##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q/A



---



AMENDMENT NUMBER 2



Quarterly report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934



For the quarterly period ended December 31, 2002



Commission file number: 000-26355



---



eUNIVERSE, INC.

(Exact name of registrant as specified in its charter)



---



|DELAWARE                                                       |  | 06-1556248                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|6060 CENTER DRIVE, SUITE #300 LOS ANGELES, CALIFORNIA          |  | 90045                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(310)215-1001

(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 ̈



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



As of January 31, 2003, there were 25,107,629 shares of eUniverse, Inc. common stock outstanding.



---



---

##### Table of Contents

eUNIVERSE, INC.



FORM 10-Q/A



This Form10-Q/A is being filed for the purpose of amending and restating Items 1, 2 and 4 of Part I of Form 10-Q to reflect the restatement of our consolidated financial
statements as of and for the three months and nine months ended December 31, 2002. We have made no further changes to the previously filed Form 10-Q. This quarterly financial information was previously restated in the Annual Report on Form 10-K
filed on August 22, 2003. All information in this Form 10-Q/A is as of December 31, 2002 and does not reflect any subsequent information or events other than the aforementioned restatement and changes to forward-looking statements as a result of the
restatement. Item 4. Controls and Procedures details the events leading up to the restatement and the enhancements and remedial actions designed to improve the Companys accounting and financial reporting procedures and controls. This filing
should be read in conjunction with the Companys Form 10-K for the fiscal year ended March 31, 2003.



FOR THE QUARTER ENDED DECEMBER 31, 2002



INDEX



|PART I - FINANCIAL INFORMATION
|------------------------------
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              



2



---

##### Table of Contents

PART I



|ITEM  1. |  | CONSOLIDATED FINANCIAL STATEMENTS
|-------- |  | ---------------------------------



eUniverse, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and par value data)



|                                                                                                                                     |  | December 31,2002      |         |   | March 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------- | ------- | - | ------------- | -
|                                                                                                                                     |  | (Unaudited)(Restated) |         |   |               |  
|Assets                                                                                                                               |  |                       |         |   |               |  
|Current assets:                                                                                                                      |  |                       |         |   |               |  
|Cash and cash equivalents                                                                                                            |  | $                     | 5,728   |   |               | $
|Restricted cash                                                                                                                      |  |                       | 576     |   |               |  
|Accounts receivable (net of allowances for doubtful accounts of $856 and $452)                                                       |  |                       | 4,201   |   |               |  
|Inventories                                                                                                                          |  |                       | 1,256   |   |               |  
|Prepaid expenses                                                                                                                     |  |                       | 2,290   |   |               |  
|Deferred charges and other                                                                                                           |  |                       | 453     |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total current assets                                                                                                                 |  |                       | 14,504  |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Property and equipment, net of accumulated depreciation and amortization                                                             |  |                       | 2,702   |   |               |  
|                                                                                                                                     |  |                      
|Other assets:                                                                                                                        |  |                       |         |   |               |  
|Goodwill, net of accumulated amortization                                                                                            |  |                       | 15,604  |   |               |  
|Other intangible assets, net of accumulated amortization                                                                             |  |                       | 4,551   |   |               |  
|Deferred charges                                                                                                                     |  |                       | 30      |   |               |  
|Deposits and other                                                                                                                   |  |                       | 1,706   |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total assets                                                                                                                         |  | $                     | 39,097  |   |               | $
|                                                                                                                                     |  |                       |         |   |               |  
|Liabilities and Shareholders Equity                                                                                                 |  |                       |         |   |               |  
|Current liabilities:                                                                                                                 |  |                       |         |   |               |  
|Accounts payable                                                                                                                     |  | $                     | 3,500   |   |               | $
|Accrued expenses                                                                                                                     |  |                       | 5,339   |   |               |  
|Deferred revenue                                                                                                                     |  |                       | 703     |   |               |  
|Current portion of long-term debt                                                                                                    |  |                       | 4,062   |   |               |  
|Current portion of capitalized lease obligations                                                                                     |  |                       | 1,036   |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total current liabilities                                                                                                            |  |                       | 14,640  |   |               |  
|                                                                                                                                     |  |                      
|Long-term debt, less current portion                                                                                                 |  |                       |        |   |               |  
|Accrued interest                                                                                                                     |  |                       | 444     |   |               |  
|Capitalized lease obligations, less current portion                                                                                  |  |                       | 565     |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total liabilities                                                                                                                    |  |                       | 15,649  |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Shareholders equity:                                                                                                                |  |                       |         |   |               |  
|Preferred stock, $0.10 par value; 40,000,000 shares authorized; 2,334,577 and 2,872,665 shares issued and outstanding,
respectively  |  |                       | 233     |   |               |  
|Common stock, $0.001 par value; 250,000,000 shares authorized; 24,836,767 and 23,542,219 shares issued and outstanding,
respectively |  |                       | 26      |   |               |  
|Additional paid-in capital                                                                                                           |  |                       | 69,942  |   |               |  
|Accumulated deficit                                                                                                                  |  |                       | (46,717 | ) |               |  
|Treasury stock                                                                                                                       |  |                       | (36     | ) |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total shareholders equity                                                                                                           |  |                       | 23,448  |   |               |  
|                                                                                                                                     |  |                       |         |   |               |  
|Total liabilities and shareholders equity                                                                                           |  | $                     | 39,097  |   |               | $
|                                                                                                                                     |  |                       |         |   |               |  



See Notes to
Consolidated Financial Statements



3



---

##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(In thousands, except
share and per share data)



|                                                           |  | Three Months Ended December 31, |            |   | Nine Months Ended December 31, |  
|---------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | -
|                                                           |  | 2002                            |            |   | 2001                           |  
|                                                           |  | (Restated)                      |            |   |                                |  
|Revenues                                                   |  | $                               | 21,959     |   |                                | $
|Cost of sales                                              |  |                                 | 6,830      |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Gross profit                                               |  |                                 | 15,129     |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Operating expenses:                                        |  |                                 |            |   |                                |  
|Marketing and sales                                        |  |                                 | 8,009      |   |                                |  
|Product development                                        |  |                                 | 3,276      |   |                                |  
|General and administrative                                 |  |                                 | 3,629      |   |                                |  
|Amortization of other intangible assets                    |  |                                 | 324        |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Total operating expenses                                   |  |                                 | 15,238     |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Operating income (loss)                                    |  |                                 | (109       | ) |                                |  
|                                                           |  |                                 |            |  
|Non-operating income (expense):                            |  |                                 |            |   |                                |  
|Interest income                                            |  |                                 | 14         |   |                                |  
|Interest expense and other financing costs                 |  |                                 | (286       | ) |                                |  
|Cancellation of stock options                              |  |                                 |           |   |                                |  
|Gain on extinguishment of debt                             |  |                                 |           |   |                                |  
|Other gains and (losses)                                   |  |                                 | (104       | ) |                                |  
|                                                           |  |                                 |            |   |                                |  
|Income (loss) from continuing operations before income tax |  |                                 | (485       | ) |                                |  
|                                                           |  |                                 |            |  
|Income tax expense                                         |  |                                 |           |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Income (loss) from continuing operations                   |  |                                 | (485       | ) |                                |  
|                                                           |  |                                 |            |  
|Discontinued operations:                                   |  |                                 |            |   |                                |  
|Gain from operations of discontinued segment               |  |                                 | 235        |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Net income (loss)                                          |  |                                 | (250       | ) |                                |  
|Accretion of preferred stock redemption value              |  |                                 | 52         |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Income (loss) available to common shares                   |  | $                               | (302       | ) |                                | $
|                                                           |  |                                 |            |   |                                |  
|Continuing operations earnings (loss) per common share     |  | $                               | (0.02      | ) |                                | $
|Discontinued operations earnings per common share          |  |                                 | 0.01       |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Basic earnings (loss) per common share                     |  | $                               | (0.01      | ) |                                | $
|                                                           |  |                                 |            |   |                                |  
|Diluted earnings (loss) per common share                   |  | $                               | (0.01      | ) |                                | $
|                                                           |  |                                 |            |   |                                |  
|Basic weighted average common shares outstanding           |  |                                 | 24,600,496 |   |                                |  
|                                                           |  |                                 |            |   |                                |  
|Diluted weighted average shares outstanding                |  |                                 | 24,600,496 |   |                                |  
|                                                           |  |                                 |            |   |                                |  



