##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | -------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934.
| |  | --------------------------------




For the Quarterly Period Ended March 31, 2002





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934.
| |  | --------------------------------




For the transition period
from    to





Commission File Number 000-29121





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SNOWBALL.COM, INC.


(Exact name of registrant as specified in its charter)





DELAWARE

94-3316902(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





3240 BAYSHORE BOULEVARD, BRISBANE, CA 94005


(Address of principal executive offices) (Zip Code)





(415) 508-2000


(Registrants telephone number, including area code)





---




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  ̈





The number of shares of the registrants common stock outstanding as of April 30, 2002 was 1,853,750.





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SNOWBALL.COM, INC.


FORM
10-Q


TABLE OF CONTENTS





Page NoPart I.    Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31Part II.    Other InformationItem 1.

Legal Proceedings

32Item 2.

Changes in Securities and Use of Proceeds

32Item 3.

Defaults Upon Senior Securities

32Item 4.

Submission of Matters to a Vote of Security Holders

32Item 5.

Other Information

33Item 6.

Exhibits and Reports on Form 8-K

33Signatures

34




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##### Table of Contents




SNOWBALL.COM, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share amounts)





March 31, 2002


December 31, 2001(1)Assets

(unaudited)Current assets:Cash and cash equivalents

$
5,654


$
8,285Accounts receivable, net


1,125



1,544Prepaid expenses and other current assets


464



626Total current assets


7,243



10,455Restricted cash


781



2,296Goodwill and intangible assets, net


1,949



2,218Fixed assets, net


2,098



6,118Other assets


71



227Total assets

$
12,142


$
21,314Liabilities and stockholders equityCurrent liabilities:Accounts payable

$
1,250


$
1,732Accrued liabilities and other


1,767



2,245Deferred revenue


1,200



1,410Current equipment financing obligations






1,538Total current liabilities


4,217



6,925Deferred rent


377



562Long-term equipment financing obligations






75Stockholders equity:Common stock, $0.001 par value: 100,000,000 shares authorized, 1,818,016 and 1,804,052 shares issued and outstanding at March 31,
2002 and December 31, 2001, respectively


2



2Treasury stock, 270,501 and 269,311 shares at March 31, 2002 and December 31, 2001, respectively


(1,176
)


(1,172
)Additional paid-in capital


150,058



150,004Other stockholders equity


(126
)


(165
)Accumulated deficit


(141,210
)


(134,917
)Total stockholders equity


7,548



13,752Total liabilities and stockholders equity

$
12,142


$
21,314


---

|(1) |  | The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




See notes to condensed
consolidated financial statements.




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SNOWBALL.COM, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


(in thousands, except per share amounts)


Three Months Ended March 31,2002


2001Revenue

$
2,321


$
2,512Cost of revenue


402



1,232Gross profit


1,919



1,280Operating expenses:Production and content


1,061



2,471Engineering and development


1,303



2,157Sales and marketing


1,363



4,110General and administrative


555



1,427Stock-based compensation(1)


41



1,303Amortization of goodwill and intangible assets






1,123Restructuring and asset impairment charges


5,032



1,958Total operating expenses


9,355



14,549Loss from operations


(7,436
)


(13,269
)Interest and other income (expense), net


29



321Net loss before extraordinary items


(7,407
)


(12,948
)Gain on sale of assets


1,114



Net loss

$
(6,293
)

$
(12,948
)Net loss per sharebasic and diluted

$
(3.58
)

$
(6.76
)Shares used in per share calculation


1,760



1,915(1)  Stock-based compensation relates to the following:Cost of revenue

$



$
2Production and content


6



153Engineering and development


20



112Sales and marketing


15



206General and administrative






830Total

$
41


$
1,303





See notes to condensed consolidated financial statements.




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SNOWBALL.COM, INC.





CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)


(in thousands)





Three Months Ended March 31,2002


2001Cash flows from operationsNet loss

$
(6,293
)

$
(12,948
)Reconciliation to net cash used in operations:Depreciation and amortization


899



2,356Stock-based compensation


41



1,303Non-cash restructuring and asset impairment charges


2,905



79Gain on sale of assets


(1,114
)


Other non-cash items, net


(72
)


Changes in assets and liabilities:Accounts receivable


494



1,644Prepaid expenses and other assets


318



745Accounts payable and accrued liabilities


(960
)


(2,082
)Deferred revenue


196



(225
)Deferred rent


57



83Net cash used in operating activities


(3,529
)


(9,045
)Cash flows from investment activitiesEstablishment of facility letters of credit


(69
)


Reduction in facility letters of credit


1,584



Purchases of fixed assets


(361
)


(355
)Proceeds from sale of assets


1,000Net refund on tenant improvements


335



1,023Net cash provided by investment activities


2,489



668Cash flows from financing activitiesProceeds from other issuance of common and preferred stock, net of (repurchases)


26



(61
)Repayment of equipment financing obligations


(1,613
)


(405
)Purchase of stock for treasury


(4
)


(772
)Net cash used in financing activities


(1,591
)


(1,238
)Net decrease in cash and cash equivalents


(2,631
)


(9,615
)Cash and cash equivalents at beginning of period


8,285



26,479Cash and cash equivalents at end of period

$
5,654


$
16,864





See notes to condensed consolidated financial statements.




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SNOWBALL.COM





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.    FINANCIAL STATEMENT PRESENTATION





The condensed consolidated financial statements include
Snowball.com, Inc. and its wholly owned subsidiaries (collectively herein referred to as Snowball) after elimination of intercompany amounts.





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ materially from those estimates. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of
the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2001. These financial statements include all
normal recurring adjustments that Snowball believes necessary for a fair presentation of the statements. Certain reclassifications, none of which affected net operating expenses or net loss, have been made to the prior years amounts in order
to conform to the current years presentation.





The results of operations for the three months ended March 31, 2002 are not
necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2002.





2.    THE COMPANY





About Snowball





Snowball is an Internet media property that operates a network of destination web sites for members of Generation i (Gen i TM ) and the companies that want to reach them. We define Gen i as young adults, primarily 13 to 30 years of age, who regularly use the Internet. Our web
sites are primarily focused on editorial content, products and services relating to computer and video gaming and other forms of video and audio entertainment. We sell advertising, marketing and commerce programs to companies that wish to reach this
audience for branding, education or sales of their products and services. Additionally, we sell rights to access certain of our content to our web site visitors on a subscription fee basis. We organize both our own web sites and affiliated web sites
around networks and channels that target different segments of the Gen i audience. Currently, our networks are:





| |  |  | IGN Games, which contains separate channels for all the different gaming platforms, as well as separate channels for codes and guides; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | IGN Entertainment, which contains separate channels covering DVDs, male lifestyle, gear, movies and science-fiction.
| | - |  | --------------------------------------------------------------------------------------------------------------------




3.    ACQUISITIONS





In February 2000, Snowball acquired all of the assets of GameSages LLC, an Internet content provider, in exchange for approximately $4.8 million in cash. The financial results of this entity were insignificant and,
therefore, no pro forma information reflecting this acquisition has been presented.





In December 1999, Snowball completed the
acquisition of Extreme Interactive Media, Inc. (Extreme) for $1.9 million in cash, common stock and unsecured promissory notes. The




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SNOWBALL.COM





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




purchase price was increased by $1.2 million of additional cash consideration based upon the attainment of certain economic milestones by Extreme.
During the second quarter of 2001, Snowball ceased all operations that had been associated with the Extreme acquisition and recorded an asset impairment charge of $1.6 million to write off the remaining goodwill and intangible assets.





4.    NET LOSS PER SHARE





Basic and diluted net loss per share are presented in conformity with the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share, for all periods presented.





In accordance with SFAS 128, basic and
diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.





