##### Table of Contents

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



Form 10-Q



---



(Mark One)

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



For the quarterly period ended September 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



---



Intermix Media, Inc.

(Exact Name of Registrant as Specified in its Charter)



---



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



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

(310) 215-1001

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



eUniverse, Inc.

(Former Name)



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

None



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

Common Stock, par value $.0001 per share



---



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



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



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



---



---

##### Table of Contents

Intermix Media, Inc.



Form 10-Q

For the Three Months Ended September 30, 2004



INDEX



|                              |  |                                                                                                       |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  | 3                                                                                                    
|                              |  |                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                  |  | 3   
|                              |  |                                                                                                      
|                              |  | Consolidated Balance Sheets  September 30, 2004 and March 31, 2004                                   |  | 3   
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Operations  Three months and six months ended September 30, 2004 and 2003 |  | 4   
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Cash Flows  Six months ended September 30, 2004 and 2003                  |  | 5   
|                              |  |                                                                                                      
|                              |  | Notes to Consolidated Financial Statements  September 30, 2004                                       |  | 6   
|                              |  |                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 19  
|                              |  |                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosure About Market Risk                                             |  | 37  
|                              |  |                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                               |  | 37  
|                              | 
|PART II. OTHER INFORMATION    |  | 38                                                                                                   
|                              |  |                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                     |  | 38  
|                              |  |                                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                   |  | 39  
|                              |  |                                                                                                      
|Item 6.                       |  | Exhibits                                                                                              |  | 39  
|                              | 
|Signature                     |  | 40                                                                                                   



2



---

##### Table of Contents

PART 1  FINANCIAL INFORMATION

Item 1. Financial Statements



Intermix Media, Inc.

Consolidated Balance Sheets

(in thousands, except par value data - unaudited)



|                                                                                                                         |  |                   |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                         |  | September 30,2004 |         |   | March 31,2004 |  
|Assets                                                                                                                   |  |                   |         |   |               |   |         |  
|Current assets:                                                                                                          |  |                   |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                |  | $                 | 4,802   |   |               | $ | 6,245   |  
|Restricted cash                                                                                                          |  |                   | 2,004   |   |               |   | 2,116   |  
|Accounts receivable, net                                                                                                 |  |                   | 3,938   |   |               |   | 3,901   |  
|Inventories, net                                                                                                         |  |                   | 2,238   |   |               |   | 1,168   |  
|Net assets of SkillJam held for sale                                                                                     |  |                   |        |   |               |   | 102     |  
|Prepaid expenses and other assets                                                                                        |  |                   | 4,582   |   |               |   | 3,136   |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total current assets                                                                                                     |  |                   | 17,564  |   |               |   | 16,668  |  
|Property and equipment, net                                                                                              |  |                   | 3,151   |   |               |   | 2,454   |  
|Goodwill                                                                                                                 |  |                   | 16,646  |   |               |   | 14,882  |  
|Other intangible assets, net                                                                                             |  |                   | 2,302   |   |               |   | 2,520   |  
|Deposits and other assets                                                                                                |  |                   | 1,002   |   |               |   | 974     |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total assets                                                                                                             |  | $                 | 40,665  |   |               | $ | 37,498  |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Liabilities and Stockholders Equity                                                                                     |  |                   |         |   |               |   |         |  
|Current liabilities:                                                                                                     |  |                   |         |   |               |   |         |  
|Accounts payable                                                                                                         |  | $                 | 5,024   |   |               | $ | 5,793   |  
|Accrued expenses                                                                                                         |  |                   | 2,886   |   |               |   | 3,317   |  
|Deferred revenue                                                                                                         |  |                   | 1,611   |   |               |   | 892     |  
|Current portion of debt obligations                                                                                      |  |                   |        |   |               |   | 5,224   |  
|Current portion of capitalized lease obligations                                                                         |  |                   | 129     |   |               |   | 489     |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total current liabilities                                                                                                |  |                   | 9,650   |   |               |   | 15,715  |  
|Capitalized lease obligations, less current portion                                                                      |  |                   | 16      |   |               |   | 33      |  
|Obligation to issue common stock                                                                                         |  |                   | 1,798   |   |               |   |        |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total liabilities                                                                                                        |  |                   | 11,464  |   |               |   | 15,748  |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Stockholders equity:                                                                                                    |  |                   |         |   |               |   |         |  
|Preferred stock, $0.10 par value; 40,000 shares authorized; 8,963 and 7,627 shares issued and outstanding, respectively  |  |                   | 917     |   |               |   | 763     |  
|Common stock, $0.001 par value; 250,000 shares authorized; 28,976 and 28,819 shares issued and outstanding, respectively |  |                   | 29      |   |               |   | 29      |  
|Additional paid-in capital                                                                                               |  |                   | 84,925  |   |               |   | 82,178  |  
|Accumulated deficit                                                                                                      |  |                   | (56,670 | ) |               |   | (61,220 | )
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total stockholders equity                                                                                               |  |                   | 29,201  |   |               |   | 21,750  |  
|                                                                                                                         |  |                   |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                 | 40,665  |   |               | $ | 37,498  |  
|                                                                                                                         |  |                   |         |   |               |   |         |  



See Notes to
Consolidated Financial Statements



3



---

##### Table of Contents

Intermix Media, Inc.

Consolidated Statements of Operations

(in thousands, except per share data - unaudited)



|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                                             |  | 2004                            |        |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Revenues                                                     |  | $                               | 17,762 |   |                               | $ | 11,315 |      |  | $ | 34,509 |   |  | $ | 24,318 |  
|Cost of revenues                                             |  |                                 | 4,058  |   |                               |   | 2,458  |      |  |   | 8,051  |   |  |   | 5,901  |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                 |  |                                 | 13,704 |   |                               |   | 8,857  |      |  |   | 26,458 |   |  |   | 18,417 |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                          |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Marketing and sales                                          |  |                                 | 8,141  |   |                               |   | 4,351  |      |  |   | 14,680 |   |  |   | 10,379 |  
|Product development                                          |  |                                 | 1,596  |   |                               |   | 1,347  |      |  |   | 3,229  |   |  |   | 2,872  |  
|General and administrative                                   |  |                                 | 4,013  |   |                               |   | 3,746  |      |  |   | 8,337  |   |  |   | 7,657  |  
|Restatement professional fees                                |  |                                 | 56     |   |                               |   | 2,261  |      |  |   | (281   | ) |  |   | 3,223  |  
|Amortization of other intangible assets                      |  |                                 | 267    |   |                               |   | 321    |      |  |   | 534    |   |  |   | 641    |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                     |  |                                 | 14,073 |   |                               |   | 12,026 |      |  |   | 26,499 |   |  |   | 24,772 |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                               |  |                                 | (369   | ) |                               |   | (3,169 | )    |  |   | (41    | ) |  |   | (6,355 | )
|Interest expense, net                                        |  |                                 | (83    | ) |                               |   | (118   | )    |  |   | (172   | ) |  |   | (203   | )
|Gain on debt extinguished                                    |  |                                 | 630    |   |                               |   |       |      |  |   | 630    |   |  |   |       |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes |  |                                 | 178    |   |                               |   | (3,287 | )    |  |   | 417    |   |  |   | (6,558 | )
|Income taxes                                                 |  |                                 | (22    | ) |                               |   |       |      |  |   | (27    | ) |  |   |       |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  |                                 | 156    |   |                               |   | (3,287 | )    |  |   | 390    |   |  |   | (6,558 | )
|Loss from discontinued operations                            |  |                                 | (44    | ) |                               |   | (311   | )    |  |   | (148   | ) |  |   | (88    | )
|Gain on sale of SkillJam                                     |  |                                 | 4,647  |   |                               |   |       |      |  |   | 4,647  |   |  |   |       |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  |                                 | 4,759  |   |                               |   | (3,598 | )    |  |   | 4,889  |   |  |   | (6,646 | )
|Preferred stock dividends and liquidation preference         |  |                                 | (169   | ) |                               |   | (17    | )    |  |   | (339   | ) |  |   | (34    | )
|Income allocated to preferred stockholders                   |  |                                 | (997   | ) |                               |   |       |      |  |   | (1,024 | ) |  |   |       |  
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) to common stockholders                         |  | $                               | 3,593  |   |                               | $ | (3,615 | )    |  | $ | 3,526  |   |  | $ | (6,680 | )
|                                                             |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations:                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  | $                               |       |   |                               | $ | (0.13  | )    |  | $ |       |   |  | $ | (0.25  | )
|Diluted per share                                            |  |                                 |       |   |                               |   | (0.13  | )    |  |   |       |   |  |   | (0.25  | )
|Gain on sale of SkillJam:                                    |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  |                                 | 0.12   |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|Diluted per share                                            |  |                                 | 0.12   |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|Income (loss) to common stockholders:                        |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  |                                 | 0.12   |   |                               |   | (0.14  | )    |  |   | 0.12   |   |  |   | (0.25  | )
|Diluted per share                                            |  |                                 | 0.12   |   |                               |   | (0.14  | )    |  |   | 0.12   |   |  |   | (0.25  | )



