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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

Or

For the transition period from              to             .

Commission File No. 000-26355

Intermix Media, Inc.

(Exact Name of Registrant as Specified in its Charter)

6060 Center Drive, Suite 300, Los Angeles, CA 90045

(310) 215-1001

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

eUniverse, Inc.

(Former Name)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.0001 per share

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 November 11, 2004, there were 30,620,000 shares of the Registrant’s common stock, par value $0.001 outstanding.

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Intermix Media, Inc.

Form 10-Q

For the Three Months Ended September 30, 2004

INDEX

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PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

Intermix Media, Inc.

Consolidated Balance Sheets

(in thousands, except par value data - unaudited)

See Notes to Consolidated Financial Statements

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Intermix Media, Inc.

Consolidated Statements of Operations

(in thousands, except per share data - unaudited)

See Notes to Consolidated Financial Statements

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Intermix Media, Inc.

Consolidated Statements of Cash Flows

(in thousands - unaudited)

See Notes to Consolidated Financial Statements

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Intermix Media, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1. The Company and Basis of Presentation

Intermix Media, Inc. (the “Company”, “we” or “our”), a Delaware Corporation, is an online media and entertainment company that leverages proprietary technologies, analytical marketing tools, and unique viral and user generated content across its online network and develops ecommerce brands. The Company conducts operations from facilities located in Los Angeles, California and Mount Vernon, Washington. These financial statements include the accounts of Intermix Media, Inc. and its majority owned subsidiaries. Inter-company transactions and balances have been eliminated in consolidation. The Company changed its name from eUniverse, Inc. to Intermix Media, Inc. on July 15, 2004.

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 and six months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended March 31, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principals 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, 2004.

Note 2. Accounting Policies

Estimates and assumptions

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements in conformity with generally accepted accounting principles 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 management’s estimates and assumptions.

Restricted cash and deposits

At September 30, 2004 and March 31, 2004, the Company had $2,004,000 and $1,699,000, respectively of funds held by banks as reserves against any possible charge backs and returns on credit card transactions related to customer disputes that are not offset against the Company’s daily sales deposit activity. These amounts are reflected as restricted cash. The Company also had $637,000 and $1,051,000 in certificates of deposit at September 30, 2004 and March 31, 2004, respectively which collateralize lease obligations. At March 31, 2004, a $417,000 certificate of deposit was classified as restricted cash and the remaining balances at September 30, 2004 and March 31, 2004 are classified as long-term deposits.

Allowance for doubtful accounts

The Company provides an allowance for doubtful accounts receivable by applying a reserve for all 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 (benefit) was ($406,000) for the six months ended September 30, 2004 and $779,000 for the six months ended September 30, 2003. The allowance for doubtful accounts was $283,000 at September 30, 2004 and $710,000 at March 31, 2004.

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Prepaid expenses

In November 2003, a Company subsidiary signed application download and content distribution agreements with Sharman Networks, Ltd. The subsidiary agreed to provide non-refundable cash advances to Sharman Networks that are recoupable against a sharing of revenues. The Company also issued Sharman Networks 500,000 shares of Company common stock. Sharman Networks is currently bundling one of the Company’s applications with other applications that are downloaded from the Internet with the Kazaa Media Desktop. Sharman Networks is also currently including channel links on the Kazaa Media Desktop to content provided by the Company. The Company has guaranteed the obligations of the subsidiary. The unrecouped cash advances and the unamortized value of the common stock that are included in prepaid expenses at September 30, 2004 was $625,000 and at March 31, 2004 was $1,787,000.

Accrued expenses

Included in accrued expenses are $1,126,000 of accrued compensation at September 30, 2004 and $797,000 at March 31, 2004.

Revenues

Product revenue is generated from the sale of herbal and all-natural ingestible and cosmetic products, and ink cartridges and related office products. We also sold collectibles, fitness products and various niche products in prior years. For these transactions, the Company recognizes revenue upon shipment of the products. Fulfillment for these products is handled internally and outsourced to third-parties. Shipping and handling fees charged to customers are included in revenues, and shipping and handling costs are included in cost of revenues.

The Company recognizes revenue upon fulfillment and delivery of customer 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.

Subscription and non-refundable membership revenues are recognized ratably over the period that services are provided. Deferred revenue consists primarily of subscription revenues billed in advance of the term of service.

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 and six months ended September 30, 2004 and 2003, the Company recorded no bartered advertising revenue.

