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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

         COMMISSION FILE NUMBER 000-26355

eUniverse, Inc.
(Exact Name of Registrant as Specified in Its Charter)

6060 Center Drive, Suite 300, Los Angeles, CA 90045
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (310) 215-1001

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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  o     No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  o     No  x

As of September 30, 2002, the aggregate market value of the Company’s outstanding common shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the NASDAQ Small Cap Market on September 30, 2002) was approximately $35,233,760. Shares of the Registrant’s common stock held by each executive officer and director and by each entity that owns 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of July 31, 2003, there were 26,562,239 shares of the Registrant’s common stock outstanding.

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eUniverse, Inc.

Annual Report on Form 10-K for the Year Ended March 31, 2003

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PART I

Forward-Looking Statements

         This document contains “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

         Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this annual report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

         Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to, those discussed in the section entitled Risk Factors beginning on page 16 of this Form 10-K.

         eUniverse, Inc. and its subsidiaries are referred to herein as “eUniverse,” “we” and “the Company”.

ITEM 1.   BUSINESS

Recent Events

Restatement

         On May 6, 2003, the Company announced its intent to restate its previously reported quarterly financial results for the fiscal year ended March 31, 2003 because of accounting errors it had identified in the Company’s financial statements (the “Restatement”).

         As a result of the discovery of the accounting errors, management initiated an internal review of its accounting records and its accounting policies and procedures. In an effort to identify the extent of the accounting errors, and to identify any deficiencies in the Company’s system of internal controls, management significantly expanded its accounting and finance staff and retained an outside accounting firm to assist in the process. In addition to the foregoing, the Company’s Board of Directors directed the Audit Committee of the Board to explore the facts and circumstances giving rise to the Restatement as well as to evaluate the Company’s accounting practices, policies and procedures (the “Audit Committee review”). To assist with the Audit Committee review, the Audit Committee engaged the law firm of Foley & Lardner.

         During management’s and the Audit Committee reviews of the Company’s accounting records and procedures, and during the audit of the Company’s financial statements for the year ended March 31, 2003, various deficiencies in the Company’s internal controls were identified. The Company believes such deficiencies were attributable to the following broad factors: insufficient supervision and oversight of the Company’s accounting systems and personnel; a poorly designed, non-integrated accounting system; the rapid growth in the Company’s business operations during the course of fiscal year 2003; difficulties in absorbing and integrating the acquisition of a sizable e-commerce company, ResponseBase LLC, during the third and fourth quarters of fiscal year 2003; the loss of critical personnel; and limited human resources in the Company’s accounting and financial reporting function with which to respond to the Company’s increased business scale and growing complexity.

         As a result of management’s and the Audit Committee reviews, the Company has determined the need to restate its consolidated financial statements for the first three quarters of fiscal year 2003, ended June 30, September 30, and December 31, 2002, respectively. The following table summarizes the impact of the adjustments on the Company’s statement of operations.

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Restatement Impact on Classifications Within the Statements of Operations
(In thousands, except share and per share data)
(unaudited)

(1)  The financial results set forth for the quarters ended June 30, September 30, and December 31, 2002 include the reclassification of certain items to conform to their presentation for the quarter ended December 31, 2002 and the year ended March 31, 2003. These reclassifications had no effect on previously reported net income in any of the first three quarters of fiscal year 2003. Certain fees paid to third parties for media space, license agreements, and ad revenue-sharing arrangements, which had previously been included in cost of goods sold, are reflected in marketing and sales expenses. In addition, credit card fees, which had previously been included in general and administrative expense, have been reclassified and appear in cost of sales.

(2)  Amounts reflect the aggregate effect of the restatement adjustments and reclassifications through December 31, 2002.

Overall Analysis of the Restatement

         The adjustments reflected in each of the periods above generally arise from the following:

         The impact of the adjustments to the specific classifications in the Company’s statement of operations is discussed in detail below.

Revenues

         Revenue has been decreased by approximately $630,000, $1,499,000 and $3,864,000 for the Company’s first, second and third fiscal quarters respectively. The adjustments to revenue are primarily attributable to correction of the allowance for product sales returns, and correction of the accounting for revenue related to certain products and services, in the second and third fiscal quarters.

         The Company’s review of its accounting records indicated the Company had relied upon inaccurate and incomplete source data, and had applied an inaccurate methodology, in calculating the allowance necessary for product returns and sales charge backs. These types of accounting errors were particularly pronounced in the third fiscal quarter, a period in which the Company experienced a dramatic increase in the volume of its e-commerce transactions as a result of its acquisition of ResponseBase and the Company’s own internal growth and expansion. In addition, the Company experienced a high rate of product returns during the quarter as a result of delayed order fulfillment during the December holiday season. The Company’s review also indicated the Company had incorrectly accounted for certain credit card transactions and merchant bank activity, resulting in an inaccurate calculation of sales return reserves, and contributing to the overstatement of revenue.

         The Company’s review of its accounting records also revealed that the recording of certain service revenue had been premised upon inaccurate data. Additionally, it was determined that certain revenue relating to product sales had been inappropriately recorded, and that certain deferred revenue had been recognized in an incorrect period.

         Although the overall impact of the adjustments was to reduce revenue by approximately $5,993,000 for the nine months ended December 31, 2002, and there was no impact to the Company’s reported cash balances as a result of the revenue restatements.

Cost of Sales and Operating Expenses

         Cost of sales has been decreased by approximately $436,000 and $579,000, and increased by $100,000, for the Company’s first, second, and third fiscal quarters, respectively. Additionally, operating expenses have been increased by approximately $288,000 and $1,163,000, and decreased by approximately $471,000, for the respective three fiscal quarters. The adjustments to costs of sales and operating expenses primarily relate to the correction of accounts payable cutoff errors. An examination of the Company’s accounts payable records disclosed that, in certain instances, improper cutoff procedures were applied when calculating the accounts payable amounts, mistakes were made in postings to the accounts payable system, and invoices were incorrectly processed. The adjustments also include correction of the accounting methodology applied to certain capital lease transactions.

Non-operating Expenses

         Non-operating expenses have been decreased by approximately $18,000, and increased by approximately $203,000 and $256,000, for the first, second, and third fiscal quarters of 2003, respectively. These adjustments result from the correction of the accounting for a sale and leaseback transaction, and correction of interest expense amortization for certain debt obligations.

Discontinued Operations

         Discontinued operations have been decreased by approximately $41,000, $105,000, and $235,000, for the first, second and third fiscal quarters of 2003, respectively. These changes relate to the incorrect classification of certain transactions between discontinued operations and other income statement classifications.

Balance Sheet Adjustments

         The net balance sheet impact of the foregoing adjustments is to decrease stockholders’ equity by approximately $6,112,000 for the nine months ended December 31, 2002. Further information with respect to our restated financial statements is presented in “Item 14–Controls and Procedures,” and in Notes 2 and 21 of Notes to Consolidated Financial Statements.

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NASDAQ Trading Halt, NASDAQ Delisting Proceedings and SEC Investigation

         In response to the announcement of the Restatement, on May 6, 2003 NASDAQ halted trading of the Company’s common Stock, and trading remains halted through the date of this filing. On June 13, 2003, the Company received a NASDAQ Staff Determination stating that its common stock was subject to delisting from The NASDAQ SmallCap Market (the “SmallCap Market”) due to the NASDAQ Staff’s in ability to assess the Company’s current financial position and the Company’s ability to sustain compliance with NASDAQ’s continued listing requirements. On July 2, 2003, the Company received notice of an additional listing deficiency from NASDAQ indicating that the Company was not in compliance with the filing requirement for continued listing due to the Company’s failure to timely file its Annual Report on Form 10-K. Subsequently, on August 15, 2003, the Company filed a Report on Form 12b-25 with the Securities and Exchange Commission (the “SEC”) as a result of its failure to timely file its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003. The Company currently anticipates it will file this Form 10-Q in September 2003. The Company has appealed the NASDAQ Staff’s determination to delist the Company’s securities to a Listing Qualifications Hearings Panel (the “Panel”). On July 31, 2003, in an oral hearing before the Panel, the Company presented its plan for providing current financial information to the market place and complying with NASDAQ filing requirements. The Panel has not yet made a determination on the Company’s appeal and there has been no indication from the NASDAQ Staff as to whether the halt in trading of the Company’s common stock will be lifted. The Company can provide no assurance that the Panel will grant the Company’s request for continued listing or that trading in the Company’s common stock on the SmallCap Market will resume.

         Immediately after announcing its intention to restate its quarterly financial statements, the Company contacted the SEC to notify it of the Restatement. The SEC Staff initiated an informal inquiry into the matter and the Company has remained in regular contact with the SEC Staff concerning the status of the Restatement and Audit Committee review. The Company has been and intends to continue cooperating with the SEC. The Company cannot predict the outcome of the SEC’s inquiry.

Enhancements to Accounting and Financial Reporting Procedures and Controls

         In response to the rapid growth, change, and complexity in the Company’s business during the course of fiscal year 2003, management undertook several initiatives to enhance the efficiency of its accounting and finance functions. These initiatives included the hiring of consultants to review the Company’s financial reporting efficiency and organizational structure. In addition, management determined the need to enhance its accounting software for cash management and inventory tracking, and the need to supplement Company personnel with significant additional resources to address staffing shortages and accounting department backlogs.

         More recently, in response to the matters identified in connection with the review of the Company’s accounting records and procedures by management and the Audit Committee, the Company has implemented a number of remedial and other actions designed to improve its accounting and financial reporting procedures and controls. These actions have included, among others: (i) significant expansion of the resources of the accounting and financial reporting department, nearly doubling the department’s staff size, and replacing all pre-existing accounting personnel with individuals of greater experience and expertise, (ii) replacement of the leadership of the department with a new controller who has experience with the challenges of system and business scaling, and (iii) the search for a new Chief Financial Officer to fill the vacancy resulting from the departure of Joseph L. Varraveto, who resigned effective August 19, 2003.

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         As part of its remedial actions, the Company has also implemented or strengthened a number of internal controls. These measures include requiring enhanced levels of authorization for transactions, strictly limiting access to various accounting modules, improving the processing of transactional documentation, augmenting cash management controls, enhancing inventory controls, and redesigning the sales order process. Management has also initiated a reorganization and upgrade of the Company’s accounting systems and processes. In particular, management has begun migrating the Company to a new integrated financial reporting system, one that is more appropriate to the size and complexity of the Company’s current business operations.

         Management is also presently evaluating several experienced consulting firms with respect to an engagement to advise the Company on further enhancements to internal and operational controls. The Company expects to be an early adopter of the internal control attestation requirements of the Sarbanes-Oxley Act of 2002.

         The Company has also appointed Lawrence Moreau to its Board of Directors and to serve as the Audit Committee Chair.

Operational Reorganization

         eUniverse has initiated, and largely completed, significant steps to streamline the Company’s operating structure. The Company has closed four of its under-performing business lines, UltraConversions, FitnessHeaven, MegaLottoClub and FamilyCareAdvantage, and has consolidated certain core properties. In addition, the Company has reduced headcount by approximately 20% to 241 employees as of August 8, 2003. These actions are expected to result in annual savings of more than $6 million, and should simplify the Company’s financial reporting and operational structure.

Additional Financing

         In July 2003, the Company received $2 million of debt financing from VP Alpha Holdings IV, L.L.C. (“VPVP”) an affiliate of VantagePoint Venture Partners. The debt financing consisted of a $2 million, 8% secured note (the “VPVP Note”) which is due on the first to occur of: (i) the maturity of a note held by a wholly-owned subsidiary of Sony Music Entertainment (currently due March 31, 2005), (ii) the closing of the preferred stock investment (described below) by VPVP, at which point the VPVP Note would be applied toward the purchase price, (iii) March 31, 2005 and (iv) the closing by the Company of a debt or equity financing in excess of $2.5 million with a party other than VPVP.

         Concurrently with the debt financing, the Company and VPVP entered into a term sheet relating to a second phase of financing that would consist of an up to $10 million preferred stock investment by VPVP in eUniverse, and the provision of an additional $20 million dollar “line of credit” to be used in future merger and acquisition transactions. The terms of the second phase of the financing as set forth in the term sheet, are non-binding. The term sheet contemplates that VPVP would purchase up to $10 million shares of a newly authorized series of preferred stock, as more fully described below. The purchase price of the shares is expected to be $1.50 per share. The VPVP Note would be credited towards the purchase price. Upon the closing of the sale of the preferred stock to VPVP, the term sheet contemplates that VPVP would provide the Company with a line of credit of up to $20 million for making acquisitions and entering into strategic business development ventures. VPVP would have discretion over eUniverse’s use of the line of credit, the detailed terms of which are to be negotiated.

         Also in connection with the debt financing, VPVP purchased from 550 Digital Media Ventures, Inc. (“550 DMV”), a wholly owned subsidiary of Sony Music Entertainment, $0.5 million of an approximately $2.3 million note held by 550 DMV (the “Sony Note”) and an option (the “Option”) to purchase up to 3,050,000 shares of the Company’s Common Stock and up to 1,750,000 shares of the Company’s Series B Convertible Preferred Stock held by 550 DMV for a purchase price of $1.10 per share, with the price subject to adjustment under certain conditions. If the Option is exercised for all the shares subject to it, 550 DMV and any assignee of its remaining Series B shares will, in future votes, vote in the same manner as VPVP with respect to the Series B shares purchased pursuant to the Option. Any and all rights that 550 DMV has associated with the Common Stock and the Series B, including but not limited to registration rights, voting rights, preemptive rights, liquidation preference, or otherwise, will be deemed transferred (to the extent transferable) to VPVP upon its exercise of the Option and the payment of the related purchase price. In addition, 550 DMV has agreed that it will vote as a stockholder in favor of any investment and loan transaction between the Company and VPVP resulting in an additional investment in the Company by VPVP of not less than $5

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million at a price of at least $1.00 per share (if an equity transaction), as approved by the Board of Directors of the Company. In connection with the consummation of any such transaction, 550 DMV will be deemed to have waived any anti-dilution protection and any pre-emptive rights and rights of first refusal that 550 DMV may have in connection with its securities holdings in the Company. Pursuant to the debt financing agreements, eUniverse and VPVP agreed that in the event that VPVP does not exercise the Option within 120 days of its grant, that VPVP may, within 10 days after the expiration of such 120-day period, transfer the Option to eUniverse in exchange for a warrant (the “Warrant”) to purchase 200,000 shares of the Company’s Series C Convertible Preferred Stock.

         In connection with the above-referenced transactions, eUniverse agreed that it will create a new series of preferred stock if (i) VPVP exercises the Option, and (ii) the Company and VPVP agree to consummate the preferred stock financing described above. The Company currently expects that the new series of preferred stock will be designated Series C Convertible Preferred Stock (the “Series C”) and will be created by board resolution in accordance with the Company’s certificate of incorporation. If the Series C is so created, VPVP would purchase Series C in the second phase of financing, VPVP would receive the right to exchange any shares of Series B acquired pursuant to the Option for Series C and the Warrant (if issued) would be exercisable into Series C.

         As currently contemplated, the Series C would be substantially similar to the Company’s Series B, subject to the following differences, among others: (a) the Series C would be entitled to an 8% cumulative dividend payable in additional shares of Series C; (b) the conversion price would be $1.50; (c) the Series C would be convertible into common stock at VPVP’s election; and (d) upon other events to be negotiated between the Company and VPVP and acceptable to VPVP. If the Option has been exercised in full, the Series C would also have additional rights as follows: (a) the Series C would have the right to elect a number of the members of the Company’s Board of Directors identical to the current rights of the Series B to elect members of the Board of Directors, as 550 DMV would be required to vote in the same manner as VPVP, such board members would constitute both the Series B and Series C board representatives; and (b) so long as VPVP or any of its affiliates owns at least 1,442,308 shares of Series C or Common Stock (as adjusted for any stock split, combination, reorganization, reclassification, stock dividend, stock distribution or similar event), the Company would not, without the affirmative consent or  vote of at least two-thirds of the Board of Directors (i) enter into an agreement for or consummate, a Corporate Transaction (as defined in the Series B Certificate of Designations), (ii) enter into transactions which result in or require the Company to issue shares of its capital stock in excess of 5% (in any one transaction) or 12.5% (in the aggregate) of the Company’s then-current market capitalization, (iii) increase or decrease the number of authorized shares of capital stock, (iv) directly or indirectly declare or pay any dividend or make any other distribution in respect thereof, or purchase, redeem, repurchase or otherwise acquire any shares of capital stock of the Company or any subsidiary, other than as specified in the Series B Certificate of Designations, or (v) increase or decrease the size of the Company’s Board of Directors. In the event the agreement reached with VPVP with respect to the second phase of financing would require the Company to issue securities in an amount equal or greater than 20% or more of the Company’s common stock or voting power outstanding before the issuance, the Company may need to seek shareholder approval of the transaction pursuant to NASDAQ’s MarketPlace rules.