See Notes to
Consolidated Financial Statements



4



---

##### Table of Contents

Intermix Media, Inc.

Consolidated Statements of Cash Flows

(in thousands - unaudited)



|                                                                                     |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                     |  | Six Months Ended September 30, |       
|                                                                                     |  | 2004                           |        |   | 2003 |  
|Operating activities:                                                                |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                    |  | $                              | 4,889  |   |      | $ | (6,646 | )
|Net cash provided by (used in) discontinued operations                               |  |                                | 108    |   |      |   | (21    | )
|Gain on sale of SkillJam                                                             |  |                                | (4,647 | ) |      |   |       |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization of property and equipment                              |  |                                | 697    |   |      |   | 861    |  
|Amortization of other intangible assets                                              |  |                                | 534    |   |      |   | 641    |  
|Gain on debt extinguished                                                            |  |                                | (630   | ) |      |   |       |  
|Other non-cash charges                                                               |  |                                | 52     |   |      |   | 146    |  
|Provision (benefit) for doubtful accounts                                            |  |                                | (406   | ) |      |   | 779    |  
|Changes in other current assets                                                      |  |                                | (1,063 | ) |      |   | 1,009  |  
|Changes in current liabilities                                                       |  |                                | (1,325 | ) |      |   | (786   | )
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash used in operating activities                                                |  |                                | (1,791 | ) |      |   | (4,017 | )
|                                                                                     |  |                                |        |   |      |   |        |  
|Investing activities:                                                                |  |                                |        |   |      |   |        |  
|Purchases of property and equipment                                                  |  |                                | (1,407 | ) |      |   | (194   | )
|Purchases of other intangible assets                                                 |  |                                | (115   | ) |      |   | (87    | )
|Acquisition of Supernation assets                                                    |  |                                | (219   | ) |      |   |       |  
|Proceeds from sale of SkillJam                                                       |  |                                | 4,651  |   |      |   |       |  
|Deposits and other                                                                   |  |                                |       |   |      |   | 375    |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by investing activities                                            |  |                                | 2,910  |   |      |   | 94     |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Financing activities:                                                                |  |                                |        |   |      |   |        |  
|Repayment of capital lease obligations                                               |  |                                | (420   | ) |      |   | (651   | )
|Proceeds from debt obligations                                                       |  |                                |       |   |      |   | 2,000  |  
|Repayment of debt obligations                                                        |  |                                | (2,204 | ) |      |   | (293   | )
|Proceeds from exercise of stock options                                              |  |                                | 62     |   |      |   | 157    |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                  |  |                                | (2,562 | ) |      |   | 1,213  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Change in cash and cash equivalents                                                  |  |                                | (1,443 | ) |      |   | (2,710 | )
|Cash and cash equivalents, beginning of period                                       |  |                                | 6,245  |   |      |   | 4,663  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                             |  | $                              | 4,802  |   |      | $ | 1,953  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Supplemental Cash Flow Information:                                                  |  |                                |        |   |      |   |        |  
|Cash paid for interest                                                               |  | $                              | 81     |   |      | $ | 100    |  
|Cash paid for income taxes                                                           |  |                                | 192    |   |      |   | 95     |  
|Obligation to issue common stock                                                     |  |                                | 1,798  |   |      |   |       |  
|Conversion of note into Series C-1 preferred stock                                   |  |                                | 2,500  |   |      |   |       |  
|Preferred stock dividends                                                            |  |                                | 339    |   |      |   |       |  
|Equipment acquired under capital leases                                              |  |                                |       |   |      |   | 121    |  



See Notes to
Consolidated Financial Statements



5



---

##### Table of Contents

Intermix Media, Inc.

Notes to Consolidated Financial Statements

(unaudited)



Note 1. The Company and Basis of Presentation



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



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



Note 2. Accounting Policies



Estimates and assumptions



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



Restricted cash and deposits



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



Allowance for doubtful accounts



The Company provides an allowance for doubtful accounts receivable by applying a reserve for all accounts receivable outstanding over 60 days based upon
historical experience and a specific reserve for accounts with a high likelihood of becoming uncollectible. Bad debt expense (benefit) was ($406,000) for the six months ended September 30, 2004 and $779,000 for the six months ended September 30,
2003. The allowance for doubtful accounts was $283,000 at September 30, 2004 and $710,000 at March 31, 2004.



6



---

##### Table of Contents

Prepaid expenses



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



Accrued expenses



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



Revenues



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



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



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



Barter transactions are recorded at the lower of the estimated fair value of advertising received or the estimated fair value of the advertising given,
with the difference recorded as an advance or prepaid expense. Barter advertising expense is recorded in cost of revenues. During the three and six months ended September 30, 2004 and 2003, the Company recorded no bartered advertising revenue.



