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

FORM 10-QSB

 

(Mark One)

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

For the quarterly period ended: March 31, 2002

Or

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

For the transition period from _________ to _________Commission file number: 0-26597

DOT COM ENTERTAINMENT GROUP, INC.(Exact name of small business issuer as specified in itscharter)

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      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| (State or other jurisdiction of            incorporation or organization)(I.R.S. Employer Identification Number)
150 Randall St.,                 Oakville, Ontario, Canada, L6J 1P4                (Address of principal executive offices)

(905) 337-8524Issuer's telephone number

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes    X      No_____

As of April 30, 2002, the registrant had 10,787,500 shares of Common Stockoutstanding.

Transitional Small Business Disclosure Format (check one).

Yes_____ No    X     

This quarterly report contains forward-looking statements that involvesubstantial risks and uncertainties. Any statement in this quarterly report andany documents incorporated by reference into this quarterly report that is not astatement of an historical fact constitutes a forward-looking statement withinthe meaning of the Private Securities Litigation Reform Act of 1995. Further,when we use the words "may", "expect", "anticipate", "plan", "believe", "seek","estimate" and similar words, we intend to identify statements and expressionsthat may be forward-looking statements. We believe it is important tocommunicate certain of our expectations to our investors. Forward-lookingstatements are not guarantees of future performance. They involve risks,uncertainties and assumptions that could cause dot com's future results todiffer materially from those expressed in any forward-looking statements. Manyfactors are beyond our ability to control or predict. You are accordinglycautioned not to place undue reliance on such forward-looking statements. Wehave no obligation or intent to update publicly any forward-looking statementswhether in response to new information, future events or otherwise. Importantfactors that may cause our actual results to differ from such forward-lookingstatements include, but are not limited to, the risk factors discussed belowunder Item 2 "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION", "RISKSAND UNCERTAINTIES" and in dot com's Annual Report on Form 10-KSB.

Part I - Financial Information

Item 1. - Financial Statements.
**dot com ENTERTAINMENT GROUP, INC.**AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Audited)
March 31,
    December 31,**ASSETS**
2002
2001**Current assets:**          Cash and cash equivalents     $ 943,802 $    965,041           Accounts receivable:     Trade    1,328,535     1,306,931     Other    15,408     8,964           Prepaid expenses and deposits      25,249        26,578    Total current assets     2,312,994     2,307,514      Fixed assets - net     104,784     105,114      Deferred tax asset    122,000       122,000    $2,539,778    =======$2,534,628    ======= **LIABILITIES AND STOCKHOLDERS' EQUITY****Current liabilities:**          Accounts payable and accrued expenses        $ 118,250 $    96,544           Accounts payable - officers     27,500     50,000           Deferred revenue     214,075     214,701           Income taxes payable    116,034       338,968    Total current liabilities    475,859           700,213 **Stockholders' equity:**          Common stock, $0.001 par value, 50,000,000                 shares authorized, 10,787,500 shares issued                 and outstanding (10,787,500 - 2001)     10,788     10,788           Additional paid in capital     1,454,887     1,454,887           Retained earnings        598,244       368,7402,063,919    1,834,415                      $ 2,539,778    ======= $2,534,628    ======= 
(see accompanying notes)    
 **dot com ENTERTAINMENT GROUP, INC.**AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Months Ended
March 31
2002
2001**Revenues:**         Royalties    $ 663,545     $ 560,553          Installation fees    406,225     159,225          Support and maintenance   164,265    85,0581,234,035  804,836**Expenses:**         Marketing     216,581     146,372          Research, software development and support    services     217,531     192,696          General and administrative        417,417    226,182   851,529   565,250    Net income before income tax expense        382,506     239,586     Income tax expense    153,002   95,834**Net income**    229,504     143,752     Retained earnings (accumulated deficit),     beginning of period           368,740      (341,413)**Retained earnings (accumulated deficit),****end of period**    $ 598,244    ======     $ (197,661)    =======**Net income per share:**         Basic     $       0.02     =======    $        0.01        =======         Diluted     $       0.02     =======    $        0.01    ======= **Weighted average number of common shares outstanding:**         Basic     10,787,500    ========     10,730,000    ========          Diluted     11,242,220     ========    10,811,023    ======== 
(see accompanying notes)    
 