Recent Management and Board Changes

         On May 27, 2003, the Company appointed Lawrence R. Moreau to its Board of Directors and Audit Committee Chair, filling a vacancy created by a previously disclosed director resignation. Joseph L. Varraveto, resigned as Chief Financial Officer of the Company effective August 19, 2003. The Company has conducted a search for a new Chief Financial Officer and expects to announce a replacement in the near future.

Business Overview

         The businesses owned and operated by eUniverse comprise one of the most compelling collections of online enterprises doing business on and through the Internet today. From its start as an online retailer of music and movies in April 1999, eUniverse has quickly diversified and grown into a premier, predominantly online network of interactive entertainment, electronic commerce and publishing, and direct to consumer marketing. At the core of the Company’s holdings is its entertainment network and its electronic newsletter portfolio. eUniverse’s “content” offerings, commonly referred to as the eUniverse network of websites (the “eUniverse Network”), attract on average 15 million to 20 million visitors per month.⁽¹⁾ During fiscal year 2003, the eUniverse Network has generally ranked among the top 15 most visited destinations on the Internet, and the Company communicates on a daily basis with many millions of subscribers to the Company’s portfolio of electronic newsletters. eUniverse’s reach on the Internet has, for the past two years, fueled the growth of the Company’s products and services business segment, which includes (i) online services in the areas of dating, health fitness and dieting, self-help and well-being, and third-party marketing and advertising campaign development, and (ii) electronic commerce in the areas of consumer electronics, collectibles, inkjet printer supplies and peripherals, herbal health products and supplements, electronic books, downloadable applications, and other impulse merchandise. eUniverse also maintains a strong and growing presence in the online computer gaming market with premier properties in the league, ladder and tournament and pay-to-play skill-based game spaces. More recently, the Company has pursued offline, direct to consumer initiatives with a telemarketing center and two joint ventures to market and sell fitness products. The Company constantly evaluates and refines its existing businesses and searches for opportunities to deepen and broaden its holdings through internal development and external acquisition.

⁽¹⁾ Source: Nielsen//Net Ratings, April 2002 through March 2003.

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Highlights in the Development of the Business

         The genesis of eUniverse occurred in April 1999 through a series of transactions colloquially referred to as a reverse merger into a publicly traded shell (the “Reorganization”). The Reorganization culminated in eUniverse, Inc. (f/k/a Motorcycle Centers of America, Inc., a non-operating Nevada corporation whose shares were publicly traded on the OTC Bulletin Board) becoming the parent and sole shareholder of CDUniverse, Inc., a Connecticut corporation engaged in the business of selling music CD’s and movie videos and DVD’s via the Internet. eUniverse thereby became a publicly traded company whose historical results of operations were those of CDUniverse. Simultaneously with the Reorganization, the Company consummated a financing of roughly $6.5 million placed with approximately forty Series A Preferred Stock investors, among whom Lehman Brothers was the largest. In April, 2000, eUniverse moved to the NASDAQ SmallCap Market and continued to trade under the symbol EUNI. In December 2002, the Company changed its domicile and became a Delaware corporation.

         During the Company’s first fiscal year, fiscal year 2000, the Company acquired a series of online gaming companies (including Cases Ladder, Inc.) and entertainment content properties (including Funone.com and Justsaywow.com), thus adding the beginnings of the Company’s other two principal components of its current operations, content and gaming.

         During fiscal year 2001, the Company continued to acquire entertainment content websites (including Send4fun.com, Debsfunpages.com and Funnygreetings.com) and to build its core entertainment network audience. Early in its fiscal year 2001, the Company also launched what has become its flagship entertainment property, Flowgo.com. By April 2001, Flowgo had become one of the most frequented entertainment websites on the Internet. With the acquisition and introduction of these and other entertainment websites, the eUniverse Network quickly ascended into the upper echelons of the Internet’s most trafficked destinations. Also in its fiscal year 2001 (in October of 2000), the Company divested itself of the music and movie retail products segment of its business (i.e., CDUniverse and its related e-commerce properties). The Company received $1 million in exchange for the sale of the intangible and tangible assets of the business to CLBL, Inc. Additionally, over the next six months, the company received $0.5 million from CLBL for advertising on eUniverse websites.

         As the Company entered its fiscal year 2002, and with the divestment of CDUniverse, the Company’s revenue was derived almost exclusively from paid third-party advertising on the eUniverse Network. By June 2002, eUniverse had become the most frequented entertainment network on the Internet. The Company then embarked on a strategy of diversifying its revenue streams and developing longer, higher yielding relationships with its user base. As part of this strategy, in the first quarter of its fiscal year 2002 the Company launched its online dating website CupidJunction.com, representing the beginning of the build-out of the Company’s products and services business segment. Over the course of the year, the Company added seven additional product and/or service offerings consisting of a combination of internally developed and acquired properties.

         Also during its fiscal year 2002, the Company substantially augmented its E-mail newsletter portfolio by acquiring the various publications distributed under the IntelligentX and InfoBeat brand names. In conjunction with its acquisition of InfoBeat, the Company raised approximately $5 million in a private placement of Series B Convertible Preferred Stock with an affiliate of Sony Music Entertainment, Inc.

         Early in its fiscal year 2003, the Company began leveraging its expertise in developing and distributing online advertising campaigns by signing deals with various major media and consumer product companies to promote their properties, artists and products on the eUniverse Network. Also during fiscal year 2003, and in an effort to gain broader consumer reach for the Company’s products and services, the Company launched Performance Marketing Group (“PMG”). PMG’s primary objective is to generate sales of the Company’s various offerings on networks and websites beyond the eUniverse Network.

         In September 2002, the Company continued its effort to broaden its consumer reach by acquiring certain assets of ResponseBase LLC. ResponseBase is an on-line marketing company that manages over 30 million permission-based E-mail records to which it markets and sells its own proprietary products and services as well as those of third parties. The transaction also provided the Company with additional management talent and incremental distribution and product development opportunities.

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         Also during September 2002, the Company signed a multi-year agreement with Microsoft Corporation relating to its skilled gaming and gaming download offerings. The joint offerings went live in the fourth quarter of fiscal year 2003.

Description of the Business

         The Company’s businesses are generally divided into two categories or types: (1) Media and Advertising and (2) Products and Services. In fiscal year 2003, the Company’s revenue was generated from a combination of paid third-party advertising on the eUniverse Network and from sales of the Company’s portfolio of products and services.

Media and Advertising

         The eUniverse Network. The eUniverse Network constitutes one of the most visited destinations on the Internet, offering fun and compelling interactive entertainment that people use to communicate and connect. The eUniverse Network attracts between 15 to 20 million monthly visitors, with Flowgo.com, one of the largest entertainment websites, being the Company’s most popular
website.⁽¹⁾ Network websites offer thousands of pages of funny pictures, jokes, animations, greetings, parodies, poems, stories, quizzes, polls and games. The nature of the content ranges from the edgy and satirical comedy found on MadBlast.com, to the lighthearted funpages and humor of GotLaughs.com, to the inspirational stories and pages of BlessTheDay.com, to the mind, body and spirit self-evaluation aids at SelfNetwork.com, to the fun and easy to play games at GameRival.com. The variety of offerings renders the Network content akin to television programming, with different shows and channels geared toward different audiences and tastes and with regularly updated, fresh and relevant content. Visitors to the eUniverse Network are encouraged to share the content they experience with family and friends by clicking a link at the bottom of each content Web page and using what the Company refers to as the Flowgo Referral System. The Flowgo Referral System is an internally developed tool that enables users to conveniently E-mail links to the content they view to up to ten other people at a time. Visitors to Network websites are also encouraged to sign up to website mailing lists in order to receive updates about new content and the daily picks of Network webmasters.

         Newsletter Portfolio. The Company distributes content via electronic mail everyday to many millions of subscribers to its Network Web site and topical newsletter subscription lists. eUniverse’s E-mail newsletters are received by over 50 million unique subscribers each month. A majority of the newsletters are E-mailed daily. The Company has over 50 newsletters in its portfolio, covering specific topics such as sports, technology, entertainment, business and finance. A large number of these newsletters are vehicles for delivering content from the numerous websites that make up the eUniverse Network. Some of the Company’s more popular newsletters are IntelligentX, with two daily publications, and InfoBeat, with four daily publications, both providing factual news delivery and other fare similar to that found in traditional newspapers or magazines. These two newsletter groups have a combined subscriber base of over 5 million.

         eUniverse derives its content from a variety of sources and relationships, but the vast majority of its content is produced internally by the Company’s webmasters, programmers and graphic artists. The Web publishing side of eUniverse’s business has enabled the Company to attract a large and diverse audience and to amass a considerable database of subscriber and viewer information. This audience and ability to communicate effectively with potential customers has proved an attractive proposition to third-party advertisers. The Company’s audience includes strong reach into some of the most lucrative demographic segments of the Internet population. eUniverse reaches over 4 to 10 million adult women every month, which amounts to approximately 1 in 6 adult women (18 or older) on the Web. This demographic is believed to control a high percentage of household spending. The eUniverse Network is also one of the top five websites visited by adults over age 55. This demographic group has more leisure time and greater buying power in the aggregate than most other standard demographic groups. The eUniverse Network is also one of the top six websites for teens and one of the top fifteen websites for males over the age of 18.⁽²⁾ In short, the eUniverse Network and newsletter portfolio present one of the most fertile opportunities available online for customer acquisition. Perhaps more importantly, the Company’s access to a large online audience affords the Company a considerable competitive advantage with respect to its ability to test the marketability of new products and services and to generate sales of the Company’s existing products and services at low customer acquisition costs.

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                   In addition to selling advertising space in its Web and E-mail inventory, the Company also employs a team that, using eUniverse’s unique approach to online marketing, conceives and develops Internet advertising campaigns on behalf of third-party clients. In this regard, the Company fills the creative function of a traditional advertising agency in addition to providing the media in which the ads are run. Clients for the Company’s advertising services have included various television, motion picture and consumer product companies such as CBS, Fox and USA Network in television, Disney, TriStar Pictures and Warner Brothers in film, and Chevrolet, Gatorade and Budweiser in consumer products.

Products and Services

                   During the past two fiscal years, the Company has been following a strategy to diversify its revenue streams and develop a deeper relationship with its user base, thereby increasing the lifetime value of the customers with whom it is in contact. The introduction of the Products and Services segment in fiscal year 2002 was a first step in this effort. The Company offers and sells a variety of products and services, the selection of which is a function of the Company’s core competencies, the consumer tastes and demands of the Company’s user demographic, and the mediums through which the Company reaches consumers. The Company’s e-commerce properties were visited by over 5 million unique visitors in March 2003, a number which would place eUniverse’s shopping traffic, on an aggregated basis, 10^th in Nielsen//Netratings “Multi-Category Commerce” ranking. As of the end of fiscal year 2003, the Company had processed credit card transactions for approximately 1.1 million unique credit card paying customers since the beginning of the Company’s build-out of its Products and Services business segment in early fiscal year 2002.

                   Electronic Commerce. The Company sells an eclectic collection of products and services through its various e-commerce websites. These products, services and websites include the following: online dating at CupidJunction.com; health, fitness and dieting resources; self-awareness resources for mind, body and spirit at Colorgenics.com; inkjet printer supplies and peripherals at premiumink.com and allyoucanink.com; collectibles such as commemorative coins, Olympic berets, and other memorabilia and impulse merchandise at PerfectCollectibles.com; herbal and all-natural ingestible and topical products at IncreaseYourHealth.com and FemaleAdvantage.com; downloadable animated desktop mates at CrazyMates.com; and electronic books, scooters, housewares and other niche products at CoolOnlineProducts.com. The Company continuously tests and sources new product and service offerings to determine their marketability on the Internet.

                   The diversity of products and services in which the Company traffics bears some similarity to what one might find on Home Shopping Network or QVC, but as applied to the Internet. As with television direct to consumer sales, the Company’s selection and marketing of products and services on the Internet is largely a function of competition for advertising media. Only certain products and services yield a rate of return that enables payment of competitive rates for advertising, hence the eclectic nature of the Company’s product and service portfolio. eUniverse believes it has competitive advantages in this space from (i) the ability of the Company to test and sell product and service offerings on its own Network at comparatively low cost, (ii) the Company’s expertise in developing marketing campaigns and creating incremental revenue opportunities from initial transactions and customer contact, and (iii) the Company’s ability and expertise, through its PMG group, in purchasing Internet advertising media outside of its own Network, including in large quantities at discounted rates. These factors result in a higher likelihood that the Company will be able to source and create new product and service offerings that are viable on the Internet as compared to smaller or more focused online retailers and providers.

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                   Online Gaming. The Company’s Products and Services segment includes its growing presence in the online gaming market. The Company owns and operates two of the premier properties in their respective online gaming categories, Cases Ladder and SkillJam. These properties, combined with the Company’s other gaming related properties, have over 7 million registered users. The online gaming market has become one of the hottest and fastest growing areas of Internet commerce. Online gaming revenue is projected to increase at a rate of 138% between 2000 and 2005, and online gaming revenue is projected to exceed $5.5 billion by 2005.⁽¹⁾ Researchers predict that there will be 114 million online gamers by 2006, and the total number of online games played will reflect a six-fold increase over current activity levels.⁽²⁾

                   Cases Ladder is the leader in Internet gaming ladders, leagues and tournaments for online multiplayer games. At the heart of the online gaming movement is the core desire to play against other people and, for many, to compete more broadly and see how they rank against the best players in the world. Cases Ladder provides that opportunity with the most advanced leagues available for online gamers. Cases Ladder leagues are set up for hundreds of Internet playable games, and can be created and co-branded specifically for online gaming services and game developers. Cases Ladder offers both free and premium membership programs to mass-market game players and operates the largest collection of online ladders, leagues and tournaments for its extremely loyal and active gaming community.

                   SkillJam is the premier destination for cash prize skill game play. SkillJam offers nearly 100 fun games including favorites like Trivia Challenge, Diamond Mine, Pool, MahJong Solitaire, and more. Users select the games they would like to play and compete for fun, prizes, and cash. SkillJam offers two types of tournaments:

                   Tournament winners receive a congratulatory winner notification E-mail with cash prizes automatically deposited into their SkillJam account. These funds can be used as entry fees for other tournaments, saved in a user account, or cashed out. SkillJam also offers an array of community-building features such as Special Tournaments, Challenge Matches, Message Boards, and more. SkillJam’s operating process and proprietary software ensure that the players’ competitive gaming environment remains fair. In addition to its skill specific rating system, SkillJam employs a sophisticated fraudulent game activity detection system.

                   Both Cases Ladder and Skilljam operate on proprietary technology platforms that are customizable turnkey solutions for third-parties (such as gaming websites, Web portals and game publishers) wishing to offer leagues, ladders and tournaments or cash prize skill-game contests to their users. Skilljam, for instance, has an agreement to provide the platform and power the play-for-cash skill-games available on Zone.com, MSN’s exclusive games channel. Cases Ladder and SkillJam are, in this regard, destinations as well as salable applications and thus have multi-faceted revenue generating capacity.

Offline and Multimedia Initiatives

                   In addition to expanding the outlets for the Company’s products and services beyond the eUniverse Network through the online media buying activities of PMG, the Company began in fiscal year 2003 to use various offline media, such as radio, television and print, to market its products and services. Also, in August 2002, the Company purchased a telemarketing center in Montclair, California, from which it principally markets its own products and services and, to a more limited extent, those of third parties as well. In September, 2002, the Company entered into two joint ventures with Michael Casey Enterprises to produce television infomercials for two home fitness products.⁽³⁾ The Company continues to examine and evaluate ways in which to expand the Company’s product and service offerings and the marketing and distribution channels through which they flow.