Stock-based compensation



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



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



7



---

##### Table of Contents

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



|                                                                           |  |                                 |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                           |  | Three Months EndedSeptember 30, |       |   | Six Months EndedSeptember 30, |  
|                                                                           |  | 2004                            |       |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Income (loss) to common stockholders:                                      |  |                                 |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                |  | $                               | 3,593 |   |                               | $ | (3,615 | )    |  | $ | 3,526  |   |  | $ | (6,680 | )
|Less: stock-based compensation expense determined by the fair value method |  |                                 | (662  | ) |                               |   | (873   | )    |  |   | (1,281 | ) |  |   | (1,777 | )
|Plus: expense allocated to preferred stockholders                          |  |                                 | 139   |   |                               |   |       |      |  |   | 268    |   |  |   |       |  
|                                                                           |  |                                 |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Pro forma income (loss) to common stockholders                             |  | $                               | 3,070 |   |                               | $ | (4,488 | )    |  | $ | 2,513  |   |  | $ | (8,457 | )
|                                                                           |  |                                 |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) to common stockholders:                                      |  |                                 |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic per share  as reported                                              |  | $                               | 0.12  |   |                               | $ | (0.14  | )    |  | $ | 0.12   |   |  | $ | (0.25  | )
|Basic per share  pro forma                                                |  |                                 | 0.11  |   |                               |   | (0.17  | )    |  |   | 0.09   |   |  |   | (0.32  | )
|                                                                           |  |                                 |       |  
|Diluted per share  as reported                                            |  |                                 | 0.12  |   |                               |   | (0.14  | )    |  |   | 0.12   |   |  |   | (0.25  | )
|Diluted per share  pro forma                                              |  |                                 | 0.11  |   |                               |   | (0.17  | )    |  |   | 0.09   |   |  |   | (0.32  | )



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



|                        |  |                                |   |  |             |  
|----------------------- |  | ------------------------------ | - |  | ----------- | -
|                        |  | Six Months Ended September 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 six months of fiscal years 2005 and 2004, were $8,742,000 and $4,769,000 of advertising media costs, respectively. The costs
of direct-response television advertising are capitalized and amortized to cost of revenues over the period future benefits are expected to be received. Included in discontinued operations for the first six months of fiscal year 2004 is $2,164,000
of direct response advertising costs. There were no direct response advertising costs included in discontinued operations in the first six months of fiscal year 2005.



Discontinued operations



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



8



---

##### 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 $4,904,000 in revenues and $5,021,000 in costs and expenses in the first six months of fiscal year 2004.



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



Income per share



Basic income per share is computed as net income (loss) less accretion of the Series A preferred stock, stock dividends on
the Series C preferred stock and income allocated to preferred stockholders divided by the weighted average number of outstanding common shares during the period. Diluted income per share gives effect to all potentially dilutive common shares
outstanding during the period. The computation of diluted income per share does not assume the conversion or exercise of securities that would have an anti-dilutive effect. For the second quarter and first six months of fiscal year 2005, 8,521,000
and 7,675,000, respectively of stock options, 7,669,000 and 7,661,000, respectively of preferred stock and 108,000 and 108,000, respectively of stock purchase warrants were excluded from the computation of diluted income per share because their
effect is anti-dilutive. For the second quarter and first six months of fiscal year 2004, 4,867,000 and 5,148,000, respectively of stock options, 2,320,000 and 2,320,000, respectively of preferred stock and 108,000 and 108,000, respectively of stock
purchase warrants were excluded from the computation of diluted income per share because their effect is anti-dilutive.



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



|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                                     |  | 2004                            |        |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Income (loss) from continuing operations:            |  | $                               | 156    |   |                               | $ | (3,287 | )    |  | $ | 390    |   |  | $ | (6,558 | )
|Preferred stock dividends and liquidation preference |  |                                 | (169   | ) |                               |   | (17    | )    |  |   | (339   | ) |  |   | (34    | )
|Income allocated to preferred stockholders           |  |                                 | (33    | ) |                               |   |       |      |  |   | (81    | ) |  |   |       |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Loss to common stockholders - basic                  |  |                                 | (46    | ) |                               |   | (3,304 | )    |  |   | (30    | ) |  |   | (6,592 | )
|Loss from discontinued operations                    |  |                                 | (44    | ) |                               |   | (311   | )    |  |   | (148   | ) |  |   | (88    | )
|Gain on sale of SkillJam                             |  |                                 | 4,647  |   |                               |   |       |      |  |   | 4,647  |   |  |   |       |  
|Income allocated to preferred stockholders           |  |                                 | (964   | ) |                               |   |       |      |  |   | (943   | ) |  |   |       |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) to common stockholders                 |  | $                               | 3,593  |   |                               | $ | (3,615 | )    |  | $ | 3,526  |   |  | $ | (6,680 | )
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic weighted average common shares                 |  |                                 | 28,946 |   |                               |   | 26,562 |      |  |   | 28,900 |   |  |   | 26,534 |  
|Conversion of preferred stock                        |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Exercise of stock options                            |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Exercise of stock purchase warrants                  |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Diluted weighted average common shares               |  |                                 | 28,946 |   |                               |   | 26,562 |      |  |   | 28,900 |   |  |   | 26,534 |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic income (loss) per common share:                |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                |  | $                               |       |   |                               | $ | (0.13  | )    |  | $ |       |   |  | $ | (0.25  | )
|Discontinued operations                              |  |                                 |       |   |                               |   | (0.01  | )    |  |   |       |   |  |   |       |  
|Gain on sale of SkillJam                             |  |                                 | 0.12   |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                     |  | $                               | 0.12   |   |                               | $ | (0.14  | )    |  | $ | 0.12   |   |  | $ | (0.25  | )
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Diluted income (loss) per common share:              |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                |  | $                               |       |   |                               | $ | (0.13  | )    |  | $ |       |   |  | $ | (0.25  | )
|Discontinued operations                              |  |                                 |       |   |                               |   | (0.01  | )    |  |   |       |   |  |   |       |  
|Gain on sale of SkillJam                             |  |                                 | 0.12   |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                     |  | $                               | 0.12   |   |                               | $ | (0.14  | )    |  | $ | 0.12   |   |  | $ | (0.25  | )
|                                                     |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  



9



---

##### Table of Contents

Recent accounting pronouncements



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



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



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



10



---

##### Table of Contents

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



Reclassifications



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



Note 3. Property and Equipment



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



|                                                |  |                   |        |   |               |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                                                |  | September 30,2004 |        |   | March 31,2004 |  
|Furniture and fixtures                          |  | $                 | 76     |   |               | $ | 75     |  
|Computers and equipment                         |  |                   | 3,778  |   |               |   | 2,656  |  
|Equipment under capital leases                  |  |                   | 495    |   |               |   | 2,495  |  
|Leasehold improvements                          |  |                   | 40     |   |               |   | 19     |  
|Purchased software                              |  |                   | 995    |   |               |   | 752    |  
|                                                |  |                   |        |   |               |   |        |  
|                                                |  |                   | 5,384  |   |               |   | 5,997  |  
|Less: accumulated depreciation and amortization |  |                   | (2,233 | ) |               |   | (3,543 | )
|                                                |  |                   |        |   |               |   |        |  
|                                                |  | $                 | 3,151  |   |               | $ | 2,454  |  
|                                                |  |                   |        |   |               |   |        |  



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



Note 4. Goodwill and Other Intangible Assets



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



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



11



---

##### Table of Contents

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



|                               |  |                   |        |   |               |   |        |  
|------------------------------ |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                               |  | September 30,2004 |        |   | March 31,2004 |  
|Customer lists                 |  | $                 | 2,260  |   |               | $ | 2,243  |  
|Domain names                   |  |                   | 1,780  |   |               |   | 1,700  |  
|License agreements             |  |                   | 315    |   |               |   | 315    |  
|Websites                       |  |                   | 1,429  |   |               |   | 1,210  |  
|Other                          |  |                   | 684    |   |               |   | 684    |  
|                               |  |                   |        |   |               |   |        |  
|                               |  |                   | 6,468  |   |               |   | 6,152  |  
|Less: accumulated amortization |  |                   | (4,166 | ) |               |   | (3,632 | )
|                               |  |                   |        |   |               |   |        |  
|                               |  | $                 | 2,302  |   |               | $ | 2,520  |  
|                               |  |                   |        |   |               |   |        |  



