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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



Or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to
 .





Commission File No. 000-26355



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Intermix Media, Inc.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 06-1556248                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



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

(310) 215-1001

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



eUniverse, Inc.

(Former
Name)



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

None



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

Common Stock, par value $.0001 per share



---



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No ̈



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



As of August 12, 2004, there were 28,945,000 shares of the Registrants common stock, par value $0.001 outstanding.



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##### Table of Contents

Intermix Media, Inc.



Form 10-Q

For the Three Months Ended June 30, 2004



INDEX



|                              |  |                                                                                       |  |                                                                                   |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                      
|                              |  |                                                                                       |  | Page                                                                             
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  | 3                                                                                
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Consolidated Balance Sheets  June 30, 2004 and March 31, 2004                    |  | 3   
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Consolidated Statements of Operations  Three months ended June 30, 2004 and 2003 |  | 4   
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Consolidated Statements of Cash Flows  Three months ended June 30, 2004 and 2003 |  | 5   
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Notes to Consolidated Financial Statements  June 30, 2004                        |  | 6-17
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18-36                                                                            
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 36                                                                               
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 36-37                                                                            
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 37                                                                               
|                              |  |                                                                                      
|Item 2.                       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 37                                                                               
|                              |  |                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 37                                                                               
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 37                                                                               
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 37                                                                               
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 38                                                                               
|                              | 
|Signatures                    |  | 39                                                                                   



2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements



Intermix Media, Inc.



Consolidated Balance Sheets

(In thousands, except par value data - unaudited)



|                                                                                                                         |  |               |         |   |                |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                         |  | June 30, 2004 |         |   | March 31, 2004 |  
|Assets                                                                                                                   |  |               |         |   |                |   |         |  
|Current assets:                                                                                                          |  |               |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                |  | $             | 3,765   |   |                | $ | 6,245   |  
|Restricted cash                                                                                                          |  |               | 1,311   |   |                |   | 2,116   |  
|Accounts receivable, net                                                                                                 |  |               | 4,078   |   |                |   | 3,901   |  
|Inventories, net                                                                                                         |  |               | 2,606   |   |                |   | 1,168   |  
|Net assets of SkillJam held for sale                                                                                     |  |               | 12      |   |                |   | 102     |  
|Prepaid expenses and other assets                                                                                        |  |               | 4,190   |   |                |   | 3,136   |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total current assets                                                                                                     |  |               | 15,962  |   |                |   | 16,668  |  
|Property and equipment, net                                                                                              |  |               | 2,651   |   |                |   | 2,454   |  
|Goodwill                                                                                                                 |  |               | 14,882  |   |                |   | 14,882  |  
|Other intangible assets, net                                                                                             |  |               | 2,270   |   |                |   | 2,520   |  
|Deposits and other assets                                                                                                |  |               | 999     |   |                |   | 974     |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total assets                                                                                                             |  | $             | 36,764  |   |                | $ | 37,498  |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Liabilities and Stockholders Equity                                                                                     |  |               |         |   |                |   |         |  
|Current liabilities:                                                                                                     |  |               |         |   |                |   |         |  
|Accounts payable                                                                                                         |  | $             | 6,178   |   |                | $ | 5,793   |  
|Accrued expenses                                                                                                         |  |               | 2,722   |   |                |   | 3,317   |  
|Deferred revenue                                                                                                         |  |               | 715     |   |                |   | 892     |  
|Current portion of debt obligations                                                                                      |  |               | 5,012   |   |                |   | 5,224   |  
|Current portion of capitalized lease obligations                                                                         |  |               | 237     |   |                |   | 489     |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total current liabilities                                                                                                |  |               | 14,864  |   |                |   | 15,715  |  
|Capitalized lease obligations, less current portion                                                                      |  |               | 20      |   |                |   | 33      |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total liabilities                                                                                                        |  |               | 14,884  |   |                |   | 15,748  |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Stockholders equity:                                                                                                    |  |               |         |   |                |   |         |  
|Preferred stock, $0.10 par value; 40,000 shares authorized; 7,607 and 7,627 shares issued and outstanding, respectively  |  |               | 761     |   |                |   | 763     |  
|Common stock, $0.001 par value; 250,000 shares authorized; 28,945 and 28,819 shares issued and outstanding, respectively |  |               | 29      |   |                |   | 29      |  
|Additional paid-in capital                                                                                               |  |               | 82,339  |   |                |   | 82,178  |  
|Accumulated deficit                                                                                                      |  |               | (61,249 | ) |                |   | (61,220 | )
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total stockholders equity                                                                                               |  |               | 21,880  |   |                |   | 21,750  |  
|                                                                                                                         |  |               |         |   |                |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $             | 36,764  |   |                | $ | 37,498  |  
|                                                                                                                         |  |               |         |   |                |   |         |  



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

Intermix Media, Inc.



Consolidated Statements of Operations

(In thousands, except per share data - unaudited)



|                                                                |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Three Months Ended June 30, |       
|                                                                |  | 2004                        |        |   | 2003 |  
|Revenues                                                        |  | $                           | 16,747 |   |      | $ | 13,003 |  
|Cost of revenues                                                |  |                             | 3,993  |   |      |   | 3,443  |  
|                                                                |  |                             |        |   |      |   |        |  
|Gross profit                                                    |  |                             | 12,754 |   |      |   | 9,560  |  
|                                                                |  |                             |        |   |      |   |        |  
|Operating expenses:                                             |  |                             |        |   |      |   |        |  
|Marketing and sales                                             |  |                             | 6,539  |   |      |   | 6,028  |  
|Product development                                             |  |                             | 1,633  |   |      |   | 1,525  |  
|General and administrative                                      |  |                             | 4,324  |   |      |   | 3,911  |  
|Restatement professional fees                                   |  |                             | (337   | ) |      |   | 962    |  
|Amortization of other intangible assets                         |  |                             | 267    |   |      |   | 320    |  
|                                                                |  |                             |        |   |      |   |        |  
|Total operating expenses                                        |  |                             | 12,426 |   |      |   | 12,746 |  
|                                                                |  |                             |        |   |      |   |        |  
|Operating income (loss)                                         |  |                             | 328    |   |      |   | (3,186 | )
|Interest expense, net                                           |  |                             | (89    | ) |      |   | (85    | )
|                                                                |  |                             |        |   |      |   |        |  
|Income (loss) from continuing operations before income taxes    |  |                             | 239    |   |      |   | (3,271 | )
|Income taxes                                                    |  |                             | (5     | ) |      |   |       |  
|                                                                |  |                             |        |   |      |   |        |  
|Income (loss) from continuing operations                        |  |                             | 234    |   |      |   | (3,271 | )
|Income (loss) from discontinued operations, net of income taxes |  |                             | (104   | ) |      |   | 223    |  
|                                                                |  |                             |        |   |      |   |        |  
|Net income (loss)                                               |  |                             | 130    |   |      |   | (3,048 | )
|Preferred stock dividends and liquidation preference            |  |                             | (170   | ) |      |   | (17    | )
|                                                                |  |                             |        |   |      |   |        |  
|Loss to common stockholders                                     |  | $                           | (40    | ) |      | $ | (3,065 | )
|                                                                |  |                             |        |   |      |   |        |  
|Income (loss) per common share:                                 |  |                             |        |   |      |   |        |  
|Continuing operations                                           |  | $                           |       |   |      | $ | (0.13  | )
|Discontinued operations                                         |  |                             |       |   |      |   | 0.01   |  
|                                                                |  |                             |        |   |      |   |        |  
|Basic income (loss) per common share                            |  | $                           |       |   |      | $ | (0.12  | )
|                                                                |  |                             |        |   |      |   |        |  
|Diluted loss per common share                                   |  | $                           |       |   |      | $ | (0.12  | )
|                                                                |  |                             |        |   |      |   |        |  
|Basic weighted average common shares                            |  |                             | 28,853 |   |      |   | 26,505 |  
|                                                                |  |                             |        |   |      |   |        |  
|Diluted weighted average common shares                          |  |                             | 31,162 |   |      |   | 26,505 |  
|                                                                |  |                             |        |   |      |   |        |  



See Notes to
Consolidated Financial Statements



4



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Intermix Media, Inc.



Consolidated Statements of Cash Flows

(in thousands - unaudited)



|                                                                                     |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                     |  | Three Months Ended June 30, |       
|                                                                                     |  | 2004                        |        |   | 2003 |  
|Operating activities:                                                                |  |                             |        |   |      |   |        |  
|Net income (loss)                                                                    |  | $                           | 130    |   |      | $ | (3,048 | )
|Net cash provided by (used in) discontinued operations                               |  |                             | 90     |   |      |   | (75    | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                             |        |   |      |   |        |  
|Depreciation and amortization of property and equipment                              |  |                             | 379    |   |      |   | 420    |  
|Amortization of other intangible assets                                              |  |                             | 267    |   |      |   | 320    |  
|Other non-cash charges                                                               |  |                             | 35     |   |      |   | 36     |  
|Provision (benefit) for doubtful accounts                                            |  |                             | (93    | ) |      |   | 505    |  
|Changes in other current assets                                                      |  |                             | (1,796 | ) |      |   | 122    |  
|Changes in current liabilities                                                       |  |                             | (337   | ) |      |   | (911   | )
|                                                                                     |  |                             |        |   |      |   |        |  
|Net cash used in operating activities                                                |  |                             | (1,325 | ) |      |   | (2,631 | )
|                                                                                     |  |                             |        |   |      |   |        |  
|Investing activities:                                                                |  |                             |        |   |      |   |        |  
|Purchases of property and equipment                                                  |  |                             | (584   | ) |      |   | (44    | )
|Purchases of other intangible assets                                                 |  |                             | (67    | ) |      |   |       |  
|Deposits and other                                                                   |  |                             |       |   |      |   | 262    |  
|                                                                                     |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                  |  |                             | (651   | ) |      |   | 218    |  
|                                                                                     |  |                             |        |   |      |   |        |  
|Financing activities:                                                                |  |                             |        |   |      |   |        |  
|Repayment of capital lease obligations                                               |  |                             | (292   | ) |      |   | (306   | )
|Repayment of debt obligations                                                        |  |                             | (212   | ) |      |   |       |  
|Proceeds from exercise of stock options                                              |  |                             |       |   |      |   | 157    |  
|                                                                                     |  |                             |        |   |      |   |        |  
|Net cash used in financing activities                                                |  |                             | (504   | ) |      |   | (149   | )
|                                                                                     |  |                             |        |   |      |   |        |  
|Change in cash and cash equivalents                                                  |  |                             | (2,480 | ) |      |   | (2,562 | )
|Cash and cash equivalents, beginning of period                                       |  |                             | 6,245  |   |      |   | 4,663  |  
|                                                                                     |  |                             |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                             |  | $                           | 3,765  |   |      | $ | 2,101  |  
|                                                                                     |  |                             |        |   |      |   |        |  
|Supplemental Cash Flow Information:                                                  |  |                             |        |   |      |   |        |  
|Cash paid for interest                                                               |  | $                           | 65     |   |      | $ | 37     |  
|Cash paid for income taxes                                                           |  |                             | 60     |   |      |   | 95     |  
|Equipment acquired under capital leases                                              |  |                             |       |   |      |   | 106    |  
|Preferred stock dividends                                                            |  |                             | 159    |   |      |   |       |  



See Notes to
Consolidated Financial Statements



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Intermix Media, Inc.