The following table presents the calculation of basic and diluted net loss per common share (in thousands, except per share data):





Quarter Ended March 31,2002


2001Net loss

$
(6,293
)

$
(12,948
)Basic and diluted:Weighted average shares of common stock outstanding


1,810



2,024Less: weighted average shares subject to repurchase


(50
)


(109
)Weighted average shares used in computing basic and diluted net loss per share


1,760



1,915Basic and diluted net loss per share

$
(3.58
)

$
(6.76
)





5.    RESTRUCTURING AND ASSET IMPAIRMENT
CHARGES





During 2001, Snowballs Board of Directors approved a restructuring program aimed at reducing our underlying cost
structure to better position Snowball for improved operating results. In the first quarter of 2002 as part of this program, we recorded restructuring charges of $5.0 million consisting mainly of facility exit costs related to the restructuring of
our Brisbane headquarters lease. In the year ended December 31, 2001, we recorded restructuring charges of $2.5 million comprised of $1.8 million of facility exit costs and abandoned facility assets and $728 thousand in employee termination costs.
Of these charges, $2.0 million were recorded in the first quarter of 2001 comprised of $1.6 million of facility exit costs and abandoned facility assets and $327 thousand in employee termination costs. As of March 31, 2002, $55 thousand of these
restructuring charges had not yet been paid. Snowball believes that additional restructuring charges may be incurred in the future in connection with ongoing cost reduction efforts.





Asset impairment charges arise when the expected future discounted cash flows to be generated from a long-lived intangible asset, goodwill in our case, are less than the present carrying
value. During 2001, we recorded an impairment charge of $1.6 million recorded against the remaining




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SNOWBALL.COM





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







unamortized goodwill of our 1999 acquisition of Extreme Interactive Media, Inc. when we discontinued
operation of that site. We did not record asset impairment charges in the quarters ended March 31, 2002 and 2001.





6.    GOODWILL AND OTHER INTANGIBLE ASSETS





Snowball adopted FASB Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) on January 1, 2002. Snowball was required to evaluate its existing goodwill and intangible assets and make any necessary reclassifications in order to comply
with the new criteria in SFAS 142. The following disclosures are required to be presented at the time SFAS 142 is adopted and for all periods presented until all periods are accounted for in accordance with SFAS 142. These disclosures include
presenting income for periods presented before the adoption of SFAS 142 adjusted to exclude the effects of adopting the new standard.





Quarter Ended March 31,2002


2001Net loss

$
(6,293
)

$
( 12,948
)Add back goodwill amortization






1,123Adjusted net loss

$
(6,293
)

$
(11,825
)Basic and diluted net loss per share

$
(3.58
)

$
(6.76
)Add back goodwill amortization per share






0.59Adjusted basic and diluted net loss per share

$
(3.58
)

$
(6.17
)





7.    GAIN ON SALE OF ASSET





On January 16, 2002 we completed the sale of our HighSchoolAlumni network for approximately $1.0 million in cash to Reunion.com, a private
company. We recorded an extraordinary gain of approximately $1.1 million in association with the transaction, which represents cash received plus the deferred revenue balance as of January 15, 2002 related to the unrecognized portion of subscription
money received on our HighSchoolAlumni subscription program less the net unamortized value of our 1999 acquisition of Ameritrack.





8.    COMMITMENTS





As of March 31, 2002, we are under a lease commitment
through February 2004 for our headquarters facility in Brisbane, CA. Upon relocating to Brisbane in October 2000, Snowball originally assumed a lease for three buildings with terms of 10, 11, and 12 years, respectively. The lease was amended in
November 2000 to return two of the buildings to the landlord in May and October of 2001, respectively, therefore ending our associated liability for those buildings. In March 2002, we further amended this lease to decrease our square footage from
66,002 to 13,606 and our monthly rents proportionately. Additionally, our lease term was reduced from an original end date of September 2012 to February 2004. We also lease sales and support offices in New York, Los Angeles and Connecticut.




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SNOWBALL.COM





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As of March 31, 2002, in connection with Snowballs Brisbane and New York
facility leases, we are committed under irrevocable standby letters of credit totaling $781 thousand as security deposits for these facilities. This amount represents a reduction from our committed letters of credit as of December 31, 2001 of $1.5
million as a result of our renegotiated Brisbane lease. These amounts are classified as restricted cash on the accompanying balance sheets at March 31, 2002 and December 31,
2001.





9.    STOCKHOLDERS EQUITY





In connection with the granting of certain stock options from
April 1999 to February 2000, Snowball recorded an accumulated deferred compensation of approximately $14.1 million. Additional deferred compensation of approximately $80 thousand was recorded in September 2000 due to the granting of repriced options
to an officer which were early exercised and subject to repurchase provisions. Deferred compensation is adjusted quarterly for exercises, cancellations, terminations and accelerations and is amortized for financial reporting purposes over the
vesting period of the options using an accelerated method with any adjustments charged as stock-based compensation expense. Our entire deferred compensation had been expensed as of December 31, 2001 and no additional deferred compensation had been
recorded in the first quarter of 2002.





Snowball has also issued to certain employees and consultants stock options that are
subject to variable accounting. These grants require measurement for the difference between the exercise price of the option and the intrinsic value of the stock until the date the options are exercised, forfeited, or expire unexercised.
Accordingly, additional compensation expense may be recorded in future periods due to the variable treatment of these options. Expenses associated with these issuances are charged to stock-based compensation.





In the first quarter of 2002, our Board of Directors approved the acceleration of the unvested portion of certain employees stock options as part
of these employees terminations. We recorded stock based compensation expense for the difference between the grant price and the stocks fair market value on the date of acceleration.





Stock-based compensation expense for the three months ended March 31, 2002 was $41 thousand. Stock-based compensation for the three months ended March 31, 2001 was $1.3 million.





10.    TREASURY STOCK





In December 2000, the Board of Directors authorized a stock repurchase program under which Snowball is authorized to repurchase up to 277,778 shares of our common stock in the open
market for cash. Repurchases may be made from time to time at market prices and as market and business conditions warrant. No time limit has been set for the completion of the program. As of March 31, 2002, Snowball had repurchased 270,501 shares at
an average purchase price of $4.35 per share.





11.    CONCENTRATION OF CREDIT RISK





Snowball is exposed to concentration of credit risk principally from accounts receivable and revenue. As March 31, 2002, one
customer accounted for approximately 15% of our net accounts receivable balance. For the first quarter of 2002, one other customer accounted for




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SNOWBALL.COM





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







approximately 13% of revenue. Loss of or non-performance by these significant customers could adversely
affect Snowballs financial position, liquidity or results from operations. No one customer accounted for greater than 10% of our December 31, 2001 net accounts receivable or our first quarter 2001 revenue.





12.    RECENT ACCOUNTING PRONOUNCEMENTS





In June 2001, the FASB issued SFAS 141 Business Combinations and SFAS 142 Goodwill and Other Intangible Assets. SFAS 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 requires the use of a non-amortization approach to account for purchased
goodwill and intangibles deemed to have indefinite lives. Under a non-amortization approach, goodwill and intangible assets deemed to have indefinite lives will not be amortized into results of operations, but instead will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The provisions of the Statements that apply to goodwill and intangible assets acquired prior to June 30, 2001 have
been adopted by Snowball as of January 1, 2002. We did not record any asset impairment charges in the first quarter of 2002; however, impairment reviews may result in future periodic write-downs.





In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which
addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 was effective for fiscal years beginning after December 15, 2001, with earlier application encouraged.
We have adopted FAS 144 as of January 1, 2002 and did not record any asset impairment charges in the first quarter of 2002; however, future impairment reviews may result in periodic write-downs.





13.    SUBSEQUENT EVENTS





Consistent with Snowballs decision to focus our business on our IGN network, our Board of Directors have solicited a vote from shareholders to approve a company name change to IGN Entertainment, Inc. The vote will happen May 9, 2002
and if approved, the name change will become effective May 10, 2002. In addition to the corporate name change, if approved, the symbol that our common stock is traded under on the Nasdaq Small-Cap market will be changed to IGNX from
SNOW, also effective May 10, 2002.




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Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and notes thereto, which include information as to
significant accounting policies, included in our annual report on Form 10-K for the year ended December 31, 2001 and our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to,
those discussed below and elsewhere in this report.