**dot com ENTERTAINMENT GROUP, INC.**AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
2002
2001**Cash flows from operating activities:**        Net income $    229,504 $    143,752        Adjustments to reconcile net income to           net cash provided (used) by operating    activities:     Depreciation     9,810     3,590     Deferred income tax expense -        56,500     Changes in non-cash working capital items:            Accounts receivable     (28,048)    (112,963)        Prepaid expenses and deposits     1,329     (16,708)        Accounts payable and accrued expenses        21,706     59,828         Accounts payable - officers     (22,500)    (9,805)        Deferred revenue     (626)    13,775         Income taxes payable     (222,934)          27,334 **Net cash provided by (used in) operating    activities**     (11,759)     165,303 **Cash flows used in investing activities:**         Purchases of fixed assets           (9,480)          (2,739)**Net cash used in investing activities**      (9,480)      (2,739)**Net increase (decrease) in cash and cash    equivalents****during the period**    (21,239)    162,564     Cash and cash equivalents beginning of period             965,041          655,409 **Cash and cash equivalents, end of period**$    943,802    ====== $    817,973     ======**Supplemental cash flow activities**       Income taxes paid $    375,936    ====== $    12,000    ===== 
(see accompanying notes) ****
dot com Entertainment Group, Inc.

NOTES TO FINANCIAL STATEMENTS - THREE-MONTH PERIOD ENDED MARCH 31, 2002
**NOTE 1. - BASIS OF PRESENTATION**
The accompanying unaudited consolidated financial statementsof the dot com Entertainment Group, Inc. and its Subsidiaries (the "Company")have been prepared in accordance with accounting principles generally acceptedin the U.S.A. for interim financial information and with the instructions toForm 10-QSB. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the U.S.A. forcomplete financial statements. In the opinion of management, all adjustmentsconsidered necessary for fair presentation have been included. Operating resultsfor the three-month period ended March 31, 2002 are not necessarily indicativeof the results that may be expected for the year ended December 31, 2002. Forfurther information, refer to the Company's Annual Report on Form 10-KSB for theyear ended December 31, 2001, which includes audited financial statements andfootnotes as at and for the years ended December 31, 2001 and 2000.
**NOTE 2. - STOCK OPTIONS**
During the three-month period ended March 31, 2002, theCompany granted 155,000 options to employees of the Company to purchase commonstock of the Company at exercise prices ranging from $0.81 to $1.08 per share.These options will be accounted for under APB 25. Accordingly, no compensationexpense has been recognized in the statements of income, since the option priceis expected to be greater or equal to the market value of the Company's commonstock at the measurement date.
**NOTE 3. - EARNINGS PER SHARE**
In accordance with Statement of Financial AccountingStandards No. 128, "Earnings Per Share," the Company has reported basic earningsper share and diluted earnings per share. The diluted weighted average number ofcommon shares outstanding at March 31, 2002 includes the impact of the assumedexercise of 2,015,000 stock options with a exercise prices ranging from $0.75 to$0.89 per share. The amount was determined using the treasury stock method. Allother securities, consisting of 2,005,000 stock options and warrants withexercise prices ranging from $0.94 to $4.00, are anti-dilutive and have not beenincluded in the calculation.
**NOTE 4. - ACCOUNTS RECEIVABLE**
During the three-month period ended March 31, 2002, the Company entered intoa deferred payment arrangement with a customer, which provided for payment ofpast due accounts receivable totaling $638,401 by September 30, 2002. Under thisdeferred payment arrangement, payments were scheduled to commence on March 31,2002 and continue monthly through September 30, 2002. The customer has not yetpaid the March 31, 2002 or April 30, 2002 payments. While management expectsthat this balance will be paid in full, it is reasonably possible that, as aconsequence of the negotiations presently in process or due to other factors,the anticipated payment dates for this amount could be further deferred oraccelerated.
**NOTE 5. - DEFERRED TAXES**
At March 31, 2002, the Company had a deferred tax asset in the amount of$122,000 which represented the anticipated tax deduction for non-qualified stockoption expense related to options issued in 1999. The tax deduction will beavailable if and when the stock options are exercised. The stock options expirein February 2003 and are all exercisable at $3.00 per share. If, in the view ofmanagement, it becomes more likely than not that the stock options will not beexercised then it will be necessary to establish a valuation allowance againstthe deferred tax asset. If required, this valuation allowance will be recognizedno later than December 31, 2002. 

Item 2. - Management's Discussion and Analysis or Plan of Operation

Management's Discussion and Analysis of Financial Condition and Results ofOperations

General

dot com Entertainment Group, Inc. ("dot com" or the "Company") is an Internetsoftware development company specializing in the creation and support ofInternet gaming products and related services.

dot com is not an Internet gaming company, in that it does not directly orindirectly accept wagers used to play games of chance on the Internet. Rather,it develops and licenses the use of its commercial software products andtrademarks to independent third parties located in jurisdictions where Internetgaming is regulated or tolerated.

The Company derives its revenues from several sources, including itsassessment of installation fees and royalties from the use of its software.Additionally, dot com generates revenue by providing licensees with technicalsupport, maintenance, software upgrades, e-digital and systems consultingservices. e-digital services include the production and maintenance of websites.