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



|                            |  |   |      
|--------------------------- |  | - | -----
|2005 (remaining six months) |  | $ | 492  
|2006                        |  |   | 853  
|2007                        |  |   | 438  
|2008                        |  |   | 257  
|Thereafter                  |  |   | 262  
|                            |  |   |      
|                            |  | $ | 2,302
|                            |  |   |      



Note 5. Debt Obligations and
Capital Leases



Debt obligations consist of the following
(in thousands):



|                                           |  |                   |       |               |   |        |  
|------------------------------------------ |  | ----------------- | ----- | ------------- | - | ------ | -
|                                           |  | September 30,2004 |       | March 31,2004 |  
|550 Digital Media Ventures  Affiliate (1) |  | $                 |      |               | $ | 2,404  |  
|VantagePoint  Affiliate (2)               |  |                   |      |               |   | 2,500  |  
|SFX Entertainment, Inc. (3)                |  |                   |      |               |   | 320    |  
|Obligation to issue common stock (4)       |  |                   | 1,798 |               |   |       |  
|                                           |  |                   |       |               |   |        |  
|                                           |  |                   | 1,798 |               |   | 5,224  |  
|Less: current portion of debt obligations  |  |                   |      |               |   | (5,224 | )
|                                           |  |                   |       |               |   |        |  
|                                           |  | $                 | 1,798 |               | $ |       |  
|                                           |  |                   |       |               |   |        |  

---

|(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 was March
31, 2005. This note bore interest at prime plus 2%, was collateralized by a security interest in the Companys assets and was 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



12



---

##### Table of Contents

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



|(2) | The note bore interest at 8% and was collateralized by a security interest in all of the Companys assets. VantagePoint converted the note into 1,250,000 shares of Series C-1
preferred stock on September 30, 2004. The security interest in the Companys assets was terminated when the note was converted.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(4) | On September 15, 2004, we purchased the assets of Supernation, LLC for $125,000 in cash, 900,000 shares of common stock to be issued in November 2004 and a participation in certain
future revenues. The value of the common stock to be issued in November 2004 was recorded as a debt obligation on the date of acquisition and will be transferred to stockholders equity when the common stock is issued.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 six months)                        |  | $ | 114  |  
|2006                                               |  |   | 24   |  
|Thereafter                                         |  |   | 10   |  
|                                                   |  |   |      |  
|Total minimum lease payments                       |  |   | 148  |  
|Less: amounts representing interest                |  |   | (3   | )
|                                                   |  |   |      |  
|Present value of net minimum lease payments        |  |   | 145  |  
|Less: current portion of capital lease obligations |  |   | (129 | )
|                                                   |  |   |      |  
|Long-term obligations under capital leases         |  | $ | 16   |  
|                                                   |  |   |      |  



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



Note 6. Commitments and Contingencies



Operating leases



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



|                            |  |   |      
|--------------------------- |  | - | -----
|2005 (remaining six months) |  | $ | 391  
|2006                        |  |   | 714  
|                            |  |   |      
|Total                       |  | $ | 1,105
|                            |  |   |      



13



---

##### Table of Contents

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



Legal proceedings



As previously reported, on January 31, 2003 Arcade Planet, Inc.
(Arcade Planet), a California corporation, filed a patent infringement complaint against the Company in the United States District Court for the District of Nevada. The complaint filed by Arcade Planet alleges that the Companys
online skill-based gaming business infringes a patent held by Arcade Planet entitled the 918 Patent. The complaint seeks to prevent future infringement of the 918 Patent and compensation for lost profits or royalty damages. In April
2003, the Company filed an answer denying Arcade Planets allegations and seeking declaratory judgment from the Court that the Company has not infringed the 918 Patent and that the claims of the 918 Patent are invalid and unenforceable. In July
2003, the Court stayed this action until the United States Patent and Trademark Office reexamines substantial new questions of patentability affecting certain claims underlying the 918 Patent. In July 2004, the Company sold its online skill-based
gaming business. In the event that the 918 Patent claims at issue survive reexamination by the United States Patent and Trademark Office and Arcade Planet continues to pursue any claims for past infringement, the Company will reevaluate how to
proceed at that time.



As previously reported, on October 14,
2003, several purported stockholder class action lawsuits previously filed against the Company and several current and former Company officers and/or employees in the United States District Court for the Central District of California were
consolidated into one action and lead counsel and plaintiff were appointed (the Securities Litigation). The Securities Litigation arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and
includes allegations of, among other things, intentionally false and misleading statements regarding the Companys business prospects, financial condition and performance. On December 17, 2003, plaintiffs in the Securities Litigation filed an
amended and consolidated class action complaint reiterating those allegations and also naming the Companys former auditor as an additional defendant. The Company and other defendants filed motions to dismiss the lawsuit for, among other
things, the failure of the complaint to state facts sufficient to constitute a valid claim for violation of securities laws. On June 9, 2004, the Court granted the Companys and other defendants motions to dismiss the lawsuit and
plaintiffs were permitted to file an amended complaint. On July 15, 2004, the Securities Litigation was stayed until October 13, 2004, in order to attempt a mediated settlement of the claims asserted in the matter. On October 8, 2004, the stay was
extended by the Court upon stipulation of the parties until November 15, 2004. On October 26, 2004, the parties participated in mediation. See Note 10 for information regarding an agreement in principle to settle the Securities Litigation.



Also as previously reported, two purported stockholder
derivative actions, which are substantially similar, are pending against various current and former Company directors, officers, and/or employees. One of the actions is pending in the United States District Court for the Central District of
California and the other, formerly two actions which have been consolidated, was filed in the Superior Court of California for the County of Los Angeles (collectively, the Derivative Litigation). The Derivative Litigation similarly
arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and includes claims of breach of fiduciary duty in connection with the restatement and in connection with allegedly improper insider sales of Company
stock by one officer and one former Company employee. On January 12, 2004, the Company filed a motion to dismiss plaintiffs consolidated derivative complaint in the State Court derivative action on the grounds, among others, that plaintiffs
have not pled, and will not be able to plead, facts sufficient to demonstrate that demand on the Companys Board of Directors would have been futile. On April 27, 2004, the Companys motion, as well as those filed by the individual
defendants in the case, were sustained in their entirety. On May 27, 2004, plaintiffs filed an amended consolidated derivative complaint which essentially replicated the allegations made in the Securities Litigation. The Company and individual
defendants again filed motions to dismiss the lawsuit based on, among other grounds, the failure of plaintiffs to remedy the deficiencies that prompted dismissal of the original consolidated complaint. On October 1, 2004, the Companys and
individual defendants motions were granted and the Court dismissed the State Court derivative action. Plaintiffs may appeal the decision of the Court, but have not to date filed notice of their intent to do so. The Federal Court derivative
action has been stayed pending determination of whether plaintiffs in the Securities Litigation will be able to state a claim against the defendants.