Overview





Snowballs business model and focus have significantly evolved since our inception. Our response to the difficult market conditions of 2001 was to focus on our core strengths.
Commencing in the fourth quarter of 2001, we have focused our business on our IGN entertainment and gaming network and virtually all of our revenue in the first quarter of 2002 was derived from IGN related advertising sales and subscriptions. We
have greatly reduced our relationships with affiliated web sites. We have diversified our revenue by adding new product lines, including a subscription based access model. We have significantly reduced operating costs, mainly by reducing headcount,
renegotiating our facilities leases, decreasing marketing efforts and reducing the number of our affiliates. We still have not achieved profitability, although, we have made progress towards this goal by sequentially decreasing our pro forma net
loss for the past nine quarters. (Pro forma net loss excludes depreciation, amortization, stock-based compensation, restructuring and asset impairment charges and extraordinary gains).





Consistent with Snowballs decision to focus our business on our IGN network, our Board of Directors have solicited a vote from shareholders to approve a company name change to IGN
Entertainment, Inc. The vote will happen May 9, 2002 and if approved, the name change will become effective May 10, 2002. In addition to the corporate name change, if approved, the symbol that our common stock is traded under on the Nasdaq SmallCap
market will be changed to IGNX from SNOW, also effective May 10, 2002. As of the date of this report, management believes the name change will be approved.





Our operating activities to date have been focused on developing the quality of our content and services; expanding our audience and the usage of our services; establishing relationships
with users and the companies who want to reach this large web-centric audience; building sales momentum and marketing our networks and Snowball brands; developing our computer software and hardware infrastructure; and more recently, growing our
subscriber base.





Since our inception we have never been profitable. Furthermore, due in part to the financial difficulties
experienced recently by Internet and Internet-related companies and reductions in advertising budgets of companies that advertise on the Internet, we cannot assure you that our revenue will grow or that we will ever achieve or maintain
profitability. We have experienced significant declines in our advertising revenue from Internet companies, which have been only partially offset by revenue from companies in more traditional lines of business. Snowball anticipates that weakness in
advertising demand will continue until overall business conditions improve and advertising expenditures rebound. Accordingly, we anticipate that we will incur additional operating losses at least through 2002. If we are unsuccessful in adapting to
the needs of our advertisers and audience, our business, operating results and financial condition would suffer significantly.




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Critical Accounting Policies





The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, we evaluate estimates, including those related to bad debts, intangible assets and restructuring. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under
different assumptions or conditions.





We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial statements.





Revenue recognition





We derive our revenue principally from short-term contracts for various size and types of impression-based advertisements. This revenue is recognized at
the lesser of the straight-line basis over the term of the contract or the ratio of impressions delivered over total committed impressions, provided that we do not have any significant remaining obligations and collection of the resulting receivable
is reasonably assured. To the extent that minimum committed impression levels or other obligations are not met, we defer recognition of the corresponding revenue until such levels are achieved.





Revenue also includes fees from sponsorship, fixed slotting fees, variable lead generation, commerce partnerships and other marketing programs under contracts in which we commit to
provide our business customers with promotional opportunities or web-based services in addition to impression-based banner advertising. We generally receive a fixed fee and/or incremental payments for lead generation, customer delivery or traffic
driven to the commerce partners site. Revenue that includes delivery of various types of impressions and services is recognized based on the lesser of the straight-line basis over the term of the contract or upon delivery when no minimum
guaranteed deliverable exists.





We assess collection based on a number of factors, including past transaction history with the
customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.





Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.





For all sales we use either a binding insertion order or signed agreement as evidence of an arrangement.





We also recognize revenue from subscription fees that we charge our users for access to premium content and services on our web sites. Subscription fees are recorded, net of any
discounts, ratably over the subscription period (generally one month to one year) and deferred




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revenue is recorded for amounts received before services are provided. Transaction costs are recognized in the period
the transaction occurs.





Allowance for doubtful accounts





Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The use of different estimates or assumptions could produce different allowance balances. If
the financial condition of our customers were to deteriorate, subsequent to the date of our arrangements with them, this could result in an impairment of their ability to make payments and additional allowances would be required.





Valuation of goodwill and intangible assets





We assess the impairment of goodwill and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include
the following:





| |  |  | significant underperformance relative to expected historical or projected future operating results;
| | - |  | ---------------------------------------------------------------------------------------------------




| |  |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
| | - |  | -----------------------------------------------------------------------------------------------------------------




| |  |  | significant negative industry or economic trends.
| | - |  | -------------------------------------------------




When we determine that the carrying value of goodwill and intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.





Results of Operations for the Quarters Ended March 31, 2002 and 2001





Quarter Ended March 31,2002


2001(in thousands)Revenue

$
2,321


$
2,512Percentage of revenue


100
%


100
%





Revenue was $2.3 million and $2.5 million for the three months ended March 31,
2002 and 2001, respectively, which represents a decrease of 8%. This decline in revenue is due primarily to the closure of ChickClick and sale of our HighSchoolAlumni web sites. This decrease was partially offset by




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revenue from subscriptions of $292 thousand, representing 13% of first quarter of 2002 total
revenue.





To date, we have derived revenue principally
from short-term contracts for impression-based advertisements, including Flash, Unicast and click-within advertising units, as well as banners, buttons and textlinks. Under these contracts, we provide advertisers with a number of
impressions, or a number of times a user will view their advertisements, for which we receive a fee.





Revenue
also includes fees from sponsorship, fixed slotting fees, variable lead generation, content licenses, commerce partnerships and other marketing programs under contracts in which we commit to provide our business customers with promotional
opportunities and web site and editorial services in addition to traditional impression-based advertising. These agreements typically provide not only for the delivery of advertising impressions on our web sites, but also exclusive placement on our
networks, special content and promotional offers and the design and development of customized content or sites to enhance the promotional objectives of the advertiser or commerce partner.





In the second quarter of 2001, we added a pay for access subscription fee model for our users. From this programs inception in April 2001 through March 2002, our IGNinsider subscription
base has grown to approximately 45,000 users and we have collected $918 thousand in cash. In the first quarter of 2002 we collected $412 thousand in cash from this program.





We believe this subscription model and focus on IGN products and business partnerships may help us to increase our revenue; however, these initiatives may take several quarters to
produce significant results, if at all, and if they are not accepted by our users and customers, will not increase revenue.





Quarter Ended March 31,2002


2001(in thousands)Cost of Revenue

$
402


$
1,232Percentage of revenue


17
%


49
%





Cost of revenue consists primarily of expenses related to operating
Snowball-owned web sites, guaranteed payments or the portion of revenue owed to our affiliates for advertising and marketing placed on their web sites, and costs of third-party content and community tools. In the first quarter of 2002 and 2001,
costs associated with our affiliates comprised 14% and 49%, respectively, of our total cost of revenue. The decline in costs associated with our affiliates reflects our efforts beginning in late 2000 to renegotiate, terminate or let expire many of
our affiliate contracts.





Cost of revenue was $402 thousand in the first quarter of 2002, a decrease of $830 thousand, or 67%
from $1.2 million in the first quarter of 2001. This decrease reflects lower hosting costs due to a more favorable hosting contract with our outside service provider, a reduction in the number of affiliates and less reliance upon third-party
community tools content.





Operating Expenses





We categorize operating expenses into production and content, engineering and development, sales and marketing, general and administrative, stock-based compensation, amortization of




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goodwill and intangible assets and restructuring and asset impairment charges. Total operating expenses for the three
months ended March 31, 2002 and 2001 were $9.4 million and $14.5 million, respectively, representing a 36% decline. This decline of $5.2 million was primarily a result of our headcount reductions, expense control efforts, our full amortization of
our deferred stock-based compensation as of December 31, 2001 and no goodwill amortization charges due to the adoption of a SFAS 142 effective January 1, 2002. Partially offsetting this decline was an increase of $3.1 million in restructuring and
impairment charges due to the amendment of our headquarters facility lease in March 2002.





Quarter Ended March 31,2002


2001(in thousands)Production and Content

$
1,061


$
2,471Percentage of revenue


46
%


98
%





Production and content costs were $1.0 million and $2.5 million for the three
months ended March 31, 2002 and 2001, respectively, which represents a decrease of 57%. The decrease is due primarily to the reduction of our editorial, artistic and production staff and efforts to reduce usage of freelance writers, artists and
computer-related expenses for the creation of content for our web sites. In connection with our efforts to control our expenses, we eliminated certain channels within our networks and in the fourth quarter of 2001 we curtailed operations of our
HighSchoolAlumni and ChickClick networks and ultimately sold our HighSchoolAlumni network in the first quarter of 2002.