Notes to
Consolidated Financial Statements

(unaudited)



Note 1. The Company and Basis of Presentation



Intermix Media, Inc. (the Company, we or our), a Delaware Corporation, is an Internet
marketing company that offers external marketers a compelling group of entertainment and community-oriented Internet properties and markets and distributes a select group of products and services. The Company conducts operations from facilities
located in Los Angeles, California and Mount Vernon, Washington. These financial statements include the accounts of Intermix Media, Inc. and its majority owned subsidiaries. Inter-company transactions and balances have been eliminated in
consolidation. The Company changed its name from eUniverse, Inc. to Intermix Media, Inc. on July 15, 2004.



These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and
accruals necessary for the fair presentation of the consolidated balance sheets, operating results and cash flows for the periods presented. Operating results for the three months ended June 30, 2004 are not necessarily indicative of the results
that may be expected for the year ended March 31, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principals generally accepted in the United States of America have
been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes
included in our Annual Report on Form 10-K for the year ended March 31, 2004.



Note 2. Accounting Policies



Estimates and assumptions



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



Restricted cash and deposits



At June 30, 2004 and March 31, 2004, the Company had $1,311,000 and
$1,699,000, respectively of funds held by banks as reserves against any possible charge backs and returns on credit card transactions related to customer disputes that are not offset against the Companys daily sales deposit activity. These
amounts are reflected as restricted cash. The Company also had $635,000 and $1,051,000 in certificates of deposit at June 30, 2004 and March 31, 2004, respectively which collateralize lease obligations. At March 31, 2004, a $417,000 certificate of
deposit was classified as restricted cash and the remaining balances at June 30, 2004 and March 31, 2004 are classified as long-term deposits.



Allowance for doubtful accounts



The Company provides an allowance for doubtful accounts receivable by applying a reserve for all accounts receivable outstanding over 60 days based upon
historical experience and a specific reserve for accounts with a high likelihood of becoming uncollectible. Bad debt expense was ($93,000) for the first quarter of fiscal year 2005 and $505,000 for the first quarter of fiscal year 2004. The
allowance for doubtful accounts was $480,000 at June 30, 2004 and $710,000 at March 31, 2004.



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Prepaid expenses



In November 2003, a Company subsidiary signed application download and content distribution agreements with Sharman Networks, Ltd. The subsidiary agreed
to provide non-refundable cash advances to Sharman Networks that are recoupable against a sharing of revenues. The Company also issued Sharman Networks 500,000 shares of Company common stock. Sharman Networks is currently bundling one of the
Companys applications with other applications that are downloaded from the Internet with the Kazaa Media Desktop. Sharman Networks is also currently including channel links on the Kazaa Media Desktop to content provided by the Company. The
Company has guaranteed the obligations of the subsidiary. The unrecouped cash advances and the unamortized value of the common stock that are included in prepaid expenses at June 30, 2004 was $1,197,000 and at March 31, 2004 was $1,787,000.



Accrued expenses



Included in accrued expenses are $1,224,000 of accrued compensation at June
30, 2004 and $797,000 at March 31, 2004.



Revenues



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



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



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



Barter transactions are recorded at the lower of the estimated fair value of advertising received or the estimated fair value of the advertising given,
with the difference recorded as an advance or prepaid expense. Barter advertising expense is recorded in cost of revenues. During the first quarter of fiscal years 2005 and 2004, the Company recorded no bartered advertising revenue.



Stock-based compensation



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



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The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148
(SFAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure. The following table illustrates the effect on loss to common stockholders and income (loss) per share to common stockholders had the
Company applied the fair value recognition provisions of SFAS 148 to stock-based employee compensation (in thousands, except per share data):



|                                                                          |  |                             |       |   |      |   |        |  
|------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ------ | -
|                                                                          |  | Three Months Ended June 30, |      
|                                                                          |  | 2004                        |       |   | 2003 |  
|Loss to common stockholders:                                              |  |                             |       |   |      |   |        |  
|As reported                                                               |  | $                           | (40   | ) |      | $ | (3,065 | )
|Add stock-based compensation in loss to common stockholders               |  |                             |      |   |      |   |       |  
|Less stock-based compensation expense determined by the fair value method |  |                             | (620  | ) |      |   | (904   | )
|                                                                          |  |                             |       |   |      |   |        |  
|Pro forma loss to common stockholders                                     |  | $                           | (660  | ) |      | $ | (3,969 | )
|                                                                          |  |                             |       |   |      |   |        |  
|Income (loss) per share to common stockholders:                           |  |                             |       |   |      |   |        |  
|Basic  as reported                                                       |  | $                           |      |   |      | $ | (0.12  | )
|                                                                          |  |                             |       |   |      |   |        |  
|Basic  pro forma                                                         |  | $                           | (0.02 | ) |      | $ | (0.15  | )
|                                                                          |  |                             |       |   |      |   |        |  
|Diluted  as reported                                                     |  | $                           |      |   |      | $ | (0.12  | )
|                                                                          |  |                             |       |   |      |   |        |  
|Diluted  pro forma                                                       |  | $                           | (0.02 | ) |      | $ | (0.15  | )
|                                                                          |  |                             |       |   |      |   |        |  



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



|                        |  |                             |  |              
|----------------------- |  | --------------------------- |  | -------------
|                        |  | Three Months Ended June 30,
|                        |  | 2004                        |  | 2003         
|Expected volatility     |  | 86% - 134%                  |  | 86% -134%    
|Risk free interest rate |  | 2.33%-5.72%                 |  | 3.86% - 5.72%
|Expected lives          |  | 5 years                     |  | 5 years      
|Dividend rate           |  |                            |  |             



Advertising costs



Advertising costs, except for costs associated with direct-response
advertising, are charged to marketing and sales expense when incurred. Included in marketing and sales expense for the first quarter of fiscal years 2005 and 2004, were $3,853,000 and $3,048,000 of advertising and media space costs, respectively.
The costs of direct-response advertising are capitalized and amortized to cost of revenues over the period future benefits are expected to be received. Included in discontinued operations for the first quarter of fiscal year 2004 is $760,000 of
direct response advertising costs. There were no direct response advertising costs included in discontinued operations in the first quarter of fiscal year 2005.



Discontinued operations



In April 2004, we decided to sell the assets of our SkillJam business unit. We reclassified the revenues and expenses of this business unit to
discontinued operations and we reclassified the balance sheet

of this business unit to net assets of SkillJam held for sale. This business unit had
$1,139,000 in revenues and $1,243,000 in costs and expenses in the first quarter of fiscal year 2005 and $919,000 in revenues and $872,000 in costs and expenses in the first quarter of fiscal year 2004.



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##### Table of Contents

In the fourth quarter of fiscal year 2004, we sold the assets of the Body Dome product line. This product
line had $1,914,000 in revenues and $1,738,000 in costs and expenses in the first quarter of fiscal year 2004.



We sold the SkillJam business unit to CES Software PLC on July 30, 2004. The sale proceeds were $8 million and we realized a $4.6 million gain on sale of
assets, net of income taxes. We paid off a related $1.2 million acquisition earn out obligation to a company owned by two employees. A one year, $1 million escrow was established for certain indemnification obligations and we will record up to an
additional $1 million gain on sale depending on the resolution of the indemnification obligations. In addition, we will receive a percentage of the net revenue from the sale of the SkillJam technology to the buyers European customers over five
years. We have agreed to indemnify CES Software for certain contingent obligations up to the amount of the sale proceeds. We believe this contingency to be remote.



Income per share



Basic income per share is computed as net income (loss) less accretion of the Series A preferred stock and stock dividends on Series C preferred stock
divided by the weighted average number of outstanding common shares during the period. Diluted income per share gives effect to all potentially dilutive common shares outstanding during the period. The computation of diluted income per share does
not assume the conversion or exercise of securities that would have an anti-dilutive effect. For the first quarter of fiscal year 2005, 2,757,000 stock options, 30,000 stock purchase warrants, 5,892,000 shares of Series A and C preferred stock and
1,250,000 shares issuable upon exercise of convertible debt were excluded from the computation of diluted income per share because their effect is anti-dilutive. For the first quarter of fiscal year 2004, 5,430,000 stock options, 108,000 stock
purchase warrants and 2,313,000 shares of Series A and B preferred stock were excluded from the computation of diluted income per share because their effect is anti-dilutive.