See Notes to
Consolidated Financial Statements



4



---

##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)



|                                                                 |  | Nine Months endedDecember 31, |       
|---------------------------------------------------------------- |  | ----------------------------- | ------
|                                                                 |  | 2002                          |       
|                                                                 |  | (Restated)                    |       
|Operating activities                                             |  |                               |       
|Net income                                                       |  | $                             | 1,648 
|Transactions not requiring cash:                                 |  |                               |       
|Depreciation                                                     |  |                               | 793   
|Amortization of intangible assets                                |  |                               | 835   
|Gain from extinguishment of debt                                 |  |                               | (1,269
|Allowance for doubtful accounts                                  |  |                               | 636   
|Non-cash financing related costs                                 |  |                               |      
|Stock and warrants granted to outside consultants and affiliates |  |                               |      
|Changes in current assets                                        |  |                               | (2,350
|Changes in current liabilities                                   |  |                               | 2,545 
|Changes in other                                                 |  |                               | (21   
|                                                                 |  |                               |       
|Net cash provided by operating activities                        |  |                               | 2,817 
|                                                                 |  |                               |       
|                                                                 |  |                              
|Investing activities                                             |  |                               |       
|Acquisition of ResponseBase LLC                                  |  |                               | (3,523
|Deposits and other                                               |  |                               | (1,229
|Purchases of fixed assets                                        |  |                               | (1,034
|Purchases of intangible assets                                   |  |                               | (734  
|                                                                 |  |                               |       
|Net cash used in investing activities                            |  |                               | (6,520
|                                                                 |  |                               |       
|Financing activities                                             |  |                               |       
|Repayment of short term notes                                    |  |                               |      
|Proceeds from capital leases                                     |  |                               | 1,966 
|Repayment of capital leases                                      |  |                               | (712  
|Receipt of advances to officer                                   |  |                               |      
|Repayment of long-term notes                                     |  |                               | (505  
|Proceeds from sale of preferred stock                            |  |                               |      
|Proceeds from exercise of stock options                          |  |                               | 674   
|                                                                 |  |                               |       
|Net cash provided by financing activities                        |  |                               | 1,423 
|                                                                 |  |                               |       
|Change in cash and cash equivalents                              |  |                               | (2,280
|Cash and cash equivalents, beginning of period                   |  |                               | 8,008 
|                                                                 |  |                               |       
|Cash and cash equivalents, end of period                         |  | $                             | 5,728 
|                                                                 |  |                               |       
|Cash paid during the year for:                                   |  |                               |       
|Interest                                                         |  | $                             | 187   
|                                                                 |  |                               |       
|Income taxes                                                     |  | $                             |      
|                                                                 |  |                               |       



See Notes to
Consolidated Financial Statements



5



---

##### Table of Contents

|                                                                                                    |  | Nine Months EndedDecember 31, | 
|--------------------------------------------------------------------------------------------------- |  | ----------------------------- | 
|                                                                                                    |  | 2002                          | 
|OTHER NON-CASH FINANCIAL ACTIVITIES                                                                 |  |                               | 
|Stock issued in connection with acquisitions                                                        |  |                              | 
|Stock issued to employees                                                                           |  |                              | 
|Warrants issued in connection with services performed and to be performed (1)                       |  |                              | 
|Warrants issued to preferred shareholders                                                           |  |                              | 
|Shares cancelled in payment of amounts due from employees                                           |  |                              | 
|Shares issued to Isosceles (2)                                                                      |  |                              | 
|Reduction of FunnyGreetings goodwill in connection with restructuring of obligation                 |  |                              | 
|Restructuring of obligation in connection with FunnyGreetings acquisition                           |  |                              | 
|Shares returned to treasury in payment of amounts due from employees                                |  |                              | 
|Stock options issued in connection with services performed and to be performed                      |  |                              | 
|Stock issued in connection with purchase of Infobeat from 550 DMV (3)                               |  |                              | 
|Warrants cancelled that were issued to 550 DMV (3)                                                  |  |                              | 
|Stock issued in connection with 550 DMV warrant cancellation (3)                                    |  |                              | 
|Issuance of below market preferred shares to 550 DMV in connection with Sony purchase agreement (3) |  |                              | 
|Beneficial conversion of below market preferred shares to 550 DMV (3)                               |  |                              | 
|Shares issued to Saggi Capital in connection with payment of note (4)                               |  | 450                           | 
|Capital lease obligations for software and hardware equipment                                       |  | 2,135                         | 

---

|(1) |  | The Company agreed to a two year investor relations services agreement that commenced on April 4, 2001. As consideration for these services, the Company issued warrants for 300
thousand shares of the Companys common stock with an exercise price of $1.25. The warrants have been valued at $473 thousand in the financial statements using the Black-Scholes model with a risk-free rate of 5.75%, a volatility of 128% with no
expected dividend yield and a life of two years. The warrants expire on 4/3/2003.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Shares issued in satisfaction of settlement agreement February 2, 2001 with the Isosceles Fun Limited.
|--- |  | ------------------------------------------------------------------------------------------------------

|(3) |  | 550 Digital Media Ventures (Sony) share purchase agreement as previously disclosed.
|--- |  | -----------------------------------------------------------------------------------

|(4) |  | On August 12, 2002, Saggi Capital exercised its right to convert its $450 thousand, and accrued interest into 216,522 shares of Company common stock at $2.08 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



---

##### Table of Contents

eUNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002



NOTE 1: ORGANIZATION AND LINE OF BUSINESS



eUniverse, Inc. (the Company, we or our ) is a Delaware corporation engaged in developing and operating a network of
websites providing entertainment-oriented content and certain proprietary products and services. Effective December 30, 2002, the Company, previously a Nevada corporation, completed a statutory merger effected for the purpose of changing its state
of incorporation from Nevada to Delaware by merging into a newly formed Delaware corporation, eUniverse, Inc. Further information regarding the Delaware reincorporation is contained in the Companys Form 8-K filed with the Securities and
Exchange Commission on January 9, 2003. During the reporting period, the Company had two primary reporting segments: (1) Products and Services and (2) Media/Advertising. The Company conducts operations from facilities located in Los Angeles, CA;
Santa Monica, CA; Montclair, CA and Mount Vernon, WA. The financial statements being presented include the accounts of eUniverse, Inc. and its consolidated subsidiaries. Prior to fiscal year 2002, the Company engaged in sales of audio CDs,
videotapes (VHS), and digital video disks (DVDs) over the Internet. This business was discontinued in October 2000. All significant inter-company transactions and balances have been eliminated in consolidation.



2. RESTATEMENT



On August 22, 2003, the Company restated its previously reported quarterly financial results for the first three quarters of
the year ended March 31, 2003 (fiscal year 2003) because of accounting errors it had identified in the Companys financial statements (the Restatement). As a result of the discovery of the accounting errors, management
and the Audit Committee initiated an internal review of its accounting records and its accounting policies and procedures. In an effort to identify the extent of the accounting errors, and to identify any deficiencies in the Companys system of
internal controls that gave rise to the errors, management significantly expanded its accounting and finance staff and retained an outside accounting firm to assist in the process. The Companys Board of Directors also directed the Audit
Committee of the Board to explore the facts and circumstances giving rise to the Restatement as well as to evaluate the Companys accounting practices, policies and procedures (the Audit Committee review). During managements
and the Audit Committee reviews of the Companys accounting records and procedures, and during the audit of the Companys financial statements for fiscal year 2003, a variety of deficiencies in the Companys internal controls were
identified. We believe such deficiencies were attributable to the following broad factors: insufficient supervision and oversight of the Companys accounting systems and personnel; a poorly designed, non-integrated accounting system; the rapid
growth in the Companys business operations during fiscal year 2003; difficulties in absorbing and integrating the acquisition of a sizable e-commerce company, ResponseBase, during the third and fourth quarters of fiscal year 2003; the loss of
critical personnel; and, limited human resources in our accounting and financial reporting function with which to respond to the Companys increased business scale and growing complexity.



As a result of these items, for the three-month and nine-month periods ended
December 31, 2002, the Company has reduced its previously reported revenue by $3,895 thousand and $6,024 thousand, respectively, decreased its net income by $3,514 thousand and $6,110 thousand, respectively, and decreased its basic earnings per
share to ($ 0.01) from $0.13 and to $0.07 from $0.32, respectively.



Following are reconciliations of the Companys balance sheet and statement of operations and cash flows from financial statements previously filed to these restated financial statements. The reported amounts in the following statements
of operations include the reclassification of certain items to conform to the presentation for the year ended March 31, 2003. These reclassifications had no effect on previously reported net income. Certain fees paid to third parties for media
space, license agreements, and ad revenue-sharing arrangements, which had previously been included in cost of sales are reflected in marketing and sales expenses. In addition, credit card fees, which had previously been included in general and
administrative expense, have been reclassified to cost of sales.



