The Company's adjusted EBITDA (earnings/loss from continuing operations, excluding interest income (expense), income taxes, depreciation and amortization), was a loss of $71,021 for the quarter ended June 30, 2003 and a loss of $68,004 for the six months ended June 30, 2003 compared with a loss of $368,683 for the quarter ended June 30, 2002 and a loss of $783,829 for the six months ended June 30, 2002. The decrease in the adjusted EBITDA loss was primarily due to significant increases in our revenue base coupled with only modest increases in our expense structure. Adjusted EBITDA is not a measure used in financial statements reported in accordance with generally accepted accounting principals, does not represent funds available for discretionary use and is not intended to represent cash flow from operations as measured under generally accepted accounting principles. Adjusted EBITDA should not be considered as an alternative to net loss or net cash us ed in operating activities. The Company's calculation of adjusted EBITDA may not be comparable to the computation of similarly titled measures of other companies.

      We use adjusted EBITDA as a measure of our operating performance. In addition, we believe that adjusted EBITDA may be useful to existing and potential creditors, and to any analysts and investors that follow our performance, because it is one measure of the income generated that is available to service debt and capital leases.

      The Company's net loss from continuing operations was a loss of $255,988 for the quarter ended June 30, 2003 and a loss of $423,362 for the six months ended June 30, 2003 compared with a loss of $621,524 for the quarter ended June 30, 2002 and a loss of $1,201,376 for the six months ended June 30, 2002. Reconciliation of net loss from continuing operations to adjusted EBITDA is as follows:

      On January 22, 2002, the Securities and Exchange Commission issued FR-61, Commission Statement About Management's Discussion and Analysis of Financial Condition and Results of Operations. The release sets forth certain views of the Commission regarding disclosure that should be considered by registrants. Disclosure matters addressed by the release are liquidity and capital resources including off-balance sheet arrangements, certain trading activities that include non-exchange traded contracts accounted for at fair value, and effects of transactions with related and certain other parties. The following table sets forth the information in a format described in the release with regard to disclosures about contractual obligations and commercial commitments.

      The following table discloses aggregate information about our contractual obligations including long-term debt, operating and capital lease payments, office lease payments and contractual service agreements, and the periods in which payments are due as of June 30, 2003:

      As of June 30, 2003, the Company had $195,686 in cash and cash equivalents. This represents a decrease of $41,825 compared to December 31, 2002. Cash used during the six-months ended June 30, 2003 includes approximately $321,178 used in operations, as well as $245,672 used in investing activities and $525,025 provided by financing activities. Of the $525,025 of cash provided by financing activities, $691,000 represents cash received from the proceeds of the Dolphin Notes with a principal amount of $691,000 issued on January 16, 2003 to Dolphin (see the subsection entitled "Certain Factors" below for information on such transaction.). The $165,975 difference between the $691,000 of cash received and the $525,025 of cash provided by financing activities represents payments on capital leases.

      We anticipate making capital expenditures between $150,000 and $300,000 during the remainder of calendar 2003, generally for data center equipment, customer servers and related software. During the prior quarter, we obtained an equipment lease line of credit in the amount of $250,000 from a financing company. As of June 30, 2003, we had used $27,275 of the $250,000 available on such lease line of credit.

      On June 30, 2003 we obtained two accounts receivable factoring lines of credit with Alliance Bank that allow us to sell up to an aggregate of $1,000,000 in accounts receivable to the bank, thereby immediately monetizing a large non-cash asset. We anticipate that this factoring line will provide us with between $200,000 and $300,000 of cash between now and the end of the calendar year.

      We expect that the cash that we have at June 30, 2003, together with recurring operating revenues and the cash to be advanced from our AR factoring line, should be sufficient to meet our current and future obligations until the time that the Company can sustain itself on its own internally-generated cash flow. However, we are currently actively evaluating various debt and equity financing alternatives that might be available to us, the proceeds of which would be used for working capital and general corporate requirements. If, for whatever reason our cash on hand at June 30, 2003 is not sufficient, we would need to obtain such additional debt or equity financing. If we are unable to obtain additional financing at a reasonable cost, or at all, we could make some cuts in our expense model to the point where we would be break-even from an operating cash flow perspective. By making these cuts, we would be able to continue operating the business; however, such actions would slow our growth and could have a material adverse effect on future operations and financial results.

