EUNIVERSE INC - 10-Q Quarterly Report

(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of February 10, 2004, there were 28,754,000 shares of the Registrant’s common stock, par value $0.001 outstanding.

eUniverse, Inc. (the “Company”, “we” or “our”) is a Delaware Corporation, engaged in marketing and selling proprietary products and services and developing and operating a network of websites providing entertainment-oriented content. The Company conducts operations from facilities located in Los Angeles and Montclair, California and Mount Vernon, Washington. These financial statements include the accounts of eUniverse, Inc. and subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for the fair presentation of the consolidated balance sheets, operating results and cash flows for the periods presented. Operating results for the three months and nine months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ended March 31, 2004 (“fiscal year 2004”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended March 31, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

On August 22, 2003, the Company restated previously reported quarterly financial results for the first three quarters of the year ended March 31, 2003 (“fiscal year 2003”) because of accounting errors it had previously identified in the Company’s financial statements. As a result of the discovery of the accounting errors, management and the Audit Committee initiated an internal review of the Company’s 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 that gave rise to the errors, management significantly expanded its accounting and finance staff and retained an outside accounting firm to assist in the process. The Company’s Board of Directors also directed the Audit Committee to explore the facts and circumstances giving rise to the restatement as well as to evaluate the Company’s accounting practices, policies and procedures. During management’s and the Audit Committee’s reviews of the Company’s accounting records and procedures, and during the audit of the Company’s financial statements for fiscal year 2003, a variety of deficiencies in internal controls were identified. We believe 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 our business operations during fiscal year 2003; difficulties in absorbing and integrating the acquisition of a sizable e-commerce company, ResponseBase, during the third and fourth quarters of fiscal year 2003; the loss of critical personnel; and limited human resources in the accounting and financial reporting function. Further information about the nature of the restatement adjustments is presented in “Business — Recent Events — Restatement” and “Item 14 — Controls and Procedures” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2003.

In response to the Company’s restatement announcement on May 6, 2003, NASDAQ halted trading of the Company’s common stock. 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 due to the NASDAQ Staff’s inability to assess the Company’s current financial position and the Company’s ability to sustain compliance with NASDAQ’s continued listing requirements. The Company appealed the NASDAQ Staff’s determination to delist the Company’s securities to a Listing Qualifications Hearings Panel (the “Panel”). The Panel decided to delist the Company’s securities from The NASDAQ SmallCap Market on September 2, 2003. The Company appealed the Panel’s decision and, as instructed by the NASDAQ Hearing Listing Counsel, the Panel is in the process of determining if public interest concerns currently exist and if the Company is otherwise in compliance with current listing standards. The Company’s common stock has been trading on what is commonly called the “pink sheets” since September 2, 2003.

An amended Form 10-Q for the quarter ended December 31, 2002 was filed with the Securities and Exchange Commission on November 3, 2003. That filing contains information about the restatement adjustments for the three and nine months ended December 31, 2002.

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Examples of significant estimates used in preparing the accompanying financial statements include goodwill and other intangible assets impairment, revenue recognition and reserves for accounts receivable, inventories, sales returns and deferred tax assets. Actual results and outcomes may differ from these estimates and assumptions.

The Company had $1,008,000 of funds held by banks as reserves against possible charge backs and returns on credit card transactions at December 31, 2003 and $1,842,000 at March 31, 2003. These amounts are classified as restricted cash. The Company also had $1,048,000 in certificates of deposit at December 31, 2003 and $1,447,000 at March 31, 2003 which collateralize operating and capital lease obligations. At December 31, 2003, a $416,000 certificate of deposit is classified as restricted cash and the remaining balances at December 31, 2003 and March 31, 2003 are classified as long-term deposits.

The Company provides an allowance for doubtful accounts receivable by applying a reserve for accounts receivable outstanding over 60 days based upon historical experience and a specific reserve for accounts with a high likelihood of becoming uncollectible. Bad debt expense was $1,308,000 for the nine months ended December 31, 2003 and $636,000 for the nine months ended December 31, 2002. The allowance for doubtful accounts was $1,358,000 at December 31, 2003 and $1,179,000 at March 31, 2003.

Media Desktop to content provided by the Company. The Company has guaranteed the obligations of the newly formed subsidiary. The unrecouped cash advances and the unamortized value of the common stock that are included in prepaid expenses at December 31, 2003 was $2,747,000. The common stock issued to the third party was valued at the closing market value on the date issued and is amortized to marketing and sales expense over twelve months.

Included in accrued expenses are $802,000 of accrued compensation at December 31, 2003 and $1,255,000 at March 31, 2003. In addition, accrued expenses include $996,000 of reserves for sales returns at December 31, 2003 and $666,000 at March 31, 2003.

Product revenue is generated from the sale of products such as laser and inkjet printer supplies, cameras, health and beauty products, diet products and other assorted products. For these transactions, the Company recognizes revenue upon shipment of the products. Product revenue includes shipping and handling charges. Fulfillment for these products is handled internally or outsourced to independent third-parties.

Shipping and handling fees charged to customers are included in revenues, and shipping and handling costs are included in cost of revenues. Amounts included in revenues and cost of revenues for shipping and handling were $3,755,000 and $2,254,000, respectively for the nine months ended December 31, 2003, and were $1,750,000 and $1,334,000, respectively for the nine months ended December 31, 2002.

Subscription and non-refundable membership revenues are recognized ratably over the period that services are provided. Advertising, commerce content and other revenues are recognized as the services are performed or when the goods are delivered. Service revenue also includes fees from the sale of nonrefundable dating credits, which are recognized at the time of use. Deferred revenue consists primarily of prepaid commerce and advertising, and monthly and annual prepaid subscription revenues billed in advance.

The Company recognizes revenue upon fulfillment and delivery of customers advertising. The Company generates advertising revenues based on delivered quantities of advertising, action by the recipient of the advertising message, or upon revenue generation by the Company’s customer. Revenues are recorded when delivery has occurred, the sales price is determinable and collection is probable. Third party distribution fees are included in marketing and sales expense in the month the related advertising is earned.

Barter transactions are recorded at the lower of the estimated fair value of advertising received or the estimated fair value of the advertising given, with the difference recorded as an advance or prepaid expense. Barter advertising expense is recorded in cost of revenues. During the three months and nine months ended December 31, 2003, we did not have any bartered advertising revenue. During the three months and nine months ended December 31, 2002, the Company recorded $0 and $888,000, respectively, of bartered advertising revenue.

The Company has a stock option plan and we account for this plan under the recognition and measurement principles of APB Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees”. Under the provisions of APB No. 25, compensation expense is only recorded if stock options are granted at a discount to the market price on the date of grant or if certain events such as the grant of stock options to consultants occurs.

The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB Statement No. 123.” SFAS 148 amends Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent

disclosures both in 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 following table illustrates the effect on net income (loss) and income (loss) per common share as if the Company had applied the fair value recognition provisions of SFAS 148 to stock-based employee compensation (in thousands, except per share data):

The fair value calculation for pro forma purposes was made using the Black-Scholes option-pricing model assuming 86%-134% expected volatility, 2.9%-5.7% risk free interest rates, 5-year expected lives and no dividend yield for all periods.

Basic income per share is computed as net income (loss) less accretion of the Series A preferred stock liquidation preference and Series C stock dividend divided by the weighted average number of outstanding common shares during the period. Diluted income per share gives effect to all potentially dilutive common shares outstanding during the period. The computation of diluted income per share does not assume the conversion or exercise of securities that would have an anti-dilutive effect. For the three months and nine months ended December 31, 2003, 4,754,000 and 5,017,000, respectively of stock options, 5,746,000 and 3,411,000, respectively of preferred stock and 108,000 and 108,000, respectively of stock purchase warrants were excluded from the computation of diluted income per share because their effect is anti-dilutive. For the three months and nine months ended December 31, 2002, 8,304,000 and 1,576,000, respectively of stock options, 2,426,000 and 0, respectively of preferred stock, and 1,985,000 and 27,000, respectively of stock purchase warrants were excluded from the computation of diluted income per share because their effect is anti-dilutive.

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 149 (“SFAS No. 149”), “Amendment of Statement 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. The provisions of this statement will be applied prospectively. This statement amends SFAS 133 for decisions made in the

derivatives project implementation process, in connection with other FASB projects dealing with financial instruments, and in connection with implementation issues related to the definition of a derivative. The adoption of SFAS 149 has not had any impact on the financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS No. 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement requires that certain financial instruments which had previously been classified as equity be classified as liabilities. We have no outstanding securities that meet the criteria of SFAS No. 150 and, therefore, this statement will not have any impact on our financial statements.

Depreciation and amortization expense was $1,309,000 for the nine months ended December 31, 2003 and $793,000 for the nine months ended December 31, 2002.

The net carrying value of goodwill and other intangible assets was $17,886,000 at December 31, 2003 and $19,934,000 at March 31, 2003. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” prescribes a two-phase process for impairment testing of goodwill, which is performed once annually, absent indicators of impairment. The first phase screens for impairment and, if necessary, the second phase measures the amount of impairment. We have elected to perform our annual analysis during the fourth quarter of our fiscal year. In the third quarter of fiscal year 2004, the ResponseBase division’s revenues declined $7.1 million compared to the same period last year. We recorded a $1,200,000 impairment charge in the third quarter of fiscal year 2004 and reduced goodwill by $556,000 and other intangible assets by $644,000 due to the significant reduction in ResponseBase’s revenues. The impairment charge was computed by comparing discounted future cash flows of the ResponseBase business to the book value of goodwill and other intangible assets of the ResponseBased business. No other indicators of impairment were identified in the nine months ended December 31, 2003.

