##### 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 March 31, 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 registrant as specified in its charter)

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

Snorrabraut 54
IS-105 Reykjavik, Iceland
(Address of principal executive offices, including zip code)

011 (354) 535-0000
(Registrants telephone number, including area code)



---



Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [   ]

As of March 31, 2002, there were 85,878,436 shares of the registrants
Common Stock outstanding.



1



---

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 (LOSS)              
|                              |                                                                                               | 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                    



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##### Table of Contents



INDEX

|                              |  |         |                                                                                                                          |  |   
|----------------------------- |  | ------- | ------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I. FINANCIAL INFORMATION |  |        
|                             
|                             
|                             
|                             
|                              |  | ITEM 1. | FINANCIAL STATEMENTS                                                                                                     |  |   
|                             
|                             
|                             
|                             
|                              |  |         | Consolidated Balance Sheets at December 31, 2001 and
March 31, 2002 (unaudited)                                          |  | 3 
|                             
|                             
|                             
|                             
|                              |  |         | Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2002 (unaudited)                     |  | 4 
|                             
|                             
|                             
|                             
|                              |  |         | Consolidated Statements of Shareholders Equity (Deficit) for
the three months ended March 31, 2001 and 2002 (unaudited) |  | 5 
|                             
|                             
|                             
|                             
|                              |  |         | Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2002 (unaudited)                     |  | 6 
|                             
|                             
|                             
|                             
|                              |  |         | Consolidated Statements of Comprehensive Income (Loss) for the
three months ended March 31, 2001 and 2002 (unaudited)    |  | 7 
|                             
|                             
|                             
|                             
|                              |  |         | Notes to Consolidated Financial Statements                                                                               |  | 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                                                                                         |  | 16
|                             
|                             
|                             
|                             
|SIGNATURE                     |  | 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, |            | March 31,
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |          
|                                                     |                                                                                                     |                                                                                            |                           |             | 2001         |            | 2002     
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |          
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           | (unaudited)
|Assets                                               |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|Current assets:                                      |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     | Cash and cash equivalents                                                                  |                           | $           | 651,265      |            |           | $           | 2,271,191  |          
|                                                     |                                                                                                     | Trade accounts receivable, net of allowance
for doubtful accounts of $197,250 and
$204,130 |                           |             | 58,894       |            |           |             | 73,476     |          
|                                                     |                                                                                                     | Accounts receivable from shareholders                                                      |                           |             | 3,033,953    |            |           |             | 1,668,174  |          
|                                                     |                                                                                                     | Prepaid expenses and other current assets                                                  |                           |             | 215,995      |            |           |             | 139,449    |          
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                            | Total current assets      |             |              | 3,960,107  |           |             |            | 4,152,290 | 
|Property and equipment, net                          |                                                                                                     |                                                                                            | 2,883,093                 |             |              |            | 2,632,843 |            
|Intangibles, net                                     |                                                                                                     |                                                                                            | 3,739,582                 |             |              |            |          |            
|Other assets                                         |                                                                                                     |                                                                                            | 161,595                   |             |              |            | 161,795   |            
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                            | Total assets              |             | $            | 10,744,377 |           |             | $          | 6,946,928 | 
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|Liabilities and Shareholders Equity (Deficit)       |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|Current liabilities:                                 |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     | Trade accounts payable                                                                     |                           | $           | 764,966      |            |           | $           | 111,213    |          
|                                                     |                                                                                                     | Accrued liabilities                                                                        |                           |             | 860,685      |            |           |             | 1,005,149  |          
|                                                     |                                                                                                     | Deferred revenue                                                                           |                           |             | 8,348,974    |            |           |             | 88,143     |          
|                                                     |                                                                                                     | Current portion of notes payable                                                           |                           |             | 775,941      |            |           |             | 806,816    |          
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                            | Total current liabilities |             |              | 10,750,566 |           |             |            | 2,011,321 | 
|Notes payable                                        |                                                                                                     |                                                                                            | 363,624                   |             |              |            | 378,465   |            
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|                                                     |                                                                                                     |                                                                                            | Total liabilities         |             |              | 11,114,190 |           |             |            | 2,389,786 | 
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|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  |              |            |           | 36,165,712  |           
|                                                     | Notes receivable from shareholders                                                                  |                                                                                            |                           | (353,900    | )            |            |           | (353,900    | )         
|                                                     | Deferred compensation                                                                               |                                                                                            |                           | (2,305,848  | )            |            |           | (1,882,052  | )         
|                                                     | Accumulated other comprehensive income -
cumulative translation adjustment                          |                                                                                            |                           | 704,149     |              |            |           | 662,919     |           
|                                                     | Accumulated deficit                                                                                 |                                                                                            |                           | (51,731,577 | )            |            |           | (47,050,767 | )         
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|Total shareholders equity (deficit)                 |                                                                                                     |                                                                                            | (4,869,813                | )           |              |            | 4,557,142 |            
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            
|Total liabilities and shareholders equity (deficit) |                                                                                                     | $                                                                                          | 10,744,377                |             |              | $          | 6,946,928 |            
|                                                     |                                                                                                     |                                                                                            |                           |             |              |            |           |            