      As previously mentioned, although we believe that our cash reserves at June 30, 2003 should be adequate (particularly in light of our option to modify the expense structure of the business to achieve a break-even cash flow level), certain events, including the following, may cause those cash balances to be insufficient:

      If any of these, or a combination of any of these were to occur, our available cash balances at June 30, 2003 might not be sufficient, and in that event, we would need to obtain additional debt or equity financing. There can be no assurance that we would be able to obtain additional debt or equity financing on terms that would be agreeable to us, or at all. See also the risks discussed in "Certain Factors" below.

      In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the financial and accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 requires that intangible assets be amortized over their useful lives unless that life is determined to be indefinite. Intangible assets shall be evaluated annually to determine whether events and circumstances continue to support an indefinite useful life. An intangible asset that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company adopted SFAS No. 142 on January 1, 2002, which eliminated goodwill amortization starting in fiscal year 2002.

      VitalStream, Inc. (the primary operating subsidiary of VitalStream Holdings) was founded in March 2000 and, accordingly, our current business has a limited operating history upon which an evaluation of our prospects and us can be based. VitalStream Holdings has experienced net losses in each quarter since inception, with net losses of $6.36 million from inception until June 30, 2003. Although we have projected that we will begin generating positive cash flow from operations during 2003, such projections are based on the assumption that our revenue will continue to grow at the same rate it has grown over the last several months, that we will retain substantially all of our customers (including those acquired from Epoch) and that we will incur no unanticipated or extraordinary expenses. Competition for new customers in our business is intense, and our revenue may not continue to grow at its current rate, or at all. In addition, we may incur extraor dinary expenses in connection with additional acquisition transactions, expansion of our facilities or other events for which we have not budgeted. If our revenue does not continue to grow at its current rate, we are unable to retain our existing customers or if we incur significant unanticipated or extraordinary expenses, we may not achieve positive cash flow when projected, or at all.

      In addition, because of non-cash expenses such as depreciation and amortization, even if we reach positive cash flow, we will not have reached financial statement profitability. Achieving financial statement profitability would require additional growth in our revenues in such an amount that the additional gross profit from those additional revenues would be sufficient to cover the non-cash expenses. We can provide no assurance that we will ever become profitable.

      The market for Internet broadcasting services is new and rapidly evolving. We cannot be certain that a viable market for our services will emerge or be sustainable. Factors that may inhibit the development of a viable market for Internet broadcasting services include:

      If the market for Internet broadcasting services does not develop, or develops more slowly than expected, our business, results of operations and financial condition will be seriously harmed.

      We have pledged substantially all of our assets to secure repayment of the Factoring and Security Agreement, dated June 30, 2003, we entered into with Alliance Bank, pursuant to which we may sell certain of our accounts receivable to the bank and make periodic interest payments to the bank in respect of the face amount of the sold receivables that are outstanding during such period In addition, in order to be able to grant a security interest to Alliance Bank, we were required under the restrictive covenants related to the Dolphin Notes to enter into a Security Agreement, dated June 30, 2003, with Dolphin granting Dolphin a security interest in substantially all of our assets other than our accounts receivable in order to Secure the Dolphin Notes. These security agreements afford the bank and Dolphin rights and remedies that are commonly provided a secured creditor. Accordingly, if we default under our Factoring and Security Agreement or the Do lphin Notes, among the alternative remedies available to the secured parties is immediate seizure and disposition of all pledged assets.

      In order to successfully implement our business strategy, we must establish and achieve substantial growth in our customer base through sales, through business acquisitions or a combination thereof. If achieved, significant growth would place significant demands on our management and systems of financial and internal controls, and will almost certainly require an increase in the capacity, efficiency and accuracy of our billing and customer support systems. Moreover, significant growth would require an increase in the number of our personnel, particularly sales and marketing, customer service and technical personnel. The market for such personnel remains highly competitive, and we may not be able to attract and retain the qualified personnel required by our business strategy. Further, if successful in attracting new customers, we will outgrow our present facilities, placing additional strains on our management in trying to locate and manage multiple l ocations.