Quarter Ended March 31,2002


2001(in thousands)Engineering and Development

$
1,303


$
2,157Percentage of revenue


56
%


86
%





Engineering and development expenses consist primarily of personnel and related
costs, consultant and outside contractor costs, and software and hardware maintenance and depreciation costs for our development and programming efforts, including internal information services costs. To date, all engineering and development
expenses have been expensed as incurred.





Engineering and development expenses were $1.3 million and $2.2 million for the three
months ended March 31, 2002 and 2001, respectively, which represents a decrease of 40%. The decrease is due primarily to reduction of personnel, consulting and recruiting fees and decreased deprecation as certain equipment became fully depreciated.





Quarter Ended March 31,2002


2001(in thousands)Sales and Marketing

$
1,363


$
4,110Percentage of revenue


59
%


164
%





Sales and marketing expenses were $1.4 million and $4.1 million for the three
months ended March 31, 2002 and 2001, respectively, which represents a decrease of 67%. The decrease is due primarily to the reduction of our advertising, marketing and branding activities, and decreases in our sales and marketing staff.




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Quarter Ended March 31,2002


2001(in thousands)General and Administrative

$
555


$
1,427Percentage of revenue


24
%


57
%





General and administrative expenses were $555 thousand and $1.4 million for the
three months ended March 31, 2002 and 2001, respectively, which represents a decrease of 61%. This decrease is due largely to the general reduction in accounting and finance, human resources and other administrative staff in response to reductions
in staff in other functional areas.





Quarter Ended March 31,2002


2001(in thousands)Stock-based Compensation

$
41


$
1,303Percentage of revenue


2
%


52
%





Stock-based compensation expense mainly represents the amortized aggregate
difference between the exercise price of an option and the deemed fair market value of the underlying stock as of the grant date. This aggregate difference is initially recorded as deferred stock-based compensation on the balance sheet and is
amortized over the life of the respective options (generally four years) using a graded amortization method. Any unamortized portion is reversed upon an options cancellation. In certain cases, we also record stock-based compensation expense when the
terms of options are altered, such as accelerated vesting, usually measured as the difference between the grant price and the fair market value on the date the terms are altered. Further, certain option awards granted in the past are accounted for
as variable awards and, accordingly, may result in stock-based compensation charges in future periods, if our stock price exceeds the strike price of these awards; during the first quarter of 2002, we did not recorded any stock-based compensation
expense from these variable awards.





Stock-based compensation expense was $41 thousand and $1.3 million for the three months
ended March 31, 2002 and 2001, respectively, which represents a decrease of 97%. This decrease is due mainly to the combination of option cancellations as a result of our 2000 and 2001 reductions in force and the accelerated amortization method in
which deferred stock-based compensation was expensed. Our deferred stock-based compensation balance from options granted below fair market value prior to 2001 was amortized to zero as of December 31, 2001. We did not grant any options at a price
below the then fair market value in the first quarter of 2002. For the quarter ended March 31, 2002, stock-based compensation expense of $41 thousand was primarily due to employees who as part of their termination packages had the unvested portions
of certain of their options accelerated to become vested and fully exercisable.





Quarter Ended March 31,2002


2001(in thousands)Amortization of Goodwill and Intangible Assets

$



$
1,123Percentage of revenue


0
%


45
%





In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets, which became effective January 1, 2002, requiring the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under this nonamortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the




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recorded value of goodwill and certain intangibles is more than its fair value. Snowball adopted this accounting standard as of January 1, 2002. Based upon our
impairment review during the first quarter of 2002, no impairment charges were recorded; however, future impairment reviews may result in periodic write-downs. As of March 31, 2002, the balance of our goodwill was $1.9 million.





Quarter Ended March 31,2002


2001(in thousands)Restructuring and Asset Impairment Charges

$
5,032


$
1,958Percentage of revenue


217
%


78
%





In response to the challenges in our business, during 2001 our Board of Directors
approved a restructuring program aimed at reducing our underlying cost structure to better position Snowball for improved operating results. During the first quarter of 2002, we recorded restructuring charges of $5.0 million which was comprised of
$5.0 million of net buyout consideration given in relation to the amendment of our headquarters facility lease and $74 thousand related to an employee reduction in force. With respect to the facility lease amendment which was effective March 2002,
our square footage decreased from 66,002 to 13,606 and our monthly rents decreased proportionately. Additionally, our committed lease term was reduced from an original end date of September 2012 to February 2004. As consideration, the landlord drew
upon its $1.6 million letter of credit, we paid an additional $416 thousand in cash and we forfeited certain furniture and all tenant improvements from the vacated space.





For the three months ended March 31, 2001, restructuring charges were $2.0 million which reflect our abandonment of two buildings in Brisbane and severance costs associated with a
reduction in force in that quarter.





Quarter Ended March 31,2002


2001(in thousands)Interest and Other Income, net

$
29


$
321Percentage of revenue


1
%


13
%





Interest and other income, net was $29 thousand and $321 thousand for the
quarters ended March 31, 2002 and 2001, respectively, a decrease of 91%. This decrease was due primarily to our decreasing cash and cash equivalent position due to our operating losses.





Quarter Ended March 31,2002


2001(in thousands)Gain on Sale of Asset

$
1,114


$
Percentage of revenue


48
%


0
%





On January 16, 2002 we completed the sale of our HighSchoolAlumni network for
approximately $1.0 million in cash to Reunion.com, a private company. The gain on sale of asset represents cash received plus the deferred revenue balance on the date of sale related to the unrecognized portion of subscription money received from
our HighSchoolAlumni subscription program less the net unamortized value of our 1999 acquisition of Ameritrack. We did not have any similar charges for the respective 2001 period.




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Liquidity and Capital Resources





Cash used by operations totaled $3.5 million during the first quarter of 2002 compared to $9.0 million during the first quarter 2001. This decrease resulted primarily from the decrease
in operating expenses during the first quarter of 2002 and the resulting decrease in net loss. Additionally, in the first quarter of 2002, we paid $2.0 million in buyout costs per the terms of our Brisbane facility lease amendment. Working capital
at March 31, 2002 was $3.0 million. Cash, cash equivalents and short-term investments at March 31, 2002 were $5.7 million.





Net cash provided from investment activities for the quarter ended March 31, 2002 was $2.5 million. This was due largely to proceeds of $1.0 million from the sale of our HighSchoolAlumni web site and a reduction in our facility letters of
credit of $1.6 million. The letter of credit reduction of $1.6 million combined with an additional $416 thousand in cash comprised the $2.0 million we used to buyout our Brisbane facility lease amendment. We also received a refund of $335 thousand
on tenant improvements associated with our New York facility, purchased $361 thousand of fixed assets and established $69 thousand of new facility letters of credit.





In April 1999 through March 2000, we entered into equipment lease lines of credit totaling $5.0 million. In January 2002, we paid off the remaining $1.6 million balance on our equipment
lease obligations.





In December 2000, the Board of Directors authorized a stock repurchase program under which Snowball is
authorized to repurchase up to 277,778 shares of our common stock in the open market for cash. From the inception of this program through March 31, 2002 Snowball repurchased 270,501 shares at an average purchase price of $4.35 per share; 1,190 of
these shares were repurchased in the first quarter of 2002.





As of March 31, 2002 we had $781 thousand remaining in letters of
credit as security deposits associated with our facilities in Brisbane, California and New York. This amount represents a decrease from our original letters of credit for these facilities of $5.1 million. During 2001, $2.8 million of our letters of
credit were released in connection with the return of two of our Brisbane buildings to our landlord. In the first quarter of 2002, $1.6 million was forfeited to our landlord and $69 thousand of new letters of credit were established under the terms
of our March 2002 facility lease restructuring. Our letter of credit security deposits as of March 31, 2002 and 2001 have been classified as restricted cash on our balance sheets.