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
|                             |                                                                                          |                          |           | ENDED MARCH 31,     
|                             |                                                                                          |                          |           |                     
|                             |                                                                                          |                          |           | 2001                 |            | 2002
|                             |                                                                                          |                          |           |                      |            |     
|REVENUES                     |                                                                                          |                          |           |                      |            |      |           |          
|                             | Development services                                                                     |                          | $         | 2,035,666            |            |      | $         | 7,517,278 |          
|                             | Client services                                                                          |                          |           | 2,186                |            |      |           | 842,500   |          
|                             | License fees                                                                             |                          |           | 59,143               |            |      |           | 20,831    |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             |                                                                                          | Total revenues           |           |                      | 2,096,995  |      |           |           | 8,380,609 | 
|COST OF REVENUES             |                                                                                          |                          | 1,634,447 |                      |            |      | 1,007,552 |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|GROSS PROFIT                 |                                                                                          |                          | 462,548   |                      |            |      | 7,373,057 |          
|OPERATING EXPENSES           |                                                                                          |                          |           |                      |            |      |           |          
|                             | Sales and marketing                                                                      |                          |           | 1,099,104            |            |      |           | 566,103   |          
|                             | General and administrative (including
stock-based compensation of $435,609 and
$423,796) |                          |           | 3,127,798            |            |      |           | 2,033,303 |          
|                             | Research and development                                                                 |                          |           | 841,995              |            |      |           | 712,580   |          
|                             | Impairment loss on intangible assets                                                     |                          |           |                     |            |      |           | 3,141,348 |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             |                                                                                          | Total operating expenses |           |                      | 5,068,897  |      |           |           | 6,453,334 | 
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             |                                                                                          | Operating income (loss)  |           |                      | (4,606,349 | )    |           |           | 919,723   | 
|                             |                                                                                          |                          |           |                      |            |      |           |          
|Contract termination fee     |                                                                                          |                          |          |                      |            |      | 3,896,279 |          
|Interest income              |                                                                                          |                          | 42,115    |                      |            |      | 2,355     |          
|Interest expense             |                                                                                          |                          | (20,552   | )                    |            |      | (29,546   | )        
|Other expense, net           |                                                                                          |                          | (346,192  | )                    |            |      | (108,001  | )        
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             | Income (loss) before income taxes and
minority interest                                  |                          |           | (4,930,978           | )          |      |           | 4,680,810 |          
|Income taxes                 |                                                                                          |                          |          |                      |            |      |          |          
|Minority interest            |                                                                                          |                          | 7,563     |                      |            |      |          |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             | Net income (loss)                                                                        |                          | $         | (4,923,415           | )          |      | $         | 4,680,810 |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|NET INCOME (LOSS) PER SHARE: |                                                                                          |                          |           |                      |            |      |           |          
|                             | Basic                                                                                    |                          | $         | (0.05                | )          |      | $         | 0.05      |          
|                             |                                                                                          |                          |           |                      |            |      |           |          
|                             | Diluted                                                                                  |                          | $         | (0.05                | )          |      | $         | 0.03      |          
|                             |                                                                                          |                          |           |                      |            |      |           |          