7



---

##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

(In thousands, except share and par value data)



|                                                                                                        |  | December 31, 2002 |        
|------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                        |  | As reported       |        
|Assets                                                                                                  |  |                   |        
|Current assets:                                                                                         |  |                   |        
|Cash and cash equivalents                                                                               |  | $                 | 5,410  
|Restricted cash                                                                                         |  |                   | 1,294  
|Accounts receivable                                                                                     |  |                   | 7,116  
|Inventories                                                                                             |  |                   | 1,256  
|Prepaid expenses                                                                                        |  |                   | 3,047  
|Deferred charges and other                                                                              |  |                   | 263    
|                                                                                                        |  |                   |        
|Total current assets                                                                                    |  |                   | 18,386 
|                                                                                                        |  |                   |        
|Property and equipment, net of accumulated depreciation and amortization                                |  |                   | 3,372  
|                                                                                                        |  |                   |        
|Other assets:                                                                                           |  |                   |        
|Goodwill, net of accumulated amortization                                                               |  |                   | 15,308 
|Other intangible assets, net of accumulated amortization                                                |  |                   | 5,133  
|Deferred charges                                                                                        |  |                   | 30     
|Deposits and other                                                                                      |  |                   | 557    
|                                                                                                        |  |                   |        
|Total assets                                                                                            |  | $                 | 42,786 
|                                                                                                        |  |                   |        
|Liabilities and Shareholders Equity                                                                    |  |                   |        
|Current liabilities:                                                                                    |  |                   |        
|Accounts payable                                                                                        |  | $                 | 2,146  
|Accrued expenses                                                                                        |  |                   | 4,901  
|Deferred revenue                                                                                        |  |                   | 553    
|Current portion of long-term debt                                                                       |  |                   | 3,969  
|Current portion of capitalized lease obligations                                                        |  |                   | 1,026  
|                                                                                                        |  |                   |        
|Total current liabilities                                                                               |  |                   | 12,595 
|                                                                                                        |  |                   |        
|Long-term debt, less current portion                                                                    |  |                   | 314    
|Accrued interest                                                                                        |  |                   |       
|Capitalized lease obligations, less current portion                                                     |  |                   | 426    
|                                                                                                        |  |                   |        
|Total liabilities                                                                                       |  |                   | 13,335 
|                                                                                                        |  |                   |        
|Shareholders equity:                                                                                   |  |                   |        
|Preferred stock, $0.10 par value; 40,000,000 shares authorized; 2,334,577 shares issued and outstanding |  |                   | 287    
|Common stock, $0.001 par value; 250,000,000 shares authorized; 24,836,767 shares issued and outstanding |  |                   | 25     
|Additional paid-in capital                                                                              |  |                   | 69,781 
|Accumulated deficit                                                                                     |  |                   | (40,606
|Treasury stock                                                                                          |  |                   | (36    
|                                                                                                        |  |                   |        
|Total shareholders equity                                                                              |  |                   | 29,451 
|                                                                                                        |  |                   |        
|Total liabilities and shareholders equity                                                              |  | $                 | 42,786 
|                                                                                                        |  |                   |        



8



---

##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(In thousands, except share and per share data)



|                                                             |  | Three Months Ended December 31, 2002 |           
|------------------------------------------------------------ |  | ------------------------------------ | ----------
|                                                             |  | As reportedandreclassified           |           
|Revenues                                                     |  | $                                    | 25,854    
|Cost of sales                                                |  |                                      | 7,044     
|                                                             |  |                                      |           
|Gross profit                                                 |  |                                      | 18,810    
|                                                             |  |                                      |           
|Operating expenses:                                          |  |                                      |           
|Marketing and sales                                          |  |                                      | 7,915     
|Product development                                          |  |                                      | 3,671     
|General and administrative                                   |  |                                      | 3,529     
|Amortization of other intangible assets                      |  |                                      | 350       
|                                                             |  |                                      |           
|Total operating expenses                                     |  |                                      | 15,465    
|                                                             |  |                                      |           
|Operating income (loss)                                      |  |                                      | 3,345     
|                                                             |  |                                      |           
|Non-operating income (expense):                              |  |                                      |           
|Interest income                                              |  |                                      | 24        
|Interest expense and other financing costs, net              |  |                                      | (105      
|Other gains and (losses)                                     |  |                                      |          
|                                                             |  |                                      |           
|Income (loss) from continuing operations before income taxes |  |                                      | 3,264     
|Income tax expense                                           |  |                                      |          
|                                                             |  |                                      |           
|Income (loss) from continuing operations                     |  |                                      | 3,264     
|                                                             |  |                                      |           
|Discontinued operations:                                     |  |                                      |           
|Gain from operations of discontinued segment                 |  |                                      |          
|                                                             |  |                                      |           
|Net income (loss)                                            |  |                                      | 3,264     
|                                                             |  |                                      |           
|Accretion of preferred stock redemption value                |  |                                      | 52        
|                                                             |  |                                      |           
|Income (loss) available to common shares                     |  | $                                    | 3,212     
|                                                             |  |                                      |           
|Continuing operations earnings (loss) per common share       |  | $                                    | 0.13      
|Discontinued operations earnings per common share            |  |                                      |          
|                                                             |  |                                      |           
|Basic earnings (loss) per common share                       |  | $                                    | 0.13      
|                                                             |  |                                      |           
|Diluted earnings (loss) per common share                     |  | $                                    | 0.10      
|                                                             |  |                                      |           
|Basic weighted average common shares outstanding             |  |                                      | 24,600,496
|                                                             |  |                                      |           
|Diluted weighted average shares outstanding                  |  |                                      | 32,044,909
|                                                             |  |                                      |           



9



---

##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(In thousands, except share and per share data)



|                                                             |  | Nine Months Ended December 31, 2002 |           
|------------------------------------------------------------ |  | ----------------------------------- | ----------
|                                                             |  | As reportedandreclassified          |           
|Revenues                                                     |  | $                                   | 49,753    
|Cost of sales                                                |  |                                     | 11,947    
|                                                             |  |                                     |           
|Gross profit                                                 |  |                                     | 37,806    
|                                                             |  |                                     |           
|Operating expenses:                                          |  |                                     |           
|Marketing and sales                                          |  |                                     | 13,412    
|Product development                                          |  |                                     | 7,924     
|General and administrative                                   |  |                                     | 8,164     
|Amortization of other intangible assets                      |  |                                     | 835       
|                                                             |  |                                     |           
|Total operating expenses                                     |  |                                     | 30,335    
|                                                             |  |                                     |           
|Operating income (loss)                                      |  |                                     | 7,471     
|Non-operating income (expense):                              |  |                                     |           
|Interest income                                              |  |                                     | 63        
|Interest expense and other financing costs, net              |  |                                     | (420      
|Cancellation of stock options                                |  |                                     | (452      
|Gain on extinguishment of debt                               |  |                                     | 1,269     
|Other gains and (losses)                                     |  |                                     | (24       
|                                                             |  |                                     |           
|Income (loss) from continuing operations before income taxes |  |                                     | 7,907     
|Income tax expense                                           |  |                                     |          
|                                                             |  |                                     |           
|Income (loss) from continuing operations                     |  |                                     | 7,907     
|                                                             |  |                                     |           
|Discontinued operations:                                     |  |                                     |           
|Gain (loss) from operations of discontinued segment          |  |                                     | (149      
|                                                             |  |                                     |           
|Net income (loss)                                            |  |                                     | 7,758     
|Accretion of preferred stock redemption value                |  |                                     | 154       
|                                                             |  |                                     |           
|Income (loss) available to common shares                     |  | $                                   | 7,604     
|                                                             |  |                                     |           
|Continuing operations earnings (loss) per common share       |  | $                                   | 0.33      
|Discontinued operations earnings (loss) per common share     |  |                                     | (0.01     
|                                                             |  |                                     |           
|Basic earnings (loss) per common share                       |  | $                                   | 0.32      
|                                                             |  |                                     |           
|Diluted earnings (loss) per common share                     |  | $                                   | 0.25      
|                                                             |  |                                     |           
|Basic weighted average common shares outstanding             |  |                                     | 24,142,979
|                                                             |  |                                     |           
|Diluted weighted average shares outstanding                  |  |                                     | 30,711,660
|                                                             |  |                                     |           



10



---

##### Table of Contents

NOTE 3: ACCOUNTING POLICIES



Interim financial information



The accompanying unaudited interim financial statements have been prepared by the Company, in accordance with United States generally accepted accounting
principles pursuant to Regulation S-K of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Companys financial statements and related notes as contained in Form 10-K for the year ended March 31, 2002. In the opinion of
management, the interim financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of operations for the three months and nine months ended
December 31, 2002 are not necessarily indicative of results of operations to be expected for the full year.



Business combinations



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



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



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



Principles of consolidation



The financial statements include the accounts of eUniverse, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated.
Equity investments and investments in joint ventures in which we own at least 20% of the voting securities are accounted for using the equity method, except for investments in which the Company is not able to exercise significant influence over the
investee, in which case, the cost method of accounting is used. Investments in which the Company owns in excess of 50% are consolidated for financial reporting purposes.



Restricted cash and deposits



At December 31, 2002, the Company has $576 thousand of funds held by banks as a reserve against any possible chargebacks/returns on credit card
transactions related to customer disputes that are not offset against the Companys daily sales deposit activity. This amount is reflected as restricted cash.



At December 31, 2002, the Company also has $1.3 million in certificates of deposit which collateralize operating and capital
lease obligations. These amounts are classified as long term deposits.



Estimates and assumptions



Preparing
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues, and expenses during the reported period. Examples of significant estimates used in preparing the accompanying financial statements include; potential impairment of goodwill and
other intangibles, revenue recognition; the potential outcome of the future tax consequences of events that have been recognized in the Companys financial statements or tax returns; determining reserves for allowances in accounts receivable,
inventories and sales returns. Actual results and outcomes may differ from these estimates and assumptions.



11



---

##### Table of Contents

Revenue recognition



The Company recognizes service revenue upon fulfillment and delivery of customers advertising. Additionally, the
Company derives revenue from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned.



The Company also earns revenue from services and electronic commerce transactions, including sales of products and services. Service revenue includes fees
from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned. Service revenue also includes fees from the sale of non-refundable dating credits, which are recognized at the time of purchase. These credits are
utilized in the Companys dating service. Electronic commerce transactions include, but are not limited to, sales of laser and inkjet printer supplies. For these transactions, the Company recognizes revenue upon shipment of its products.
Revenue includes shipping and handling charges. Fulfillment for these products is outsourced to an independent third party.



Barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the advertisements
given with the difference recorded as an advance or prepaid. During the nine months ended December 31, 2002 and 2001, the Company recorded $888 thousand and $325 thousand as bartered advertising revenue, respectively.



Inventory



Inventory is composed of inkjet and laser printer cartridges and various consumer merchandise, primarily digital cameras and
other electronic products. Inventories are held by unrelated third parties who operate the Companys order fulfillment. Inkjet and laser printer cartridge inventory is purchased and title is transferred to the Company automatically as orders
are accepted from customers. All other inventories are purchased from suppliers and title transferred upon receipt of goods.



Property and equipment



Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, or
terms of the related capital lease agreements. Maintenance and repairs are charged to expense as incurred. Estimated useful lives are as follows:



|Leasehold improvements        |  | Life of the lease
|----------------------------- |  | -----------------
|Computer equipment            |  | 5 years          
|Telephone equipment           |  | 5 years          
|Computer software             |  | 5 years          
|Furniture, fixtures and other |  | 10 years         



Intangible assets



Intangible assets consist of goodwill, customer
lists, and domain names. Excess cost over the fair value of net assets acquired (or goodwill) was amortized on a straight-line basis over 5 years effective January 1, 2001. These assets will be assessed for impairment annually or upon an adverse
change in operations and are being amortized on a straight-line basis over a period of 2 to 5 years. Through December 31, 2000, goodwill and domain names were amortized over 10 years. Effective April 1, 2001, the Company adopted SFAS 141 and SFAS
142. Should events or circumstances occur subsequent to the acquisition of a business, which bring into question the realization or impairment of the related goodwill, the Company will evaluate the remaining useful life and balance of goodwill and
make adjustments, if required. The Companys principal consideration in determining an impairment includes the strategic benefit to the Company of the particular assets as measured by undiscounted current and future operating income of that
specified group of assets and expected undiscounted cash flows. Should an impairment be identified, a loss would be reported to the extent that the carrying value of the related goodwill exceeds the fair value of that goodwill as determined by
discounted future cash flows.



Advertising costs



Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of direct-response advertising, if any, are capitalized and amortized over the period during which future benefits are expected to be received. During the nine months ended December 31,
2002 and 2001 advertising expense amounted to $727 thousand and $1,205 thousand respectively. The Company had no direct-response advertising during the periods presented.



Earnings per share



Basic earnings per share is computed as net income less accretion of the Series A redeemable convertible preferred stock divided by the weighted average
number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect. For the three and nine months ended December 31, 2002, 8,304 thousand and 1,576 thousand stock options, respectively, and 1,985 thousand and 27 thousand warrants to purchase common stock,
respectively have been excluded from the computation of diluted earning per share because their effect is currently anti-dilutive.



12



---

##### Table of Contents

4. MAJOR CUSTOMERS



During the nine months ended December 31, 2002, approximately 7% of the Companys total revenues resulted from five customers ranging from 1% to 2%
of total revenues each. These five customers comprised 19% of media/advertising segment revenues ranging 3% to 4% of advertising revenues each.



During the nine months ended December 31, 2001, approximately 44% of revenues were generated from the top five customers ranging from 5% to 12% of
revenues each. These customers made up 62% of media/advertising segment revenue.



5. AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS



The net carrying value of goodwill and other intangibles recorded through acquisitions is $20,155 thousand and $16,875 thousand as of December 31,2002 and March 31, 2002, respectively. Effective April 1, 2001, the Company adopted SFAS 141
and SFAS 142. These assets are now assessed for impairment at least annually or upon an adverse change in operations. The assets were amortized on a straight-line basis over two to five years beginning January 1, 2001. Prior to that date, the
Company amortized goodwill and other intangibles on a straight line basis over ten years. Since March 31, 2002, the Company has not noted any material adverse events that could cause an impairment of the net carrying value of goodwill or other
intangible assets as of December 31, 2002.



Goodwill in the
amount of approximately $14,846 thousand is not amortized.



Other Intangibles consist primarily of the cost of website domain names and customer lists acquired (in thousands):



|                               |  | December 31,2002 |        |   | March 31,2002 |  
|------------------------------ |  | ---------------- | ------ | - | ------------- | -
|Customer lists                 |  | $                | 1,393  |   |               | $
|Domain names                   |  |                  | 1,572  |   |               |  
|License agreements             |  |                  | 315    |   |               |  
|Websites                       |  |                  | 2,446  |   |               |  
|Other                          |  |                  | 284    |   |               |  
|                               |  |                  |        |   |               |  
|                               |  |                  | 6,010  |   |               |  
|Less: accumulated amortization |  |                  | (1,459 | ) |               |  
|                               |  |                  |        |   |               |  
|Other Intangibles, net         |  | $                | 4,551  |   |               | $
|                               |  |                  |        |   |               |  





6. FIXED ASSETS



Fixed assets, at cost, consist of the following (in thousands):



|                               |  | December 31,2002 |        |   | March 31,2002 |  
|------------------------------ |  | ---------------- | ------ | - | ------------- | -
|Furniture and fixtures         |  | $                | 71     |   |               | $
|Computers and equipment        |  |                  | 1,586  |   |               |  
|Equipment under capital lease  |  |                  | 2,135  |   |               |  
|Leasehold improvements         |  |                  | 5      |   |               |  
|Purchased software             |  |                  | 262    |   |               |  
|                               |  |                  |        |   |               |  
|                               |  |                  | 4,059  |   |               |  
|Less: accumulated depreciation |  |                  | (1,357 | ) |               |  
|                               |  |                  |        |   |               |  
|Fixed assets, net              |  | $                | 2,702  |   |               | $
|                               |  |                  |        |   |               |  



Depreciation expense
for the nine months period ended December 31, 2002 and 2001 was approximately $793 and $224 thousand respectively.



13



---

##### Table of Contents

7. PREPAID EXPENSES



Prepaid expenses consist of cash payments made in advance for marketing or other services to be rendered as follows (in thousands):



|                              |  | December 31, 2002 |       | March 31, 2002
|----------------------------- |  | ----------------- | ----- | --------------
|                              | 
|Bank fees                     |  | $                 | 25    |               
|Accounting fees               |  |                   | 25    |               
|Co-marketing agreement shares |  |                   | 327   |               
|eGames earnout advance        |  |                   | 300   |               
|Marketing expenses            |  |                   | 150   |               
|Investment banking expenses   |  |                   | 23    |               
|Investor relations expenses   |  |                   | 10    |               
|Licensing agreements          |  |                   | 320   |               
|Inventory                     |  |                   | 284   |               
|Insurance, advances & other   |  |                   | 826   |               
|                              |  |                   |       |               
|Total                         |  | $                 | 2,290 |               
|                              |  |                   |       |               



9. DEFERRED CHARGES



Deferred charges consist of the unamortized fair value of warrants or
options issued principally in connection with the securing of financing, investor relations services and web site development. Options issued to advertising affiliates for continued online advertising services are also included. All such options and
warrants have been valued using the Black-Scholes method option pricing model (see also Note 15  Warrants). (In thousands):



|                          |  | December 31, 2002 |     |   | March 31, 2002 |  
|------------------------- |  | ----------------- | --- | - | -------------- | -
|                          | 
|Warrants:                 |  |                   |     |   |                |  
|Granted for services      |  |                   | 483 |   |                |  
|                          |  |                   |     |   |                |  
|                          |  |                   | 483 |   |                |  
|Less: Non-current portion |  |                   | (30 | ) |                |  
|                          |  |                   |     |   |                |  
|Total                     |  | $                 | 453 |   |                | $
|                          |  |                   |     |   |                |  



10. SHORT-TERM NOTES PAYABLE



Short-term notes payable consist of the following (in
thousands):



|                                                  |  | December 31,2002 |       |   | March 31,2002 |  
|------------------------------------------------- |  | ---------------- | ----- | - | ------------- | -
|Notes payable:                                    |  |                  |       |   |               |  
|550 Digital Media Ventures  Affiliate (Sony) (1) |  | $                | 2,290 |   |               | $
|Debs Fun Pages (2)                               |  |                  | 287   |   |               |  
|Funbug                                            |  |                  | 200   |   |               |  
|Funnygreetings (5)                                |  |                  | 545   |   |               |  
|FunPageLand (2)                                   |  |                  | 113   |   |               |  
|Saggi Capital (4)                                 |  |                  |      |   |               |  
|SFX Entertainment (3)                             |  |                  | 696   |   |               |  
|                                                  |  |                  |       |   |               |  
|                                                  |  |                  | 4,131 |   |               |  
|Less: Discount on FunnyGreetings Note             |  |                  | (69   | ) |               |  
|                                                  |  |                  |       |   |               |  
|Total                                             |  | $                | 4,062 |   |               | $
|                                                  |  |                  |       |   |               |  