In addition to our headquarters facility in Brisbane, California, we also lease sales and support offices in New York, Los Angeles and Connecticut. With respect to our New York sales
office, we are currently seeking alternative lease arrangements as we believe our space exceeds our present needs. The following shows our aggregate commitments under non-cancelable offices space of March 31, 2002 (in thousands):





Nine Months Ended December 31, 2002

$
878Years Ended December 31,2003


1,1292004


7842005


6832006


6882007


6882008 and thereafter


2,236Total minimum lease payments

$
7,086




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Our capital requirements depend on numerous factors, including market acceptance of our
products and services, the resources we allocate to developing our networks, our marketing and selling capabilities and maintenance of our brands. Since our inception we experienced substantial expenditures as we grew our operations and personnel.
Although we have significantly reduced our costs beginning in the second quarter of 2000, we still have not achieved positive cash flows from operations. We believe that our available cash, cash equivalents and short-term investments and cash flows
from operations will be sufficient to meet our anticipated needs for working capital and capital expenditures at least until the end of our fiscal year 2002. To meet our longer term liquidity needs, potentially including our needs in fiscal 2002, we
will need to raise additional funds, establish additional credit facilities, seek other financing arrangements or further reduce costs and expenses. Additional funding may not be available on favorable terms, on a timely basis or at all. See our
risk factor entitled Our prospects for obtaining additional financing, if required, are uncertain and failure to obtain needed financing would limit our operations and might cause our business to fail as set forth in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this report.





Risk
Factors





Risks Related to Our Business





Our
current business model is unproven and may fail.





We have a limited operating history upon which you can evaluate our
current business model and prospects and the merits of investing in our stock. Your evaluation is complicated by the fact that we are also in the process of restructuring our business and implementing a new and unproven business model. We have sold
or significantly decreased operations of all except our IGN network, implemented a new subscription based program and significantly reduced our dependence on affiliate content. If our business model proves to be unsuccessful, the trading price of
our stock will fall and our business may fail. Accordingly, our prospects and the merits of investing in our stock must be considered in light of the risks, expenses and difficulties encountered by Internet-related companies who have restructured
their business and adopted new business models. To meet our longer-term liquidity needs, potentially including our needs in fiscal 2002, we expect that we will need to raise additional funds, establish additional credit facilities, seek other
financing arrangements or further reduce costs and expenses. Additional funding may not be available on favorable terms, on a timely basis or at all. Our plans with respect to liquidity and capital resource requirements are discussed above in
Managements discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.





We have a history of
losses and expect to incur substantial net losses for the foreseeable future.





We have incurred net losses since the
formation of our business in January 1997. At March 31, 2002, we had an accumulated deficit of approximately $141.2 million. We may increase our operating expenses to develop additional subscription offerings, buyout or restructure some or all of
our long-term facility leases, develop additional networks, expand our sales and marketing operations, develop and upgrade our technology and purchase equipment and leasehold improvements to support our operations and network infrastructure. We also
may




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incur costs relating to the acquisition of technologies, content, or other businesses. Whether we increase expenditures
or not, we may not generate sufficient revenue to offset our expenditures. As a result, we expect to incur significant operating losses on a quarterly basis for the foreseeable future, and may never become profitable. Even if we do achieve
profitability, we might not be able to sustain profitability on a quarterly or annual basis in the future.





Our prospects for obtaining additional
financing, if required, are uncertain and failure to obtain needed financing would limit our operations and might cause our business to fail.





We do not know with certainty whether our cash reserves and any cash flows from operations or financing will be sufficient to fund our operations beyond 2002. Our independent auditor Ernst & Young LLP has
qualified its report on our 2001 financial statements as to our ability to continue as a going concern. We expect that we will need to raise additional funds based upon our estimates of revenue, expenses, working capital and capital expenditure
requirements. In the event that resolution of our funding needs involve issuance of capital stock, our existing stockholders may experience significant dilution. We also may need to raise funds if we are required to respond to unforeseen
technological or marketing hurdles. If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to limit our operations significantly and our business might fail. Our future capital
requirements are dependent upon many factors, including:





| |  |  | the rate at which we expand or contract our sales and marketing operations;
| | - |  | ---------------------------------------------------------------------------




| |  |  | the willingness or ability of our customers and subscribers to pay for our services;
| | - |  | ------------------------------------------------------------------------------------




| |  |  | our ability to successfully transfer liability for or restructure long-term facility leases for facilities that exceed our present capacity needs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the amount and timing of leasehold improvements and capital equipment purchases;
| | - |  | --------------------------------------------------------------------------------




| |  |  | the extent to which we expand or contract our content and service offerings;
| | - |  | ----------------------------------------------------------------------------




| |  |  | the extent to which we develop and upgrade our technology and data network infrastructure;
| | - |  | ------------------------------------------------------------------------------------------




| |  |  | the response of competitors to our content and service offerings; and
| | - |  | ---------------------------------------------------------------------




| |  |  | the willingness of advertisers to become and remain our customers.
| | - |  | ------------------------------------------------------------------




Additional financings could disadvantage our existing stockholders.





If additional funds are raised through the
issuance of equity securities, the percentage ownership of our existing stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights, preferences or privileges senior to
those securities held by our existing stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants.





If our IGN network is unsuccessful, our revenue will decline.





We currently rely solely
upon our IGN network for all of our traffic, advertising revenue and subscription base. We have either sold or ceased operating all of our other networks in the first quarter of 2002. If we are unable to anticipate changes in the interests, styles,
trends or preferences of IGNs target audience our relevance to advertisers and/or strategic partners and subscribers would decrease and our revenue would decline.




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Our ability to successfully raise awareness of our IGN brand and web sites is crucial to our success.





We believe that broader recognition and a favorable user perception of our IGN brand and web sites are essential to our
future success. As we significantly decreased marketing related expenditures during 2001, we became reliant mainly upon word of mouth for proliferation of our brand awareness. If our brand awareness is not promoted through word of mouth, or if
current or future marketing efforts are not accepted by our audience, our user base and revenue would decline.





Our quarterly revenue and operating
results may fluctuate in future periods and we may fail to meet expectations, which may reduce the trading price of our common stock.





We cannot forecast our revenue and operating results with precision, particularly because of our recent restructuring and our current products and services are relatively new and evolving, and our prospects uncertain.
Further, the U.S. economy is much weaker now than it has been in recent history, which has and could continue to have a negative impact on our advertising revenue. This weakness has and could continue to have serious consequences for our business
and operating results. If revenue in a particular period does not meet expectations, it is unlikely that we will be able to adjust our level of expenditures significantly for the same period. If our operating results fail to meet expectations, the
trading price of our common stock would decline.





We believe that period-to-period comparisons are not necessarily meaningful
and are not necessarily indicative of future performance. We anticipate that the results of our operations will fluctuate significantly in the future as a result of a variety of factors, including: the long sales cycle we face selling advertising
and promotions; our ability to attract new and to retain existing audience and subscribers; seasonal trends in Internet usage, advertising placements and e-commerce; and other factors discussed in this section. As a result, it is likely that in some
future quarters or years our results of operations will fall below the expectations of securities analysts or investors, which would cause the trading price of our common stock to decline.





Our current business strategy depends on a portion of our revenue being derived from subscriptions, and if our users do not subscribe or do not renew their subscriptions, our revenue would decline.





In the second quarter of 2001, we began offering premium content and services to customers on a subscription fee
basis. Subscription revenue accounted for 13% of revenue in the first quarter of 2002. Part of our subscription model requires that certain content and services that had previously been offered for free now require a paid subscription. Because many
of our competitors offer content and services similar to ours at no charge, users may be unwilling to pay a subscription fee, or if the content and services provided do not meet customer expectations, users may not utilize our sites and as a result,
revenue would decline. This potential decline in our traffic also could cause a decrease in our advertising revenue.




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If our advertising, commerce partnerships and marketing agreements are terminated or are not renewed, our revenue
would decline.





To date, we have derived a substantial portion of our revenue from relatively small orders from advertising,
commerce and marketing customers that generally have terms of less than six months. Because we expect to derive a large portion of our future revenue from these short-term agreements, we are exposed to competitive pressures and potentially severe
fluctuations in our financial results. If our relationships and/or arrangements with these customers are terminated or are not renewed, our revenue would decline.