⁽¹⁾ research firm Datamonitor.
⁽²⁾ research group DFC Intelligence.
⁽³⁾ In February 2003, the Company sold its interest in one of the joint ventures for $358,000.

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Revenue Generation

                   By the close of its fiscal year 2002, the Company had increased its revenue by approximately 117% from the prior fiscal year. Approximately 34% of overall revenue was generated from the Products and Services segment. During fiscal year 2003, the Company’s revenue increased by approximately 100% for the second consecutive year with approximately 70% of overall revenue from non-advertising sources. The Company believes that this trend in the source of the revenue should continue into the future with a majority of future growth coming from non-advertising related sources. The Company does not have any customers that represent more than 10% of its overall revenue.

         Media and Advertising Revenue. The Company generates advertising revenue through the sale of its inventory of ad space on the eUniverse Network websites and in E-mail newsletters. The Company’s inventory of ad space allows for various forms of Web-based advertisements including the following:

         Many of the above types of Web-based ads are served in rich media format, meaning they are animated and often accompanied by sound.

         The Company’s advertising deals with third parties are generally structured as sponsorship, impression-based or performance-based arrangements. Sponsorship ad deals are flat fee arrangements for placement of an advertiser’s name, logos or other branding as the sponsor of a website (or section of a website), newsletter, particular piece of content, or particular promotion. Sponsorship arrangements differ from impression or performance based arrangements in that appearance of the advertisements in the placement location is constant for an agreed upon period of time. Impression-based arrangements, on the other hand, are negotiated as a rate per the number of times an advertisement is shown, usually measured as cost per thousand impressions (“CPM”). In a CPM scenario, an advertiser purchases a certain number of advertising impressions, which the Company delivers on agreed upon schedules, formats and locations.

         The vast majority of the Company’s advertising revenue is generated from performance-based arrangements, measured in terms of cost per click (“CPC”) or cost per acquisition (“CPA”). Performance-based ad deals are result oriented, meaning that the advertiser pays the Web publisher only if the Internet user performs an agreed upon activity. The required activity can be as simple as clicking on the ad (i.e., a CPC arrangement) or could require that the user link to the advertisers’ website and provide information, sign up or make a purchase. Over the past couple years, the Company has become an expert in working with its advertisers to deliver online campaigns that lead to the conversion of viewers into customers. In an online advertising market that has increasingly placed a premium on results-oriented advertising, this has been an essential ingredient of the Company’s strategy and success.

         Products and Services Revenue. The Company continues to manage a shift in its revenue base from third-party paid advertising to its portfolio products, services and on-line gaming offerings. During fiscal year 2003, over two-thirds of the Company’s revenues were sales related to products, services and gaming, as compared to a one-third contribution in fiscal year 2002. The Company believes the strategy to grow its portfolio products, services and gaming properties will provide it with enhanced growth potential through higher and longer-term revenue yields. Additionally, revenue streams of this nature are expected to provide the company with greater visibility of future sales.

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         The Company’s revenue from its products and services segment is generated from sales of merchandise, subscriptions and activity-based fees. Sales of merchandise make up the vast majority of the Company’s products and services revenue, with revenue generated from the sale of a diverse assortment of products (including inkjet printer supplies and peripherals, consumer electronics, collectibles and other impulse merchandise, and herbal and all-natural ingestible and topical products), and consummated through continuity type consumer relationships. An example of the Company’s continuity type merchandise sales is found at the Company’s IncreaseYourHealth website, where users are offered a free, no risk trial of apple cider vinegar pills, a popular all-natural weight loss supplement, which converts into a monthly shipment of the product. Similarly, the Company’s subscription-type offerings, such as to its fitness and health and dating websites, represent the sort of steady and predictable streams of revenue toward which the Company continues to migrate. The Company also expects that websites charging activity-based fees, such as the Company’s pay-to-play skill gaming website SkillJam.com, will play an increasingly larger role in the Company’s revenue mix.

         Traditionally, spending in the advertising sector and general retail sector increases during the latter part of each calendar year, in line with the holiday shopping season. Accordingly, the Company’s revenue from advertising and products and services may be significantly higher during its third fiscal quarter than in other quarters throughout the year.

Corporate Organization

                   The Company has moved toward, and is in the process of refining, a corporate structure with eUniverse, Inc. as the parent holding company of, and service provider to, its various operating subsidiaries and joint ventures. Currently, the Company has 11 operating subsidiary entities and two joint ventures with certain services and functions performed at the parent level including accounting and finance, human resources, legal and technology. Recently, and in connection with its recent operational reorganization (see Recent Events above), the Company has begun a corporate restructuring to simplify and consolidate its corporate structure.

Expansion

                   eUniverse currently offers products and services across several categories including health and wellness, lifestyle and impulse merchandising. The Company intends to continue to expand its products and services portfolio by adding additional complementary products and services to its existing offerings. This expansion will be driven from organic development within the Company, acquisitions of other companies and businesses and through the development of strategic relationships. The Company will also continue to explore marketing channels beyond the Internet including television, radio and print. The Company intends to invest in the infrastructure and resources necessary to accommodate the scaling requirements of these expansion plans.

                   The Company is actively augmenting and improving the content and functionality of its current websites and related offerings. The core content and newsletter offerings are considered key components of the revenue generating capabilities of the Company and are continuously refreshed in an effort to retain users and enhance yield. New content offerings are expected to come from internal development as well as third-party licensing arrangements. The Company may also expand its content through selective acquisitions that attract desired demographics, and that cater to the specific communities of interest on the eUniverse Network.

Domain Names, Patents and Trademarks

                   The Company’s domain name portfolio constitutes important intellectual property of the Company that is essential to its business. There are currently 622 domain names registered to the Company. Also important to eUniverse’s business are its trademarks and service marks. eUniverse currently has 27 registered trademarks and service marks and 14 applications for trademarks and service marks filed with the US Patent and Trademark Office (“USPTO”). The Company currently has one patent application filed with the USPTO. eUniverse believes that it presently has, or is capable of acquiring, ownership and control of the intellectual property rights, which are necessary to conduct its operations, and to carry out its strategic plans.

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Operations and Technology

                   The Company’s primary operating facilities are located in Los Angeles, California. The Company’s senior management team and several core operations, marketing, product development and administrative support are combined in the same facility. Certain of the company’s customer care and content development operations are undertaken at various locations throughout the United States and in India.

                   eUniverse maintains a technology center at the Company’s primary facility, supported by in-house technical staff. This staff monitors the Company’s network of websites 24 hours a day, 7 days a week. The Company’s computer hardware to support its network and other Internet activities is housed at the co-location facility of a Tier 1 service provider. Additionally, the Company maintains a software development center, with in-house software engineers.

                   eUniverse has developed certain proprietary technologies and systems that provide for reliable online entertainment and commerce in a secure and easy-to-use format. Using a combination of proprietary solutions and licensed technologies, the Company has deployed systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. Chief among the company’s proprietary systems is the E-mail transmission and reporting technology. All of the Company’s E-mail is transmitted and tracked via this proprietary system. The Company’s E-mail system can send the appropriate type of E-mail to specific domains based on information generated from previous E-mail campaigns. Additionally, eUniverse has built a content delivery system that enables its users to freely transmit greeting cards and other content to their friends and family. The content delivery system has a full-featured ad tracking subsystem that allows eUniverse to monitor usage of the system. Finally, the Company has built a full-featured ad distribution system capable of meeting the dynamic ad creative, ad reporting and ad tracking needs of the business. This system allows the company to use many different types of ad creative from pop-ups to dynamic flash creative.

                   eUniverse’s websites are based on a Microsoft platform. The Company’s on-site network operations center is connected via a secure digital transmission link to its primary Internet service provider, AT&T Corporation. This service is provided under a three-year contract expiring in January 2005.

Marketing and Sales

                   The Company markets its own products and services, and those of third-party advertisers, using various direct marketing tools and techniques available across its advertising inventory. The company maintains an internal sales force to obtain and maintain third-party advertising relationships as well as market and sell its own proprietary products and services. This team, internally referred to as the CPA Team, continuously sources, tests and monitors advertising campaigns using the Company’s online advertising inventory. The CPA Team acts as a gatekeeper of sorts to the Company’s valuable advertising inventory by ensuring that only the highest yielding campaigns available at any particular time occupy inventory.

                   In addition to the CPA Team, in August of 2002, the Company announced the launch of PMG, an online marketing entity whose mission is primarily to broaden the reach for the Company’s products and services by placing them in online advertising media outside the eUniverse Network of websites and publications, and secondarily to offer the methods, tools and unique marketing services of the Company to third-parties seeking to promote their products and services online. PMG carries out its primary mission in two ways. First, PMG employs a team of media buyers that purchase large quantities of online advertising inventory from third parties in which to market the Company’s products and services. Second, PMG has created and operates an automated system called Partner2Profit (“P2P”) that provides Web publishers the ability to promote eUniverse’s best of breed products and services to their own audience. P2P is a turnkey solution with an automated, online sign-up process that affords Web publishers access to the same highly effective campaigns that eUniverse has used to successfully monetize its own audience. Users of the P2P service can retrieve ad creatives available on the P2P website to deliver to their audiences, for which they receive a commission for any sales resulting from the ads shown. The P2P system has proved an effective revenue generating service for hundreds of smaller Web publishers as well as an effective tool for marketing the Company’s products and services beyond its own network.

                   The company intends to continue investing in the marketing and sales teams of its various products and services offerings, including expansion beyond the online market. Additionally, the Company considers customer care to be a vital component of customer acquisition and retention. Accordingly, eUniverse intends to invest in the enhancement of its customer care function.

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Competition

                   The market for online multi-channel offerings, which includes information, entertainment, community, commerce and activity based experiences is rapidly evolving and intensely competitive. The past three years has seen an extremely soft advertising market, with ad budgets still down from those that existed in the late 1990’s and 2000. Accordingly, a few of the leading Internet websites have started to develop business models with a broader base of revenue streams, similar to eUniverse. The most notable of these competitive companies are AOL Time Warner and Yahoo. The Company believes it differentiates itself from these competitors through its origins as a multi-channel entertainment and destination network, as opposed to being more of a pass-through portal. Accordingly, eUniverse users are more accustomed to interacting with the content and offerings on the network of websites. Additionally, the company believes its various offerings are superior to, or at least competitive with, other similar competitive products and services.

                   Other direct competition is from advertising networks such as ValueClick, Advertising.com, Sportsline.com, and Traffix, as well as more focused information providers such as Overture and Google. In addition, the Company also faces competition from traditional offline media such as print, radio and television for a share of advertisers’ budgets. We expect the advertising market to remain intensely competitive for the foreseeable future, and barriers to entry are not prohibitive, thus new and existing competitors may expand their offerings at a relatively low cost.

                   Some of our current competitors have larger user bases, longer operating histories, higher brand recognition, and greater financial resources than eUniverse. As we expand the scope of our offerings, we may have to compete with a larger number of Internet websites as well as media companies. In addition, as the Internet becomes increasingly ubiquitous, larger, more well-financed or well-established entities may expand into, acquire, invest or continue to consolidate, thus increasing the competitive pressures that eUniverse faces.

Employees

                   As of March 31, 2003, there were 302 full-time employees, including 160 in marketing and sales, 40 in product development, 59 in technology and 43 in finance, human resources, legal and administration.

Website Access to SEC Reports

                   The Company’s Internet website can be found at http://www.eUniverse.com. Information contained on the Company’s Internet website is not part of this report. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the Section 16 filings of its officers, directors, and shareholders beneficially owning 10% or more of the Company’s common stock are available on the Company’s website, free of charge, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Alternatively, you may access these reports at the SEC’s Internet website: http://www.sec.gov.

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Risk Factors

Trading in our common stock has been halted and may not be resumed. NASDAQ may delist our securities.

                   On May 6, 2003, in response to the announcement of our intent to restate our quarterly financial statements for fiscal year 2003, NASDAQ halted trading in our common stock due to our inability to provide the market place with sufficient current financial information. On June 13, 2003, we received a NASDAQ Staff Determination stating that our common stock was subject to delisting from The NASDAQ SmallCap Market (the “SmallCap Market”) due to the NASDAQ Staff’s inability to assess the Company’s current financial position and its ability to sustain compliance with NASDAQ’s continued listing requirements. On July 2, 2003, we received notice of an additional listing deficiency from NASDAQ indicating that the Company was not in compliance with the filing requirement for continued listing due to our failure to timely file our Annual Report on Form 10-K. Subsequently, on August 15, 2003, the Company filed a Report on Form 12b-25 with the Securities and Exchange Commission as a result of its failure to timely file its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003. The Company currently anticipates it will file this Form 10-Q in September 2003. We have appealed the NASDAQ Staff’s determination to delist the Company’s securities to the Listing Qualifications Hearings Panel (the “Panel”). On July 31, 2003, in an oral hearing before the Panel, we presented our plan for providing current financial information about the Company to the market place and complying with the NASDAQ filing requirements. The Panel has not yet made determination on our appeal and there has been no indication from the NASDAQ Staff as to whether the halt in trading of our stock will be lifted. The Company can provide no assurance that the Panel will grant our request for continued listing or that the trading in our stock on the SmallCap Market will resume.

                   NASDAQ also has various quantitative listing requirements for a company to remain listed on the NASDAQ SmallCap Market. These criteria, which undergo periodic NASDAQ review, include, among other things, (i) at least $35 million in market capitalization, $2.5 million in stockholders’ equity, or $500 thousand in net income in an issuer’s last fiscal year or two of its last three fiscal years; (ii) a $1.00 minimum bid price; (iii) two market makers; (iv) 300 round lot shareholders; and (v) 500 thousand publicly held shares with a market value of $1 million (excluding shares held by officers, directors and persons owning 10% or more of the company’s issued and outstanding shares). Although we were in compliance with these quantitative listing requirements as of March 31, 2003, there can be no assurance that we will remain in compliance with these requirements in the future.                   

                    If we do not resume trading on the SmallCap Market, or if our common stock is delisted, trading in our common stock, if any, would be conducted in the over-the-counter market on the OTC Bulletin Board established for companies that do not meet the listing requirements of the SmallCap Market or in what is commonly referred to as the “pink sheets.” Transitioning to the over-the-counter market or the “pink sheets” could damage our general business reputation and would impair our ability to raise additional funds. This would further adversely affect our stock price. Furthermore, if our shares are delisted and are traded on the over-the-counter bulletin board or the “pink sheets,” their value would be negatively affected because stocks which trade on the over-the-counter bulletin board or the “pink sheets” tend to be less liquid and trade with larger variations between the bid and ask price than stocks on the SmallCap Market. Accordingly, either of the foregoing events could have a material adverse effect on our business, financial condition and operating results.

Litigation and regulatory proceedings regarding the restatement of our consolidated financial statements could seriously harm our business.

                   As previously disclosed by the Company in its current report on Form 8-K filed June 20, 2003, since May 9, 2003, eight purported shareholder class action lawsuits, which are substantially similar, have been filed against the Company and several current and former officers and/or employees of the Company in the United States District Court for the Central District of California. In addition, three purported shareholder derivative actions, which are similar, have been filed against various current and former directors, officers, and/or employees of the Company, one of which was recently filed in the United States District Court for the Central District of California, and two of which were filed in the Superior Court of California for the County of Los Angeles. The Company expects that the purported shareholder class action lawsuits filed in the United States District Court for the Central District of California (collectively, the “Federal Court Cases)”, and any additional similar actions, will be consolidated into one action, and that the purported shareholder derivative actions filed in the Superior Court of California for the County of Los Angeles (collectively, the “State Court Actions”), and any additional similar actions filed in that Court, will similarly be coordinated before one judge. All of the lawsuits, which arise out of the Company’s previously disclosed Restatement, include varying allegations of, among other things, false and misleading statements regarding the Company’s business prospects and financial condition and performance, sales of Company stock by one officer and one former employee of the Company, and breach of fiduciary duty. The Company intends to vigorously defend itself in the Federal Court Cases and to address the State Court Actions as appropriate. Defending against existing and potential securities and class action litigation relating to the Restatement will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. If our defenses were ultimately unsuccessful, or if we were unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operations.

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                   In addition, the SEC has commenced an informal inquiry regarding the circumstances leading up to the Restatement. Responding to any such review could require significant diversion of management’s attention and resources in the future. For example, if the SEC elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management resources. If we are unsuccessful in defending against this or other investigations or proceedings, we may face civil or criminal penalties or fines that would seriously harm our business and results of operations.