Amortization expense for other intangible assets was $986,000 for the nine months ended December 31, 2003 and $835,000 for the nine months ended December 31, 2002. Amortization expense for other intangible assets for the future years ending March 31 is as follows (in thousands):

The following are payments due under capitalized leases and the present value of future minimum rentals for the future years ending March 31 (in thousands):

Equipment with a cost of $2,488,000 at December 31, 2003 is collateral for the capital lease obligations. During fiscal year 2003 and the first quarter of fiscal year 2004, the Company entered into several sale-leaseback transactions for computers and telephone equipment. Under the terms of the agreements, the Company is required to maintain and insure the equipment and provide general liability insurance. In addition, under one lease, the Company is required to maintain an irrevocable standby letter of credit through May 1, 2004 of at least 75% of the principal balance owed ($416,000 at December 31, 2003).

The Company leases various facilities under non-cancelable operating leases. Minimum lease payments under these non-cancelable operating leases for the future years ending March 31 are as follows (in thousands):

Rent expense was $976,000 in the nine months ended December 31, 2003 and $756,000 in the nine months ended December 31, 2002.

As previously reported, 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. SoftwareOnline alleges a 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 $10,000. 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. There have been no material developments in this matter since the Company’s last report.

As previously reported, 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 the Company has not infringed the 918 Patent and that 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 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. There have been no material developments in this matter since the Company’s last report.

allegations and also naming the Company’s former auditor as an additional defendant. The Company and other defendants currently have until February 17, 2004 to respond to plaintiffs’ complaint, at which time the Company expects to file a motion to dismiss the lawsuit for, among other things, the failure of the complaint to state a valid claim against the Company. A hearing on the Company’s motion to dismiss is currently scheduled for April 19, 2004.

Also as previously reported, two purported stockholder derivative actions, which are substantially similar, are pending against various current and former directors, officers, and/or employees of the Company. One of the actions is pending in the United States District Court for the Central District of California and the other, formerly two actions which have been consolidated, is pending in the Superior Court of California for the County of Los Angeles (collectively, the “Derivative Litigation”). The Derivative Litigation similarly arises out of the Company’s restatement of quarterly financial results for fiscal year 2003 and includes claims of breach of fiduciary duty in connection with the restatement and in connection with allegedly improper insider sales of Company stock by one officer and one former Company employee. On January 12, 2004, the Company filed a demurrer to plaintiffs’ consolidated derivative complaint in the State Court derivative action on the grounds that, among others, plaintiffs have not pled, and will not be able to plead, facts sufficient to demonstrate that demand on the Company’s Board of Directors would be futile. The Company’s demurrer, as well as those filed by the individual defendants in the case, is currently scheduled to be heard on April 7, 2004, and discovery in the action is stayed pending such hearing. The Federal Court derivative action has been stayed in its entirety pending the outcome of the hearing on defendants’ motions challenging the complaint in the Securities Litigation.

The Company intends to vigorously defend itself in the Securities Litigation and to address the Derivative Litigation as appropriate. Defending against existing and potential securities and class action litigation relating to the accounting restatement will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. If the Company’s defenses were ultimately unsuccessful, or if the Company was unable to achieve a favorable settlement, the Company could be liable for large damage awards that could seriously harm its business and results of operations. In September 2003, one of the Company’s insurance carriers agreed that certain claims made in the lawsuits are covered by a directors and officers insurance policy, subject to the limits and other terms and conditions of the policy. The Company cannot predict how much of the ongoing litigation costs or any eventual settlement or judgment, if any, will be reimbursed by the insurance carrier.

On January 22, 2004, Bridge Ventures, Inc. (“Bridge”) and Saggi Capital Corp. (“Saggi”), both Florida corporations, filed a demand for arbitration with the American Arbitration Association in Los Angeles pursuant to a settlement agreement between Bridge and Saggi on the one hand, and the Company on the other, dated as of February 13, 2003. The settlement agreement resolved, among other things, disputes relating to warrants to purchase Company common stock previously issued to Bridge and Saggi and relating to a consulting agreement between Saggi and the Company. The demand for arbitration filed by Bridge and Saggi alleges securities and common law fraud in connection with the settlement agreement based on Saggi’s and Bridge’s contention that the Company knew, or was reckless in not knowing, that its financial statements and public comments on financial results were materially inaccurate at the time of entering into the settlement agreement. Saggi and Bridge are seeking compensatory damages in excess of $968,000, punitive damages in an unspecified amount, and costs and fees. The Company disputes Saggi’s and Bridge’s claims and allegations, believes that they are without merit and intends to vigorously defend itself in this action.

On December 11, 2003, Brad Greenspan, the Company’s former Chairman and Chief Executive Officer, filed a complaint against the Company, each of the Company’s directors and the Company’s Series C preferred stockholders in the Court of Chancery of the State of Delaware in and for New Castle County. The complaint alleges that the adoption of an amendment to the Company’s bylaws adding advance notification requirements for actions at Company stockholder meetings, and the reduction in the size of the Board and, therefore, the number of Board members elected by the Company’s stockholders generally relative to those elected exclusively by preferred stockholders, effectively precluded Mr. Greenspan from soliciting proxies for an alternative slate of directors at the Company’s 2003 annual meeting of stockholders. Mr. Greenspan asked the Court to prevent application of the bylaw amendment and the

alleged reduction in the number of directors subject to general election, and he sought an order postponing the annual meeting of stockholders so that Mr. Greenspan could solicit proxies for an alternative slate of director nominees. Mr. Greenspan also sought to prevent the Company’s Series C preferred stockholders from voting at the stockholder’s meeting based on his allegation that the Company changed the record date for its stockholder’s meeting to permit the Series C preferred stockholders to vote at the meeting. Finally, Mr. Greenspan challenged the Company’s application of its Certificate of Incorporation concerning the number of directors to be elected by the Company’s Series B preferred stockholders and challenged whether one of the Company’s directors had been validly appointed to fill a seat reserved for election by Series B preferred stockholders. The Company and the Company’s directors denied Mr. Greenspan’s allegations and believe that they are factually incorrect and otherwise without merit. For reasons largely unrelated to Mr. Greenspan’s lawsuit, the Company rescheduled the date of the annual stockholder’s meeting, thus rendering moot Mr. Greenspan’s desire to avoid application of the Company’s advance notification bylaw provision. The Board of Directors also determined to nominate four directors to be elected by the Company’s stockholders generally, also rendering moot Mr. Greenspan’s claims concerning the reduction in the size of the Board of Directors. Prior to the January 13, 2004 trial in this matter, Mr. Greenspan dropped all of his claims but one. Trial concerning the one remaining claim proceeded, but Mr. Greenspan also dropped this claim after the Company’s majority Series B preferred stockholder delivered a consent unequivocally taking the actions about which Mr. Greenspan had raised questions. On January 14, 2004, Mr. Greenspan informed the Court that he may raise additional claims, but has not to date done so.

On January 28, 2004, the Company filed a lawsuit against Mr. Greenspan in the United States District Court for the Central District of California for violation of federal securities laws governing proxy solicitation based on Mr. Greenspan’s filing and dissemination of what the Company believes are deficient, false and misleading proxy materials. Later the same day, Mr. Greenspan filed a complaint against the Company in the same Court similarly alleging that the Company had distributed false and misleading proxy materials and seeking to enjoin the Company’s conduct of its 2003 annual meeting of stockholders. Mr. Greenspan also seeks an order from the Court declaring that California law requires that the election of directors at the annual meeting be determined on a cumulative voting basis instead of by plurality vote. On January 29, 2004, the Company’s annual meeting was held and the voting results of the annual meeting were certified by the independent inspector of election on February 6, 2004. The foregoing lawsuits are still pending. The Company denies Mr. Greenspan’s allegations, believes they are without merit and will vigorously defend itself.

On October 31, 2003, the Company sold 5,333,000 shares of a new series of convertible preferred stock, designated Series C convertible preferred stock to VantagePoint for $1.50 per share generating $8 million of proceeds. The Company paid $314,000 in professional fees in connection with the stock sale. The Company allocated 22 million shares of authorized preferred stock for the Series C preferred stock and has reserved shares of common stock for conversion of the Series C preferred stock into common stock. VantagePoint will receive 427,000 additional shares of Series C preferred stock as dividends for one year.

VantagePoint also agreed to loan the Company, or provide a guarantee to a bank for the bank to loan the Company, up to $4 million. The Company must complete the loan documentation by February 28, 2004. The $4 million loan will be secured by all of the Company’s assets and will be senior to the $2,360,000 secured loan due to 550 Digital Media Ventures and the $2.5 million secured loan due to VantagePoint. The Company committed to issue to VantagePoint 250,000 five year warrants to purchase shares of Series C preferred stock at $2.00 for each $1 million of money borrowed from or guaranteed by VantagePoint. The Company also amended the $2.5 million loan from VantagePoint to allow VantagePoint to convert the loan to Series C preferred stock at the rate of one share of Series C preferred stock for each $2.00 of principal converted. The Company received stockholder approval at the January 29, 2004 stockholders meeting for the issuance of the warrant to purchase up to 1 million shares of Series C preferred stock and the Series C preferred stock to be issued upon conversion of the $2.5 million loan. The unregistered Series C preferred stock has registration rights and the Series A and Series B stockholders have agreed to subordinate their preferred stock interests to the Series C preferred stock.

As partial consideration for the application download and content distribution agreements with Sharman Networks, Ltd., the Company issued Sharman Networks 500,000 shares of eUniverse common stock valued at $975,000 in November 2003. The Company has given registration rights to Sharman Networks for this unregistered common stock.

On November 18, 2003, the Company sold 1,643,000 shares of common stock to existing and new stockholders for $1.50 per share generating approximately $2.4 million of proceeds. The Company has given registration rights to the holders of this unregistered common stock.

