##### Table of Contents



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

FORM 10-QSB

|           |                                  |                                                                                          |   
|---------- | -------------------------------- | ---------------------------------------------------------------------------------------- | --
|(Mark One) |                                  |                                                                                         
|          
|           | [X]                              | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|          
|           |                                  | For the quarterly period ended June 30, 2002                                            
|          
|           |                                  |                                                                                          | 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 COMMUNICATIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)

|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 95-4560875
(I.R.S. Employer Identification
No.)

Windsor Station, Room 150
1100, De La Gauchetiere West
Montreal, Canada H3B 2S2
(Address of principal executive offices, including zip code)

(514) 390-1333
(Registrants telephone number, including area code)



---

APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.

Yes  [   ]        No  [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS

As of June 30, 2002 there were 85,878,436 shares of the registrants
Common Stock outstanding.

Transitional Small Business Disclosure Format (check one)

Yes  [   ]    No  [X ]

1



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS                                         
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|SIGNATURE                    
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



INDEX

|                              |  |         |  |                                                                                                                                  |  |   
|----------------------------- |  | ------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |        
|                             
|                              |  | ITEM 1. |  | FINANCIAL STATEMENTS                                                                                                             |  |   
|                             
|                              |  |         |  | Consolidated Balance Sheets at December 31, 2001 and
June 30, 2002 (unaudited)                                                   |  | 3 
|                             
|                              |  |         |  | Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2002 (unaudited)                      |  | 4 
|                             
|                              |  |         |  | Consolidated Statements of Changes in Shareholders Equity (Deficit)
for the six months ended June 30, 2001 and 2002 (unaudited) |  | 5 
|                             
|                              |  |         |  | Consolidated Statements of Cash Flows for the
three and six months ended June 30, 2001 and 2002 (unaudited)                      |  | 6 
|                             
|                              |  |         |  | Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2001 and 2002
(unaudited)            |  | 7 
|                             
|                              |  |         |  | Notes to
Consolidated Financial Statements (unaudited)                                                                           |  | 8 
|                             
|                              |  | ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS                                            |  | 11
|                             
|PART II. OTHER INFORMATION    |  |        
|                             
|                              |  | ITEM 1. |  | LEGAL PROCEEDINGS                                                                                                                |  | 16
|                             
|                              |  | ITEM 2. |  | CHANGES IN SECURITIES                                                                                                            |  | 16
|                             
|                              |  | ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES                                                                                                  |  | 16
|                             
|                              |  | ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                              |  | 16
|                             
|                              |  | ITEM 5. |  | OTHER INFORMATION                                                                                                                |  | 16
|                             
|                              |  | ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                 |  | 17
|                             
|SIGNATURES                    |  | 17     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |             |             |           | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------- | ----------- | ------------ | ---------- | --------- | ----------- | ----------- | --------- | 
|                                                     |                                                                                                     |                                                                                         |                           |             | December 31, |            | June 30, 
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |          
|                                                     |                                                                                                     |                                                                                         |                           |             | 2001         |            | 2002     
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |          
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |             | (unaudited)
|Assets                                               |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Current assets:                                      |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     | Cash and cash equivalents                                                               |                           | $           | 651,265      |            |           | $           | 2,435,314   |          
|                                                     |                                                                                                     | Accounts receivable, net of allowance for
doubtful accounts of $197,250 and $0          |                           |             | 58,894       |            |           |             | 441,592     |          
|                                                     |                                                                                                     | Accounts receivable from shareholders                                                   |                           |             | 3,033,953    |            |           |             | 1,981       |          
|                                                     |                                                                                                     | Prepaid expenses and other current assets                                               |                           |             | 215,995      |            |           |             | 87,465      |          
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                         | Total current assets      |             |              | 3,960,107  |           |             |             | 2,966,352 | 
|Property and equipment, net                          |                                                                                                     |                                                                                         | 2,883,093                 |             |              |            | 1,623,697 |            
|Intangibles, net                                     |                                                                                                     |                                                                                         | 3,739,582                 |             |              |            |          |            
|Other assets                                         |                                                                                                     |                                                                                         | 161,595                   |             |              |            | 169,577   |            
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                         | Total assets              |             | $            | 10,744,377 |           |             | $           | 4,759,626 | 
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Liabilities and Shareholders Equity (Deficit)       |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Current liabilities:                                 |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     | Trade accounts payable                                                                  |                           | $           | 764,966      |            |           | $           | 213,699     |          
|                                                     |                                                                                                     | Accrued liabilities                                                                     |                           |             | 860,685      |            |           |             | 1,087,424   |          
|                                                     |                                                                                                     | Deferred revenue                                                                        |                           |             | 8,348,974    |            |           |             | 100,098     |          
|                                                     |                                                                                                     | Current portion of notes payable                                                        |                           |             | 775,941      |            |           |             | 816,803     |          
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                         | Total current liabilities |             |              | 10,750,566 |           |             |             | 2,218,024 | 
|Notes payable                                        |                                                                                                     |                                                                                         | 363,624                   |             |              |            |          |            
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                         | Total liabilities         |             |              | 11,114,190 |           |             |             | 2,218,024 | 
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Redeemable common stock, $0.01 par value             |                                                                                                     |                                                                                         | 4,500,000                 |             |              |            |          |            
|Commitments and contingencies                        |                                                                                                     |                                                                                         |                          |             |              |            |          |            
|Shareholders equity (deficit):                      |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Convertible preferred stock, $0.01 par value:        |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     | 25,000,000 shares authorized:                                                                       |                                                                                         |                           |             |              |            |           |             |            
|                                                     |                                                                                                     | 14,270,964 and 13,970,964 shares issued and
outstanding (liquidation value $13,970,964) |                           |             | 16,546,446   |            |           |             | 16,156,446  |          
|Common stock, $0.01 par value:                       |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|                                                     | 275,000,000 shares authorized
90,387,596 and 85,878,436 shares issued and
outstanding, respectively |                                                                                         |                           | 903,876     |              |            |           | 858,784     |            
|                                                     | Additional paid-in capital                                                                          |                                                                                         |                           | 31,367,041  |              |            |           | 35,216,275  |            
|                                                     | Notes receivable from shareholders                                                                  |                                                                                         |                           | (353,900    | )            |            |           | (353,900    | )          
|                                                     | Deferred compensation                                                                               |                                                                                         |                           | (2,305,848  | )            |            |           | (929,744    | )          
|                                                     | Accumulated
other comprehensive income 
cumulative translation adjustment                          |                                                                                         |                           | 704,149     |              |            |           | 888,303     |            
|                                                     | Accumulated deficit                                                                                 |                                                                                         |                           | (51,731,577 | )            |            |           | (49,294,562 | )          
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Total shareholders equity (deficit)                 |                                                                                                     |                                                                                         | (4,869,813                | )           |              |            | 2,541,602 |            
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            
|Total liabilities and shareholders equity (deficit) |                                                                                                     | $                                                                                       | 10,744,377                |             |              | $          | 4,759,626 |            
|                                                     |                                                                                                     |                                                                                         |                           |             |              |            |           |            

The accompanying notes are an integral part of the consolidated financial
statements.