---

|(1) |  | Due to Sony subsidiary 550 Digital Media Ventures on March 31, 2003. The note is convertible to common or preferred stock subject to certain conditions and is collateralized by a
blanket lien on the assets of the Company. The note accrues interest at the prime rate plus 2%.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | As of March 1, 2001, the Company entered into promissory notes in connection with settlements of amounts due pursuant to agreements with certain then-current employees that had
developed websites, as listed above, and related content of the Company.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

| |  | Obligations were settled by entering into promissory notes having a term of 30 months and with the entire principal due on September 1, 2003. Interest accrues at 8% with payments of
interest only payable at different dates for the various notes through September 2003. The note holders have the right at any time to convert the unpaid balance of the note into shares of unregistered, restricted common stock of the Company at $6
per share.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In January 2002, the payment terms of this note were extended to January 1, 2004 from August 26, 2002. The note is collateralized by 2,600,000 shares of common stock owned by Brad
D. Greenspan. Principal and interest payments are quarterly over the life of the note with an effective interest rate of 18.51%.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On August 13, 2001, Saggi Capital purchased the $450 thousand note formerly held by Videogame Partners. The note was payable in stock on June 12, 2002, and accrued interest at 8%.
Saggi Capital expressed its intention to exercise its conversion rights pursuant to the agreement prior to June 30, 2002. During the quarter ended September 30, 2002, the Company issued 216,522 shares of Company common stock to Saggi Capital to
redeem the note and pay all accrued interest.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | In July 2001, the Company amended its agreement with an employee for the purchase of Funnygreetings.com. Under the prior agreement, the Company was obligated to pay $2 million.
Under the new agreement, the Company reduced the obligation to $1.2 million, less $86 thousand already received by the seller, and restructured the payment terms as described below. The Company made an additional payment of $130 thousand in
connection with Company financing which closed October 23, 2001 with 550 Digital Media Ventures as previously reported. The remaining balance of $984 thousand is payable in thirty monthly installments subject to certain advertising revenues being
achieved on the Funnygreetings.com website. Whenever revenue performance is not achieved in a given month, the monthly payment is reduced to a minimum of $20 thousand.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11. LONG-TERM NOTES PAYABLE



Long-term notes payable consist of the following (in thousands):



|                      |  | December 31,2002 |   | March 31,2002
|--------------------- |  | ---------------- | - | -------------
|Debs Fun Pages (1)   |  |                  |  |              
|FunBug                |  |                  |  |              
|FunnyGreetings (4)    |  |                  |  |              
|FunPageLand (1)       |  |                  |  |              
|JustSayWow (1) (3)    |  |                  |  |              
|Send4Fun (1) (3)      |  |                  |  |              
|SFX Entertainment (2) |  |                  |  |              
|                      |  |                  |   |              
|Total                 |  | $                |  |              
|                      |  |                  |   |              

---

|(1) |  | As of March 1, 2001, the Company entered into promissory notes in connection with settlements of amounts due pursuant to agreements with certain then-current employees that had
developed Web sites, as listed above, and related content for the Company. Obligations were settled by entering into promissory notes having a term of 30 months and with the entire principal due on September 1, 2003. Interest accrues at 8% with
payments of interest only payable at different dates for the various notes through September 2003. The note holders have the right at anytime to convert the unpaid balance of the note into shares of unregistered, restricted common stock of the
Company at $6 per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In January 2002, the payment terms of this note were extended to January 1, 2004 from August 26, 2002. The note is collateralized by 2,600,000 shares of common stock owned by Brad
D. Greenspan. Principal and interest payments are quarterly over the life of the note with an effective interest rate of 16.96%.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3). |  | In June 2002, the Company recognized gain from the early retirement of the principal and related accrued interest of these notes payable. This retirement of debt resulted in the
Company recognizing a gain of $1,269 thousand.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | In July 2001, the Company amended its agreement with an employee for the purchase of Funnygreetings.com. Under the prior agreement, the Company was obligated to pay $2 million.
Under the new agreement, the Company reduced the obligation to $1.2 million, less $86 thousand already received by the seller, and restructured the payment terms as described below. The Company made an additional payment of $130 thousand in
connection with Company financing which closed October 23, 2001 with 550 Digital Media Ventures as previously reported. The remaining balance of $984 thousand is payable in thirty monthly installments subject to certain advertising revenues being
achieved on the Funnygreetings.com website. Whenever revenue performance is not achieved in a given month, the monthly payment is reduced to a minimum of $20 thousand.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

##### Table of Contents

12. CAPITALIZED LEASE OBLIGATIONS



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



|Year ended March 31,                                   |  |   |       
|------------------------------------------------------ |  | - | ------
|2003 (remaining 3 months)                              |  | $ | 367   
|2004                                                   |  |   | 1,089 
|2005                                                   |  |   | 271   
|                                                       |  |   |       
|Total minimum lease payments                           |  |   | 1,727 
|                                                       | 
|Less: Amounts representing interest                    |  |   | (126  
|                                                       |  |   |       
|Present value of net minimum lease payments            |  |   | 1,601 
|Less: Current portion of capitalized lease obligations |  |   | (1,036
|                                                       |  |   |       
|Long-term capitalized lease obligations                |  | $ | 565   
|                                                       |  |   |       



Equipment with a cost
basis of $2,135 thousand is collateral for the obligations under capital leases. During fiscal year 2003, the Company entered into several sale-leaseback transactions for computer equipment. Under the terms of the agreements, the Company, as lessee,
is required to maintain the equipment and provide public liability insurance coverage in the minimum amount of $1 million. As additional security relating to the sale-leaseback of equipment, the Company is required to maintain an $825 thousand
irrevocable standby letter for the first twelve months of the lease term and $413 thousand for the remaining twelve months of the lease term.



13. ACCRUED EXPENSES



Accrued expenses consist of the following (in thousands):



|                                        |  | December 31,2002 |       | March 31,2002
|--------------------------------------- |  | ---------------- | ----- | -------------
|Professional services                   |  | $                |      |              
|Acquisition payments                    |  |                  | 109   |              
|Vacation                                |  |                  | 264   |              
|Compensation                            |  |                  | 9     |              
|Affiliate payments                      |  |                  | 41    |              
|Marketing                               |  |                  | 188   |              
|Interest                                |  |                  | 14    |              
|Royalties                               |  |                  | 439   |              
|Bonuses and commissions                 |  |                  | 1,557 |              
|Sales tax                               |  |                  | 312   |              
|Sales return                            |  |                  | 1,260 |              
|Legal settlement payable                |  |                  | 312   |              
|Commissions  Funpagers                 |  |                  | 32    |              
|401K payables  employee check payments |  |                  | 12    |              
|Insurance                               |  |                  | 263   |              
|Customer deposit                        |  |                  | 432   |              
|Other                                   |  |                  | 95    |              
|                                        |  |                  |       |              
|Total                                   |  | $                | 5,339 |              
|                                        |  |                  |       |              



16



---

##### Table of Contents

14. COMMITMENTS AND CONTINGENCIES



Operating Leases



The Company leases various facilities under non-cancelable operating lease agreements that expire within the next five years. Future minimum lease
payments under these non-cancelable operating leases are as follows (in thousands):



|Years ended March 31,         |  |  
|----------------------------- |  | -
|2003 (remaining three months) |  | $
|2004                          |  |  
|2005                          |  |  
|2006                          |  |  
|2007                          |  |  
|                              |  |  
|                              |  | $
|                              |  |  



Rent expense from
continuing operations for the nine months ending December 31, 2002 and 2001 was $756 thousand and $380 thousand.



Litigation



As previously disclosed, on July 6, 2001, Adolph Komorsky Investments, Inc. (AKI), an Illinois corporation with its principal place of
business in Tarrytown, New York, filed a complaint against the Company in the Supreme Court of the State of New York, County of Westchester. AKI alleges that the Company breached a consulting agreement with AKI by failing and refusing to pay cash
and warrants due under the agreement. The Company filed an answer to AKIs complaint denying AKIs allegations and asserting defenses to the claims including the failure of AKI to perform its obligations under the consulting agreement. On
February 11, 2003, the Company accepted an offer by AKI to settle this matter for a one-time cash payment in an amount not exceeding the reserve established by the Company to cover this contingent liability. The settlement is expected to be
documented and finalized in the near future and is not expected to have a material adverse effect on the Company.



On October 17, 2002, the Company filed a complaint in the Superior Court of Los Angeles, California, against Jody Henderson, the former owner and
proprietor of the Companys interactive entertainment website known as FunnyGreetings. The Company is seeking an order from the California Court declaring the validity and enforceability of, and the Companys compliance with, an amendment
to the acquisition agreement pursuant to which the Company purchased FunnnyGreetings from Mr. Henderson in September of 2000. The terms of the amendment, which was executed by the parties in July 2001, resulted in, among other things, an $800,000
reduction in the minimum purchase price to be paid by the Company to Mr. Henderson for the FunnyGreetings business. The Company filed the lawsuit due to Mr. Hendersons allegations that (1) the Company breached the purchase agreement by not
accounting for all, and/or by undermining, sources of revenue from the Companys operation of the FunnyGreetings website thereby adversely affecting amounts due to Mr. Henderson under the purchase agreement, and (2) the amendment to the
purchase agreement was the result of economic duress and is unenforceable. In January of 2003, the Company was served with a lawsuit filed by Mr. Henderson in the Circuit Court of Fayette County, Kentucky, which includes claims based on the above
allegations. On January 9, 2003, the Company removed the lawsuit to the United States District Court for the Eastern District of Kentucky. The Company believes that Mr. Hendersons claims are without merit and intends to vigorously defend
itself.