In the nine months ended December 31, 2003, 81,000 shares of Series A preferred stock were converted into 102,000 shares of common stock. In the nine months ended December 31, 2002, 538,000 shares of Series A preferred stock were converted into 643,000 shares of common stock. In the nine months ended December 31, 2003, the Company issued 71,000 shares of Series C preferred stock as stock dividends. As of December 31, 2003, there were 275,000 outstanding shares of Series A preferred stock that are convertible into 353,000 shares of common stock at the current conversion rate. In addition, at December 31, 2003 there are 1,923,000 outstanding shares of Series B preferred stock and 5,404,000 shares of Series C preferred stock that are convertible into 7,327,000 shares of common stock at the current conversion rate.

The following is a summary of stock option activity (in thousands, except per share data):

The following table summarizes information about stock options outstanding at December 31, 2003 (in thousands, except per share data):

The following is a summary of stock purchase warrant activity (in thousands, except per share data):

In December 2003, the Company filed federal and state income tax returns for fiscal year 2003. In those income tax returns, prior year federal and state net operating loss carry forwards were corrected to reflect actual taxable income and loss for fiscal years 2000 to 2002. The net operating loss carry forwards as of March 31, 2003 that are eligible to offset future taxable income, aggregate $34,563,000. In addition, the Company has $2,644,000 of loss carry forwards created by the exercise of non-qualified stock options and the early disposition of incentive stock options, the benefit of which will be recorded through stockholders’ equity. The use of these loss carry forwards will be recorded based on the order they were created.

Using the criteria established by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company currently operates in two business segments. The Company does not allocate any operating expenses other than direct cost of revenues to its Products and Services segment, as management does not use this information to measure the performance of the operating segment. Management does not believe that allocating these expenses is material in evaluating the segment’s performance.

Summarized information by segment from internal management reports is as follows (in thousands):

During the three months and nine months ended December 31, 2003, one customer exceeded 10% of segment revenues. This customer represented 25% and 11% of Media and Advertising segment revenues for the three months and nine months ended December 31, 2003, respectively. In the Products and Services segment, the top 10 customers were approximately 8% and 5% of segment revenues in the three months and nine months ended December 31, 2003, respectively. In the Media and Advertising segment, the top 10 customers were approximately 52% and 36% of segment revenues in the three months and nine months ended December 31, 2003, respectively.

During the three months and nine months ended December 31, 2002, no customer exceeded 10% of segment revenues. In the Products and Services segment, the top 10 customers were approximately 8% and 9% of segment revenues in the three months and nine months ended December 31, 2002, respectively. In the Media and Advertising segment, the top 10 customers were approximately 27% and 30% of segment revenues in the three months and nine months ended December 31, 2002, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Report 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 projections of earnings, revenue or other financial items; statements of the plans, strategies and objectives of management for future operations; statements concerning proposed new services or developments; statements regarding future economic conditions or performance; statements of belief; and statements of assumptions. 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 Report. Except for our ongoing reporting obligations, 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 are discussed in the section entitled “Risk Factors” and elsewhere in this Report.

On October 31, 2003, VantagePoint invested $8 million in our Company by purchasing 5,333,000 shares of a new series of preferred stock that is designated Series C convertible preferred stock. In addition, VantagePoint agreed to make available to the Company a $4 million one year senior secured bridge loan for business development initiatives. Further information about the VantagePoint transactions is presented in Liquidity and Capital Resources.

We added four new directors to our Board of Directors in October 2003. Jeffrey Edell and Bradley Ward were added to our Board of Directors and VantagePoint appointed two directors, David Carlick and Andrew Sheehan. In addition, Thomas Gewecke, the director nominated by 550 Digital Media Ventures, stepped down from the Board of Directors in October 2003. Also, in October 2003, Brad Greenspan stepped down as the Company’s Chief Executive Officer and was removed as Chairman of the Board.

In December 2003, Brad Greenspan resigned as a director and sued the Company and the Board of Directors in the Chancery Court of Delaware. In January 2004, Mr. Greenspan dropped all of his claims. In addition, in January 2004 Mr. Greenspan proposed a slate of director nominees in opposition to the incumbent director nominees proposed by the Board of Directors. At the January 29, 2004 stockholder’s meeting, the incumbent director nominees were re-elected by the Company’s stockholders. One other matter related to the VantagePoint Series C preferred stock sale proposed by the Board of Directors and opposed by Mr. Greenspan was also approved by the Company’s stockholders at the January 29, 2004 stockholder’s meeting.

We group the Company’s businesses into two principle segments, the Products and Services segment and the Media and Advertising segment.

Products and Services segment revenues consist of the sale of merchandise over the Internet, subscriptions to our websites and activity-based fees. Sales of merchandise make up the majority of the Products and Services segment’s revenue, with revenue generated from the sale of a diverse collection of products, including 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 offerings include websites for online gaming, dating services, and health, fitness and dieting. The Company collects activity-based fees on websites such as the Company’s pay-to-play skilled gaming website.

Media and Advertising segment revenues consist of advertisement revenues from our websites, our electronic newsletters and other online media. The Company’s inventory of ad space includes banner and button ads, pop-up and pop-under ads, interstitial ads which appear on a screen while the principal content being viewed is loading and E-mail advertisements. The Company’s advertising is generally structured as sponsorship, impression-based or performance-based arrangements. Sponsorship ads are flat fee arrangements for placement of an advertiser’s name, logos or other branding as the sponsor of a website, an electronic newsletter, a particular piece of content, or a particular promotion. In impression-based ad 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 or could require that the user link to the advertisers’ website and provide information, execute a sign-up or make a purchase.

The preparation of 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 that goodwill and other intangible assets impairment, revenue recognition and reserves for accounts receivable, inventories, sales returns and deferred tax assets are critical accounting policies involving the most complex, difficult and subjective estimates and judgments.

Under SFAS 142, goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually. If an event occurs or circumstances change that might reduce the fair value of intangible assets below carrying value, then we will test the impacted assets for impairment at that time. Events or circumstances which could trigger an impairment review include a significant adverse change in 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 acquired assets, 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 assets and expected undiscounted cash flows. Should impairment be identified, a loss would be reported to the extent that the carrying value of the assets exceeds the fair value as determined by discounted future cash flows.

We performed our annual goodwill and other intangible assets impairment evaluation during the fourth quarter of fiscal year 2003. In fiscal year 2003, the Company analyzed goodwill for impairment at the Company level. As a result of the reorganization of the Company’s reporting structure, we now have sufficiently discrete financial information to conduct an intangible asset impairment analysis at the reporting unit level. In the third quarter of fiscal year 2004, the ResponseBase division’s revenues declined $7.1 million compared to the same period last year. We recorded a $1,200,000 impairment charge in the third quarter of fiscal year 2004 due to the significant reduction in ResponseBase’s revenues. No other indicators of impairment were identified in the nine months ended December 31, 2003.

Revenue is recognized when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed or the product is shipped and collectability of the resulting receivable is reasonably assured.

Revenues for subscriptions and memberships to our Internet websites and services are recognized ratably as earned over the term of the subscription or membership. Upon commencement of the subscription or membership, 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.

Advertising revenue is earned 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 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”. Click-through arrangements are 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. 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.

We occasionally purchase a product or service from a vendor and at the same time we sell advertising or other services to the vendor. These barter transactions are recorded at the lower of the estimated fair value of the advertisements received or the estimated fair value of the advertisements given, with the difference recorded as an advance or prepaid expense. The advertising expense is recorded in cost of revenues.

We have advertising affiliate agreements under which advertising payments are guaranteed to the affiliates in return for the Company’s right to sell sponsorships on the affiliates’ websites. An affiliate is a third-party advertising company which uses available internet advertising inventory to market our products and services in exchange for a fee or share of revenue. Sponsorship is defined by these agreements as advertising such as banners, buttons and pop-up windows of third parties on the affiliates’ websites. In accordance with EITF 99-19 revenues derived from affiliates are reported gross of the payment to affiliates while payments from affiliates are reported on a net basis.

Electronic commerce transactions include 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 independent third-parties.

We maintain an allowance for doubtful accounts to reduce billed accounts receivable to estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivable, 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 the aging of the accounts receivable, trends within and ratios involving the age of the accounts receivable, the customer mix in each of the aging categories and the nature of the receivable, our historical provision for doubtful accounts, the credit worthiness of the customer, economic conditions of the customer’s industry, and general economic conditions, among other factors.

The quantities of inventory on hand and their values are reviewed periodically for potentially excess and obsolete product or pricing. 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 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 revenues may be required.

We maintain an allowance for estimated customer sales returns. In determining the estimate of products 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 product returns or advertising credits differ from our estimates, adjustments to revenues may be required.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes”. SFAS 109 requires the use of the liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to 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 future taxable income. To the extent that we believe that recovery is not assured, we establish a valuation allowance. When this allowance is established, or increases or decreases in the future, we increase or decrease our income tax expense. If our estimate of the likelihood of future taxable income proves to be incorrect, adjustments to income tax expense could be required. At December 31, 2003, we fully reserved our deferred tax assets since we believe that realization is not assured. Deferred tax assets and net operating losses carry forwards at March 31, 2003 were $39,803,000.

The following table sets forth consolidated statement of operations data expressed as a percentage of revenues:

In the third quarter of fiscal year 2004, revenues decreased 25% to $16.5 million from $22.0 million in the third quarter of fiscal year 2003 due to lower holiday impulse product sales. The $7.1 million decline in revenues at the ResponseBase division to $1.8 million in the third quarter of this year compared

to the same quarter last year was the primary cause of the decline in quarterly revenue. In the nine months ended December 31, 2003, revenues increased 9% to $47.6 million compared to the same period last year. The growth in revenues in the nine months of fiscal year 2004 compared to the same period last year was due to the growth in Products and Services segment revenues, which produced $33.9 million of revenues, up $7.3 million from $26.6 million last year. The Body Dome product line was the most significant factor in the increase in the Products and Services segment revenues by contributing $6.0 million of the increase in revenues. Media and Advertising segment revenues declined 20% in the third quarter and first nine months of fiscal year 2004 compared to the same periods last year due to lower commercial E-mail revenues and greater internal use of advertising inventory.