Failure or circumvention of our controls or procedures could seriously harm our business.

                   In response to the Company’s announcement that it intended to restate its quarterly financial statements for the fiscal year ended March 31, 2003, both management and the Audit Committee of the Board of Directors undertook a review of the Company’s accounting records, policies, practices and procedures. During the course of this review, and during the course of the audit of the Company’s financial statements for the year ended March 31, 2003, various deficiencies in the Company’s internal control were identified. As described above, we have taken a number of steps to improve our internal controls and procedures. Additionally, management is undertaking a number of initiatives to further enhance our internal controls and procedures. However, we can provide no assurance that these actions or any other actions we may take will be successful. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. A failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.

We are controlled by our management, preferred stockholders, and members of our Board of Directors whose interest may differ from those of our other stockholders.

                   As of March 31, 2003, our executive officers, preferred stockholders holding a 5% or greater beneficial ownership in our securities, and members of our Board of Directors will beneficially own approximately 56% of our common stock on an as-converted basis. As a result, our executive officers, preferred stockholders, and directors will be able to influence the outcome of matters requiring a stockholder vote, including the election of directors, the issuance of new securities and the approval of significant transactions, thereby controlling our affairs and our management. The interests of our executive officers, preferred stockholders, and directors may conflict with or not be the same as the interests of our other stockholders and, through control of the Board of Directors, the executive officers, preferred stockholders and directors may delay, defer or prevent a change in control of our company, or make some transactions more difficult or impossible. Examples of potentially conflicting transactions, include the issuance of additional preferred securities, proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price of our common stock.

We may issue securities with rights superior to those of the common stock, which could materially limit the ownership rights of existing stockholders.

                   We may issue additional preferred stock at such time or times and for such consideration as the Board of Directors may determine. Each series is required to be so designated as to distinguish the shares thereof from the shares of all other series. The Board of Directors is expressly authorized, subject to the limitations prescribed by law and the provisions of our Certificate of Incorporation, to provide for the issuance of all or any shares of preferred stock, in one or more series, each with such designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as are determined by the Board of Directors.

                   In July 2003, the Company entered into certain agreements, and executed a non-binding term sheet with respect to certain contemplated agreements, with VP Alpha Holding IV, L.L.C. ("VPVP"), an affiliate of VantagePoint Venture Partnership, that may result in the issuance of a new series of preferred stock with certain rights, preferences and privileges that would be senior to the rights, preferences and privileges of the Company's common stock. Further information with respect to the agreements and contemplated agreements with VPVP is set forth above in "Business - Recent Events - Additional Financing."

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                   In addition, our Certificate of Incorporation authorizes blank check preferred stock. Our Board of Directors can set the voting, redemption, conversion and other rights relating to the preferred stock and can issue the stock in either a private or public transaction. The issuance of any preferred stock may have the effect of delaying or preventing a change in control of eUniverse without further stockholder action and may adversely affect the rights and powers, including voting rights of the holders of our common stock, rights to receive dividends and rights to payments upon liquidation. In certain circumstances, the issuance of preferred stock could depress the market price of our common stock, and could encourage persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our Board of Directors rather than pursue non-negotiated takeover attempts.

We have many potentially dilutive securities outstanding.

                   As of March 31, 2003, we had 7,601,810 options and 127,244 warrants to purchase our common stock outstanding.

                   As of March 31, 2003, we had 356,500 shares of our Series A 6% Convertible Preferred stock outstanding (the “Series A”). The Series A shares may be converted, at any time, into the Company’s common stock at the then-applicable conversion rate. The shares of Series A have a liquidation preference of $3.60 per share, which increases at a rate of 6% per annum. Each share of Series A may be converted to common stock at a rate of one share of common stock for each $3.60 of liquidation preference. The liquidation preference was $4.58 as of April 14, 2003. Because of the 6% accretion factor, each share of Series A may be converted into greater than one share of common stock. Prior to any conversion, the conversion price is adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend, or other similar event. The conversion price is also subject to a weighted average adjustment to reduce dilution in the event that we issue additional equity securities (other than those reserved as employee shares pursuant to any employee stock option plan) at a purchase price less than the applicable conversion price described above.

                   As of March 31, 2003, we had 1,923,077 shares of our Series B Convertible Preferred Stock outstanding (the “Series B”). The Series B may be converted, at any time, into our common stock at the then applicable conversion rate at the election of the holders of at least a majority of the outstanding Series B. The Series B has a liquidation preference of $2.60 per share. Each share of Series B may be converted to common stock at an initial rate of one share of common stock for each $2.60 of liquidation preference. Prior to any conversion, the conversion price is adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend, or other similar event. The conversion price per share of Series B may be adjusted downward if we issue additional equity securities (other than certain excluded stock), without consideration or for consideration per share less than the then-current conversion price (initially $2.60 per share).

                   In July 2003, the Company entered into certain agreements, and executed a non-binding term sheet with respect to certain contemplated agreements, with VP Alpha Holdings IV, L.L.C. (“VPVP”), an affiliate of VantagePoint Venture Partners, that may result in the issuance of a new series of preferred stock with certain rights, preferences and privileges that would be senior to the rights, preferances and privileges of the Company’s common stock. Further information with respect to the agreements and contemplated agreements with VPVP is set forth above in “Business - Recent Events - Additional Financing.”

                   The issuance of common stock upon the exercise of our outstanding options and warrants, or the conversion of the Series A, Series B, or any newly issued Series of preferred stock, will cause dilution to existing shareholders and could adversely affect the market price of our common stock.

If we are unable to use new technologies effectively or adapt our websites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards, customers may not visit our network of websites, which could result in a decrease in our revenues.

                   To remain competitive, we must continue to enhance and improve the responsiveness, functionality, features of our websites, and develop new features to meet customer needs. The Internet is characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions, and the emergence of new industry standards and practices that could render our existing network and websites, technology and systems obsolete. Our success will depend, in part, on our ability to license leading technologies useful in our business, enhance our existing services, develop new services and technology that address the needs of our customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

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If we are unable to continue to develop compelling entertainment and other content for our network of websites and electronic newsletters, the Company’s traffic, subscriber and user base may be reduced and our revenues could decrease.

         The online business market is new, rapidly evolving and intensely competitive, and eUniverse expects that competition will further intensify in the future. Similarly, the competition for website traffic and subscribers, as well as advertising revenues, both on Internet websites and in more traditional media, is intense. Barriers to entry are currently minimal, and current and new competitors can launch new websites and electronic newsletters at a relatively low cost. The primary competitive factors in providing entertainment and multi-channel products and services via the Internet are name recognition, variety of value-added offerings, ease of use, price, quality of service, availability of customer support and technical expertise. Our prospects for achieving our business objectives will depend heavily upon our ability to continuously provide high quality, entertaining content, along with user-friendly website features, and value-added Internet products and services. If we fail to continue to attract a high volume of traffic for our websites or a broad subscriber base, revenues could decrease and our business, results of operations and financial condition may be materially adversely affected.

We depend on strategic relationships with our partners.

         We expect to generate significant commerce and advertising revenues from strategic relationships with certain outside companies. However, there can be no assurance that our existing relationships will be maintained through their initial terms or that additional third-party alliances will be available to the Company on acceptable commercial terms, or at all. The inability to enter into new or to maintain any one or more of our existing, strategic alliances could result in decreased third-party paid advertising and product and service sales revenue. Even if we are able to maintain our strategic alliances, there can be no assurance that these alliances will be successful or that our infrastructure of hardware and software will be sufficient to handle any potential increased traffic or sales volume resulting from these alliances.

Some of our sponsorship arrangements may not generate anticipated revenues.

         Advertising revenues are partly generated by sponsored services and placements by third parties in our online media properties. We receive sponsorship fees or a portion of transaction revenues in return for user impressions to be provided by us. Consequently, we are exposed to potential financial risks if: sponsors do not renew the arrangement or do so at a lower rate; the shared revenue is lower than expected; fees are adjusted to reflect performance; or we are obligated to provide additional services to supplement lower than anticipated performance. Additionally, any material reduction of our user base may directly reflect upon these sponsorship arrangements and adversely effect revenues.

Our success depends on retaining our current key personnel and attracting additional key personnel.

         The company is dependent on the services of key personnel, including our senior management, vice presidents, and business unit managers. Due to the specialized knowledge of these individuals, as it relates to eUniverse and our operations, if they were to leave the employ of the Company, we could have difficulty hiring qualified individuals to replace the personnel in a timely manner. Consequently, operations and productivity surrounding the vacated position may be impaired and cause an adverse effect on operating results. In addition, our success depends on our continuing ability to attract, hire, train and retain a selected number of highly skilled managerial, technical, sales, marketing and customer support personnel, particularly in the areas of content development, product development, website design, and sales and marketing. Competition for qualified personnel is intense, and our ability to retain key employees, or to attract or retain other highly qualified personnel, may be harder given recent adverse changes in our business.

We may not be able to continue to grow through acquisitions of other companies and we may not manage the integration of acquired companies successfully.

         A significant portion of our future growth and profitability may depend in part upon our ability to identify companies that are suitable acquisition candidates, to acquire those companies upon appropriate terms, and to

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effectively integrate and expand their operations within our infrastructure. We may not be able to identify additional candidates that are suitable for acquisition or to consummate desired acquisitions on favorable terms. Acquisitions involve a number of special risks: the diversion of management’s attention to the assimilation of the operations and personnel of the acquired companies, adverse short-term effects on our operating results, and the potential inability to integrate financial and management reporting systems. A significant portion of eUniverse’s capital resources could be used for these acquisitions. Accordingly, we may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to us, if at all. Moreover, we may not be able to successfully integrate an acquired business into its business or to operate an acquired business profitably. It could have a material adverse effect on our business if we are not able to identify appropriate acquisition candidates or integrate and expand the operations of acquired companies without excessive costs, delays or other adverse developments.

If we do not effectively manage our growth, our business will be harmed.

         Even after giving effect to our recent reduction in headcount, the scope of our operations and our workforce has expanded significantly over a relatively short period of time. This growth requires significant time and resources of senior management, and may distract from other business initiatives. If we are unable to effectively manage this growth, then our earnings could be adversely affected. In addition, we rely on the effectiveness of our financial reporting and data systems, which have become increasingly complex due to rapid expansion and diversification. Management of our business is dependent on the information from these systems, and if we do not adapt to the rapid changes in the business, then our business could be adversely effected.

Our previous acquisitions and any future acquisitions may require us to incur significant charges for goodwill and intangible assets.

         We have adopted the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” In light of the SFAS 142 adoption, we are required to review our amortizable intangible assets for impairment when events or changes in conditions may prevent the Company from recovering the carrying value. Furthermore, goodwill is required to be tested for impairment at least once per fiscal year. If our stock price and market capitalization decline, we may be required to record a material charge to earnings in our financial statements during the period in which we analyze our intangible assets and goodwill for impairment. Furthermore, the future cash flows associated with our various properties may decline due to changes in market conditions or technology, thereby requiring an impairment assessment of any intangible assets and goodwill associated with the property.

         In fiscal year 2003, we analyzed goodwill for impairment at the Company level. As a result of the ongoing reorganization of our reporting structure, we anticipate that, in the future, we will have sufficiently discrete financial information to conduct a goodwill impairment analysis at the reporting unit level. This change may affect the amounts recorded for goodwill impairment in future periods.

If we are unable to protect our trademarks and other proprietary rights, our reputation and brand could be impaired, and we could lose customers.

         We regard our trademarks, trade secrets and similar intellectual property as valuable to our business, and rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, partners and others to protect our proprietary rights. There can be no assurance that the steps taken by us will be adequate to prevent misappropriation or infringement of our proprietary property. We have some of our trademarks or service marks registered with the United States Patent and Trademark Office, and we are currently applying for registration of a number of its trademarks and service marks. Completion of our applications for these trademarks may not be successful. See “Business - Domain Names, Patents, and Trademarks”, above.

If we are unable to protect our domain names, our reputation and brand could be impaired, and we could lose customers.

         We own numerous Internet domain names. See “Business - Domain Names, Patents and Trademarks”, above. National and international Internet regulatory bodies generally regulate the registration of domain names. The regulation of domain names in the United States and in other countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not acquire or maintain the domain names referenced in the Domain Names section or comparable domain names in all the countries in which we conduct business, which could harm our business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and still evolving. Therefore, we might be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.

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As we provide more audio and video content, particularly music, we may be required to spend significant amounts of money on content acquisition and content broadcasts.

         The majority of our content is derived internally or licensed to us by third parties. However, we have been providing increasing amounts of audio and video content to our uses, particularly the broadcast of music. In order to broadcast music through our online properties, we are required to pay a royalty on the music we broadcast. The revenue we receive due to the broadcast of the audio and video content may not justify the costs of providing such services to our customers.

We have a limited operating history and compete in new and rapidly evolving markets. These facts make it difficult to evaluate our future prospects based on historical operating results.

         eUniverse commenced in April 1999, and we have a limited operating history upon which an evaluation of eUniverse and our prospects can be based. In addition, we have repositioned our service and product offerings to adjust to evolving customer requirements and competitive pressures. Our prospects for financial success must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new, unproven and rapidly evolving markets, such as the Internet market. To address these risks, we must, among other things, expand our customer base, respond effectively to competitive developments, continue to attract, retain and motivate qualified employees, and continue to upgrade our technologies. If we are not successful in further developing and expanding our entertainment content, product and services businesses, and other related business opportunities, our ability to maintain and increase profitability may not be achieved and our market price may decline.

We may need to raise additional capital. This capital may not be available on acceptable terms, if at all.

         Given the recent significant changes in our business and results of operations, the fluctuation in cash and cash equivalents balances and anticipated cash flow may be greater than presently anticipated. In addition, we expect to incur significant non-recurring expenses associated with the Restatement and the implementation of internal controls and other corporate goverance initiatives required by the Sarbanes-Oxley Act of 2002, as well as significant expenses in connection with the Restatement-related litigation. In the event we are unable to reach an agreement with VPVP for additional financing (see “Business—Recent Events—Additional Financing,” above), we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional debt or equity financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, grow our business, or meet unanticipated cash requirements, which could seriously harm our business.

Our quarterly and long-term operating results are volatile and difficult to predict.

         Due to the nature of our business, our future operating results may fluctuate. If we are unable to meet the expectations of investors and public market analysts, the market price of our common stock may decrease. We expect to experience fluctuations in future quarterly and long-term operating results that may be caused by a variety of factors, many of which are outside our control. Factors that may affect our operating results include, without limitation:

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More individuals are utilizing non-PC devices to access the Internet and we may not be successful in adapting our services to these new devices.

         Devices other than personal computers, such as personal digital assistants, cellular telephones, and television set-top devices, are expected to increase dramatically in the coming years. Our services are designed for presentation on graphic rich devices such as the personal computer. The decreased functionality and lower resolution of the new technologies available to consumers may make it difficult for us to adapt our services in a compelling manner. Consequently, we may face adverse financial effects and operational changes that effect earnings, in order to adapt our services to these new devices. It is difficult to predict with certainty what effect these devices will have on our earnings potential, and significant resources may be required in the future to leverage our online presence in this new format.

We depend on the acceptance and growth of the Internet and the Internet Infrastructure.

         Our market, users of the global computer network known as the Internet, is new and rapidly evolving. Our future results and growth may not be realized and our business could suffer if the use of the Internet does not continue to increase. Internet usage may be inhibited for a number of reasons, including:

         If Internet usage grows, the Internet infrastructure might not be able to support the demands placed on it by this growth or its performance and reliability may decline. In addition, future outages and other interruptions occurring throughout the Internet could lead to decreased use of our network of websites and harm our business.

We may face litigation for information retrieved from the Internet.