14



---

##### Table of Contents

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



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



As
previously reported, on December 11, 2003, Brad Greenspan, the Companys former Chairman and Chief Executive Officer, filed a complaint against the Company, each of the Companys directors and the Companys Series C preferred
stockholders in the Court of Chancery of the State of Delaware in and for New Castle County. The complaint challenged various actions taken by the Company and its Board of Directors in advance of the Companys 2003 annual meeting of
stockholders, which was held on January 29, 2004. The Company and the Companys directors denied Mr. Greenspans allegations and claims as factually incorrect and otherwise without merit. On July 8, 2004, Mr. Greenspan filed a motion to
dismiss the action as moot and for an award of attorneys fees and costs in the amount of $320,000. The Company agrees that the lawsuit should be dismissed but has opposed the application for fees and costs. There have been no material
developments in this matter since the Companys last report.



Note 7.
Stockholders Equity and Equity Compensation Plans



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



15



---

##### Table of Contents

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



|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|-------------------------------- |  | ------------------------------ | - | ---- | ---------------------------- | ---- | --------------- | ------ | - | ---------------------------- | - | ----
|                                 |  | Six Months Ended September 30,
|                                 |  | 2004                           |   | 2003
|                                 |  | NumberofOptions                |   |      | WeightedAverageExercisePrice |      | NumberofOptions |        |   | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 7,844                          |   |      | $                            | 2.28 |                 | 7,602  |   |                              | $ | 3.25
|Granted                          |  | 1,750                          |   |      |                              | 2.35 |                 |       |   |                              |   |    
|Exercised                        |  | (31                            | ) |      |                              | 2.00 |                 | (26    | ) |                              |   | 2.16
|Cancelled                        |  | (1,042                         | ) |      |                              | 2.54 |                 | (2,709 | ) |                              |   | 4.28
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|Outstanding at end of period     |  | 8,521                          |   |      |                              | 2.26 |                 | 4,867  |   |                              |   | 2.68
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|Exercisable at end of period     |  | 3,495                          |   |      |                              | 2.52 |                 | 3,290  |   |                              |   | 2.70
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     



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



|            |  |                     |  |                                |      |        |       |                                |   |     
|----------- |  | ------------------- |  | ------------------------------ | ---- | ------ | ----- | ------------------------------ | - | ----
|            |  | Options Outstanding |  | Options Exercisable           
|Price Range |  | Number              |  | Weighted AverageExercise Price |      | Number |       | Weighted AverageExercise Price
|$5.01-7.00  |  | 145                 |  | $                              | 5.94 |        | 139   |                                | $ | 5.96
|3.01-5.00   |  | 172                 |  |                                | 3.85 |        | 112   |                                |   | 3.85
|1.00-3.00   |  | 8,204               |  |                                | 2.16 |        | 3,244 |                                |   | 2.32
|            |  |                     |  |                                |      |        |       |                                |   |     
|            |  | 8,521               |  |                                |      |        | 3,495 |                                |   |     
|            |  |                     |  |                                |      |        |       |                                |   |     



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



|                                 |  |                                |  |                              |      |                  |      |   |                              |   |     
|-------------------------------- |  | ------------------------------ |  | ---------------------------- | ---- | ---------------- | ---- | - | ---------------------------- | - | ----
|                                 |  | Six Months Ended September 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
|                                 |  |                                |  |                              |      |                  |      |   |                              |   |     



16



---

##### Table of Contents

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 EndedSeptember 30, |        | Six Months EndedSeptember 30,
|                   |  | 2004                            |        | 2003                          |   | 2004   |  | 2003
|Revenues:          |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Products marketing |  | $                               | 11,414 |                               | $ | 6,467  |  | $    | 21,971 |  | $ | 13,492
|Network            |  |                                 | 6,348  |                               |   | 4,848  |  |      | 12,538 |  |   | 10,826
|                   |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Total revenues     |  | $                               | 17,762 |                               | $ | 11,315 |  | $    | 34,509 |  | $ | 24,318
|                   |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Gross profit:      |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Products marketing |  | $                               | 7,513  |                               | $ | 4,406  |  | $    | 14,279 |  | $ | 8,526 
|Network            |  |                                 | 6,191  |                               |   | 4,451  |  |      | 12,179 |  |   | 9,891 
|                   |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Total gross profit |  | $                               | 13,704 |                               | $ | 8,857  |  | $    | 26,458 |  | $ | 18,417
|                   |  |                                 |        |                               |   |        |  |      |        |  |   |       



During the first six
months of fiscal year 2005, sales to two customers exceeded 10% of segment revenues. Sales to these two customers represented 10% and 30%, respectively of network segment revenues. In the product marketing segment, sales to the top 10 customers were
less than 1% of segment revenues. In the network segment, sales to the top 10 customers were approximately 54% of segment revenues. Revenues from the sale of Body Shape, Dream Shape and Hydroderm products were approximately 18%, 15% and 45%,
respectively of first six months of fiscal year 2005 product marketing revenues. Most of the products sold in the first six months of fiscal year 2005 were purchased from three vendors.



17



---

##### Table of Contents

During the first six months of fiscal year 2004, no customer exceeded 10% of segment revenues. In the
product marketing segment, sales to the top 10 customers were less than 1% of segment revenues. In the network segment, sales to the top 10 customers were approximately 26% 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.



Note 10. Subsequent Events



We purchased the common and preferred stock of Focalex, Inc. on November 5,
2004 for $2.6 million in cash and 548,000 shares of common stock. Focalex reported $3,526,000 in revenues for the fiscal year ended June 30, 2004 and was profitable. We are negotiating a $3 million bank line of credit to replace the cash portion of
the purchase price. There can be no assurance that the bank line of credit will be completed on acceptable terms or at all.



The Company reached an agreement in principle on November 5, 2004 to settle the Securities Litigation. The lead plaintiff and the Company have agreed to
settle the lawsuit for $5.5 million in cash. The Companys insurance carriers have agreed to fund the entire settlement. One of the Companys insurance carriers, from whom the Company expects that approximately $1.5 million of the
settlement will be paid, has reserved the right to seek reimbursement from the Company should the carrier dispute that it was obligated to provide coverage for the lawsuit. Consummation of the settlement is conditioned on agreement by the parties to
the additional terms and conditions of a stipulation of settlement and upon the Courts acceptance and approval of the settlement.



18



---

##### Table of Contents

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. 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



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, and a sharing of certain future revenues. This acquisition closed on September 15, 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 agreed to sell his member interests in Supernation to avoid any participation in the future revenue sharing 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. We used $1.8 million of the sale proceeds to repay a $2.4 million senior secured convertible note payable to 550
DMV and recorded a $630,000 gain on debt extinguished.



In
December 2003, we sold a 33% interest in our website MySpace.com to certain employees that were developing the website and also gave them certain minority owner protections. At the same time, certain of these employees agreed to release the Company
from disputed earn-out obligations related to a business we purchased from them. We experienced steady growth in new members at the website and began selling advertising on the website during the next six months. In the second quarter of this fiscal
year, the rate of growth surged and we experienced a significant increase in the number of new MySpace.com members. MySpace.com now has about three billion available monthly advertising impressions. We are currently funding all the operations,
working capital and capital needs of this website.