Stock-based compensation

The Company accounts for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” using the intrinsic value-based method of accounting. Compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price, if any. Compensation expense is recognized immediately if vesting is at issuance or ratably over the vesting period if the options vest over time. Common stock issued to vendors is valued at the closing market price on the date of issuance and other equity instruments granted to consultants and vendors are valued using the Black-Scholes option-pricing model.

The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and

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Disclosure”. The following table illustrates the effect on income (loss) to common stockholders and income (loss) per share to common stockholders had the Company applied the fair value recognition provisions of SFAS 148 to stock-based employee compensation (in thousands, except per share data):

The Company’s fiscal year 2005 and 2004 fair value calculation for pro forma purposes was made using the Black-Scholes option-pricing model with the following assumptions:

Advertising costs

Advertising costs, except for costs associated with direct-response advertising, are charged to marketing and sales expense when incurred. Included in marketing and sales expense for the first six months of fiscal years 2005 and 2004, were $8,742,000 and $4,769,000 of advertising media costs, respectively. The costs of direct-response television advertising are capitalized and amortized to cost of revenues over the period future benefits are expected to be received. Included in discontinued operations for the first six months of fiscal year 2004 is $2,164,000 of direct response advertising costs. There were no direct response advertising costs included in discontinued operations in the first six months of fiscal year 2005.

Discontinued operations

In July 2004, we sold the assets of our SkillJam business unit. We reclassified the revenues and expenses of this business unit to discontinued operations and we reclassified the balance sheet of this business unit to net assets of SkillJam held for sale. This business unit had $1,523,000 in revenues and $1,671,000 in costs and expenses in the six months of fiscal year 2005 and $1,863,000 in revenues and $1,834,000 in costs and expenses in the first six months of fiscal year 2004.

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In the fourth quarter of fiscal year 2004, we sold the assets of the Body Dome product line. This product line had $4,904,000 in revenues and $5,021,000 in costs and expenses in the first six months of fiscal year 2004.

We sold the SkillJam business unit to CES Software PLC on July 30, 2004. The sale proceeds were $8 million and we realized a $4,647,000 gain on sale of assets, net of $168,000 of income taxes. We paid off a related $1.2 million acquisition earn out obligation to a company owned by two SkillJam employees. A one year, $1 million escrow was established for certain indemnification obligations and we will record up to an additional $1 million gain on sale depending on the resolution of the indemnification obligations. In addition, we will receive a percentage of the net revenue from the sale of the SkillJam technology to the buyer’s European customers over five years. We have agreed to indemnify CES Software for certain contingent obligations up to the amount of the sale proceeds. We believe this contingency to be remote.

Income per share

Basic income per share is computed as net income (loss) less accretion of the Series A preferred stock, stock dividends on the Series C preferred stock and income allocated to preferred stockholders 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 second quarter and first six months of fiscal year 2005, 8,521,000 and 7,675,000, respectively of stock options, 7,669,000 and 7,661,000, 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 second quarter and first six months of fiscal year 2004, 4,867,000 and 5,148,000, respectively of stock options, 2,320,000 and 2,320,000, 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.

The computation of basic and diluted income (loss) per common share is as follows (in thousands):

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Recent accounting pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 requires a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN No. 46 is effective for reporting periods ending after December 15, 2003. In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. The adoption of this interpretation did not have a significant impact on the Company’s financial statements.

In March 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which requires companies that have participating securities to calculate earnings per share using the two-class method. This method requires the allocation of undistributed earnings to common shares and participating securities based on the proportion of undistributed earnings that each would have been entitled to had all the period’s earnings been distributed. Our Series A, B and C preferred stock are participating securities as defined in EITF 03-6. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and earnings per share reported in prior periods must be retroactively adjusted to comply with EITF 03-6. The Company adopted EITF 03-6 in the quarter ended September 30, 2004 by reducing income (loss) to common stockholders in the second quarter and six months ended September 30, 2004 by the income allocated to Series A, B and C stockholders. EITF 03-6 had no impact on prior year per share amounts because of the net losses for the prior periods.

In March 2004, the FASB issued an exposure draft “Share-Based Payment – An Amendment of FASB Statements No. 123 and 95.” The exposure draft addresses the accounting for transactions in which a company receives employee services in exchange for equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of equity instruments. The exposure draft would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally would require instead that such transactions be accounted for using a fair-value based method. The exposure draft proposes that the cost of all forms of equity-based compensation granted to employees, excluding employee stock ownership plans, be recognized in a company’s income statement and that such cost be measured at the fair value of the stock options. As proposed, the new rules would be applied on one of three retroactive or prospective methods as defined in the exposure draft, and would be effective for quarters beginning after June 30, 2005. We are currently evaluating option valuation methodologies and assumptions in light of the evolving accounting

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standards related to employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

Reclassifications

Prior year amounts in the financial statements related to the discontinued SkillJam business unit, the discontinued Body Dome product line and the reconfigured segment disclosures have been reclassified to conform to the current period presentation.