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



|                                                       |  |                             |        |   |      |   |        |  
|------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                       |  | Three Months Ended June 30, |       
|                                                       |  | 2004                        |        |   | 2003 |  
|Income (loss) from continuing operations               |  | $                           | 234    |   |      | $ | (3,271 | )
|Preferred stock dividends and liquidation preference   |  |                             | (170   | ) |      |   | (17    | )
|                                                       |  |                             |        |   |      |   |        |  
|Income (loss) available to common stockholders  basic |  |                             | 64     |   |      |   | (3,288 | )
|Income (loss) from discontinued operations             |  |                             | (104   | ) |      |   | 223    |  
|                                                       |  |                             |        |   |      |   |        |  
|Loss available to common stockholders - diluted        |  | $                           | (40    | ) |      | $ | (3,065 | )
|                                                       |  |                             |        |   |      |   |        |  
|Basic weighted average common shares                   |  |                             | 28,853 |   |      |   | 26,505 |  
|Conversion of Series B preferred stock                 |  |                             | 1,889  |   |      |   |       |  
|Exercise of stock options                              |  |                             | 382    |   |      |   |       |  
|Exercise of stock purchase warrants                    |  |                             | 38     |   |      |   |       |  
|                                                       |  |                             |        |   |      |   |        |  
|Diluted weighted average common shares                 |  |                             | 31,162 |   |      |   | 26,505 |  
|                                                       |  |                             |        |   |      |   |        |  
|Income (loss) per common share:                        |  |                             |        |   |      |   |        |  
|Continuing operations                                  |  | $                           |       |   |      | $ | (0.13  | )
|Discontinued operations                                |  |                             |       |   |      |   | 0.01   |  
|                                                       |  |                             |        |   |      |   |        |  
|Basic income (loss) per common share                   |  | $                           |       |   |      | $ | (0.12  | )
|                                                       |  |                             |        |   |      |   |        |  
|Diluted loss per common share                          |  | $                           |       |   |      | $ | (0.12  | )
|                                                       |  |                             |        |   |      |   |        |  



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Reclassifications



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



Note 3. Property and Equipment



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



|                                                |  |              |        |   |               |   |        |  
|----------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | -
|                                                |  | June 30,2004 |        |   | March 31,2004 |  
|Furniture and fixtures                          |  | $            | 75     |   |               | $ | 75     |  
|Computers and equipment                         |  |              | 3,117  |   |               |   | 2,656  |  
|Equipment under capital leases                  |  |              | 1,255  |   |               |   | 2,495  |  
|Leasehold improvements                          |  |              | 29     |   |               |   | 19     |  
|Purchased software                              |  |              | 858    |   |               |   | 752    |  
|                                                |  |              |        |   |               |   |        |  
|                                                |  |              | 5,334  |   |               |   | 5,997  |  
|Less: accumulated depreciation and amortization |  |              | (2,683 | ) |               |   | (3,543 | )
|                                                |  |              |        |   |               |   |        |  
|                                                |  | $            | 2,651  |   |               | $ | 2,454  |  
|                                                |  |              |        |   |               |   |        |  



Depreciation and
amortization expense was $379,000 for the first quarter of fiscal year 2005 and $420,000 for the first quarter of fiscal year 2004.



Note 4. Goodwill and Other Intangible Assets



The net carrying value of goodwill and other intangible assets was $17,152,000 as of June 30, 2004 and $17,402,000 as of March 31, 2004. We assess the
potential impairment of goodwill and other intangible assets with indefinite lives in our fourth quarter or whenever events or circumstances suggest that the carrying amount may not be recoverable. We assess the potential impairment of intangible
assets with definite lives whenever events or circumstances suggest that the carrying amount may not be recoverable. If the carrying value exceeds fair value, an impairment loss is recognized for the excess. Fair value is determined based on the
estimated future cash inflows on a discounted basis attributable to the asset less estimated future cash outflows on a discounted basis. The assessment of the potential impairment of goodwill and other intangible assets requires significant judgment
and estimates. No indicators of impairment were identified in the first quarter of fiscal years 2005 or 2004.



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



|                               |  |              |        |   |               |   |        |  
|------------------------------ |  | ------------ | ------ | - | ------------- | - | ------ | -
|                               |  | June 30,2004 |        |   | March 31,2004 |  
|Customer lists                 |  | $            | 2,243  |   |               | $ | 2,243  |  
|Domain names                   |  |              | 1,742  |   |               |   | 1,700  |  
|License agreements             |  |              | 315    |   |               |   | 315    |  
|Websites                       |  |              | 1,210  |   |               |   | 1,210  |  
|Other                          |  |              | 659    |   |               |   | 684    |  
|                               |  |              |        |   |               |   |        |  
|                               |  |              | 6,169  |   |               |   | 6,152  |  
|Less: accumulated amortization |  |              | (3,899 | ) |               |   | (3,632 | )
|                               |  |              |        |   |               |   |        |  
|                               |  | $            | 2,270  |   |               | $ | 2,520  |  
|                               |  |              |        |   |               |   |        |  



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Amortization expense for other intangible assets was $267,000 for the first quarter of fiscal 2005 and
$320,000 for the first quarter of fiscal 2004. Amortization expense for other intangible assets for future years ending March 31 is as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|2005 (remaining nine months) |  | $ | 724  
|2006                         |  |   | 782  
|2007                         |  |   | 370  
|2008                         |  |   | 202  
|Thereafter                   |  |   | 192  
|                             |  |   |      
|                             |  | $ | 2,270
|                             |  |   |      



Note 5. Debt Obligations and
Capital Leases



Debt obligations consist of the following
(in thousands):



|                                           |  |              |        |   |               |   |        |  
|------------------------------------------ |  | ------------ | ------ | - | ------------- | - | ------ | -
|                                           |  | June 30,2004 |        |   | March 31,2004 |  
|550 Digital Media Ventures  Affiliate (1) |  | $            | 2,404  |   |               | $ | 2,404  |  
|VantagePoint  Affiliate (2)               |  |              | 2,500  |   |               |   | 2,500  |  
|SFX Entertainment, Inc. (3)                |  |              | 108    |   |               |   | 320    |  
|                                           |  |              |        |   |               |   |        |  
|                                           |  |              | 5,012  |   |               |   | 5,224  |  
|Less: current portion of debt obligations  |  |              | (5,012 | ) |               |   | (5,224 | )
|                                           |  |              |        |   |               |   |        |  
|                                           |  | $            |       |   |               | $ |       |  
|                                           |  |              |        |   |               |   |        |  

---

|(1) | 550 Digital Media Ventures, Inc. (550 DMV) is an indirect subsidiary of Sony Corporation of America. The due date of the principal and interest on this note is March 31,
2005. This note bears interest at prime plus 2%, is collateralized by a security interest in the Companys assets and is convertible into Series B preferred stock after March 31, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In July 2003, an affiliate of VantagePoint Venture Partners (along with its
other affiliates VantagePoint) acquired an option from 550 DMV, to purchase 3,050,000 shares of Company common stock and 1,750,000 shares of Company Series B preferred stock. Under the terms of the option, 550 DMV would retain the right
to receive a portion of the profit from the resale of those securities by VantagePoint under certain circumstances. In October 2003, VantagePoint partially exercised the option and purchased 454,545 shares of Series B preferred stock from 550 DMV.
In April 2004, VantagePoint exercised the remainder of the option. At that time, VantagePoint also negotiated the right to purchase the $2.4 million convertible note of the Company from 550 DMV for $1.8 million and 550 DMV agreed to waive its
participation in the profit from the resale of the option shares acquired by VantagePoint if VantagePoint purchased the note. In connection with the Companys sale of the SkillJam assets in July 2004, the Company secured from VantagePoint, and
VantagePoint assigned to the Company for no consideration, its right to purchase the 550 DMV note and the Company repurchased the note for $1.8 million and realized a $628,000 gain on debt extinguishment. The security interest in the Companys
assets was terminated when the note was repaid.



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##### Table of Contents

|(2) | The note bears interest at 8%, is collateralized by a security interest in all of the Companys assets and is due October 31, 2004. VantagePoint may convert the note into
Series C-1 preferred stock, at the rate of one share for each $2.00 of principal. This note must either be converted into Series C-1 preferred stock or repaid by October 31, 2004, as determined by VantagePoint.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Principal and interest payments are due through August 2004 and the note has an effective interest rate of 9.7%. This note is collateralized by 2,600,000 shares of the
Companys common stock owned by the Companys former Chairman and Chief Executive Officer.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                                   |  |   |      |  
|-------------------------------------------------- |  | - | ---- | -
|2005 (remaining nine months)                       |  | $ | 230  |  
|2006                                               |  |   | 24   |  
|Thereafter                                         |  |   | 10   |  
|                                                   |  |   |      |  
|Total minimum lease payments                       |  |   | 264  |  
|Less: amounts representing interest                |  |   | (7   | )
|                                                   |  |   |      |  
|Present value of net minimum lease payments        |  |   | 257  |  
|Less: current portion of capital lease obligations |  |   | (237 | )
|                                                   |  |   |      |  
|Long-term obligations under capital leases         |  | $ | 20   |  
|                                                   |  |   |      |  



Equipment with a cost
of $1,255,000 at June 30, 2004 is collateral for the capital lease obligations.



Note 6. Commitments and Contingencies



Operating leases



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



|                             |  |   |      
|---------------------------- |  | - | -----
|2005 (remaining nine months) |  | $ | 775  
|2006                         |  |   | 714  
|                             |  |   |      
|Total                        |  | $ | 1,489
|                             |  |   |      



Rent expense was
$285,000 in the first quarter of fiscal year 2005 and $303,000 in the first quarter of fiscal year 2004.



Accounting restatement



In fiscal year 2004, the Company restated previously reported quarterly financial results for the first three quarters of fiscal year 2003 because of accounting errors it had identified in the Companys financial statements. The NASDAQ
Listing Qualifications Hearings Panel (the Panel) decided to delist the Companys securities from The NASDAQ SmallCap Market on September 2, 2003. The Company appealed the Panels decision and on March 15, 2004, the Panel
decided to not re-list the Companys common stock on The NASDAQ SmallCap Market. The Company then appealed the Panels decision. We recently dropped the appeal and we are exploring other national listing options.



12



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##### Table of Contents

Legal proceedings



As previously reported, on May 13, 2003 SoftwareOnline.com, Inc., a Washington corporation with its principal place of business in King County, Washington
(SoftwareOnline), filed a complaint against the Company in the United States District Court for the Western District of Washington at Seattle. SoftwareOnline alleged breach of a nondisclosure agreement and misappropriation of trade
secrets and trade dress related to the Companys online marketing and sales of downloadable software. The parties have reached a mediated settlement of this matter which the Company does not believe will have a material adverse effect on the
Company.



As previously reported, on January 31, 2003 Arcade
Planet, Inc. (Arcade Planet), a California corporation, filed a patent infringement complaint against the Company in the United States District Court for the District of Nevada. The complaint filed by Arcade Planet alleges that online
skill-based gaming services offered by the Company infringes a patent held by Arcade Planet entitled the 918 Patent. The complaint seeks to prevent future infringement of the 918 Patent and compensation for lost profits or royalty
damages. On April 9, 2003, the Company filed an answer denying Arcade Planets allegations and seeking declaratory judgment from the Court that the Company has not infringed the 918 Patent and that the claims of the 918 Patent are invalid and
unenforceable. On July 18, 2003, the Court stayed this action until the United States Patent and Trademark Office reexamines a substantial new question of patentability affecting certain claims underlying the 918 Patent. The Company disputes Arcade
Planets claims, believes that they are without merit and will vigorously defend itself in this matter. There have been no material developments in this matter since the Companys last report.