For the third quarter of fiscal year 2004, 71% of the Company’s revenues were produced from the Products and Services segment and 29% of revenues were produced from the Media and Advertising segment. For the third quarter of fiscal year 2003, 73% of the Company’s revenues were produced from the Products and Services segment and 27% of revenues from the Media and Advertising segment. We have an agreement in principle, subject to documentation, to sell the Body Dome product line. This product line produced $6.0 million in revenues in fiscal year 2004 but was not profitable. In addition, we have recently merged the ResponseBase products business, which was not profitable, into our Performance Marketing Group business unit. We believe that the fourth quarter of fiscal year 2004 revenues of the Products and Services segment will be negatively impacted by these two changes, but overall Company profitability will be positively impacted.

On occasion, the Company will enter into barter 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 the three months and nine months ended December 31, 2003, we did not have any barter transactions. There were no barter transactions in the three months ended December 31, 2003. In the nine months ended December 31, 2002, the barter value of these transactions was 2% of revenue.

Cost of revenues are associated with the Products and Services segment and consist primarily of the cost of Internet and television products inventory, direct response media costs, list rental fees, shipping costs and credit card merchant fees. In the third quarter of fiscal year 2004, cost of revenues decreased 30% to $4.8 million from $6.8 million in the third quarter of fiscal year 2003. In the nine months ended December 31, 2003, cost of revenues increased 44% to $15.3 million compared to the same period last year. A change in the mix of product sales in fiscal year 2004 increased the gross profit margin of the Products and Services segment to 59% in the third quarter of fiscal year 2004 compared to 57% in the third quarter of fiscal year 2003. The current period includes media costs for the sale of the direct response marketed Body Dome product line and the prior period does not include any Body Dome revenues. Without the direct response Body Dome product line, the gross profit margin of the Products and Services segment would have been 66% in the third quarter of fiscal year 2004. We expect the mix of product sales in the fourth quarter of fiscal year 2004 to be similar to the mix of product sales realized in the fourth quarter of fiscal year 2003.

Marketing and sales consists of expenses of marketing and selling the Company’s own products and services as well as the Company’s Media and Advertising segment services. The costs consist primarily of fees paid to third parties for media space, bad debts, ad shared-revenue arrangements, promotional and advertising costs, personnel costs, commissions, agency and consulting fees and allocated overhead costs. The Company also has a direct sales force that sells our inventory of advertising to advertisers and advertising agencies.

Marketing and sales expenses decreased to $6.1 million or 37% of revenues in the third quarter of fiscal year 2004, from $8.0 million or 37% of revenues in the third quarter of fiscal year 2003. In the nine months ended December 31, 2003, marketing and sales expenses increased to $18.0 million from $14.9 million in the same period last year. Media space costs decreased $2,746,000, and salaries and bad debt expenses increased $197,000 and $151,000, respectively in the three months ended December 31, 2003 compared to the same period last year. Salaries and bad debt expenses increased $2,037,000 and $672,000, respectively and media space costs decreased $710,000 in the nine months ended December 31, 2003 compared to the same period last year.

We plan to concentrate the efforts of our direct sales, marketing and customer care teams during the fourth quarter of fiscal year 2004 to increase customer continuity program retention and drive new revenue growth. The Company’s strategy is to develop a longer-term relationship with its customers and enhance the lifetime value of each relationship. We expect marketing and sales costs will increase in the fourth quarter of fiscal year 2004 compared to the third quarter of fiscal year 2004, but should remain about the same percentage of overall revenues.

Product development expenses consist 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 development expenses decreased to $1.7 million or 10% of revenues in the third quarter of fiscal year 2004, from $2.6 million or 12% of revenues in the third quarter of fiscal year 2003. In the nine months ended December 31, 2003, product development expenses decreased to $5.0 million from $5.9 million in the same period last year. Salaries and consulting services expenses decreased $639,000 and $235,000, respectively in the three months ended December 31, 2003 compared to the same period last year. Salaries and consulting services expenses decreased $565,000 and $285,000, respectively in the nine months ended December 31, 2003 compared to the same period last year. We expect product development costs in the fourth quarter of fiscal year 2004 will remain about the same as the third quarter of fiscal year 2004.

General and administrative expenses consist of payroll and related costs for executive, finance, legal, human resources and administrative personnel, recruiting and professional fees, internet, depreciation and amortization and other general corporate expenses. General and administrative expenses decreased to $3.5 million in the third quarter of fiscal year 2004 from $4.3 million in the same period last year. General and administrative expenses increased to $11.4 million in the nine months ended December 31, 2003 from $10.1 million in the same period last year. Salaries expense decreased $301,000 in the three months ended December 31, 2003 compared to the same period last year. In addition, the reversal of a $534,000 royalty accrual due to the favorable settlement of an audit and the $200,000 refund of prior year officer bonuses, partially offset by $348,000 in proxy solicitation costs favorably impacted the third quarter of fiscal year 2004. Depreciation and amortization of property and equipment increased $516,000 in the nine months ended December 31, 2003 compared to the same period last year. A number of smaller increases in general and administrative expenses in the nine months ended December 31, 2003 compared to the same period last year also contributed to the increase in expenses. General and administrative expenses increased to 21% and 24% of revenues in the three months and nine months ended December 31, 2003, respectively from 20% and 23%, respectively, in the three months and nine months ended December 31, 2002. We expect general and administrative expenses in the fourth quarter of fiscal year 2004 to be about the same as realized in the third quarter of fiscal year 2004, excluding the impact of the unusual royalty and bonus expense reductions realized in the third quarter of fiscal year 2004 and approximately $650,000 in proxy solicitation costs incurred in the fourth quarter of fiscal year 2004.

We incurred approximately $862,000 of accounting restatement costs in the third quarter of fiscal year 2004 and $4.1 million in the nine months ended December 31, 2003. These costs consist of legal expenses, including litigation, regulatory and Audit Committee investigation costs, additional auditing costs and consultants and temporary personnel to assist in the restatement of the financial statements for the first three quarters of fiscal year 2003. The decline in expenses in the third quarter of fiscal year 2004 compared to the first and second quarters of fiscal year 2004 is due to lower auditing costs, consulting and temporary personnel costs due to the filing of the restated fiscal year 2003 Form 10-Q’s in November 2003. These costs are expected to continue, although at a much lower rate into fiscal year 2005. We do not know how long the litigation and regulatory matters will continue or how much each will cost.

In the third quarter of fiscal year 2004, amortization of other intangible assets was $330,000 compared to $324,000 in the third quarter of fiscal year 2003. We expect amortization expense in the last quarter of fiscal year 2004 to be about the same as the expense in the third quarter of fiscal year 2004.

We paid $3.6 million for the acquisition of ResponseBase in September 2003. Revenues from ResponseBase decreased $7.1 million in the third quarter of fiscal year 2004 compared to the same period last year. Recently, we merged the ResponseBase products business into our Performance Marketing Group business unit and the ResponseBase advertising business into our Flowgo business unit. We recorded a $1,200,000 goodwill and other intangible assets impairment charge in the third quarter of fiscal year 2004 as a result of the significant reduction in the ResponseBase’s revenues.

In the third quarter of fiscal year 2004, net interest expense was $108,000 compared to $272,000 in the third quarter of fiscal year 2003. The reduction in interest expense was due to the repayment of capital lease and debt obligations, partially offset by the additional $2 million loan from VantagePoint. In the first quarter of fiscal year 2003, we realized a $1,269,000 gain on the extinguishment of debt and a $452,000 cost to cancel certain stock options. In the third quarter of fiscal year 2003, we recognized $235,000 in income from discontinued operations due to the reversal of accrued liabilities.

The Company recorded a minor tax expense in the third quarter of fiscal year 2004. We do not expect to record a tax benefit or expense in the fourth quarter of fiscal year 2004.

Net cash provided by (used in) operating activities was ($7.7) million in the nine months ended December 31, 2003 compared to $2.8 million in the nine months ended December 31, 2002. The net cash used in operating activities in the nine months ended December 31, 2003 was primarily due to the loss from operations including the costs associated with the accounting restatement, the cash advances to Sharman Networks and a decrease in current liabilities, partially offset by the impairment charge and non-cash expenses. The net cash provided by operating activities in the nine months ended December 31, 2002 was primarily due to the net income for the period, non-cash expenses and an increase in current liabilities, partially offset by the non-cash gain on debt extinguished and an increase in current assets.

Net cash used in investing activities was $140,000 in the nine months ended December 31, 2003 compared to $6.5 million for the nine months ended December 31, 2002. Net cash used in investing activities in the nine months ended December 31, 2003 was from the purchase of computer equipment and

intangible assets, partially offset by the reduction in a certificate of deposit used to secure a capital lease obligation. Net cash used in investing activities in the nine months ended December 31, 2002 was from the $3.5 million acquisition of ResponseBase, deposits to secure operating and capital lease obligations, the purchase of computer and telephone equipment and the purchase of customer lists.

Net cash provided by financing activities was $10.3 million in the nine months ended December 31, 2003 compared to $1.4 million in the nine months ended December 31, 2002. Net cash provided by financing activities in the nine months ended December 31, 2003 was due to the proceeds from the $2.0 million loan and $8 million sale of preferred stock to VantagePoint and proceeds from the issuance of common stock, including a $2.4 million common stock sale in November 2003, partially offset by the repayment of capital lease and debt obligations. Net cash provided by financing activities in the nine months ended December 31, 2002 was due to the $2.0 million of proceeds from capital lease transactions and the issuance of common stock, partially offset by the repayment of capital lease and debt obligations.

