
stock does develop, the market price of the common stock may be highly volatile.
Any securities broker-dealer that makes a market in our securities may have
significant influence over the market, and if any market develops, the price and
liquidity of the common stock may be affected by the degree of participation of
any person in the market. Therefore, purchasers of our common stock may be
unable to liquidate their investment readily or at all.

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<PAGE>   27

THE STOCK PRICE FOR OUR SHARES MAY BE VOLATILE

     Should a market for our common stock develop, it will be affected by a
number of factors, including:

     - the announcement of new products or service offerings by us or our
       competitors;

     - quarterly variations in our results of operations or the results of
       operations of our competitors or companies in related industries;

     - changes in earnings or revenue estimates or recommendations by securities
       analysts;

     - developments in our industry;

     - general market conditions;

     - future sales of substantial amounts of shares by our shareholders; and

     - other factors, including factors unrelated to our operating performance
       or the performance of our competitors.

In addition, stock prices for many companies in the technology field have
experienced, and continue to experience, wide fluctuations that have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations, as well as general economic, political and market conditions in
markets where we conduct business, such as recessions, may materially and
adversely affect the market price of our securities.

OUR OUTSTANDING OBLIGATIONS TO ISSUE ADDITIONAL SHARES OF COMMON STOCK MAY
ADVERSELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL EQUITY CAPITAL

     We are obligated to issue 29,061,928 shares of common stock upon the
conversion of the shares of our Series A Preferred stock outstanding as of March
31, 2001. As of March 31, 2001, 1,792,003 shares of common stock were available
for issuance pursuant to options that may be granted under our 1995 Stock Option
Plan and 682,076 shares of common stock were available for issuance pursuant to
grants under our 1998 Incentive Stock Option Plan. As of the same date, options
to purchase a total of 7,280,832 shares of common stock were outstanding under
the 1995 Stock Option Plan. Warrants to purchase an aggregate of 428,000 shares
of common stock were also outstanding as of March 31, 2001. To the extent that
options, warrants or other obligations for the issuance of common stock are
granted or exercised, dilution to the interests of the existing holders of
common stock may occur. Moreover, the terms upon which we will be able to obtain
additional equity capital may be adversely affected because holders of
outstanding options, warrants or other obligations can be expected to exercise
them at a time when we in all likelihood will be able to obtain any needed
capital on terms more favorable to us than those provided by such outstanding
obligations.

WE MAY ISSUE ADDITIONAL STOCK AND THIS MAY HAVE A DILUTIVE EFFECT

     We are currently authorized to issue two classes of stock, which are
designated "Common Stock" and "Preferred Stock." The authorized number of shares
of Preferred Stock is presently 25,000,000 shares. 20,000,000 shares of the
Preferred Stock are currently designated as "Series A Preferred." The authorized
number of shares of Common Stock is 275,000,000. Accordingly, we may in the
future authorize without further shareholder approval the issuance of additional
shares of Common Stock or Preferred Stock. Any such future issuance of our
capital stock could have a dilutive effect on the holders of our stock.

CURRENT DIRECTORS AND OFFICERS MAY EFFECTIVELY CONTROL THE COMPANY

     Our directors and officers as a group beneficially owned approximately 60%
of our Common Stock (prior to any conversion of the Series A Preferred stock) as
of March 31, 2001. As a result, these shareholders, if acting together, would be
able to control effectively matters requiring approval by our shareholders,
including election of at least a majority of our Board of Directors and approval
of significant corporate transactions, except for certain matters as to which
the holders of the Series A Preferred stock vote as a separate class.

                                        24
<PAGE>   28

ITEM 2. FACILITIES

     We maintain offices at (1) Snorrabraut 54 and Snorrabraut 56, IS-105,
Reykjavik, Iceland, (2) Drottninggatan 82, Stockholm, Sweden, (3) 9820 Towne
Centre Drive, San Diego, California and (4) Windsor Station, Room 150, 1100 de
La Gauchetiere West, Montreal, Canada. We own the facility at Snorrabraut 54,
Iceland and rent all the other offices from unaffiliated parties. We have
pledged the Snorrabraut building as collateral for outstanding loans. The amount
due on these loans was $450,000 at December 31, 2000. Our subsidiary, SmartVR,
Inc., maintains an office at Skipholt 50b, IS-105 Reykjavik, Iceland.

     The rent for the Snorrabraut 56, Iceland office, which consists of 451.7
square meters, is ISK 333,200 per month ($3,945 at December 31, 2000), subject
to monthly adjustment in accordance with the price-index for housing in Iceland.
The lease terminates on November 1, 2004.

     The rent for the Sweden office, which consists of 486 square meters, is SEK
460,950 per quarter ($47,714 at December 31, 2000). The term of the lease is
from April 1, 2000 to September 30, 2003.

     The rent for the United States office, which consists of approximately
1,500 square feet, is $4.30 per square foot per month on a full service gross
basis, including Internet connectivity. The term of the lease expires on
December 31, 2001.

     The rent for the Canada office, which consists of approximately 18,500
square feet, is (CAN) $1.25 ($0.83 at December 31, 2000) per square foot per
month on a full service gross basis. The term of the lease expires on April 30,
2011.

     The rent for SmartVR, Inc.'s office, which consists of approximately 224.17
square meters, is 194,369 ISK per month ($2,301 at December 31, 2000). The term
of this lease expires on September 1, 2007.

ITEM 3. LEGAL PROCEEDINGS

     On August 9, 2000, Garry Hare filed a complaint against us in the Superior
Court for the City and County of San Francisco, California. Mr. Hare was a
director and officer whose employment was terminated in December 1998. We and
Mr. Hare subsequently entered into a termination agreement. Mr. Hare's amended
complaint alleges fraud and breach of the employment and termination agreements.
The amended complaint seeks compensatory damages according to proof, punitive
damages according to proof, specific performance of the stock bonus portion of
the termination agreement or employment agreement, a declaration that the
termination agreement is void, and attorneys' fees and costs. We believe that
the allegations in the amended complaint are without merit and intend to defend
vigorously against the complaint. In addition, we filed a cross-complaint
against Mr. Hare on December 30, 2000, seeking attorneys' fees and damages for
fraud and breach of the termination agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to our shareholders during the fourth quarter of
2000.

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<PAGE>   29

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

     Currently there is no organized public trading market for our Common Stock.
No class of our capital stock is quoted on either the National Quotations Bureau
"Pink Sheets" or the NASD OTC Bulletin Board.

DIVIDENDS

     We have not paid dividends since our formation and do not anticipate paying
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, business, results of operations, capital requirements
and such other factors as the Board of Directors deems relevant.

HOLDERS

     As of March 31, 2001, there were 1,278 holders of record of Common Stock
and 25 holders of record of Series A Preferred stock.

     As of March 31, 2001, 89,779,596 shares of Common Stock and 14,530,964
shares of Series A Preferred stock were outstanding. Shares held by our
affiliates, as defined in Rule 144 of the Securities Act, may be sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144.

RECENT SALES OF SECURITIES

     On November 8, 2000, we issued 5,069,271 and 11,405,860 shares of Common
Stock to Ericsson Canada and Microcell Capital, respectively, in exchange for
all of the issued and outstanding stock of MCE Holding Corporation pursuant to
two share exchange agreements between us and each of Ericsson Canada and
Microcell Capital. We determined that the value of the MCE Holding Corporation
stock was equal to approximately $18.4 million. The stock was issued in reliance
on Section 4(2) of the Securities Act and Regulation D thereunder.

     In the year ended December 31, 2000 we issued in total 2,372,017 shares of
Common Stock upon exercise of options issued under our 1995 Plan and 160,000
shares of Common Stock were issued under our 1998 plan. These sales were made in
reliance on Rule 701 under the Securities Act. During the first three months of
2001 no employee elected to exercise options.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The following discussion of our financial condition and results of
operations should be read in conjunction with the supplemental consolidated
financial statements and the related notes included elsewhere in this filing.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements.

OVERVIEW

     Since we were incorporated in December 1995, we have devoted substantially
all of our resources to developing our multi-user communications platform, first
in the context of three-dimensional ("3D") online environments, and since 1997,
primarily in the context of wireless telecommunications networks. In 1998, we
began working with Ericsson to develop a wireless Internet communications
platform now called "iPulse(TM)" based on this technology. We first recognized
development revenues in November 1998, and generated development revenues of
approximately $4.5 million in the year ended December 31, 1999 and $7.7 million
in the year ended December 31, 2000. We first recognized license revenues in
February 1999, and generated license revenues of approximately $0.08 million in
the year ended December 31, 1999 and approximately

                                        26
<PAGE>   30

$0.28 million for the year ended December 31, 2000. In addition, we first
recognized client services revenues of approximately $0.3 million in the year
ended December 31, 2000.

     We incurred net losses of approximately $14.0 million for the year ended
December 31, 2000 and $2.9 million for the year ended December 31, 1999. As of
December 31, 2000, we had an accumulated deficit of approximately $27.1 million.
We are currently operating at a deficit and expect to continue operating at a
deficit over at least the next twelve months as we incur increasing levels of
expense to support growth. We believe that our historical operating results are
not indicative of future performance for the reasons discussed below.

     We generate revenues from development work, client services to wireless
network operators and license fees. We expect to begin receiving licensing
revenues from customers of mPresence(TM) and our value-added services and from
Ericsson's sale of iPulse(TM) licenses. We receive development revenues under a
contract with Ericsson and Microcell as discussed further below. Until recently,
we received license revenues primarily from a license of our core technologies
to Ericsson. However, in November 2000, we amended and entered into new
agreements with Ericsson. We also entered into agreements with Microcell in
connection with our acquisition of OZ.COM Canada Company ("OZ.COM Canada").
However, as a result of the levels of ownership interest of Microcell and
Ericsson at the inception of the contracts, certain payments received from
Ericsson Canada and Microcell have not been recognized as revenues, and future
payments from Ericsson Canada and Microcell may not be immediately recognizable
as revenue according to generally accepted accounting principles. In the fourth
quarter of 2000, we received payments of $1 million for consulting services and
$750,000 for development work rendered to Microcell, and $750,000 from Ericsson
Canada that was not recognized as revenue. The expenses associated with our
performance of this work have been recognized as cost of revenues in the case of
the payment for consulting services and as research and development expenses in
the case of development work and the payments from Microcell for the work
performed have been recorded as deferred revenues on our balance sheet. We have
not recognized any cost in connection the payment from Ericsson Canada because
we have not yet commenced the performance of services for Ericsson Canada. We
will recognize all of the deferred revenues as current revenues at the
termination of the contract under which we performed the work.

     On November 1, 2000, we entered into a general co-operation and development
agreement with Ericsson. The general co-operation and development agreement
superseded the earlier document of the same name that we entered into in
February 1999. Pursuant to this agreement, Ericsson and we agreed to cooperate
in the area of Internet-based technologies, applications and services,
including, but not limited to, development, testing integration, marketing,
sales, distribution, support and maintenance of solutions based on the
technologies and services of each company. Our cooperation pursuant to this
agreement is nonexclusive and each party's participation is based on its
individual evaluation of the commercial viability and expected benefits of the
relationship.

     OZ.COM Canada entered into a specific co-operation and development
agreement with Ericsson Canada on November 8, 2000 pursuant to which OZ.COM
Canada will provide consulting and development services in the areas of mobile
Internet applications for third generation ("3G") mobile telephony platforms.
The specific co-operation and development agreement is an agreement under the
Ericsson general co-operation and development agreement. Under the terms of the
specific co-operation and development agreement, Ericsson Canada will advance to
OZ.COM Canada a total of $6 million in quarterly installments over the
agreement's two-year term, which installments will be applied by Ericsson Canada
against amounts due for development work performed under the agreement. OZ.COM
Canada will have access to Ericsson Canada's 3G laboratories and will receive up
to 6,000 hours of assistance from qualified 3G experts for testing of the 3G
development work. As further described below, we acquired OZ.COM Canada on
November 8, 2000 in connection with our acquisition of MCE Holding Corporation
("Acquisition").

     Prior to the Acquisition, OZ.COM Canada had entered into a general
co-operation and development agreement with Microcell on November 8, 2000
pursuant to which Microcell agreed to use OZ.COM Canada as its preferred
development resource for development work and consulting services in the field
of wireless Internet applications. Under the terms of the agreement, Microcell
has committed to purchasing $9 million in

                                        27
<PAGE>   31

consulting and development services and technology licenses during the
three-year term of the agreement. OZ.COM Canada will have full ownership of the
products developed under the agreement and their related intellectual property
rights. However, if the products are unrelated to OZ.COM Canada's product
offerings or if the products are completed by Microcell as a result of OZ.COM
Canada's breach of the agreement, Microcell will own the product and its related
intellectual property rights, with OZ.COM Canada retaining the right to use,
sell, and distribute the product outside of Canada for three years. Microcell
will have a license to use, sell and distribute for commercial use all products
developed under the agreement. The license will be royalty free, except that
Microcell will pay to OZ.COM Canada 10% of its net revenues attributable to the
sale or license of the products during the three-year term after the commercial
launch of the products. OZ.COM Canada will pay to Microcell 10% of all of its
net revenues attributable to the sale or license of products developed under the
agreement during the three-year term commencing with the commercial launch of
the products.

     OZ.COM Canada also had concluded a specific development and consulting
agreement with Microcell on November 8, 2000, prior to the Acquisition, pursuant
to which OZ.COM Canada granted to Microcell a non-exclusive, non-transferable,
non-revocable license to use iPulse(TM) 1.5 on the terms and conditions set
forth in the agreement. Except for the revenue sharing payments under the
general co-operation and development agreement with Microcell dated November 8,
2000 the license is royalty free. Ericsson had granted to MCE Holding
Corporation, a strategic alliance between Ericsson Canada and Microcell Capital
II Inc., the right to grant a license to iPulse(TM) 1.5 and agreed to the
assignment of this right to OZ.COM Canada.

     Our business strategy relies to a significant extent on the widespread
propagation of iPulse(TM) through our relationships with network operators and
Ericsson, one of the leading wireless telephone manufacturers. iPulse(TM) is
available to network operators directly from Ericsson although we have entered
into an agency agreement with Ericsson pursuant to which Ericsson is obligated
to pay a commission based upon the net amount of payments (after deduction of
taxes, insurance and other similar costs) actually received by Ericsson under
licensing contracts for iPulse(TM) concluded through Ericsson's acceptance of
orders that we procure. We will set the commission rate and the method of
calculation and payment with Ericsson from time to time. At the same time, we
have the opportunity to offer our Internet-based services to these customers. In
the event that Ericsson licenses iPulse(TM) to one of its customers, we are
entitled under a specific co-operation and development agreement dated February
1999 to a license fee equal to 15% of the revenue from that sale.

     We derive client services revenues from services provided directly to
network operator customers and a few select application service providers. These
client services include consulting, system integration, hosting and other
value-added services. We have performed client services for Microcell and oCen
Communications. We expect in the future to generate service revenues from
hosting iPulse(TM) and other mPresence(TM) applications primarily on behalf of
network operators, as well as from product installation, maintenance and
engineering support services.

     Consequently, we expect that our future revenues will be derived from the
following:

     - Payments from development work for Ericsson and Microcell;

     - Commissions and referral fees paid by Ericsson with respect to sales and
       licenses of iPulse(TM);

     - Licensing fees (i.e., revenue sharing payments) paid by Ericsson with
       respect to sales and licenses of iPulse(TM);

     - Licensing fees and/or revenue sharing payments paid by customers with
       respect to sales and licenses of mPresence services and applications; and

     - Fees from client services that we provide to our customers.

     Our future success depends on our ability to increase revenues from the
sources identified above. If the market for Internet-based services via wireless
telephones fails to develop or develops more slowly than expected, then our
business would be materially and adversely affected. In addition, because there
are a

                                        28
<PAGE>   32

relatively small number of network operators worldwide, any failure to sell our
products to network operator customers successfully could result in a shortfall
in revenues that could not be readily offset by other revenue sources.

     In February 2000, we introduced mPresence(TM) and our value-added services,
which are a growing suite of mobile Internet applications. We continue to expect
to incur significant additional expenses in developing and commercializing
mPresence(TM) and our value-added services, including costs relating to
operating our network cluster and network operating center in North America, as
well as sales and marketing and research and development expenses. Although we
have taken action to control these costs, we expect to incur substantial costs
and expenses in advance of generating revenues from this service and cannot be
certain that our business model for mPresence(TM) will result in significant
revenues or profitability.

     Ericsson has entered into an agency agreement with respect to our
mPresence(TM) framework and value-added services. Ericsson's commission is based
upon the net amount of payments (after deduction of taxes, hosting expenses,
third-party licensing costs, insurance and similar costs) actually received by
us under a licensing contract for mPresence(TM) and the value-added services
concluded through Ericsson. We will set the commission rate and the method of
calculation and payment with Ericsson from time to time. In the absence of an
agreement, the rate will be 15% of the net amount of payment. If Ericsson does
not conclude the sale but introduces the customer to us, Ericsson is entitled to
a finder's fee equal to 5% of the net amount of payment. The agency agreement
has a two-year term and will be automatically renewed for an indefinite period
unless earlier terminated in accordance with its provisions.

     We also entered into a value-added distribution license agreement with
Ericsson on November 1, 2000, which superseded the value-added reseller
agreement entered into with Ericsson in February 2000. The agreement gives us
unrestricted perpetual rights to offer iPulse(TM) as a hosted service to our
mPresence(TM) customers in exchange for license fees. Either party to the
agreement may terminate the agreement if the other party commits a material
breach of its obligations under the agreement or if any of the representations
of such other party are materially untrue, and such default is not cured within
thirty days of notice of such breach. Notwithstanding the termination of the
agreement, OZ will retain the right to provide hosting services based on the
then current version of iPulse(TM). After November 2003, and provided all
royalties due Ericsson under the agreement have been paid, Ericsson will no
longer be able to terminate the agreement.

     We expect that our gross profit on revenues derived from sales of our
products and services through Ericsson and future channel partners will be less
than the gross profit on revenues from direct sales. Our success, in particular
in international markets, depends in part on our ability to increase sales of
our products and services through value-added resellers and to expand our
indirect distribution channels.

     We expect sales in Europe and Canada to account for a significant portion
of our revenues in the foreseeable future. Risks inherent in our international
business activities include:

     - failure by us and/or third parties to develop localized content and
       applications that are used with our products;

     - costs of localizing our products for foreign markets;

     - difficulties in staffing and managing foreign operations;

     - longer accounts receivable collection time;

     - political and economic instability;

     - fluctuations in foreign currency exchange rates;

     - reduced protection of intellectual property rights in some foreign
       countries;

     - contractual provisions governed by foreign laws;

     - export restrictions on encryption and other technologies;

                                        29
<PAGE>   33

     - potentially adverse tax consequences; and

     - the burden of complying with complex and changing regulatory
       requirements.

     Since early 2000, we have invested substantially in research and
development, marketing, domestic and international sales channels, professional
services and our general and administrative infrastructure. These investments
have significantly increased our operating expenses, contributing to net losses
in each fiscal quarter since our inception. Our limited operating history makes
it difficult to forecast future operating results. Although we believe that our
revenues will continue to grow in the next several quarters, our revenues may
not increase at a rate sufficient to achieve and maintain profitability, if at
all. We anticipate that our operating expenses will remain approximately at
their current levels as we focus on performing existing contracts and supporting
Ericsson's iPulse(TM) sales effort. Even if we were to achieve profitability in
any period, we may not sustain or increase profitability on a quarterly or
annual basis.