As previously reported, on October 14, 2003, several purported stockholder
class action lawsuits previously filed against the Company and several current and former Company officers and/or employees in the United States District Court for the Central District of California were consolidated into one action and lead counsel
and plaintiff were appointed (the Securities Litigation). The Securities Litigation arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and includes allegations of, among other things,
intentionally false and misleading statements regarding the Companys business prospects, financial condition and performance. On December 17, 2003, plaintiffs in the Securities Litigation filed their amended and consolidated class action
complaint reiterating those allegations and also naming the Companys former auditor as an additional defendant. The Company and other defendants filed motions to dismiss the lawsuit for, among other things, the failure of the complaint to
state a valid claim for violation of securities laws. On June 9, 2004, the Court granted the Companys and other defendants motions to dismiss the lawsuit and plaintiffs were permitted to file an amended complaint. On July 15, 2004, the
Securities Litigation was stayed until October 13, 2004, in order to attempt a mediated settlement of the claims asserted in the matter.



Also as previously reported, two purported stockholder derivative actions, which are substantially similar, are pending against various current and former
Company directors, officers, and/or employees. One of the actions is pending in the United States District Court for the Central District of California and the other, formerly two actions which have been consolidated, is pending in the Superior
Court of California for the County of Los Angeles (collectively, the Derivative Litigation). The Derivative Litigation similarly arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and
includes claims of breach of fiduciary duty in connection with the restatement and in connection with allegedly improper insider sales of Company stock by one officer and one former Company employee. On January 12, 2004, the Company filed a motion
to dismiss plaintiffs consolidated derivative complaint in the State Court derivative action on the grounds, among others, that plaintiffs have not pled, and will not be able to plead, facts sufficient to demonstrate that demand on the
Companys Board of Directors would have been futile. On April 27, 2004, the Companys motion, as well as those filed by the individual defendants in the case, were sustained in their entirety and plaintiffs were given leave to amend their
complaint with respect to all but one claim. On May 27, 2004, plaintiffs filed an amended consolidated derivative complaint which essentially replicated the allegations made in the Securities Litigation. The Company and individual defendants have
again filed motions to dismiss the lawsuit based on, among other grounds, the failure of plaintiffs to remedy the deficiencies that prompted dismissal of the original consolidated complaint. Discovery in the action remains stayed. The Federal Court
derivative action has been stayed pending determination of whether plaintiffs in the Securities Litigation will be able to state a claim against the defendants.



13



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##### Table of Contents

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



As previously reported, on January 22, 2004, Bridge Ventures, Inc.
(Bridge) and Saggi Capital Corp. (Saggi), both Florida corporations, filed a demand for arbitration with the American Arbitration Association in Los Angeles pursuant to a settlement agreement between Bridge and Saggi on the
one hand, and the Company on the other, dated as of February 13, 2003. The settlement agreement resolved, among other things, disputes relating to warrants to purchase Company common stock previously issued to Bridge and Saggi relating to a
consulting agreement between Saggi and the Company. The demand for arbitration filed by Bridge and Saggi alleges securities and common law fraud in connection with the settlement agreement based on Saggis and Bridges contention that the
Company knew, or was reckless in not knowing, that its financial statements and public comments on financial results were materially inaccurate at the time of entering into the settlement agreement. Saggi and Bridge are seeking compensatory damages
in excess of $968,000, punitive damages in an unspecified amount, and costs and fees. The Company disputes Saggis and Bridges claims and allegations, believes that they are without merit and intends to vigorously defend itself in this
action. There have been no material developments in this matter since the Companys last report.



As previously reported, on December 11, 2003, Brad Greenspan, the Companys former Chairman and Chief Executive Officer, filed a complaint against
the Company, each of the Companys directors and the Companys Series C preferred stockholders in the Court of Chancery of the State of Delaware in and for New Castle County. The complaint challenged various actions taken by the Company
and its Board of Directors in advance of the Companys 2003 annual meeting of stockholders, which was held on January 29, 2004. The Company and the Companys directors denied Mr. Greenspans allegations and claims as factually
incorrect and otherwise without merit. On July 8, 2004, Mr. Greenspan filed a motion to dismiss the action as moot and for an award of attorneys fees and costs in the amount of $320,000. The Company agrees that the lawsuit should be dismissed
but has opposed the application for fees and costs.



Note 7.
Stockholders Equity and Equity Compensation Plans



In the first quarter of fiscal year 2005, no shares of Series A preferred stock were converted into shares of common stock. In the first quarter of fiscal year 2004, 44,000 shares of Series A preferred stock were converted into 54,000
shares of common stock. As of June 30, 2004, there are 194,000 outstanding shares of Series A preferred stock that are convertible into 255,000 shares of common stock at the current conversion rate. In the first quarter of fiscal year 2005, 126,000
shares of Series B preferred stock were converted into 126,000 shares of common stock. In the first quarter of fiscal year 2004, no shares of Series B preferred stock were converted into shares of common stock. As of June 30, 2004, there are
1,797,000 outstanding shares of Series B preferred stock and 5,616,000 outstanding shares of Series C preferred stock that are convertible into 7,413,000 shares of common stock at the current conversion rates. In the first quarter of fiscal year
2005, the Company issued 106,000 shares of Series C preferred stock to Series C stockholders as dividends.



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##### Table of Contents

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



|                                 |  |                             |   |      |                              |      |                 |        |   |                              |   |     
|-------------------------------- |  | --------------------------- | - | ---- | ---------------------------- | ---- | --------------- | ------ | - | ---------------------------- | - | ----
|                                 |  | Three Months Ended June 30,
|                                 |  | 2004                        |   | 2003
|                                 |  | NumberofOptions             |   |      | WeightedAverageExercisePrice |      | NumberofOptions |        |   | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 7,844                       |   |      | $                            | 2.28 |                 | 7,602  |   |                              | $ | 3.25
|Granted                          |  | 617                         |   |      |                              | 2.09 |                 |       |   |                              |   |    
|Exercised                        |  |                            |   |      |                              |     |                 | (26    | ) |                              |   | 2.16
|Cancelled                        |  | (631                        | ) |      |                              | 2.33 |                 | (2,146 | ) |                              |   | 4.61
|                                 |  |                             |   |      |                              |      |                 |        |   |                              |   |     
|Outstanding at end of period     |  | 7,830                       |   |      |                              | 2.25 |                 | 5,430  |   |                              |   | 2.71
|                                 |  |                             |   |      |                              |      |                 |        |   |                              |   |     
|Exercisable at end of period     |  | 3,664                       |   |      |                              | 2.55 |                 | 3,426  |   |                              |   | 2.66
|                                 |  |                             |   |      |                              |      |                 |        |   |                              |   |     



The following table
summarizes information about stock options outstanding at June 30, 2004 (in thousands, except per share data):



|            |  |                     |  |                                 |      |        |       |                                |   |     
|----------- |  | ------------------- |  | ------------------------------- | ---- | ------ | ----- | ------------------------------ | - | ----
|            |  | Options Outstanding |  | Options Exercisable            
|Price Range |  | Number              |  | Weighted Average Exercise Price |      | Number |       | Weighted AverageExercise Price
|$5.01-7.00  |  | 148                 |  | $                               | 5.92 |        | 140   |                                | $ | 5.95
|3.01-5.00   |  | 183                 |  |                                 | 3.86 |        | 104   |                                |   | 3.86
|1.00-3.00   |  | 7,499               |  |                                 | 2.14 |        | 3,420 |                                |   | 2.37
|            |  |                     |  |                                 |      |        |       |                                |   |     
|            |  | 7,830               |  |                                 |      |        | 3,664 |                                |   |     
|            |  |                     |  |                                 |      |        |       |                                |   |     



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



|                                 |  |                             |  |                              |      |                  |      |   |                              |   |     
|-------------------------------- |  | --------------------------- |  | ---------------------------- | ---- | ---------------- | ---- | - | ---------------------------- | - | ----
|                                 |  | Three Months Ended June 30,
|                                 |  | 2004                        |  | 2003                        
|                                 |  | NumberofWarrants            |  | WeightedAverageExercisePrice |      | NumberofWarrants |      |   | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 258                         |  | $                            | 2.20 |                  | 353  |   |                              | $ | 2.05
|Granted                          |  |                            |  |                              |     |                  |     |   |                              |   |    
|Exercised                        |  |                            |  |                              |     |                  | (235 | ) |                              |   | 2.07
|Cancelled                        |  |                            |  |                              |     |                  | (10  | ) |                              |   | 5.10
|                                 |  |                             |  |                              |      |                  |      |   |                              |   |     
|Outstanding at end of period     |  | 258                         |  |                              | 2.20 |                  | 108  |   |                              |   | 2.66
|                                 |  |                             |  |                              |      |                  |      |   |                              |   |     
|Exercisable at end of period     |  | 258                         |  |                              | 2.20 |                  | 108  |   |                              |   | 2.66
|                                 |  |                             |  |                              |      |                  |      |   |                              |   |     



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Note 8. Income Taxes



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



Note 9. Segment Disclosures



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



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



|                   |  |                             |        |      |   |       
|------------------ |  | --------------------------- | ------ | ---- | - | ------
|                   |  | Three Months Ended June 30,
|                   |  | 2004                        |        | 2003
|Revenues:          |  |                             |        |      |   |       
|Products marketing |  | $                           | 10,557 |      | $ | 7,025 
|Network            |  |                             | 6,190  |      |   | 5,978 
|                   |  |                             |        |      |   |       
|Total revenues     |  | $                           | 16,747 |      | $ | 13,003
|                   |  |                             |        |      |   |       
|Gross Profit:      |  |                             |        |      |   |       
|Products marketing |  | $                           | 6,766  |      | $ | 4,120 
|Network            |  |                             | 5,988  |      |   | 5,440 
|                   |  |                             |        |      |   |       
|Total gross profit |  | $                           | 12,754 |      | $ | 9,560 
|                   |  |                             |        |      |   |       



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##### Table of Contents

During the first quarter of fiscal year 2005, two customers exceeded 10% of segment revenues. These two
customers represented 31% and 11%, respectively of network segment revenues. In the product marketing segment, the top 10 customers were less than 1% of segment revenues. In the network segment, the top 10 customers were approximately 54% of segment
revenues. Revenues from the sale of Body Shape, Dream Shape and Hydroderm products were approximately 20%, 20% and 37%, respectively of first quarter fiscal year 2005 product marketing revenues. Most of the products sold in the first quarter of
fiscal year 2005 were purchased from three vendors.