On October
15, 2004, the Securities and Exchange Commission (SEC) notified the Company that the SEC staff informal investigation has been terminated and no enforcement action has been recommended. Such action on the part of the SEC staff is not a
finding nor judgment about the matters investigated or a conclusion that a future action will not be brought against the Company or its officers or directors.



19



---

##### Table of Contents

On October 18, 2004, the American Stock Exchange informed us that they approved the Companys
application for initial listing of our common stock on the American Stock Exchange. Trading in our common stock commenced October 29, 2004 under the symbol MIX.



We purchased Focalex, Inc. on November 5, 2004 for $2.6 million in cash and 548,000 shares of common stock. We are negotiating a $3 million bank line
of credit to replace the cash portion of the purchase price. There can be no assurance that the bank line of credit will be completed on acceptable terms or at all.



The Company reached an agreement in principle on November 5, 2004 to settle the Securities Litigation. The lead plaintiff
and the Company have agreed to settle the lawsuit for $5.5 million in cash. The Companys insurance carriers have conditionally agreed to fund the entire settlement. Consummation of the settlement is conditioned on agreement by the parties to
the additional terms and conditions of a stipulation of settlement and upon the Courts acceptance and approval of the settlement.



Business Segments



We group the Companys businesses into two business segments, the product marketing segment and the network segment. Our revenues are generated
predominately from the sale of products direct to consumers and the sale of advertising on our network of websites. 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.



Product marketing segment revenues consist of the sale of products direct to
consumers over the Internet. We also earned subscriptions to our websites and activity-based fees in prior years. We sell various products through our ecommerce websites and telemarketing centers. Customers are obtained predominately by online
advertising on both Company-owned and third party websites and to a lesser extent by television, radio and print advertising. These products change over time and include herbal and all-natural ingestible and cosmetic products, and ink cartridges and
related office products. We also sold collectibles, fitness products and various niche products in prior years. The Company continuously tests product offerings to determine customer acquisition costs and revenue potential, and to identify the most
effective marketing programs.



We have a diverse network of
websites that provide entertainment and community oriented content (the Intermix Network). We earn paid advertising revenues through a variety of traditional ad units such as banner, skyscraper, pop-up and interstitial ads, rich media,
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 advertisement or performs a specific
action. The Intermix 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



20



---

##### Table of Contents

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 is 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.



We recognize revenue on shipment of products or provision of services. Revenue includes shipping and handling charges. Product warehousing and fulfillment
is handled internally as well as 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.



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 areas 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.



21



---

##### Table of Contents

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.



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 September 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 continue to fully reserve our deferred tax
assets.



22



---

##### Table of Contents

Results of Operations



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



|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|------------------------------------------------------------ |  | ------------------------------- | - |  | ----------------------------- | -- |  | ----- | - |  | ----- | --
|                                                             |  | Three Months EndedSeptember 30, |   |  | Six Months EndedSeptember 30, |   
|                                                             |  | 2004                            |   |  | 2003                          |    |  | 2004  |   |  | 2003  |   
|Revenues:                                                    |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Product marketing                                            |  | 64.3                            | % |  | 57.2                          | %  |  | 63.7  | % |  | 55.5  | % 
|Network                                                      |  | 35.7                            |   |  | 42.8                          |    |  | 36.3  |   |  | 44.5  |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Total                                                        |  | 100.0                           |   |  | 100.0                         |    |  | 100.0 |   |  | 100.0 |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Cost of revenues:                                            |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Product marketing                                            |  | 22.0                            |   |  | 18.2                          |    |  | 22.3  |   |  | 20.4  |   
|Network                                                      |  | 0.9                             |   |  | 3.5                           |    |  | 1.0   |   |  | 3.9   |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Total                                                        |  | 22.9                            |   |  | 21.7                          |    |  | 23.3  |   |  | 24.3  |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Operating expenses:                                          |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Marketing and sales                                          |  | 45.8                            |   |  | 38.5                          |    |  | 42.5  |   |  | 42.7  |   
|Product development                                          |  | 9.0                             |   |  | 11.9                          |    |  | 9.4   |   |  | 11.8  |   
|General and administrative                                   |  | 22.6                            |   |  | 33.1                          |    |  | 24.2  |   |  | 31.4  |   
|Restatement professional fees                                |  | 0.3                             |   |  | 20.0                          |    |  | (0.8  | ) |  | 13.3  |   
|Amortization of other intangible assets                      |  | 1.5                             |   |  | 2.8                           |    |  | 1.5   |   |  | 2.6   |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Total operating expenses                                     |  | 79.2                            |   |  | 106.3                         |    |  | 76.8  |   |  | 101.8 |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Operating loss                                               |  | (2.1                            | ) |  | (28.0                         | )  |  | (0.1  | ) |  | (26.1 | ) 
|Interest expense, net                                        |  | (0.4                            | ) |  | (1.0                          | )  |  | (0.5  | ) |  | (0.9  | ) 
|Gain on debt extinguished                                    |  | 3.5                             |   |  |                              |    |  | 1.8   |   |  |      |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Income (loss) from continuing operations before income taxes |  | 1.0                             |   |  | (29.0                         | )  |  | 1.2   |   |  | (27.0 | ) 
|Income taxes                                                 |  | (0.1                            | ) |  |                              |    |  | (0.1  | ) |  |      |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Income (loss) from continuing operations                     |  | 0.9                             |   |  | (29.0                         | )  |  | 1.1   |   |  | (27.0 | ) 
|Loss from discontinued operations                            |  | (0.3                            | ) |  | (2.8                          | )  |  | (0.4  | ) |  | (0.3  | ) 
|Gain on sale of SkillJam                                     |  | 26.2                            |   |  |                              |    |  | 13.5  |   |  |      |   
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   
|Net income (loss)                                            |  | 26.8                            | % |  | (31.8                         | )% |  | 14.2  | % |  | (27.3 | )%
|                                                             |  |                                 |   |  |                               |    |  |       |   |  |       |   



Revenues



Revenues increased 57% to $17.8 million in the second quarter of fiscal year
2005 from $11.3 million in the second quarter of fiscal year 2004. The increase in revenues was attributable to growth in both business segments, with the product marketing segment producing $11.4 million in revenues in the second quarter of fiscal
year 2005 compared to $6.5 million in the same quarter last year, and the network segment producing $6.4 million in revenues in the second quarter of fiscal year 2005 compared to $4.8 million in the same quarter last year.



23



---

##### Table of Contents

Revenues increased 42% to $34.5 million in the first six months of fiscal year 2005 from $24.3 million in
the first six months of fiscal year 2004. The increase in revenues was attributable to both business segments with the product marketing segment producing $22.0 million in revenues in the first six months of fiscal year 2005 compared to $13.5
million in the same period last year, and the network segment producing $12.5 million in revenues in the first six months of fiscal year 2005 compared to $10.8 million in the same period last year.



For the second quarter of fiscal year 2005, product marketing segment
revenues increased by 76% to $11.4 million compared to the same quarter last year. The Alena business unit produced $7.2 million in increased revenues in the second 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 $858,000 in the second quarter of fiscal year 2005 compared to the same quarter last year due to no
sales of seasonal and limited life products in the current quarter. The ResponseBase business unit was merged into the Alena business unit at December 31, 2003 and we no longer sell seasonal and limited life products. We also experienced a $431,000
decline in revenues at our ink cartridge business unit in the second quarter of fiscal year 2005 compared to the same quarter last year due to lower spending on the acquisition of new customers.