RESTATEMENT

     Subsequent to the issuance of our consolidated financial statements for the
year ended December 31, 1999, our management determined that the fair value of
certain warrants should have been allocated to additional paid-in capital,
certain previously recognized license revenue should have been amortized, and
accrued interest expense related to the conversion of bonds payable to common
stock should have been recognized as additional paid-in capital rather than a
reduction in interest expense. As a result, the consolidated financial
statements for the year ended December 31, 1999 have been restated from amounts
previously reported.

     The effects of the restatement for the year ended December 31, 1999 are
presented in note 16 of the notes to the consolidated financial statements and
have been reflected therein.

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated income statement data,
expressed as a percentage of revenues, for the years ended December 31, 1999 and
2000.

<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                               DECEMBER 31,
                                                             -----------------
                                                             1999(1)     2000
                                                             -------    ------
<S>                                                          <C>        <C>
INCOME STATEMENT DATA:
Revenues...................................................   100.0%     100.0%
Cost of revenues...........................................    72.0       61.7
Operating expenses:
  Sales and marketing expenses.............................    41.9       59.9
  General and administrative expenses:
     Amortization of goodwill and other intangible
       assets..............................................      --        5.8
     Stock-based compensation..............................     1.9       15.8
     Other.................................................    47.2       75.6
  Research and development.................................    10.6       38.5
Total operating expenses...................................   101.6      195.6
Operating loss.............................................   (73.6)    (157.3)
Interest and other income (expense), net...................     9.8      (11.2)
Net loss...................................................   (63.8)    (168.2)
</TABLE>

---------------
(1) As restated; see Note 16 to the consolidated financial statements.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     REVENUES. Our revenues increased 80.6% to $8.3 million in 2000 from $4.6
million in 1999. The increase is primarily the result of an increase in the
volume of development work for Ericsson, and to a lesser extent because of an
increase in our customer base and a diversification of our sources of revenues.
Revenues from
                                        30
<PAGE>   34

Ericsson increased 95.0% to $7.8 million in 2000 from $4.0 million in 1999. In
the year ended December 31, 1999, 86.8% of our revenues were earned from
Ericsson under the terms of a single development contract and a license of our
core technology incidental to the development work. In the year ended December
31, 2000, we added a second development contract with Ericsson and a new
development agreement with Microcell, although as mentioned above, we received
payments totaling $2.5 million for consulting and development work performed for
Microcell and Ericsson that are not recognized as revenues under U.S. generally
accepted accounting principles. We also began providing client services, which
include consulting, system integration and development services in connection
with the commercialization of our technologies.

     DEVELOPMENT SERVICES REVENUES. Development services revenues increased from
$4.5 million for the year ended December 31, 1999 to $7.7 million for the year
ended December 31, 2000. The increase in development services revenues was
attributable primarily to the timing of the commencement of development work for
Ericsson, which started in February 1999.

     CLIENT SERVICES REVENUES. The three-month period ended September 30, 2000
was the first quarter in which we recognized client services revenue. These
revenues were mainly derived from a contract with oCen Communications, which
engaged us to perform services relating to their commercial launch of our
technology, and from Ericsson, which sponsored our Leif Ericsson project.

     LICENSING REVENUES. Licensing revenues increased 254.9% to $0.3 million in
2000 from $0.1 million in 1999. These revenues were related to the license of
our core technology to Ericsson in 1999 in connection with the development of
iPulse(TM). The increase in licensing revenues was primarily due to the timing
of recognition of the revenues associated with this license. As described above,
we are entitled under our new arrangements with Ericsson to receive revenue
sharing fees from Ericsson's license or sale of iPulse(TM) to network operators.
We also expect to receive revenues from licensing our mPresence(TM) suite of
applications to network operators and Internet businesses. We expect our
mPresence(TM) licensing revenues to be based on a revenue-sharing model whenever
possible. When revenue sharing is not possible or, in our opinion, advisable, we
will consider alternative pricing models, including upfront or incremental
royalties per application per unit of time.

     COST OF REVENUES -- DEVELOPMENT SERVICES. Cost of revenues -- development
services consists of compensation and independent consultant costs for personnel
engaged in our developing services operations and related overhead. Cost of
development services revenues increased to $4.4 million for the year ended
December 31, 2000 from $3.3 million for the year ended December 31, 1999. As a
percentage of development services revenues, cost of revenues -- development
services for the years ended December 31, 1999 and 2000 was 73.3% and 56.7%
respectively. The increase in margins reflects a higher mix of development
services performed on a time-and-materials basis during the period ended
December 31, 2000. The mix of company personnel and independent consultants
assigned to projects impacts gross profit on development services revenues. The
gross profit we achieve is also impacted by the contractual terms of the
development assignments we undertake, and the gross profit on fixed price
contracts typically is more susceptible to fluctuation than contracts performed
on a time-and-materials basis. We anticipate that the cost of development
services revenues will increase slightly in absolute dollars but decrease as a
percentage of sales as we continue to invest in the growth of our consulting
services and licensing operations.

     COST OF REVENUES -- CLIENT SERVICES. Cost of revenues -- client services
consists of compensation and independent consultant costs for personnel engaged
in our consulting services operations, our hosting center and network operating
center in North America and related overhead. The three-month period ended
September 30, 2000 was the first period in which we recognized client services
revenues. Cost of client services revenues was $0.7 million for the year ended
December 31, 2000. Included in cost of revenues -- client services is the cost
of providing consulting services to Microcell, for which we received $1 million
in payments, but which are not yet recognized as revenue under U.S. generally
accepted accounting principles.

     COST OF REVENUES -- LICENSING. We have had no significant cost of
revenues -- licensing associated with our historical licensing revenues, which
relate to a single license of our core technology to Ericsson in 1999. When we
begin realizing licensing revenues from the sale of licenses related to our
mPresence(TM) framework and value-added services, we expect to experience cost
of revenues -- licensing, which will consist primarily of

                                        31
<PAGE>   35

third-party license and support fees. We expect that cost of
revenues -- licensing will vary as a percentage of licensing revenues from
period to period.

     RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
increased 555.3% to $3.2 million in 2000 from $0.5 million in 1999. The increase
is primarily the result of research and development expenses in the area of
on-line training of our subsidiary SmartVR Inc., the development work of our
music awareness solutions subsidiary, Propheus, Inc., and certain work performed
for Microcell that is not recognizable as revenues under U.S. generally accepted
accounting principles. Our research and development costs are comprised
primarily of salaries and consulting fees. During the quarter ended December 31,
2000, we recognized in research and development expenses the cost of providing
certain development services to Microcell, for which we received a payment of
$750,000, which was not recognized as revenue under U.S. generally accepted
accounting principles.

     SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased
158.4% to $5.0 million in 2000 from $1.9 million in 1999. The increase is
primarily the result of the establishment of a sales organization during 2000,
including sales offices in the United States and Sweden, the hiring of
additional sales people in all offices, and the initiation of a focused sales
and marketing campaign in connection with iPulse(TM).

     GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses, including stock-based compensation and depreciation and amortization,
increased 258.0% to $8.1 million in 2000 from $2.3 million in 1999. The
increases are due primarily to the addition of personnel performing general and
administrative functions, the management of our international operations,
compliance with the reporting requirements under the U.S. Securities Exchange
Act of 1934, increased amortization of stock-based compensation and amortization
of intangible assets associated with the acquisition of MCE Holding Corporation
in November 2000. We expect general and administrative expenses to begin to
decline in the short-term as the effects of recent reductions in general and
administrative personnel begin to impact our expenses. We will attempt to
maintain a lower level of general and administrative expenses relative to the
fourth quarter of 2000 and commit to additional expenses only if and when
required in response to the growth of our business.

     OPERATING LOSS. Our operating loss increased 286.4% to $13.1 million in
2000 from $3.4 million in 1999. The increase is primarily the result of an
increase in all operating expense categories, which were not offset by a
proportional increase in revenues.

     This increase in operating expenses is primarily the result of our strategy
to simultaneously accelerate research and development of the mPresence(TM)
product and the build up of sales and marketing resources in anticipation of the
launch of mPresence(TM).

     INTEREST INCOME (EXPENSE), NET. Our interest income, net was constant at
$0.3 million in 1999 and 2000.

     OTHER INCOME (EXPENSE), NET. Our other expense, net was $1.2 million in
2000 compared to other income, net of $0.1 million in 1999. The increase is
primarily the result of changes in U.S. dollar currency exchange rates in
comparison with European currencies.

LIQUIDITY AND CAPITAL RESOURCES

     From December 31, 1999 to December 31, 2000, our total assets increased
from $17.6 million to $27.4 million, total liabilities increased from $1.7
million to $4.9 million and total shareholders' equity increased from $2.9
million to $18 million. The increases in total assets and total shareholders'
equity resulted primarily from the acquisition of MCE Holding Corporation, and
the increase in total liabilities resulted from the working capital requirements
of two new offices and the liabilities associated with a three-fold increase in
employees.

     Our primary liquidity needs are for working capital, capital expenditures,
acquisitions and investments, and, to a lesser extent, debt service. Our primary
sources of liquidity are cash flows from operations and issuances of stock.

                                        32
<PAGE>   36

     Net cash used in operating activities was $10.4 million for the year ended
December 31, 2000, compared to $2.6 million for the year ended December 31,
1999. The increase in net cash used in operating activities in 2000 was due
primarily to increased working capital needs related to our growth.

     Our working capital at December 31, 2000 was $4.1 million compared to $14.5
million at December 31, 1999. Working capital as of December 31, 2000 was
comprised of $3.6 million in cash, $3.5 million in accounts receivable, and $0.5
million in other current assets, net of $3.5 million in current liabilities. As
of December 31, 1999, our working capital was comprised of $13.6 million in
cash, $1.4 million in accounts receivable, and $0.4 million in other current
assets, net of $0.9 million in current liabilities.

     During the year ended December 31, 2000, we invested $2.5 million primarily
in computer systems for employees and an iPulse(TM) network system (we call this
an "iPulse cluster") in Boston, which we have subsequently moved to Montreal.
This first iPulse(TM) cluster will be used to in the delivery of our
mPresence(TM) framework and value-added services in North America. We expect to
spend significant amounts on a network operating center during the first six
months of 2001 and additional amounts on new iPulse(TM) clusters when we begin
to enter into hosting and value-added services agreements with customers.

     Through our Icelandic subsidiary, OZ hf., we have outstanding long-term
notes payable to Bunaoarbanki Islands, an Icelandic bank, and to the seller of
our building at Snorrabraut 54 in Reykjavik, Iceland. We have pledged our
building as collateral for these loans. The amount due on these loans at
December 31, 2000, was approximately $450,000. The loans accrue interest at
rates between 6.0% and 7.35% per annum. We have also pledged our building as
collateral for an approximately $230,000 working capital line of credit. We
intend to work with our present banks to determine whether it is feasible to
establish an additional working capital line of credit on the strength of our
accounts receivable.

     In February 1999, we entered into a Stock and Warrant Purchase Agreement
with Ericsson Inc. under the terms of which Ericsson Inc. had the right to
purchase up to 10,052,431 shares of Series A Preferred stock at $1.30 per share.

     In March and May of 1999, we sold and issued to an Icelandic security house
and an Icelandic investment bank an aggregate of 2,000,000 shares of our common
stock at a gross amount of $1.90 per share and received cash totaling
$3,510,000, which was net of a discount.

     In June 1998 we sold and issued a series of convertible bonds to fourteen
Icelandic institutional investors, consisting of an insurance company, a
privately held company, capital funds, pension funds, security houses and an
investment bank, in consideration for an aggregate of $2.5 million. The
convertible bonds could be converted at the election of the bondholder any time
prior to June 1, 1999 for that number of shares equal to the face value of the
bond, divided by $0.65. Prior to June 1999, all of the holders of the
convertible bonds converted their bonds into an aggregate of 3,846,150 shares of
Common Stock at a value of $0.65 per share.

     In June 1999, Ericsson exercised a portion of its purchase rights by
purchasing 4,769,231 shares of our Series A Preferred stock for total cash
consideration of $6.2 million.

     In October 1999, Ericsson exercised the balance of its purchase rights by
purchasing 5,283,200 shares of our Series A Preferred stock for total cash
consideration of $6.9 million.

     We are limiting discretionary expenses in all categories and plan to halt
our growth, except for some expansion in our Montreal office, which may be
offset from some attrition in other offices. We do not believe that our
operating requirements for the next 12 months can be funded from cash provided
by operations and cash reserves. Therefore, we intend to seek additional debt or
equity financing through public or private placements of our securities. We
cannot be sure that any such financing will be obtained or, if obtained, will be
adequate to meet our needs. Our consolidated financial statements for the year
ended December 31, 2000 have been prepared assuming that we will continue as a
going concern. Our recurring losses from operations, negative cash flows, and
future need for additional capital raise substantial doubts about our ability to
continue as a going concern. We may revise our plans in response to future
changes in the mobile communications industry in general and the demand for our
services in particular, our results of operations, our other capital
requirements and other relevant factors. We believe there may be some attractive
opportunities to expand by

                                        33
<PAGE>   37

making strategic acquisitions of businesses or assets in the current economic
environment. We believe that we will likely fund any such acquisition through
the issuance of debt or additional equity securities.

MARKET RISK DISCLOSURE

     During the year ended December 31, 2000, we billed and collected in U.S.
dollars. To the extent possible, cash is held in interest bearing U.S. dollar
accounts. Funds are transferred from these accounts and converted to local
currencies (primarily Icelandic and Swedish krona) as necessary to pay local
operating expenses. Accordingly, we are exposed to risks in changes in foreign
currency exchange rates. For financial reporting purposes, assets and
liabilities of our foreign subsidiaries, whose functional currency is the local
currency, are translated at exchanges rates prevailing at the end of the period.
OZ hf., our Icelandic subsidiary, carries on its financial statements an
intercompany loan that is payable to us in U.S. dollars. If the U.S. dollar
currency exchange rate increases relative to the Icelandic krona, as it did in
2000, then the principal amount of this intercompany loan on our subsidiary's
financial statements will increase. Any difference in the carrying value of this
liability at the end of an accounting period ($148,682 and ($1,243,969) at
December 31, 1999 and December 31, 2000, respectively) is included in foreign
currency exchange gain (loss) on the consolidated statements of operations.
Revenues and expenses are translated at the average rates of exchange prevailing
during the period. Adjustments resulting from translating the financial
statements of foreign subsidiaries ($56,886 and $667,810 at December 31, 1999
and December 31, 2000, respectively) are included in accumulated other
comprehensive income, which is reflected as a separate component of
shareholders' equity.

     We have borrowed funds in Iceland, which are secured by our facility at
Snorrabraut 54, Reykjavik. While the interest rates on these loans are fixed,
the original principal balance is adjusted monthly for fluctuations in the
Icelandic consumer price index, in accordance with the terms of the note
agreement. Accordingly, we are exposed to risks in changes in the Icelandic
consumer price index, which tends to rise quickly in inflationary economic
conditions. The change in the consumer price index during 1999 and 2000 was 5.6%
and 4.2%. The estimated change in 2001 is 6%.

INCOME TAXES

     At December 31, 2000 we had net operating loss carryforwards of
approximately $23.9 million, $11.9 million, and $4 million for federal, state
and foreign income tax purposes, respectively. Unless we utilize these
beforehand to offset future taxable income, if any, these carryforwards will
expire from year 2001 through 2020.

IMPACT OF PRICING, INFLATION AND SEASONALITY

     The pricing of our products and services is primarily a function of the
perceived need for our products and services, the availability of competitive
products or services, the presence of competition for end users within a
particular market and the degree of acceptance of the mobile phone as an
entertainment and commercial transaction device. Our pricing model for
mPresence(TM) will in many cases be based on a fixed price per user per month
and/or on a revenue sharing model in which we will take a percentage of revenues
resulting from each end user using the various services or being exposed to
advertisements. Our future revenues are therefore largely dependent on the
number of subscribers to the wireless network operators or Internet businesses
that utilize our products and services. We are not able to make reliable
estimates as to the rate of adoption by the subscribers of the particular
services offered through our products. It is therefore difficult to predict the
size of our future revenues and these future revenues will be largely dependent
on the number of subscribers to the wireless network operators or Internet
businesses, in general, and the subscription to the services offered through our
products, in particular. The price that subscribers will be willing to pay for
these services is also difficult to estimate.

     We believe that inflationary trends had no material impact on the results
of our operations during the year ended December 31, 2000.

                                        34
<PAGE>   38

     Our revenues and operating results are expected to vary, sometimes
substantially, from quarter to quarter. Quarterly revenues and operating results
may fluctuate as a result of a variety of factors, including:

     - the timing of large transactions,

     - an estimated initial sales cycle of three to six months,

     - the proportion of revenues attributable to revenue-sharing or fixed per
       end-user fees versus revenues from software sales,

     - changes in the level of operating expenses,

     - the utilization rate of our development services employees,

     - demand for our products and services,

     - the introduction of new products and product enhancements by us or our
       competitors,

     - changes in customer budgets,

     - competitive conditions in the industry, and

     - general economic conditions.

     Further, the purchase of our products and services often involves a
significant commitment of capital by our customers with the attendant delays
frequently associated with large capital expenditures and authorization
procedures within an organization. Accordingly, the sales cycles for our
products and services are typically lengthy, with an estimated initial sales
cycle of six to nine months, and subject to a number of significant risks over
which we have little or no control, including our customers' budgetary
constraints and internal authorization reviews.

     In addition, we expect our quarterly operating results to be subject to
seasonal fluctuations. We do not yet see a pattern in licensing revenues (i.e.,
from the sales of iPulse(TM) licenses or mPresence(TM) and value-added
services), but we have observed seasonality in our service businesses. Our
revenues and operating results from development contracts and customer services
are typically lower in the second and third quarters than the remainder of the
year because these revenues are to some extent dependent on the availability of
professional staff and a disproportionate number of holidays or vacation days
typically fall in these quarters. In particular, our third fiscal quarter
includes the months of July and August, when billable service activity by
professional staff, as well as engagement decisions by customers, are reduced
due to summer vacation schedules.

                                        35
<PAGE>   39

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                     OZ.COM

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGES
                                                              ---------
<S>                                                           <C>
Independent Auditors' Reports...............................    37 - 38
Consolidated Balance Sheets as of December 31, 1999 and
  2000......................................................         39
Consolidated Statements of Operations for the years ended
  December 31, 1999 and 2000................................         40
Consolidated Statements of Changes in Shareholders' Equity
  (Deficit) and Comprehensive Income for the years ended
  December 31, 1999 and 2000................................         41
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999 and 2000................................         42
Notes to Consolidated Financial Statements..................    43 - 57
</TABLE>

                                        36
<PAGE>   40

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
  Stockholders of OZ.COM
Reykjavik, Iceland

We have audited the accompanying consolidated balance sheet of OZ.COM and
subsidiaries (the "Company") as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive income, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements for the year ended December
31, 2000 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses from operations, negative cash flows, and future need
for additional capital raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Deloitte & Touche hf.
Hjorleifur Palsson
State Authorized Public Accountant
Reykjavik, Iceland
May 21, 2001

                                        37
<PAGE>   41

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of OZ.COM.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and comprehensive income and of cash flows present fairly, in all
material respects, the financial position of OZ.COM and its subsidiaries at
December 31, 1999 and the results of their operations and their cash flow for
the year ended December 31, 1999 in conformity with generally accepted
accounting principles in the United States. These financial statements are the
responsibility of OZ.COM's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.