In addition, we have entered into several larger agreements that have terms longer than six-months but have termination rights at various points during their respective terms. As a
result, our customers could and do cancel these agreements, change their advertising expenditures or buy advertising from our competitors on relatively short notice and without penalty. There can be no assurance that these customers will continue to
do business with Snowball. For example, in April 2002, one customer, that accounted for 13% of our first quarter 2002 revenue terminated its contract which unless renegotiated will end on June 1, 2002. The termination of any of our longer-term
agreements, if not replaced with new customers and or contracts, would cause revenue to decline.





If we fail to perform in accordance with the terms
of our advertising agreements, we would lose revenue.





Our advertising agreements typically provide for minimum performance
levels, such as click-throughs by web users or impressions. If we fail to perform in accordance with these terms, we typically have to provide free advertising to the customer until the minimum level is met, causing us to lose revenue and/or incur
additional costs. Further, these performance levels are often based on the customers own records which could be disadvantageous to us in cases of disagreement. In addition to minimum performance levels, we occasionally guarantee the availability of
advertising space in connection with promotion arrangements and content agreements and often guarantee exclusive placement on our network for our largest customers, which precludes us from permitting certain competitors of these customers to offer
products and services on our network that are similar to those offered by our exclusive customers. If we cannot fulfill the guarantees we make to our customers, or if we lose potential customers whose advertisements, sponsorships and promotions
conflict with those of other customers or our exclusive customers fail to renew their contracts, we will lose revenue and our future growth may be impeded.





If we do not continue to attract and retain users we may not be able to compete successfully for advertisers and commerce partners, which would cause our revenue to decline.





We currently derive the majority of our revenue from advertisers and commerce partners who pay us to advertise on our networks, and our business model depends in part on increasing the
amount of this revenue. The market for advertising revenue is highly competitive, and recently demand has decreased significantly. We must continue to attract and retain users to compete successfully for advertising revenue. If we fail to attract
and retain more users, our revenue would decline. Many of our current competitors, including Yahoo!, AOL, CNET, MSN, Terra Lycos, Electronic Arts, and even some non-publicly traded companies, as well as a number of potential new competitors, compete
vigorously in this market. Many of these competitors have significantly




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greater editorial, financial, technical, marketing, sales and other resources than we do. Our competitors may develop
content and service offerings that are superior to ours or achieve greater market acceptance than ours or may combine to achieve market dominance. Moreover, if our content and service offerings fail to achieve success in the short term, we could
suffer an insurmountable loss in market share and brand acceptance.





Technical problems or intentional service adjustments with either our internal or
our outsourced computer and communications systems could interrupt or decrease our service, resulting in decreased customer satisfaction, the possible loss of users and advertisers and a decline in revenue.





Our operations depend on our ability to maintain our computer systems and equipment in effective working order. Our web sites must accommodate a high
volume of traffic and deliver frequently updated information. Any sustained or repeated system failure or interruption would reduce the attractiveness of our web sites to customers and advertisers and could cause us to lose users and advertisers to
our competitors. This would cause our revenue to decline. In addition, interruptions in our systems could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require.
Unanticipated problems affecting our systems have caused from time to time in the past, and could cause in the future, slower response times and interruptions in our services.





We depend on third parties for co-location of our data servers and cannot guarantee the security of our servers. Our primary servers currently reside in facilities in the San Francisco
Bay area. Currently, these facilities do not provide the ability to switch instantly to another back-up site in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for
at least several hours. This downtime could result in increased costs and lost revenues which would be detrimental to our business.





Fire, earthquakes, power loss, water damage, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events, may damage our computer systems and interrupt service. Moreover, scheduled upgrades and
changes to our computer systems may increase our operating cost or result in unsatisfactory performance. Our computer systems continuing and uninterrupted performance is critical to our success. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or interruptions in our systems.





Any such interruptions in our
ability to continue operations could damage our reputation, harm our ability to retain existing customers and to obtain new customers and could result in lost revenue, any of which could substantially harm our business and results of operations.





If we lose key personnel or are unable to hire additional qualified personnel, or if our management team is unable to perform effectively, we will
not be able to implement our business strategy or operate our business effectively.





Our success depends upon the continued
services of our senior management and other key personnel, many of whom would be difficult to replace. The loss of any of these individuals would adversely affect our ability to implement our business strategy and to operate our business
effectively. In particular, the services of Mark Jung, our chief executive officer, and Rick Boyce, our president, would be difficult to replace. None of our officers or key employees is covered by key person life insurance policies.




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Our success also depends upon our ability to continue to attract, retain and motivate skilled
employees. We believe that there are only a limited number of persons with the requisite skills to serve in many key positions and it is difficult to attract, retain and motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees with appropriate qualifications.





Further, we have
conducted several workforce reductions over our brief operating history. These reductions can cause anxiety and uncertainty and could adversely affect employee morale. As a result, our remaining personnel may seek employment with larger, more
established companies or companies they perceive as having less volatile stock prices.





Competitors and others have in the past
attempted, and may in the future attempt, to recruit our employees. We believe that we will incur increasing salary, benefit and recruiting expenses because of the difficulty in hiring and retaining employees.





Finally, our success depends on the ability of our management to perform effectively, both individually and as a group. If our management is unable to
operate effectively in their respective roles or as a team, we will not be able to implement our business strategy or operate our business effectively.





Our failure to manage our restructuring effectively could result in our inability to operate our new business effectively.





We have significantly reduced our operations and anticipate that further change will be required to address potential market problems and opportunities. If we fail to manage this change effectively, we will be unable
to operate our business effectively. From a peak of approximately 380 full-time employees in March 2000, we have reduced our workforce, through attrition and lay offs, to approximately 65 full-time employees as of April 2002. These significant
changes have placed, and we expect them to continue to place, a strain on our management, operational and financial resources. In particular, the reduction in workforce could have negative consequences on our ability to produce content and to
attract new users, or to maintain our web sites availability and performance.





If we fail to maintain our relationships with key affiliates, or
incorporate new key affiliates into our networks on a timely basis, our user traffic and revenue would decline or would not increase.





We derive revenue primarily from advertisers who pay us to advertise on our networks because our networks attract a large number of visitors. Although we have significantly reduced the number of our affiliates, we do
rely upon certain key affiliates to generate a portion of the content that attracts visitors to our networks. If we lose these key affiliates and cannot replace them with affiliates having comparable traffic patterns and user demographics, or if we
fail to maintain or add key affiliates to our networks on a timely basis, we would lose user traffic and revenue or would not be able to expand traffic and revenue on a timely basis. We could lose or fail to attract a new affiliate if it were to:





| |  |  | terminate or fail to renew its affiliate agreement with us;
| | - |  | -----------------------------------------------------------




| |  |  | be acquired by or otherwise form a relationship with one of our competitors;
| | - |  | ----------------------------------------------------------------------------




| |  |  | demand from us a greater portion of revenue derived from advertisements placed on its web sites;
| | - |  | ------------------------------------------------------------------------------------------------



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| |  |  | seek to require us to make payments for access to its web sites; or
| | - |  | -------------------------------------------------------------------




| |  |  | cease business operations.
| | - |  | --------------------------




We also
will likely face increasing competition for the content and services provided by current or potential affiliates. If we fail to continue to identify potential affiliates or fail to enter into agreements with new affiliates on a timely basis, our IGN
network may lose its relevance to Gen i, we would lose advertising and promotional opportunities, and our revenue would decline.





If we are unable to
identify or successfully integrate potential acquisitions and investments, we may not grow, our expenses may increase and our managements attention may be diverted from the operation of our business.





Since our incorporation, we have acquired several businesses or the selected assets of other businesses and our new business model may include acquiring
or making investments in complementary businesses, products, services or technologies in the future. If we are unable to identify suitable acquisition or investment candidates, we may not grow. Even if we do identify suitable candidates, we might
not be able to make acquisitions or investments on commercially acceptable terms and on a timely basis. If we buy a business, we could have difficulty in assimilating that companys personnel, operations, products, services or technologies into
ours. In fact, in 2001, we recorded an impairment charge for the unamortized value of the goodwill and intangible assets of two of our previous acquisitions.





We may have to litigate to protect our intellectual property rights, or to defend claims that we have infringed the rights of others, which could subject us to significant liability and be time consuming and expensive.