      Pursuant to an Amended and Restated Note Purchase Agreement dated January 16, 2003 with Dolphin (the "Note Purchase Agreement"), in exchange for $1.1 million in cash from Dolphin, we issued to Dolphin $1.1 million in Dolphin Notes and related warrants to purchase our common stock, signed an investor rights agreement and a registration agreement and agreed to take certain other actions. The consummation of such transaction involves, among other risks, the following risks:

      Our business plan contemplates continued expansion of our operations in the foreseeable future. In addition, we presently experience negative cash flow from operations. If we are to continue our operations and grow as contemplated, of which there can be no assurance, we will need to seek additional funding from the capital markets. We expect to fund our future capital requirements, if any, through existing resources, sales of our services and debt or equity financings.

      We may not be successful in raising sufficient debt or equity capital on terms that we consider acceptable, or at all. Failure to generate sufficient funds may require us to delay or abandon some of our future expansion or planned expenditures or to discontinue some of our operations, which would have a material adverse effect on our growth and our ability to compete in the electronic broadcasting industry.

      Our current and future competitors in Internet broadcasting may include other digital content delivery providers, Internet broadcast network specialty providers and alternative access providers such as various cable television companies, direct broadcast satellite, DSL, wireless communications providers and other established media companies. Many of these competitors have greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources, than we do. As a result, our competitors may be able to:

      In addition, various organizations, including certain of those identified above, have entered into or are forming joint ventures or consortiums to provide services similar to our services.

      Our current and future competitors in hosting and colocation may include other Internet hosting, colocation and access businesses, including such major providers as Cable & Wireless and Qwest, and essentially any other participant in the Internet industry. Many of these competitors have greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources, than we do. As a result, our competitors may be able to:

      In addition, various organizations, including certain of those identified above, have entered into or are forming joint ventures or consortiums to provide services similar to our services.

Our services are subject to system failure and security risks.

      Our operations are dependent upon our ability to protect our network infrastructure against damage from natural disasters, such as fire, earthquakes and floods, as well as power loss, telecommunications failures and similar events. Most of our network and computer equipment, including components critical to our operations, are currently concentrated in three locations in California, which in the recent past has experienced threatened power shortages. The remainder of our equipment is in two, third-party data centers, one located in Ashburn, Virginia, and the other in Chicago, Illinois. The occurrence of a natural disaster or other unanticipated system or power failures could cause interruptions in the services we provide. Although we provide backup power solutions, power failures or the lack of expansion power within our location could cause interruptions in our service. Additionally, failure of one or several of our telecommunications providers to provide the data communications capacity we require as a result of natural disasters, operational disruptions or for any other reason could cause interruptions in the services we provide. Any damage or failure that causes interruptions in our operations could have a material adverse effect on our business, financial condition and results of operations.

      Our networks are also subject to factors that could cause interruptions in service or reduced capacity for our customers. Despite the implementation of security measures, the core of our network infrastructure is vulnerable to unauthorized access, computer viruses, equipment failure and other disruptive problems, including the following:

      The occurrence of any unauthorized access, computer virus, equipment failure or other disruptive problem could have a material adverse affect on our business, financial condition and results of operations.

We are dependent upon key personnel who may leave at any time.

      We are highly dependent upon the efforts of our senior management team, the loss of any of whom could impede our growth and ability to execute our business strategy. Although our principal managers have significant equity interests in the company, none are party to employment agreements with the company that are not terminable at will. In addition, we believe that our future success will depend in large part on our ability to attract and retain qualified technical and marketing personnel for whom there is intense competition in the areas of our activities. The loss of the services of key personnel or the failure to attract or retain additional personnel as required could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to keep up with evolving industry standards and changing user needs.