For the second quarter of fiscal year 2005, network segment revenues
increased by 31% to $6.4 million compared to the same quarter last year. The increase in revenues was due to $3.5 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 $271,000 of higher subscription 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 year.



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 gross profit margin of the product marketing segment was 66% in the second quarter of fiscal year 2005 compared
to 68% in the same quarter last year, and 65% in the first six months of fiscal year 2005 compared to 63% in the same period last year. The first six months 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 relates to non-advertising revenues and was $157,000 in the second
quarter of fiscal year 2005 compared to $397,000 in the same quarter last year, and $359,000 in the first six months of fiscal year 2005 compared to $935,000 in the same period 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 $8.1 million in the second quarter of fiscal year 2005 compared to $4.4 million in the second quarter of fiscal year 2004, and were 46% of revenues for the second quarter of fiscal year
2005 compared to 39% of revenues for the same quarter last year. Marketing and sales costs



24



---

##### Table of Contents

were $14.7 million in the first six months of fiscal year 2005 compared to $10.4 million in the same period last year,
and were 43% of revenues for the first six months of fiscal years 2005 and 2004. Advertising and related revenue sharing expenses increased by $3.7 million in the second quarter of fiscal year 2005 due to higher spending on continuity program
customer acquisition and download advertising revenue sharing arrangements. Outside services increased by $166,000 due to higher third party call center customer support costs in the current quarter at our Alena business unit and salary expense
increased by $199,000 due to additional personnel. We recruited a national sales team to sell branded advertising on our network of websites and the higher salary expense was due in part to these additional personnel. Bad debt expense decreased by
$588,000 in the latest quarter due to improved customer credit granting experience. We expect marketing and sales costs to represent about 45% 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 9% of revenues for the second quarter of fiscal year 2005, from $1.3 million or 12% of revenues for the same quarter
last year. Product development costs increased to $3.2 million or 9% of revenues for the first six months of fiscal year 2005, from $2.9 million or 12% of revenues for the same period last year. The current quarter expense increase was a result of
$244,000 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 $4.0 million, amounting to 23% of revenues for the second quarter of
fiscal year 2005, from $3.7 million or 33% of revenues for the second quarter of fiscal year 2004. General and administrative costs increased to $8.3 million, amounting to 24% of revenues for the first six months of fiscal year 2005, from $7.6
million or 31% of revenues for the same period last year. Salaries expense decreased $129,000 in the second quarter of fiscal year 2005 compared to the same quarter last year due to fewer personnel in the current quarter. Insurance expense increased
$125,000 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 of 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, and will represent about 25% of revenues.



Restatement Professional Fees



We incurred approximately $56,000 of restatement professional fees in the second quarter of fiscal year 2005 and approximately $177,000 in the first six
months of fiscal year 2004. 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 quarter ended June 30, 2004 of first quarter and prior year legal costs. We do not know how long the litigation matters will continue or how much each
will cost. In the second quarter and first six months of fiscal year 2004, we incurred approximately $2.3 million and $3.2 million, respectively of restatement professional fees.



Amortization of Other Intangible Assets



In the second quarter of fiscal year 2005, amortization of other intangible assets was $267,000 compared to $321,000 in the same quarter last year.
Amortization of other intangible assets was $534,000 in the first six months of fiscal year 2005 compared to $641,000 in the same period last year. We expect amortization expense for the last two quarters of fiscal year 2005 to be approximately
$500,000.



25



---

##### Table of Contents

Income Taxes



We recorded $27,000 of income tax expense in the first six months 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.



Gain on Debt Extinguished



In connection with the sale of the SkillJam assets in July 2004, we repurchased a $2.4 million senior secured convertible note from 550 DMV for $1.8 million and realized a $630,000 gain on debt extinguishment.



Income (Loss) from Discontinued Operations



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



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



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



Liquidity and Capital Resources



Net cash used in operating activities was ($1.8) million in the first six
months of fiscal year 2005 compared to ($4.0) million in the first six months of fiscal year 2004. The net cash used in operating activities in the first six months of fiscal year 2005 was primarily due to an increase in current assets and a
decrease in current liabilities, partially offset by income from operations and non-cash expenses. The net cash used in operating activities in the first six months 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.



Net cash provided by investing activities was $2.9 million in the first six months of fiscal year 2005 compared to $94,000 in the first six months of fiscal year 2004. Net cash provided by investing activities in the
first six months of fiscal year 2005 was from the proceeds from the sale of SkillJam, partially offset by purchases of computer and network equipment, and intangible assets. Net cash provided by investing activities in the first six months 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.



26



---

##### Table of Contents

Net cash provided by (used in) financing activities was ($2.6) million in the first six months of fiscal
year 2005 compared to $1.2 million in the first six months of fiscal year 2004. Net cash used in financing activities in the first six months of fiscal year 2005 was due to the repayment of capital lease and debt obligations. Net cash provided by
financing activities in the first six months of fiscal year 2004 was due to the proceeds from a debt obligation and proceeds from the exercise of stock options, partially offset by the repayment of capital lease and debt obligations.



As of September 30, 2004, we had $4.8 million of cash and cash equivalents
and $2.6 million in restricted cash, and $7.9 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 September 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, partially offset by the proceeds
from the sale of SkillJam. The increase in working capital from March 31, 2004 to September 30, 2004 was primarily due to the repayment of capital lease obligations and the repayment and conversion to stockholders equity of 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 550 DMV senior secured convertible note for $1.8 million and 550 DMV agreed to waive its participation in the profit from the resale of the option shares acquired by
VantagePoint if VantagePoint purchased the note. In connection with the Companys sale of the SkillJam assets in July 2004, VantagePoint assigned its right to purchase the 550 DMV note to the Company for no consideration and the Company
repurchased the note for $1.8 million and realized a $630,000 gain on debt extinguishment.



On September 30, 2004, VantagePoint converted a $2.5 million senior secured convertible note into 1,250,000 shares of Series C-1 preferred stock. The repayment of the 550 DMV note and the conversion of the
VantagePoint note resulted in the retirement of all senior secured debt other than a minor amount of capital lease obligations.



We are obligated to issue 900,000 shares of common stock in November 2004 to the sellers of the Supernation assets. This is a non-cash obligation at
September 30, 2004 that was settled in common stock on November 5, 2004.



We sold our 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.



We have application download and
content distribution agreements with Sharman Networks, Ltd. that will terminate in November 2004. The remaining non-refundable cash advance obligations to Sharman Networks are minor. The unrecouped cash advances and the unamortized value of the
common stock issued to Sharman Networks at September 30, 2004 was $625,000.



We purchased the common and preferred stock of Focalex, Inc. on November 5, 2004 for $2.6 million in cash and 548,000 shares of common stock. We are negotiating a $3 million bank line of credit to replace the cash
portion of the purchase price. The proposed bank line of credit is expected to have a one-year term and would grant the bank a first priority lien on all of the Companys assets. There can be no assurance that the bank line of credit will be
completed on acceptable terms or at all.