During the
first quarter of fiscal year 2004, no customer exceeded 10% of segment revenues. In the product marketing segment, the top 10 customers were less than 1% of segment revenues. In the network segment, the top 10 customers were approximately 29% of
segment revenues.



The Company does not allocate assets to
business segments because product marketing and network segment assets minus liabilities, other than goodwill and other intangible assets, are not significant. Goodwill and other intangible assets by business segment have not changed significantly
since March 31, 2004.



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



Forward-Looking Statements



This Report contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements for purposes of federal and state securities laws, including projections of earnings, revenue or
other financial items; statements of the plans, strategies and objectives of management for future operations; statements concerning proposed new services or developments; statements regarding future economic conditions or performance; statements of
belief; and statements of assumptions. Forward-looking statements may include the words may, could, will, estimate, intend, continue, believe, expect or
anticipate or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing reporting obligations, we do not intend, and undertake no obligation, to
update any forward-looking statement. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties. The factors impacting these risks and uncertainties are discussed in the
section entitled Risk Factors and elsewhere in this report.



Recent Events



On May 31, 2004, Bradley Ward
resigned from the Board of Directors and on June 1, 2004, James Quandt was appointed to the Board of Directors.



The Company changed its name from eUniverse, Inc. to Intermix Media, Inc. on July 15, 2004. On July 15, 2004, the Companys trading symbol changed
from EUNI to IMIX.



On July 15, 2004, we agreed to purchase the
assets of Supernation, LLC, which includes the Superdudes gaming network, for approximately $2 million in cash and stock. This acquisition is subject to customary closing conditions associated with the transfer of assets, including obtaining certain
third party consents, and is expected to close in August 2004. On July 14, 2004, the Companys Board of Directors, upon the recommendation of the Companys Audit Committee, adopted a resolution which grants a waiver of the conflict of
interest provision contained in our Financial Code of Professional Conduct to Mr. Richard Rosenblatt, the Companys Chief Executive Officer, in connection with the acquisition of the Supernation assets. Mr. Rosenblatt owns approximately 25% of
the Supernation member interests. Mr. Rosenblatt has agreed to sell his member interests in Supernation to avoid any participation in the future earn out proceeds so as to not have an ongoing potential conflict of interest.



We sold the assets of our SkillJam business unit to CES Software PLC on July
30, 2004. The sales proceeds were $8 million and the Company realized a $4.6 million gain on sale of assets, net of income taxes. We used $1.8 million of the sale proceeds to repay a $2.4 million convertible note payable to an affiliate of Sony
Corporation of America and will record a $628,000 gain on debt extinguished.



Business Segments



We group the Companys
businesses into two business segments, the product marketing segment and the network segment. Our revenues are predominately generated from a combination of credit card sales of the Companys products by our product marketing segment and
invoiced sales of paid advertising by our network website businesses. Prior to the fourth quarter of fiscal year 2004, we combined our products, services and gaming businesses into one segment called the products and services business segment. Due
to a change in internal reporting, we now report our gaming and non-product businesses in the network segment. The network segment was previously referred to as the media and advertising business segment and this segment now includes our gaming and
non-product businesses. The fiscal year 2004 segment disclosures have been reclassified to be consistent with the fiscal year 2005 presentation.



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Product marketing segment revenues consist of the sale of merchandise over the Internet, subscriptions to
our websites and activity-based fees. We sell various products through e-commerce websites and telemarketing centers. Customers are obtained by online advertising on both Company-owned and third party websites and by television, radio and print
advertising. These products change over time and include herbal and all-natural ingestible and cosmetic products, collectibles, ink cartridges and various niche products. The Company continuously tests product offerings to determine customer
acquisition costs and revenue potential and the most effective marketing programs.



We have a diverse network of websites that provide entertainment and community oriented content (the Intermix Media Network). We earn paid advertising revenues through a variety of traditional ad units
such as banner, skyscraper, pop-up and interstitial ads, targeted E-mail marketing, paid search marketing, lead generation marketing and affiliate marketing. Our advertising is primarily performance based with pricing based on the number of times
our audience views the ad or performs a specific action, or clicks through to the customers website. The Intermix Media Network also has websites that generate subscription revenues, provide marketing services and conduct transaction-based
revenues in addition to the websites that are primarily paid advertising based.



Critical Accounting Policies



The preparation
of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the
disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our
current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe that goodwill and other intangible assets impairment, revenue recognition and reserves for
accounts receivable, inventories, sales returns and deferred tax assets are critical accounting policies involving the most complex, difficult and subjective estimates and judgments.



Goodwill and other intangible assets impairment



Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually, and whenever events or
circumstances suggest that the carrying value may not be recoverable. Intangible assets with definite useful lives are tested for impairment whenever events or circumstances suggest that the carrying value may not be recoverable. Events or
circumstances which could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of
our use of acquired assets, the strategy for our overall business, or significant negative industry or economic trends.



Our principal consideration in determining impairment includes the strategic benefit to the Company of the particular assets as measured by expected
future cash flows. An impairment loss would be reported to the extent that the carrying value of the assets exceeds the fair value as determined by discounted future cash flows.



Revenue recognition



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



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We recognize revenue on shipment of products or provision of services. Revenue includes shipping and
handling charges. Product warehousing and fulfillment is handled internally or is outsourced to independent third-parties.



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



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



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



Reserve for uncollectible accounts
receivable



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



Reserve for excess and obsolete inventory



The quantities of inventory on hand and their values are reviewed
periodically for potentially excess and obsolete product or pricing. Consequently, we maintain an allowance for excess and obsolete inventory to reduce cost to estimated realizable value. A considerable amount of judgment is required when we assess
the realization of inventory, including assessing the probability of sale and the current market demand for each product. If actual market conditions for our products differ from those projected by management, and our estimates prove to be
inaccurate, additional write downs or adjustments to cost of revenues may be required.



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Reserve for sales returns



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



Reserve for deferred tax assets



The Company accounts for income taxes in accordance with the liability
method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets
and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable income. To the extent that we believe that recovery is not assured, we establish a valuation allowance. When this allowance is established, or increases or decreases in
the future, we increase or decrease our income tax expense. If our estimate of the likelihood of future taxable income proves to be incorrect, adjustments to income tax expense could be required. At June 30, 2004, we fully reserved our deferred tax
assets since we believe that realization is not reasonably assured at this time. If the Company has operating income from continuing operations this fiscal year, we intend to reassess the need to fully reserve our deferred tax assets.



Results of Operations



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



|                                                             |  |                             |   |  |       |    
|------------------------------------------------------------ |  | --------------------------- | - |  | ----- | ---
|                                                             |  | Three Months Ended June 30, |  
|                                                             |  | 2004                        |   |  | 2003  |    
|Revenues:                                                    |  |                             |   |  |       |    
|Product marketing                                            |  | 63.0                        | % |  | 54.0  | %  
|Network                                                      |  | 37.0                        |   |  | 46.0  |    
|                                                             |  |                             |   |  |       |    
|Total                                                        |  | 100.0                       |   |  | 100.0 |    
|                                                             |  |                             |   |  |       |    
|Cost of revenues:                                            |  |                             |   |  |       |    
|Product marketing                                            |  | 22.6                        |   |  | 22.3  |    
|Network                                                      |  | 1.2                         |   |  | 4.2   |    
|                                                             |  |                             |   |  |       |    
|Total                                                        |  | 23.8                        |   |  | 26.5  |    
|                                                             |  |                             |   |  |       |    
|Operating expenses:                                          |  |                             |   |  |       |    
|Marketing and sales                                          |  | 39.0                        |   |  | 46.4  |    
|Product development                                          |  | 9.8                         |   |  | 11.7  |    
|General and administrative                                   |  | 25.8                        |   |  | 30.0  |    
|Restatement professional fees                                |  | (2.0                        | ) |  | 7.4   |    
|Amortization of other intangible assets                      |  | 1.6                         |   |  | 2.5   |    
|                                                             |  |                             |   |  |       |    
|Total operating expenses                                     |  | 74.2                        |   |  | 98.0  |    
|                                                             |  |                             |   |  |       |    
|Operating income (loss)                                      |  | 2.0                         |   |  | (24.5 | )  
|Interest expense, net                                        |  | (0.6                        | ) |  | (0.7  | )  
|                                                             |  |                             |   |  |       |    
|Income (loss) from continuing operations before income taxes |  | 1.4                         |   |  | (25.2 | )  
|Income taxes                                                 |  |                            |   |  |      |    
|                                                             |  |                             |   |  |       |    
|Income (loss) from continuing operations                     |  | 1.4                         |   |  | (25.2 | )  
|Income (loss) from discontinued operations                   |  | (0.6                        | ) |  | 1.8   |    
|                                                             |  |                             |   |  |       |    
|Net income (loss)                                            |  | 0.8                         | % |  | (23.4 | ) %
|                                                             |  |                             |   |  |       |    



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Revenues



Revenues increased 29% to $16.7 million in the first quarter of fiscal year 2005 from $13.0 million in the first quarter of fiscal year 2004. The increase
in revenues was attributable to both business segments with the product marketing segment producing $10.5 million in revenues in the first quarter of fiscal year 2005 compared to $7.0 million in the same quarter last year, and the network segment
producing $6.2 million in revenues in the first quarter of fiscal year 2005 compared to $6.0 million in the same quarter last year.



For the first quarter of fiscal year 2005, product marketing segment revenues increased by 50% to $10.5 million compared to the same quarter last year.
The Alena business unit produced $6.0 million in increased revenues in the first quarter of fiscal year 2005 compared to the same quarter last year due to higher continuity program sales of the Body Shape, Dream Shape and Hydroderm product lines in
the current quarter. ResponseBase product revenues declined by $1.6 million in the first quarter of fiscal year 2005 compared to the same quarter last year due to lower sales of seasonal and limited life products in the current quarter. We also
experienced a $271,000 decline in revenues at our ink cartridge business unit in the first quarter of fiscal year 2005 compared to the same quarter last year due to lower spending on the acquisition of new customers.



For the first quarter of fiscal year 2005, network segment revenues increased
by 4% to $6.2 million compared to the same quarter last year. The increase in revenues was due to $1.9 million of higher advertising revenues from application downloads and advertising rate increases on the Intermix Network of websites, partially
offset by lower subscription revenues on our dating website and lower E-mail revenues. We also realized $128,000 of higher revenues at our Cases Ladder business due to an increase in the number of customers.