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 THREE MONTHS ENDED MARCH 31,
|                                                                            |                                                                                                                      |                                                      |                            |            |                                     
|                                                                            |                                                                                                                      |                                                      |                            |            | 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                                                                        |                                                      |                            | (150,000   | )                                    |  |        | (195,000   | )           |             |        | (300,000   | )          |  |   | (390,000   | )          
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            |                                                                                                                      | Balance, end of period                               |                            |            | 14,530,964                           |  |        | $          | 16,884,446  |             |        |            | 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                                                                                     |                                                      |                            |           |                                      |  |        |           |             |             |        | 90,000     |            |  |   | 9,000      |            
|                                                                            | Common stock issued for
professional
services rendered                                                               |                                                      |                            |           |                                      |  |        |           |             |             |        | 100,000    |            |  |   | 384,495    |            
|                                                                            | Conversion of preferred stock
to common stock                                                                        |                                                      |                            | 300,000    |                                      |  |        | 195,000    |             |             |        | 600,000    |            |  |   | 390,000    |            
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            | Balance, end of period                                                                                               |                                                      |                            | 89,779,596 |                                      |  | $      | 31,924,117 |             |             |        | 85,878,436 |            |  | $ | 37,024,496 |            
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|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                                                                                |                                                      |                            |            |                                      |  |        | 435,609    |             |             |        |            |            |  |   | 423,796    |            
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            | Balance, end of period                                                                                               |                                                      |                            |            |                                      |  | $      | (3,596,958 | )           |             |        |            |            |  | $ | (1,882,052 | )          
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|Accumulated Other Comprehensive
Income  Cumulative Translation
Adjustment: |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            | Balance, beginning of period                                                                                         |                                                      |                            |            |                                      |  | $      | 667,810    |             |             |        |            |            |  | $ | 704,149    |            
|                                                                            |                                                                                                                      | Other comprehensive income -
Translation adjustments |                            |            |                                      |  |        |            | 541,005     |             |        |            |            |  |   |            | (41,230     | )          
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            |                                                                                                                      | Balance, end of period                               |                            |            |                                      |  |        | $          | 1,208,815   |             |        |            |            |  |   | $          | 662,919     |            
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            | Accumulated Deficit:                                                                                                 |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |            |            
|                                                                            |                                                                                                                      | Balance, beginning of period                         |                            |            |                                      |  |        | $          | (27,088,205 | )           |        |            |            |  |   | $          | (51,731,577 | )          
|                                                                            |                                                                                                                      |                                                      | Net income (loss)          |            |                                      |  |        |            |             | (4,923,415  | )      |            |            |  |   |            |             | 4,680,810   |  
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            |                                                                                                                      |                                                      | Balance, end of period     |            |                                      |  |        |            | $           | (32,011,620 | )      |            |            |  |   |            | $           | (47,050,767 | )
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           
|                                                                            |                                                                                                                      |                                                      | Total shareholders equity |            |                                      |  |        |            | $           | 14,054,900  |        |            |            |  |   |            | $           | 4,557,142   |  
|                                                                            |                                                                                                                      |                                                      |                            |            |                                      |  |        |            |             |             |        |            |            |  |   |           