As discussed in Note 16 to the financial statements, OZ.COM changed its method
of accounting for revenue and restated its 1999 financial statements to conform
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming OZ.COM will
continue as a going concern. As discussed in Note 1 to the financial statements,
OZ.COM has suffered recurring losses from operations and has a net capital
deficiency that raise doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PRICEWATERHOUSECOOPERS EHF
Reykjavik, Iceland

April 14, 2000, except for
Note 1 which is as of May 3, 2000
and for Notes 1, Going Concern
and 16 which are as of May 21, 2001

                                        38
<PAGE>   42

                                     OZ.COM

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  1999             2000
                                                              -------------    ------------
                                                               AS RESTATED
                                                              (SEE NOTE 16)
<S>                                                           <C>              <C>
Assets

Current assets:
  Cash and cash equivalents.................................  $ 13,603,592     $  3,559,559
  Trade accounts receivable, net of allowance for doubtful
     accounts of $1,377 and $104,546........................        22,456           98,235
  Accounts receivable from shareholder (Note 2).............     1,391,816        3,413,433
  Prepaid expenses and other current assets.................       406,232          530,777
                                                              ------------     ------------
          Total current assets..............................    15,424,096        7,602,004
Property and equipment, net (Note 3)........................     2,079,531        3,879,161
License, net of accumulated amortization of $36,684.........            --          852,205
Goodwill, net of accumulated amortization of $448,505.......            --       15,076,668
Other assets................................................       130,510               --
                                                              ------------     ------------
          Total assets......................................  $ 17,634,137     $ 27,410,038
                                                              ============     ============
Liabilities and Shareholders' Equity
Current liabilities:
  Trade accounts payable....................................  $    188,305     $    558,483
  Accrued liabilities (Note 4)..............................       505,133        1,111,304
  Current portion of deferred revenue.......................       236,571        1,767,107
  Current portion of notes payable (Note 5).................        24,069           21,476
  Current portion of capital lease obligation...............         3,384               --
                                                              ------------     ------------
          Total current liabilities.........................       957,462        3,458,370
  Notes payable (Note 5)....................................       505,445          429,521
  Deferred revenue..........................................       236,572        1,011,957
                                                              ------------     ------------
          Total liabilities.................................     1,699,479        4,899,848
                                                              ------------     ------------
Minority interest...........................................            --            8,489

Redeemable convertible preferred stock, $0.01 par value
  10,052,431 shares issued and outstanding..................    13,068,160               --
Redeemable common stock, $0.01 par value (Note 2)...........            --        4,500,000
Commitments and contingencies (Note 15).....................            --               --

Shareholders' equity: (Note 7)
  Convertible preferred stock, $0.01 par value:
     5,685,218 and 14,680,964 shares issued and outstanding
     (liquidation value $14,680,964)........................     5,384,976       17,079,446
  Common stock, $0.01 par value:
     275,000,000 shares authorized:
     68,359,078 and 89,479,596 shares issued and
      outstanding...........................................       683,591          894,796
  Additional paid-in capital................................    10,440,238       30,834,321
  Notes receivable from shareholders (Note 11)..............      (200,200)        (353,900)
  Deferred compensation (Note 9)............................      (376,668)      (4,032,567)
  Accumulated deficit including accumulated other
     comprehensive income of $56,886 and $667,810...........   (13,065,439)     (26,420,395)
                                                              ------------     ------------
          Total shareholders' equity........................     2,866,498       18,001,701
                                                              ------------     ------------
          Total liabilities and shareholders' equity........  $ 17,634,137     $ 27,410,038
                                                              ============     ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        39
<PAGE>   43

                                     OZ.COM

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEARS ENDED
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  1999             2000
                                                              -------------    ------------
                                                               AS RESTATED
                                                              (SEE NOTE 16)
<S>                                                           <C>              <C>
REVENUES
  Development services......................................   $ 4,518,238     $  7,724,249
  Client services...........................................            --          299,756
  License fees..............................................        78,857          279,880
                                                               -----------     ------------
          Total revenues....................................     4,597,095        8,303,885
COST OF REVENUES
  Development services......................................     3,309,870        4,381,512
  Client services...........................................            --          740,667
                                                               -----------     ------------
          Total cost of revenues............................     3,309,870        5,122,179
                                                               -----------     ------------
          Gross profit......................................     1,287,225        3,181,706

OPERATING EXPENSES
  Sales and marketing.......................................     1,924,807        4,974,366
  General and administrative (including stock-based
     compensation of $88,094 and $1,314,101)................     2,256,542        8,078,198
  Research and development..................................       487,388        3,193,882
                                                               -----------     ------------
          Total operating expenses..........................     4,668,737       16,246,446
                                                               -----------     ------------

          Operating loss....................................    (3,381,512)     (13,064,740)
                                                               -----------     ------------

Interest income.............................................       399,322          441,466
Interest expense............................................       (80,749)        (109,333)
Foreign currency exchange gain (loss).......................       148,682       (1,243,969)
Other income (expense), net.................................       (17,861)         (14,588)
                                                               -----------     ------------
          Loss before provision for income taxes and
            minority interest...............................    (2,932,118)     (13,991,164)
Income taxes................................................            --               --
Minority interest...........................................            --           25,284
                                                               -----------     ------------
          Net loss..........................................   $(2,932,118)     (13,965,880)
                                                               ===========     ============

Basic and diluted net loss per share (Note 8)...............   $     (0.04)    $      (0.19)
                                                               ===========     ============

Weighted average number of shares outstanding...............    66,228,956       72,904,841
                                                               ===========     ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        40
<PAGE>   44

                                     OZ.COM

      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                            AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                  --------------------------------------------------------
                                                             1999                          2000
                                                  --------------------------    --------------------------
                                                    SHARES         AMOUNT         SHARES         AMOUNT
                                                  ----------    ------------    ----------    ------------
<S>                                               <C>           <C>             <C>           <C>
Preferred Stock:
  Balance, beginning of year....................   5,398,755    $  5,012,574     5,685,218    $  5,384,976
  Redeemable preferred shares reclassified to
    permanent equity............................          --              --    10,052,431      13,038,160
  Conversion of common stock to preferred
    stock.......................................     286,463         372,402            --              --
  Conversion of preferred stock to common
    stock.......................................          --              --    (1,056,685)     (1,373,691)
                                                  ----------    ------------    ----------    ------------
    Balance, end of year........................   5,685,218    $  5,384,976    14,680,964    $ 17,079,446
                                                  ==========    ============    ==========    ============
Common Stock and Additional Paid in Capital:
  Balance, beginning of year....................  61,449,556    $  4,216,184    68,359,078    $ 11,123,829
  Issuance of warrants to purchase preferred
    stock, as restated (see Note 16)............          --         448,000            --              --
  Common stock issued...........................   2,000,000       3,510,000    16,475,131      13,787,395
  Employee stock options exercised..............   1,513,484         280,348     2,532,017         474,202
  Common stock issued for employee
    compensation................................     122,814          79,229            --              --
  Deferred compensation from stock option
    grants......................................          --         350,470            --       4,970,000
  Convertible bonds converted to common stock,
    as restated (see Note 16)...................   3,846,150       2,612,000            --              --
  Conversion of preferred stock to common
    stock.......................................          --              --     2,113,370       1,373,691
  Conversion of common stock to preferred
    stock.......................................    (572,926)       (372,402)           --              --
                                                  ----------    ------------    ----------    ------------
  Balance, end of year, as restated (see Note
    16).........................................  68,359,078    $ 11,123,829    89,479,596    $ 31,729,117
                                                  ==========    ============    ==========    ============
Notes Receivable from Shareholders (Note 11):
  Balance, beginning of year....................                $    (74,600)                 $   (200,200)
  Notes receivable issued.......................                    (141,000)                     (189,500)
  Payments received.............................                      15,400                        35,800
                                                                ------------                  ------------
    Balance, end of year........................                $   (200,200)                 $   (353,900)
                                                                ============                  ============
Deferred Compensation:
  Balance, beginning of year....................                $   (114,292)                 $   (376,668)
  Deferred compensation arising from option
    grants......................................                    (350,470)                   (4,970,000)
  Amortization of deferred compensation.........                      88,094                     1,314,101
                                                                ------------                  ------------
    Balance, end of year........................                $   (376,668)                 $ (4,032,567)
                                                                ============                  ============
Accumulated Deficit and Accumulated Other
  Comprehensive Income:
  Balance, beginning of year....................                $(10,118,301)                 $(13,065,439)
                                                                ------------                  ------------
    Net loss, as restated (see Note 16).........                  (2,932,118)                  (13,965,880)
  Other comprehensive income (loss):
    Translation adjustments.....................                     (15,020)                      610,924
                                                                ------------                  ------------
      Comprehensive income, as restated (see
         Note 16)...............................                  (2,947,138)                  (13,354,956)
                                                                ------------                  ------------
      Balance, end of year, as restated (see
         Note 16)...............................                $(13,065,439)                 $(26,420,395)
                                                                ============                  ============
      Total shareholders' equity, as restated
         (see Note 16)..........................                $  2,866,498                  $ 18,001,701
                                                                ============                  ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        41
<PAGE>   45

                                     OZ.COM

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                                  1999             2000
                                                              -------------    ------------
                                                               AS RESTATED
                                                              (SEE NOTE 16)
<S>                                                           <C>              <C>
Cash flows from operating activities:
  Net loss..................................................   $(2,932,118)    $(13,965,880)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Depreciation and amortization...........................       344,000        1,196,888
    Minority interest.......................................            --          (25,284)
    Provision for doubtful accounts.........................            --          103,170
    Noncash charges.........................................        99,920               --
    Amortization of deferred compensation...................        88,094        1,314,101
Changes in operating assets and liabilities:
  Increase in accounts receivable...........................      (496,281)      (2,200,567)
  (Increase) decrease in prepaid expenses and other
    assets..................................................      (165,744)          38,238
  Increase (decrease) in trade accounts payable.............      (192,618)         370,178
  Increase in accrued liabilities...........................       200,115          479,505
  Increase in deferred revenue..............................       473,143        2,305,922
                                                               -----------     ------------
         Net cash used in operating activities..............    (2,581,449)     (10,383,729)
                                                               -----------     ------------
Cash flows from investing activities:
  Purchases of property and equipment.......................      (948,932)      (2,511,329)
  Proceeds from sales of furniture and equipment............        17,875               --
  Cash acquired in acquisition of MCE Holding Corporation...            --        2,000,000
                                                               -----------     ------------
         Net cash used in investing activities..............      (931,057)        (511,329)
                                                               -----------     ------------
Cash flows from financing activities:
  Bank overdraft............................................      (383,304)              --
  Issuance of warrants......................................       448,000               --
  Issuance of preferred stock...............................    13,068,160               --
  Issuance of common stock..................................     3,510,000               --
  Exercise of employee stock options........................       154,748          322,002
  Repayments of notes payable...............................       (19,047)         (78,517)
  Payment of capital lease obligation.......................       (15,714)          (3,384)
                                                               -----------     ------------
         Net cash provided by financing activities..........    16,762,843          240,101
                                                               -----------     ------------
Effect of currency exchange rates on cash...................       (15,020)         610,924
                                                               -----------     ------------
         Net increase (decrease) in cash....................    13,235,317      (10,044,033)
Cash and cash equivalents at beginning of year..............       368,275       13,603,592
                                                               -----------     ------------
Cash and cash equivalents at end of year....................   $13,603,592     $  3,559,559
                                                               ===========     ============
Supplemental cash flow information:
  Interest paid.............................................   $    49,698     $     48,135
                                                               ===========     ============
Supplemental schedule of non-cash investing and financing
  activities:
  Conversion of bonds to common stock.......................   $ 2,612,000               --
                                                               ===========     ============
  Conversion of common stock to preferred stock.............   $   372,402               --
                                                               ===========     ============
  Conversion of preferred stock to common stock.............            --     $  1,373,691
                                                               ===========     ============
  Common stock issued to acquire MCE Holding Corporation....            --     $ 18,287,395
                                                               ===========     ============
  Common stock issued for notes.............................   $   141,000     $    189,500
                                                               ===========     ============
  Common stock issued for employee compensation.............   $    79,229               --
                                                               ===========     ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        42
<PAGE>   46

                                     OZ.COM

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Organization

     OZ.COM was incorporated in California in December 1995. OZ.COM and its
subsidiaries (the "Company") are developers and vendors of software and
services, including hosting services, that enable the delivery of wireless and
Internet-based services over multiple communications networks, including
wireless networks, the public fixed telephone network and the Internet. The
Company conducts its marketing and sales in North America, Iceland and Sweden,
while design and development activities are primarily conducted in Iceland and
Canada. Through December 2000, the Company's business has primarily been in the
development of customer specific software products.

  Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
OZ.COM and its subsidiaries. Significant intercompany accounts and transactions
have been eliminated.

  Going Concern

     The Company's consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has devoted
substantial efforts to developing new products and has incurred losses and
negative cash flows from operations since inception. The Company does not
believe that its operating requirements for the next 12 months can be funded
from cash provided by operations and cash reserves. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is seeking to raise additional capital through the offering of debt
or equity securities. The Company is also limiting discretionary expenses in all
categories and plans to halt its growth, except for some expansion in Montreal,
which may be offset by some attrition in other offices. However, there can be no
assurance that the Company's efforts to achieve profitable operations or raise
additional capital will be successful. These consolidated financial statements
do not include any adjustment that might result from the outcome of this
uncertainty.

  Use of Estimates

     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in its consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

  Cash and Cash Equivalents

     Cash equivalents consist of highly liquid investments, which are readily
convertible into cash or have maturities of three months or less on the date of
purchase.

  Financial Instruments

     Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and cash equivalents,
accounts receivable and notes payable. Cash and cash equivalents are held with
financial institutions with high credit standings.

     The customer base currently consists of two large related party customers.
The concentration of credit risk with these customers is not considered
significant due to their size and credit standing. See the discussion of related
parties in Note 2. The carrying value approximates fair value for all financial
instruments.

                                        43
<PAGE>   47
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Property and Equipment

     Property and equipment, including property under capital leases, are
recorded at cost. The Company uses the straight-line method in computing
depreciation based on the estimated useful lives of the assets. The annual
provisions for depreciation have been computed principally in accordance with
the following ranges of asset lives: buildings -- 50 years; computer equipment
and software -- 2 to 3 years; furniture and leasehold improvements -- 5 years or
the life of the lease, whichever is shorter; and other equipment -- 5 years.

     Maintenance and repairs are expensed as incurred, while capital
improvements to assets are recorded as an addition to the original cost of the
asset and depreciated over the remaining useful life of the related asset. When
assets are retired or otherwise disposed of, the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in the statement of operations.

  Impairment of Long-Lived Assets

     The Company reviews long-lived assets for potential impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets held for use is measured by
comparing the carrying amount of an asset to the undiscounted estimated future
cash flows expected to be generated by the asset. In estimating expected future
cash flows for determining whether an asset is impaired, assets are grouped at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. If any such assets are
considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds its fair value. The Company has
made no adjustment to the carrying values of long-lived assets during the years
ended December 31, 1999 and 2000.

  Capitalized Software Development Costs

     Software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until
the product is available for general release to customers. To date, the
establishment of technological feasibility of products and general release of
such software have substantially coincided. As a result, software development
costs qualifying for capitalization have been insignificant and, therefore, the
Company has not capitalized any such costs.

  Research and Development

     The Company expenses all research and development costs as incurred.

  Revenue Recognition

     The Company's revenues consist primarily of fees for software development
received from contracted research and development agreements. Revenues from
contracted research and development agreements are recognized at the completion
and acceptance of the project by the customer provided that the fee is fixed and
determinable, and collection is considered probable by management. The Company
also has software license revenue, which consists of software technology
licensed to Ericsson. License revenue is amortized over the life of the
agreement upon delivery and acceptance of the software license.

     Additionally, the Company earns revenue from client services including the
delivery of software applications and value added services that are hosted on
the Company's network. Because these applications can also be run on the
Company's customers' networks, the Company refers to this as a "hosted service"
when it is delivered from the Company's network.

     Maintenance and support is included in a hosted solution, but would be
charged separately if a customer chose to purchase a value added service or an
application that it would deliver from its own network. Client

                                        44
<PAGE>   48
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

services also include consulting, customization and implementation services of
Internet platform products the Company has developed under a General
Co-Operation and Development Agreement dated February 1999 with Ericsson, which
was superseded by an agreement of the same name dated November 1, 2000. Revenues
from all these services will be recognized in the month in which the service is
performed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable.

     Deferred revenue is comprised of software technology license fees received
in advance of satisfying revenue recognition criteria related to the 1999
development agreements with Ericsson. Payments for certain development work for
Ericsson and Microcell in connection with the 2000 development agreements with
Ericsson and Microcell are recorded as deferred revenue and will be recognized
as revenue upon completion of such agreements.

     The Company generally warrants that its products will function
substantially in accordance with documentation provided to customers for
approximately twelve months following initial shipment to the customer. As of
December 31, 2000, the Company had not incurred any significant expenses related
to warranty claims.

  Network Costs

     Internet based services include expenses incurred by the Company to
maintain, monitor and manage the Company's network. The Company recognizes
network costs in accordance with Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Development or Obtained for Internal Use." As
such, the Company expenses all costs incurred that relate to the planning and
post implementation phases of development. Costs incurred in the development
phase are capitalized and recognized over the product's estimated useful life if
the product is expected to have a useful life beyond one year. Costs associated
with repair or maintenance of the existing network are included in internet
based services expense in the accompanying consolidated statement of income.

  Income Taxes

     The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities using enacted statutory rates in the relevant tax
jurisdictions. A valuation allowance against net deferred tax assets is
established if, based on the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. No provision is
made for U.S. income taxes applicable to undistributed earnings of foreign
subsidiaries that are indefinitely invested in foreign operations.

  Foreign Currency Translation

     Assets and liabilities of foreign subsidiaries, whose functional currency
is the local currency, are translated at the year-end exchange rates. Revenues
and expenses are translated at the average rates of exchange prevailing during
the year. The adjustments resulting from translating the financial statements of
such foreign subsidiaries are included in accumulated other comprehensive
income, which is reflected as a separate component of shareholders' equity.

  Stock Split and Establishment of Par Value

     On May 3, 2000, the shareholders of the Company approved a 2-for-1 stock
split of the Company's common stock and the establishment of a par value for
common stock and preferred stock of $0.01 per share. The consolidated financial
statements give retroactive effect to these events for all periods presented.

                                        45
<PAGE>   49
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Earnings Per Share

     Basic earnings per share are based upon the weighted average number of
common shares outstanding during the year. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding during the year plus the effect of common stock issuable upon the
exercise of employee stock options and common stock warrants using the treasury
stock method and the effect of convertible debt and convertible preferred shares
using the if converted method.

  Employee Stock-Based Compensation

     The Company accounts for stock-based compensation under the intrinsic value
method as set forth in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The alternative fair value accounting provided
for under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation," is discussed in Note 10.

  Stock-Based Compensation for Non-Employees

     The Company periodically settles fees incurred for professional services
through the issuance of common stock. The number of shares of common stock equal
to the fees incurred is calculated and issued based upon the fair value of
common stock on the date of issuance.