We occasionally enter into barter or non-cash advertising transactions where
we exchange advertising on our websites for similarly valued online advertising or other services. We typically use barter transactions to test prospective media and advertising purchases or sales campaigns with the anticipation of additional
advertising business. There was no barter revenue in either quarter.



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Cost of Revenues



Cost of revenues are primarily associated with the product marketing segment and consist of the cost of products, warehouse, fulfillment and shipping
costs, and credit card fees. The cost of revenues increased to $4.0 million in the first quarter of fiscal year 2005 from $3.4 million in the first quarter of fiscal year 2004 due to higher revenues. The gross profit margin of the product marketing
segment was 64% in the first quarter of fiscal year 2005 compared to 59% in the same quarter last year. The gross profit margin improvement was due to cost reductions and a greater percentage of revenues by the Alena business unit which has a lower
cost of revenues, partially offset by higher product costs by the ink cartridge business unit. Cost of network segment revenues was $202,000 in the first quarter of fiscal year 2005 compared to $538,000 in the same quarter last year. We expect the
gross profit margin for the product marketing segment to be approximately 65% in fiscal year 2005.



Marketing and Sales



Marketing and sales costs consist primarily of fees paid to third parties for media space, bad debts, advertising revenue sharing arrangements, promotional and advertising costs, personnel costs, commissions, agency and consulting fees and
allocated overhead costs. The Company also has a direct sales force that sells our inventory of advertising to advertisers and advertising agencies.



Marketing and sales costs were $6.5 million in the first quarter of fiscal year 2005 compared to $6.0 million in the first quarter of fiscal year 2004,
but were 39% of revenues for the first quarter of fiscal year 2005 compared to 46% of revenues for the same quarter last year. Advertising and related revenue sharing expenses increased by $1.4 million in the first quarter of fiscal year 2005 due to
higher spending on continuity program customer acquisition and download advertising revenue sharing arrangements. Outside services increased by $256,000 due to higher third party call center customer support costs in the current quarter at our Alena
business unit. Salary expense decreased by $481,000 due to fewer personnel in the first quarter of fiscal year 2005 and bad debt expense decreased by $598,000 due to improved customer credit granting experience. We expect marketing and sales costs
to decrease to about 37% of revenues in fiscal year 2005.



Product
Development



Product development costs consist of payroll
and related expenses for developing and maintaining the Companys websites, developing and maintaining key proprietary technology, and developing proprietary products and services. Product development costs increased to $1.6 million or 10% of
revenues for the first quarter of fiscal year 2005, from $1.5 million or 12% of revenues for the same quarter last year. The current quarter expense increase was a result of $91,000 of higher salaries. We expect product development costs in fiscal
year 2005 will remain about the same as fiscal year 2004.



General and
Administrative



General and administrative costs consist
of payroll and related costs for executive, finance, legal, human resources and administrative personnel, recruiting and professional fees, internet, rent, insurance, depreciation and amortization and other general corporate expenses. General and
administrative costs increased to $4.3 million, amounting to 26% of revenues for the first quarter of fiscal year 2005, from $3.9 million or 30% of revenues for the same quarter last year. Salaries expense increased $407,000 in the first quarter of
fiscal year 2005 compared to the same quarter last year due to higher bonus expense in the current quarter. Insurance expense increased $244,000 in the current quarter due to insurance rate increases and increased revenue-based insurance costs. The
current quarter also includes $244,000 of amortization of the value the common stock given to Sharman Networks as part of the download application agreements. For fiscal year 2005, we anticipate that general and administrative costs will increase
overall, but will be decrease to about 25% of revenues.



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Restatement Professional Fees



We incurred approximately $121,000 of restatement professional fees in the first quarter of fiscal year 2005. These costs
consist of legal expenses and other costs, including litigation and regulatory costs, related to the restatement of our financial statements for the first three quarters of fiscal year 2003. These costs are expected to continue in fiscal year 2005.
We recorded a $458,000 insurance reimbursement in the first quarter ended June 30, 2004 of first quarter and prior year legal costs. We do not know how long the litigation and regulatory matters will continue or how much each will cost. In the first
quarter of fiscal year 2004, we incurred approximately $962,000 of restatement professional fees.



Amortization of Other Intangible Assets



In the first quarter of fiscal year 2005, amortization of other intangible assets was $267,000 compared to $320,000 in the same quarter last year.



Income Taxes



We recorded $5,000 of income tax expense in the first quarter of fiscal year 2005 for minimum taxes due on the utilization of net operating loss carry
forwards. The Company recorded no tax benefit for the first quarter of fiscal year 2004.



Income (Loss) from Discontinued Operations



In April 2004, we decided to sell the assets of our SkillJam business unit. We reclassified the revenues and expenses of this business unit to discontinued operations and we reclassified the balance sheet of this
business unit to net assets of SkillJam held for sale. This business unit had $1,139,000 in revenues and $1,243,000 in costs and expenses in the first quarter of fiscal year 2005 and $919,000 in revenues and $872,000 in costs and expenses in the
first quarter of fiscal year 2004.



In the fourth quarter of
fiscal year 2004, we sold the assets of the Body Dome business unit. This business unit had $1,914,000 in revenues and $1,738,000 in costs and expenses in the first quarter of fiscal year 2004.



We sold the SkillJam business unit to CES Software PLC on July 30, 2004. The
sale proceeds were $8 million and we realized a $4.6 million gain on sale of assets, net of income taxes. We paid off a related $1.2 million acquisition earn out obligation to company owned by two employees. A one year, $1 million escrow was
established for certain indemnification obligations and we will record up to an additional $1 million gain on sale depending on the resolution of the indemnification obligations. In addition, we will receive a percentage of the net revenue from the
sale of the SkillJam technology to the buyers European customers over five years. We have agreed to indemnify CES Software for certain contingent obligations up to the amount of the sale proceeds. We believe this contingency to be remote.



Liquidity and Capital Resources



Net cash used in operating activities was ($1.3) million in the first
quarter of fiscal year 2005 compared to ($2.6) million in the first quarter of fiscal year 2004. The net cash used in operating activities in the first quarter of fiscal year 2005 was primarily due to an increase in current assets and a decrease in
current liabilities, partially offset by the income from operations and non-cash expenses. The net cash used in operating activities in the first quarter of fiscal year 2004 was primarily due to the loss from operations and a decrease in current
liabilities, partially offset by non-cash expenses and a decrease in current assets.



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Net cash provided by (used in) investing activities was ($651,000) in the first quarter of fiscal year
2005 compared to $218,000 in the first quarter of fiscal year 2004. Net cash used in investing activities in the first quarter of fiscal year 2005 was from the purchase of computer and network equipment, and intangible assets. Net cash provided by
investing activities in the first quarter of fiscal year 2004 was from the reduction in a certificate of deposit used to secure a capital lease obligation, partially offset by the purchase of computer equipment.



Net cash used in financing activities was ($504,000) in the first quarter of
fiscal year 2005 compared to ($149,000) in the first quarter of fiscal year 2004. Net cash used in financing activities in the first quarter of fiscal year 2005 was due to the repayment of capital lease and debt obligations. Net cash used in
financing activities in the first quarter of fiscal year 2004 was due to the repayment of capital lease obligations, partially offset by the proceeds from the exercise of stock options.



As of June 30, 2004, we had $3.8 million of cash and cash equivalents and $1.9 million in restricted cash, and $1.1 million
in working capital. As of March 31, 2004, we had $6.2 million in cash and cash equivalents and $2.8 million in restricted cash, and $953,000 in working capital. The decrease in total cash from March 31, 2004 to June 30, 2004 was primarily due an
increase in current assets, a decrease in current liabilities, purchases of property and equipment and the repayment of capital lease and debt obligations.



In July 2003, VantagePoint acquired an option from 550 DMV, to purchase 3,050,000 shares of Company common stock and 1,750,000 shares of Company Series B
preferred stock. Under the terms of the option, 550 DMV would retain the right to receive a portion of the profit from the resale of those securities by VantagePoint under certain circumstances. In October 2003, VantagePoint partially exercised the
option and purchased 454,545 shares of Series B preferred stock from 550 DMV. In April 2004, VantagePoint exercised the remainder of the option. At that time, VantagePoint also negotiated the right to purchase the $2.4 million convertible note of
the Company from 550 DMV for $1.8 million and 550 DMV agreed to waive its participation in the profit from the resale of the option shares acquired by VantagePoint if VantagePoint purchased the note. In connection with the Companys sale of the
SkillJam assets in July 2004, the Company secured from VantagePoint, and VantagePoint assigned to the Company for no consideration, its right to purchase the 550 DMV note and the Company repurchased the note for $1.8 million and realized a $628,000
gain on debt extinguishment.



We have a $2.5 million
convertible note due to VantagePoint that will either be converted into Series C preferred stock by October 31, 2004 or will need to be repaid, as determined by VantagePoint. We have enough cash and available borrowing capacity to fund our business
for at least the next 12 months and repay the VantagePoint note, if necessary.



We sold the SkillJam business unit to CES Software PLC on July 30, 2004. The sale proceeds were $8 million. A one year, $1 million escrow was established for certain indemnification obligations and we will receive up
to an additional $1 million from the escrow depending on the resolution of the indemnification obligations. We have agreed to indemnify CES Software for certain contingent obligations up to the amount of the sale proceeds. We believe this
contingency to be remote.



In November 2003, a Company
subsidiary signed application download and content distribution agreements with Sharman Networks, Ltd. The subsidiary agreed to provide non-refundable cash advances to Sharman Networks that are recoupable against a sharing of revenues. The Company
also issued Sharman Networks 500,000 shares of Company common stock. Sharman Networks is currently bundling one of the Companys applications with other applications that are downloaded from the Internet with the Kazaa Media Desktop. Sharman
Networks is also currently including channel links on the Kazaa Media Desktop to content provided by the Company. The Company has guaranteed the obligations of the newly formed subsidiary. The unrecouped cash advances and the unamortized value of
the common stock that are included in prepaid expenses at June 30, 2004 was $1,197,000.



At June 30, 2004, the Company had no off-balance sheet financing arrangements or undisclosed liabilities related to special purpose, related party, or unconsolidated entities.



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Contractual Obligations



We have outstanding notes payable maturing at various dates through March 31, 2005. We also lease facilities and equipment under various capital and
operating lease agreements expiring at various dates through March 2008.