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



5



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##### Table of Contents






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

|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |           |   |            |  
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------- | ---------- | -------------------- | --------- | --------- | --------- | - | ---------- | -
|                                                                         |                                                                                                    |   |                                                            |            | FOR THE THREE MONTHS
|                                                                         |                                                                                                    |   |                                                            |            | ENDED MARCH 31,     
|                                                                         |                                                                                                    |   |                                                            |            |                     
|                                                                         |                                                                                                    |   |                                                            |            | 2001                 |           | 2002     
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |          
|Cash flows from operating activities:                                    |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Net income (loss)                                                                                  |   | $                                                          | (4,923,415 | )                    |           | $         | 4,680,810 |  
|                                                                         | Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |   |                                                            |            |                      |           |           |           |  
|                                                                         |                                                                                                    |   | Depreciation and amortization                              |            |                      | 1,129,825 |           |           |   | 930,476    |  
|                                                                         |                                                                                                    |   | Impairment loss on intangible assets                       |            |                      |          |           |           |   | 3,141,348  |  
|                                                                         |                                                                                                    |   | Minority interest                                          |            |                      | (7,563    | )         |           |   |           |  
|                                                                         |                                                                                                    |   | Amortization of deferred stock-based
compensation          |            |                      | 435,609   |           |           |   | 423,796    |  
|                                                                         |                                                                                                    |   | Issuance of notes payable for employment
services
rendered |            |                      |          |           |           |   | 30,000     |  
|                                                                         | Changes in operating assets and liabilities:                                                       |   |                                                            |            |                      |           |           |           |  
|                                                                         |                                                                                                    |   | Accounts receivable                                        |            |                      | 1,029,442 |           |           |   | 821,281    |  
|                                                                         |                                                                                                    |   | Prepaid expenses and other assets                          |            |                      | (84,588   | )         |           |   | 76,346     |  
|                                                                         |                                                                                                    |   | Accounts payable                                           |            |                      | (237,154  | )         |           |   | (269,258   | )
|                                                                         |                                                                                                    |   | Accrued liabilities                                        |            |                      | 183,464   |           |           |   | 144,464    |  
|                                                                         |                                                                                                    |   | Deferred revenue                                           |            |                      | 1,241,671 |           |           |   | (8,260,831 | )
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Net cash provided by (used in) operating activities                                                |   |                                                            | (1,232,709 | )                    |           |           | 1,718,432 |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Cash flows from investing activities:                                    |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Purchases of property and equipment                                                                |   |                                                            | (425,712   | )                    |           |           | (66,688   | )
|                                                                         | Proceeds from sales of property and equipment                                                      |   |                                                            |           |                      |           |           | 5,197     |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Net cash used in investing activities                                                              |   |                                                            | (425,712   | )                    |           |           | (61,491   | )
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Cash flows from financing activities:                                    |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Issuance of notes payable                                                                          |   |                                                            | 500,000    |                      |           |           |          |  
|                                                                         | Exercise of employee stock options                                                                 |   |                                                            |           |                      |           |           | 9,000     |  
|                                                                         | Repayments of notes payable                                                                        |   |                                                            | (6,792     | )                    |           |           | (4,785    | )
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Net cash provided by financing activities                                                          |   |                                                            | 493,208    |                      |           |           | 4,215     |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Effect of currency exchange rates on cash                                |                                                                                                    |   | 541,005                                                    |            |                      |           | (41,230   | )        
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Net increase (decrease) in cash                                                                    |   |                                                            | (624,208   | )                    |           |           | 1,619,926 |  
|Cash and cash equivalents at beginning of period                         |                                                                                                    |   | 3,559,559                                                  |            |                      |           | 651,265   |          
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Cash and cash equivalents at end of period                               |                                                                                                    | $ | 2,935,351                                                  |            |                      | $         | 2,271,191 |          
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Supplemental cash flow information:                                      |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Cash paid for interest                                                                             |   | $                                                          | 6,742      |                      |           | $         | 6,690     |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|Supplemental disclosures of non-cash investing and
financing activities: |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Conversion of preferred stock to common stock                                                      |   | $                                                          | 195,000    |                      |           | $         | 390,000   |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Common stock issued for professional services                                                      |   | $                                                          |           |                      |           | $         | 384,495   |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          
|                                                                         | Common
stock reacquired in connection withtermination of Microcell development contract            |   | $                                                          |           |                      |           | $         | 529,916   |  
|                                                                         |                                                                                                    |   |                                                            |            |                      |           |           |          

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



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

|                                   |                                         |   |                      |         |      |   |           |         |  
|---------------------------------- | --------------------------------------- | - | -------------------- | ------- | ---- | - | --------- | ------- | -
|                                   |                                         |   | FOR THE THREE MONTHS
|                                   |                                         |   | ENDED MARCH 31,     
|                                   |                                         |   |                     
|                                   |                                         |   | 2001                 |         | 2002
|                                   |                                         |   |                      |         |     
|Net income (loss)                  |                                         | $ | (4,923,415           | )       |      | $ | 4,680,810 |        
|Other comprehensive income
(loss): |                                         |   |                      |         |      |   |           |        
|                                   | Foreign currency
translation adjustment |   |                      | 541,005 |      |   |           | (41,230 | )
|                                   |                                         |   |                      |         |      |   |           |        
|Comprehensive income (loss)        |                                         | $ | (4,382,410           | )       |      | $ | 4,639,580 |        
|                                   |                                         |   |                      |         |      |   |           |        

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



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OZ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 for a fair
statement of the interim results of operations.