As of December 31, 2003, we had $7.2 million in cash and cash equivalents and $2.1 million in restricted cash and certificates of deposit, and we had $7.1 million in working capital. As of March 31, 2003, we had $4.7 million of cash and cash equivalents and $3.3 million in restricted cash and certificates of deposit, and $1.6 million in working capital. The increase in total cash and working capital from March 31, 2003 to December 31, 2003 was due to the $10.3 million sales of common and preferred stock and $2.0 borrowing under a debt obligation, partially offset by the net loss for the period including the costs related to the accounting restatement, working capital uses and repayment of capital lease and debt obligations.

On October 31, 2003, VantagePoint invested $8 million in our Company by purchasing 5,333,000 shares of a new series of convertible preferred stock, designated Series C convertible preferred stock. VantagePoint will receive an additional 427,000 shares of Series C preferred stock as dividends during the year ended October 31, 2004. The Company allocated 22 million shares of authorized preferred stock for the Series C preferred stock and has reserved shares of common stock for conversion of the Series C preferred stock into common stock. In addition, on July 15, 2003, 550 Digital Media Ventures and VantagePoint entered into an option agreement pursuant to which VantagePoint may purchase up to 3,050,000 shares of our common stock, and 1,750,000 shares of our Series B preferred stock, owned by 550 Digital Media Ventures until January 16, 2004. On October 31, 2003, the option term was extended to April 16, 2004 and VantagePoint agreed to partially exercise the option and purchase 454,545 shares of our Series B preferred stock from 550 Digital Media Ventures for $500,000 within five days of the closing of the Series C preferred stock sale. 550 Digital Media Ventures also agreed to release the Company from any claims that it may have, other than claims relating to the outstanding $2,360,000 convertible secured promissory note held by 550 Digital Media Ventures, including the related security interest, and any current advertising arrangements with the Company. 550 Digital Media Ventures’ rights associated with its common stock and the Series B preferred stock, including registration and voting rights will be transferred to VantagePoint upon exercise of the option and payment of the purchase price. In connection with the transaction, 550 Digital Media Ventures waived its anti-dilution protection, preemptive rights and rights of first refusal. 550 Digital Media Ventures agreed to vote in favor of VantagePoint’s investment and loan transactions at any Company stockholder meeting or by written consent and not sell any of its Company stockholdings until such transactions are completed.

As consideration for the DMV Option, 550 Digital Media Ventures sold to VantagePoint a $500,000 convertible promissory note of the Company. In anticipation of the preferred stock investment, on July 15, 2003, VantagePoint loaned $2 million to the Company. VantagePoint and the Company agreed to terminate the $500,000 convertible promissory note and issue to VantagePoint a new $2.5 million convertible promissory note. The $2.5 million note bears interest at 8% and is collateralized by a security interest in all of the Company’s assets. The Company and VantagePoint also agreed that in the event that VantagePoint does not exercise the option within 120 days of its grant, VantagePoint may, within 10 days after the expiration of such 120-day period, transfer the option to the Company in exchange for a warrant to purchase 200,000 shares of the Company’s Series B preferred stock at $2.50 per share expiring three years from the date of issuance. VantagePoint did not transfer the option to the Company within the 120-day period.

On October 31, 2003, VantagePoint agreed to provide a one-year senior secured $4 million bridge loan to the Company or provide a bank guarantee of a $4 million one-year senior secured bridge loan to the Company for certain proposed business development initiatives. The bridge loan would bear interest at the prime rate and be secured by a security interest in all of our assets that is senior to the $2.5 million convertible note with VantagePoint and the $2,360,000 convertible note with 550 Digital Media Ventures. The senior secured bridge loan needs to be accessed by the Company by February 28, 2004. If the Company draws upon the senior secured bridge loan, for each $1 million in loan proceeds we receive the Company will issue a warrant to purchase 250,000 shares of Series C preferred stock at $2.00 per share expiring five years from the date of issuance. We do not know if we will draw down on this bridge loan. In addition, on October 31, 2003, the Company amended the terms of the $2.5 million note due to VantagePoint to accelerate the due date to February 10, 2004. The Company’s stockholders approved the extension of the maturity date to October 31, 2004 and the addition of a conversion feature to the note to allow the conversion into a prospective series of Company preferred stock at the rate of one share for each $2.00 of principal at the January 29, 2004 stockholder’s meeting.

In January 2004, we amended the Series C stock purchase agreement to limit the number of shares issuable if we sell additional securities below the per share issue price, as adjusted, of the Series C preferred stock. NASDAQ has a marketplace rule that requires listed companies to obtain stockholder approval for the issuance of new securities that represent more than 20% of outstanding equity securities. We agreed with VantagePoint that we would either obtain stockholder approval if we need to issue securities that exceed the 20% rule or alternatively pay cash to VantagePoint for the value of the securities that would otherwise be issuable. We intend to ask our stockholders to approve the Series C preferred stock sale at our next stockholder meeting in August 2004 so that we do not need to pay cash to VantagePoint if we were ever to issue securities below the per share issue price, as adjusted.

In connection with the VantagePoint transactions, the Company entered into a management rights agreement pursuant to which VantagePoint is entitled to consult with and advise the Company’s management on significant business issues, inspect the Company’s books and records and appoint a representative to attend all meetings of the Board as a non-voting observer.

We have a $2.5 million convertible note due to VantagePoint that will either be converted by October 31, 2004 or will need to be repaid. We also have a $2,360,000 convertible note due to 550 Digital Media Ventures that will need to be repaid or 550 Digital Media Ventures can convert to Series B preferred stock after March 31, 2005. We have enough cash and available borrowing capacity to fund our business for at least the next 12 months and repay these two notes, if necessary.

In September 2003, we announced the hiring of an investment advisor to seek to raise capital for our newly formed subsidiary, GameUniverse, Inc. We intend to contribute our online gaming properties, including Skilljam.com and Casesladder.com, to GameUniverse. There can be no assurance that the effort to raise capital for GameUniverse will be successful or what the nature of the transaction or terms might be.

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

We have outstanding notes payable maturing at various dates through March 2005. We also lease facilities and equipment under various capital and operating lease agreements expiring at various dates through March 2008.

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

Trading in our common stock was halted and NASDAQ has delisted 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 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. On July 31, 2003, in a 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. 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. On August 22, 2003, we filed our Annual Report on Form 10-K. The Panel delisted the Company’s securities from The NASDAQ SmallCap Market on September 2, 2003. The Company’s common stock has been trading on what is commonly referred to as the “pink sheets” since September 2, 2003.

The Company appealed the Panel’s decision to the Nasdaq Listing and Hearing Review Council (the “Listing Council”) and on December 2, 2003, the Listing Council rendered a decision on the Company’s appeal. The Listing Council noted that the Company is now current in its public filing requirements and that events occurring subsequent to the Panel’s August 28, 2003 decision may address the public interest concerns. The Listing Council instructed the Panel to determine whether public interest concerns continue to exist and to determine if there are any other deficiencies under Nasdaq’s continued listing standards. If the Panel determines that the public interest concerns no longer exist and that no other deficiencies exist, the Panel is instructed to relist the Company’s common stock on The Nasdaq SmallCap Market. Under the Listing Counsel’s decision, the Panel has several months to complete their investigation. The Company is not able to predict the outcome of the Panel’s review or if the Company’s common stock will be relisted on The Nasdaq SmallCap Market.

NASDAQ has various quantitative listing requirements for a company to remain listed on The NASDAQ SmallCap Market. These criteria include (i) at least $35 million in market capitalization, or $2.5 million in stockholders’ equity, or $500,000 in net income in the last fiscal year or two of the last three fiscal years; (ii) a $1.00 minimum bid price; (iii) 2 market makers; (iv) 300 round lot stockholders; and (v) 500,000 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 outstanding shares). We were in compliance with these quantitative listing requirements as of December 31, 2003. The initial listing requirements for a company to be admitted to The NASDAQ SmallCap Market are much higher and include (i) at least $50 million in market capitalization, or $5 million in stockholders’ equity or $750,000 in net income in the last fiscal year or two of the last three fiscal years; (ii) a $4.00 minimum bid price; (iii) 3 market makers; (iv) 300 round lot stockholders; and (v) 1 million publicly held shares with a market value of $5 million (excluding shares held by officers, directors and persons owning 10% or more of the company’s outstanding shares). We were not in compliance with the initial listing requirements as of December 31, 2003. There can be no assurance that NASDAQ will apply the continued listing requirements rather than the initial listing requirements in our appeal of the Panel’s decision. In addition, there can be no assurance that we will remain in compliance with the continued listing requirements in the future.

If we do not resume trading on The NASDAQ SmallCap Market, trading in our common stock could continue to be conducted in the over-the-counter market on the OTC Bulletin Board or in what is commonly referred to as the “pink sheets.” Continued trading in the over-the-counter market or the “pink sheets” could further damage our general business reputation and could impair our ability to raise funds. This could further adversely affect our stock price and limit our ability to grow our business. Furthermore, if our shares continue to be traded on the over-the-counter bulletin board or the “pink sheets,” their value could 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 NASDAQ SmallCap Market.

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

As previously reported, on October 14, 2003, the purported stockholder class action lawsuits previously 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 were consolidated into one action and lead counsel and plaintiff were appointed (the “Securities Litigation”). The Securities Litigation arises out of the Company’s restatement of quarterly financial results for fiscal year 2003 and includes allegations of, among other things, intentionally false and misleading statements regarding the Company’s business prospects, financial condition and performance. On December 17, 2003, plaintiffs in the Securities Litigation filed their amended and consolidated class action complaint reiterating those allegations and also naming the Company’s former auditor as an additional defendant. The Company and other defendants currently have until February 17, 2004 to respond to plaintiffs’ complaint, at which time the Company expects to file a motion to dismiss the lawsuit for, among other things, the failure of the complaint to state a valid claim against the Company. A hearing on the Company’s motion to dismiss is currently scheduled for April 19, 2004.

of Directors would be futile. The Company’s demurrer, as well as those filed by the individual defendants in the case, is currently scheduled to be heard on April 7, 2004, and discovery in the action is stayed pending such hearing. The Federal Court derivative action has been stayed in its entirety pending the outcome of the hearing on defendants’ motions challenging the complaint in the Securities Litigation.