3



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##### Table of Contents






OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |           |            |  
|---------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------ | --------- | -------------------- | ---------- | ------------------ | ------- | ---------- | ---------- | ---- | --------- | ---------- | ---------- | - | --------- | --------- | ---------- | -
|                             |                                                                                                            |                          |           | FOR THE THREE MONTHS |            | FOR THE SIX MONTHS
|                             |                                                                                                            |                          |           | ENDED JUNE 30,       |            | ENDED JUNE 30,    
|                             |                                                                                                            |                          |           |                      |            |                   
|                             |                                                                                                            |                          |           | 2001                 |            | 2002               |         | 2001       |            | 2002
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |     
|REVENUES                     |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Development services                                                                                       |                          |           | 2,273,723            |            |                    |         | 100,961    |            |      |           | 4,309,389  |            |   |           | 7,618,239 |           
|                             | Client services                                                                                            |                          |           | 52,240               |            |                    |         | 38,192     |            |      |           | 54,426     |            |   |           | 880,692   |           
|                             | License fees                                                                                               |                          |           | 59,143               |            |                    |         | 20,832     |            |      |           | 118,286    |            |   |           | 41,663    |           
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             |                                                                                                            | Total Revenues           |           |                      | 2,385,106  |                    |         |            | 159,985    |      |           |            | 4,482,101  |   |           |           | 8,540,594  |  
|COST OF REVENUES             |                                                                                                            |                          | 1,856,847 |                      |            |                    | 251,036 |            |            |      | 3,491,294 |            |            |   | 1,258,588 |          
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|GROSS PROFIT                 |                                                                                                            |                          | 528,259   |                      |            |                    | (91,051 | )          |            |      | 990,807   |            |            |   | 7,282,006 |          
|OPERATING EXPENSES           |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Sales and marketing                                                                                        |                          |           | 644,353              |            |                    |         | 594,072    |            |      |           | 1,743,457  |            |   |           | 1,160,175 |           
|                             | General and administrative
(including stock based
compensation of $432,984,
$2,871, $868,593 and
$426,667) |                          |           | 3,235,538            |            |                    |         | 844,965    |            |      |           | 6,363,336  |            |   |           | 2,878,268 |           
|                             | Research and development                                                                                   |                          |           | 586,430              |            |                    |         | 652,171    |            |      |           | 1,428,425  |            |   |           | 1,364,751 |           
|                             | Impairment loss on intangible
assets                                                                       |                          |           |                     |            |                    |         |           |            |      |           |           |            |   |           | 3,141,348 |           
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             |                                                                                                            | Total operating expenses |           |                      | 4,466,321  |                    |         |            | 2,091,208  |      |           |            | 9,535,218  |   |           |           | 8,544,542  |  
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             |                                                                                                            | Operating loss           |           |                      | (3,938,062 | )                  |         |            | (2,182,259 | )    |           |            | (8,544,411 | ) |           |           | (1,262,536 | )
|Contract termination fee     |                                                                                                            |                          |          |                      |            |                    |        |            |            |      |          |            |            |   | 3,896,279 |          
|Interest income              |                                                                                                            |                          | 11,049    |                      |            |                    | 958     |            |            |      | 53,164    |            |            |   | 3,313     |          
|Interest expense             |                                                                                                            |                          | (42,616   | )                    |            |                    | (21,788 | )          |            |      | (63,168   | )          |            |   | (51,334   | )        
|Other income (expense) net   |                                                                                                            |                          | 140,319   |                      |            |                    | (40,706 | )          |            |      | (205,873  | )          |            |   | (148,707  | )        
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Income (loss) before
provision for income taxes
and minority interest                                      |                          |           | (3,829,310           | )          |                    |         | (2,243,795 | )          |      |           | (8,760,288 | )          |   |           | 2,437,015 |           
|Income taxes                 |                                                                                                            |                          |          |                      |            |                    |        |            |            |      |          |            |            |   |          |          
|Minority interest            |                                                                                                            |                          | 14,382    |                      |            |                    |        |            |            |      | 21,945    |            |            |   |          |          
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Net income (loss)                                                                                          |                          | $         | (3,814,928           | )          |                    | $       | (2,243,795 | )          |      | $         | (8,738,343 | )          |   | $         | 2,437,015 |           
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|NET INCOME (LOSS) PER SHARE: |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Basic                                                                                                      |                          | $         | (0.04                | )          |                    | $       | (0.03      | )          |      | $         | (0.10      | )          |   | $         | 0.02      |           
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          
|                             | Diluted                                                                                                    |                          | $         | (0.04                | )          |                    | $       | (0.03      | )          |      | $         | (0.10      | )          |   | $         | 0.02      |           
|                             |                                                                                                            |                          |           |                      |            |                    |         |            |            |      |           |            |            |   |           |          

The accompanying notes are an integral part of the consolidated financial
statements.