         We could be sued for information retrieved from the Internet. Due to the fact that material may be downloaded from websites and may be subsequently distributed to others, there is a potential that claims will be made against eUniverse under legal theories, such as defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of the material. These claims have been brought, and sometimes successfully pressed, against online services in the past. In addition, we could be exposed to liability with respect to the material that may be accessible through its products, services, and websites, including claims asserting that, by providing hypertext links to websites operated by third parties, we are liable for wrongful actions by those third parties through the websites. Although we carry general liability insurance, our insurance may not cover potential claims of this type, or the level of coverage may not be adequate to fully protect eUniverse against all liability that may be imposed. Any costs or imposition of liability or legal defense expenses that are not covered by insurance or in excess of insurance coverage could reduce our working capital and have a material adverse effect on its business, results of operations and financial condition. Also, the legal effectiveness of our terms and conditions of use is uncertain. Except as disclosed elsewhere herein, management is currently not aware of any claims that can be expected to have a material adverse impact on our financial condition or our ability to conduct our business.

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We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services or increase the cost of doing business.

         Government regulation and legal uncertainties could increase our costs and risks of doing business on the Internet. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel, taxation and personal privacy are applicable to the Internet. The applications of existing laws, or the adoption of new laws and regulations in the future, that address issues such as user privacy, pricing, taxation and the characteristics and quality of products and services, could create uncertainty in the Internet marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.

If the delivery of Internet advertising on the Web, or the delivery of our E-mail messages, are limited or blocked, demand for our products and services may decline.     

         Our business may be adversely affected by the adoption by computer users of technologies that harm the performance of our products and services. For example, computer users may use software designed to filter or prevent the delivery of Internet advertising or deploy Internet browsers set to block the use of cookies. We cannot assure you that the number of computer users who employ these or other similar technologies will not increase, thereby diminishing the efficacy of our products and services. In the case that one or more of these technologies becomes widely adopted by computer users, demand for our products and services would decline.

         We also depend on our ability to deliver E-mails over the Internet through Internet service providers and private networks. Internet service providers are able to block messages from reaching their users and we do not have, nor are we required to have, agreements with any Internet service providers to deliver E-mails to their customers. As a result, we could experience periodic temporary blockages of our delivery of E-mails to their customers, which would limit the effectiveness of our E-mail marketing. Some Internet service providers also use proprietary technologies to handle and deliver E-mail. If Internet service providers materially limit or block the delivery of our E-mails, or if our technology fails to be compatible with these Internet service providers’ E-mail technologies, then our business, results of operations or financial condition could be materially and adversely affected. In addition, the effectiveness of E-mail marketing may decrease as a result of increased consumer resistance to E-mail marketing in general.

We may be not able to keep pace with rapid technological changes in the Internet industry, which could cause us to lose customers and revenue.

         Rapid technological developments, evolving industry standards and user demands, and frequent new product introductions and enhancements characterize the market for Internet products and services. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. Our future success will depend on our ability to continually improve our content offerings and products and services. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature, viability and measurability of Internet-based advertising and direct marketing, which may harm our business.

Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event.

         Significant portions of our operations are located in California, which is susceptible to earthquakes and forest fires. In addition, our operations are susceptible to outages due to “rolling black-outs”, fire, floods, telecommunication failures, break-ins, and other natural disasters. We have multiple website capacity to minimize disruption to our services; however, not all services provided by the Company are supported by such redundancy. Despite our implementation of network security measures, our services may become vulnerable to new computer viruses and similar disruptions from unauthorized tampering with our computer systems or personal computers for individuals.

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Our business and future operating results are subject to a wide range of uncertainties arising out of the continuing threat of terrorist attacks.

         The United States has been the target of terrorist attacks in the past and remains the target of armed hostilities both in the United States and abroad. These attacks result in global instabilities in the financial markets, which may in turn contribute to increased volatility in the stock prices of United States publicly traded companies, such as eUniverse. Furthermore, these attacks may lead to economic instability in the United States, which could adversely affect our revenue.

ITEM 2.   FACILITIES

         eUniverse currently leases approximately 42,500 square feet of office space in two separate facilities in Los Angeles, California for its headquarters staff, including technical, sales and marketing, business development and administrative functions. The Company leased approximately 25,000 square feet in April 2002, as part of a facilities expansion plan designed to accommodate the Company’s current and future growth. In January 2003, the Company leased an additional 7,500 square feet to accommodate further growth. The lease term for the recently obtained space runs through February 2006, with initial monthly rental rates of approximately $45 and $17 thousand, respectively. These lease arrangements include an annual 3% escalation clause. The remaining 10,000 square feet of space in Los Angeles is under lease at approximately $18 thousand per month through December 30, 2004. The Company intends to sub-lease some or all of this space.

         The Company leased approximately 5,000 square feet of office space in August 2002, for its Call Center in Montclair, California. The lease with respect to this facility expires on July 31, 2004, with an initial monthly rental rate of approximately $4 thousand. This lease arrangement includes an annual 5% escalation clause.

         The Company leases approximately 300 square feet of office space for its marketing and sales staff in New York at a monthly cost of $2 thousand, on a month-to-month basis.

         The Company leased approximately 2,000 square feet of office space in February 2003 for its Cases Ladder subsidiary in Mount Vernon, Washington. The lease with respect to this facility expires on January 31, 2005 with an initial monthly rental rate of $2 thousand. This lease arrangement includes an annual 3% escalation clause, and it may be renewed at the end of the current lease term.

         On March 26, 2003, the Company entered into a six month lease beginning on April 15, 2003 with an initial monthly rental rate of $10 thousand which was subsequently extended to 18 months, for 13,500 square feet of warehouse space to be used for inventory and order fulfillment. This lease arrangement includes an annual 3% escalation clause.

         Management of the Company believes that the current available facilities are adequate to accommodate the needs of the business, and that suitable additional space will be available to accommodate growth in operations.

ITEM 3.   LEGAL PROCEEDINGS

         As previously disclosed, on July 6, 2001, Adolph Komorsky Investments, Inc. (“AKI”), an Illinois corporation with its principal place of business in Tarrytown, New York, filed a complaint against the Company in the Supreme Court of the State of New York, County of Westchester. AKI alleged that the Company breached a consulting agreement with AKI by failing and refusing to pay AKI cash and warrant consideration called for under the agreement. On or about March 25, 2003, the Company and AKI entered into a Settlement Agreement pursuant to which (i) the Company agreed to pay AKI an undisclosed sum of cash, (ii) the parties released each other from all claims and liabilities arising out of the subject matter of the AKI litigation, and (iii) AKI agreed to dismiss the lawsuit with prejudice.

         As previously disclosed, on October 17, 2002, the Company filed a complaint in the Superior Court of Los Angeles, California, against Jody Henderson, the former owner and proprietor of the Company’s interactive entertainment website known as FunnyGreetings (the “California Action”). The Company is seeking an order from the Court declaring the validity and enforceability of, and the Company’s compliance with, an amendment to the acquisition agreement pursuant to which the Company purchased FunnyGreetings from Mr. Henderson in September

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of 2000. The terms of the amendment, which was executed by the parties in July of 2001, resulted in, among other things, an $800 thousand reduction in the minimum purchase price to be paid by the Company to Mr. Henderson for the FunnyGreetings business. The Company filed the lawsuit due to Mr. Henderson’s allegations that (i) the Company breached the purchase agreement by not accounting for all, and/or by undermining, sources of revenue from the Company’s operation of the FunnyGreetings website thereby adversely affecting amounts due to Mr. Henderson under the purchase agreement, and (ii) the amendment to the purchase agreement was the result of economic duress and is unenforceable. In January of 2003, the Company was served with a lawsuit filed by Mr. Henderson in the Circuit Court of Fayette County, Kentucky, which includes claims based on the above allegations (the “Kentucky Action”). On January 9, 2003, the Company removed the Kentucky Action to the United States District Court for the Eastern District of Kentucky. On August 21, 2003, the Company and Mr. Henderson entered into a settlement agreement pursuant to which the Company agreed to pay Mr. Henderson $365,000 of the remaining obligation, the parties released all claims against each other and agreed to dismiss the lawsuits with prejudice.

         On February 14, 2003, Symantec Corporation, a Delaware corporation with its principal place of business in Cupertino, California (“Symantec”), filed a complaint in the United States District Court for the Central District of California naming the Company, e-Commerce Transactions, LLC (“ECT,” a wholly owned subsidiary of the Company), and two of the Company’s executive officers as defendants (collectively the “eUniverse Defendants”). Symantec alleges claims of trademark and copyright infringement, and related state and common law claims, related to ECT’s marketing and sale of Norton Anti-virus software products. The eUniverse Defendants have filed an answer to Symantec’s complaint denying Symantec’s allegations and asserting various affirmative defenses. This matter is in the early stages of discovery with a trial date set for December 16, 2003. The Company believes that ECT’s sales of Norton software products did not infringe Symantec’s rights and that the claims and allegations of Symantec are without merit. The eUniverse Defendants intend to vigorously defend themselves in this matter. To the extent Symantec’s claims are meritorious, the Company believes it has claims for reimbursement and indemnity against the suppliers from whom ECT purchased the subject software.

         On May 13, 2003, SoftwareOnline.com, Inc., a Washington corporation with its principal place of business in King County, Washington (“SoftwareOnline”), filed a complaint against the Company in the United States District Court for the Western District of Washington at Seattle. The Company had previously entered into a nondisclosure agreement and letter of intent with SoftwareOnline in anticipation of a potential acquisition of SoftwareOnline by eUniverse. SoftwareOnline alleges, inter alia, breach of the nondisclosure agreement and misappropriation of trade secrets and trade dress related to the Company’s online marketing and sales of downloadable software. SoftwareOnline seeks injunctive relief, actual damages in an amount to be proven at trial, and punitive damages in the amount of $10 thousand. On June 27, 2003, the Company filed an answer denying SoftwareOnline’s allegations and asserting various defenses. The Company disputes SoftwareOnline’s claims and allegations, believes that they are without merit and intends to vigorously defend itself in this action.

         On January 31, 2003, Arcade Planet, Inc. (“Arcade Planet”), a California corporation, filed a patent infringement complaint against the Company in the United States District Court for the District of Nevada. The Complaint filed by Arcade Planet alleges that online skill-based gaming services offered by the Company on certain of its websites infringe a patent held by Arcade Planet and entitled the “918 Patent.” On April 9, 2003, the Company filed an answer denying Arcade Planet’s allegations and seeking declaratory judgment from the Court to the effect that (i) the Company has not and does not infringe the 918 Patent and (ii) the claims of the 918 Patent are invalid and unenforceable. On July 18, 2003, the court stayed this action until the United States Patent and Trademark Office reexamines a substantial new question of patentability affecting certain claims in question underlying the 918 Patent. The Company disputes Arcade Planet’s claims, believes that they are without merit, and will vigorously defend itself in this matter.

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         On May 13, 2003, Bridgeport Laboratories, LLC d/b/a YourFreeVitamins.com (“Bridgeport”), a Florida limited liability company, filed a complaint against the Company in the Superior Court of Los Angeles, California. Bridgeport alleges that the Company owes unpaid amounts due under a marketing agreement of approximately $153 thousand, although plaintiff seeks compensatory damages of in excess of $600 thousand. On April 1, 2003 the Company filed a verified answer to Bridgeport’s complaint denying Bridgeport’s allegations and filed a cross-complaint for breach of the marketing agreement and is seeking damages of in excess of $500 thousand. The Company disputes Bridgeport’s claims, believes that they are without merit, and will vigorously defend itself and prosecute its cross-claims in this matter.

         As previously disclosed by the Company in its current report on Form 8-K filed June 20, 2003, since May 9, 2003, eight purported shareholder class action lawsuits, which are substantially similar, have been filed against the Company and several current and former officers and/or employees of the Company in the United States District Court for the Central District of California. In addition, three purported shareholder derivative actions, which are similar, have been filed against various current and former directors, officers, and/or employees of the Company, one of which was recently filed in the United States District Court for the Central District of California, and two of which were filed in the Superior Court of California for the County of Los Angeles. The Company expects that the purported shareholder class action lawsuits filed in the United States District Court for the Central District of California (collectively, the “Federal Court Cases)”, and any additional similar actions, will be consolidated into one action, and that the purported shareholder derivative actions filed in the Superior Court of California for the County of Los Angeles (collectively, the “State Court Actions”), and any additional similar actions filed in that Court, will similarly be coordinated before one judge. All of the lawsuits, which arise out of the Company’s previously disclosed Restatement, include varying allegations of, among other things, false and misleading statements regarding the Company’s business prospects and financial condition and performance, sales of Company stock by one officer and one former employee of the Company, and breach of fiduciary duty. The Company intends to vigorously defend itself in the Federal Court Cases and to address the State Court Actions as appropriate. Defending against existing and potential securities and class action litigation relating to the Restatement will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. If our defenses were ultimately unsuccessful, or if we were unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operations.

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

         No matters were submitted during the fourth quarter of the fiscal year 2003 to a vote of the Company’s security holders, through the solicitation of proxies or otherwise.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

         As of July 31, 2003 there were 26,562,239 shares of the Company’s common stock outstanding, which were held by approximately 3,000 shareholders of record.

         From April 20, 2000 to July 14, 2003, our common stock has been listed on the NASDAQ Small Cap Market under the symbol EUNI. From July 15, 2003 to present our common stock is listed under the symbol EUNIE due to the failure to timely file our fiscal year 2003 Annual Report on Form 10-K. From April 30, 1999 to April 19, 2000, the common stock of eUniverse was traded on the OTC Electronic Bulletin Board under the symbol EUNI. On May 6, 2003, NASDAQ halted trading in our common stock, and trading has remained halted to the date of the filing of this Annual Report on Form 10-K. On May 5, 2003, the last day of trading in the shares of our common stock, the price per share of our common stock was $3.62.

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         The following table sets forth the range of low and high sales prices reported by NASDAQ SmallCap Market for our Class A common stock for the periods indicated.

Dividends

         To date, eUniverse has paid no cash dividends, and has no intention to pay cash dividends on its common stock in the foreseeable future. Our present policy is to retain earnings, if any, to finance future growth.

         On January 9, 2003, the Company issued 97,201 shares of its common stock incident to partial, net issuance exercise of a warrant to purchase 305,000 shares of Company common stock at an exercise price of $2.10 per share originally issued to a consultant of the Company on January 2, 2001.

         On January 21, 2003, the Company issued 4,225 shares of its common stock incident to net issuance exercise of a warrant to purchase 6,000 shares of Company common stock at an exercise price of $2.00 per share originally issued to a Series A Preferred shareholder of the Company on January 31, 2001.

         On January 21, 2003, the Company issued 1,778 shares of its common stock incident to net issuance exercise of a warrant to purchase 2,400 shares of Company common stock at an exercise price of $1.75 per share originally issued to a Series A Preferred shareholder of the Company on October 22, 2001.

         On February 3, 2003, the Company issued 1,250 shares of its common stock incident to exercise of a warrant to purchase 1,250 shares of Company common stock at an exercise price of $1.75 per share originally issued to a Series A Preferred shareholder of the Company on October 22, 2001.

         On February 10, 2003, the Company issued 64,010 shares of its common stock incident to net issuance exercise of a warrant to purchase 80,000 shares of Company common stock at an exercise price of $1.25 per share originally issued to a consultant of the Company on April 4, 2001.

         On February 12, 2003, the Company issued 437 shares of its common stock incident to net issuance exercise of a warrant to purchase 600 shares of Company common stock at an exercise price of $1.75 per share originally issued to a consultant of the Company on October 22, 2001.

         On February 27, 2003, the Company issued a total of 280,984 shares of its common stock incident to net issuance exercise of warrants to purchase 410,000 shares of Company common stock at an exercise price of $1.00 per share originally issued to two investors in the Company on September 25, 2001.

         On February 28, 2003, the Company issued 116,192 shares of its common stock incident to net issuance exercise of a warrant to purchase 150,000 shares of Company common stock at an exercise price of $1.25 per share originally issued to an investor in the Company on April 4, 2001.

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         On March 10, 2003, the Company issued 372,432 shares of its common stock incident to net issuance exercise of a warrant to purchase 671,865 shares of Company common stock at an exercise price of $2.74 per share originally issued to a consultant of the Company on April 14, 1999.

         On March 31, 2003, the Company issued 1,563 shares of its common stock incident to exercise of a warrant to purchase 1,563 shares of Company common stock at an exercise price of $2.00 per share originally issued to a Series A Preferred shareholder of the Company on March 27, 2001.

         The foregoing sales of common stock were made in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D promulgated thereunder for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sales of securities. These sales were made without general solicitation or advertising. Each purchaser was an accredited investor or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the shares were being acquired for investment.