In addition, the SEC has commenced an informal inquiry regarding the circumstances leading up to the accounting 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 could seriously harm our business and results of operations.

Our other litigation will require resources to resolve and may result in an unfavorable judgment.

We are subject to litigation in the ordinary course of our business. We could be subject to future litigation related to acquisitions we consider or consummate, products we sell, the content of our web pages and the technology we use, among other potential issues. The resolution of these issues will require resources, management time and could result in an adverse judgment.

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 fiscal year 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 controls were identified. As described in Item 4. Controls and Procedures, 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 other stockholders.

As of December 31, 2003, our executive officers, common and preferred stockholders holding a 5% or greater beneficial ownership in our securities and members of our Board of Directors beneficially own approximately 52% of our common stock on an as-converted basis, excluding vested stock options and warrants to purchase common stock. As a result, our executive officers, our large common and 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 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.

On October 31, 2003, the Company sold 5,333,000 shares of a new series of convertible preferred stock with rights, preferences and privileges that are senior to the rights, preferences and privileges of the Company’s common stock and Series A and Series B preferred stock. Further information with respect to the agreements with VantagePoint is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 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 preferred stock may have the effect of delaying or preventing a change in control of the Company 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.

As of December 31, 2003, we had 4,754,000 outstanding stock options and 108,000 outstanding warrants to purchase our common stock.

As of December 31, 2003, we had 275,000 shares of our Series A preferred stock outstanding. The Series A preferred stock may be converted into our common stock at the then-applicable conversion rate. The Series A preferred stock has a $3.60 per share liquidation preference which increases at a rate of 6% per annum. Each share of Series A preferred stock 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 $4.62 as of December 31, 2003. Because of the 6% accretion factor, each share of Series A preferred stock will be converted into greater than one share of common stock. Prior to any conversion, the conversion price is also adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend, issuance of 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.

As of December 31, 2003, we had 1,923,000 shares of our Series B preferred stock outstanding. The Series B preferred stock may be converted 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 preferred stock. The Series B preferred stock has a $2.60 per share liquidation preference. 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.

On October 31, 2003, the Company sold 5,333,000 shares of a new series of convertible preferred stock to VantagePoint. The Series C preferred stockholders are paid an 8% annual dividend in additional Series C preferred stock for one year and on December 31, 2003, we issued 71,000 additional shares as dividends. The Series C preferred stock also has a $1.50 per share liquidation preference and the conversion price is also adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend, issuance of additional equity securities (other than those reserved as employee shares).

The issuance of common stock upon the exercise of our outstanding options and warrants, or the conversion of the Series A, Series B, Series C or any newly issued series of preferred stock, will cause dilution to existing stockholders and could adversely affect the market price of our common stock. The Series C preferred stock issued in October 2003 and the 1,643,000 shares of common stock issued in November 2003 are unregistered and the stockholders have registration rights. If the registration rights are exercised and the stock is sold, the market price of our common stock could be adversely affected.

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.

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 we expect 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 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 our Company and our operations, if they were to terminate employment, 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 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 acceptable terms, and to 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 including 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 our 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.

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 other intangible assets.

We are required to review our 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 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 for impairment. Furthermore, future cash flows associated with our various properties may decline due to changes in market conditions or technology, thereby requiring an impairment assessment of the property’s goodwill and other intangible assets. For example, revenues in our ResponseBase business unit declined significantly in the third quarter of fiscal year 2004 compared to the same period last year. This decline in revenues required us to test for goodwill and other intangible asset impairment and resulted in a $1,200,000 impairment charge in the third quarter of fiscal year 2004.

In fiscal year 2003, we analyzed goodwill and other intangible assets for impairment at the Company level. As a result of the reorganization of our reporting structure, we now have sufficiently discrete financial information to conduct the impairment analysis at the reporting unit level. This change may cause us to record an impairment charge in the fourth quarter of fiscal year 2004.

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.

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. 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 be able to maintain our domain names or obtain 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.

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 created internally or licensed to us by third parties. However, we have been using increasing amounts of audio and video content, 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.

We commenced operations in April 1999, and we have a limited operating history upon which an evaluation of 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.

We have hired an financial advisor to seek to raise capital for our newly formed subsidiary, GameUniverse, Inc. We intend to contribute our online gaming properties, including Skilljam.com and CasesLadder.com, to GameUniverse. There can be no assurance that the effort to raise capital for GameUniverse will be successful or what the nature of the transaction or terms might be. If we do not raise capital to grow our online gaming properties, we will not be able to achieve the revenue and profit potential of those properties.

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 annual 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:

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 could be sued for information retrieved from the Internet. Because material may be downloaded from websites and may be subsequently distributed to others, there is a potential that claims will be made against us 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 us 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.

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 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.

In December 2003, the President signed a new law that will impact the way certain commercial E-mails are sent over the Internet. The new law goes into effect January 1, 2004 and supercedes the future enforcement of most state commercial E-mail laws, including the recently enacted California commercial E-mail law. The new law prohibits E-mails that have misleading headers (the digital path to the recipient) and other practices that disguise the origin or path of the E-mail, false or misleading sender information and deceptive subject lines. The new law requires commercial E-mail’s to clearly identify the E-mail as an advertisement or solicitation, and contain a method for the recipient to opt-out of future mailings and the sender must honor the opt-out decision. The new law also calls on the Federal Trade Commission to create a do-not-E-mail registry similar to the do-not-call registry. Penalties for failure to comply with the new law include significant fines, forfeiture of property and imprisonment. This law and other laws or regulations that impact E-mail advertising could harm our business.

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. Microsoft Corporation has announced plans to add pop-up blocking features to Internet Explorer with Service Pack 2 in 2004. In addition, Internet service providers have recently introduced anti-pop-up tools or agreed not to sell pop-ups to third parties. 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.

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. Furthermore, these attacks may lead to economic instability in the United States, which could adversely affect our revenue.

In November 2003, a newly formed Company subsidiary signed application download and content distribution agreements with Sharman Networks, Ltd. The subsidiary agreed to provide an aggregate $2.3 million of non-refundable cash advances to Sharman Networks at various dates and additional monthly cash advances for at least one year that are recoupable against a sharing of revenues. The Company also issued 500,000 shares of eUniverse common stock to Sharman Networks. Sharman Networks agreed to bundle two of the Company’s applications with other applications that are downloaded from the Internet with the Kazaa Media Desktop. Sharman Networks also agreed to include channel links on the Kazaa Media Desktop to content provided by the Company. The Kazaa Media Desktop is a peer-to-peer file sharing application. If the revenue earned from the two download applications and the content does not meet Company expectations, the advances to Sharman Networks will not be recouped. In addition, if Sharman Networks fails to bundle the application or host the content for any reason, the advances to Sharman Networks will also not be recouped. Any unrecouped advances and the unamortized value of the Company common stock issued to Sharman Networks, if any, will be expensed.

Market risk represents the potential impact to 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 interest rate of our variable rate debt. A 1% change in interest rates would increase or decrease our annual interest expense by $25,000.

We place our cash and cash equivalents in banks with high quality standards. Cash investments consist of high quality overnight investments that bear minor exposure to interest rate fluctuations.

On August 22, 2003, the Company restated previously reported quarterly financial results for the first three quarters of fiscal year 2003 because of accounting errors previously identified in the Company’s financial statements. 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 controls, management significantly expanded its accounting and finance staff and retained an outside accounting firm to assist in the process. In addition, the Company’s Board of Directors directed the Audit Committee to explore the facts and circumstances giving rise to the restatement as well as to evaluate the Company’s accounting practices, policies and procedures. 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 fiscal year 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, 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.

In response to the matters identified by management’s and the Audit Committee’s reviews, the Company has implemented a number of remedial and other actions designed to improve its accounting and financial reporting procedures and controls. Actions designed to broadly strengthen the functioning and oversight of the accounting function have included:

The Company also implemented or strengthened specific internal controls, including:

Finally, the Company is continuing to implement a new integrated financial reporting system that is more appropriate to the size and complexity of the Company’s current business operations.

In addition to the foregoing changes, the Company expects to retain an experienced consulting firm to advise the Company on further enhancements to its internal and operational controls based on the COSO framework. The Company also expects to be an early adopter of the internal control attestation requirements of the Sarbanes-Oxley Act of 2002.

Pending full implementation of an integrated financial reporting system, the Company has adopted supplemental control measures to ensure that the financial statements and other financial information included in the reports it files with the Securities and Exchange Commission, fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented. The Company expects that full implementation of its integrated financial reporting system will render these supplemental control measures redundant.

Our management, including our Principal Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. 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 evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures for purposes of filing this report under the Securities Exchange Act of 1934, as amended. This evaluation was done under the supervision and with the participation of management, including our Principal Executive Officer and our Chief Financial Officer. As part of their controls evaluation, the Principal Executive Officer and Chief Financial Officer considered the results to date of the Audit Committee review of the matters leading to the accounting restatement.

Based in part on the foregoing, the Company’s Principal Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report December 31, 2003, our disclosure controls and procedures were effective to ensure that information the Company is required to disclose in the reports that it files with the Securities and Exchange Commission was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

The changes to the Company’s internal controls identified above are intended, and have been undertaken by the Company, to enhance the effectiveness of the Company’s internal control procedures.