4



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##### Table of Contents






OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
unaudited)

|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |             |         | 
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  | --------------------------------- | - | ------ | - | ----------- | ------- | ------ |  | ---------- | - |  | - | ----------- | ------- | 
|                                                                            |                                                                                                                      |                                                      |  | FOR THE SIX MONTHS ENDED JUNE 30,
|                                                                            |                                                                                                                      |                                                      |  |                                  
|                                                                            |                                                                                                                      |                                                      |  | 2001                              |   | 2002  
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |       
|                                                                            |                                                                                                                      |                                                      |  | Shares                            |   | Amount |   | Shares      |         | Amount
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |       
|Preferred Stock:                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  | 14,680,964                        |   |        | $ | 17,079,446  |         |        |  | 14,270,964 |   |  | $ | 16,546,446  |        
|                                                                            | Conversion of preferred
stock to common stock                                                                        |                                                      |  | (410,000                          | ) |        |   | (533,000    | )       |        |  | (300,000   | ) |  |   | (390,000    | )      
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  | 14,270,964                        |   |        | $ | 16,546,446  |         |        |  | 13,970,964 |   |  | $ | 16,156,446  |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|Common Stock and Additional Paid in
Capital:                                |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  | 89,479,596                        |   |        | $ | 31,729,117  |         |        |  | 90,387,596 |   |  | $ | 32,270,917  |        
|                                                                            | Redeemable common stock
reclassified
to permanent shareholders
equity in connection with
cancellation of put option |                                                      |  |                                  |   |        |   |            |         |        |  |           |   |  |   | 4,500,000   |        
|                                                                            | Common stock reacquired in
connection with termination of
Microcell development contract                             |                                                      |  |                                  |   |        |   |            |         |        |  | (5,299,160 | ) |  |   | (529,916    | )      
|                                                                            | Employee stock options exercised                                                                                     |                                                      |  | 40,000                            |   |        |   | 4,000       |         |        |  | 90,000     |   |  |   | 9,000       |        
|                                                                            | Forfeitures of unvested stock
options                                                                                |                                                      |  |                                  |   |        |   |            |         |        |  |           |   |  |   | (949,437    | )      
|                                                                            | Common stock issued for
professional
services rendered                                                               |                                                      |  |                                  |   |        |   |            |         |        |  | 100,000    |   |  |   | 384,495     |        
|                                                                            | Conversion of preferred stock
to common stock                                                                        |                                                      |  | 820,000                           |   |        |   | 533,000     |         |        |  | 600,000    |   |  |   | 390,000     |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  | 90,339,596                        |   |        | $ | 32,266,117  |         |        |  | 85,878,436 |   |  | $ | 36,075,059  |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|Notes Receivable from Shareholders                                          |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  |                                   |   |        | $ | (353,900    | )       |        |  |            |   |  | $ | (353,900    | )      
|                                                                            | Notes receivable issued                                                                                              |                                                      |  |                                   |   |        |   |            |         |        |  |            |   |  |   |            |        
|                                                                            | Payments received                                                                                                    |                                                      |  |                                   |   |        |   |            |         |        |  |            |   |  |   |            |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  |                                   |   |        | $ | (353,900    | )       |        |  |            |   |  | $ | (353,900    | )      
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|Deferred Compensation:                                                      |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  |                                   |   |        | $ | (4,032,567  | )       |        |  |            |   |  | $ | (2,305,848  | )      
|                                                                            | Amortization of deferred
compensation                                                                                |                                                      |  |                                   |   |        |   | 868,593     |         |        |  |            |   |  |   | 426,667     |        
|                                                                            | Forfeitures of unvested stock
options                                                                                |                                                      |  |                                   |   |        |   |            |         |        |  |            |   |  |   | 949,437     |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  |                                   |   |        | $ | (3,163,974  | )       |        |  |            |   |  | $ | (929,744    | )      
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|Accumulated Other Comprehensive Income  Cumulative Translation
Adjustment: |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  |                                   |   |        | $ | 667,810     |         |        |  |            |   |  | $ | 704,149     |        
|                                                                            |                                                                                                                      | Other
comprehensive income 
Translation adjustments |  |                                   |   |        |   |             | 443,251 |        |  |            |   |  |   |             | 184,154 | 
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  |                                   |   |        | $ | 1,111,061   |         |        |  |            |   |  | $ | 888,303     |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|Accumulated Deficit:                                                        |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, beginning of period                                                                                         |                                                      |  |                                   |   |        | $ | (27,088,205 | )       |        |  |            |   |  | $ | (51,731,577 | )      
|                                                                            | Net income (loss)                                                                                                    |                                                      |  |                                   |   |        |   | (8,738,343  | )       |        |  |            |   |  |   | 2,437,015   |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Balance, end of period                                                                                               |                                                      |  |                                   |   |        | $ | (35,826,548 | )       |        |  |            |   |  | $ | (49,294,562 | )      
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            
|                                                                            | Total shareholders equity                                                                                           |                                                      |  |                                   |   |        | $ | 10,579,202  |         |        |  |            |   |  | $ | 2,541,602   |        
|                                                                            |                                                                                                                      |                                                      |  |                                   |   |        |   |             |         |        |  |            |   |  |   |            

The accompanying notes are an integral part of the consolidated financial
statements.