The following tables set forth selected information from the statements ofincome for the three months ended March 31, 2002 and 2001 and the balance sheetsas at March 31, 2002 and December 31, 2001.

        Selected Statement of Income Information           
Three Months Ended March 31,  
                            2002
                             2001   Revenue
$ 1,234,035
 $ 804,836 Expenses 851,529 565,250 Net income
229,504
143,752            Selected Balance Sheet Information    
As at         March 31,
As at December 31, 
2002
 2001   Current assets
$2,312,994 
$ 2,307,514Current liabilities 
475,859 
700,213Stockholders' equity
 2,063,919 
1,834,415 
Review of the three months ended March 31, 2002 compared with the threemonths ended March 31, 2001
Revenues increased to $1,234,035 for the three-month period ended March 31,2002 from $804,836 for the comparable 2001 quarter. The growth in revenuesresults primarily from higher royalties and installation fees. The royaltyrevenue increased to $663,545 for the three-month period ended March 31, 2002from $560,553 for the comparable 2001 quarter reflecting the increased numberand revenue activity of the Company's licensees. Installation fees were$406,225, as compared to $159,225 for the comparable quarter in 2001,representing fees recognized on the delivery of the Company's software to eightlicensee sites during the three-month period ended March 31, 2002. While four ofthese licensee sites derived royalty revenue in the three-month period endedMarch 31, 2002, royalty revenue from four licensee sites is expected to commencein the second quarter of 2002. Support and maintenance revenue was $164,265 forthe three-month period ended March 31, 2002 resulting from continued developmentand delivery of software enhancements, e-digital services and marketing andpromotional programs to customers. Support and maintenance revenue was $85,058for the comparable 2001 quarter. 

The additional licensees referred to above are expected to continue todiversify the Company's sources of revenue for the remainder of fiscal year 2002and beyond. During the three-month period ended March 31, 2002, 28% (three-monthperiod ended March 31, 2001- 67%) of the Company's revenue was derived from onecustomer. This customer also represented 57% of the trade accounts receivable atMarch 31, 2002 (77% at December 31, 2001). The loss of this customer or itsbankruptcy, resulting in its failure to pay the amounts owed to the Company,could have a material negative impact on the Company's revenues, profit and cashflows. During the three-month period ended March 31, 2002, the Company enteredinto a deferred payment arrangement with this customer which provided forscheduled payments of past due accounts receivable totaling $638,401 bySeptember 30, 2002. Under this deferred payment arrangement, payments werescheduled to commence on March 31, 2002 and continue monthly through September30, 2002. As of May 9, 2002 the customer has not paid the March 31, 2002 orApril 30, 2002 payments. While management fully expects that the balance will bepaid in full, it is reasonably possible that, as a consequence of thenegotiations presently in process or due to other factors, the anticipatedpayment dates for this amount could be further deferred or accelerated. Inaddition, during fiscal 2001, the Company had signed a new license agreementwith this customer. The new agreement reduced the royalty rate for this customerresulting in royalty revenue from this customer decreasing by approximately$206,000 for the three-month period ended March 31, 2002 compared to thecomparable 2001 quarter.

Operating expenses increased to $851,529 for the three-month period endedMarch 31, 2002 from $565,250 for the comparable 2001 quarter. The increasedoperating expenses reflect the significantly higher level of activity at theCompany, including increased staffing and related costs realized by the Companyover that of the prior year. At March 31, 2002 there were 43 full-time employeesand consultants compared to 27 at March 31, 2001. 

Marketing expenses increased to $216,581 for the three-month period endedMarch 31, 2002 from $146,372 for the comparable 2001 quarter. The increasereflects the Company's enhancement of its e-digital division, and the allocationof additional resources to marketing and selling. In addition, additionalresources have been allocated to the support function to provide licensees withfront end site customization services. Marketing expenses represented 18% ofrevenues for the three-month period ended March 31, 2002 and the comparable 2001quarter. 

Research, software development and support service expenses increased to$217,531 for the three-month period ended March 31, 2002 from $192,696 for thecomparable 2001 quarter. This increase resulted from the consequence ofcontinuing to hire additional software developers to improve and diversify theCompany's products and services to reflect the growing demand realized, andanticipated, for these products and services. Research, software development andsupport service expenses represented 18% of revenues for the three-month periodended March 31, 2002 compared to 24% for the comparable 2001 quarter.

General and administrative expenses increased to $417,417 for the three-monthperiod ended March 31, 2002 from $226,182 for the comparable 2001 quarter. Theincrease primarily results from increased remuneration to senior management, theleasing of larger office space, professional fees and the incurrence of expensesassociated with the higher level of activity of the Company. Operating costsalso includes a charge in the amount of $67,500 for a one-time non-recurringbuyout of an existing management contract due to expire in December 2002.General and administrative expenses represented 34% of revenue for thethree-month period ended March 31, 2002 compared to 28% for the comparable 2001quarter. 