These steps constitute significant changes in internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis, and will take further action as appropriate.

See Note 7. Commitments and Contingencies of Notes to Consolidated Financial Statements (PART. 1 – FINANCIAL INFORMATION, Item 1. Financial Statements) for information on legal proceedings.

On October 31, 2003, the Company sold 5,333,000 shares of a new series of convertible preferred stock, designated Series C convertible preferred stock to VantagePoint for $1.50 per share generating $8 million of proceeds. The unregistered Series C preferred stock has registration rights. No underwriters were used in the private placement. The Series C convertible preferred stock is convertible into common stock at the initial conversion rate of one to one. The Series C preferred stock is senior in preference to the Series A and Series B preferred stock. See Liquidity and Capital Resources for further information regarding this private placement and related financing transactions with VantagePoint.

The Series A and Series B Certificates of Designation were amended as part of the VantagePoint private placement and related financing transactions. “Section 12 Event of Default” was deleted from the Series A Certificate of Designation and Section 4(b), Board of Director representation, of the Series B Certificate of Designation was modified. The consent of stockholders to these amendments is generally required under Delaware law and the stockholders approved these amendments at the Company’s fiscal year 2003 annual meeting of stockholders held on January 29, 2004.

As partial consideration for the application download and content distribution agreements with Sharman Networks, Ltd., the Company issued Sharman Networks 500,000 shares of eUniverse common stock on November 13, 2003. The Company has given registration rights to Sharman Networks for this unregistered common stock. No underwriters were used in the private placement.

The October and November 2003 sales of preferred and common stock 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. Each purchaser represented to the Company that the shares were acquired for investment purposes.

We held our 2003 annual meeting of stockholders on January 29, 2004. The Board of Directors submitted to a vote of the Company’s stockholders and solicited proxies for, a slate of directors to hold office until the next annual meeting of stockholders, two other matters related to the VantagePoint Series C preferred stock and debt transactions and the appointment of independent auditors. Mr. Brad Greenspan,

the Company’s past Chairman and Chief Executive Officer offered an alternative slate of directors in opposition to the slate offered by the Board of Directors and opposed one of the two VantagePoint Series C preferred stock and debt matters proposed by the Board of Directors. The independent inspectors of elections issued their final report on February 6, 2004 reporting that the four Board of Director proposals were passed and the two Brad Greenspan proposals were not passed.

Proposal 2. To approve the issuance of a warrant to VantagePoint if we draw down on a $4 million loan commitment and the modification of the terms of an existing note due to VantagePoint, including the preferred stock issuable on exercise or conversion and the conversion of the preferred stock into common stock at the applicable conversion rate:

Proposal 3. To approve amendments to the Series A and Series B Certificates of Designation:

Proposal 4. To ratify the appointment of Moss Adams LLP as the Company’s independent auditors for fiscal year 2004:

(1) Incorporated by reference to eUniverse, Inc.’s Form 10-K for the year ended March 31, 2003 filed on August 22, 2003.

(2) Incorporated by reference to eUniverse, Inc.’s Form 8-K filed on November 6, 2003.

(3) Incorporated by reference to eUniverse, Inc.’s Definitive Proxy Statement filed on December 30, 2003.

(4) Incorporated by reference to eUniverse, Inc.’s Form 8-K filed on January 9, 2003.

(5) Incorporated by reference to eUniverse, Inc.’s Form 10-Q for the quarter ended September 30, 2003 filed on November 13, 2003.

On November 3, 2003, we reported that Brad Greenspan stepped down as the Company’s Chief Executive Officer and will no longer serve as Chairman of the Board of Directors. Brett Brewer, the Company’s President, will serve as the Company’s interim principal executive officer. We also announced the recent addition of two new members to our Board of Directors, Jeffrey Edell and Bradley Ward. Jeffrey Edell replaced Thomas Gewecke who served on the Company’s Board as the designee of Sony Music Entertainment.

On November 6, 2003, we reported that the Company closed an $8 million financing with VantagePoint Venture Partners. Under the terms of the investment, VantagePoint entities purchased 5,333,333 shares of a new series of preferred stock for $1.50 per share.

On November 24, 2003, we reported that the Company completed a private placement of 1,643,000 shares of common stock to a group of existing and new Company stockholders for $1.50 per share generating proceeds of approximately $2.5 million.

On November 26, 2003, we reported that the Company’s Board of Directors approved an amendment to the Company’s bylaws adding advance notification requirements for actions at Company’s stockholder meetings.

On December 5, 2003, we reported that the Nasdaq Listing and Hearing Review Council rendered a decision on the Company’s appeal of the Nasdaq Listing Qualifications Panel’s decision to delist the Company’s common stock from The Nasdaq SmallCap Market.

On December 18, 2003, we reported that Brad Greenspan resigned from the Board of Directors. The disagreements alleged by Mr. Greenspan were described in the filing.

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


eUNIVERSE, INC. (Registrant)

By:		/s/ Thomas J. Flahie

		Thomas J. Flahie Chief Financial Officer (Principal Financial and Accounting Officer)


	December 31, 2003			March 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	7,151		$	4,663
Restricted cash		1,424			1,842
Accounts receivable, net		4,573			4,985
Inventories, net		1,870			1,610
Prepaid expenses and other assets		4,848			1,777

Total current assets		19,866			14,877
Property and equipment, net		2,470			3,229
Goodwill		15,018			15,487
Other intangible assets, net		2,868			4,447
Deposits and other assets		1,026			1,889

Total assets	$	41,248		$	39,929


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,142		$	5,293
Accrued expenses		4,206			4,230
Deferred revenue		696			1,126
Current portion of debt obligations		2,985			1,460
Current portion of capitalized lease obligations		763			1,178

Total current liabilities		12,792			13,287
Debt obligations, less current portion		2,360			2,290
Capitalized lease obligations, less current portion		73			437
Accrued interest		16			479

Total liabilities		15,241			16,493

Stockholders’ equity:
Preferred stock, $0.10 par value; 40,000 shares authorized; 7,602 and 2,280 shares issued and outstanding, respectively		760			229
Common stock, $0.001 par value; 250,000 shares authorized; 28,772 and 26,303 shares issued, respectively		29			26
Additional paid-in capital		81,975			71,029
Accumulated deficit		(56,657	)		(47,812	)
Treasury stock; 59 and 32 shares in treasury, respectively		(100	)		(36	)

Total stockholders’ equity		26,007			23,436

Total liabilities and stockholders’ equity	$	41,248		$	39,929


	Three Months Ended December 31,						Nine Months Ended December 31,
	2003			2002 — Restated			2003			2002 — Restated
Revenues	$	16,506		$	21,959		$	47,591		$	43,729
Cost of revenues		4,796			6,830			15,337			10,631

Gross profit		11,710			15,129			32,254			33,098

Operating expenses:
Marketing and sales		6,083			8,009			17,959			14,878
Product development		1,701			2,576			4,999			5,873
General and administrative		3,511			4,329			11,445			10,102
Restatement professional fees		862			—			4,085			—
Amortization of other intangible assets		330			324			986			835
Impairment of goodwill and other intangible assets		1,200			—			1,200			—

Total operating expenses		13,687			15,238			40,674			31,688

Operating income (loss)		(1,977	)		(109	)		(8,420	)		1,410
Interest expense, net		(108	)		(272	)		(311	)		(828	)
Cancellation of stock options		—			—			—			(452	)
Gain on debt extinguished		—			—			—			1,269
Other gains and (losses)		—			(104	)		—			8

Income (loss) from continuing operations before income taxes		(2,085	)		(485	)		(8,731	)		1,407
Income taxes		8			—			8			6

Income (loss) from continuing operations		(2,093	)		(485	)		(8,739	)		1,413
Income from discontinued segment		—			235			—			235

Net income (loss)		(2,093	)		(250	)		(8,739	)		1,648
Preferred stock dividend and liquidation preference		123			52			157			154

Income (loss) to common stockholders	$	(2,216	)	$	(302	)	$	(8,896	)	$	1,494

Continuing operations	$	(0.08	)	$	(0.02	)	$	(0.33	)	$	0.05
Discontinued segment		—			0.01			—			0.01

Basic income (loss) per common share	$	(0.08	)	$	(0.01	)	$	(0.33	)	$	0.06

Diluted income (loss) per common share	$	(0.08	)	$	(0.01	)	$	(0.33	)	$	0.05

Basic weighted average common shares		27,611			24,601			26,894			24,143

Diluted weighted average common shares		27,611			24,601			26,894			30,712


	Nine Months Ended December 31,
	2003			2002 — Restated
Operating activities:
Net income (loss)	$	(8,739	)	$	1,648
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		1,309			793
Amortization of other intangible assets		986			835
Impairment of goodwill and other intangible assets		1,200			—
Gain on debt extinguished		—			(1,269	)
Other non-cash charges		136			—
Allowance for doubtful accounts		1,308			636
Changes in other current assets		(2,418	)		(2,350	)
Changes in current liabilities		(1,498	)		2,545
Other		—			(21	)

Net cash provided by (used in) operating activities		(7,716	)		2,817

Investing activities:
Purchases of property and equipment		(429	)		(1,034	)
Acquisition of ResponseBase		(87	)		(3,523	)
Acquisition of intangible assets		(51	)		(734	)
Deposits and other		427			(1,229	)

Net cash used in investing activities		(140	)		(6,520	)

Financing activities:
Proceeds from capitalized lease obligations		—			1,966
Repayment of capitalized lease obligations		(988	)		(712	)
Proceeds from debt obligations		2,000			—
Repayment of debt obligations		(975	)		(505	)
Proceeds from issuance of preferred stock		7,686			—
Proceeds from issuance of common stock		2,621			674