Our material contractual obligations at June 30, 2004 are as follow (in thousands):



|                                                       |  |                       |       |                             |   |                |  |            |     |  |   |   
|------------------------------------------------------ |  | --------------------- | ----- | --------------------------- | - | -------------- |  | ---------- | --- |  | - | --
|Contractual Obligations                                |  | TotalAmountsCommitted |       | 9 MonthsEndedMarch 31, 2005 |   | March 31, 2006 |  | Thereafter
|Convertible note payable to 550 Digital Media Ventures |  | $                     | 2,404 |                             | $ | 2,404          |  | $          |    |  | $ |  
|Note payable to SFX Entertainment, Inc.                |  |                       | 108   |                             |   | 108            |  |            |    |  |   |  
|Convertible note payable to VantagePoint               |  |                       | 2,500 |                             |   | 2,500          |  |            |    |  |   |  
|Capital lease obligations                              |  |                       | 264   |                             |   | 230            |  |            | 24  |  |   | 10
|Operating lease obligations                            |  |                       | 1,489 |                             |   | 775            |  |            | 714 |  |   |  
|                                                       |  |                       |       |                             |   |                |  |            |     |  |   |   
|Total contractual obligations                          |  | $                     | 6,765 |                             | $ | 6,017          |  | $          | 738 |  | $ | 10
|                                                       |  |                       |       |                             |   |                |  |            |     |  |   |   



Risk Factors



NASDAQ delisted our common stock and there is no guarantee of a suitable
alternative.



On May 6, 2003, in response to
the announcement of our intent to restate our quarterly financial statements for fiscal year 2003, NASDAQ halted trading in our common stock due to our inability to provide the market place with sufficient current financial information. On June 13,
2003, we received a NASDAQ Staff Determination stating that our common stock was subject to delisting from The NASDAQ SmallCap Market due to the NASDAQ Staffs inability to assess the Companys current financial position and its ability to
sustain compliance with NASDAQs continued listing requirements. On July 2, 2003, we received notice of an additional listing deficiency from NASDAQ indicating that the Company was not in compliance with the filing requirements for continued
listing due to our failure to timely file our Annual Report on Form 10-K. The Panel delisted the Companys securities from The NASDAQ SmallCap Market on September 2, 2003. The Companys common stock has been trading on what is commonly
referred to as the Pink Sheets since September 2, 2003.



The Company appealed the Panels decision to the Nasdaq Listing and Hearing Review Council (the Listing Council) and on December 2, 2003, the Listing Council rendered a decision on the Companys appeal. The Listing
Council noted that the Company was now current in its public filing requirements and that events occurring subsequent to the Panels August 28, 2003 decision may address the public interest concerns. The Listing Council instructed the Panel to
determine whether public interest concerns continue to exist and to determine if there are any other deficiencies under NASDAQs continued listing standards. The Panel conducted their investigation and on March 15, 2004 rendered their decision.
The Panel acknowledged the conclusion of the NASDAQ Staff that no public interest concerns currently exist related to the accounting and internal control issues addressed in the Audit Committees investigation report. Nevertheless, citing the
Companys failure to comply with requirements for listing, both while previously listed and subsequently in connection with the Companys financing transactions, the Panel determined that re-listing of the Companys securities at this
time would not be in the best interests of the investing public or NASDAQ. The Company appealed the Panels decision to the Listing Council. The Company recently dropped the appeal and is evaluating other options for an exchange or quotation
system listing of the Companys stock. We cannot predict what other listing options may become available to the Company.



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If we do not resume trading on an exchange or quotation system, trading in our common stock could be
conducted in the over-the-counter market on the OTC Bulletin Board, or where it is currently traded in what is commonly referred to as the Pink Sheets. Continued trading in the over-the-counter market or the Pink Sheets could
further damage our general business reputation and could impair our ability to raise funds. This could further adversely affect our stock price and limit our ability to grow our business. Furthermore, if our shares continue to be traded on the
over-the-counter bulletin board or the Pink Sheets, their value could be negatively affected because stocks which trade on the over-the-counter bulletin board or the Pink Sheets tend to be less liquid and trade with larger
variations between the bid and ask price than, for example, stocks on The NASDAQ SmallCap Market.



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



As previously reported, on October 14, 2003, several purported stockholder class action lawsuits previously filed against
the Company and several current and former Company officers and/or employees in the United States District Court for the Central District of California were consolidated into one action and lead counsel and plaintiff were appointed (the
Securities Litigation). The Securities Litigation arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and includes allegations of, among other things, intentionally false and misleading
statements regarding the Companys business prospects, financial condition and performance. On December 17, 2003, plaintiffs in the Securities Litigation filed their amended and consolidated class action complaint reiterating those allegations
and also naming the Companys former auditor as an additional defendant. The Company and other defendants filed motions to dismiss the lawsuit for, among other things, the failure of the complaint to state a valid claim for violation of
securities laws. On June 9, 2004, the Court granted the Companys and other defendants motions to dismiss the lawsuit and plaintiffs were permitted to file an amended complaint. On July 15, 2004, the Securities Litigation was stayed until
October 13, 2004, in order to attempt a mediated settlement of the claims asserted in the matter.



Also as previously reported, two purported stockholder derivative actions, which are substantially similar, are pending against various current and former
Company directors, officers, and/or employees. One of the actions is pending in the United States District Court for the Central District of California and the other, formerly two actions which have been consolidated, is pending in the Superior
Court of California for the County of Los Angeles (collectively, the Derivative Litigation). The Derivative Litigation similarly arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and
includes claims of breach of fiduciary duty in connection with the restatement and in connection with allegedly improper insider sales of Company stock by one officer and one former Company employee. On January 12, 2004, the Company filed a motion
to dismiss plaintiffs consolidated derivative complaint in the State Court derivative action on the grounds, among others, that plaintiffs have not pled, and will not be able to plead, facts sufficient to demonstrate that demand on the
Companys Board of Directors would have been futile. On April 27, 2004, the Companys motion, as well as those filed by the individual defendants in the case, were sustained in there entirety and plaintiffs were given leave to amend their
complaint with respect to all but one claim. On May 27, 2004, plaintiffs filed an amended consolidated derivative complaint which essentially replicated the allegations made in the Securities Litigation. The Company and individual defendants have
again filed motions to dismiss the lawsuit based on, among other grounds, the failure of plaintiffs to remedy the deficiencies that prompted dismissal of the original consolidated complaint. Discovery in the action remains stayed. The Federal Court
derivative action has been stayed pending determination of whether plaintiffs in the Securities Litigation will be able to state a claim against the defendants.



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



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



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



An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future conditions. A failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.



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



As of June 30, 2004, our executive officers, common and preferred stockholders holding a 5% or greater beneficial ownership in our securities and members
of our Board of Directors beneficially own approximately 54% of our common stock on an as-converted basis, excluding stock options, warrants to purchase common stock and convertible debt. As a result, our executive officers, our large common and
preferred stockholders, and our directors would be able to influence the outcome of matters requiring a stockholder vote, including the election of directors, the issuance of new securities and the approval of significant transactions, thereby
controlling our affairs and our management. The interests of our executive officers, our large common and preferred stockholders, and our directors may conflict with the interests of our other stockholders and may delay, defer or prevent a change in
control of our Company, or make some transactions more difficult or impossible. Examples of potentially conflicting transactions include the issuance of additional preferred securities, proxy contests, tender offers, mergers or other purchases of
common stock that could give you the opportunity to realize a premium over the then-prevailing market price of our common stock.



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



We may issue additional
preferred stock at such time or times and for such consideration as the Board of Directors may determine. Each series is required to be so designated as to distinguish the shares thereof from the shares of all other series. The Board of Directors is
expressly authorized, subject to the limitations prescribed by law and the provisions of our Certificate of Incorporation, to provide for the issuance of all or any shares of preferred stock, in one or more series, each with such designations,
preferences, voting powers, relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as are determined by the Board of Directors.



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



We
have many potentially dilutive securities outstanding.



As of June 30, 2004, we had 7,830,000 outstanding stock options and 258,000 outstanding warrants to purchase our common stock.



As of June 30, 2004, we had 194,000 shares of our Series A preferred stock outstanding. The Series A preferred stock may be converted into our common
stock at the then-applicable conversion rate. The Series A preferred stock has a $3.60 per share liquidation preference which increases at the rate of 6% per annum. Each share of Series A preferred stock may be converted to common stock at a rate of
one share of common stock for each $3.60 of liquidation preference. The liquidation preference was $4.73 as of June 30, 2004. Because of the 6% accretion factor, each share of Series A preferred stock will be converted into greater than one share of
common stock. Prior to any conversion, the conversion price is also adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend, issuance of additional equity securities (other
than those reserved as employee shares pursuant to any employee stock option plan) at a purchase price less than the then-current conversion price.



As of June 30, 2004, we had 1,797,000 shares of our Series B preferred stock outstanding. The Series B preferred stock may be converted into our common
stock at the then applicable conversion rate. The Series B preferred stock has a $2.60 per share liquidation preference. Each share of Series B may be converted to common stock at an initial rate of one share of common stock for each $2.60 of
liquidation preference. Prior to any conversion, the conversion price is adjusted to account for any increase or decrease in the number of outstanding shares of common stock by stock split, stock dividend or other similar event. The conversion price
per share of Series B may be adjusted downward if we issue additional equity securities other than certain excluded stock, without consideration or for consideration per share less than the then-current conversion price.



As of June 30, 2004, we had 5,616,000 shares of our Series C preferred stock
outstanding. The Series C preferred stock may be converted into our common stock at the then applicable conversion rate. The Series C preferred stock has a $1.50 per share liquidation preference. Each share of Series C may be converted to common
stock at an initial rate of one share of common stock for each $1.50 of liquidation preference. Prior to any conversion, the conversion price is adjusted to account for any increase or decrease in the number of outstanding shares of common stock by
stock split, stock dividend or other similar event. The conversion price per share of Series C may be adjusted downward if we issue additional equity securities other than certain excluded stock, without consideration or for consideration per share
less than the then-current conversion price. The Series C preferred stockholders are paid an 8% annual dividend in additional Series C preferred stock for one year and we will issue an additional 144,000 shares of Series C preferred stock as
dividends through October 31, 2004.



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



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We may not recoup non-refundable advances made to Sharman Networks, Ltd.