15. EQUITY COMPENSATION PLAN



Stock Options



Under the Companys 1999 Stock Award Plan, stock options may be granted to officers, directors, employees and
consultants. An aggregate of 9 million shares of common stock have been reserved for issuance under the Plan. Typically, options granted under the plan will vest ratably over 3 years with 1/3 vesting after 12 months and the remaining vesting in 1/8
increments each 3 months thereafter. During the quarter ended December 31, 2002, the Company issued 222 thousand options with exercise prices ranging from $2.20 to $4.42. As of December 31, 2002, 8,304 thousand options were outstanding at a weighted
average price of $3.17, of which 4,668 thousand options were exercisable at a weighted average price of $3.52.



The Company uses the intrinsic value method (APB Opinion 25) to account for its stock options granted to officers, directors, and employees. Under this
method, compensation expense is recorded over the vesting period based on the difference between the exercise price and quoted market price on the date the options are granted. Since the company has granted all its stock options at an exercise price
equal to or above the quoted market value on the measurement date, no compensation expense related to grants of stock options to employees has been recorded.



Pursuant to FASB Interpretation No. 44, the Company accounts for its repriced options as a variable plan. Compensation is measured as the difference
between the fair market value and the exercise price of the option at the reporting period, recognized in the financial statements over the service period.



17



---

##### Table of Contents

On July 12, 2002, the Company agreed to pay approximately $452 thousand to various stock option holders
in exchange for the cancellation of approximately 925 thousand options.



Warrants



The Company has granted
warrants to purchase common stock in connection with debt and services.



Warrants outstanding and exercisable as of December 31, 2002 were 1,985 thousand with exercise prices ranging from $1.00 to $5.03 per share.



16. SEGMENT INFORMATION



Based on the criteria established by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company currently operates in
two principal business segments globally. The Company does not allocate any operating expenses other than direct cost of sales to its Goods and Services segment, as management does not use this information to measure the performance of the operating
segment. Management does not believe that allocating these expenses is material in evaluating the segments performance.



Summarized information by segment as excerpted from the internal management reports is as follows for the three and nine months ended December 31,2002 and
2001 are as follow (in thousands):



|Three Months Ended December 31, 2002 |  |                   |        |                     |   |        |  |   |       
|------------------------------------ |  | ----------------- | ------ | ------------------- | - | ------ |  | - | ------
|                                     |  |                   |       
|                                     |  | Media/Advertising |        | ProductsandServices |   | Total 
|Net revenues                         |  | $                 | 6,026  |                     | $ | 15,933 |  | $ | 21,959
|Gross profit                         |  | $                 | 6,026  |                     | $ | 9,103  |  | $ | 15,129
|                                     |  |                   |       
|Nine Months Ended December 31, 2002  |  |                   |        |                     |   |        |  |   |       
|                                     |  |                   |       
|                                     |  | Media/Advertising |        | ProductsandServices |   | Total 
|Net revenues                         |  | $                 | 17,127 |                     | $ | 26,602 |  | $ | 43,729
|Gross profit                         |  | $                 |       |                     | $ | 10,631 |  | $ | 10,631



17. BUSINESS COMBINATIONS



In August 2002, the Company entered into a joint venture
with VintaCOM Media Group Inc., an Alberta, Canada company to form Relationship Exchange Company, LLC (REC), a Nova Scotia, Canada company for the purpose of expanding the Internet dating businesses of both parties. VintaCOM has agreed to license
certain intellectual property and provide hosting and technical services to REC in exchange for a 51% share of REC. The Company received the remaining 49% of REC. Unanimous approval of both parties is required over certain corporate governance
matters and the Company has significant influence over major operating decisions affecting the joint venture. The Company will report its share of REC profits and losses and its investment in REC using the equity method of accounting. No significant
profits or losses have been reported to date.



In September
2002, the Company entered into two joint ventures with Michael Casey Enterprises, LLC, a California company to form Abdominal King, LLC, a Delaware company, and Yogabol, LLC, a Delaware company to distribute certain fitness products. The Company has
received a 51% interest and substantial control over corporate governance and daily operations for a cash investment for marketing support through December 31, 2002 of approximately $0.6 million. No significant profits and losses have been reported
by either joint venture to date.



In September 2002, the
Company purchased certain assets of Mainland Communications Ltd of Ireland for $337,000 and has launched new products and services featuring the Colorgenics Psychological Profiling System. As a result of this agreement, the Company has the exclusive
online and offline worldwide rights for Colorgenics. The new products and services line includes a subscription service where users can obtain a detailed psychological analysis and e-mail newsletter providing Colorgenics assessments based on color
affinity testing.



In September 2002, the Company acquired
certain assets of ResponseBase LLC, for $3.5 million. ResponseBase is a Santa Monica, CA online marketing company that manages approximately 30 million permission-bases e-mail records and is expected to add proven talent to the existing eUniverse
team and add incremental distribution and product development opportunities. Additional payments will be made on an earn-out basis subject to the achievement of certain performance goals for the two year period October 2002-September 2004.



18



---

##### Table of Contents

|ITEM  2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|-------- |  | --------------------------------------------------------------------------------------



The following discussion should be read in conjunction with our financial statements and the accompanying notes that appear
elsewhere in this report. The results for the current quarter reflect the consolidated operations of eUniverse, Inc. and its subsidiaries. The following subsidiaries were acquired or created during the periods being discussed below, and therefore
their financial results are not fully represented in all such periods: Infobeat L.L.C. f/k/a Indimi, L.L.C. (acquired as of October 23, 2001); Performance Marketing Group, LLC (created as of July 22, 2002); Relationship Marketing Services (acquired
as of July 10, 2002); and Ultra Conversions, LLC (acquired as of May 15, 2002).



Effective October 10, 2000, the Company sold the assets of CD Universe to CLBL, Inc. and the results of that segment are treated as a discontinued operation in the financial statements.



The following discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.



RESULTS OF OPERATIONS



Quarter Ended December 31, 2002 Compared to Quarter Ended December 31, 2001



Net Revenues



In the current quarter, approximately 73% of the Companys revenues were derived from its Product and Services segment, which was launched June, 2001
with the remaining 27% from paid third party advertising. During the quarter ended December 31, 2001, 61% of the Companys revenues were derived from paid third party advertising and the remaining 39% of revenue came from the Products and
Services segment. The Company intends to continue its strategy of growing and diversifying its revenues by introducing and enhancing various proprietary products and services. Management of the Company believes that the Product and Services segment
will continue to be the primary revenue driver for the Company. The Products and Services segment is anticipated to grow both in total dollars and as a percentage of total revenue.



Products and Services segment revenues are derived primarily from subscriptions, merchandise sales and fees charged for
activity based games and other items. The Companys third party advertising commitments range from one week to three months with revenue derived from Cost Per Acquisition (CPA), Cost Per Click (CPC), Cost Per Impression (CPM) agreements with
its customers.



Services revenues include fees from the sale of
non-refundable memberships and sponsorships that are recognized ratably as earned. Service revenues also include fees from the sale of non-refundable dating credits, which are recognized as credits are used.



The Company launched a new online product and service featuring the
Colorgenics Psychological Profiling System in September 2002. Colorgenics sells subscriptions where users can obtain a detailed psychological analysis and e-mail newsletter.



In August 2002, the Company launched Performance Marketing Group, LLC (PMG), an online direct marketing company specializing
in designing, planning, implementing and optimizing advertising campaigns for online publishers. PMG has significantly increased overall revenues and profitability through the purchase and optimization of media campaigns and is expected to expand
its activities.



Electronic commerce transactions include
product sales for items such as laser and inkjet printer supplies, various consumer electronic products, consumer health products and various impulse merchandise. For these transactions, the Company recognizes revenue upon shipment of its products.
Revenue includes shipping and handling charges. Product fulfillment is outsourced to independent third parties.



Revenues from barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the
advertisements given with the difference recorded as an advance or prepaid. The Company had no barter transactions during the current quarter or comparable quarter last year.



The Company recognizes revenues as the amount paid upon the delivery and fulfillment of advertising, provided that the
collection of the resulting receivable is probable.



19



---

##### Table of Contents

|                      |  | Three Months Ended December 31, |       
|--------------------- |  | ------------------------------- | ------
|                      |  | 2002                            |       
|                      |  | (in thousands)                  |       
|Revenues              |  |                                 |       
|Media / Advertising   |  | $                               | 6,026 
|Products and Services |  |                                 | 15,933
|                      |  |                                 |       
|Total Revenues        |  | $                               | 21,959
|                      |  |                                 |       
|                      | 
|                      |  | Nine Months Ended December 31,  |       
|                      |  | 2002                            |       
|                      |  | (in thousands)                  |       
|Revenues              |  |                                 |       
|Media / Advertising   |  | $                               | 17,127
|Products and Services |  |                                 | 26,602
|                      |  |                                 |       
|Total Revenues        |  | $                               | 43,729
|                      |  |                                 |       



For the current
quarter, total revenue increased 117% to $22 million, up from $10.1 million reported the same quarter in 2001. For the nine months ended December 31, 2002 total revenue increased 100% to $43.7 million, up from $21.9 million reported for the same
period in 2001. The increase is due to the introduction of the Products and Services segment, which contributed substantially all of the overall increase in revenues of $12 million for the current quarter. The revenues produced from this segment
were primarily from recurrent transaction products (e.g. ink jet cartridges), subscription-based services (e.g. dating, fitness, premium memberships) and the sale of impulse merchandise. The Company intends to continue to add to and upgrade its
product and service offerings during the remainder of fiscal year 2003 and for the fore seeable future.