Our success depends significantly upon our copyrights, trademarks, service marks, trade secrets, technology and other intellectual property
rights. The steps we have taken to protect our intellectual property may not be adequate and third parties may infringe or misappropriate our intellectual property. If this occurs, we may have to litigate to protect our intellectual property rights.
These difficulties could disrupt our ongoing business, increase our expenses and distract our managements attention from the operation of our business. We have not applied for the registration of all of our trademarks and service marks, and
effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our content, services and products are made available online. If we were prevented from using our trademarks, we would need to
re-implement our web sites and rebuild our brand identity with our customers, users and affiliates. This would increase our operating expenses substantially.





Companies frequently resort to litigation regarding intellectual property rights. From time to time, we have received, and we may in the future receive, notices of claims of infringement by Snowball or one of our
affiliates of other parties proprietary rights. We may have to litigate to defend claims that we have infringed the intellectual property rights of others. Any claims of this type could subject us to significant liability, be time-consuming
and expensive, divert managements attention, require the change of our trademarks and the alteration of content, require us to redesign our web sites or services or require us to pay damages or enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, might not be available on acceptable terms or at all. If a successful claim of infringement were made against us and we could not develop non-infringing intellectual property or license the infringed or
similar intellectual property on a timely and cost-effective basis, we might be unable to continue operating our business as planned.




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We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company, even an acquisition
that would be beneficial to our stockholders.





Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Issuance of the preferred stock would make it more difficult for a third party to acquire a majority of our outstanding voting stock, even if doing so would be beneficial to our stockholders. Without any further vote or action on
the part of the stockholders, the board of directors has the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if issued, might have conversion rights and other
preferences that work to the disadvantage of the holders of common stock.





Our certificate of incorporation, bylaws and equity
compensation plans include provisions that may deter an unsolicited offer to purchase Snowball. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Snowball. Furthermore, our board of directors has been divided into three classes, only one of which will be elected each year. Directors will only be removable by the affirmative vote of at least 66 2/3% of all classes of voting stock.
These factors may further delay or prevent a change of control of Snowball and may be detrimental to our stockholders.





Risks Related to Our Industry





Since our revenue is derived primarily from selling advertisements, our revenue might decline and we might not grow if advertisers do not
continue or increase their usage of the Internet as an advertising medium.





In the past, we have derived, and we expect to
continue to derive in the future, a substantial majority all of our revenue from selling advertisements and other marketing initiatives. However, the prospects for continued demand and market acceptance for Internet marketing solutions are
uncertain. In particular, with the recent downturn of the U.S. economy, there has been a reduction of advertising and marketing spending and a negative public perception of on-line media companies as well as technology companies in general. If
advertisers do not continue or increase their usage of the Internet, our revenue might decline or we might not grow. Most advertising agencies and potential advertisers, particularly local advertisers, have only limited experience advertising on the
Internet and may not devote a significant portion of their advertising expenditures to Internet advertising. Moreover, advertisers that have traditionally relied on other advertising media may not advertise on the Internet. In addition, advertising
on the Internet is at a much earlier stage of development in international markets than it is in the United States and may not fully develop in these markets. As the Internet evolves, advertisers may find Internet advertising to be a less attractive
or effective means of promoting their products and services relative to traditional methods of advertising and may not continue to allocate funds for Internet advertising. Many historical predictions by industry analysts and others concerning the
growth of the Internet as a commercial medium have overstated the growth of the Internet and should not be relied upon. This growth may not occur or may occur more slowly than estimated. In fact, due to the current economic downturn, our advertising
revenue has declined.





There can be no assurance that customers will continue to purchase advertising or marketing programs or
commerce partnerships on our web pages, or that market prices for web-based advertising will not decrease due to competitive or other factors. In addition, if a large number of Internet users use filter software programs that limit or remove
advertising from the users monitor, advertisers may choose not to advertise on the Internet. Moreover, there are no widely accepted standards for the measurement of the effectiveness of Internet advertising, and standards may not develop
sufficiently to support Internet advertising as a significant advertising medium.




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Our ability to implement our business strategy and our ultimate success depend on continued growth in the use of the
Internet and the ability of the Internet infrastructure to support this growth.





Our business strategy depends on continued
growth in the use of the Internet and increasing the number of users who visit our networks. A decrease in the growth of web usage, particularly usage by Gen i, would impede our ability to implement our business strategy and our ultimate success. If
the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet infrastructure might not be able to support the demands placed on it or the performance or reliability of
the Internet might be adversely affected. Web sites have experienced interruptions in service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays occur frequently in the
future, Internet usage, as well as the usage of our web sites, could grow more slowly than expected or decline. Security and privacy concerns may also slow growth. Because our revenue ultimately depends upon Internet usage generally as well as usage
on our web sites, our business may suffer as a result of declines in Internet usage.





We might have to expend significant capital or other resources
to protect our networks from unauthorized access, computer viruses and other disruptive problems.





Internet and online
service providers have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We might be required to expend
significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Nevertheless, security measures that we implement might be circumvented. Eliminating computer viruses and
alleviating other security problems may also require interruptions, delays or cessation of service to users accessing web pages that deliver our content and services. In addition, a party who circumvents our security measures could misappropriate
proprietary information or cause interruptions in our operations.





We may be sued regarding privacy concerns, subjecting us to significant liability
and expense.





If a party were able to penetrate our network security or otherwise misappropriate our users personal
information or credit card information, we could be subject to significant liability and expense. We may be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. Claims could
also be based on other misuses of personal information, such as unauthorized marketing purposes. These claims could result in costly litigation. The Federal Trade Commission and state agencies have been investigating various Internet companies
regarding their use of personal information. In 1998, the United States Congress enacted the Childrens Online Privacy Protection Act of 1998. We depend upon collecting personal information from our customers and the regulations promulgated
under this act have made it more difficult for us to collect personal information from some of our customers. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices
are investigated. Furthermore, the European Union recently adopted a directive addressing data privacy that may limit the collection and use of




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information regarding Internet users. This directive and regulations enacted by other countries may limit our ability to target advertising or to collect and
use information internationally.





Information displayed on and communication through our networks could expose us to significant liability and
expense.





We face possible liability for defamation, negligence, copyright, patent or trademark infringement and other
claims, such as product or service liability, based on the nature and content of the materials published on or downloaded from our and our affiliate web sites. These types of claims have been brought, sometimes successfully, against Internet
companies and print publications in the past, and the potential liability associated with these claims is significant. We could also be subjected to claims based upon the online content that is accessible from our web sites through links to other
web sites or through content and materials that may be posted in chat rooms or bulletin boards. We do not verify the accuracy of the information supplied by third-party content providers, including affiliates. We also offer email services which may
subject us to potential risks, such as liabilities or claims resulting from unsolicited email, lost or misdirected messages, illegal or fraudulent use of email or interruptions or delays in email service. The law in these areas is unclear.
Accordingly, we are unable to predict the potential extent of our liability. Our insurance may not cover potential claims of this type, or may not be adequate to indemnify us for all liability that may be imposed.





Changes in regulation of domain names may result in the loss or change of our domain names, a reduction in brand awareness among our customers and a diminished ability to
attract advertisers and generate revenue.





We hold various domain names relating to our networks and brands. In the United
States, the National Science Foundation has appointed a limited number of entities as the current exclusive registrars for the .com, .net and .org generic top level domains. We expect future changes in the United
States to include a transition from the current system to a system controlled by a non-profit corporation and the creation of additional top level domains. Requirements for holding domain names also are expected to be affected. These changes may
result in the loss or change of our domain names, a reduction in brand awareness among our customers and a diminished ability to attract advertisers and generate revenue. Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights. In addition, we may lose our domain names to third parties with trademarks or other proprietary rights in those names or similar names.





Future regulation of the Internet may slow its growth, resulting in decreased demand for our services and increased costs of doing business.