ITEM 6.   SELECTED FINANCIAL DATA

         The following selected financial data are derived from our audited financial statements presented as of March 31, 2003, 2002, 2001, 2000 and 1999. The results presented for the year ended March 31, 1999 are those of CD Universe, Inc., the financial predecessor of eUniverse. The historical results are not necessarily indicative of results to be expected for any future period. The data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes to the financial statements included elsewhere in this Form 10-K.

eUNIVERSE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

BALANCE SHEET DATA

(1) Certain fees paid to third parties for media space, license agreements, and ad revenue-sharing arrangements, which had previously been included in cost of goods sold, are reflected in marketing and sales expenses. In addition, credit card fees, which had previously been included in general and administrative expense, have been reclassified and appear in cost of goods sold.

         Following is a recap of the reclassifications for the years ended March 31 (in thousands):

         For the year ended March 31, 2000, $1,397 was reclassed from Amortization of goodwill and other intangible assets to General and Administrative expenses.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         In addition to historical information, the following discussion and analysis of management contains forward-looking statements. These forward-looking statements, including those with respect to expected operating results for 2004, involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the results of any acquisitions we may complete, and those risks and uncertainties discussed in the section of this Form 10-K entitled “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. eUniverse undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K to be filed by us in fiscal year 2004.

         The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes that appear elsewhere in this report.

Recent Events

         The Company has determined the need to restate its consolidated financial statements for the first three fiscal quarters of fiscal year 2003, ended June 30, September 30, and December 31, 2002, respectively. Further information with respect to the Company’s restated quarterly financial statements is presented in “Business – Recent Events – Restatement”, “Item 14 – Controls and Procedures,” and in Note 2 and Note 21 of Notes to Consolidated Financial Statements. As a result of the Company’s announcement of its intent to restate its quarterly financial statements, NASDAQ halted trading in the Company’s common stock and initiated delisting proceedings. In addition, the Company contacted the Securities and Exchange Commission to notify it of the Company’s restatement and the SEC staff initiated an informal inquiry into the matter. Further information with respect to the NASDAQ and SEC matters is provided above in “Business – Recent Events – NASDAQ Trading Halt, NASDAQ Delisting Proceedings, and SEC Investigation.” In response to the identification of various deficiencies leading to the Company’s restatement of its quarterly financial statements, the Company has implemented a number of enhancements and taken certain remedial actions designed to improve the Company’s accounting and financial reporting procedures and controls. Further information with respect to these efforts is set forth above in “Business – Recent Events – Enhancements to Accounting and Financial Reporting Procedures and Controls.”

Overview

         The Company’s businesses are generally divided into two segments: (1) Products and Services and (2) Media and Advertising. In fiscal year 2003, the Company’s revenue was generated from a combination of sales of the Company’s portfolio of products, services and gaming offerings, and from paid third-party advertising on the eUniverse Network of websites and electronic newsletters.

         Products and Services.   The Company generates revenue from the Products and Services segment primarily through the sale of merchandise over the Internet, subscriptions to the Company’s websites, and through activity-based fees. Sales of merchandise make up the majority of the Company’s Products and Services revenue, with revenue generated from the sale of a diverse collection of products, including, among others: inkjet printer supplies and peripherals; consumer electronics; collectibles and other impulse merchandise; and herbal and all-natural ingestible and topical cosmetic products. The Company’s subscription-type offerings include websites for online gaming, and health, fitness, and dieting. The Company collects activity-based fees on websites such as the Company’s pay-to-play skilled gaming website, SkillJam.com, and the Company’s dating website, CupidJunction, where users purchase credits to initiate contact with potential matches.

         Media and Advertising.   In the Media and Advertising segment, the Company offers a variety of advertising opportunities, including advertisements on its websites, in its electronic newsletters, and through other online media. The Company’s inventory of ad space allows for various forms of web-based advertisements, including: banner and button ads; pop-up and pop-under adds; interstitial ads which appear on a screen while the principal content being viewed is loading; and E-mail advertisements. The Company’s advertising transactions with third parties are generally structured as sponsorship, impression-based or performance-based arrangements. Sponsorship ad deals are flat fee arrangements for placement of an advertiser’s name, logos or other branding as the sponsor of a website,

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an electronic newsletter, a particular piece of content, or a particular promotion. In impression-based arrangements, an advertiser purchases a certain number of advertising impressions, which the Company delivers on agreed-upon schedules, and in agreed-upon formats and/or locations, at a negotiated rate per the number of times an advertisement is shown. Performance-based arrangements are measured in terms of a cost-per-click or cost-per-action. Performance-based ad transactions are result oriented, meaning that the advertiser pays the web publisher only if the Internet user performs an agreed-upon activity. The required activity can vary from clicking on the ad (i.e., a cost-per-click arrangement) or could require that the user link to the advertisers’ website and provide information, execute a sign-up, or make a purchase.

Critical Accounting Policies

         The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: legal contingencies; other contingencies; goodwill and intangible asset impairment; revenue recognition; allowance for doubtful accounts; business combinations; allowance for excess and obsolete inventory; income taxes; and stock-based compensation.

Legal contingencies

         We are currently involved in legal proceedings, certain of which are discussed elsewhere in this Form 10-K. We record liabilities related to pending litigation when an unfavorable outcome is probable and we can reasonably estimate the amount of loss. We have not recorded liabilities for certain pending litigation because of the uncertainties related to assessing both the amount and the probable outcome of those claims. As additional information becomes available, we continually assess the potential liability related to each pending litigation. While we currently believe that the liabilities recorded on our balance sheet are sufficient to cover pending litigation for which an unfavorable outcome is probable and the amount of loss can be reasonably estimated, the outcome of litigation is inherently uncertain, and there can be no assurance that such estimates will be accurate or that, in the future, additional reserves will not be required.

Other contingencies

        In the normal course of business, the Company maintains liabilities related to its estimations of payments due to third parties under music and intellectual property royalty agreements, estimations of discretionary bonuses to be paid to employees and estimations of payments due under revenue sharing arrangements with affiliates and partners. At the balance sheet date, the Company uses the best information available to determine a range of possible liabilities, the probability of paying such amounts and accrues its best estimate of the liabilities.

Goodwill and intangible asset impairment

         We adopted Statement of Financial Accounting Standards No. 142-Goodwill and Other Intangible Assets (SFAS 142) on April 1, 2001. Under SFAS 142, goodwill and other intangible assets with indefinite useful lives are no longer amortized, but are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value amount. Events or circumstances which could trigger an impairment review include a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends.

         Our principal consideration in determining impairment includes the strategic benefit to the Company of the particular assets as measured by undiscounted current and future operating income of the specified group of assets and expected undiscounted cash flows. Should impairment be identified, a loss would be reported to the extent that the carrying value of the asset exceeds the fair value as determined by discounted future cash flows.

         In accordance with SFAS No. 142, we performed an annual evaluation of goodwill and other intangible asset impairment during the fourth quarter of fiscal 2003 and concluded that, at that time, there was impairment of intangibles of approximately $130 thousand. Any future impairment losses could have a material adverse impact on our financial condition and results of operations.

         In fiscal year 2003, the Company analyzed goodwill for impairment at the Company level. As a result of the ongoing reorganization of the Company's reporting structure, the Company anticipates that, in the future, it will have sufficiently discrete financial information to conduct a goodwill impairment analysis at the reporting unit level. This change may affect the amounts recorded for goodwill impairment in future periods.

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Revenue Recognition

         In accordance with generally accepted accounting principles (“GAAP”) in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.

         Advertising Revenue. Advertising revenue is derived from the sale of banner and button advertisements, pop-up and other Web-based advertising, and sponsorships of E-mail newsletters or parts of our Websites. We recognize revenue from the sale of our banner and button advertisements, pop-up and other Web-based advertising in the period in which the advertisements are delivered. The arrangements are evidenced either by an insertion order or contract that stipulates the types of advertising to be delivered and pricing. Under certain arrangements, we charge fees to merchants based on the number of users who click on an advertisement or text link to visit websites of our merchant partners, which we refer to as a “click-through”. For a click-through the arrangement is evidenced by a contract that stipulates the click-through fee. The fee becomes fixed and determinable upon delivery of the click-through and these revenues are recognized in the period in which the click-through is delivered to the merchant. Revenues relating to E-mail newsletters are derived from delivering advertisements to E-mail lists for advertisers and websites. Agreements are primarily short-term and revenues are recognized as services are delivered provided that we have no significant remaining obligations and collection of the resulting receivable is probable. In certain arrangements, we sell banner advertising, click-through programs, and E-mail newsletter or Web site sponsorships to customers as part of a bundled arrangement. For these arrangements, we allocate revenue to each deliverable based on the relative fair value of each deliverable. Revenue is recognized in these arrangements as we deliver on our obligation.

         Shared revenue arrangements. Revenues earned from our advertising services can also be based upon a percentage of revenue earned from the advertisement. In accordance with Emerging Issues Task Force (EITF) 99-19, we recognize revenues shared with third-party network partners and E-mail list owners on a net basis.

         Memberships and subscriptions to Internet websites. Revenues for memberships and subscriptions to our Internet websites and services are recognized ratably as earned over the term of the membership or subscription. Upon commencement of the membership or subscription, we record deferred revenue for the fee charged. This deferred revenue is then recognized ratably over the period of the arrangement. Service revenue also includes fees from the sale of non-refundable dating credits, which are recognized in the period the consumer uses the dating credit. Dating credits are utilized to establish contact with other individuals that are members of the Relationship Exchange.

         Electronic commerce. Electronic commerce transactions include, but are not limited to, sales of laser and inkjet printer supplies, consumer electronics, collectibles and other consumer products. For these transactions, we recognize revenue upon shipment of the products. Revenue includes shipping and handling charges. Fulfillment for these products is handled internally, or outsourced to an independent third-party.

         Contemporaneous sales and purchases. We occasionally enter into a transaction where we are purchasing a product or service from a vendor and at the same time we are negotiating a contract for the sale of advertising or other services to the vendor. These concurrent transactions are accounted for under Accounting Principles Board (APB) Opinion No. 29, —Accounting for Non-monetary Transactions, as interpreted by Emerging Issues Task Force (EITF) 01-02, —Interpretations of APB Opinion No. 29 and EITF 99-17—Accounting for Advertising Barter Transactions. Generally, these transactions are recorded at the lower of the estimated fair value of the product or service received, or the estimated fair value of the advertisements given, with the difference recorded as an advance or prepaid expense.

         Sales returns and advertising credits. We maintain allowances for estimated sales returns by our customers. In determining the estimate of product sales that will be returned, we analyze historical returns, current economic trends, changes in customer demand and acceptance of our products, known returns we have not received and other assumptions. Similarly, we record reductions to revenue for the estimated future credits to our advertising customers in the event that delivered advertisements do not meet contractual specifications. Should the actual amount of sales returns or advertising credits differ from our estimates, adjustments to the associated allowances may be required.

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Allowance for doubtful accounts

         We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer’s industry as well as general economic conditions, among other factors.

Business combinations

         The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, which established accounting and reporting standards for business combinations and requires that all business combinations be accounted for by the purchase method. Under the purchase method of accounting, the cost, including transaction costs, is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

         The judgments made in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly impact net income. For example, different classes of assets will have useful lives that differ. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period.

         Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions. We use a one-year period following the consummation of acquisitions to finalize estimates of the fair values of assets and liabilities acquired. Two areas, in particular, that require significant judgment are estimating the fair values and related useful lives of identifiable intangible assets. While there are a number of different methods used in estimating the value of acquired intangibles, there are two approaches primarily used: the discounted cash flow and market comparison approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. Most of the foregoing assumptions are made based on available historical information.

Excess and obsolete inventory

         The Company records inventory at cost, which is not in excess of market, however quantities on hand, and the values of such, are reviewed periodically for excess and obsolete product. Consequently, we maintain an allowance for excess and obsolete inventory to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of the sale of inventory, including assessing the probability of sale and the current market demand for each product. If actual market conditions for our products differ from those projected by management, and our estimates prove to be inaccurate, additional write downs or adjustments to cost of sales may be required.

Income taxes

         The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from

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future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period.

Stock-Based Compensation

         In December 2002, the FASB issued SFAS No. 148 – Accounting for Stock-Based Compensation – Transition and Disclosure. This statement amends SFAS No. 123 – Accounting for Stock-Based Compensation, providing alternative methods of voluntarily transitioning to the fair market value based method of accounting for stock based employee compensation. FAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method in both the annual and interim financial statements. The provisions of this statement related to transition methods are effective for fiscal years ending after December 15, 2002, while provisions related to disclosure requirements are effective in financial reports for interim periods beginning after December 31, 2002.

         The Company elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price.

Recent Accounting Pronouncements

         In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, (“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”).  The Interpretation elaborates on the disclosures to be made by sellers or guarantors of products and services, as well as those entities guaranteeing the financial performance of others.  The Interpretation further clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of this Interpretation are effective on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements of periods ending after December 15, 2002.  The Company believes that its disclosures with regards to these matters are adequate. 

         In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123.  This Statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, it amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The adoption of this standard has not resulted in an impact to results of operations or financial position of the Company as the Company continues to follow the intrinsic value method to account for stock-based employee compensation.  The additional disclosure requirements of this Statement have been adopted. 

        In January 2003, the FASB issued Interpretation No. 46 (“Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51”).  The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  Management does not believe the Interpretation will have a material impact on the financial statements. 

         In April 2003, FASB issued SFAS No. 149 (“Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”).  SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  In addition, all provisions of this Statement should be applied prospectively.  This Statement amends SFAS 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, (2) in connection with other Board projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative.  Management does not believe the adoption of SFAS 149 will have material impact on the financial statements. 

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Business Transactions and Developments

         In August 2002, the Company launched Performance Marketing Group, LLC (“PMG”), an online direct marketing company specializing in designing, planning, implementing and optimizing advertising campaigns for online publishers. The Company expects PMG to contribute to increased revenues and profitability through the purchase and optimization of media campaigns and expects to expand its activities in fiscal year 2004.

         In September 2002, the Company acquired certain assets of ResponseBase, LLC, a California-based online marketing company. ResponseBase is focused on creating online direct response campaigns to promote products and services. In addition, ResponseBase provides e-mail marketing to help companies more effectively reach their customer base and currently manages a database of approximately 30 million permission-based E-mail records. The Company acquired the assets of ResponseBase for $3.3 million, with additional payments due on an earn-out basis subject to the achievement of certain performance goals for the two-year period October 2002 through September 2004.

         In September 2002, the Company entered into two joint ventures with Michael Casey Enterprises, LLC, a California company, in the form of Abdominal King, LLC, a Delaware company, and Yogabol, LLC, a Delaware company, to produce television infomercials and thereby market and distribute certain home fitness products. The Company received a 51% interest in the two newly formed entities for a cash investment of approximately $1.4 million intended to support initial production and marketing costs. In February 2003, the Company sold its interest in Abdominal King, LLC, for $0.4 million, recognizing a gain of approximately $0.1 million.

         In March 2003, the Company announced the launch of a new proprietary, pay-to-play skilled gaming platform powered by its SkillJam division. In addition, SkillJam signed an exclusive two-part agreement with Zone.com, MSN’s games channel, to provide the platform for the play-for-cash skill-games and game-billing services available on MSN’s Zone.com. As part of the multi-year agreement, the SkillJam platform will be promoted across MSN’s Zone.com and will be the exclusive provider of games to Zone.com’s Cash Games section. The Company expects the agreement to provide a new incremental revenue stream in its paid online gaming offerings.

         In July 2003, the Company announced that it had initiated, and largely completed, significant steps to streamline the Company’s operating structure. The Company closed four of its under-performing operating business lines, UltraConversions, FitnessHeaven, MegaLottoClub and FamilyCareAdvantage, and consolidated certain core properties. In addition, the Company reduced headcount by approximately 20%, to 241 employees as of August 8, 2003. The Company expects these actions will result in annual savings of more than $6 million and should simplify the Company’s financial reporting and operational structure.

         In July 2003, the Company received $2 million of debt financing from VP Alpha Holdings IV, L.L.C. (“VPVP”) an affiliate of VantagePoint Venture Partners. The debt financing consisted of a $2 million, eight % secured note (the “VPVP Note”) which is due on the first to occur of (i) the maturity of a noted held by 550 Digital Media Ventures, Inc., a wholly- owned subsidiary of Sony Music Entertainment (currently due March 31, 2005), (ii) the closing of a preferred stock investment by VPVP, at which point the VPVP Note would be applied toward the purchase price, (iii) March 31, 2005 and (iv) the closing by the Company of a debt or equity financing in excess of $2.5 million with a party other than VPVP.