  Recently Issued Accounting Pronouncements

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after January 1, 2001. The adoption of SFAS 133 in the
first quarter of 2001 did not have a material effect on the Company's results of
operations or financial condition.

  Reclassifications

     Certain 1999 amounts have been reclassified to conform with the 2000
presentation.

 2. RELATED PARTY TRANSACTIONS:

     In February 1999, the Company entered into a stock and warrant purchase
agreement with Ericsson, Inc. pursuant to which Ericsson received a warrant and
other purchase rights to purchase up to 10,052,431 shares of the Company's
Series A Preferred stock at $1.30 per share, at the time equal to approximately
20% of the capital stock of the Company on an as-converted basis. In June 1999,
Ericsson exercised its warrant by purchasing 4,769,231 shares of the Company's
Series A Preferred stock for total cash consideration of $6,200,000. In October
1999, Ericsson exercised the balance of its purchase rights by purchasing
5,283,200 shares of the Company's Series A Preferred stock for total cash
consideration of $6,868,160. The warrant had a contracted life of four months,
the purchase rights were conditioned upon exercise of the warrant and had a
contracted life of approximately four months commencing on the exercise date of
the warrant, and based upon a fair value calculation, the fair value of the
warrant and purchase rights at the date of issuance was $448,000, which was
allocated to additional paid-in capital at the inception of the agreement. The
fair value was determined using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes option pricing model were: interest rate
of 4.5%; contract life of four months; expected volatility of 75%; and expected
dividends of zero.

     In February 1999, Ericsson and the Company entered into two agreements,
which formed the basis for a strategic alliance between the two companies.
Pursuant to these agreements, the companies agreed to cooperate in the area of
Internet-based technologies, applications and services, including, but not
limited to,
                                        46
<PAGE>   50
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

development, testing, integration, marketing, sales, distribution, support and
maintenance of solutions based on the technologies and services of each company.
The parties' co-operation is non-exclusive and each party's participation is
based on its individual evaluation of the commercial viability and expected
benefits of the relationship. The initial terms of the agreements expire on
December 31, 2001, but the agreements renew automatically for one-year terms
until terminated by either party.

     Under the terms of one of the agreements, as long as Ericsson owns shares
representing 5% or more of the capital stock of the Company, the Company must
inform Ericsson of any proposal to license or sell any of the technology covered
in the agreement or to enter into any transaction with any principal competitor
of Ericsson. Ericsson may opt to enter into the proposed transaction on the same
terms and conditions.

     In October 2000, the Company and Ericsson Inc. entered into Amendment
Number One to the Shareholder Rights Agreement ("Amendment No. One"), which
eliminates Ericsson's right under the Shareholder Rights Agreement dated
February 4, 1999 to require the Company to repurchase the shares of Series A
Preferred Stock and/or Common Stock owned by Ericsson. Prior to Amendment No.
One, the Series A Preferred stock held by Ericsson had been recorded in
temporary equity on the Company's consolidated balance sheet. With the
elimination of Ericsson's right of redemption, this Series A Preferred stock was
transferred to permanent shareholders' equity in the fourth quarter of 2000.

     For the years ended December 31, 1999 and 2000, the Company recognized
revenue from Ericsson in the amounts of $3,988,390 and $7,778,505, respectively.
At December 31, 2000, all amounts classified as trade accounts receivable from
shareholder in the accompanying consolidated balance sheets are due from
Ericsson in connection with development agreements.

     On November 8, 2000, the Company completed its acquisition of all the
outstanding voting capital stock of MCE Holding Corporation. MCE Holding
Corporation was a strategic alliance (the "Strategic Alliance") of Microcell
Capital II, Inc. ("Microcell") and Ericsson Canada Inc. ("Ericsson Canada")
formed to hold all of the issued and outstanding capital stock of 3044016 Nova
Scotia Company, a recently organized company based in Montreal, Canada, which
was formed to develop mobile Internet applications for network operators in
Canada. The name of 3044016 Nova Scotia Company was changed to OZ.COM Canada
Company ("OZ Canada") following the closing of the transaction.

     The transaction was closed pursuant to two Share Exchange Agreements (the
"Acquisition Agreements") dated November 8, 2000 by and between the Company and
each of Microcell and Ericsson Canada as the former stockholders of MCE Holding
Corporation. The acquisition was structured as a stock-for-stock exchange in
which the Company issued an aggregate of 16,475,131 shares of its common stock
to Microcell and Ericsson Canada in exchange for all of the issued and
outstanding stock of MCE Holding Corporation. Total consideration given,
including direct acquisition costs, aggregated approximately $18.4 million. The
Company has accounted for the transaction using the purchase method of
accounting. The Strategic Alliance had no operations prior to the acquisition.
The excess of the purchase price over the estimated fair value of the tangible
net assets acquired amounted to approximately $16.4 million, with $15.5 million
attributable to goodwill and $0.9 million attributable to a fully paid-up iPulse
1.5 license for the benefit of Microcell and its affiliates. The Company will
amortize the goodwill on a straight-line basis over an estimated useful life of
five years and the iPulse 1.5 license on a straight-line basis over an estimated
useful life of 3.5 years. The estimated fair values and useful lives are a
preliminary determination based on available information.

     The acquired assets consist of cash and licensed technology to be used in
the business of developing and marketing Internet application technology for
wireless service providers.

     In connection with the acquisition, the Company entered into a shareholder
agreement with Microcell and two of the Company's directors and officers, Skuli
Mogensen and Guojon Mar Guojonsson. This agreement gives Microcell the right to
participate in any sales of the Company's shares by either Mr. Mogensen or Mr.
Guojonsson and, with some exceptions, to purchase pro rata shares of the
Company's

                                       47
<PAGE>   51
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

securities offered by the Company. In addition, Messrs. Mogensen and Guojonsson
have agreed to vote a sufficient number of the Company's shares to enable a
nominee of Microcell to sit on the board of directors of the Company.

     The Company also entered into a shareholder agreement with Ericsson Canada,
Skuli Mogensen and Guojon Mar Guojonsson. This agreement gives Ericsson Canada
the right to participate in any sales of the Company's shares by either Mr.
Mogensen or Mr. Guojonsson and, with some exceptions, to purchase pro rata
shares of the Company's securities offered by the Company.

     The Acquisition Agreement with Microcell grants Microcell the right, during
the period from February 15, 2002 until April 15, 2002, to require the Company
to repurchase the 11,405,860 shares delivered to Microcell in connection with
the acquisition at the price of $4,500,000, if prior to February 15, 2002 the
Company fails to complete a firmly underwritten public offering pursuant to a
registration statement under the Securities Act of 1933 ("Securities Act"), or a
public offering in which OZ.COM's shares are listed or designated for trading on
any "designated offshore securities market" as such term is defined in
Regulation S under the Securities Act, which offering, in either case, results
in a market capitalization of not less than $225 million. The 11,405,860 shares
that are subject to this right have an issue value of $12.7 million, which has
been allocated to shareholders' equity in the Company's consolidated balance
sheet less the amount related to the redemption value of $4.5 million. The
redemption value of $4.5 million is allocated to temporary equity on the balance
sheet.

     In connection with the acquisition, OZ Canada entered into a General
Co-Operation Development Agreement ("Microcell GCDA") with Microcell Labs, Inc.
("Microcell Labs") on November 8, 2000, pursuant to which Microcell Labs agreed
to use OZ Canada as its preferred development resource for development work and
consulting services in the field of wireless Internet applications under the
terms and conditions of the Microcell GCDA. Under the terms of the Microcell
GCDA, Microcell Labs has committed to purchasing $9 million in consulting and
development services and technology licenses during the term of the Microcell
GCDA. OZ Canada will have full ownership of the products developed under the
Microcell GCDA and their related intellectual property rights. However, if the
products are unrelated to OZ Canada's product offerings or if the products are
completed by Microcell Labs as a result of OZ Canada's breach of the Microcell
GCDA, Microcell Labs will own the product and its related intellectual property
rights, with OZ Canada retaining the right to use, sell, and distribute the
product outside of Canada for three years. Microcell Labs will have a license to
use, sell and distribute for commercial use by Microcell Labs and its affiliates
all products developed under the Microcell GCDA. The license will be royalty
free, except that Microcell Labs will pay to OZ Canada 10% of its net revenues
attributable to the sale or license of the products during the three-year term
after the commercial launch of the products. OZ Canada will pay to Microcell
Labs 10% of all of its net revenues attributable to the sale or license of
products developed under the Microcell GCDA during the three-year term
commencing with the commercial launch of the products. The term of the Microcell
GCDA is three years, unless earlier terminated by written notice of a party upon
a petition for bankruptcy by the other party or the occurrence of an insolvency
related event with respect to the other party.

     In connection with the acquisition, OZ Canada also concluded a Specific
Development and Consulting Agreement ("Microcell SDCA") with Microcell Labs
dated November 8, 2000 pursuant to which OZ Canada granted to Microcell Labs a
non-exclusive, non-transferable, non-revocable license to use iPulse 1.5. Except
for the revenue sharing payments under the Microcell GCDA the license is
royalty-free. Ericsson had granted to MCE Holding Corporation the right to grant
a license to iPulse 1.5 and agreed to the assignment of this right to OZ Canada.

     In addition, OZ Canada entered into a Specific Co-Operation and Development
Agreement with Ericsson Canada on November 8, 2000 ("Ericsson SCDA") in
connection with the acquisition pursuant to which OZ Canada will provide
consulting and development services in the areas of mobile Internet applications
for third generation ("3G") mobile telephony platforms. The Ericsson SCDA is an
agreement

                                       48
<PAGE>   52
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

under the General Co-Operation and Development Agreement entered into on
November 1, 2000 between an affiliate of Ericsson Canada, Ericsson Radio Systems
AB ("Ericsson Radio Systems"), and the Company. Under the terms of the Ericsson
SCDA, Ericsson Canada will advance to OZ Canada a total of $6 million in
quarterly installments over the Ericsson SCDA's two-year term, which
installments will be applied by Ericsson Canada against amounts due for
development work performed under the Ericsson SCDA. OZ Canada will have access
to Ericsson Canada's 3G laboratories and will receive up to 6,000 hours of
assistance from qualified 3G experts for testing of the 3G development work.

     Ericsson Canada is a subsidiary of LM Ericsson, Sweden. Another subsidiary
of LM Ericsson, Ericsson, Inc., owns 10,052,431 shares of the Company's Series A
Preferred stock, which is currently convertible into the Company's common stock
on a two-for-one basis. Under the terms of a shareholders agreement entered into
in February 1999 among Ericsson, Inc., the Company and Messrs. Skuli Mogensen
and Gu(LOGO)jon Mar Gu(LOGO)jonsson, Messrs. Skuli Mogensen and Gu(LOGO)jon Mar
Gu(LOGO)jonsson have agreed to vote a sufficient number of shares to elect a
nominee of Ericsson Inc. to the Company's board of directors. Currently, an
Ericsson, Inc. nominee sits on the Company's board of directors. The Company and
Ericsson Radio Systems entered into a Specific Co-Operation and Development
Agreement in February 1999 under which the Company is performing development
work for Ericsson Radio Systems related to Ericsson's iPulse product, as well as
a value added license distribution agreement under which the Company may offer
the iPulse product to its customers in exchange for royalties. In addition, the
Company and Ericsson Radio Systems entered into two agency agreements which
allow the Company to act as a sales agent for Ericsson's iPulse product and
allow Ericsson Radio Systems to act as a sales agent for the Company's mPresence
services offering, in return for certain sales commissions and referral fees.

     Assuming MCE Holding Corporation was acquired on January 1, 1999 the
unaudited pro forma revenues for the years ended December 31, 1999 and 2000 were
$4,597,095 and $8,303,885. Pro forma loss before income taxes for the years
ended December 31, 1999 and 2000 was $6,171,000 and $16,750,000. Pro forma net
loss for the years ended December 31, 1999 and 2000 was $6,171,000 and
$16,725,000. Pro forma net loss per share for the years ended December 31, 1999
and 2000 was $(0.07) and $(0.19).

 3. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1999           2000
                                                    -----------    -----------
<S>                                                 <C>            <C>
Buildings.........................................  $ 1,383,156    $ 1,405,851
Computer equipment and software...................    1,272,654      3,130,158
Computer equipment under capital lease............      197,252             --
Furniture and leasehold improvements..............      400,940      1,006,539
Other equipment...................................       61,695         84,225
                                                    -----------    -----------
                                                      3,315,697      5,626,773
Less accumulated depreciation and amortization....   (1,236,166)    (1,747,612)
                                                    -----------    -----------
                                                    $ 2,079,531    $ 3,879,161
                                                    ===========    ===========
</TABLE>

     For the years ended December 31, 1999 and 2000 depreciation expense was
$344,000 and $711,699. respectively.

                                        49
<PAGE>   53
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 4. ACCRUED LIABILITIES:

     Accrued liabilities is comprised of the following at December 31, 1999 and
2000:

<TABLE>
<CAPTION>
                                                         1999         2000
                                                       --------    ----------
<S>                                                    <C>         <C>
Accrued vacation.....................................  $239,058    $  439,326
Other payroll liabilities............................   189,389       489,101
Other accrued liabilities............................    76,686       182,877
                                                       --------    ----------
                                                       $505,133    $1,111,304
                                                       ========    ==========
</TABLE>

 5. NOTES PAYABLE:

     The Company has entered into several long-term borrowing agreements with
Icelandic lenders. At December 31, 1999 and 2000 the following borrowings were
outstanding:

<TABLE>
<CAPTION>
                                                                             PRINCIPAL OUTSTANDING AT
                                                                                   DECEMBER 31,
                                          ANNUAL                             ------------------------
               LENDER                  INTEREST RATE      MATURITY DATE         1999          2000
               ------                  -------------    -----------------    ----------    ----------
<S>                                    <C>              <C>                  <C>           <C>
Bunaoarbanki Islands hf(1)...........      6.85%        December 15, 2021     $150,219      $134,037
Bunaoarbanki Islands hf(2)...........      7.35%            June 15, 2009      114,167        91,145
Osta-og smjorsalan sf(3).............      6.00%          October 1, 2022      265,128       225,815
                                                                              --------      --------
                                                                              $529,514      $450,997
                                                                              ========      ========
</TABLE>

---------------
(1) The bank note payable is denominated in Icelandic Krona ("ISK") with an
    original principal balance of ISK 10 million. The original principal balance
    is adjusted monthly for fluctuations in the Icelandic consumer price index,
    in accordance with the terms of the note agreement. At December 31, 1999 and
    2000, the adjusted principal balances are ISK 10,868,347 and ISK 11,322,129,
    respectively. Principal payments commence on July 15, 2009. Payments are
    made monthly on a pro-rata basis over the remaining 8.5 years of the note
    term. Interest payments are made on a monthly basis.

(2) The bank note payable is denominated in Icelandic Krona with an original
    principal balance of ISK 10 million. The original principal balance is
    adjusted annually for fluctuations in the Icelandic consumer price index, in
    accordance with the terms of the note agreement. At December 31, 1999 and
    2000 the adjusted principal balances are ISK 8,259,942 and ISK7,699,045,
    respectively. Principal payments commenced on January 15, 1997. Principal
    and interest payments are made monthly on a pro-rata basis of the remaining
    principal plus accrued interest balance.

(3) Note payable is denominated in Icelandic Krona with an original principal
    balance of ISK 20 million. The original principal balance is adjusted
    annually for fluctuations in the Icelandic consumer price index, in
    accordance with the terms of the note agreement. At December 31, 1999 and
    2000, the adjusted principal balances are ISK 19,182,022 and ISK 19,074,607,
    respectively. Principal payments commenced on October 1, 1997. Principal and
    interest payments are made annually on a pro-rata basis of the remaining
    principal plus accrued interest balance.

                                        50
<PAGE>   54
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Principal maturities of notes payable at December 31, 2000 are as follows:

<TABLE>
<S>                                                         <C>
YEARS ENDING DECEMBER 31:
  2001....................................................  $ 21,476
  2002....................................................    21,476
  2003....................................................    21,476
  2004....................................................    21,476
  2005....................................................    21,476
  Thereafter..............................................   343,617
                                                            --------
          Total...........................................   450,997
Current portion...........................................   (21,476)
                                                            --------
Long-term portion.........................................  $429,521
                                                            ========
</TABLE>

     Pursuant to the note agreements, the Company has pledged its buildings as
collateral for several loans. The amount pledged at December 31, 1999 and 2000
approximates $534,000 and $687,000, respectively.

 6. CONVERTIBLE BONDS:

     In June 1998, the Company issued $2.5 million in convertible bonds. The
bonds had a stated interest rate of 8% and were to mature on September 1, 2001.
The bonds provided for annual interest payments beginning on September 1, 1999.

     In accordance with the terms of the bond agreement, the bonds were
converted at the option of the bondholders into common stock from January 11,
1999 to May 31, 1999 at a conversion price of $0.65 per share of common stock.

 7. PREFERRED AND COMMON STOCK:

     The Company is authorized to issue 275 million shares of $0.01 par value
common stock and 25 million shares of $0.01 par value preferred stock. Twenty
million shares of preferred stock are designated as Series A Preferred. The
remaining five million shares of preferred stock have not yet been designated.

     On December 14, 1997, the shareholders of the Company approved and adopted
a plan of recapitalization. Under this plan, all shareholders who paid $0.2344
or more per share of common stock were permitted to exchange two shares of
common stock for one share of Series A Preferred. The exchange was terminated on
February 15, 1999. During the years ended December 1998 and 1999, 10,797,510 and
572,926 shares of common stock were converted to Series A Preferred,
respectively. Amounts were reclassified from common stock to preferred stock on
the specific identification method.

  Series A Preferred Shares

     The Company is authorized to issue 20 million shares of Series A Preferred
stock. On December 31, 1999 and 2000, 15,737,649 and 15,480,964 shares of Series
A Preferred were issued and outstanding. In the event of liquidation,
dissolution, winding up or merger of the Company, either voluntary or
involuntary, the holders of the Series A Preferred shares retain liquidation
preference over the common shareholders equal to $1.00 per share, as adjusted
for stock splits, stock dividends and other recapitalizations. If there are
sufficient proceeds to pay the holders of the Series A Preferred stock their
liquidation preference in full, then the holders of common stock are entitled to
be paid an amount equal to $0.50 per share (as adjusted). Thereafter, holders of
preferred and common stock share equally in any remaining assets.

     Holders of the Series A Preferred stock are entitled to vote on the basis
of the number of shares of common stock into which the preferred stock could be
converted on the record date for the vote.

                                        51
<PAGE>   55
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Series A Preferred stock is convertible at any time into common stock
at a ratio of one to two. All preferred stock will be converted into shares of
common stock upon the closing of the sale of shares pursuant to a registration
statement under the Securities Act of 1933 at an offering price of not less than
$0.50 per share (adjusted to reflect any stock splits, recapitalizations, or
combinations), and $5 million in the aggregate.

 8. NET LOSS PER SHARE:

     Diluted net loss per share does not differ from basic net loss per share
since potential common stock from the conversion of preferred stock, stock
options, convertible bonds and warrants are antidilutive for all periods
presented and are, therefore, excluded from the calculation. Potentially
dilutive securities not included in the diluted net loss per share calculation
equivalent to 25.9 million and 34.9 million for the years ended December 31,
1999 and 2000, respectively, included preferred stock, stock options and
warrants.