Net cash provided by financing activities		10,344			1,423

Change in cash and cash equivalents		2,488			(2,280	)
Cash and cash equivalents, beginning of period		4,663			8,008

Cash and cash equivalents, end of period	$	7,151		$	5,728

Supplemental cash flow information:
Cash paid for interest	$	203		$	187
Cash paid for income taxes		138			—
Equipment acquired under capital leases		121			2,135
Common stock issued to Sharman Networks		975			—
Preferred stock dividends		106			—
Stock issued on conversion of debt obligation		—			450


	Three Months Ended December 31,						Nine Months Ended December 31,
	2003			2002			2003			2002
Income (loss) to common stockholders:
As reported	$	(2,216	)	$	(302	)	$	(8,896	)	$	1,494
Less: stock-based compensation expense determined by the fair value method		(763	)		(1,023	)		(2,540	)		(3,069	)

Pro forma loss to common stockholders	$	(2,979	)	$	(1,325	)	$	(11,436	)	$	(1,575	)

Income (loss) per share to common stockholders:
Basic — as reported	$	(0.08	)	$	(0.01	)	$	(0.33	)	$	0.06

Basic — pro forma	$	(0.11	)	$	(0.05	)	$	(0.43	)	$	(0.07	)

Diluted — as reported	$	(0.08	)	$	(0.01	)	$	(0.33	)	$	0.05

Diluted — pro forma	$	(0.11	)	$	(0.05	)	$	(0.43	)	$	(0.07	)


	December 31, 2003			March 31, 2003
Furniture and fixtures	$	75		$	75
Computers and equipment		2,264			1,958
Equipment under capital leases		2,488			2,353
Leasehold improvements		9			9
Purchased software		722			620

		5,558			5,015
Less: accumulated depreciation and amortization		(3,088	)		(1,786	)

	$	2,470		$	3,229


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — December 31, 2003 and March 31, 2003	3
	Consolidated Statements of Operations — Three months and nine months ended December 31, 2003 and 2002	4
	Consolidated Statements of Cash Flows — Nine months ended December 31, 2003 and 2002	5
	Notes to Consolidated Financial Statements — December 31, 2003	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	40

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 2.	Changes in Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Submission of Matters to a Vote of Security Holders	43

Item 5.	Other Information	44

Item 6.	Exhibits and Reports on Form 8-K	44

Signature		47


	December 31, 2003			March 31, 2003
Customer lists	$	2,243		$	2,243
Domain names		1,700			1,700
License agreements		315			315
Websites		1,210			1,210
Other		817			766

		6,285			6,234
Less: accumulated amortization		(3,417	)		(1,787	)

	$	2,868		$	4,447


	March 31,
2004 (remaining three months)	$	277
2005		1,010
2006		792
2007		371
2008		211
Thereafter		207

	$	2,868


	December 31, 2003			March 31, 2003
550 Digital Media Ventures — Affiliate (1 and 2)	$	2,360		$	2,290
VantagePoint — Affiliate (2)		2,500			—
Deb’s Fun Pages		—			287
Funny Greetings (3)		61			454
FunPageLand		—			113
SFX Entertainment, Inc. (4)		424			606

		5,345			3,750
Less: current portion of debt obligations		(2,985	)		(1,460	)

	$	2,360		$	2,290


	Nine Months Ended December 31,
	2003				2002
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at beginning of year	7,602		$	3.25	8,707		$	3.16
Granted	828			1.90	553			3.98
Exercised	(73	)		2.31	(240	)		2.69
Cancelled	(3,603	)		3.90	(716	)		4.61

Outstanding at end of period	4,754			2.53	8,304			3.17

Exercisable at end of period	3,103			2.67	4,668			3.52


	Options Outstanding			Options Exercisable
Price Range	Number	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$5.01-7.00	178	$	5.93	156	$	5.96
3.01-5.00	201		3.87	81		3.86
1.00-3.00	4,375		2.33	2,866		2.46

	4,754		2.53	3,103		2.67


	Three Months Ended December 31,				Nine Months Ended December 31,
	2003		2002		2003		2002
Revenues:
Products and services	71.0	%	72.6	%	71.3	%	60.8	%
Media and advertising	29.0		27.4		28.7		39.2

Total	100.0		100.0		100.0		100.0

Cost of revenues:
Products and services	29.1		31.1		32.2		24.3
Media and advertising	—		—		—		—

Total	29.1		31.1		32.2		24.3

Operating expenses:
Marketing and sales	36.9		36.5		37.7		34.0
Product development	10.3		11.7		10.5		13.4
General and administrative	21.2		19.7		24.1		23.2
Restatement professional fees	5.2		—		8.6		—
Amortization of other intangible assets	2.0		1.5		2.1		1.9
Impairment of goodwill and other intangible assets	7.3		—		2.5		—

Total operating expenses	82.9		69.4		85.5		72.5

Operating income (loss)	(12.0	)	(0.5	)	(17.7	)	3.2
Interest expense, net	(0.7	)	(1.2	)	(0.7	)	(1.9	)
Cancellation of stock options	—		—		—		(1.0	)
Gain on debt extinguished	—		—		—		2.9
Other gains and (losses)	—		(0.5	)	—		—

Income (loss) from continuing operations before income taxes	(12.7	)	(2.2	)	(18.4	)	3.2
Income taxes	—		—		—		—

Income (loss) from continuing operations	(12.7	)%	(2.2	)%	(18.4	)%	3.2	%


	Payments Due by Period
	Total Amounts Committed		3 Months Ended March 31, 2004		March 31, 2005		March 31, 2006		Thereafter
Contractual Obligations
Note payable for acquisition of Funnygreetings	$	61	$	61	$	—	$	—	$	—
Note payable to 550 Digital Media Ventures		2,360		—		2,360		—		—
Note payable to SFX Entertainment, Inc.		424		103		321		—		—
Note payable to VantagePoint		2,500		—		2,500		—		—
Capital lease obligations		865		329		502		24		10
Operating lease obligations		2,052		296		1,042		714		—

Total contractual obligations	$	8,262	$	789	$	6,725	$	738	$	10


	For	Withheld
Board of Directors nominees:
Brett Brewer	18,388,136	1,593,970
Daniel Mosher	18,399,136	1,582,970
Lawrence Moreau	18,402,201	1,579,905
Bradley Ward	18,401,901	1,580,205

Brad Greenspan nominees:
Ken Schapiro	8,398,220	238,579
John Neubauer	8,398,220	238,579
Vincent Bitteti	8,398,220	238,579
James Somes	8,398,220	238,579
Nathan Peck	8,398,220	238,579


	For	Against	Abstain
Board of Directors proposal:	12,486,317	144,042	7,351,747

Brad Greenspan proposal	19,000	8,444,965	172,834


Exhibit Number		Title
3.1		Certificate of Incorporation of eUniverse, Inc. dated October 31, 2002. (4)
3.2		Bylaws of eUniverse, Inc., dated January 17, 2003. (5)


4.1		Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2002. (4)
4.2		Certificate of Designation of Series B Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2002. (4)
4.3		Certificate of Designation of Series C Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2003. (2)
4.4		Certificate of Designation of Series C-1 Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2003. (2)
10.1		Second Amended and Restated Secured Convertible Promissory Note dated July 15, 2003, in the principal amount of $1,789,764. (1)
10.2		Second Amended and Restated Secured Convertible Promissory Note dated July 15, 2003, in the principal amount of $500,000. (1)
10.3		Secured Note Purchase Agreement, by and between eUniverse, Inc. and VP Alpha Holdings IV, L.L.C., dated July 15, 2003. (1)
10.4		Form of eUniverse, Inc. Series B Preferred Stock Purchase Warrant to be issued to VP Alpha Holdings IV, L.L.C. (1)
10.5		Option Agreement, by and among eUniverse, Inc., 550 Digital Media Ventures, Inc. and VP Alpha Holdings IV, L.L.C., dated July 15, 2003. (1)
10.6		Security Agreement, by and between eUniverse, Inc. and V.P. Alpha Holdings IV, L.L.C., dated July 15, 2003. (1)
10.7		Bonus Repayment Agreement, by and between eUniverse, Inc. and Brad D. Greenspan, dated August 21, 2003. (1)
10.8		Bonus Repayment Agreement, by and between eUniverse, Inc. and Brett C. Brewer, dated August 21, 2003. (1)
10.9		Bonus Repayment Agreement, by and between eUniverse, Inc. and Chris Lipp, dated August 21, 2003. (1)
10.10		Series C Preferred Stock Agreement between eUniverse, Inc. and affiliates of VantagePoint Venture Partners, dated October 31, 2003. (2)
10.11		Agreement between eUniverse, Inc. and Series C preferred stockholders, dated January 30, 2004.
10.12		Amended and Restated Convertible Secured Promissory Note between eUniverse, Inc. and VP Alpha Holdings IV, L.L.C., dated as of October 31, 2003. (3)
10.13		Form of Warrant to Purchase Shares of Series C Preferred Stock issued to VP Alpha Holdings IV, L.L.C., dated October 31, 2003. (2)
10.14		Voting Agreement with affiliates of VantagePoint Venture Partners, dated October 31, 2003. (2)
10.15		550 DMV Consent and Waiver Agreement, dated October 31, 2003. (2)
10.16		Registration Rights Agreement between eUniverse, Inc. and affiliates of VantagePoint Venture Partners, dated October 31, 2003. (2)
10.17		Form of Director Indemnification Agreement for David Carlick and Andrew Sheehan. (2)
10.18		Form of Common Stock Purchase Agreement, with various investors, dated November 18, 2003.
10.19		Form of Registration Rights Agreement, with various investors, dated November 18, 2003.
31		Section 302 Certificates of Chief Executive Officer and Chief Financial Officer, adopted pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
32		Certificate of Chief Executive Officer and Chief Financial Officer, adopted pursuant to 18 U.S.C. Section 1350.