Net income increased to $229,504 for the three-month period ended March 31,2002 from $143,752 for the comparable 2001 quarter. As the Company increases thenumber of its licensees and introduces new products it is anticipated thatprofitability will continue to improve. The income tax provision for thethree-month period ended March 31, 2002 increased to $153,002 from $95,834 forthe comparable 2001 quarter. The deferred tax asset at March 31, 2002, in theamount of $122,000 represents the anticipated tax deduction for non-qualifiedstock option expense related to options issued in 1999. The tax deduction willbe available if and when the stock options are exercised. The stock optionsexpire in February 2003 and are all exercisable at $3.00 per share. If, in theview of management, it becomes more likely than not that the stock options willnot be exercised then it will be necessary to establish a valuation allowanceagainst the deferred tax asset. If required, this valuation allowance will berecognized no later than December 31, 2002. 

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, the Company had cash and cash equivalents of $943,802compared with $965,401 at December 31, 2001.

At March 31, 2002, the Company had working capital of $1,837,135 comparedwith $1,607,301 at December 31, 2001. The increase primarily reflects the netincome for the three-month period ended March 31, 2002. The Company intends touse this working capital to further develop its current products, create anddevelop new products and to expand its sales and marketing efforts to increasethe number of licensees of its products. Within working capital during thethree-month period ended March 31, 2002, there has been an increase in accountsreceivable collections, partially offset by the negative impact of the deferredpayment arrangement entered into with a significant customer previously referredto. Also, there was a decrease in income taxes payable of approximately $223,000following the remittance of the Company's 2001 income tax liabilities to thetaxation authorities in the amount of approximately $376,000, offset by theincome tax provision for the three-month period ended March 31, 2002 ofapproximately $153,000. 

At March 31, 2002, total assets increased to $2,539,778 from $2,534,628 atDecember 31, 2001. The increase is due primarily to the net income for thethree-month period ended March 31, 2002 offset by the impact of the remittancesto the taxation authorities referred to above. 

At March 31, 2002, total liabilities decreased to $475,859 at March 31, 2002from $700,213 at December 31, 2001. The decrease primarily represents theremittances to the taxation authorities previously referred to. 

Net cash used in operating activities was $11,759 for the three-month periodended March 31, 2002 compared with cash provided by operations of $165,303 forthe same quarter in 2001. The use of cash this quarter results primarily fromthe remittances of 2001 income tax liabilities to the taxation authoritiesreferred to above which offsets the net income for the quarter.

Management believes that the Company will have sufficient resources tosupport its growth through continued revenue improvements, the collection of itstrade accounts receivable in the ordinary course of business and by continuingto monitor its expenses in light of the cash resources of the Company.Notwithstanding the above, there can be no assurance that management's plans canbe met.

There are presently no material commitments for capital expenditures. Due tothe nature of its business, the Company does not require significant outlays forcapital expenditures and, as a result, is not planning for any material capitalexpenditures for the foreseeable future.

RISKS AND UNCERTAINTIES

The Company has identified that there is uncertainty in North Americarelating to the lawfulness of Internet gaming. As such, notwithstanding the factthat its licensees operate from countries where such business is lawful iflicensed, governments elsewhere, including the federal, state or any localgovernments in the United States may take the position that the Company'ssoftware and support systems are being played and or used unlawfully in theirjurisdiction. Accordingly, the Company may face criminal prosecution in anynumber of jurisdictions for aiding and abetting others, such as its licensees,in operating an illegal gaming operation. The Company has devoted only limitedresources to investigating the legal climate in which it operates. Many of theissues facing the Company are the same as those facing all other e-commerce andother Internet software providers and traditional software providers, as currentlaws are not clear as to who, if anyone, has jurisdiction over Internet-basedcommerce. A number of bills have been introduced in the United States House ofRepresentatives to expressly ban Internet gaming. To date all of these proposalshave been defeated. Although the Company intends to do business worldwide, anyenforceable ban on Internet gaming in the United States would have a materialadverse effect on the Company's business and both its short-term and long-termliquidity and its revenues from operations.

IMPACT OF INFLATION

The Company believes that inflation has not had a material effect on itsbusiness.

Part II - Other Information

No items applicable

SIGNATURES

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

DOT COM ENTERTAINMENT GROUP, INC.(Registrant)
Date: May 9, 2002/s/ SCOTT WHITE                                         Scott White     President and Chief Executive Officer  Date: May 9, 2002 /s/ DAVID CALLANDER                             David Callander     Chief Financial Officer   ****************** |