 9. EMPLOYEE STOCK OPTION PLANS:

  1995 Stock Option Plan

     In December 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), under which the Company has now reserved up to 13,000,000 shares of
common stock for issuance to all employees, except employees of the Company's
Swedish subsidiary, outside directors and certain consultants, as determined on
a case-by-case basis. The Company has the ability to grant both incentive and
supplemental stock options. Incentive stock options are issuable at an exercise
price at least equal to the fair value of the Company's shares of common stock
at the date of grant. Supplemental stock options may be issued at prices as low
as 85% of fair market value. Compensation expense is recorded for options
granted at prices below fair market value on the date of grant. Both incentive
and supplemental stock options have a maximum term of ten years.

     At December 31, 2000, the Company had 7,837,003 authorized shares to be
granted under the 1995 Plan.

  1998 Incentive Stock Option Plan

     In May 1998, the Company adopted the 1998 Incentive Stock Plan (the "1998
Plan"), under which the Company has reserved up to 2,000,000 shares of common
stock. The 1998 Plan provides for grants to directors, executive officers and
selected employees and consultants ("Participants"). Under this plan the Company
may grant stock to Participants for which the Participant is not obligated to
pay additional consideration ("Stock Award") and may grant Participants the
right to purchase a specified number of shares of common stock pursuant to a
written agreement issued under the 1998 Plan ("Stock Purchase Offer"). Shares of
common stock that Participants may receive as a Stock Award or under a Stock
Purchase Offer may include restrictions on transfer, repurchase rights, rights
of first refusal and forfeiture provisions. There is no restriction to the term
of exercisability unless the employee terminates his employment. At December 31,
2000, there were 1,317,924 shares remaining, which were available for future
grants under the 1998 Plan.

                                        52
<PAGE>   56
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     A summary of options outstanding and activity under the 1995 and 1998 stock
option plans is as follows:

<TABLE>
<CAPTION>
                                                                                WEIGHTED
                                                                                AVERAGE
                                                NUMBER OF       PRICE PER       EXERCISE
                                                  SHARES          SHARE          PRICE
                                                ----------    --------------    --------
<S>                                             <C>           <C>               <C>
Outstanding at January 1, 1999................   7,999,000             $0.10     $0.10
Options granted...............................   2,736,000      0.10  - 1.20      0.93
Options exercised.............................  (1,636,298)     0.10  - 1.18      0.22
Options forfeited.............................  (1,721,436)     0.10  - 1.20      0.35
                                                ----------    --------------     -----
Outstanding at December 31, 1999..............   7,377,266      0.10  - 1.20      0.33
Options granted...............................   2,240,000      1.175 - 1.25      1.21
Options exercised.............................  (2,532,017)     0.10  - 1.20      0.18
Options forfeited.............................    (859,417)     0.10  - 1.20      0.31
                                                ----------    --------------     -----
Outstanding at December 31, 2000..............   6,225,832    $1.175 - $1.25     $0.75
                                                ==========    ==============     =====
</TABLE>

     Information regarding the stock options outstanding at December 31, 2000 is
summarized below:

<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING
                                                    ----------------------      OPTION
                                                                 REMAINING    EXERCISABLE
                                                     SHARES        LIFE         SHARES
                                                    ---------    ---------    -----------
<S>                                                 <C>          <C>          <C>
$0.10.............................................  2,774,332    7.1 years     1,299,667
$1.175............................................  2,206,500    9.1 years       266,000
$1.20.............................................    205,000    8.4 years        60,000
$1.25.............................................  1,040,000    9.3 years            --
                                                    ---------                  ---------
                                                    6,225,832                  1,625,667
                                                    =========                  =========
</TABLE>

     The Company recorded deferred compensation of $350,470 and $4,970,000 for
options granted at less than fair value during 1999 and 2000, respectively. This
deferred compensation, net of cancellations, is being amortized ratably over the
vesting period of the related options.

     The following information concerning the Company's stock option plans is
provided in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). The Company accounts for
the Plan in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
fair value of options granted in 1999 and 2000 was estimated at the date of the
grant using a Black-Scholes option pricing model. Weighted average assumptions
used in determining the fair value of grants in 1999 and 2000, include a risk-
free interest rate of 5.9% and 5.0%, and an expected life of five and one half
years, expected volatility of 0% and 75% and expected dividend yields of zero.

     As a result of the above assumptions, the weighted average fair value of
options granted in 1999 and 2000, was $0.93 and $2.85 per share, respectively.

     The pro forma net loss for the Company, for the years ended December 31,
1999 and 2000, following the provisions of SFAS 123, is $3,465,819 and
$14,747,090, respectively. The pro forma net loss per share for the Company for
the years ended December 31, 1999 and 2000, following the provisions of SFAS
123, is $0.05 and $0.20, respectively.

                                        53
<PAGE>   57
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. WARRANTS TO PURCHASE COMMON STOCK:

     As of December 31, 2000, the Company had the following warrants outstanding
that are fully vested:

<TABLE>
<CAPTION>
NUMBER OF   EXERCISE PRICE   EXPIRATION
WARRANTS      PER SHARE         DATE
---------   --------------   ----------
<S>         <C>              <C>
 308,000        $0.55           (1)
  40,000        $0.25           (2)
  80,000        $0.25           (3)
 -------
 428,000
 =======
</TABLE>

---------------
(1) The warrants are held by unrelated parties and are exercisable until a sale
    of the Company's shares of common stock pursuant to an effective
    registration statement under the Securities Act or a consolidation (as
    defined) or merger of the Company into another corporation.

(2) The warrants are held by a third party and are exercisable until the earlier
    of October 31, 2001 or immediately prior to the completion of any
    consolidation (as defined) or merger of the Company.

(3) The warrants are held by a former employee and are exercisable until the
    earlier of February 1, 2002 or immediately prior to completion of any
    consolidation (as defined) or merger of the Company.

11. NOTES RECEIVABLE FROM SHAREHOLDERS:

     Under certain written agreements issued under the 1998 Incentive Stock
Plan, the Company may issue shares of common stock to employees upon the receipt
of a note receivable from the employee. The note receivable is secured by the
shares of common stock, does not have a maturity date and is interest free. The
Company does not realize any benefit or loss from changes in value of the
underlying shares held by the Company as security of the note receivable. Upon
termination any amount unpaid is settled through receipt of the original shares
issued at the original exercise price.

     During 1999 and 2000, the Company issued 120,000 and 160,000 shares of
common stock in exchange for notes receivable in the amount of $141,000 and
$189,500, respectively. During 1999 and 2000, the Company received payments of
$15,400 and $35,800 in exchange for 154,000 and 358,000 shares of common stock.
At December 31, 1999 and 2000, notes receivable in the amount of $200,200 and
$353,900 were outstanding for 712,000 and 514,000 shares of common stock,
respectively.

12. INCOME TAXES:

     The components of deferred income taxes at December 31, 2000 are as
follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1999           2000
                                                    -----------    -----------
<S>                                                 <C>            <C>
Non-current deferred income tax assets:
  Net operating loss carryforwards................  $ 4,531,455    $ 9,508,622
  Other...........................................      144,111        202,204
                                                    -----------    -----------
          Total deferred income tax asset.........    4,675,566      9,710,826
Valuation allowance...............................   (4,675,566)    (9,710,826)
                                                    -----------    -----------
                                                    $        --    $        --
                                                    ===========    ===========
</TABLE>

     Due to the uncertain nature of the ultimate realization of the above
deferred tax asset, the Company has recorded a valuation allowance against
deferred tax assets.

                                        54
<PAGE>   58
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     At December 31, 2000 the Company has net operating loss carryforwards of
approximately $23,900,000, $11,900,000 and $4,000,000 for federal, state and
foreign income tax purposes, respectively. These carryforwards will expire from
year 2001 through 2020.

13. EMPLOYEE BENEFIT PLAN:

     In July 1997, the Company established a 401(k) defined contribution benefit
plan covering all eligible employees. Company contributions to the plan may be
made at the discretion of the Company. As of December 31, 2000, the Company has
not made any contributions to the plan since its inception.

14. SEGMENTS:

     The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenues by geographic region and by product for purposes of making operating
decisions and assessing financial performance. The Company operates in three
operating segments: 1) development of software that enables the delivery of
Internet-based services to mass-market wireless telephones, 2) the delivery of
Internet-based services to wireless network operators and Internet businesses,
and related consulting services and 3) the licensing of the Company's core
technologies to Ericsson and the licensing of the Company's products to network
operators and Internet businesses. The disaggregated information reviewed on a
product basis by the CEO is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1999          2000
                                                      ----------    ----------
<S>                                                   <C>           <C>
Revenues:
  Development.......................................  $4,518,238    $7,724,249
  Client services...................................          --       299,756
  Licenses..........................................      78,857       279,880
                                                      ----------    ----------
          Total Revenues............................  $4,597,095    $8,303,885
                                                      ==========    ==========
</TABLE>

     Revenues attributable to geographic regions are based upon the origination
of the sales. The Company currently has sales operations in Stockholm, Sweden to
address the European markets and in San Diego to address the United States and
Canadian markets. Information regarding the Company's revenues in different
geographic regions is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1999          2000
                                                      ----------    ----------
<S>                                                   <C>           <C>
Revenues:
  North America.....................................  $3,891,524    $7,393,299
  Europe (principally Iceland)......................     705,571       910,586
                                                      ----------    ----------
          Total Revenues............................  $4,597,095    $8,303,885
                                                      ==========    ==========
</TABLE>

     Ericsson Telecom AB and/or its affiliates ("Ericsson") was the Company's
most significant customer during the years ended December 31, 1999 and December
31, 2000. Microcell Telecommunications Inc. and/or its affiliates ("Microcell")
became a significant customer in the three-month period ended December 31, 2000,
accounting for payments to the Company in the amount of $1,750,000 for
development services. These payments from Microcell were not recognized as
revenue because of the significant related party relationship between Microcell
and the Company at the inception of the contract. See Note 2, which discusses
the nature of the relationship with these customers.

                                        55
<PAGE>   59
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. COMMITMENTS AND CONTINGENCIES:

     The Company has entered into various noncancellable operating leases for
office space. Future minimum lease payments under operating leases as of
December 31, 2000 are as follows:

<TABLE>
<S>                                                         <C>
YEARS ENDING DECEMBER 31:
  2001....................................................  $254,404
  2002....................................................    74,948
  2003....................................................    74,948
  2004....................................................    67,058
  2005....................................................    27,612
  Thereafter..............................................    18,408
                                                            --------
          Total minimum lease payments....................  $517,378
                                                            ========
</TABLE>

     On August 9, 2000, Garry Hare filed a complaint against us in the Superior
Court for the City and County of San Francisco, California. Mr. Hare is a former
director and officer whose employment was terminated in December 1998. We
subsequently entered into a termination agreement with Mr. Hare. The amended
complaint alleges fraud and breach of the employment and termination agreements.
The amended complaint seeks compensatory damages according to proof, punitive
damages according to proof, specific performance of the stock bonus portion of
the termination agreement or employment agreement, a declaration that the
termination agreement is void, and attorneys' fees and costs. The Company
believes that the allegations in the amended complaint are without merit and
intends to defend the complaint vigorously. In addition, the Company filed a
cross-complaint against Mr. Hare on December 30, 2000, seeking attorneys' fees
and damages for fraud and breach of the termination agreement. The ultimate
outcome of this matter is not presently determinable.

16. RESTATEMENT:

     Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1999, the Company's management
determined that the fair value of certain warrants issued should have been
allocated to additional paid-in capital, certain previously recognized license
revenue should have been amortized, and accrued interest expense related to the
conversion of bonds payable to common stock should have been recognized as
additional paid-in capital rather than a reduction in interest expense. As a
result, the 1999 consolidated financial statements have been restated from
amounts previously reported.

                                        56
<PAGE>   60
                                     OZ.COM

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     A summary of effects of the restatement as of December 31, 1999 and for the
year then ended is as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31, 1999
                                               -----------------------------------
                                               PREVIOUSLY REPORTED      RESTATED
                                               -------------------    ------------
<S>                                            <C>                    <C>
Revenues.....................................     $  5,174,398        $  4,597,095
Operating loss...............................       (2,804,209)         (3,381,512)
Interest expense.............................           31,251             (80,749)
Loss before provision of income taxes........       (2,242,815)         (2,932,118)
Net loss.....................................       (2,242,815)         (2,932,118)
Net loss per share:
  Basic......................................            (0.03)              (0.04)
  Diluted....................................            (0.03)              (0.04)
Current portion of deferred revenue..........          171,920             236,571
Total current liabilities....................          892,811             957,462
Deferred revenue.............................          171,920             236,572
Total liabilities............................        1,570,176           1,699,479
Additional paid-in capital...................        9,880,238          10,440,238
Accumulated deficit including accumulated
  other comprehensive income.................      (12,376,136)        (13,065,439)
Shareholders' equity.........................        2,995,801           2,866,498
</TABLE>

                                        57
<PAGE>   61

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     On December 5, 2000, we dismissed PricewaterhouseCoopers ehf
("PricewaterhouseCoopers") as our independent auditors, as approved by the Audit
Committee of our Board of Directors.

     The reports of PricewaterhouseCoopers on our financial statements for the
past two fiscal years or for any subsequent interim period through December 5,
2000 did not contain any adverse opinion or disclaimer of opinion and were not
modified as to uncertainty, audit scope or accounting principles.

     We believe that there was no disagreement with PricewaterhouseCoopers in
connection with the audit of our financial statements for our two most recent
fiscal years or for any subsequent interim period through December 5, 2000,
which disagreement if not resolved to their satisfaction would have caused
PricewaterhouseCoopers to make reference to the subject matter of the
disagreements in connection with its report.

     On December 19, 2000, we engaged Deloitte & Touche hf. ("Deloitte &
Touche") as our new independent auditors.

     During the past two fiscal years and the subsequent interim period through
December 5, 2000, we did not consult Deloitte & Touche regarding the application
of accounting principles to a specific completed or contemplated transaction or
the type of audit opinion that might be rendered on our financial statements or
any matter that was the subject of a disagreement or event identified in
response to paragraph (a)(1)(iv) of Item 304 of Regulation S-B.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

DIRECTORS

     The following table lists the members of the Board of Directors and
provides their ages and positions with us as of March 31, 2001. Biographical
information for each director is provided below.

<TABLE>
<CAPTION>
                      NAME                        AGE                POSITION
                      ----                        ---                --------
<S>                                               <C>    <C>
Guojon Mar Guojonsson...........................  29     Director, Chief Visionary
Skuli Mogensen..................................  32     Director, Chief Executive Officer
Stig-Arne Larsson...............................  58     Director, Chairman of the Board
Lars Boman......................................  52     Director
Jeffrey Pulver..................................  38     Director
Andre Tremblay..................................  46     Director
</TABLE>

     Guojon Mar Guojonsson, age 29, is our co-founder and our Chief Visionary.
He has served as a director since December 1995. In 1990, he founded OZ, hf, our
predecessor in Iceland. Mr. Guojonsson has worked extensively in the computer
software, communications and Internet industry over the last decade. He has
served as a government consultant on various projects and was responsible for
designing a future vision for the Ministry of Communication in Iceland in 1998.

     Skuli Mogensen, age 32, is our co-founder and our Chief Executive Officer.
Mr. Mogensen has served as a director since December 1995. He has been involved
in several successful ventures in Scandinavia and has extensive international
business experience. Mr. Mogensen is responsible for our overall business
development, investment banking, major partners, general strategy and tactical
input in major contracts and key accounts.

     Stig-Arne Larsson, age 58, has served as a director since May 2000 and
serves as the acting Chairman of the Board. He is currently the Chief Executive
Officer of Sal Ventures AB, a telecom and information technology consulting
firm. Previously, he was the Chief Executive Officer and Chief Financial Officer
of Telia Group, the incumbent Swedish telecom operator, and Deputy Director
General and Finance Director at Swedish Telecom Televerket. Mr. Larsson is also
a member of the board of directors of TradeDoubler AB, Generic Systems AB,
Secode AB, Svenska Brand AB and Castellum AB.

                                        58
<PAGE>   62

     Jeffrey Pulver, age 38, has served as a director since May 2000. He is the
President and founder of Pulver.com, Inc., an Internet-based consulting firm
that publishes Internet technology related research, produces trade shows and
related conferences and provides consulting services to the telecommunications
industry. Mr. Pulver is one of the leading experts in the field of streaming
audio and video technologies and their effect on business communications. He is
a pioneer in the field of Internet telephony and is the founder of the Voice on
the Net Coalition, which aims to keep the Internet telephony industry free from
regulations.

     Lars Boman, age 52, has served as a director since May 2000. He is Vice
President and Head of the Internet Applications Business Unit for Ericsson Radio
Systems AB (ERA), Stockholm. Mr. Boman is a member of the board of directors of
Ericsson Microsoft Mobile Venture.

     Andre Tremblay, age 46, has served as a director since November 2000. He
has been the President and Chief Executive Officer of Microcell
Telecommunications Inc. since May 1995 and has been actively involved in the
telecommunications industry since 1989. Mr. Tremblay has been a member of the
board of directors of Microcell Telecommunications Inc. since November 1995. Mr.
Tremblay is also a member of the board of directors and Executive Vice-President
of Telesystem. Prior to joining the Telesystem group of companies, Mr. Tremblay
was a partner and member of the management committee of Raymond, Chabot, Grant,
Thornton, a Canadian accounting firm formerly known as Raymond, Chabot, Martin,
Pare. Mr. Tremblay holds a Bachelor's Degree in Business Administration and a
License in Accounting from Laval University, as well as a Master's degree in
Taxation from Sherbrooke University. He has also completed the Advanced
Management Program offered by the Harvard Business School.

OFFICERS

     Officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment. See "Executive Compensation."
There is no family relationship between any director or executive officer and
any other director or executive officer. Our executive officers on March 31,
2001 were as follows:

<TABLE>
<CAPTION>
                NAME                   AGE                       POSITION
                ----                   ---                       --------
<S>                                    <C>    <C>
Skuli Mogensen.......................  32     Chief Executive Officer
Guojon Mar Guojonsson................  29     Chief Visionary
Robert G. Quinn......................  43     Chief Financial Officer
Kjartan Pierre Emilsson..............  35     Chief Technology Officer
Skuli Valberg Olafsson...............  34     Chief Operating Officer
Fredrik Torstensson..................  36     Executive Vice President of Sales and Business
                                              Development
Gunnar Thoroddsen....................  31     General Counsel
Jon L. Arnason.......................  40     Secretary and Treasurer
Gilles Lapierre......................  41     Vice President; Managing Director, OZ.COM
                                              Canada Company
</TABLE>

     Biographical information for Skuli Mogensen and Guojon Mar Guojonsson is
provided above.

     Robert G. Quinn has been Chief Financial Officer since April 2000. Prior to
serving as our CFO, Mr. Quinn was our General Counsel. Mr. Quinn was formerly
the CFO for Safety Syringes, Inc., Paulsson Geophysical Services, Inc., Net4TV
Corporation, and Novora, Inc., and served as our Interim CFO from May 1996
through May 1997. Mr. Quinn is a founding partner of Quinn & Quinn, a law firm,
and is a member of the boards of directors of About Publishing, Inc., Heart Sine
Technologies, Inc., Paulsson Geophysical Services, Inc. and Propheus, Inc. He
earned his B.A. from California State University and his J.D. from Vanderbilt
University School of Law.