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##### Table of Contents






OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |           |   |            |           | 
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | - | -------------------- | --------- | ------------------ | - | --------- | --------- | ---------- | - | ---------- | ---------- | --------- | - | ---------- | --------- | 
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   | FOR THE THREE MONTHS |           | FOR THE SIX MONTHS
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   | ENDED JUNE 30,       |           | ENDED JUNE 30,    
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                   
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   | 2001                 |           | 2002               |   | 2001      |           | 2002      
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |           
|Cash flows from operating activities:                                    |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Net income (loss)                                                                                  |                                              | $                                                          | (3,814,928                                          | ) |                      | $         | (2,243,795         | ) |           | $         | (8,738,343 | ) |            | $          | 2,437,015 |  
|                                                                         | Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities: |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |           |  
|                                                                         |                                                                                                    |                                              | Depreciation and amortization                              |                                                     |   | 1,121,498            |           |                    |   | 161,094   |           |            |   | 2,251,323  |            |           |   | 1,091,570  |          
|                                                                         |                                                                                                    |                                              | Impairment loss on intangible assets                       |                                                     |   |                     |           |                    |   |          |           |            |   |           |            |           |   | 3,141,348  |          
|                                                                         |                                                                                                    |                                              | Minority interest                                          |                                                     |   | (14,382              | )         |                    |   |          |           |            |   | (21,945    | )          |           |   |           |          
|                                                                         |                                                                                                    |                                              | Amortization of deferred stock-based
compensation          |                                                     |   | 432,984              |           |                    |   | 2,872     |           |            |   | 868,593    |            |           |   | 426,668    |          
|                                                                         |                                                                                                    |                                              | Gain on sale of property and equipment                     |                                                     |   |                     |           |                    |   | (145,424  | )         |            |   |           |            |           |   | (145,424   | )        
|                                                                         |                                                                                                    |                                              | Issuance of notes payable for employment
services rendered |                                                     |   |                     |           |                    |   | 30,000    |           |            |   |           |            |           |   | 60,000     |          
|                                                                         |                                                                                                    | Changes in operating assets and liabilities: |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |           |   |           
|                                                                         |                                                                                                    |                                              | Accounts receivable                                        |                                                     |   | (692,953             | )         |                    |   | 2,216,112 |           |            |   | 337,029    |            |           |   | 3,037,393  |          
|                                                                         |                                                                                                    |                                              | Prepaid expenses and other assets                          |                                                     |   | 15,965               |           |                    |   | 44,202    |           |            |   | (68,623    | )          |           |   | 120,548    |          
|                                                                         |                                                                                                    |                                              | Accounts payable                                           |                                                     |   | 521,849              |           |                    |   | (282,009  | )         |            |   | 284,695    |            |           |   | (551,267   | )        
|                                                                         |                                                                                                    |                                              | Accrued liabilities                                        |                                                     |   | (22,071              | )         |                    |   | 82,275    |           |            |   | 161,393    |            |           |   | 226,739    |          
|                                                                         |                                                                                                    |                                              | Deferred revenue                                           |                                                     |   | 1,471,301            |           |                    |   | 11,955    |           |            |   | 2,712,972  |            |           |   | (8,248,876 | )        
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         |                                                                                                    |                                              |                                                            | Net cash provided by (used in)
operating activities |   |                      | (980,737  | )                  |   |           | (122,718  | )          |   |            | (2,212,906 | )         |   |            | 1,595,714 | 
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Cash flows from investing activities:                                    |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Purchases of property and equipment                                                                |                                              |                                                            | (629,678                                            | ) |                      |           | (96,299            | ) |           |           | (1,055,390 | ) |            |            | (162,987  | )
|                                                                         | Proceeds from sales of property and equipment                                                      |                                              |                                                            |                                                    |   |                      |           | 535,733            |   |           |           |           |   |            |            | 540,930   |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         |                                                                                                    |                                              | Net cash provided by (used in) investing
activities        |                                                     |   | (629,678             | )         |                    |   | 439,434   |           |            |   | (1,055,390 | )          |           |   | 377,943    |          
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Cash flows from financing activities:                                    |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Issuance of notes payable                                                                          |                                              |                                                            |                                                    |   |                      |           |                   |   |           |           | 500,000    |   |            |            |          |  
|                                                                         | Exercise of employee stock options                                                                 |                                              |                                                            | 4,000                                               |   |                      |           |                   |   |           |           | 4,000      |   |            |            | 9,000     |  
|                                                                         | Repayments of notes payable                                                                        |                                              |                                                            | (3,946                                              | ) |                      |           | (377,977           | ) |           |           | (10,738    | ) |            |            | (382,762  | )
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         |                                                                                                    |                                              | Net cash provided by (used in) financing
activities        |                                                     |   | 54                   |           |                    |   | (377,977  | )         |            |   | 493,262    |            |           |   | (373,762   | )        
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Effect of currency exchange rates on cash                                |                                                                                                    |                                              | (117,356                                                   | )                                                   |   |                      | 225,384   |                    |   |           | 423,109   |            |   |            | 184,154    |          
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Net increase (decrease) in cash                                                                    |                                              |                                                            | (1,727,717                                          | ) |                      |           | 164,123            |   |           |           | (2,351,925 | ) |            |            | 1,784,049 |  
|Cash and cash equivalents at beginning of period                         |                                                                                                    |                                              | 2,935,351                                                  |                                                     |   |                      | 2,271,191 |                    |   |           | 3,559,559 |            |   |            | 651,265    |          
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Cash and cash equivalents at end of period                               |                                                                                                    | $                                            | 1,207,634                                                  |                                                     |   | $                    | 2,435,314 |                    |   | $         | 1,207,634 |            |   | $          | 2,435,314  |          
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Supplemental cash flow information:                                      |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Cash paid for interest                                                                             |                                              | $                                                          | 13,469                                              |   |                      | $         | 3,894              |   |           | $         | 20,211     |   |            | $          | 10,584    |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|Supplemental disclosures of non-cash investing and
financing activities: |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Conversion of preferred stock to common stock                                                      |                                              | $                                                          | 338,000                                             |   |                      | $         |                   |   |           | $         | 533,000    |   |            | $          | 390,000   |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Common stock issued for professional services                                                      |                                              | $                                                          |                                                    |   |                      | $         |                   |   |           | $         |           |   |            | $          | 384,495   |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Common stock reacquired in connection with termination of Microcell development contract           |                                              | $                                                          |                                                    |   |                      | $         |                   |   |           | $         |           |   |            | $          | 529,916   |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          
|                                                                         | Sale of property in exchange for receivable                                                        |                                              | $                                                          |                                                    |   |                      | $         | 388,119            |   |           | $         |           |   |            | $          | 388,119   |  
|                                                                         |                                                                                                    |                                              |                                                            |                                                     |   |                      |           |                    |   |           |           |            |   |            |            |          

The accompanying notes are an integral part of the consolidated financial
statements.

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##### Table of Contents






OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

|                                   |                                         |   |                      |         |                    |   |            |         |      |   |            |         |  |   |           |         | 
|---------------------------------- | --------------------------------------- | - | -------------------- | ------- | ------------------ | - | ---------- | ------- | ---- | - | ---------- | ------- |  | - | --------- | ------- | 
|                                   |                                         |   | FOR THE THREE MONTHS |         | FOR THE SIX MONTHS
|                                   |                                         |   | ENDED JUNE 30,       |         | ENDED JUNE 30,    
|                                   |                                         |   |                      |         |                   
|                                   |                                         |   | 2001                 |         | 2002               |   | 2001       |         | 2002
|                                   |                                         |   |                      |         |                    |   |            |         |     
|Net income (loss)                  |                                         | $ | (3,814,928           | )       |                    | $ | (2,243,795 | )       |      | $ | (8,738,343 | )       |  | $ | 2,437,015 |        
|Other comprehensive income
(loss): |                                         |   |                      |         |                    |   |            |         |      |   |            |         |  |   |           |        
|                                   | Foreign currency
translation adjustment |   |                      | (97,754 | )                  |   |            | 225,384 |      |   |            | 443,251 |  |   |           | 184,154 | 
|                                   |                                         |   |                      |         |                    |   |            |         |      |   |            |         |  |   |           |        
|Comprehensive income (loss)        |                                         | $ | (3,912,682           | )       |                    | $ | (2,018,411 | )       |      | $ | (8,295,092 | )       |  | $ | 2,621,169 |        
|                                   |                                         |   |                      |         |                    |   |            |         |      |   |            |         |  |   |           |        

The accompanying notes are an integral part of the consolidated financial
statements.