         Concurrently with the debt financing, the Company and VPVP entered into a term sheet relating to a second phase of financing that would consist of an up to $10 million preferred stock investment by VPVP in eUniverse and the provision of an additional $20 million dollar “line of credit” to be used in future merger and acquisition transactions. The terms of the second phase of the financing as set forth in the term sheet are non-binding. The term sheet contemplates that VPVP would purchase up to $10 million shares of a newly authorized series of preferred stock. The purchase price of the shares is expected to be $1.50 per share. The VPVP Note would be credited towards the purchase price. Upon the closing of the sale of the preferred stock to VPVP, the term sheet contemplates that VPVP would provide the Company with a line of credit of up to $20 million for making acquisitions and entering into strategic business development ventures. VPVP would have discretion over eUniverse’s use of the line of credit, the detailed terms of which are to be negotiated. Additional information with respect to the contemplated financing agreements with VPVP is set forth above in “Business – Recent Events – Additional Financing.”

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Results of Operations

         The following table sets forth the principal line items from our consolidated statements of operations.

*Not Meaningful

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Revenue

Fiscal Year 2003 Compared to Fiscal Year 2002

         For the year ended March 31, 2003 (“fiscal year 2003”), revenue increased $32.5 million, or 98%, to $65.7 million, up from $33.2 million for the year ended March 31, 2002 (“fiscal year 2002”). The growth in revenue was primarily attributable to the sharp growth in the Products and Services segment, which produced revenue of $42.7 million for fiscal year 2003, up $31.4 million from $11.3 million in revenue in fiscal year 2002. Media and Advertising revenue also contributed slightly to the overall growth in revenue, increasing to $23.1 million in fiscal year 2003, or $1.2 million, up from $21.9 million in fiscal year 2002.

         Products and Services segment. For fiscal year 2003, revenue in the Products and Services segment increased by $31.4 million, or 276%, to $42.7 million, from revenue of $11.3 million in fiscal year 2002. Substantially all of this growth was attributable to the dramatic increase in the segment’s e-commerce transactions, resulting from the Company’s acquisition of ResponseBase in September 2002 and from internal growth and expansion. In the third fiscal quarter of 2003, the Company experienced a high rate of product returns as a result of delayed order fulfillment during the December holiday season. However, the Company expects to improve its order fulfillment performance during the holiday season of fiscal year 2004. Subscription and activity-based fee revenues also grew in fiscal year 2003, contributing to overall revenue growth in the segment, although e-commerce transactions remain the predominant source of segment revenue. The Company expects to continue to invest in this segment throughout fiscal year 2004 by periodically introducing new products and services, and providing innovations and upgrades to existing offerings.

         Media and Advertising segment. Revenue from the Media and Advertising segment was $23.1 million in fiscal year 2003, an increase of $1.2 million, or 6%, from revenue of $21.9 million in fiscal year 2002. The increase was due primarily to an increase in available advertising space from newly launched and acquired websites. However, further growth was dampened by a significant decrease in e-mail advertising revenue during the fourth quarter of fiscal year 2003, and by the allocation of a greater percentage of available advertising inventory to promote the Company’s own proprietary products and services.

         For fiscal year 2003, approximately 35% of the Company’s revenue was derived from the Media and Advertising segment, with 65% of revenue coming from the Products and Services segment. For fiscal year 2002, approximately 66% of the Company’s revenue was derived from the Media and Advertising segment, with the remaining 34% of revenue coming from the Products and Services segment, which was launched in June 2001. Management of the Company believes that this trend will continue with Products and Services segment revenue continuing as the dominant revenue driver of the Company.

         On occasion, the Company will enter into barter or non-cash advertising transactions where the Company exchanges advertising on its websites for similarly valued online advertising or other services. The Company typically uses barter transactions to test prospective media and advertising purchases or sales campaigns, with the anticipation of additional advertising business. In fiscal year 2003, the barter value of these transactions was $0.9 million, or 1.4% of revenue. In fiscal year 2002, the Company had $0.6 million or 1.9% of revenue, in barter transactions.

Fiscal Year 2002 Compared to Fiscal Year 2001

         For the year ended March 31, 2002, revenue increased by $17.5 million, or 112%, to $33.2 million, up from $15.7 million for year ended March 31, 2001 (“fiscal year 2001”). The increase was due primarily to the introduction of the Products and Services segment which contributed approximately 63% of the overall increase in revenues. Revenue in the Products and Service segment was $11.3 million in fiscal year 2002, compared to revenue of $0.3 million in fiscal year 2001. The Products and Services segment was launched in fiscal year 2002 with the introduction of the Company’s dating website Cupid Junction, and several other product and service offerings. A majority of the revenue generated from this segment in fiscal year 2002 was from the sale of impulse merchandise and activity-based fee services (e.g., dating). Revenue from Media and Advertising increased 43% to $21.9 million in fiscal year 2002, up $6.6 million from $15.3 million in fiscal year 2001, due primarily to an increase in available advertising space from newly launched and acquired websites, and an increase in the overall yield from available advertising inventory. During fiscal year 2001, all of the Company’s revenue from continuing operations was derived from paid, third-party advertising.

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         Revenue also included certain barter and non-cash transactions. The barter value was $0.6 million, or 1.9% of total revenue, for the year ending March 31, 2002. The Company had $0.5 million in barter transactions, or 3.2% of total revenue, in fiscal year 2001.

Cost of Sales

Fiscal Year 2003 Compared to Fiscal Year 2002

         Cost of sales are associated with the Products and Services segment and consist primarily of the cost of products for the Company’s electronic commerce offerings, certain license arrangements, shipping costs, and credit card merchant fees. During fiscal year 2003, cost of sales increased to $17.3 million, or 26% of revenues, up from $5.8 million or 18% of revenues, in fiscal year 2002. The increase was primarily due to the greater volume of product sales during fiscal year 2003. Product costs generally range from 10% to 45% of the product sold, and a change in the product mix in fiscal year 2003 partially offset the general increase in cost of sales relating to volume. Shipping costs in fiscal year 2003 rose as a result of the increased volume of product shipments. Credit card merchant fees remained relatively constant as a percentage of e-commerce transactions for fiscal year 2003. Cost of sales as a percentage of product sales may vary due to changes in unit product costs over time. However, the Company expects cost of sales to continue to increase as a percentage of overall revenues of the Company as the Products and Services segment continues its growth, relative to the Media and Advertising segment.

         Within the Products and Services segment, the Company currently uses a single supplier and fulfillment provider for its entire inkjet cartridge inventory, creating a concentration of risk in the Company’s inkjet cartridge business. However, additional sources for inkjet cartridge supply have entered the market which the Company believes helps to mitigate this risk.

Fiscal Year 2002 Compared to Fiscal Year 2001

         During fiscal year 2002, cost of sales increased to $5.8 million from zero in the prior period as a result of the introduction of the Products and Services segment in June 2001.

Marketing and Sales

Fiscal Year 2003 Compared to Fiscal Year 2002

         Marketing and sales costs include expenses associated with marketing and selling the Company’s own products and services as well as the Company’s Media and Advertising services. The costs consist primarily of: certain fees paid to third parties for media space, license agreements and ad shared-revenue arrangements, which we refer to as affiliate spending; promotional and advertising costs; personnel costs, commissions, agency and consulting fees; and allocated overhead costs such as computer systems and facilities. The Company also has a direct sales force that sells our inventory of advertisements to advertisers and advertising agencies.

         Marketing and sales costs increased to $25.1 million, or 38% of revenue, for fiscal year 2003, from $6.6 million, or 20% of revenue for fiscal year 2002. The $18.5 million increase in fiscal year 2003 was primarily due to a significant increase in ad affiliate spending to market the Company's own products and services and to support revenue generated by the Media and Advertising segment. Growth in salary expense as a result of additional staffing for fiscal year 2003, an increase in bad debt expense primarily attributable one division, an increase in consulting services, and an increase in allocated facility expense attributable to higher rent at a new location, also contributed to the increase in marketing and sales expenses in fiscal year 2003.

         We plan to concentrate our direct sales, marketing and customer care teams during fiscal year 2004 in an effort to increase customer retention and drive new revenue growth. The Company’s core strategy is to develop a longer-term

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relationship with its customers and enhance the lifetime value of each relationship. The Company expects that marketing and sales costs will increase in absolute terms but should decline as a percentage of overall revenue.

Fiscal Year 2002 Compared to Fiscal Year 2001

         Marketing and sales costs decreased by $3.3 million to $6.6 million, or 20% of total revenues, for fiscal year 2002, from $9.9 million, or 63% of total revenues, for fiscal year 2001. The $3.3 million decrease was primarily due to the restructuring of certain website development revenue-sharing contracts that were completed during the fourth quarter of fiscal year 2001, which significantly reduced the commission payouts to content creators. Slight decreases in consulting and other service and facility expense also contributed to the overall decrease in marketing and sales costs, which was partially offset by increases in advertising and promotion expense, and payroll and related costs.

Product Development

Fiscal Year 2003 Compared to Fiscal Year 2002

         Product development costs consists of payroll and related expenses for: developing and maintaining the Company’s websites; developing and maintaining key proprietary technology; and developing proprietary products and services. Product and development costs increased to $11.5 million, or 17% of revenues, for fiscal year 2003, from $6.0 million, or 18% of total revenues, for fiscal year 2002. The $5.5 million increase is primarily a result of growth in salaries, consulting fees, facility expense and Internet expenses due to our continued rapid expansion in network traffic, website development and product and service development. Management anticipates that product development costs will decrease in absolute terms in fiscal year 2004 due to a decrease in Internet costs based on the negotiation of bandwidth contracts, and the transfer of portions of content development to India.

Fiscal Year 2002 Compared to Fiscal Year 2001

         Product development costs increased to $6 million, or 18% of total revenues, for fiscal year 2002, from $3.8 million, or 24% of total revenues, for fiscal 2001. The $2.2 million increase was primarily a result of growth in salaries and related Internet expenses due to the Company’s expansion in network traffic, website development and product and service development.

General and Administrative

Fiscal Year 2003 Compared to Fiscal Year 2002

         General and administrative expenses consist of: payroll and related costs for executive, finance, legal, human resources and administrative personnel; recruiting and professional fees; depreciation; and other general corporate expenses. General and administrative costs increased to $10.8 million, amounting to 16% of revenues, for fiscal year 2003, from $8.1 million, or 24% of revenues, for fiscal year 2002. The $2.7 million increase was due primarily to growth in the number of management, legal and finance personnel, expansion of facilities and computer systems, and an increase in accounting services to support the growth of our operations and infrastructure.

         As a percent of revenues, general and administrative expense has decreased to 16% in fiscal year 2003, from 24% in fiscal year 2002, and 26% in fiscal year 2001. However, for fiscal 2004, the Company anticipates that general and administrative costs will increase as a percentage of revenues, as the business incurs nonrecurring expenses associated with the restatement of the first three fiscal quarters of fiscal year 2003 and the implementation of controls and other corporate governance initiatives required by the Sarbanes-Oxley Act of 2002, as well as expenses in connection with the Restatement-related litigation.

Fiscal Year 2002 Compared to Fiscal Year 2001

         General and administrative costs increased to $8.1 million, or 24% of total revenues, for fiscal year 2002, from $4.1 million, or 26% of total revenues, for fiscal year 2001. The $4 million increase was due primarily to growth in management, legal and finance personnel and associated expenses to support the growth in the Company’s operations and infrastructure.

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Amortization of Other Intangible Assets; Impairment of Goodwill and Other Intangible Assets

         In fiscal year 2003, amortization of intangibles amounted to $1.1 million, inclusive of a change from indefinite life to a definite life of 7 years for intangible assets associated with the Flowgo Network.

         In fiscal year 2003, based on the discounted cash flow method, the Company recognized an impairment of intangible assets of $0.1 million relating to the acquisition of Pokemon Village, Just Pigs and Dustcloud. Based on an analysis completed on March 31, 2003, there was no impairment of goodwill for fiscal year 2003.

         In fiscal year 2003, the Company analyzed goodwill for impairment at the Company level. As a result of the ongoing reorganization of the Company’s reporting structure, the Company anticipates that, in the future, it will have sufficiently discrete financial information to conduct a goodwill impairment analysis at the reporting unit level. This change may affect the amounts recorded for goodwill impairment in future periods.

         The Company adopted SFAS 141 and SFAS 142 effective April 1, 2001 and accordingly, there was a substantially reduced cost of $0.5 million associated with amortization of certain identifiable intangibles in fiscal year 2002. The Company did not recognize any impairment of goodwill or other intangible assets in fiscal year 2002.

         Amortization of goodwill and acquisition-related intangible assets for fiscal year 2001 of $3.5 million reflected the costs related to stock acquisitions of CD Universe, Cases Ladder, Gamer’s Alliance, Big Network, Pokemon Village, Falcon Ventures, and the asset acquisitions on Justsaywow, Funone and Dustcloud. Costs associated with impairment of goodwill and other intangibles amounted to $14.5 million for fiscal year 2001. During the fourth quarter of fiscal year 2001, the Company ceased operations of the Big Network and recognized impairment in the book value of goodwill attributable to Cases Ladder.

Stock-Based Compensation

         Stock-based compensation is comprised of the portion of acquisition related consideration conditioned on the continued tenure of key employees, which must be classified as compensation expense under generally accepted accounting principles. Additional stock-based compensation is recorded for stock price fluctuations that affect compensation expense for options that were repriced in December 1999.

         There was negligible cost associated with stock compensation for fiscal year 2003 and none in fiscal year 2002, as compared to $0.3 million for fiscal year 2001. The expenses for fiscal year 2001 were attributable to performance bonuses in connection with the acquisitions of JustSayWow, Funpageland and Pokemon Village.

Non-Operating Income (expense)

         In fiscal year 2003, the Company recognized a gain of $1.3 million on the extinguishment of debt. This was partially offset by interest expense and other financing costs of $0.6 million relating to the Company’s short and long-term debt obligations, and expense relating to the repurchase of stock options amounted to $0.5 million, resulting from the Company’s repurchase of approximately 900,000 stock options in fiscal year 2003. Other gains for fiscal year 2003 amounted to $0.4 million, reflecting the aggregation of a number of smaller items.

         In fiscal year 2002, the Company recognized expense of $0.5 million associated with the Company’s short and long-term debt obligations and other losses in the amount of $0.2 million.

         During fiscal year 2001, financing expenses totaled approximately $6.3 million, relating to the issuance of warrants in connection with certain financing transactions. In fiscal year 2001, the Company also recognized other losses of approximately $0.3 million.

Income Taxes

         The Company has recorded a provision for income taxes for the year ended March 31, 2003 in the amount of $63 thousand.

         The Company has net operating losses carried-forward since inception. Utilization of the Company’s net operating loss carry forwards, which begin to expire in 2020, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding reliability of the deferred tax assets, the Company has provided a valuation allowance on the deferred tax asset in an amount necessary to reduce the net deferred tax asset to zero.

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Net Income (Loss) from Continuing Operations

         For fiscal year 2003, the Company reported net income from continuing operations of $0.3 million compared to net income from continuing operations of $5.4 million for fiscal 2002, a drop in net income of $5.1 million. The Company’s dramatic growth in fiscal year 2003 presented the Company with a number of challenges. The integration of ResponseBase into the Company’s existing operations required significant attention and resources, as did the internal growth and expansion of the Company’s e-commerce activities. In addition, the increased overhead required to support additional products and certain instances of inefficient media spending contributed to the reduction in net income from continuing operations.

         In fiscal year 2002, the Company reported net income from continuing operations of $5.4 million compared a net loss from continuing operations of $27.1 million in fiscal year 2001. The Company attributed its improved operating results in fiscal year 2002 primarily to its streamlined operating structure, greater yields from its third-party advertising segment, and the introduction of its Products and Services segment. In addition, fiscal year 2001 had been negatively impacted by a significant write down of goodwill and other intangible assets, interest and financing expenses, and amortization of intangible assets.