Although we are subject to regulations applicable to businesses generally, few laws or regulations exist that specifically regulate communications and commerce over the Internet. We expect more stringent laws and
regulations relating to the Internet to be enacted due to the increasing popularity and use of the Internet and other online services. Future regulation of the Internet may slow its growth, resulting in decreased demand for our services and
increased costs of doing business. New and existing laws and regulations are likely to address a variety of issues, including:




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| |  |  | user privacy and expression;
| | - |  | ----------------------------




| |  |  | taxation and pricing;
| | - |  | ---------------------




| |  |  | the rights and safety of children;
| | - |  | ----------------------------------




| |  |  | intellectual property; and
| | - |  | --------------------------




| |  |  | information security.
| | - |  | ---------------------




Currently we
may be subject to Sections 5 and 12 of the Federal Trade Commission Act, which regulate advertising in all media, including the Internet, and require advertisers to have substantiation for advertising claims before disseminating advertisements. The
Federal Trade Commission recently brought several actions charging deceptive advertising via the Internet, and is actively seeking new cases involving advertising via the Internet. We also may be subject to the provisions of the recently enacted
Communications Decency Act, which, among other things, imposes substantial monetary fines and/or criminal penalties on anyone who distributes or displays certain prohibited material over the Internet or knowingly permits a telecommunications device
under its control to be used for this purpose. In addition, several telecommunications companies and local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers and to impose access fees. If this were to occur, the cost of communicating on the Internet could increase substantially, potentially decreasing the use of the Internet.





Finally, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet and other online services could also increase our costs of doing business, discourage Internet communications and reduce demand for our services.





Risks Related to the Securities Markets





If our common stock ceases to
be listed for trading on the Nasdaq SmallCap Market, the value and liquidity of your investment may be adversely affected.





We cannot assure you that we will be able to meet or maintain all of the requirements for continued listing on the Nasdaq SmallCap Market in the future. If we do not meet the requirements, we expect that our common stock would be traded on
the NASD Over-The-Counter Bulletin Board. If our common stock were to be delisted from the Nasdaq SmallCap Market, the liquidity of your investment would be diminished and the volatility of the trading price of our common stock would increase.




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We expect to experience volatility in our stock price, which could negatively affect your investment.





Our common stock has only recently been traded in a public market and an active trading market for our stock may not be
sustained. Moreover, the trading price of our common stock is likely to be highly volatile in response to a number of factors, such as:





| |  |  | actual or anticipated variations in our quarterly results of operations;
| | - |  | ------------------------------------------------------------------------




| |  |  | our limited amount or availability of public float shares;
| | - |  | ----------------------------------------------------------




| |  |  | changes in the market valuations of other Internet content and service companies;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | public perception of Internet content and service companies;
| | - |  | ------------------------------------------------------------




| |  |  | public perception of growth prospects for the gaming and entertainment industries;
| | - |  | ----------------------------------------------------------------------------------




| |  |  | announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ---------------------------------------------------------------------------------------------------------------




| |  |  | changes in financial estimates or recommendations by securities analysts;
| | - |  | -------------------------------------------------------------------------




| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------




| |  |  | additions or departures of key customers;
| | - |  | -----------------------------------------




| |  |  | our ability to attract or retain subscribers;
| | - |  | ---------------------------------------------




| |  |  | failure to maintain minimum Nasdaq listing requirements; and
| | - |  | ------------------------------------------------------------




| |  |  | the addition or loss of affiliates.
| | - |  | -----------------------------------




In addition, broad market and industry factors may materially and adversely affect the market price of our common stock, regardless of our operating performance. The Nasdaq Market, and the market for Internet and technology companies in
particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.





Class action litigation resulting from volatility of the trading price of our common stock would likely result in substantial costs and a diversion of managements attention and resources.





Volatility in the trading price of our common stock could result in securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of managements attention and resources.





Should our stockholders sell a substantial number of shares of common
stock in the public market, the price of our common stock could fall.





Our current stockholders include individuals or firms
that hold a substantial number of shares that they are entitled to sell in the public market. Sales of a substantial number of these




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shares could reduce the market price of our common stock. These sales could make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.





Our officers and directors and their affiliates exercise significant control over us, which
could disadvantage other stockholders.





Our executive officers and directors and their affiliates together owned
approximately 61% of our outstanding common stock as of March 31, 2002. Christopher Anderson, the chairman of our board of directors, owned approximately 46% of our outstanding common stock alone. As a result, these stockholders exercise significant
control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of control could disadvantage other stockholders with interests different from those
of our officers, directors and their affiliates. For example, our officers, directors and their affiliates could delay or prevent someone from acquiring or merging with us even if the transaction would benefit other stockholders.





Cautionary Statement Under the Private Securities Litigation Reform Act of 1995





Certain statements contained in this Form 10-Q that are not statements of historical facts are forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on beliefs of management, as well as assumptions made by and information currently available to management. Such statements also are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. All statements, other than statements of historical fact, included in this Form 10-Q, regarding our strategy, future operations, financial position, estimated revenue, projected costs, prospects,
plans and objectives of management are forward-looking statements. Words such as may, will, should, anticipates, projects, predicts, expects, intends,
plans, believes, seeks, continues and estimates and variations of these words and similar expressions, are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. These statements are only predictions and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements. The risks, uncertainties and assumptions referred to above include our unproven current business model, history of losses, prospects for obtaining additional financing,
concentration on our IGN network and other risks that are described from time to time in our Securities and Exchange Commission reports, including by not limited to the items discussed in Risk Factors set forth in Managements
Discussion and Analysis of Financial Condition and Results of Operations in Item 2 in this report.





Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.





Item 3Quantitative and Qualitative Disclosures About Market Risk





Our
exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of interest rates in the United States, particularly since the majority of




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our investments are in short-term debt securities issued by corporations or divisions of the United States government. We place our investments with high
quality issuers and limit the amount of credit exposure to any one issuer. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure.





We had no foreign currency hedging or other derivative financial instruments as of March 31, 2002.





Part IIOTHER INFORMATION





Item 1Legal Proceedings





Not applicable





Item 2Changes in Securities and Use of Proceeds





(d)  Use of
Proceeds





Snowball completed the initial public offering of its common stock under a registration statement on Form S-1
(No. 333-93487), which was declared effective by the Securities and Exchange Commission on March 20, 2000.





From March 24,
2000 to March 31, 2002, we used the net proceeds from this offering for repayment of debt, investing in short-term, interest bearing, investment grade securities and general corporate purposes, including advertising and promoting our brands,
maintaining our sales and marketing activities, purchasing fixed assets and improving our facilities.





In addition, from the
inception of our stock repurchase program in January 2001 through March 31, 2002, we used approximately $1.2 million of the net proceeds from this offering to repurchase 270,501 shares of our common stock under the terms of the program as approved
by the board of directors in December 2000.





We expect that we will use the remaining net proceeds for short-term,
interest-bearing, investment-grade securities, purchases of fixed assets, possible acquisitions, common stock repurchases and other general corporate purposes.





Item 3Defaults Upon Senior Securities





Not applicable





Item 4Submission of Matters to a Vote of Security Holders





No matters were
submitted to a vote of security holders during the first quarter of 2002.




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Item 5Other Information





Consistent with Snowballs decision to focus
our business on our IGN network, our Board of Directors have solicited a vote from shareholders to approve a company name change to IGN Entertainment, Inc. The vote will happen May 9, 2002 and if approved, the name change will become effective May
10, 2002. In addition to the corporate name change, if approved, the symbol that our common stock is traded under on the Nasdaq SmallCap market will be changed to IGNX from SNOW, also effective May 10, 2002. As of the date of
this report, management believes the name change will be approved.





Item 6Exhibits and Reports on Form 8-K





(a)  Exhibits








2.01

Asset Purchase Agreement by and among Reunion.com, LLC, High School Alumni, Inc. and Snowball.com, Inc. as dated January 17,
2002.10.01*

Fourth Amendment to Brisbane Technology Park Lease dated November 29, 1999, between Registrant and GAL-Brisbane, L.P. dated March
13, 2002.


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|* |  | Incorporated by reference from Exhibit 10.19 to Registrants Amendment No. 1 to its annual report on Form 10-K filed on May 9, 2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------




(b)  Reports on Form 8-K





None.




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SIGNATURES





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.





SNOWBALL.COM,  INC.Date:  May 9, 2002

By:

/s/    MARK A. JUNGMark A. Jung Chief Executive Officer and
DirectorDate:  May 9, 2002

By:

/s/    JAMES R. TOLONENJames R. Tolonen Chief Financial Officer, Chief Operating Officer and Director (Principal Financial Officer)




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