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##### Table of Contents






OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002

1. INTERIM FINANCIAL STATEMENTS

The accompanying financial statements of OZ Communications, Inc. and
subsidiaries (the Company) are unaudited and have been prepared pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America have been condensed or omitted pursuant to
those rules and regulations. Accordingly, these interim financial statements
and notes should be read in connection with the Companys 2001 Annual Report on
Form 10-KSB. The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for other
interim periods or for the full fiscal year. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
financial statements not misleading.

The year-end balance sheet data were derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.

The accompanying consolidated financial statements include accounts of the
Company and its subsidiaries.

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 annual losses
and negative cash flows from operations since inception. In January and
February of 2002, the Company terminated all commercial agreements with
Ericsson, and amended several contracts with Microcell. Before their
termination or amendment, as the case may be, these agreements provided
consistent cash payments in consideration for development and other services.
As a result of the termination or amendment of the agreements, the Company now
owns all of its own technology and is not dependent upon the sales and
marketing efforts of either Ericsson or Microcell. The Company now has a
completed product that it must sell either directly or through channel
partners. This new business is considerably different and riskier than its
prior business as a developer of software solutions for Ericsson and Microcell.
The Company does not believe that its operating requirements for the next 6
months can be funded from cash provided by operations and cash reserves. As of
June 30, 2002, cash reserves were $2.4 million. 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. 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.

2. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding for the period. Diluted net income (loss)
per share is computed using the weighted average number of common shares
outstanding and any potentially dilutive securities. Potentially dilutive
securities are not included in the diluted net loss per share calculations for
the three months ended June 30, 2001 and 2002 and the six months ended June 30,
2001 as their inclusion would be anti-dilutive to the basic net loss per share
calculations. Potentially dilutive securities not included in the diluted net
loss per share calculation and outstanding during the three months ended June
30, 2001 and 2002 and the six months ended June 30, 2001, included preferred
shares, stock options, warrants and the put option on redeemable common stock.
Diluted securities included in the diluted net income per share calculation and
outstanding during the six months ended June, 2002 included preferred shares
and the put option on redeemable common stock.

The components of basic and diluted net loss per share are as follows:

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|                                                    |         |   |                           |       |      |   |             |      | 
|--------------------------------------------------- | ------- | - | ------------------------- | ----- | ---- | - | ----------- | ---- | 
|                                                    |         |   | SIX MONTHS ENDED JUNE 30,
|                                                    |         |   |                          
|                                                    |         |   | 2001                      |       | 2002
|                                                    |         |   |                           |       |     
|Net income (loss)                                   |         | $ | (8,738,343                | )     |      | $ | 2,437,015   |     
|                                                    |         |   |                           |       |      |   |             |     
|Weighted average outstanding shares of common
stock |         |   | 89,852,524                |       |      |   | 126,439,782 |     
|Net income (loss) per share:                        |         |   |                           |       |      |   |             |     
|                                                    | Basic   |   | $                         | (0.10 | )    |   | $           | 0.02 | 
|                                                    |         |   |                           |       |      |   |             |     
|                                                    | Diluted |   | $                         | (0.10 | )    |   | $           | 0.02 | 
|                                                    |         |   |                           |       |      |   |             |     

|                                                    |         |   |                             |       |      |   |            |       |  
|--------------------------------------------------- | ------- | - | --------------------------- | ----- | ---- | - | ---------- | ----- | -
|                                                    |         |   | THREE MONTHS ENDED JUNE 30,
|                                                    |         |   |                            
|                                                    |         |   | 2001                        |       | 2002
|                                                    |         |   |                             |       |     
|Net loss                                            |         | $ | (3,814,928                  | )     |      | $ | (2,243,795 | )    
|                                                    |         |   |                             |       |      |   |            |      
|Weighted average outstanding shares of common
stock |         |   | 90,082,893                  |       |      |   | 85,878,436 |      
|Net loss per share:                                 |         |   |                             |       |      |   |            |      
|                                                    | Basic   |   | $                           | (0.04 | )    |   | $          | (0.03 | )
|                                                    |         |   |                             |       |      |   |            |      
|                                                    | Diluted |   | $                           | (0.04 | )    |   | $          | (0.03 | )
|                                                    |         |   |                             |       |      |   |            |      

3. RELATED PARTY TRANSACTIONS

On January 24, 2002 the Company entered into an agreement with Ericsson
Radio Systems AB, Ericsson Telecom AB, Ericsson Inc. and Ericsson Canada Inc.
ending more than three years of cooperation between the Company and Ericsson to
develop and market the iPulse software. Under the terms of the agreement
Ericsson paid the Company an aggregate of $4.35 million during the quarter
ended March 31, 2002 and irrevocably (a) assigned to the Company an equal and
undivided share of its right, title and interest in and to (i) the iPulse
software, including source and object code, (ii) the iPulse trademark, and
(b) granted to the Company a worldwide and perpetual license for all purposes
to all other intellectual property rights contained in and related to the
iPulse software, including any patent rights, copyrights, rights to
photographs, design rights, technical documentation and any other industrial
and intellectual property rights contained in the source and object code. The
Company and Ericsson each have the right to exploit the iPulse software in any
way that they see fit. The agreement expressly terminates all other contracts
between the Company and Ericsson except for the shareholder rights agreement
made and entered into as of February 4, 1999 by and between the Company and
Ericsson Inc. and certain shareholders of the Company.

As a result of the termination of the Ericsson agreements, the Company has
recognized a contract termination fee, revenues from the Ericsson Canada, Inc.
development agreement, and an impairment loss on the related intangibles that
the Company recorded in connection with the acquisition of the shares of MCE
Holding Corporation in November 2000. In the quarter ended March 31, 2002, the
Company recognized $3.9 million of the $6 million paid by Ericsson as a
contract termination fee (other non-operating revenue) and $3.6 million in
revenues from the development agreement with Ericsson Canada Inc. that was
recorded on the December 31, 2001 balance sheet as deferred revenue.