The year-end balance sheet data was 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 12
months can be funded from cash provided by operations and cash reserves. As of
March 31, 2002, cash reserves were $2.3 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 and plans to halt its growth. 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.

Certain 2001 amounts have been reclassified to conform with the 2002
presentation.



|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 2001 diluted net loss per share calculations
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 March
31, 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 three months ended
March 31, 2002 included preferred shares and the put option on redeemable
common stock.



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

|                                                     |         |   |                              |            |      |   |           |             | 
|---------------------------------------------------- | ------- | - | ---------------------------- | ---------- | ---- | - | --------- | ----------- | 
|                                                     |         |   | THREE MONTHS ENDED MARCH 31,
|                                                     |         |   |                             
|                                                     |         |   | 2001                         |            | 2002
|                                                     |         |   |                              |            |     
|Net income (loss)                                    |         | $ | (4,923,415                   | )          |      | $ | 4,680,810 |            
|                                                     |         |   |                              |            |      |   |           |            
|Weighted average outstanding shares of common
stock: |         |   |                              |            |      |   |           |            
|                                                     | Basic   |   |                              | 89,619,596 |      |   |           | 88,741,330  | 
|                                                     | Diluted |   |                              | 89,619,596 |      |   |           | 139,279,782 | 
|Net income (loss) per share:                         |         |   |                              |            |      |   |           |            
|                                                     | Basic   |   | $                            | (0.05      | )    |   | $         | 0.05        | 
|                                                     |         |   |                              |            |      |   |           |            
|                                                     | Diluted |   | $                            | (0.05      | )    |   | $         | 0.03        | 
|                                                     |         |   |                              |            |      |   |           |            



|3. |  | RELATED PARTY TRANSACTIONS
|-- |  | --------------------------

On January 24, 2002 OZ 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 OZ and Ericsson to develop and
market the iPulse software. Under the terms of the agreement Ericsson paid OZ
an aggregate of $4.35 million during the quarter ended March 31, 2002 and
irrevocably (a) assigned to OZ 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 OZ 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. OZ 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 OZ and Ericsson except for the shareholder rights
agreement made and entered into as of February 4, 1999 by and between OZ and
Ericsson Inc. and certain shareholders of OZ.

As a result of the termination of the Ericsson agreements, OZ has
recognized a contract termination fee, revenues from the Ericsson Canada, Inc.
development agreement, and an impairment loss on the related intangibles that
OZ recorded in connection with the acquisition of the shares of MCE Holding
Corporation in November 2000. In the quarter ended March 31, 2002, OZ
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 OZ 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 OZ as
its preferred development resource in the field of wireless Internet messaging
services, terminated Microcells right to require OZ to redeem Microcells
shares of OZ 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 OZ, 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 OZ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 OZs 2002 annual shareholders meeting. In
partial consideration for OZs agreement to make the amendments, Microcell has
surrendered to OZ 5,299,160 shares of OZs common stock for cancellation.

In the quarter ended March 31, 2002, OZ 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



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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 OZ as part of the amendments.



|4. |  | 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.

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.



|5. |  | 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 three months ended March 31, 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 Internet businesses,
and related consulting services and 3) the licensing of the Companys core
technologies to Ericsson and the licensing of the Companys products to network
operators and Internet businesses. The disaggregated information reviewed on a
product basis by the CEO is as follows:

|          |                 |                |   |                    |           |      |   |           |           | 
|--------- | --------------- | -------------- | - | ------------------ | --------- | ---- | - | --------- | --------- | 
|          |                 |                |   | THREE MONTHS ENDED
|          |                 |                |   | MARCH 31,         
|          |                 |                |   |                   
|          |                 |                |   | 2001               |           | 2002
|          |                 |                |   |                    |           |     
|Revenues: |                 |                |   |                    |           |      |   |          
|          | Development     |                | $ | 2,035,666          |           |      | $ | 7,517,278 |          
|          | Client services |                |   | 2,186              |           |      |   | 842,500   |          
|          | License         |                |   | 59,143             |           |      |   | 20,831    |          
|          |                 |                |   |                    |           |      |   |          
|          |                 | Total revenues |   | $                  | 2,096,995 |      |   | $         | 8,380,609 | 
|          |                 |                |   |                    |           |      |   |          