Note 3. Property and Equipment

Property and equipment consists of the following (in thousands):

Depreciation and amortization expense was $697,000 for the first six months of fiscal year 2005 and $861,000 for the first six months of fiscal year 2004.

Note 4. Goodwill and Other Intangible Assets

The net carrying value of goodwill and other intangible assets was $18,948,000 as of September 30, 2004 and $17,402,000 as of March 31, 2004. We assess the potential impairment of goodwill and other intangible assets with indefinite lives in our fourth quarter or whenever events or circumstances suggest that the carrying amount may not be recoverable. We assess the potential impairment of intangible assets with definite lives whenever events or circumstances suggest that the carrying amount may not be recoverable. If the carrying value exceeds fair value, an impairment loss is recognized for the excess. Fair value is determined based on the estimated future cash inflows on a discounted basis attributable to the asset less estimated future cash outflows on a discounted basis. The assessment of the potential impairment of goodwill and other intangible assets requires significant judgment and estimates. No indicators of impairment were identified in the first six months of fiscal years 2005 or 2004.

On September 15, 2004, we purchased the assets of Supernation, LLC, which includes the Superdudes gaming network, for $125,000 in cash, 900,000 shares of common stock to be issued in November 2004 and a participation in certain future revenues. Mr. Richard Rosenblatt, the Company’s Chief Executive Officer, owns approximately 25% of the Supernation member interests. Mr. Rosenblatt agreed to sell his member interests in Supernation to avoid any participation in the future revenue sharing. We allocated the purchase price to $17,000 of property and equipment, $1,764,000 of goodwill and $236,000 of other intangible assets.

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Other intangible assets consist of the following (in thousands):

Amortization expense for other intangible assets was $534,000 for the first six months of fiscal 2005 and $641,000 for the first six months of fiscal year 2004. Amortization expense for other intangible assets for future years ending March 31 is as follows (in thousands):

Note 5. Debt Obligations and Capital Leases

Debt obligations consist of the following (in thousands):

In July 2003, an affiliate of VantagePoint Venture Partners (along with its other affiliates “VantagePoint”) acquired an option from 550 DMV to purchase 3,050,000 shares of Company common stock and 1,750,000 shares of Company Series B preferred stock. Under the terms of the option, 550 DMV would retain the right to receive a portion of the profit from the resale of those securities by VantagePoint under certain circumstances. In October 2003, VantagePoint partially exercised the option and purchased 454,545 shares of Series B preferred stock from 550 DMV. In April 2004, VantagePoint exercised the remainder of the option. At that time, VantagePoint also

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negotiated the right to purchase the $2.4 million 550 DMV note from 550 DMV for $1.8 million and 550 DMV agreed to waive its participation in the profit from the resale of the option shares acquired by VantagePoint if VantagePoint purchased the note. In connection with the Company’s sale of the SkillJam assets in July 2004, VantagePoint assigned its right to purchase the 550 DMV note to the Company for no consideration and the Company repurchased the note for $1.8 million and realized a $630,000 gain on debt extinguishment. The security interest in the Company’s assets was terminated when the note was repaid.

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

Equipment with a cost of $495,000 at September 30, 2004 is collateral for the capital lease obligations.

Note 6. Commitments and Contingencies

Operating leases

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

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Rent expense was $555,000 in the first six months of fiscal year 2005 and $569,000 in the first six months of fiscal year 2004.

Legal proceedings

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 the Company’s online skill-based gaming business infringes a patent held by Arcade Planet entitled the “918 Patent.” The complaint seeks to prevent future infringement of the 918 Patent and compensation for lost profits or royalty damages. In April 2003, the Company filed an answer denying Arcade Planet’s allegations and seeking declaratory judgment from the Court that the Company has not infringed the 918 Patent and that the claims of the 918 Patent are invalid and unenforceable. In July 2003, the Court stayed this action until the United States Patent and Trademark Office reexamines substantial new questions of patentability affecting certain claims underlying the 918 Patent. In July 2004, the Company sold its online skill-based gaming business. In the event that the 918 Patent claims at issue survive reexamination by the United States Patent and Trademark Office and Arcade Planet continues to pursue any claims for past infringement, the Company will reevaluate how to proceed at that time.