On February 28, 2002, OZ Canada and the Company entered into a series of
amending agreements with Microcell Labs and Microcell Capital II Inc. Under
the terms of the agreements the parties have terminated all specific
development agreements between the parties, terminated Microcells agreement to
use the Company as its preferred development resource in the field of wireless
Internet

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messaging services, terminated Microcells right to require the Company to
redeem Microcells shares of the Companys common stock, terminated Microcells
obligation to pay minimum quarterly payments of $750,000 for development
services, terminated a license of Ericssons iPulse 1.5 and delivered a license
of the OZ® Instant Communications Platform. The license is conditioned upon
the purchase by Microcell Labs Inc. of annual support and maintenance contracts
from the Company, but is otherwise royalty-free for the first three years and
incremental capacity required after the initial three-year period will be
purchased separately at competitive prices and terms. In addition, the parties
modified a shareholder agreement to change certain participation rights of
Microcell and to provide that the obligation of certain of the Companys
shareholders to vote a sufficient number of shares to elect Microcells
designee as a director is applicable only to the election of directors held at
the Companys 2002 annual shareholders meeting. In partial consideration for
the Companys agreement to make the amendments, Microcell has surrendered to
the Company 5,299,160 shares of the Companys common stock for cancellation.

In the quarter ended March 31, 2002, the Company recognized $4.5 million
in revenue from various specific development agreements with Microcell Labs
Inc. that previously was recorded on the balance sheet as deferred revenue,
recorded a $3.1 million non-cash impairment loss on intangible assets as an
operating expense, reclassified $4.5 million of redeemable common stock as
additional paid-in capital, and allocated $529,916 among common stock and
paid-in capital, and $220,084 to bad debt expense related to $750,000 that was
due in November 2001 from Microcell Labs Inc. under the general co-operation
and development agreement, but which was forgiven in connection with the return
of 5,299,160 common shares of the Company as part of the amendments.

4. NOTES PAYABLE

Notes payable of $816,803 at June 30, 2002 consist of three convertible
promissory notes issued by the Companys SmartVR, Inc. subsidiary (SmartVR).
One of these notes in the amount of $166,803 is payable to the chief executive
officer of SmartVR. These notes (as amended) were convertible through June 30,
2002 into shares of SmartVR preferred stock in the event that SmartVR raised
additional capital. This did not occur and as a result the notes are presently
due and payable to the holders. The parent company, OZ Communications, Inc.,
is not liable for the repayment of these three notes and SmartVR presently does
not have the financial resources available to repay the notes. However,
SmartVR and the noteholders have agreed to amend the notes so as to extend the
holders right to convert the notes.

5. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in an intangible asset being reclassified as goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not amortized into results of operations, but instead are
reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The provisions of each statement that
apply to goodwill and intangible assets acquired prior to June 30, 2001 were
adopted by the Company on January 1, 2002. The adoption of SFAS No. 141 and
142 on January 1, 2002 did not have a material effect on the Companys
consolidated financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 will be effective January 1, 2003.
Management does not expect that the adoption of the statement will have a
material effect on the Companys consolidated financial position or results of
operations.

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In August 2001, the FASB issued SFAS No. 144, Accounting of the
Impairment or Disposal of Long-Lived Assets. The adoption of SFAS No. 144 on
January 1, 2002 did not have a material effect on the Companys consolidated
financial position or results of operations.

6. GEOGRAPHIC, SEGMENT, AND SIGNIFICANT CUSTOMER INFORMATION

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. Through and
including the six months ended June 30, 2002, the Company operated 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 related consulting
services and 3) the licensing of the Companys products to network operators.
While the Company expects to perform only limited development services in
connection with the licensing of its products, SmartVR actively pursues
development projects. The disaggregated information reviewed on a product
basis by the CEO is as follows:

|          |                 |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |           |           | 
|--------- | --------------- | -------------- | - | ------------------ | --------- | ---------------- | - | ------- | ------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|          |                 |                |   | THREE MONTHS ENDED |           | SIX MONTHS ENDED
|          |                 |                |   | JUNE 30,           |           | JUNE 30,        
|          |                 |                |   |                    |           |                 
|          |                 |                |   | 2001               |           | 2002             |   | 2001    |         | 2002
|          |                 |                |   |                    |           |                  |   |         |         |     
|Revenues: |                 |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          
|          | Development     |                | $ | 2,273,723          |           |                  | $ | 100,961 |         |      | $ | 4,309,389 |           |  | $ | 7,618,239 |          
|          | Client services |                |   | 52,240             |           |                  |   | 38,192  |         |      |   | 54,426    |           |  |   | 880,692   |          
|          | License         |                |   | 59,143             |           |                  |   | 20,832  |         |      |   | 118,286   |           |  |   | 41,663    |          
|          |                 |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          
|          |                 | Total revenues |   | $                  | 2,385,106 |                  |   | $       | 159,985 |      |   | $         | 4,482,101 |  |   | $         | 8,540,594 | 
|          |                 |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          

Revenues attributable to geographic regions are based upon the origination
of the sales. The Company currently has sales operations in Reykjavik, Iceland
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:

|          |                              |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |           |           | 
|--------- | ---------------------------- | -------------- | - | ------------------ | --------- | ---------------- | - | ------- | ------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|          |                              |                |   | THREE MONTHS ENDED |           | SIX MONTHS ENDED
|          |                              |                |   | JUNE 30,           |           | JUNE 30,        
|          |                              |                |   |                    |           |                 
|          |                              |                |   | 2001               |           | 2002             |   | 2001    |         | 2002
|          |                              |                |   |                    |           |                  |   |         |         |     
|Revenues: |                              |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          
|          | North America                |                | $ | 1,053,363          |           |                  | $ | 38,770  |         |      | $ | 3,097,376 |           |  | $ | 7,309,712 |          
|          | Europe (principally
Iceland) |                |   | 1,331,743          |           |                  |   | 121,215 |         |      |   | 1,384,725 |           |  |   | 1,230,882 |          
|          |                              |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          
|          |                              | Total revenues |   | $                  | 2,385,106 |                  |   | $       | 159,985 |      |   | $         | 4,482,101 |  |   | $         | 8,540,594 | 
|          |                              |                |   |                    |           |                  |   |         |         |      |   |           |           |  |   |          

Ericsson and Microcell were the Companys only significant source of
revenues during the six months ended June 30, 2002. Revenues attributable to
Ericsson comprised 30% and 45% of the total revenues for the three and six
months ended June 30, 2002, respectively. Whereas revenues attributable to
Microcell comprised 0% and 53% of the total revenues for the three and six
months ended June 30, 2002, respectively.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Managements Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-QSB contain
forward-looking statements that involve risks and uncertainties. Words such as
anticipates, expects, intends, plans, believes, seeks, estimates,
may, will, should, could, potential, continues, predicts and
similar expressions and the negatives of such expressions identify such
forward-looking statements. These statements are