Revenues from Media and Advertising decreased approximately 3% to $6 million from $6.2 million, from the third quarter last year. For the nine months
ended December 31, 2002, revenues from Media and Advertising were up 6% to $17.1 million, from $16.1 million for the prior year, due primarily to an increase in available advertising space from newly launched and acquired sites.



For the nine months ended December 31, 2002, the top five customers made up
19% of media/advertising revenue, down from 62% in the prior year. The top five customers comprised 7% of total revenues in the current period, a decline from 44% in the comparable nine month period in the prior year.



The Company expects that revenue from the Products and Services segment will
continue to increase as percentage of overall revenues during fiscal year 2003. Management plans to continue to allocate a greater percentage of available advertising inventory to promote proprietary Company products and services. Consequently,
revenue growth from Media/Advertising may slow during the remainder of fiscal year 2003.



Revenue also includes barter and non-cash advertising where the Company exchanges advertising on our sites for similarly valued online advertising or other services. The Company did not enter into any barter
transactions in the current quarter. The Companys barter value was $888,000, or 2% of total revenue, for the nine months ended December 31, 2002. The Companys barter and non-cash advertising constituted $325,000, or 1% of total revenue,
in the nine months ended December 31, 2001. The Company typically uses barter transactions to test prospective media/advertising purchases or sales campaigns with the anticipation of additional advertising business.



20



---

##### Table of Contents

COST OF SALES



|                              |  | Three months ended December 31, |       
|----------------------------- |  | ------------------------------- | ------
|                              |  | 2002                            |       
|                              |  | (in thousands)                  |       
|Cost of Sales                 |  |                                 |       
|Cost of Products and Services |  | $                               | 6,830 
|                              |  |                                 |       
|Total Cost of Goods Sold      |  | $                               | 6,830 
|                              |  |                                 |       
|                              | 
|                              |  | Nine months ended December 31,  |       
|                              |  | 2002                            |       
|                              |  | (in thousands)                  |       
|Cost of Sales                 |  |                                 |       
|Cost of Products and Services |  | $                               | 10,631
|                              |  |                                 |       
|Total Cost of Goods Sold      |  | $                               | 10,631
|                              |  |                                 |       



Cost of sales consists
primarily of the cost of products for the commerce offerings within the Products and Services segment, license agreements, shipping costs and credit card merchant fees.



During the current quarter, cost of sales increased 177% to $6.8 million, or 31% of total revenues, from $2.5 million or 24%
of total revenues in 2001. Cost of sales rose due to increased Products and Service segment revenues. For the nine months ended December 31, 2002, cost of goods sold increased 236% to $10.6 million from $3.2 million. The increase was due to the
launch of the Products and Services segment in the prior year. The Company expects total cost of revenues to increase as a percentage of revenues as the Products and Services segment continues its growth. Cost of sales may increase to as much as 25%
to 30% of overall revenues during fiscal year 2003.



OPERATING COSTS



Our operating costs were as follows for the years
indicated (dollars in thousands):



|                                        |  | Three months ended December 31, |       
|--------------------------------------- |  | ------------------------------- | ------
|                                        |  | 2002                            |       
|                                        |  | (in thousands)                  |       
|Operating costs                         |  |                                 |       
|Marketing and sales                     |  | $                               | 8,009 
|Product development                     |  |                                 | 3,276 
|General and administrataive             |  |                                 | 3,629 
|Amortization of other intangible assets |  |                                 | 324   
|                                        |  |                                 |       
|Total operating costs                   |  | $                               | 15,238
|                                        |  |                                 |       
|                                        | 
|                                        |  | Nine months ended December 31,  |       
|                                        |  | 2002                            |       
|                                        |  | (in thousands)                  |       
|Operating costs                         |  |                                 |       
|Marketing and sales                     |  | $                               | 14,878
|Product development                     |  |                                 | 7,618 
|General and administrataive             |  |                                 | 8,357 
|Amortization of other intangible assets |  |                                 | 835   
|                                        |  |                                 |       
|Total operating costs                   |  | $                               | 31,688
|                                        |  |                                 |       



21



---

##### Table of Contents

MARKETING AND SALES



Marketing and sales costs consist primarily of media purchases, promotional and advertising costs, personnel costs, commissions, agency and consulting
fees, and allocated overhead for facilities and other costs. The Company has a direct sales force that sells our inventory of advertisements to advertisers and advertising agencies.



Marketing and sales costs increased by 519% to $8 million, or 36% of total revenues, for the current quarter, from $1.3
million, or 13% of total revenues, for the comparable quarter last year. Marketing and sales costs for the nine months ended December 2002 increased by 216% to $14.9 million, or 34% of total revenues, compared to $4.7 million or 22% of total
revenues for the comparable period last year. The $6.7 million and $10.2 million increases for the current quarter and nine month period, respectively, were due to increased media purchases and marketing employees. The increase in media expense was
a means to more fully expand the marketing reach to new customers, and increase revenues and profits outside of the eUniverse network of websites. The increase in marketing staff was to support new product and service categories and to identify and
develop new or enhance existing products and services. Media expense was $5.6 million and $9.5 million for the quarter and nine months ended December 31, 2002, respectively. Overall media increased to 22% as a percentage of revenues in the nine
month period from 8% for the same period last year. Salaries increased $1.5 million in the nine month period due to increased hiring while salaries declined slightly as a percentage of revenues. The remaining increase was composed of additional
consulting expense, facility costs, bad debts expense and public relations.



During the remainder of fiscal year 2003, the Company plans to continue to expand its direct sales, marketing and customer care teams to identify new product and service offerings, increase customer loyalty and drive
revenue growth. The Company intends to continue to increase the number of paying consumers and enhance the lifetime value of each consumer and advertiser relationship. Excluding media purchases, the Company expects that sales and marketing costs
will increase in absolute terms but will continue to decline as a percentage of overall revenue. However, media purchases are expected to increase as a percentage of revenues during fiscal year 2004. Such purchases will continue as a means for the
Company to expand its advertising reach, optimize revenues and profitability and further develop its core paying customer base.



PRODUCT DEVELOPMENT



Product development expenses consist of payroll and related expenses, Web hosting, consulting services and allocated overhead costs for the following: (1)
developing and maintaining the Companys websites, (2) developing and maintaining key proprietary technology, and (3) developing proprietary products and services.



Product and development costs increased by 78% to $3.3 million, or 15% of total revenues, for the current quarter, from $1.8
million, or 18% of total revenues, for the comparable quarter in the prior year. Product and development costs increased by 64% to $7.6 million or 17% of total revenues for the nine months ended December 31, 2002, from $4.7 million or 21% for the
same period in 2001. The increases of $1.4 million and $3 million for the quarter and the nine month periods, respectively were primarily due to increased staff and related salaries, benefits and consulting costs. The increase in staff and
consulting was to support increased technology, database and content development related to an increase in new products and services. Internet hosting fees were slightly lower in the nine month period. Salaries and related costs increased $2.3
million in the current year nine month period.



Management
anticipates that product development will continue to increase in absolute terms with development of new or expansion of existing product and service categories, but decline as a percentage of revenue as the Company leverages its technology and
content development processes.



GENERAL AND ADMINISTRATIVE



General and administrative expenses consist of payroll and related
expenses for executive, finance, legal, human resources and administrative personnel; recruiting; outside legal and other professional fees; and other general corporate expenses.



General and administrative costs increased by 61% to $3.6 million, or 17% of total revenues, for the current quarter, from
$2.3 million, or 22% of total revenues, for fiscal year 2001. For the nine months ended December 31, 2002, these costs increased by 54% from $5.4 million to $8.4 million for the comparable period last year. The $1.4 million and $2.9 million
increases for the quarter and nine month periods were due to growth in the number of management, legal and finance personnel, expansion of facilities and computer systems, and an increase in legal and accounting services to support the growth of
Company operations and infrastructure.



Specific increases for
the nine months ended December 31, 2002 compared to the same period last year include payroll and related of $0.8 million, and depreciation of $0.6 million. The remainder was due to facility and lease expenses and various royalty and license
expenses. Overall, general and administrative fees declined as a percentage of revenues.



For the remainder of fiscal year 2003, the Company anticipates that general and administrative costs will decline as a percentage of revenues as the business obtains further economies of scale in this area.



22



---

##### Table of Contents

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS



The Company evaluates the purchased goodwill and other intangible assets for
potential impairment on an at least an annual basis or upon the occurrence of a material adverse event. Amortization of acquisition-related intangible assets for the quarter ending December 31, 2002 reflects the stock acquisition of Infobeat and the
asset acquisitions of FunnyGreetings, SpreadingJoy, VIZX, FunOne, Send4Fun, Colorgenics, ResponseBase and other websites and customer name lists.