     Kjartan Pierre Emilsson has been Chief Technology Officer since December
1995. Prior to joining us he worked both in physics research and Internet
communication technology at the Institut Non-Lineaire De Nice -- Sophia
Antipolis, the Advanced Center for Mathematical Studies at the University of
Arizona and

                                        59
<PAGE>   63

the Science and Engineering Institute of the University of Iceland. Mr. Emilsson
holds a Ph.D. in Mathematical Physics from the University of Nice -- Sophia
Antipolis.

     Skuli Valberg Olafsson has been Chief Operating Officer since October 1999.
Prior to joining us he was Assistant Managing Director at EJS hf, the largest
systems integrator and solution developer in Iceland, specializing in banking,
finance, and retail solutions and services. Mr. Olafsson serves as Chairman of
Caoz hf and is a director of SmartVR, Inc. Both Caoz hf and SmartVR, Inc. are
our subsidiaries. Mr. Olafsson holds a B.Sc. degree in Industrial and Systems
Engineering from the University of Florida and has completed postgraduate
studies in Total Quality Management and Process Engineering.

     Fredrik Torstensson has been Executive Vice President of Business
Development and Sales since April 2000. Prior to joining us, Mr. Torstensson
worked for six years for Ericsson, most recently as Director of Business
Development for Ericsson Inc. He holds a Bachelor's Degree in Engineering from
the Chalmers University of Technology in Gothenburg, Sweden, and a Master's
Degree in International Management from the University of Texas.

     Gunnar Thoroddsen has been in-house legal counsel since July 1998. Prior to
joining us, Mr. Thoroddsen was a partner at a large Icelandic law firm,
Logfraeoistofa Reykjavikur. He is Chairman of the Board of Intrum Justitia, an
Icelandic company that provides debt collection services. Mr. Thoroddsen holds a
law degree from the University of Iceland and an LL.M. from Duke University in
North Carolina. He was admitted to the Icelandic Bar in 1995.

     Jon L. Arnason has been Secretary and Treasurer since April 2000 and
formerly was Chief Financial Officer from 1997 to April 2000. Prior to joining
us, Mr. Arnason worked for three years for an accounting firm in Iceland,
representing Arthur Andersen Worldwide. Mr. Arnason is an International Chess
Grandmaster and was a member of the Icelandic Olympic team from 1978 to 1994. He
is three times Icelandic Champion and a former junior World Champion. He holds a
Cand. Oecon. Degree in Finance and Accounting from the University of Iceland.

     Gilles Lapierre has been Vice President and Managing Director of OZ.COM
Canada Company since November 2000. Prior to joining OZ.COM Canada Company, Mr.
Lapierre was Vice President, Network Operators, at Ericsson Canada in Montreal,
QC. In this role, he was responsible for Ericsson's business activities towards
the Telesystem Group, and in particular working closely with Microcell. He also
worked as Director of several product development, sales and marketing teams
within Ericsson. In addition, Mr. Lapierre has held research and development
positions at Consortel and Nortel Networks. Mr. Lapierre earned his Bachelor's
degree in Electrical Engineering and Master's degree in Applied Science from
Ecole Polytechnique in Montreal, QC.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based upon a review of reports received by us during or with respect to the
year ended December 31, 2000 pursuant to Rule 16a-3(e) of the Securities
Exchange Act of 1934, all required reports on Form 3, Form 4 and Form 5 were
timely filed by our directors, officers and 10% stockholders, except that (i)
Andre Tremblay was late filing a report on Form 3 upon becoming a director, (ii)
Gilles Lapierre was late filing a report on Form 3 upon becoming an executive
officer, and (iii) Magnus Rosenblad, who is no longer an executive officer,
failed to file a Form 3 upon becoming an executive officer in November 2000.

                                        60
<PAGE>   64

ITEM 10. EXECUTIVE COMPENSATION

     Summary Compensation Table. The following table summarizes the annual and
long-term compensation of, and stock options held by, our Chief Executive
Officer and the four additional most highly compensated executive officers whose
annual salaries and bonuses exceeded $100,000 in total during the fiscal year
ended December 31, 2000 (collectively, the "Named Officers").

<TABLE>
<CAPTION>
                                                                                        LONG-TERM COMPENSATION
                                                                         ----------------------------------------------------
                                           ANNUAL COMPENSATION                    AWARDS                      PAYOUTS
                                     --------------------------------    -------------------------    -----------------------
                                                         OTHER ANNUAL    SECURITIES     RESTRICTED     LTIP       ALL OTHER
                                     SALARY     BONUS    COMPENSATION    UNDERLYING       STOCK       PAYOUTS    COMPENSATION
NAME AND PRINCIPAL POSITION  YEAR      ($)       ($)      ($)(1)(2)      OPTIONS(#)     AWARDS(#)       (#)         ($)(3)
---------------------------  ----    -------    -----    ------------    -----------    ----------    -------    ------------
<S>                          <C>     <C>        <C>      <C>             <C>            <C>           <C>        <C>
Skuli Mogensen............   2000    155,618      0             --               0          0            0          9,337
  Chief Executive Officer    1999    151,833      0             --               0          0            0          9,110
                             1998    131,742      0             --               0          0            0          7,905
Guojon Mar Guojonsson.....   2000    143,763      0         16,596               0          0            0          8,626
  Chairman of the Board,     1999    151,833      0             --               0          0            0          7,940
  Chief Visionary            1998    133,733      0         28,988               0          0            0          9,110
Robert Quinn..............   2000    304,644(4)   0         47,650         400,000          0            0          6,125
  Chief Financial Officer    1999    103,640      0              0               0          0            0              0
                             1998     81,170      0              0               0          0            0              0
Skuli Valberg Olafsson....   2000    114,783      0         14,541               0          0            0          6,887
  Chief Operating Officer    1999     25,937      0          3,067         500,000          0            0          1,556
                             1998         --     --             --              --         --           --
Fredrik Torstensson.......   2000    242,693(5)   0              0         500,200          0            0              0
  Executive Vice President   1999         --     --             --              --         --           --             --
  of Sales and Business      1998         --     --             --              --         --           --             --
  Development
</TABLE>

---------------
(1) Includes perquisites and other personal benefits, securities or property
    received by the Named Officer unless the aggregate amount of such
    compensation is less than 10 percent of the total annual salary and bonus
    reported for the Named Officer.

(2) Includes $13,696 in automobile benefits received in 2000 and $22,200 in
    housing benefits received in 1998 by Guojon Mar Guojonsson; $36,000 in
    housing benefits received in 2000 by Robert Quinn; and $4,541 in automobile
    benefits received in 2000 and $2,486 in automobile benefits received in 1999
    by Skuli Valberg Olafsson.

(3) Reflects contributions by us to a pension plan on behalf of the Named
    Officer in the amounts indicated.

(4) Includes $24,500 in salary paid by OZCOM AB, our wholly owned subsidiary.

(5) Includes $83,693 in salary paid by OZCOM AB, our wholly owned subsidiary.

  Option/SAR Grants In Last Fiscal Year

     The following table sets forth information regarding stock options granted
to Named Officers during the fiscal year ended December 31, 2000.

<TABLE>
<CAPTION>
                                                                   INDIVIDUAL GRANTS
                                          -------------------------------------------------------------------
                                           NUMBER OF      PERCENT OF
                                          SECURITIES    TOTAL OPTIONS                  MARKET
                                          UNDERLYING      GRANTED TO     EXERCISE     PRICE OF
                                            OPTIONS      EMPLOYEES IN    PRICE PER   UNDERLYING    EXPIRATION
                  NAME                    GRANTED(#)    FISCAL 2000(%)     SHARE     SECURITY(1)      DATE
                  ----                    -----------   --------------   ---------   -----------   ----------
<S>                                       <C>           <C>              <C>         <C>           <C>
Skuli Mogensen..........................         --            --             --           --             --
Guojon Mar Guojonsson...................         --            --             --           --             --
Robert Quinn............................    400,000(2)       19.1%        $1.175        $3.75       12/31/09
Skuli Valberg Olafsson..................         --            --             --           --             --
Fredrik Torstensson.....................    400,000(3)       19.1%        $1.175        $3.75       12/31/09
                                            100,200(4)        4.8%        $1.175        $3.75       12/31/09
</TABLE>

---------------

(1) There is currently no public market for our common stock (i.e., bid and
    asked quotations at fixed prices, excluding "bid wanted" or "offer wanted"
    quotations, have not appeared regularly in any established

                                        61
<PAGE>   65

trading system). The fair market value of the common stock on the date of grant
is deemed to be the value used for accounting purposes to determine stock-based
compensation.

(2) The stock options were granted under the 1995 Stock Option Plan and vest in
    eight equal increments with 50,000 options becoming exercisable on the last
    day of each calendar quarter beginning June 30, 2001 until March 31, 2002.

(3) The stock options were granted under the 1995 Stock Option Plan and vest in
    three increments, with 133,334 options vesting on each of March 31, 2001 and
    March 31, 2002, and 133,332 options vesting on March 31, 2003.

(4) The stock options were granted under the 1995 Stock Option Plan. 66,800
    options will vest on March 31, 2002 if certain revenue targets are reached
    for the year ended December 31, 2001, and 33,400 options will vest on March
    31, 2003 if certain revenues targets are reached for the year ended December
    31, 2002.

Long-Term Incentive Plans

     No long-term incentive plan was in effect in 2000.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

     The following table sets forth the information noted for all exercises of
options by the Named Officers during the fiscal year ended December 31, 2000 and
the fiscal year end value of unexercised options.

<TABLE>
<CAPTION>
                                                                          NUMBER OF
                                                                         SECURITIES          VALUE OF
                                                                         UNDERLYING        UNEXERCISED
                                                                         UNEXERCISED       IN-THE-MONEY
                                            SHARES                         OPTIONS           OPTIONS
                                          ACQUIRED ON       VALUE       EXERCISABLE/       EXERCISABLE/
                  NAME                     EXERCISE      REALIZED(1)    UNEXERCISABLE    UNEXERCISABLE(2)
                  ----                    -----------    -----------    -------------    ----------------
<S>                                       <C>            <C>            <C>              <C>
Skuli Mogensen..........................         --             --              --               --
Guojon Mar Guojonsson...................         --             --              --               --
Robert Quinn............................    200,000       $730,000         150,000/           $0/$0
                                                                           250,000
Fredrik Torstensson.....................         --             --         133,334/           $0/$0
                                                                           366,866
Skuli Valberg Olafsson..................         --             --         200,000/           $0/$0
                                                                           200,000
</TABLE>

---------------
(1) The value realized is based on a market value of the underlying common stock
    at exercise date of $3.75 per share at April 1, 2000 minus the exercise
    price of $0.10 per share. There has not been and currently is no public
    market for our common stock (i.e., bid and asked quotations at fixed prices,
    excluding "bid wanted" or "offer wanted" quotations, have not appeared
    regularly in any established trading system). The fair market value on the
    date of exercise is deemed to be to the value used for accounting purposes
    to determine stock-based compensation.

(2) The exercise price of these options is $1.175. The fair market value of the
    common stock underlying these options on December 31, 2000 was approximately
    $1.00 per share, which reflects management's estimate of the fair market
    value relying on an independent valuation as of November 8, 2000 and events
    and market changes subsequent to that date.

EMPLOYMENT CONTRACTS

     Skuli Mogensen entered into an employment contract with us in October 1998,
which is effective until January 2002. The contract provides for an initial
annual salary of $132,000, with a yearly 5% increase and a yearly cost of living
adjustment, and an annual bonus based on increases in revenues from the previous
year, with the bonus capped at 100% of salary. Under the contract, Mr. Mogensen
receives standard expatriation benefits. If Mr. Mogensen is terminated without
cause, he will receive a twelve-month continuation of salary and benefits and a
pro rata portion of his annual bonus. The contract includes a non-competition
provision.

                                        62
<PAGE>   66

     Gu(LOGO)jon Mar Gu(LOGO)jonsson entered into an employment contract with us
in October 1998, which is effective until January 2002. The contract provides
for an initial annual salary of $132,000, with a yearly 5% increase and a yearly
cost of living adjustment, and an annual bonus based on increases in revenues
from the previous year, with the bonus capped at 100% of salary. Under the
contract, Mr. Gu(LOGO)jonsson receives standard expatriation benefits. If Mr.
Gu(LOGO)jonsson is terminated without cause, he will receive a twelve-month
continuation of salary and benefits and a pro rata portion of his annual bonus.
The contract includes a non-competition provision.

     Robert G. Quinn entered into an employment contract with us in April 2000,
which is effective until March 31, 2002. The contract provides for an initial
annual salary of $250,000, adjusted for locations where the cost of living is
higher than that of California and for yearly cost of living increases, an
annual bonus based on increases in revenues from the previous year, with the
bonus capped at 100% of salary, expatriation benefits, and 400,000 incentive
stock options vesting quarterly over two years at an exercise price of $1.17. If
we terminate Mr. Quinn for any reason other than "good cause," he will be paid
the remainder of the salary due under the employment agreement and the options
will vest immediately.

     Skuli Valberg Olafsson entered into an employment contract with us in
September 1999, which provides that he will receive an annual salary of
$128,571, 400,000 options vesting during the subsequent 3 years, and use of an
automobile. If Mr. Olafsson's employment is terminated, he will receive six
months base salary. All other benefits will terminate as of the date of Mr.
Olafsson's termination of employment. The contract contains confidentiality and
assignment of intellectual property rights provisions.

     Fredrik Torstensson entered into an employment contract with us in March
2000. This agreement was amended in November 2000. As amended, the agreement
provides that he will receive an annual salary of $202,000, 400,000 options that
vest during the subsequent three years, a bonus program based on revenue
objectives, an automobile allowance, and relocation benefits. We have also
agreed to grant 100,200 options if he reaches specified revenue goals in 2001
and 2002. If we terminate Mr. Torstensson's employment without "cause," or he
resigns for a "good reason," as those terms are defined in his agreement, he
will be entitled to a 12-month continuation of his salary and vesting of his
options that are not tied to revenue goals. All other benefits will terminate as
of the date of Mr. Torstensson's termination of employment. He has also signed
an agreement containing confidentiality and assignment of intellectual property
rights provisions.

DIRECTOR COMPENSATION

     Commencing in 2000, after each year's annual meeting of shareholders
outside directors will receive supplemental stock options to purchase up to
50,000 shares of common stock at no less than 85% of the fair market value of
the common stock at the date of grant. These options will vest in two equal
installments with the first installment of 25,000 options vesting on the date of
the next annual meeting of shareholders following the grant and the second
installment of 25,000 options vesting on the date of the subsequent annual
meeting of shareholders. In 2000, Stig-Arne Larsson, Lars Boman and Jeff Pulver
each received 50,000 options at an exercise price of $1.175 per share. Half of
the options will vest at the 2001 annual meeting of shareholders and the
remaining half of the options will vest at the 2002 annual meeting of
shareholders. The outside directors also receive reimbursement of their expenses
associated with the performance of their duties.

STOCK OPTION PLANS

1995 STOCK OPTION PLAN

     On March 13, 2000, our Board of Directors approved, and on May 3, 2000 our
shareholders approved, an increase in the number of shares reserved for issuance
under our 1995 Stock Option Plan (the "1995 Plan") from 13,000,000 to
18,000,000.

     Options granted under the 1995 Option Plan may be "incentive stock options"
as defined in Section 422 of the Code, or nonqualified options. Under the terms
of the Plan, incentive stock options may be granted only to our key employees.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the Common Stock as of the date of grant (110% of the fair
market value if the grant is to a

                                        63
<PAGE>   67

person who owns more than 10% of the total combined voting power of all classes
of our capital stock or any of our affiliates). The Code and the Plan limit the
options first becoming exercisable in any calendar year which are treated as
incentive stock options to options covering $100,000 of aggregate value
(determined as of the date of the grant of the options) of Common Stock; options
first becoming exercisable in any calendar year in excess of this limit are
treated as nonqualified stock options. Nonqualified options may be granted under
the 1995 Option Plan at an exercise price of not less than 85% of the fair
market value of the Common Stock on the date of grant, or, if the grant is to a
person who owns more than 10% of the total combined voting power of all classes
of our capital stock or any of our affiliates, not less than 110% of the fair
market value of the Common Stock as of the date of grant. The purchase price of
stock acquired may be paid in cash or, at the discretion of the Committee, in
Common Stock or through a deferred payment or other arrangement. We may require
an optionee to give written assurances with respect to the optionee's business
experience and investment purposes if required under the then applicable
securities laws before exercising an option. If provided by the terms of the
option, the optionee may satisfy tax-withholding obligations relating to the
exercise of options by a cash payment or the withholding or delivery of Common
Stock with a fair market value equal to the obligations.

     Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then exercisable
will terminate three months (twelve months in the case of termination by reason
of disability and eighteen months in the case of death) after the termination of
employment. Upon an optionee's leave of absence, we may decide that such leave
will be treated as a termination for the purposes of determining the termination
date of the options or may suspend the vesting of the options.

     Options granted under the 1995 Option Plan may not be exercised more than
ten years after the grant (five years after the grant if the grant is an option
to a person who owns more than 10% of the total combined voting power of all
classes of our capital stock or any of our affiliates). Options granted under
the 1995 Option Plan are not transferable and may be exercised only by the
respective grantees during their lifetime or by their heirs, executors or
administrators in the event of death (or, in the case of nonqualified options, a
transferee pursuant to a qualified domestic relations order). Shares subject to
cancelled or terminated options are reserved for subsequently granted options.
The number of options outstanding and the exercise price thereof are subject to
adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends.

     The 1995 Plan may be administered by the Board of Directors or in the
Board's discretion by a committee designated by the Board. The 1995 Option Plan
is effective for ten years, unless sooner terminated or suspended.

1998 INCENTIVE STOCK PLAN

     Two million shares of Common Stock are reserved for issuance under our 1998
Incentive Stock Plan (the "1998 Plan"). The Plan is administered by the Board of
Directors, which may delegate administration to a committee (in both cases, the
"Committee"). Under the 1998 Plan, the Committee may grant stock to directors,
executive officers and selected employees ("Participants") for which the
Participant is not obligated to pay additional consideration ("Stock Award") and
may grant Participants the right to purchase a specified number of shares of
Common Stock pursuant to a written agreement issued under the 1998 Plan ("Stock
Purchase Offer"). Shares of Common Stock that Participants may receive as a
Stock Award or under a Stock Purchase Offer may include restrictions on
transfer, repurchase rights, rights of first refusal and forfeiture provisions
as the Committee may determine. Under certain Stock Purchase Offers, we may
issue shares of Common Stock to employees upon the receipt of a note receivable
from the employee. The note receivable is secured by the shares of Common Stock,
does not have a maturity date and is interest free. Upon termination any amount
unpaid is settled through receipt of the original shares issued. The 1998 Plan
will terminate in 2008, unless terminated earlier by the Board of Directors. As
of March 31, 2000 no option to purchase shares of Common Stock was outstanding
under the 1998 Plan, 1,317,924 shares had been granted as incentive stock under
the 1998 Plan, and 682,076 shares remained available for future grants under the
1998 Plan.