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not guarantees of future performance and are subject to numerous assumptions,
risks and uncertainties and a number of factors that could cause actual results
to differ materially from those expressed, forecasted or implied in such
forward looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in our Annual Report on Form
10-KSB and those appearing elsewhere in this Form 10-QSB. You are cautioned
not to place undue reliance on these forward-looking statements, which reflect
managements analysis only as of the date hereof. We assume no obligation to
update these forward-looking statements to reflect actual results or changes in
factors or assumptions affecting such 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 that Ericsson called iPulse based on this technology.
We recently terminated our development relationship with Ericsson and have
been granted a fully paid up, nonexclusive and perpetual license to use the
iPulse technology to develop our own products. We have combined the iPulse
communications platform with the applications that we used to refer to as
mPresence to create an integrated mobile instant messaging and presence
management suite of products, which we now call the OZ® Instant Communication
Solution. We have also developed a mobile group-collaboration product that we
call the OZ® Mobile Communities Solution. We first recognized development
revenues in November 1998, and generated development revenues of approximately
$7.7 million per year in the years ended December 31, 2000 and 2001. We first
recognized license revenues in February 1999, and generated license revenues of
approximately $0.28 million in the year ended December 31, 2000 and
approximately $0.24 million for the year ended December 31, 2001.

We had net income of approximately $2.4 million for the six months ended
June 30, 2002 and we incurred a net loss of approximately $24.6 million for the
year ended December 31, 2001 and $14.0 million for the year ended December 31,
2000. As of June 30, 2002, we had an accumulated deficit of approximately
$49.3 million. Although we recorded net income in the first quarter of 2002,
we expect to operate at a deficit over at least the next nine months. We
believe that our historical operating results are not indicative of future
performance for the reasons discussed below.

In the year ended December 31, 2001 we generated revenues from the
delivery of development services, hosting and license fees. While in the six
months ended June 30, 2002 we have recognized revenues from development
contracts that were terminated during the first quarter of 2002, we do not
expect to continue to provide significant development services or to recognize
significant development revenues in future quarters, except as development
services may be incidental to the licensing of our products. An example of
this kind of development might be the customization of a user interface for a
licensee of one of our products. We may also recognize development revenues
performed by our subsidiary, SmartVR. We expect to generate future revenues
from license fees and Internet-based services that we will provide to mobile
network operators. We expect to begin receiving licensing revenues from
customers of the OZ® Instant Communication Solution and our value-added
services in early 2003. For the reasons discussed in this quarterly report on
Form 10-QSB, however, we have no assurance that we will recognize significant
revenues from these or other products.

Our business strategy relies to a significant extent on the widespread
propagation of OZ ICS (Instant Communication Solution) and OZ MCS (Mobile
Communities Solution) through our relationships with network operators and
integrators and resellers of software solutions to mobile network operators.

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



| |  |  | Licensing fees and/or revenue sharing payments paid by
customers with respect to sales and licenses of OZ ICS and OZ MCS;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fees from client services that we provide to our customers.                                                                  

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Our future success depends on our ability to derive 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 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.

We expect that our gross profit on revenues derived from sales of our
products and services through 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 North America 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;                                                        
|
| |  |  | 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 all but one fiscal quarter since our inception. Our limited operating
history makes it difficult to forecast future operating results. Although we
believe that our revenues from sales of OZ ICS will commence by the first
quarter of 2003 and grow over the following 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 continue to decrease in
the short term as we make further reductions in our work force and further
reduce overhead. Even if we were to achieve profitability in any future
quarter, we may not sustain or increase profitability on a quarterly or annual
basis.

Critical Accounting Policies

The Companys accounting policies are described in Note 1 of the notes to
the consolidated financial statements in the Companys 2001 Annual Report on
Form 10-KSB. As disclosed in Note 1 to the consolidated financial statements,
the preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.

The most significant accounting estimates inherent in the preparation of
the Companys financial statements include estimates associated with its
revenue recognition, evaluation of the recoverability of long-lived assets,
collectibility of accounts receivable, valuation of common stock issued in
non-cash transactions, and assumptions used to determine the fair value of the
Companys stock at the date stock options are granted. Various assumptions and
other factors underlie the

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determination of these significant estimates. The process of determining
significant estimates is fact specific and takes into account factors such as
historical experience, current and expected economic conditions, and in some
cases valuation techniques used by valuation specialists. The Company
constantly re-evaluates these significant factors and makes adjustments where
facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described
above.

RESULTS OF OPERATIONS

Revenues

Our revenues decreased from $2.4 million for the three months ended June
30, 2001 to $0.2 million for the three months ended June 30, 2002 and increased
from $4.5 million for the six months ended June 30, 2001 to $8.5 million for
the six months ended June 30, 2002. The decrease in three-month revenues is
primarily the result of the termination of the development agreements with
Ericsson and Microcell in the first quarter of 2002. The increase in revenues
for the six months ended June 30, 2002 was attributable to the recognition of
payments from Microcell and Ericsson during the three months ended March 31,
2002, which, prior to that time had been recorded on the Companys balance
sheet as deferred revenue. Neither Ericsson nor Microcell is expected to be a
source of revenue in subsequent quarters of 2002.