      The market for Internet media-related services is characterized by rapidly changing technology, evolving industry standards, changing user needs and frequent new service and product introductions. Our success will depend in part on our ability to identify, obtain authorized access to and use third party-provided technologies effectively, to continue to develop our technical capabilities, to enhance our existing services and to develop new services to meet changing user needs in a timely and cost-effective manner. In addition, new industry standards have the potential to replace or provide lower-cost alternatives to our services. The adoption of such new industry standards could render our existing services obsolete and unmarketable or require reduction in the fees charged. Any failure on our part to identify, adopt and use new technologies effectively, to develop our technical capabilities, to develop new services or to enhance existing services in a timely and cost-effective manner could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to grow if methods of high-speed Internet access are not widely deployed.

      Our business is greatly enhanced by (and generally assumes adoption of) fundamental changes in the method of Internet access delivery to consumers. Currently, consumers access the Internet primarily via computers connected to public telephone networks through dial-up access or leased lines. A number of alternative methods for users to obtain high-speed access to the Internet, including cable modems, DSL, satellites and other terrestrial and wireless telecommunications technologies, collectively "Broadband Internet Access," currently provided by third party suppliers are in use or are under development. We believe that these technologies need to be deployed to consumers on a large scale before the delivery of media entertainment over the Internet will be truly viable. The failure of Broadband Internet Access to gain rapid acceptance could have a material adverse effect on our ability to execute our business plan and consequently on our business, finan cial condition and results of operations. Recent financial difficulties and outright bankruptcies experienced by several high profile wholesale and consumer providers of broadband connectivity may negatively impact the growth rate and availability of Broadband Internet Access.

We are dependent upon third-party suppliers and may be unable to find alternative suppliers.

      We rely on other companies to supply key components of our network infrastructure, including telecommunications services and networking equipment, which are available only from limited sources. Additionally, we rely on third-party development of technology to provide media-related functionality, such as streaming media formats and payment processing. We do not have long-term agreements governing the supply of many of these services or technologies. There can be no assurance that we can continue to obtain such services or licenses for such technologies at a commercially reasonable cost.

      We are also dependent upon regional bell operating companies, and certain other local exchange carriers, Competitive Local Exchange Carriers, and other access providers to provide telecommunications services to our customers and to us. Certain of these telecommunications companies compete with us. Additionally, many of the access providers have experienced financial problems, and some have even gone into bankruptcy. We have, from time to time, experienced delays and interruptions in receiving telecommunications services, and there can be no assurance that we will be able to obtain such services on the scale and within the time frames we require at a commercially reasonable cost, if at all. Some of our suppliers, including the regional bell operating companies and certain other local exchange carriers, are currently subject to tariff controls and other price constraints, which in the future could be changed. Such regulatory changes could result in in creased prices of services and products to us.

      The services provided by telecommunications carriers are governed by regulatory policies establishing charges and terms for wireline communications. We are not a telecommunications carrier but we do provide Internet broadcasting services, in part, through data transmissions over private and public telephone lines provided by telecommunications carriers. Operators of value-added networks that utilize regulated transmission facilities only as part of a data services package currently are excluded from regulations that apply to "telecommunications carriers" and, as such, we are not currently subject to direct regulation by the Federal Communications Commission (the "FCC"). Up until now, the FCC has treated companies providing services similar to those provided by us as "enhanced service providers," exempt from federal and state regulations governing common carriers, including the obligation to pay access charges and contribute to the universal service fu nd. If the FCC were to require Internet service providers like us to pay access charges or to contribute to the universal service fund when the Internet service provider provides its own transmission facilities and engages in data transport over those facilities in order to provide an information service, the resultant increase in cost could have a material adverse effect on our operations and our financial condition.

      Additionally, electronic commerce on the Internet has been generally exempted from taxation at the federal and state levels since 1995. This exemption is occasionally under examination by the United States Congress, where there can be no assurance that it will continue. If the United States Congress or states enact new taxes, tariffs or other assessments on electronic commerce, it could have a material adverse effect on our business, financial condition and results of operations.