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



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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
|          |                              |                |   | MARCH 31,         
|          |                              |                |   |                   
|          |                              |                |   | 2001               |           | 2002
|          |                              |                |   |                    |           |     
|Revenues: |                              |                |   |                    |           |      |   |          
|          | North America                |                | $ | 2,044,013          |           |      | $ | 7,270,942 |          
|          | Europe (principally Iceland) |                |   | 52,982             |           |      |   | 1,109,667 |          
|          |                              |                |   |                    |           |      |   |          
|          |                              | Total revenues |   | $                  | 2,096,995 |      |   | $         | 8,380,609 | 
|          |                              |                |   |                    |           |      |   |          

Ericsson was the Companys only significant source of revenues during the
three months ended March 31, 2001 and Ericsson and Microcell were the only
significant sources of revenues during the three months ended March 31, 2002.
Revenues attributable to Ericsson comprised 99.4% and 45.0% of the total
revenues for the three months ended March 31, 2001 and 2002, respectively.
Revenues attributable to Microcell comprised 53.5% of the total revenues for
the three months ended March 31, 2002.




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 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 $4.7 million for the three months
ended March 31, 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 March 31, 2002, we had an accumulated deficit of
approximately $47.1 million. Although we recorded net income in the first
quarter of 2002,



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we expect to operate at a deficit over at least the next six 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
quarter ended March 31, 2002 we have recognized revenues from development
contracts that have terminated during the quarter, we do not expect to continue
to provide significant development services or to recognize significant
development revenues in future quarters. 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 late 2002 or 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 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.                                                                  

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



| |  |  | failure by us and/or third parties to develop localized
content and applications that are used with our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | costs of localizing our products for foreign markets;                                                            
|
| |  |  | difficulties in staffing and managing foreign operations;                                                        
|
| |  |  | longer accounts receivable collection time;                                                                      
|
| |  |  | political and economic instability;                                                                              
|
| |  |  | fluctuations in foreign currency exchange rates;                                                                 
|
| |  |  | reduced protection of intellectual property rights in some foreign countries;                                    
|
| |  |  | contractual provisions governed by foreign laws;                                                                 
|
| |  |  | export restrictions on encryption and other technologies;                                                        
|
| |  |  | 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



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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 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 increased from $2.0 million for the three months ended March
31, 2001 to $8.4 million for the three months ended March 31, 2002. The
increase in revenues was attributable to the recognition of payments from
Microcell and Ericsson that until this quarter were recorded on the Companys
balance sheet as deferred revenue but have now been recognized as revenue as a
result of the termination of the development agreements under which the
services were performed. In the year ended December 31, 2001, we performed
services under a second development contract with Ericsson and a new
development agreement with Microcell, although, as mentioned above, we received
payments totaling $5.25 million for consulting and development work performed
for Microcell and Ericsson that were not recognized as revenues under generally
accepted accounting principles in the United States of America. Neither
Ericsson nor Microcell is expected to be a source of revenue in subsequent
quarters of 2002.

Cost of Revenues

Cost of revenues consists of compensation and independent consultant costs
for personnel engaged in our developing services operations and related
overhead. Cost of revenues decreased from $1.6 million for the three months
ended March 31, 2001 to $1.0 million for the three months ended March 31, 2002.
As a percentage of revenues, cost of revenues for the three months ended March
31, 2001 and 2002 was 78% and 12%, respectively. The primary reason for the
decrease is the result of the termination of the development agreements with
Ericsson and Microcell. 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.