Cost of Revenues

For periods up to and including the quarter ended March 31, 2002, cost of
revenues consisted of compensation and independent consultant costs for
personnel engaged in our development services operations and related overhead.
As we shift our sales focus to sales and licenses of our own services, we
expect to incur the cost of third-party license and support fees, as well as
the costs associated with operating and maintaining our hosting center and
network operating center in Montreal. Cost of revenues decreased from $1.9
million for the three months ended June 30, 2001 to $0.3 million for the three
months ended June 30, 2002 and from $3.5 million for the six months ended June
30, 2001 to $1.3 million for the six months ended June 30, 2002. As a
percentage of revenues, cost of revenues for the three months ended June 30,
2001 and 2002 was 78% and 157%, respectively. As a percentage of revenues,
cost of revenues for the six months ended June 30, 2001 and 2002 was 78% and
15%, respectively. The primary reason for the decrease is the result of the
termination of the development agreements with Ericsson and Microcell.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
public relations, promotional materials, travel expenses and trade show exhibit
expenses. Sales and marketing expenses remained relatively consistent at $0.6
million for the three months ended June 30, 2001 and 2002. Sales and marketing
expenses represented 27% of revenues for the three months ended June 30, 2001
and 371% of revenues for the three months ended June 30, 2002. Sales and
marketing expenses decreased 33% from $1.7 million, or 39% of revenues, for the
six months ended June 30, 2001, to $1.2 million, or 14% of revenues, for the
six months ended June 30, 2002. These decreases resulted primarily from the
reduction of our sales force and sales activities in Europe.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and
related expenses, accounting, legal and administrative expenses, professional
service fees, stock-based compensation, depreciation and amortization and other
general corporate expenses. General and administrative expenses decreased 74%
from $3.2 million or 136% of revenues, for the three months ended June 30,
2001, to $0.8 million, or 528% of revenues, for the three months ended June 30,
2002. General and administrative expenses decreased 55% from $6.4 million or
142% of revenues, for the six months ended June 30, 2001, to $2.9 million, or
34% of revenues, for the six months ended June 30, 2002. These decreases were
due primarily to the reduction of the number of personnel performing general
and administrative functions, the closing of the Stockholm office in June 2001,
and the write down of the intangible assets

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associated with the acquisition of shares of MCE Holding Corporation, which
reduced our amortization expense.

Research and Development Expenses

Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased 11% from $0.6 million, or 25% of revenues, for the three
months ended June 30, 2001, to $0.7 million, or 408% of revenues, for the three
months ended June 30, 2002. Research and development expenses decreased 4%
from $1.4 million, or 32% of revenues, for the six months ended June 30, 2001,
to $1.4 million, or 16% of revenues, for the six months ended June 30, 2002.
The decrease is primarily due to a reduction in employees combined with a
government research and development assistance payment received and recorded in
the second quarter.

Impairment of Intangible Assets

Our impairment of intangible assets was $3.1 million for the six months
ended June 30, 2002 primarily as a result of the cancellation of the Ericsson
and Microcell development contracts in January and February 2002. We
recognized the impairment of these assets in the three months ended March 31,
2002.

Contract Termination Fee

Contract termination fee was $3.9 million for the six months ended June
30, 2002 as a result of the cancellation of the Ericsson development contract
in January 2002. We recognized the contract termination fee in the three
months ended March 31, 2002.

Interest Income

Interest income decreased from $11,049 for the three months ended June 30,
2001 to $958 for the three months ended June 30, 2002 and from $53,164 for the
six months ended June 30, 2001 to $3,313 for the six months ended June 30,
2002. The decrease is due to the lower cash balances held by us in the three
and six months ended June 30, 2002.

Interest Expense

Interest expense decreased from $42,616 for the three months ended June
30, 2001 to $21,788 for the three months ended June 30, 2002 and from $63,168
for the six months ended June 30, 2001 to $51,334 for the six months ended June
30, 2002. The decrease is due to the reduction of notes payable in connection
with the sale of our building in Iceland.

Other Income (Expense), Net

Other income (expense), net changed from income of $140,319 for the three
months ended June 30, 2001 to a net expense of $40,706 for the three months
ended June 30, 2002. Other income (expense), net changed from a net expense of
$205,873 for the six months ended June 30, 2001 to a net expense of $148,707
for the six months ended June 30, 2002. The change is primarily the result of
changes in the currency exchange rates of the U.S. dollar relative to the
Icelandic krona and Canadian dollar.

Income Taxes

At December 31, 2000 and 2001 we had deferred tax assets of $9.7 million
and $14.1 million respectively. Due to the uncertain nature of the ultimate
realization, we have recorded a valuation allowance against deferred tax
assets. At December 31, 2001 we had net operating loss carryforwards of
approximately $34.8 million, $19.0 million and $5.1 million for federal, state
and foreign income tax purposes, respectively. These carryforwards will expire
from year 2002 through 2020.

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Liquidity and Capital Resources

Our primary liquidity needs are for working capital, capital expenditures
and investments, and, to a lesser extent, debt service. Our primary sources of
liquidity are cash flows from operations, the sale of investment assets and
issuances of notes payable. As described below, the notes payable have been
issued by our SmartVR, Inc. subsidiary. These notes payable are not guaranteed
by the parent company, OZ Communications, Inc.

Net cash provided by operating activities was $1.6 million for the six
months ended June 30, 2002. The net cash provided by operating activities for
the six months ended June 30, 2002 was attributable primarily to the receipt of
payments from Ericsson pursuant to our agreement to terminate the iPulse
development relationship, offset by ongoing operating costs.

Net cash provided by investing activities was $0.4 million for the six
months ended June 30, 2002, primarily reflecting the sale of our building in
Iceland during the three months ended June 30, 2002.

Net cash used in financing activities was $0.4, which represented the
repayment of the note payable for our building in Iceland.

As of June 30, 2002, our principal commitments consisted of obligations
outstanding under operating leases and the convertible promissory notes issued
by our SmartVR, Inc. subsidiary, which are not guaranteed by the parent
company, OZ Communications, Inc. We currently have no material commitments for
capital expenditures.

We are limiting discretionary expenses in all categories and plan to halt
our growth. We do not believe that our operating requirements for the next six
months can be funded from cash provided by operations and cash reserves.
Therefore, we intend to seek additional debt or equity financing through
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 have been prepared assuming that we will
continue as a going concern. Our historical 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. If additional funds are
raised through the issuance of debt or preferred stock securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and terms of any debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our shareholders and additional financing may
not be available in amounts or on terms acceptable to us, if at all. If we
are unable to obtain this additional financing, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS  NOT APPLICABLE.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS  NOT APPLICABLE.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES  NOT APPLICABLE.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  NOT APPLICABLE.




ITEM 5. OTHER INFORMATION  NOT APPLICABLE.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

a. Exhibits

| |      |  |                                                                                                            
| | ---- |  | -----------------------------------------------------------------------------------------------------------
| | 99.1 |  | Certification pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
| | 99.1 |  | Certification pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002.




SIGNATURE

In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

| |                                                                             |                         
| | --------------------------------------------------------------------------- | ------------------------
| | OZ COMMUNICATIONS, INC.
a California corporation                           
|
| | By:                                                                         | /S/ STÉPHANE ARCHAMBAULT
| |                                                                             |                         
| | Stéphane Archambault
Treasurer
(Principal Financial and Accounting Officer)

Date: August 13, 2002

17