Net Income (Loss) from Discontinued Operations

         For fiscal years 2003 and 2002, the net income from discontinued operations of $0.2 million and $0.3 million, respectively, is due primarily to the favorable settlement of certain liabilities related to previously discontinued operations.

         In fiscal year 2001, the loss from discontinued operations amounted to $13.9 million. During the third quarter of fiscal 2001, eUniverse disposed of the tangible and intangible assets of its subsidiary, CD Universe, for $1 million to CLBL, Inc., a company owned by Charles Beilman, formerly a director and officer of eUniverse. eUniverse received an additional $0.5 million from CLBL for the purchase of advertising on the Company’s websites over a period of six months following the sale. A loss on the disposal of the segment of $9.9 million, principally consisting of a loss on disposal of intangible assets relating to CD Universe, was recognized during the third quarter of fiscal year 2001. Additional losses for the period of $4.0 million were incurred during the first three quarters of the fiscal year.

Liquidity and Capital Resources

         Net cash provided by operating activities was approximately $2.5 million for the year ended March 31, 2003 (“fiscal year 2003”), compared to $7.2 million of net cash provided by operating activities for the year ended March 31, 2002 (“fiscal year 2002”). The decrease in net cash provided by operating activities in fiscal year 2003 as compared to fiscal year 2002 resulted primarily from increased cash operating expenses associated with the Company’s growth during the period. Net cash provided by operating activities for fiscal year 2003 consists primarily of net income combined with non-cash expenses for depreciation and amortization, impairment of goodwill and other intangibles, allowance for doubtful accounts, and stock and warrants granted to outside consultants and affiliates, offset by a non-cash gain from the extinguishment of debt and income from discontinued operations. Net cash provided by operating activities for fiscal year 2002 consists primarily of net income and non-cash expenses for depreciation and amortization, allowance for doubtful accounts, stock and warrants granted to outside consultants and affiliates, and non-cash financing related costs.

         Net cash used by investing activities in fiscal year 2003 was approximately $7.4 million, compared to $3.2 million of net cash used by investing activities in fiscal year 2002. Net cash used by investing activities in fiscal year 2003 is primarily attributable to the Company’s acquisition of ResponseBase LLC, and purchases of fixed and intangible assets, including additional computer equipment and related infrastructure. Net cash used by investing activities in fiscal year 2002 was primarily attributable to purchases of fixed and intangible assets, including various websites, customer lists and domain names.

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         Net cash provided by financing activities in fiscal year 2003 was $1.5 million, compared to $3.8 million of net cash provided by financing activities in fiscal year 2002. Net cash provided by financing activities in fiscal year 2003 was primarily attributable to proceeds from sale and lease back transactions and proceeds from the exercise of stock options, offset, in part, by the repayment of capital lease obligations and the repayment of long-term notes. Net cash provided by financing activities in the fiscal year 2002 was primarily attributable to proceeds from the sale of Series B Preferred shares to 550 Digital Media and proceeds from the issuance of long-term notes, offset, in part, by the repayment of short and long-term notes.

         As of March 31, 2003, we had approximately $4.7 million in cash and cash equivalents and $3.3 million in restricted cash, (current and long-term) for total cash of $8 million, and approximately $1.6 million in working capital. As of March 31, 2002, we had approximately $8 million of cash and cash equivalents, and approximately $4.2 million in working capital. The decrease in working capital in fiscal year 2003 is the result of an increase in restricted cash, inventory, accounts payable, leases payable, and accrued expenses, and a decrease in current notes. In addition, the acquisition of ResponseBase required significant funds, as no additional debt was obtained to finance the transaction.

         In March 2003, Sony Music Entertainment (“SME”) and the Company agreed on certain modifications to SME’s investment in eUniverse through its affiliate, 550 Digital Media Ventures. Under the terms of the agreement, the maturity date of SME’s then existing loan to the Company of approximately $2.3 million dollars (the “Sony Note”) was extended for two years, until March 31, 2005. In addition, the agreement provided for subordination of SME’s security interest in the assets of eUniverse to a revolving, working capital line of credit, although the Company does not have any specific plans with regard to securing such a facility.

         In July 2003, the Company received $2 million of debt financing from VP Alpha Holdings IV, L.L.C. (“VPVP”) an affiliate of VantagePoint Venture Partners. The debt financing consisted of a $2 million, 8% secured note (the “VPVP Note”) which is due on the first to occur of (i) the maturity of the Sony Note (currently due March 31, 2005), (ii) the closing of the preferred stock investment by VPVP, at which point the VPVP Note would be applied toward the purchase price, (iii) March 31, 2005 and (iv) the closing by the Company of a debt or equity financing in excess of $2.5 million with a party other than VPVP.

         Concurrently with the debt financing, the Company and VPVP entered into a non-binding term sheet relating to a second phase of financing that would consist of an up to $10 million preferred stock investment by VPVP in eUniverse, and the provision of an additional $20 million dollar “line of credit” to be used in future merger and acquisition transactions. The term sheet contemplates that VPVP would purchase up to $10 million shares of a newly authorized series of preferred stock. The purchase price of the shares is expected to be $1.50 per share. The VPVP Note would be credited towards the purchase price. Upon the closing of the sale of the preferred stock to VPVP, the term sheet contemplates that VPVP would provide the Company with a line of credit of up to $20 million for making acquisitions and entering into strategic business development ventures. VPVP would have discretion over eUniverse’s use of the line of credit, the detailed terms of which are to be negotiated. The terms of the second phase of the financing as set forth in the term sheet are non-binding. Further information with respect to the agreements and contemplated agreements with VPVP are set forth above in “Business—Recent Events—Additional Financing.”

         In fiscal year 2004, the Company expects to continue to invest in the infrastructure of the Company, and in certain strategic initiatives, to support the Company’s continued growth and expansion. In addition, the Company expects to incur significant non-recurring expenses associated with the restatement of the Company’s financial statements for the first three fiscal quarters of fiscal year 2003, and the implementation of internal controls and other corporate governance initiatives required by the Sarbanes-Oxley Act of 2002, as well as significant expenses in connection with the Restatement-related litigation. Recently, the Company has experienced changes in its business and results of operations, and fluctuations in its cash flows. The Company expects that in fiscal year 2004 it will need to supplement the net cash provided by the Company’s operations with additional debt or equity financing, so that it may continue to invest in the Company’s expansion while providing for the Company’s other cash requirements. The Company expects that the proposed additional financing from VPVP, together with a reduction in a certificate of deposit held as collateral on a capital lease, will provide sufficient funds for additional investment throughout fiscal year 2004. However, in the event we are unable to reach an agreement with VPVP for additional financing, we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional debt or equity financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, grow our business, or meet unanticipated cash requirements, which could seriously harm our business.

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         At March 31, 2003, the Company had no off-balance sheet financing arrangements or undisclosed liabilities related to special purpose, related party, or unconsolidated entities.

Contractual Obligations

         We have an outstanding note payable with an affiliate, as well as various non-affiliated notes payables, maturing at various dates through March 2005. We lease facilities and equipment under various capital and operating lease agreements with various terms and conditions, expiring at various dates through March 2008.

Our material contractual obligations at March 31, 2003 are as follow (in thousands):

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk represents the potential loss that may impact our financial position, results of operations or cash flows due to adverse changes in the financial markets. We are exposed to market risk from changes in the base of our variable rate debt.

         eUniverse places its cash and cash equivalents in banks with high quality standards. Cash investments consist of high quality overnight investments that bear immaterial exposure to interest rate fluctuations.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Financial statements required pursuant to this item are included in Part IV, Item 16 of this Form 10-K and are presented beginning on page F-1. The supplementary financial information required by this item is included under the subsection entitled Quarterly Results of Operations/Supplementary Financial Information, beginning on page F-28.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         On April 28, 2003 eUniverse, Inc., by and through the Audit Committee of the Company’s Board of Directors, engaged Moss Adams LLP as independent auditor, replacing Merdinger, Fruchter, Rosen & Company, P.C. (“MFR&C”).

         MFR&C’s reports on eUniverse, Inc.’s financial statements for the past two years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

         During eUniverse, Inc.’s two most recent fiscal years and through the date of MFR&C’s dismissal, there were no disagreements with MFR&C on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to MFR&C’s satisfaction, would have caused MFR&C to make reference to the subject matter in connection with its report of the financial statements for such years; and there were no reportable events as defined in item 304(a)(1)(v) of Regulation S-K.

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PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(1)  Member of the Compensation Committee.

(2)  Member of the Executive Committee. The Company’s Board of Directors dissolved the Executive Committee on August 9, 2002.

(3)  Resigned effective August 19, 2003.

(4)  Member of the Audit Committee.

(5)  Appointed on May 27, 2003.

(6)  Resigned effective May 8, 2003.

         Brad D. Greenspan has served as Chairman of the Board of Directors since April 14, 1999 and Chief Executive Officer since August 29, 2000. Mr. Greenspan is a member of eUniverse’s Compensation Committee. In 1997, he founded Palisades Capital, Inc., a private Beverly Hills merchant bank, and served as its President until March 1999. Mr. Greenspan received a B.A. degree in political science from the University of California at Los Angeles in 1997.

         Brett C. Brewer has served as President and Director since August 29, 2000. Mr. Brewer is a member of eUniverse’s Compensation Committee. He joined the Company in April 1999 and was named Vice President of its e-Commerce Division in December 1999 and elected President of CD Universe, Inc., a subsidiary of eUniverse, in July 2000. Prior to joining eUniverse, Mr. Brewer helped run the Southern California Retail Sales Division of CB Richard Ellis between October 1996 and December 1998. Mr. Brewer received a B.A. degree in business/economics from the University of California at Los Angeles.

          Joseph L. Varraveto served as Executive Vice President and Chief Financial Officer from January 2, 2001 until his resignation effective August 19, 2003. Prior to joining eUniverse, Mr. Varraveto served as President and Chief Operating Officer of ememories.com. Prior to that, he served as acting Chief Financial Officer of AIR4LESS.com, a leisure travel Web site. Prior to entering the online world, Mr. Varraveto worked for PepsiCo's Frito Lay International Snack Foods Division for more than six years serving in a variety of management positions, including Vice President, Finance prior to leaving the Company in 1999. He also spent nine years at PriceWaterhouse Coopers working on corporate acquisitions, reorganizations, public offerings and debt offerings. Mr. Varraveto received a B.A. degree in business economics from the University of California at Santa Barbara.

         Adam Goldenberg has served as Chief Operating Officer since October 26, 2001. In 1997, Mr. Goldenberg founded Gamer’s Alliance, Inc., an online entertainment portal, and served as its President until it was acquired by eUniverse in April 1999. Mr. Goldenberg served as Vice President, Strategic Planning of eUniverse from April 1999 to October 2001. eUniverse has benefited greatly from Mr. Goldenberg’s six years of experience in Internet marketing, product development and management.

         Christopher S. Lipp has served as Senior Vice President and General Counsel since October 26, 2001, Vice President, General Counsel since May 1, 2001, Secretary since March 30, 2000 and Vice President, Business and Legal Affairs since January 11, 2000. Prior to joining eUniverse, Mr. Lipp was employed as an attorney in the

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Intellectual Property Group of Pillsbury Madison & Sutro LLP at Los Angeles, California. He has been a member of the California State Bar since 1997. Mr. Lipp received his J.D. from the University of Southern California Law School and a B.A. degree in government and sociology from Georgetown University.

         Daniel L. Mosher has served as Director since April 17, 2000. Mr. Mosher is a member of eUniverse’s Compensation and Audit Committees. He is employed as Director of Corporate Development of Verisign, Inc. Prior to that, Mr. Mosher was employed by Webvan Group, Inc. from May 1999 to May 2001, most recently as Director, Business Development. From January 1998 to May 1999, Mr. Mosher served in the Mergers and Acquisitions Department of Morgan Stanley Dean Witter Technology Group, an investment banking firm. From February 1996 to January 1998, he held several positions in the Corporate Finance Group of Arthur Andersen, focused on technology private placements. Mr. Mosher holds a B.S. degree in business administration from the University of California at Berkeley.

         Thomas Gewecke has served as Director and a member of the Audit and Compensation Committees since October 23, 2001. Mr. Gewecke has been employed as Executive Vice President of 550 Digital Media Ventures Inc., a subsidiary of Sony Broadband Entertainment Inc. He has also served as Senior Vice President, New Technology and Business Development for Sony Music Entertainment Inc. where he is responsible for helping develop new digital products and strategy, since November 1999. Prior to joining Sony, Mr. Gewecke held various positions at PC World Communications, a subsidiary of International Data Group, from 1991 to 1999. Mr. Gewecke co-founded PC World Online in 1992, and served as Publisher of the PC World Online Services Group, a network of leading high technology Web and E-mail products, from 1995 to 1999. Mr. Gewecke co-created a new media course for the UC Berkeley Graduate School of Journalism Master’s Degree Program in 1995, and taught in the program through 1998. Mr. Gewecke received a B. A. degree in Social Studies from Harvard in 1991.

         Lawrence R. Moreau has served as Director and member of the Audit Committee since June 20, 2003. Mr. Moreau is the Chairman of Stone Mountain Financial Systems, Inc., a private company providing online payment solutions primarily to Internet related retail merchants. Previously, Mr. Moreau founded and served as Chief Executive Officer of Moreau and Company, Inc., a financial consulting firm, and Moreau Capital Corporation, a National Association of Securities Dealers registered investment-banking firm, which specialized in private and public securities offerings. Prior to founding Moreau Capital, Mr. Moreau was a financial principal and on the Board of Directors of H. J. Meyers & Company, a New York Stock Exchange investment banking firm. Previous to his investment-banking career, Mr. Moreau was a Vice President and Special Assistant to the President of Pacific Enterprises, a multi-billion dollar diversified holding company. Prior to joining Pacific Enterprises, Mr. Moreau worked for Touche Ross & Co. (now Deloitte & Touche) for eleven years planning and managing audits of companies in a wide variety of industries. Prior to beginning his professional career, Mr. Moreau served as a commissioned officer in the United States Army during the Vietnam War. Mr. Moreau holds a Bachelor of Arts in Accounting and a Master’s Degree in Accounting Science from the University of Illinois, Champaign/Urbana. Mr. Moreau was licensed as a Financial Principal and an Operations Principal with the NASD. Mr. Moreau was also an Associate Member of the NYSE and a member of the Securities and Exchange Commission practice section of the American Institute of Certified Public Accountants. For seven years, Mr. Moreau was a member of the Board of Directors of the Los Angeles Venture Capital Association and served as its Chairman for two years.

         Each director of eUniverse serves for a one-year term until the next Annual Meeting of Shareholders and until his successor has been duly elected. Each officer of eUniverse serves at the pleasure of the Board of Directors.

Agreements Concerning the Election of Directors

         Pursuant to the Company’s Certificate of Designation of Series B Convertible Preferred Stock, which gives the holders of Series B Preferred Stock (currently 550 Digital Media Ventures, Inc.) voting as a class the right to elect one, and, depending on the size of the Company’s Board of Directors, up to three Directors. Thomas Gewecke was elected to the Board of Directors on October 19, 2001.

Compliance with Section 16(a) of the Exchange Act

         Section 16(a) of the Securities Exchange Act of 1934, as amended (Section 16(a)) requires eUniverse’s executive officers, directors, and persons who own more than 10% of a registered class of eUniverse’s equity securities (10% Stockholders) to file reports of ownership on a Form 3 and changes in ownership on a Form 4 or a Form 5 with the SEC.

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         Based solely on its review of the copies of such forms received by eUniverse, or written representations from certain reporting persons, eUniverse believes that during fiscal year 2003 its executive officers, directors and 10% Stockholders complied with all applicable Section 16(a) filing requirements, except that a Form 4 required to be filed by Joseph L. Varraveto (who was an executive officer of eUniverse during fiscal year 2003) and the Form 5’s required to be filed by Thomas Gewecke and Jeffrey C. Lapin (each of whom was a director of eUniverse during fiscal year 2003) were inadvertently filed late.

ITEM 11.   EXECUTIVE COMPENSATION

         The table below summarizes the compensation paid or awarded during the last three fiscal years to our Chief Executive Officer and our four other most highly compensated Executive Officers for services rendered to eUniverse in all capacities. These executives are referred to as the Named Executive Officers elsewhere in this Form 10-K.

SUMMARY COMPENSATION TABLE