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Research and Development Expenses

Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses decreased from $0.8 million, or 40.2% of revenues, for the three
months ended March 31, 2001, to $0.7 million, or 8.5% of revenues, for the
three months ended March 31, 2002. The decrease is primarily due to expenses
recognized in connection with certain work performed for Microcell in the three
months ended March 31, 2001 that was not then recognizable as cost of revenues
because the payments associated with the work was not then recognizable as
revenue under generally accepted accounting principles in the United States of
America. As a result of the increased emphasis on the development of our own
products as we acquired the iPulse technology from Ericsson and began focusing
on the development our own products, we expect research and development
expenses to increase in the short-term.

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 decreased 48.5% from $1.1 million, or
52.4% of revenues, for the three months ended March 31, 2001, to $0.6 million,
or 6.8% of revenues, for the three months ended March 31, 2002. These
decreases resulted from the reduction of personnel in our sales and marketing
organizations and the closing of our Stockholm sales office in June 2001.

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
35.0% from $3.1 million or 149.2% of revenues, for the three months ended March
31, 2001, to $2.0 million, or 24.3% of revenues, for the three months ended
March 31, 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, the write down of the intangible
assets associated with the acquisition of shares of MCE Holding Corporation,
which reduced our amortization expense, and the initial effects of recent
reductions in general and administrative personnel.

Impairment of Intangible Assets

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

Contract Termination Fee

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

Interest Income (Expense), Net

Interest income, net changed from income of $0.02 million for the three
months ended March 31, 2001 to a net expense of $0.03 for the three months
ended March 31, 2002. The decrease is primarily the result of the decrease of
cash and cash equivalents for the three months ended March 31, 2001 compared to
2002.

Other Expense, Net

Other expense, net changed from a net expense of $0.3 million for the
three months ended March 31, 2001 to a net expense of $0.1 million for the
three months ended March 31, 2002. The change is primarily the result of
changes in the currency exchange rates of the U.S. dollar relative to the
Icelandic krona.



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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.

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 and issuances of notes payable.

Net cash provided by operating activities was $1.7 million for the three
months ended March 31, 2002. The net cash provided by operating activities for
the three months ended March 31, 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 used in investing activities was $0.06 million for the three
months ended March 31, 2002, primarily reflecting net purchases of property and
equipment.

Net cash provided by financing activities was $4,215, which represented
cash received from the exercise of stock options offset by repayments of notes
payable.

As of March 31, 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. Although we have no material commitments for
capital expenditures, we expect to increase capital expenditures and lease
commitments consistent with our anticipated growth in operations,
infrastructure and personnel. We also may increase our capital expenditures as
we expand into additional international markets.

Through our Icelandic subsidiary, OZ hf., we have outstanding long-term
notes payable to Búnaðarbanki Íslands, an Icelandic bank, and to the seller of
our building at Snorrabraut 54 in Reykjavik, Iceland. We have pledged our
building as collateral for these loans. The amount due on these loans at March
31, 2002, was approximately $398,000. The loans accrue interest at rates
between 6.0% and 7.35% per annum. We have borrowed funds in Iceland, which are
secured by our facility at Snorrabraut 54, Reykjavik. While the interest rates
on these loans are fixed, the original principal balance is adjusted monthly
for fluctuations in the Icelandic consumer price index, in accordance with the
terms of the note agreement. Accordingly, we are exposed to risks in changes
in the Icelandic consumer price index, which tends to rise quickly in
inflationary economic conditions. The change in the consumer price index
during calendar year 2000 and 2001 was 4.2% and 8.6%, respectively.

We are limiting discretionary expenses in all categories and plan to halt
our growth, except for some expansion in our Montreal office, which may be
offset from some reductions in our Reykjavik office. We do not believe that
our operating requirements for the next 12 months can be funded from cash
provided by operations and cash reserves. Therefore, we intend to seek
additional debt or equity financing through private placements of our
securities. We cannot be sure that any such financing will be obtained or, if
obtained, will be adequate to meet our needs. Our consolidated financial
statements for the year ended December 31, 2001 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. We cannot be sure that any such financing will be obtained or,
if obtained, will be adequate to meet our needs. If we are unable to obtain
this



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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.




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



| | (a) |  | Exhibits           
| | --- |  | -------------------
|
| |     |  | None.              
|
| | (b) |  | Reports on Form 8-K
|
| |     |  | None.              



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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/ JÓN L. ÁRNASON
| |                                                                                    
| | Jón L. Árnason
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: April 30, 2002



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