                                        64
<PAGE>   68

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following tables set forth the number of shares and percentage of our
outstanding Common Stock and Series A Preferred stock beneficially owned as of
March 31, 2001, by each person known to our Board of Directors to be the
beneficial owner of 5% or more of the outstanding shares of our Common Stock
and/or Series A Preferred stock, each Director, each Executive Officer, and all
Directors and Executive Officers as a group.

                                  COMMON STOCK

<TABLE>
<CAPTION>
                                                                   AS OF MARCH 31, 2001
                                                   -----------------------------------------------------
                                                                             SHARES
                                                                           ACQUIRABLE      PERCENTAGE OF
                                                   SHARES BENEFICIALLY       WITHIN         ALL COMMON
      NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED           60 DAYS(1)(2)      STOCK(3)
      ------------------------------------         -------------------    -------------    -------------
<S>                                                <C>                    <C>              <C>
Titan Holdings, Skuli Mogensen(4)................      18,597,000(5)                0          20.71%
OZone Ventures, Guojon Mar Guojonsson(4).........      34,597,000(6)          100,000          38.60%
Telefonaktiebolaget LM Ericsson, Ericsson Holding
  International B.V., Ericsson Canada Inc.,
  Ericsson Inc., LM Ericsson Holding AB, Ericsson
  Holding II Inc.(7).............................       5,069,271(8)       20,104,862          22.91%
Microcell Telecommunications Inc., Microcell
  Capital II Inc.(9).............................      11,405,860(10)               0          12.70%
Lars Boman(11)...................................               0                   0              0%
Stig-Arne Larsson(12)............................               0                   0              0%
Jeff Pulver(13)..................................               0                   0              0%
Andre Tremblay(14)...............................               0                   0              0%
Robert G. Quinn(15)..............................         200,000             200,000           0.44%
Kjartan Pierre Emilsson(4).......................         266,626              90,000           0.40%
Skuli Valberg Olafsson(4)........................           5,390(16)         200,000           0.23%
Gunnar Thoroddsen(4).............................          34,708              70,000           0.12%
Jon L. Arnason(4)................................          71,412              55,000           0.14%
Fredrik Torstensson(17)..........................               0             133,334           0.15%
Gilles Lapierre(9)...............................               0                   0              0%
All executive officers and directors as a group
  (13 persons)...................................      53,772,136             848,334          60.27%
</TABLE>

---------------

 (1) Includes 200,000 shares that could be purchased by Robert G. Quinn, 90,000
     shares that could be purchased by Kjartan Pierre Emilsson, 200,000 shares
     that could be purchased by Skuli Valberg Olafsson, 70,000 shares that could
     be purchased by Gunnar Thoroddsen, 55,000 shares that could be purchased by
     Jon L. Arnason and 133,334 shares that could be purchased by Fredrik
     Torstensson by exercise of options available on March 31, 2001 or within 60
     days thereafter.

 (2) Includes 50,000 and 10,052,431 shares of Series A Preferred stock, of which
     each share is convertible into two shares of common stock by OZone Ventures
     and Ericsson Inc., respectively, as of March 31, 2001.

 (3) Options that are currently exercisable or exercisable within sixty days
     and/or shares of Series A Preferred stock are deemed to be shares of Common
     Stock, outstanding and beneficially owned by the person holding such
     options and/or Series A Preferred stock, for the purpose of computing the
     percentage ownership of such person, but are not deemed to be outstanding
     for the purpose of computing the percentage ownership of any other person.

 (4) Shareholder is at the following address: Snorrabraut 54, IS-105, Reykjavik,
     Iceland.

 (5) Titan Holdings, a Luxembourg holding company 100% owned by Skuli Mogensen,
     is the record owner of the 18,597,000 shares beneficially owned by Mr.
     Mogensen. The number of shares indicated does not

                                        65
<PAGE>   69

include 34,697,000 shares of common stock beneficially owned by Mr. Guojonsson
and 11,405,860 shares of common stock beneficially owned by Microcell Capital II
Inc. ("Microcell Capital"), who, together with Mr. Mogensen, may constitute a
     "group" within the meaning of Section 13(d)(3) of the Securities Exchange
     Act of 1934 by virtue of the Shareholder Agreement dated November 8, 2000
     between us, Skuli Mogensen, Gu(LOGO)jon Mar Guojonsson and Microcell
     Capital ("Shareholder Agreement"), which provides that Mr. Mogensen and Mr.
     Gu(LOGO)jonsson will vote a sufficient number of shares to elect a nominee
     of Microcell Capital to our board of directors. Does not include 34,697,000
     shares of common stock beneficially owned by Mr. Gu(LOGO)jonsson and
     25,174,133 shares of Common Stock beneficially owned by Ericsson Inc., who,
     together with Mr. Mogensen, may constitute a "group" within the meaning of
     Section 13(d)(3) of the Securities Exchange Act by virtue of the
     Shareholder Rights Agreement dated February 4, 1999 between OZ.COM, Skuli
     Mogensen, Gu(LOGO)jon Mar Gu(LOGO)jonsson, OZ Holdings LLC and Ericsson
     Inc., as amended ("Shareholder Rights Agreement"), which provides that Mr.
     Mogensen and Mr. Gu(LOGO)jonsson will vote a sufficient number of shares to
     elect a nominee of Ericsson Inc. to our board of directors. Titan Holdings
     and Mr. Mogensen disclaim beneficial ownership of the shares beneficially
     owned by Mr. Gu(LOGO)jonsson, Microcell Capital or Ericsson Inc.

 (6) OZone Ventures, a Luxembourg holding company 100% owned by Gu(LOGO)jon Mar
     Gu(LOGO)jonsson, is the record owner of the 34,597,000 shares beneficially
     owned by, and the 100,000 shares acquirable within 60 days by, Mr.
     Gu(LOGO)jonsson. The number of shares indicated does not include 18,597,000
     shares of common stock beneficially owned by Mr. Mogensen and 11,405,860
     shares of common stock beneficially owned by Microcell Capital, who,
     together with Mr. Gu(LOGO)jonsson, may constitute a "group" within the
     meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 by
     virtue of the Shareholder Agreement, which provides that Mr. Mogensen and
     Mr. Gu(LOGO)jonsson will vote a sufficient number of shares to elect a
     nominee of Microcell Capital to our board of directors. Does not include
     18,597,000 shares of Common Stock beneficially owned by Mr. Mogensen and
     25,174,133 shares of Common Stock beneficially owned by Ericsson Inc., who,
     together with Mr. Gu(LOGO)jonsson, may constitute a "group" within the
     meaning of Section 13(d)(3) of the Securities Exchange Act by virtue of the
     Shareholder Rights Agreement, which provides that Mr. Mogensen and Mr.
     Gu(LOGO)jonsson will vote a sufficient number of shares to elect a nominee
     of Ericsson Inc. to our board of directors. OZone Ventures and Mr.
     Gu(LOGO)jonsson disclaim beneficial ownership of the shares beneficially
     owned by Mr. Mogensen, Microcell Capital or Ericsson Inc.

 (7) Telefonaktiebolaget LM Ericsson and LM Ericsson Holding AB are at the
     following address: Telefonvagen 30, SE-12625 Stockholm, Sweden. Ericsson
     Holding International B.V. is at the following address: Ericsson Straat #2,
     P.O. Box 8, NL-5120 AA, Rijen, Netherlands. Ericsson Canada Inc. is at the
     following address: 8400 Decarie Blvd., Town of Mount-Royal, Quebec, Canada
     H4P 2N2. Ericsson Inc. and Ericsson Holding II Inc. are at the following
     address: 740 East Campbell Road, Richardson, Texas 75083

 (8) As disclosed in the Schedule 13D filed on December 7, 2000, each of the
     named entities is the beneficial owner of the 5,069,271 shares of common
     stock owned directly by Ericsson Canada Inc. and the 10,052,431 shares of
     Series A Preferred stock owned directly by Ericsson Inc., which are
     convertible into 20,104,862 shares of common stock as of March 31, 2001.
     Does not include 34,697,000 shares of common stock beneficially owned by
     Mr. Gu(LOGO)jonsson and 18,597,000 shares of common stock beneficially
     owned by Skuli Mogensen, who, together with Ericsson Inc., may constitute a
     "group" within the meaning of Section 13(d)(3) of the Securities Exchange
     Act by virtue of the Shareholder Rights Agreement dated February 4, 1999
     between OZ.COM, Skuli Mogensen, Gu(LOGO)jon Mar Gu(LOGO)jonsson, OZ
     Holdings, LLC and Ericsson, Inc., as amended, which provides that Mr.
     Mogensen and Mr. Gu(LOGO)jonsson will vote a sufficient number of shares to
     elect a nominee of Ericsson Inc. to our board of directors.

 (9) Shareholders are at the following address: 1000, de la Gauchetiere Street
     West, 25th Floor, Montreal, Quebec H3B 4W5.

                                        66
<PAGE>   70

(10) Based on the Schedule 13D filed on November 22, 2000, Microcell
     Telecommunications Inc. is a beneficial owner of the 11,405,860 shares of
     common stock owned directly by Microcell Capital, a wholly-owned subsidiary
     of Microcell Telecommunications Inc. The number of shares beneficially
     owned by Microcell Telecommunications Inc. and Microcell Capital do not
     include 34,697,000 shares of common stock beneficially owned by Guojon Mar
     Guojonsson and 18,597,000 shares of common stock beneficially owned by
     Skuli Mogensen, who, together with Microcell Capital, may constitute a
     "group" within the meaning of Section 13(d)(3) of the Securities Exchange
     Act of 1934, as amended, by virtue of the Shareholder Agreement, which
     provides that Mr. Mogensen and Mr. Guojonsson will vote a sufficient number
     of shares to elect a nominee of Microcell Capital to our board of
     directors.

(11) Shareholder is at the following address: Hornsgatan 63 11849 Stockholm.

(12) Shareholder is at the following address: Lonnv 31B, 13552, TYRESO, Sweden.

(13) Shareholder is at the following address: P.O. Box 1432, Melville, New York
     11747.

(14) Shareholder is at the following address: 1100 de La Gauchetiere, Room 150,
     Montreal (Quebec), Canada H3B 2S2.

(15) Shareholder is at the following address: Drottninggatan 82, 111, 36
     Stockholm, Sweden.

(16) Includes 5,390 shares owned by Mr. Olafsson's family of which Mr. Olafsson
     disclaims beneficial ownership.

(17) Shareholder is at the following address: 9820 Towne Center Drive, La Jolla,
     California 92121.

                            SERIES A PREFERRED STOCK

<TABLE>
<CAPTION>
                                                                    AS OF MARCH 31, 2001
                                                      -------------------------------------------------
                                                                        SHARES
                                                         SHARES       ACQUIRABLE
                                                      BENEFICIALLY      WITHIN         PERCENTAGE OF
        NAME AND ADDRESS OF BENEFICIAL OWNER             OWNED         60 DAYS      ALL PREFERRED STOCK
        ------------------------------------          ------------    ----------    -------------------
<S>                                                   <C>             <C>           <C>
Titan Holdings, Skuli Mogensen......................            0           0                  0%
OZone Ventures, Guojon Mar Guojonsson...............       50,000(1)        0               0.34%
Telefonaktiebolaget LM Ericsson, Ericsson Holding
  International B.V., Ericsson Canada Inc., Ericsson
  Inc., LM Ericsson Holding AB, Ericsson Holding II
  Inc...............................................   10,052,431(2)        0              69.18%
Microcell Telecommunications Inc....................            0           0                  0%
Microcell Capital II Inc............................            0           0                  0%
Lars Boman..........................................            0           0                  0%
Stig-Arne Larsson...................................            0           0                  0%
Jeff Pulver.........................................            0           0                  0%
Andre Tremblay......................................            0           0                  0%
Robert G. Quinn.....................................            0           0                  0%
Kjartan Pierre Emilsson.............................            0           0                  0%
Skuli Valberg Olafsson..............................            0           0                  0%
Gunnar Thoroddsen...................................            0           0                  0%
Jon L. Arnason......................................            0           0                  0%
Fredrik Torstensson.................................            0           0                  0%
Gilles Lapierre.....................................            0           0                  0%
All executive officers and directors as a group (13
  persons)..........................................       50,000           0               0.34%
</TABLE>

---------------

(1) OZone Ventures, a Luxembourg holding company 100% owned by Guojon Mar
    Guojonsson is the record owner of the 50,000 shares beneficially owned by
    Mr. Guojonsson

(2) As disclosed in the Schedule 13D filed on December 7, 2000 each of the named
    entities is the beneficial owner of the 10,052,431 shares of Series A
    Preferred stock owned by Ericsson Inc.

                                        67
<PAGE>   71

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Directors. In July 1998 we loaned Skuli Mogensen and Guojon Mar Guojonsson
$75,000, respectively. The loans accrued interest at a rate of 8% per annum and
were due and payable on June 1, 1999. The total indebtedness for each of Messrs.
Mogensen and Guojonsson was $84,240 at December 31, 1999. Both of these loans
(including accrued interest) were repaid in full in April 2000. Messrs. Mogensen
and Guojonsson are also parties to the shareholder rights agreement and the
shareholder agreement described below.

     Ericsson. On November 1, 2000 we signed a general co-operation and
development agreement with Ericsson that superseded an earlier agreement of the
same name dated February 1999 and sets the framework for our long-term strategic
partnership and cooperation in the area of Internet-based technologies,
applications and services. The agreement anticipates joint development, testing,
integration, marketing, sales, distribution, support and maintenance of
solutions based on relevant technologies and services. Specific development
projects will be structured under various specific agreements under the general
co-operation and development agreement. Pursuant to a warrant and stock purchase
agreement entered into in February 1999, Ericsson, Inc. invested $13.1 million
in us in exchange for 10,052,431 shares of Series A Preferred stock.

     We entered into a specific co-operation and development agreement with
Ericsson dated February 4, 1999 under the general co-operation and development
agreement to develop iPulse(TM). iPulse(TM) is a client-server application
merging secure Internet messaging, message routing, IP telephony and traditional
phone systems in one application. As a starting point for the iPulse(TM)
development project, we licensed our server and client technology to Ericsson.
More specifically, Ericsson acquired the license to use, modify and distribute
our server and client technology in connection with Ericsson's commercialization
of iPulse(TM). With respect to further development of technologies and solutions
for which Ericsson would fund development costs, the parties agreed that
ownership of specific results of the joint development work, including
iPulse(TM), would reside with Ericsson. As a result of the agreement, we receive
15% royalties of iPulse(TM) sales.

     We entered into a value-added distribution license agreement with Ericsson
on November 1, 2000, which superseded the value-added reseller agreement entered
into with Ericsson in February 2000. The agreement gives us unrestricted
perpetual rights to offer iPulse(TM) as a hosted service to our mPresence(TM)
customers in exchange for royalties. Either party to the agreement may terminate
the agreement if the other party commits a material breach of its obligations
under the agreement or if any of the representations of such other party are
materially untrue, and such default is not cured within thirty days of notice of
such breach. Notwithstanding the termination of the agreement, we will retain
the right to provide hosting services based on the then current version of
iPulse(TM). After November 2003, and provided all royalties due Ericsson under
the agreement have been paid, Ericsson will no longer be able to terminate the
agreement.

     Pursuant to the mPresence(TM) agency agreement also concluded with Ericsson
on November 1, 2000, we granted Ericsson a nonexclusive right to promote our
mPresence(TM) framework and our value-added services. In the absence of a
contrary agreement with respect to any particular customer, we will pay to
Ericsson 5% of the net sales price of any sales occurring as a result of a
referral made by Ericsson and up to 15% of the net sales price if Ericsson
concludes the sale as an agent. The agreement has a two-year term and will be
automatically renewed for an indefinite period unless earlier terminated in
accordance with its provisions.

     Pursuant to the iPulse(TM) agency agreement also concluded with Ericsson on
November 1, 2000, we have obtained a nonexclusive right to promote iPulse(TM).
In the absence of a contrary agreement with respect to any particular customer,
we are entitled to receive a certain percentage of the net sales price of any
sales made by Ericsson as a result of a referral we may make and a greater
percentage of the net sales price if we conclude the sale as an agent. Any
payments made to us under the agreement will be in addition to our 15% royalty
payment under the specific co-operation and development agreement entered into
with Ericsson on February 4, 1999. The iPulse(TM) agency agreement has a
two-year term and automatically will be renewed for an indefinite period unless
earlier terminated in accordance with its provisions.

     OZ.COM Canada, our wholly owned subsidiary that we acquired in connection
with our acquisition of MCE Holding Corporation, entered into a specific
co-operation and development agreement with Ericsson Canada dated November 8,
2000, under which OZ.COM Canada will provide consulting and development

                                        68
<PAGE>   72

services in the areas of mobile Internet applications for 3G mobile telephony
platforms. The agreement gives us access to Ericsson Canada's 3G laboratories
and up to 6,000 hours of assistance from qualified 3G experts for testing our 3G
products. Under the agreement, minimum payments totaling $6 million over two
years will be made to OZ.COM Canada for development work and services, of which
$2 million will be allocated to additional iPulse(TM) development. The agreement
has a two-year term.

     As a result of the level of Ericsson's ownership in us at the inception of
any specific development agreements between Ericsson Canada and OZ.COM Canada,
all payments received from Ericsson Canada for research and development work
under such agreements are not immediately recognizable as revenue according to
generally accepted accounting principles. The expenses associated with our
performance of these obligations to Ericsson Canada are recognized as current
research and development expenses and the payments from Ericsson Canada for the
work performed are recorded as deferred revenues on our balance sheet. We will
recognize all of the deferred revenues as current revenues at the termination of
the particular agreement under which we performed the work.

     Lars Boman, a director, is currently Vice President of Ericsson Radio
Systems AB (ERA). Ericsson nominated Mr. Boman to the Board of directors under
the terms of a shareholder rights agreement dated February 4, 1999 among us,
Ericsson, Skuli Mogensen, Guojon Mar Guojonsson and OZ Holdings LLC. Each of the
parties to the shareholders rights agreement agreed to vote a sufficient number
of shares in favor of one nominee designated by Ericsson. Fredrik Torstensson,
our Executive Vice President of Business Development and Sales, was Director of
Business Development for Ericsson Mobile Phones from 1998 until April 2000.
Gilles Lapierre, our Vice President and Managing Director of OZ.COM Canada was
Vice President, Sales and Marketing, at Ericsson Canada from January 2000 to
November 2000.

     Under the shareholders rights agreement, certain holders of our securities
have the right to require registration of our securities under the Securities
Act, subject to terms and conditions set forth in the agreement. In addition,
until we effect a public offering of our securities, each party to the
shareholder rights agreement has the right of first refusal with respect to any
proposed transfer of our securities by another party other than a transfer to an
affiliate (as defined in the agreement); provided, however, that the first
1,000,000 shares transferred by Skuli Mogensen and Guojon Mar Guojonsson is not
subject to the right of first refusal and shares held by a former affiliate of a
party to the shareholder rights agreement shall become subject to the right of
first refusal at the time of the transaction by which the affiliate loses its
affiliate status. Upon notice by the transferor stating the purchase price and
terms of the third party offer to purchase the shares, the other parties have
the right for a period of ten days to elect to purchase a pro rata portion of
the offered shares. If none of the parties elects to purchase the shares, the
transferor may sell the shares to a third-party purchaser.