INTEREST AND OTHER INCOME AND OTHER NON-OPERATING EXPENSE



|                                   |  | Three Months ended December 31, |      
|---------------------------------- |  | ------------------------------- | -----
|                                   |  | 2002                            |      
|                                   |  | (in thousands)                  |      
|Interest income                    |  | $                               | 14   
|Interest and other financing costs |  |                                 | (286 
|Other losses                       |  |                                 | (104 
|                                   | 
|                                   |  | Nine Months ended December 31,  |      
|                                   |  | 2002                            |      
|                                   |  | (in thousands)                  |      
|Interest income                    |  | $                               | 45   
|Interest and other financing costs |  |                                 | (873 
|Cancellation of stock options      |  |                                 | (452 
|Gain on extinguishment of debt     |  |                                 | 1,269
|Other gains                        |  |                                 | 8    

---

|* |  | Not meaningful
|- |  | --------------



Interest and financing expense increased by 38% to $286 thousand in the current quarter from $207 thousand for the same period in 2001. The expense
includes interest on the 550 Digital Media Ventures (Sony), capital lease obligations and notes to certain website developers.



The Company paid approximately $452 thousand to various stock option holders for the cancellation of approximately 925 thousand options.



During the quarter ended June 30, 2002, the Company entered an agreement for
the early retirement of approximately $1.7 million of long-term notes payable, resulting in a gain on extinguishments of debt of $1,269,000.



INCOME TAXES



Due to net operating loss carry forwards resulting from cumulative operating losses, the Company had not recorded a provision for income taxes in the
quarters ended December 31, 2002 and 2001. As of March 31, 2002, the balance of net deferred tax assets was $8.6 million. Utilization of the Companys net operating loss carry forwards, which begins to expire in 2020, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding recovery of the deferred tax assets, the Company has provided a valuation allowance on the deferred tax asset in an amount necessary to
reduce the net deferred tax asset to zero.



LIQUIDITY AND CAPITAL RESOURCES



Liquidity and Capital Resources



Since its inception in April 14, 1999, the Company has satisfied its cash
requirements from a combination of private placements of equity securities, short-term and long-term debt and cash from operations.



For the nine months ended December 31,2002, net cash generated from operating activities was $2.8 million compared to 4.9 million for the nine months
ended December 31, 2001 due to a decrease in current year net income compared to last year.



Net operating cash flows for the nine months ended December 31, 2002 consisted of $1.6 million of net income, non-cash expenses, including depreciation and amortization of $1.6 million, bad debt expense of $0.6
million, and a decrease in current liabilities of $2.5 million. These sources of operating cash flow were partially offset by an increase in current assets of $2.4 million primarily due to holiday sales and prepaid marketing and inventory for the
AbKing and Yogabol joint ventures and by the non-cash gain from the retirement of debt for $1.3 million.



23



---

##### Table of Contents

Net operating cash flow for the nine months ended December 31, 2001 consists of $3.3 million of net
income, non-cash expenses for depreciation, amortization, warrant amortization and bad debts of $1.3 million, and an increase in current liabilities $1.0 million. These items were partially offset by an increase in current assets of $0.8 million.



Net cash used by investing activities was $6.5 million and $2
million for the nine months ended December 31, 2002 and 2001, respectively. The $6.5 million resulted from the $3.5 million acquisition of the certain assets of Response Base LLC, an online marketing company, $1 million for computer hardware,
software and other fixed assets, $0.7 million for customer and email lists and other intangible assets, and $1.2 million for the deposits required for equipment and facilities leases. During the nine months ended December 31, 2001, the $2 million
used in investing activities resulted from the purchase of subscriber databases for $0.9 million, websites and related assets of $0.7 million and computer hardware and software of $0.4 million.



Net cash provided by financing activities was $1.4 million and $4.6 million
for the nine months ended December 31, 2002 and 2001 respectively. The $1.4 million in the current period resulted from proceeds from capitalized leases of $2 million and proceeds from exercise of stock options of $0.7 million. Theses items were
offset by repayment of long-term notes and leases of $1.2 million. Net cash provided by financing activities of $4.6 million for the nine months ended December 31, 2001 resulted from proceeds of the sale of $5 million of Preferred Series B stock to
550 Digital Media Ventures, an indirect subsidiary of Sony, and proceeds from capitalized leases of $2.6 million partially offset by repayment of short-term and long-term obligations of $3 million.



As of December 31, 2002, the Company had no off-balance sheet financing
arrangements or undisclosed liabilities related to special purpose, related party or unconsolidated entities.



Management of the Company believes that current cash on hand, together with net cash generated from operations, will provide sufficient working capital
for the next 12 months. However, the Company will continue to seek financing for certain equipment purchases and other fixed asset acquisitions. Additionally, for certain acquisitions and other investments the Company may seek additional financing
from private debt or equity placements.



Contractual Obligations



We have an outstanding note payable with an
affiliate, as well as various non-affiliated notes payables, maturing at various dates through March 2005. We lease facilities and equipment under various capital and operating lease agreements with various terms and conditions, expiring at various
dates through 2007.



Our material contractual obligations at
December 31, 2002 are as follow (in thousands):



|                                                                   |  | Payments Due by Period
|------------------------------------------------------------------ |  | ----------------------
|Contractual Obligations                                            |  | TotalAmountsCommitted 
|8% Convertible Note payable for acquisition of Debs Fun Pages     |  | $                     
|8% Convertible Note payable for acquisition of Fun Page Land       |  |                       
|Note payable for acquisition of Funbug.com                         |  |                       
|Note payable for acquisition of Funnygreetings.com                 |  |                       
|Note payable with interest accruing at prime plus 2% (Sony)        |  |                       
|Note payable with effective rate of 9.7% (SFX Entertainment, Inc.) |  |                       
|Capital lease obligations                                          |  |                       
|Operating lease obligations                                        |  |                       
|                                                                   |  |                       
|Total contractual obligations                                      |  | $                     
|                                                                   |  |                       



|Item  4. |  | Controls and Procedures
|-------- |  | -----------------------



Overview



On August 22, 2003, the Company restated its previously reported quarterly financial results for the first three quarters of fiscal year 2003 because of
accounting errors it had previously identified in the Companys financial statements. As a result of the discovery of the accounting errors, management initiated an internal review of its accounting records and its accounting policies and
procedures. In an effort to identify the extent of the accounting errors, and to identify any deficiencies in the Companys system of controls, management significantly expanded its accounting and finance staff and retained an outside
accounting firm to assist in the process. In addition, the Companys Board of Directors directed the Audit Committee to explore the facts and circumstances giving rise to the restatement as well as to evaluate the Companys accounting
practices, policies and procedures. To assist with the Audit Committee review, the Audit Committee engaged the law firm of Foley & Lardner.



24



---

##### Table of Contents

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



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



| |  |  | a significant expansion of the resources of the accounting department, nearly doubling the staff size and replacing all accounting personnel with individuals of greater experience;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the replacement of the leadership of the department with a new controller who has experience with the challenges of system and business scaling;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the appointment of Lawrence R. Moreau, a Certified Public Accountant, to the Companys Board of Directors and to serve as the Audit Committee Chair; and,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the appointment of Thomas J. Flahie, our Chief Financial Officer, to fill the vacancy resulting from the departure of Joseph Varraveto, who resigned effective August 19, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the segregation of accounting duties;
| | - |  | -------------------------------------



| |  |  | the reconciliation of all material balance sheet accounts;
| | - |  | ----------------------------------------------------------



| |  |  | reorganizing and upgrading its accounting systems and processes and the storing of backup data;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | requiring enhanced levels of authorization for transactions;
| | - |  | ------------------------------------------------------------



| |  |  | limiting access to various accounting modules;
| | - |  | ----------------------------------------------



| |  |  | improving the processing of transactional documentation;
| | - |  | --------------------------------------------------------



| |  |  | augmenting cash management controls;
| | - |  | ------------------------------------



| |  |  | enhancing inventory controls;
| | - |  | -----------------------------



| |  |  | redesigning the sales order process;
| | - |  | ------------------------------------



| |  |  | creation of a process for documenting accounting policies and procedures at the time of implementation.
| | - |  | -------------------------------------------------------------------------------------------------------



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



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



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



Evaluation of Disclosure Controls and Procedures



Our management, including our Principal Executive Officer and our Chief Financial Officer, does not expect that our
disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



25



---

##### Table of Contents

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



Based in part on the foregoing, the Companys Principal Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, December 31, 2003, our disclosure controls and procedures were not effective to ensure that information the Company is required to disclose
in the reports that it files with the Securities and Exchange Commission was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



However, based upon an evaluation conducted prior to the filing of this
report, on October 10, 2003, including an evaluation of the supplemental controls and the other changes to the Companys organization and controls implemented to date, the Companys Principal Executive Officer and Chief Financial Officer
have concluded that, as of October 10, 2003 the Companys disclosure controls and procedures are effective to ensure that information the Company is required to disclose in reports that it files with the Securities and Exchange Commission, for
periods ending subsequent to June 30, 2003, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



Changes to Internal Control Over Financial Reporting



The changes to the Companys internal controls identified above are intended, and have been undertaken by the Company,
to enhance the effectiveness of the Companys internal control procedures. These steps constitute significant changes in internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and
procedures and internal control over financial reporting on an ongoing basis, and will take further action as appropriate.



26



---

##### Table of Contents

SIGNATURE



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



|                         |  |  |  |    |  | eUNIVERSE, INC. Registrant
|------------------------ |  |  |  | -- |  | --------------------------
|                         |  |  | 
|Dated:  October 30, 2003 |  |  |  | By |  | /s/  Thomas J. Flahie     
|                         |  |  |  |    |  |                           
|                         |  |  |  |    |  |                           
|                         |  |  |  |    |  |                           



27