In November 2003, a newly formed Company subsidiary signed application
download and content distribution agreements with Sharman Networks, Ltd. The subsidiary agreed to provide non-refundable cash advances to Sharman Networks at various dates and additional monthly cash advances for at least one year that are
recoupable against a sharing of revenues. The Company also issued 500,000 shares of Intermix Media common stock to Sharman Networks. Sharman Networks agreed to bundle two of the Companys applications with other applications that are downloaded
from the Internet with the Kazaa Media Desktop. Sharman Networks also agreed to include channel links on the Kazaa Media Desktop to content provided by the Company. The Kazaa Media Desktop is a peer-to-peer file sharing application. If the revenue
earned from the two download applications does not meet Company expectations, the advances to Sharman Networks will not be recouped. If Sharman Networks fails to continue to bundle the application or host the content for any reason, the advances to
Sharman Networks may also not be recouped. In addition, if the number of new downloaded applications increases before November 15, 2004, then unplanned additional advances to Sharman Networks will be required and these additional advances may not be
recouped. We have had disagreements with Sharman Networks about operational and contractual matters that may impact our ability to recoup our advances. Any unrecouped advances and the unamortized value of the Company common stock issued to Sharman
Networks, if any, will be expensed. The balance of unrecouped cash advances and the unamortized value of Company common stock was $1,197,000 at June 30, 2004.



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



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



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



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



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We depend on strategic relationships with our partners.



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



We have a concentration of our business in
certain products and vendors, and in two customers.



Revenues from the sale of Body Shape, Dream Shape and Hydroderm product lines were approximately 20%, 20% and 37%, respectively of first quarter fiscal year 2005 product marketing segment revenues. Most of the products we sold in the first
quarter of fiscal year 2005 were purchased from three vendors. In addition, revenues from Overture Services, Inc. and Advertising.com, Inc. were approximately 31% and 11%, respectively of first quarter fiscal year 2005 network segment revenues.
These concentrations of our business in certain products, vendors and in two customers create the risk of adverse financial impact if we are not able to continue to sell these products, source these products from our current vendors or continue to
use Overture Services, Inc. in our download application business. We believe that we can mitigate the financial impact of the loss of a key vendor by sourcing an alternative vendor, but we cannot predict the timing of locating and qualifying the
alternative vendor, or the pricing and terms that the alternative vendor might offer. In addition, we can mitigate the financial impact of the loss of Overture Services, Inc. as a customer by using an alternative customer for our download
application business, but we cannot predict the pricing and terms that the alternative customer might offer.



Some of our sponsorship arrangements may not generate anticipated revenues.



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



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



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



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



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



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



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



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



We are required to review our intangible assets for impairment when events or changes in conditions may prevent the Company from recovering the carrying
value. Furthermore, goodwill is required to be tested for impairment at least once per year. If our stock price and market capitalization decline, we may be required to record a material charge to earnings in our financial statements during the
period in which we analyze our intangible assets for impairment. Furthermore, future cash flows associated with our various advertising segment properties may decline due to changes in market conditions or technology, thereby requiring an impairment
assessment of the propertys goodwill and other intangible assets.



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



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



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



We own numerous Internet domain names. National and international Internet
regulatory bodies generally regulate the registration of domain names. The regulation of domain names in the United States

and in other countries is
subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or
obtain comparable domain names in all the countries in which we conduct business, which could harm our business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights
is unclear and still evolving. Therefore, we might be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.



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



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



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



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



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



Due to the nature of our business, our future operating results may fluctuate. If we are unable to meet the expectations of investors and public market
analysts, the market price of our common stock may decrease. We expect to experience fluctuations in future quarterly and annual operating results that may be caused by a variety of factors, many of which are outside our control. Factors that may
affect our operating results include:



| |  | our ability to increase our current level of e-commerce merchandise sales;
| | - | --------------------------------------------------------------------------



| |  | our ability to purchase online advertising at competitive rates to attract new e-commerce customers;
| | - | ----------------------------------------------------------------------------------------------------



| |  | our reliance on three principal suppliers of e-commerce merchandise for our Alena business unit;
| | - | ------------------------------------------------------------------------------------------------



| |  | our ability to retain existing users, attract new users at a steady rate and maintain user satisfaction;
| | - | --------------------------------------------------------------------------------------------------------



| |  | the announcement or introduction of new or enhanced content, websites, products and services, and strategic partnerships by us and our competitors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | seasonality of products revenue, which is still material to our overall revenue mix;
| | - | ------------------------------------------------------------------------------------



| |  | the level of use of the Internet and increasing consumer acceptance of the Internet for entertainment and the purchase of consumer products, services and activity based offerings;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to upgrade and develop our systems and infrastructure in a timely and effective manner; and,
| | - | --------------------------------------------------------------------------------------------------------



| |  | the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure and the implementation of marketing programs,
key agreements and strategic partnerships, and general economic conditions and economic conditions specific to the Internet.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



Our revenues are dependant on the future of the Internet. Our future results and growth may not be realized and our business could suffer if the use of the Internet does not continue to increase. Internet usage may be
inhibited for a number of reasons, including:



| |  | inadequate network infrastructure;
| | - | ----------------------------------



| |  | security concerns;
| | - | ------------------



| |  | inconsistent quality of service;
| | - | --------------------------------



| |  | lack of availability of cost-effective and high-speed service;
| | - | --------------------------------------------------------------



| |  | changes in government regulation of the Internet; and,
| | - | ------------------------------------------------------



| |  | changes in communications technology.
| | - | -------------------------------------



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



We may face litigation for information retrieved from the Internet.



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



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



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



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



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



Our business may be adversely affected by the adoption by computer users of technologies that impact access to our products and services. For example, computer users may use software designed to filter or prevent the
delivery of Internet advertising or deploy Internet browsers set to block the use of cookies. Microsoft Corporation has announced plans to add pop-up blocking features to Internet Explorer in 2004. In addition, Internet service providers have
recently introduced anti-pop-up tools or agreed not to sell pop-ups to third parties. The number of computer users who employ these or other similar technologies may increase, thereby diminishing the efficacy of our products and services. In the
case that one or more of these technologies becomes widely adopted by computer users, demand for our products and services would decline.



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



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



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



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



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



Item 3. Quantitative and Qualitative Disclosures About Market Risk



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



Item 4. Controls and Procedures



Overview



In fiscal year 2004, the Company restated 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. To identify any deficiencies in the Companys system of
internal controls, management significantly expanded the 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 evaluate the
Companys accounting practices, policies and procedures.



In response to the matters identified by managements and the Audit Committees reviews, the Company implemented a number of remedial and other actions designed to improve its accounting and financial reporting procedures and
controls. One of these changes was the purchase of a new integrated financial reporting system that is more appropriate to the size and complexity of the Companys current business operations.



Pending full implementation of an integrated financial reporting system, the
Company has adopted supplemental control measures designed 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 Chief 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.



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The Company has evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. This evaluation was done under the supervision and with the participation of
management, including our Chief Executive Officer and our Chief Financial Officer.



The Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2004, our disclosure controls and procedures were effective to ensure that information the Company is required
to disclose in the reports that it files with the Securities and Exchange Commission was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



Changes to Internal Control Over Financial Reporting



The ongoing implementation of an integrated financial reporting system
continued during the quarter ended June 30, 2004. The implementation process constituted a significant change in internal control over financial reporting.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings



See
Note 6  Commitments and Contingencies of Notes to Consolidated Financial Statements (Part 1, Item 1) for information on legal proceedings.



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



None.



Item 3. Defaults upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



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Item 6. Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



|              |  |                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Title                                                                                                                                                                          
|2.01          |  | Agreement and Plan of Merger by and between eUniverse, Inc., a Nevada corporation, and eUniverse, Inc., a Delaware corporation, dated October 31, 2002. (1)                    
|              | 
|2.02          |  | Certificate of Ownership and Merger Merging Intermix Media, Inc. into eUniverse, Inc., effective July 15, 2004. (2)                                                            
|              | 
|3.01          |  | Certificate of Incorporation of eUniverse, Inc. dated October 31, 2002. (1)                                                                                                    
|              | 
|3.02          |  | Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2002. (1)                                                          
|              | 
|3.03          |  | Certificate of Amendment of Certificate of Designation of Series A 6% Convertible Preferred Stock of eUniverse, Inc., dated February 17, 2004. (3)                             
|              | 
|3.04          |  | Certificate of Designation of Series B Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2002. (1)                                                             
|              | 
|3.05          |  | Certificate of Amendment of Certificate of Designation of Series B Convertible Preferred Stock of eUniverse, Inc., dated February 17, 2004. (3)                                
|              | 
|3.06          |  | Certificate of Designation of Series C Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2003. (4)                                                             
|              | 
|3.07          |  | Certificate of Designation of Series C-1 Convertible Preferred Stock of eUniverse, Inc., dated October 31, 2003. (4)                                                           
|              | 
|3.08          |  | Bylaws of Intermix Media, Inc. *                                                                                                                                               
|              | 
|10.01         |  | Employment Agreement with Adam Goldenberg, dated April 6, 2004. (3)                                                                                                            
|              | 
|10.02         |  | Asset Purchase Agreement dated as of July 13, 2004 by and between eUniverse, Inc. and Supernation, LLC. (5)                                                                    
|              | 
|10.03         |  | Asset Purchase Agreement, dated as of June 30, 2004, by and among CES Software, PLC and eUniverse, Inc., et. al. (6) **                                                        
|              | 
|31            |  | Section 302 certificates of Chief Executive Officer and Chief Financial Officer, adopted pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
*
|              | 
|32            |  | Certificate of Chief Executive Officer and Chief Financial Officer, adopted pursuant to 18 U.S.C. Section 1350. *                                                              

---

|* | Filed herewith.
|- | ---------------

|** | Confidential treatment has been requested for certain portions of this exhibit.
|-- | -------------------------------------------------------------------------------

|(1) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on January 9, 2003.
|--- | --------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on July 15, 2004.
|--- | ------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Intermix Media, Inc.s Form 10-K filed on June 15, 2004.
|--- | -------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on November 6, 2003.
|--- | ---------------------------------------------------------------------------------------

|(5) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on July 16, 2004.
|--- | ------------------------------------------------------------------------------------

|(6) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on August 5, 2004.
|--- | -------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



On May 26, 2004, we reported financial results for our fourth quarter and fiscal year ended March 31, 2004. In addition, we also provided a general
corporate update, which included the announcement of a restructuring of our operations, first quarter and full fiscal year 2005 outlook, and plans to change the Companys name to Intermix Media, Inc.



On June 4, 2004, we reported the appointment of James Quandt to our Board of
Directors and the resignation of Bradley Ward from our Board of Directors.



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SIGNATURES



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



Intermix Media, Inc. (Registrant)By:

/s/ Thomas J. FlahieThomas J. FlahieChief Financial Officer(Principal Financial Officer)




Dated: August 12, 2004



39