     If we sell shares of common stock or preferred stock or options, warrants
or other rights convertible or exercisable into shares of common stock or
preferred stock at any time until a public offering, each party to the
shareholder rights agreement has the right to purchase its pro rata portion of
the number of securities offered for sale. However, the parties shall not have
this right with respect to an issuance or sale of securities:

     - in connection with a stock split;

     - issuable to our employees, consultants or agents directly or through an
       equity incentive arrangement, not to exceed in the aggregate 10% of the
       outstanding capital stock as of February 4, 1999;

     - issuable or issued upon conversion of our preferred stock or warrants,
       rights or other securities convertible for common stock or preferred
       stock;

     - issuable or issued in connection with the acquisition of all or
       substantially all of the stock or assets of a person or entity; and

     - issuable or issued to a strategic investor that is not a competitor to us
       or Ericsson, not to exceed 20% of the outstanding capital stock as of
       February 4, 1999.

     If we offer to sell shares not exceeding 20% of our capital stock
outstanding on February 4, 1999 to a strategic investor that is not a competitor
to us or Ericsson, then Ericsson has the right to purchase from us a certain
number of shares as determined by the formula set forth in the shareholder
rights agreement.

                                       69
<PAGE>   73

     Until a public offering, we have agreed in the shareholder rights agreement
that we will not, without the consent of Ericsson, increase the authorized
number of shares reserved under any stock option or purchase plan that results
in the aggregate number of shares of common stock issued or issuable to
providers of services to us exceeding 10,000,000 shares, issue any equity
security or right to acquire an equity security to any primary competitor of
Ericsson, or enter into any agreements with lenders providing for the borrowing
of more than $750,000 or issue any notes, bonds, debentures, or similar
instruments with an aggregate value in excess of $750,000.

     Pursuant to an amendment to the shareholder rights agreement dated as of
October, 2000, we are no longer obligated to repurchase the shares of our stock
held by Ericsson as was set forth in the shareholder rights agreement.

     Transaction with Ericsson and Microcell. On November 8, 2000, we completed
an acquisition of all of the outstanding voting capital stock of MCE Holding
Corporation. MCE Holding Corporation was a strategic alliance of Microcell and
Ericsson formed to hold all of the issued and outstanding capital stock of
3044016 Nova Scotia Company, a recently organized company based in Montreal,
Canada, which was formed to develop mobile Internet applications for network
operators in Canada. The name of 3044016 Nova Scotia Company was changed to
OZ.COM Canada Company following the closing of the transaction. The transaction
was closed pursuant to two share exchange agreements dated November 8, 2000
between us and each of Microcell and Ericsson as the former stockholders of MCE
Holding Corporation.

     The acquisition was structured as a stock-for-stock exchange in which we
issued an aggregate of 16,475,131 shares of our common stock to Microcell and
Ericsson in exchange for all of the issued and outstanding stock of MCE Holding
Corporation. Total consideration given, including direct acquisition costs,
aggregated approximately $18.4 million. We have accounted for the acquisition
using the purchase method of accounting. MCE Holding Corporation and 3044016
Nova Scotia Company had no operations prior to the acquisition. The excess of
the purchase price over the estimated fair value of tangible net assets acquired
amounted to approximately $16.4 million, with $15.5 million attributable to
goodwill and $0.9 million attributable to a fully paid-up iPulse(TM) 1.5 license
for the benefit of Microcell and its affiliates. We are amortizing the goodwill
on a straight-line basis over an estimated useful life of five years and the
iPulse(TM) 1.5 license on a straight-line basis over an estimated useful life of
3.5 years. The acquired assets consist of licensed technology and cash to be
used in the business of developing and marketing Internet application technology
for wireless service providers.

     The share exchange agreement with Microcell grants Microcell the right,
during the period from February 15, 2002 until April 15, 2002, to require us to
repurchase the 11,405,860 shares delivered to Microcell in connection with the
acquisition at the price of $4,500,000, if prior to February 15, 2002, we fail
to complete a firmly underwritten public offering pursuant to a registration
statement under the Securities Act, or a public offering in which our shares are
listed or designated for trading on any "designated offshore securities market"
as such term is defined in Regulation S under the Securities Act, which
offering, in either case, results in a market capitalization of not less than
$225 million. The 11,405,860 shares that are subject to this right have an issue
value of $18.2 million which will be recorded in shareholders' equity in our
consolidated balance sheet less the amount related to the redemption value of
$4.5 million. The redemption value of $4.5 million will be recorded in temporary
equity on the balance sheet.

     In connection with the acquisition, we entered into a shareholder agreement
dated November 8, 2000 with Microcell and two of our directors and officers,
Skuli Mogensen and Guojon Mar Guojonsson. This agreement gives Microcell the
right to participate in any sales of our shares by either Mr. Mogensen or Mr.
Guojonsson and, with some exceptions, to purchase pro rata shares of our
securities offered by us. In addition, Messrs. Mogensen and Guojonsson have
agreed to vote a sufficient number of our shares to enable a nominee of
Microcell to sit on our board of directors. Andre Tremblay was elected as a
director pursuant to the shareholder agreement. Mr. Tremblay is currently
President and Chief Executive Officer of Microcell Telecommunications Inc.

     We also entered into a shareholder agreement dated November 8, 2000 with
Ericsson Canada Inc., Skuli Mogensen and Guojon Mar Guojonsson. This agreement
gives Ericsson Canada Inc. the right to participate in

                                       70
<PAGE>   74

any sales of our shares by either Mr. Mogensen or Mr. Guojonsson and, with some
exceptions, to purchase pro rata shares of our securities offered by us.

     Microcell. In connection with the acquisition, OZ.COM Canada entered into a
general co-operation and development agreement with Microcell on November 8,
2000 pursuant to which Microcell agreed to use OZ.COM Canada as its preferred
development resource for development work and consulting services in the field
of wireless Internet applications. Under the terms of the agreement, Microcell
has committed to purchasing $9 million in consulting and development services
and technology licenses during the three year term of the agreement. OZ.COM
Canada will have full ownership of the products developed under the agreement
and their related intellectual property rights. However, if the products are
unrelated to OZ.COM Canada's product offerings or if the products are completed
by Microcell Labs as a result of OZ.COM Canada's breach of the general
cooperation and development agreement, Microcell Labs will own the product and
its related intellectual property rights, with OZ.COM Canada retaining the right
to use, sell, and distribute the product outside of Canada for three years.
Microcell will have a license to use, sell and distribute all products developed
under the agreement. The license will be royalty-free, except that Microcell
will pay to OZ.COM Canada 10% of Microcell's net revenues attributable to the
sale or license of the products during the three year term after the commercial
launch of such products. OZ.COM Canada will pay to Microcell 10% of all of
OZ.COM Canada's net revenues attributable to the sale or license of products
developed under the agreement during the three year term following the
commercial launch of such products. The term of the general co-operation and
development agreement is three years, unless earlier terminated by written
notice of a party upon a petition for bankruptcy by the other party or the
occurrence of an insolvency related event with respect to the other party.

     OZ.COM Canada also concluded a specific development and consulting
agreement with Microcell on November 8, 2000 pursuant to which OZ.COM Canada
granted to Microcell a non-exclusive, non-transferable, non-revocable license to
use iPulse(TM) 1.5 on certain terms and conditions. Except for the revenue
sharing payments required under the general co-operation and development
agreement dated November 8, 2000 the license is royalty-free. Ericsson had
granted to MCE Holding Corporation the right to grant a license to iPulse(TM)
1.5 and agreed to the assignment of this right to OZ.COM Canada.

     As a result of the level of Microcell's ownership in us at the inception of
the agreements with Microcell, all payments received from Microcell under such
agreements are not immediately recognizable as revenue according to generally
accepted accounting principles. In the fourth quarter of 2000, we received
payments of $1 million for consulting services under the general co-operation
and development agreement with Microcell and $750,000 for development work
rendered to Microcell under the specific development and consulting agreement
that was not recognized as revenue. The expenses associated with our performance
of this work have been recognized as cost of revenues in the case of the payment
for consulting services and as research and development expenses in the case of
development work, and the payments from Microcell for the work performed have
been characterized as deferred revenues on our balance sheet. We will recognize
all of the deferred revenues as current revenues at the termination of the
particular agreement under which we perform the work.

                                        71
<PAGE>   75

ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K

     (a) DOCUMENTS TO BE FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K

        1. Exhibits. The following Exhibits are filed herewith:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>

      *2.1     Share Exchange Agreement, dated as of November 8, 2000, between
               the Registrant and Microcell Capital II Inc.

      *2.2     Share Exchange Agreement, dated as of November 8, 2000, between
               the Registrant and Ericsson Canada Inc.

       3.1     Amended and Restated Articles of Incorporation

       3.2     Amended and Restated By-laws

     *10.1     1995 Stock Option Plan

     *10.2     1998 Incentive Stock Option Plan

     *10.3     2000 Employee Stock Purchase Plan

     *10.4     Employment Agreement between the Registrant and Skuli Mogensen

     *10.5     Employment Agreement between the Registrant and Guojon Mar
               Guojonsson

     *10.6     Employment Agreement between the Registrant and Robert Quinn

     *10.7     Employment Agreement between the Registrant and Skuli Valberg
               Olafsson

      10.8     Employment Agreement between the Registrant and Fredrik
               Torstensson

      10.9     Amendment to Employment Agreement between the Registrant and
               Fredrik Torstensson

     *10.10    Form of Indemnification Agreement

     *10.11    General Co-operation and Development Agreement dated as of
               February 4, 1999 between the Registrant and Ericsson Telecom AB

     *10.12    Specific Co-operation and Development Agreement dated as of
               February 4, 1999 between the Registrant and Ericsson Telecom AB
               for Communities and Link

     *10.13    Value Added Reseller Agreement dated as of February 4, 1999
               between the Registrant and Ericsson Telecom AB

     *10.14    Shareholder Rights Agreement dated as of February 4, 1999, among
               the Registrant, Guojon Mar Guojonsson, Skuli Mogensen, Ericsson
               Inc. and OZ Holdings LLC

     *10.15    General Co-Operation and Development Agreement, dated as of
               November 1, 2000, between the Registrant and Ericsson Radio
               Systems AB

     *10.16    Specific Co-Operation and Development Agreement, dated as of
               November 8, 2000, between Ericsson Canada Inc. and OZ.COM Canada
               Company (fka 3044016 Nova Scotia Company)

     *10.17    Value-added Distribution License Agreement, dated as of November
               1, 2000, between the Registrant and Ericsson Radio Systems AB

     *10.18    General Co-Operation and Development Agreement, dated as of
               November 8, 2000, between Microcell Labs Inc. and OZ.COM Canada
               Company (fka 3044016 Nova Scotia Company)

     *10.19    Specific Development and Consulting Agreement, dated as of
               November 8, 2000, between Microcell Labs Inc. and OZ.COM Canada
               Company. (fka 3044016 Nova Scotia Company)

     *10.20    Assignment of Right to Sublicense Use of Software, dated as of
               November 8, 2000, between MCE Holding Corporation and OZ.COM
               Canada Company (fka 3044016 Nova Scotia Company)

     *10.21    mPresence Agency Agreement, dated as of November 1, 2000, among
               the Registrant and Ericsson Radio Systems AB
</TABLE>

                                        72
<PAGE>   76

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>

     *10.22    Shareholder Agreement, dated as of November 8, 2000, among the
               Registrant, Guojon Mar Guojonsson, Skuli Mogensen and Microcell
               Capital II Inc.

     *10.23    Shareholder Agreement, dated as of November 8, 2000, among the
               Registrant, Guojon Mar Guojonsson, Skuli Mogensen and Ericsson
               Canada

      10.24    iPulse Agency Agreement, dated as of November 1, 2000, between the
               Registrant and Ericsson Radio Systems AB

     *10.25    Amendment Number One to Shareholder Rights Agreement, dated as of
               October 2000, among the Registrant and Ericsson, Inc.

     *21.1     List of Subsidiaries
</TABLE>

---------------
* Previously filed and incorporated by reference herein.

     (b) Reports on Form 8-K

          Report on Form 8-K filed on November 21, 2000, which reported (1)
     under Item 2 of Form 8-K the acquisition by Registrant of MCE Holding
     Corporation on November 8, 2000 and (2) under Item 5 of Form 8-K the
     execution by Registrant and Ericsson in October 2000 of Amendment Number
     One to Shareholder Rights Agreement, which eliminated Ericsson's right
     under the Shareholder Rights Agreement dated February 4, 1999 to require
     Registrant to repurchase the shares of Series A Preferred Stock and/or
     Common Stock owned by Ericsson under certain terms and conditions.

          Report on Form 8-K filed on December 11, 2000, which reported under
     Item 4 of Form 8-K Registrant's dismissal on December 5, 2000 of
     PricewaterhouseCoopers ehf as the Registrant's independent public
     accountants.

          Report on Form 8-K/A filed on December 20, 2000, which amended the
     Report on Form 8-K filed on December 11, 2000 and reported under Item 4 of
     Form 8-K/A Registrant's engagement on December 19, 2000 of Deloitte &
     Touche hf. as Registrant's new independent public accountants, and attached
     as Exhibit 16 a letter from PricewaterhouseCoopers ehf dated December 11,
     2000 regarding the dismissal of PricewaterhouseCoopers as the Registrant's
     independent public accountants.

          Report on Form 8-K/A filed on January 22, 2001, which amended the
     Report on Form 8-K filed on November 21, 2000 and reported (1) under Item 2
     of Form 8-K/A the acquisition by Registrant of MCE Holding Corporation on
     November 8, 2000, (2) under Item 5 of Form 8-K/A the execution by
     Registrant and Ericsson in October 2000 of Amendment Number One to
     Shareholder Rights Agreement which eliminated Ericsson's right under the
     Shareholder Rights Agreement dated February 4, 1999 to require Registrant
     to repurchase the shares of Series A Preferred Stock and/or Common Stock
     owned by Ericsson., and (3) under Item 7 of Form 8-K/A, Registrant's
     unaudited pro forma consolidated condensed balance sheet as of September
     30, 2000 giving effect to the acquisition of MCE Holding Corporation as if
     it occurred on September 30, 2000, and Registrant's pro forma consolidated
     condensed statements of operations for the nine months ended September 30,
     2000 and 1999 and the year ended December 31, 1999 giving effect to the
     acquisition as if it occurred on January 1, 1999.

                                        73
<PAGE>   77

                                   SIGNATURES

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

                                          OZ.COM
                                          a California Corporation

Date: June 19, 2001                       By:      /s/ SKULI MOGENSEN
                                            ------------------------------------
                                                       Skuli Mogensen

                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Skuli Mogensen, his attorneys-in-fact, each with
the power of substitution for him in any and all capacities, to sign any and all
amendments to this Report (including any and all amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                      DATE
                      ---------                                    -----                      ----
<S>                                                    <C>                                <C>
                 /s/ SKULI MOGENSEN                       Chief Executive Officer         June 19, 2001
-----------------------------------------------------  (principal executive officer)
                   Skuli Mogensen

                 /s/ ROBERT G. QUINN                      Chief Financial Officer         June 19, 2001
-----------------------------------------------------     (principal financial and
                   Robert G. Quinn                          accounting officer)

              /s/ GUOJON MAR GUoJONSSON                 Chief Visionary and Director      June 18, 2001
-----------------------------------------------------
                Guojon Mar Guojonsson

                   /s/ LARS BOMAN                                 Director                June 13, 2001
-----------------------------------------------------
                     Lars Boman

                /s/ STIG-ARNE LARSSON                      Chairman of the Board          June 12, 2001
-----------------------------------------------------
                  Stig-Arne Larsson

                                                                  Director                       , 2001
-----------------------------------------------------
                   Jeffrey Pulver

                 /s/ ANDRE TREMBLAY                               Director                June 18, 2001
-----------------------------------------------------
                   Andre Tremblay
</TABLE>

                                        74
<PAGE>   78

                                  EXHIBIT LIST

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>

      *2.1     Share Exchange Agreement, dated as of November 8, 2000, between
               the Registrant and Microcell Capital II Inc.

      *2.2     Share Exchange Agreement, dated as of November 8, 2000, between
               the Registrant and Ericsson Canada Inc.

       3.1     Amended and Restated Articles of Incorporation

       3.2     Amended and Restated By-laws

     *10.1     1995 Stock Option Plan

     *10.2     1998 Incentive Stock Option Plan

     *10.3     2000 Employee Stock Purchase Plan

     *10.4     Employment Agreement between the Registrant and Skoeli Mogensen

     *10.5     Employment Agreement between the Registrant and Guojon Mar
               Guojonsson

     *10.6     Employment Agreement between the Registrant and Robert Quinn

     *10.7     Employment Agreement between the Registrant and Skuli Valberg
               Olafsson

      10.8     Employment Agreement between the Registrant and Fredrik
               Torstensson

      10.9     Amendment to Employment Agreement between the Registrant and
               Fredrik Torstensson

     *10.10    Form of Indemnification Agreement

     *10.11    General Co-operation and Development Agreement dated as of
               February 4, 1999 between the Registrant and Ericsson Telecom AB

     *10.12    Specific Co-operation and Development Agreement dated as of
               February 4, 1999 between the Registrant and Ericsson Telecom AB
               for Communities and Link

     *10.13    Value Added Reseller Agreement dated as of February 4, 1999
               between the Registrant and Ericsson Telecom AB

     *10.14    Shareholder Rights Agreement dated as of February 4, 1999, among
               the Registrant, Guojon Mar Guojonsson, Skuli Mogensen, Ericsson
               Inc. and OZ Holdings LLC

     *10.15    General Co-Operation and Development Agreement, dated as of
               November 1, 2000, between the Registrant and Ericsson Radio
               Systems AB

     *10.16    Specific Co-Operation and Development Agreement, dated as of
               November 8, 2000, between Ericsson Canada Inc. and OZ.COM Canada
               Company (fka 3044016 Nova Scotia Company)

     *10.17    Value-added Distribution License Agreement, dated as of November
               1, 2000, between the Registrant and Ericsson Radio Systems AB

     *10.18    General Co-Operation and Development Agreement, dated as of
               November 8, 2000, between Microcell Labs Inc. and OZ.COM Canada
               Company (fka 3044016 Nova Scotia Company)

     *10.19    Specific Development and Consulting Agreement, dated as of
               November 8, 2000, between Microcell Labs Inc. and OZ.COM Canada
               Company. (fka 3044016 Nova Scotia Company)

     *10.20    Assignment of Right to Sublicense Use of Software, dated as of
               November 8, 2000, between MCE Holding Corporation and OZ.COM
               Canada Company (fka 3044016 Nova Scotia Company)

     *10.21    mPresence Agency Agreement, dated as of November 1, 2000, among
               the Registrant and Ericsson Radio Systems AB

     *10.22    Shareholder Agreement, dated as of November 8, 2000, among the
               Registrant, Guojon Mar Guojonsson, Skuli Mogensen and Microcell
               Capital II Inc.
</TABLE>

                                        75
<PAGE>   79

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>

     *10.23    Shareholder Agreement, dated as of November 8, 2000, among
               the Registrant, Gu(LOGO)jon Mar Gu(LOGO)jonsson, Skuli
               Mogensen and Ericsson Canada

      10.24    iPulse Agency Agreement, dated as of November 1, 2000,
               between the Registrant and Ericsson Radio Systems AB

     *10.25    Amendment Number One to Shareholder Rights Agreement, dated
               as of October 2000, among the Registrant and Ericsson, Inc.

     *21.1     List of Subsidiaries
</TABLE>

---------------
* Previously filed and incorporated by reference herein.

                                        76