As previously reported, on October 14, 2003, several purported stockholder class action lawsuits previously filed against the Company and several current and former Company officers and/or employees 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 an 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 filed motions to dismiss the lawsuit for, among other things, the failure of the complaint to state facts sufficient to constitute a valid claim for violation of securities laws. On June 9, 2004, the Court granted the Company’s and other defendants’ motions to dismiss the lawsuit and plaintiffs were permitted to file an amended complaint. On July 15, 2004, the Securities Litigation was stayed until October 13, 2004, in order to attempt a mediated settlement of the claims asserted in the matter. On October 8, 2004, the stay was extended by the Court upon stipulation of the parties until November 15, 2004. On October 26, 2004, the parties participated in mediation. See Note 10 for information regarding an agreement in principle to settle the Securities Litigation.

Also as previously reported, two purported stockholder derivative actions, which are substantially similar, are pending against various current and former Company directors, officers, and/or employees. 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, was filed 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 motion to dismiss plaintiffs’ consolidated derivative complaint in the State Court derivative action on the grounds, among others, that 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 have been futile. On April 27, 2004, the Company’s motion, as well as those filed by the individual defendants in the case, were sustained in their entirety. On May 27, 2004, plaintiffs filed an amended consolidated derivative complaint which essentially replicated the allegations made in the Securities Litigation. The Company and individual defendants again filed motions to dismiss the lawsuit based on, among other grounds, the failure of plaintiffs to remedy the deficiencies that prompted dismissal of the original consolidated complaint. On October 1, 2004, the Company’s and individual defendants’ motions were granted and the Court dismissed the State Court derivative action. Plaintiffs may appeal the decision of the Court, but have not to date filed notice of their intent to do so. The Federal Court derivative action has been stayed pending determination of whether plaintiffs in the Securities Litigation will be able to state a claim against the defendants.

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In the event that the Securities Litigation fails to settle, the plaintiffs in the State Court derivative action appeal the decision of the court or that the plaintiffs in the Federal Court derivative action seek to litigate that matter, 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 fiscal year 2003 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 were 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. While one of the Company’s insurance carriers has agreed that certain claims made in the lawsuits are covered by a directors and officers’ insurance policy, such coverage is 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 will be covered by the insurance carrier.

As previously reported, on January 22, 2004, Bridge Ventures, Inc. (“Bridge”) and Saggi Capital Corp. (“Saggi”), both Florida corporations, filed a demand for arbitration 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 in connection with 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. There have been no material developments in this matter since the Company’s last report.

As previously reported, 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 challenged various actions taken by the Company and its Board of Directors in advance of the Company’s 2003 annual meeting of stockholders, which was held on January 29, 2004. The Company and the Company’s directors denied Mr. Greenspan’s allegations and claims as factually incorrect and otherwise without merit. On July 8, 2004, Mr. Greenspan filed a motion to dismiss the action as moot and for an award of attorneys’ fees and costs in the amount of $320,000. The Company agrees that the lawsuit should be dismissed but has opposed the application for fees and costs. There have been no material developments in this matter since the Company’s last report.

Note 7. Stockholders’ Equity and Equity Compensation Plans

In the first six months of fiscal year 2005, no shares of Series A preferred stock were converted into shares of common stock. As of September 30, 2004, there are 194,000 outstanding shares of Series A preferred stock that are convertible into 258,000 shares of common stock at the current conversion rate. In the first six months of fiscal year 2005, 126,000 shares of Series B preferred stock were converted into 126,000 shares of common stock. In the first six months of fiscal year 2005, the Company issued 212,000 shares of Series C preferred stock to Series C stockholders as dividends and 1,250,000 shares of Series C-1 preferred stock to VantagePoint upon conversion of a $2.5 million senior secured convertible note due to VantagePoint. As of September 30, 2004, there are 1,797,000 outstanding shares of Series B preferred stock and 6,972,000 outstanding shares of Series C and C-1 preferred stock that are convertible into 8,769,000 shares of common stock at the current conversion rates.

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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 September 30, 2004 (in thousands, except per share data):

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

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Note 8. Income Taxes

The utilization of net operating losses is subject to annual limitations if a change in ownership by 5% or more stockholders, within a three-year period, that aggregates 50 percentage points or more occurs. The aggregate change in ownership by our stockholders exceeded 50 percentage points in fiscal year 2004 and therefore, the utilization of our net operating losses will be limited. We are in the process of determining the annual limitation on the use of our net operating losses. Based on preliminary estimates of the annual limitation, approximately $5 million of Federal net operating losses per year will be available for the next five years.

Note 9. Segment Disclosures

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 segments, 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.