      Our common stock is quoted on the Nasdaq OTC Bulletin Board. The volume of trading in our common stock is limited and thus susceptible to being dominated by a few individuals. Because of the thinness of the market for our stock, the price of our common stock may be subject to manipulation by one or more shareholders and may increase or decrease significantly because of buying or selling by a single shareholder. In addition, the limited volume of trading limits significantly the number of shares that one can purchase or sell in a short period of time. Consequently, an investor may find it more difficult to dispose of shares of our common stock or to obtain a fair price for our common stock in the market.

      The market price of our common stock, like that of the securities of other early stage companies, may be highly volatile. Our stock price may change dramatically as the result of various factors, including the following:

      Under our Articles of Incorporation, as amended, we are authorized to issue up to 10,000,000 shares of preferred stock. Our Board of Directors has the authority to create various series of preferred stock with such voting and other rights superior to those of our common stock and to issue such stock without shareholder approval. Any issuance of such preferred stock would dilute the ownership and voting power of the holders of our common stock and may have a negative effect on the price of our common stock. The issuance of preferred stock without shareholder approval may also be used by management to stop or delay a change of control.

      Under the terms of the VitalStream Merger Agreement, we agreed to issue up to approximately 13 million additional shares of our common stock to the former shareholders of VitalStream, Inc. (of which approximately 4.2 million have already been issued) if certain events occur or fail to occur. The remaining approximately 8.8 million shares of our common stock (and approximately 1.2 million options to purchase common stock) issuable under the VitalStream Merger Agreement may be issued based on the following formula: a number of shares of VitalStream Holdings common stock, up to a maximum of 8,789,907 (plus 1,210,093 options), equal to the product of (a) 3.33 multiplied by, (b) .8789907 (.1210093 for options) multiplied by, (c) the highest net revenue of VitalStream Holdings for any calendar quarter through the quarter ended September 30, 2003, provided that such highest net revenue is deemed to be zero if it is less than $2,000,000. Issuance of such shar es of common stock would dilute the ownership and voting power of the holders of our common stock and may have a negative effect on the market price of our common stock.

      We have not declared any dividends on our common stock. We intend to retain earnings, if any, to finance the operation and expansion of our business and, therefore, we do not expect to pay cash dividends on our shares of common stock in the foreseeable future. In addition, pursuant to the terms of the Note Purchase Agreement, VitalStream Holdings is prohibited from paying any dividends until the $1.1 million in Dolphin Notes it issued is paid in full.

      Shares of our common stock may be deemed to be "penny stock," resulting in increased risks to our investors and certain requirements being imposed on some brokers who execute transactions in our common stock. In general, a penny stock is an equity security that

      Our common stock has a trading price below five dollars; our common stock is not trading on an exchange or NASDAQ; we have average historical revenues of less than $6 million; depending upon how governing rules are interpreted, we probably have not been in continuous operation for more than three years; and we have less than $5 million dollars in net tangible assets. Accordingly, we believe that our common stock is likely a "penny stock." At any time our common stock qualifies as a penny stock, the following requirements, among others, will generally apply:

      These requirements significantly add to the burden of the broker-dealer and limit the market for penny stocks. These regulatory burdens may severely affect the liquidity and market price for our common stock.

We may be subject to certain provisions of the California corporate code at various times.

      Because we are a Nevada corporation, the rights of our stockholders are generally governed by the Nevada Private Corporations Law. However, under Section 2115(a) of the California Corporations Code, we may become subject to various sections of the California Corporations Code during any year if, on January 1 of the prior year, more than one-half of our outstanding voting securities are held by California residents and our principal business operations are located in California. We believe that, as of January 1, 2003, California residents held more than one-half of our outstanding voting securities, and our principal business operations are located in California. Accordingly, beginning in January 2004 and thereafter as long as we satisfy the applicable conditions, the rights of VitalStream Holdings shareholders will be altered by the effect of Section 2115(a) of the California Corporations Code. Although such provisions are designed to enhance the rig hts of shareholders, they may benefit some shareholders at the expense of others, limit management's ability to operate the Company and, in instances where Nevada and applicable California corporate law conflict, cause confusion about what laws govern the actions of VitalStream Holdings.