27



---

##### Table of Contents

We experienced a significant increase in the number of new members at our MySpace.com website in the
second quarter of this fiscal year. We own 67% of this website, but we are currently funding all the operations, working capital and capital needs of this website. We are adding additional technical, sales and infrastructure personnel to support the
anticipated future growth of this website. Because the surge in new members is recent, we are not sure of the rate of future growth in MySpace.com revenues, personnel and capital needs.



We are exploring financing options to raise additional capital to fund the anticipated future growth in MySpace.com
operations and data center needs, and fund general corporate purposes, including potential future acquisitions. We do not know if we will be able to raise this capital or what the terms of such a financing might be. We have adequate cash on hand and
available borrowing capacity to fund our existing business for at least the next twelve months. We do not know how much capital over the next two to three years that might be needed for MySpace.com to achieve its potential. We might not be able to
achieve the revenue potential for MySpace.com if we are not able to raise new capital.



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



Contractual Obligations



We lease facilities and equipment under various capital and operating lease agreements expiring at various dates through
March 2008.



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



|                              |  |                       |       |                             |   |                |  |            |     |  |   |   
|----------------------------- |  | --------------------- | ----- | --------------------------- | - | -------------- |  | ---------- | --- |  | - | --
|Contractual Obligations       |  | TotalAmountsCommitted |       | 6 MonthsEndedMarch 31, 2005 |   | March 31, 2006 |  | Thereafter
|Common stock to be issued     |  | $                     | 1,798 |                             | $ | 1,798          |  | $          |    |  | $ |  
|Capital lease obligations     |  |                       | 148   |                             |   | 114            |  |            | 24  |  |   | 10
|Operating lease obligations   |  |                       | 1,105 |                             |   | 391            |  |            | 714 |  |   |  
|                              |  |                       |       |                             |   |                |  |            |     |  |   |   
|Total contractual obligations |  | $                     | 3,051 |                             | $ | 2,303          |  | $          | 738 |  | $ | 10
|                              |  |                       |       |                             |   |                |  |            |     |  |   |   



Risk Factors



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 arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and includes
allegations of, among other things, intentionally false and misleading statements regarding the Companys business prospects, financial condition and performance. On December 17, 2003, plaintiffs in the Securities Litigation filed an amended
and consolidated class action complaint reiterating those allegations and also naming the Companys former auditor as an additional defendant. The Company and other defendants filed motions to dismiss the lawsuit for, among other things, the
failure of the complaint to state facts sufficient to constitute a claim for violation of securities laws. On June 9, 2004, the Court granted the Companys and other defendants motions to dismiss the lawsuit and plaintiffs were permitted
to file an amended complaint. On July 15, 2004, the Securities Litigation was stayed until October 13, 2004, in order to attempt a mediated settlement of the claims asserted in the matter. On October 8, 2004, the stay was extended by the Court upon
stipulation of the parties until November 15, 2004. On October 26, 2004, the parties participated in mediation. See Note 10 of Notes to Consolidated Financial Statements for information regarding an agreement in principle to settle the Securities
Litigation.



28



---

##### Table of Contents

Also as previously reported, two purported stockholder derivative actions, which are substantially
similar, are pending against various current and former Company directors, officers, and/or employees. One of the actions is pending in the United States District Court for the Central District of California and the other, formerly two actions which
have been consolidated, was filed in the Superior Court of California for the County of Los Angeles. The Derivative Litigation similarly arises out of the Companys restatement of quarterly financial results for fiscal year 2003 and includes
claims of breach of fiduciary duty in connection with the restatement and in connection with allegedly improper insider sales of Company stock by one officer and one former Company employee. On January 12, 2004, the Company filed a motion to dismiss
plaintiffs consolidated derivative complaint in the State Court derivative action on the grounds, among others, that plaintiffs have not pled, and will not be able to plead, facts sufficient to demonstrate that demand on the Companys
Board of Directors would have been futile. On April 27, 2004, the Companys motion, as well as those filed by the individual defendants in the case, were sustained in their entirety. On May 27, 2004, plaintiffs filed an amended consolidated
derivative complaint which essentially replicated the allegations made in the Securities Litigation. The Company and individual defendants again filed motions to dismiss the lawsuit based on, among other grounds, the failure of plaintiffs to remedy
the deficiencies that prompted dismissal of the original consolidated complaint. On October 1, 2004, the Companys and individual defendants motions were granted and the Court dismissed the State Court derivative action. Plaintiffs may
appeal the decision of the Court, but have not to date filed notice of their intent to do so. The Federal Court derivative action has been stayed pending determination of whether plaintiffs in the Securities Litigation will be able to state a claim
against the defendants.



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



In addition, the SEC conducted an informal
inquiry regarding the circumstances leading up to the accounting restatement. On October 15, 2004, SEC notified the Company that the SEC staff informal investigation has been terminated and no enforcement action has been recommended. Such action on
the part of the SEC staff is not a finding or judgment about the matters investigated nor a conclusion that a future action will not be brought against the Company or its officers or directors. Responding to any future inquiry could require the
diversion of managements attention and expenditure of our resources.



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.



29



---

##### Table of Contents

Our management, preferred stockholders, large common stockholders and members of our Board of Directors can exert
significant influence over the affairs of the Company.



As of September 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 63% of our common stock
on an as-converted basis, excluding stock options and warrants to purchase common stock. 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 or may not be aligned, 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.



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 September 30, 2004, we had 8,521,000 outstanding stock options and
258,000 outstanding warrants to purchase our common stock.



As
of September 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 $4.78 as of September 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



30



---

##### Table of Contents

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 September 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 September 30, 2004, we had 6,972,000 shares of our Series C and Series
C-1 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 38,000 shares of Series C
preferred stock as dividends through October 31, 2004 and 100,000 shares of Series C-1 preferred stock as dividends through September 30, 2005.



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. In addition, 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.



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 bundled one of the Companys applications with other applications that are downloaded
from the Internet with the Kazaa Media Desktop. Sharman Networks also included 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 download application 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 and this contract ends November 30, 2004. 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 $625,000 at September 30, 2004.



31



---

##### Table of Contents

Our business depends on our server and network hardware and software and our ability to expand network capacity.



The performance of our server and networking hardware
and software infrastructure is critical to our business and reputation and our ability to attract Web users, advertisers, members and e-commerce partners to our websites. An unexpected and/or substantial increase in the use of our websites could
strain the capacity of our systems, which could lead to slower response time or system failures. Although we have not had any significant delays, any slowdowns or system failures could adversely affect the speed and responsiveness of our websites
and diminish the experience for our customers and members. We also face risks related to our ability to scale up member levels on our MySpace.com website while maintaining superior performance. If the usage of our websites substantially increases,
we may need to purchase additional servers and networking equipment to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be significant. Any system failure that causes an interruption in
service or a decrease in the responsiveness of our websites could reduce traffic on our websites and, if sustained or repeated, could impair our reputation and the attractiveness of our brands as well as reduce revenue and negatively impact our
operating results.



We rely on many different software
applications, many of which have been developed internally. If these software applications fail, it would adversely affect our ability to provide our services. If we receive a significant unexpected increase in usage and are not able to rapidly
expand our transaction-processing systems and network infrastructure without any systems interruptions, it could seriously harm our business and reputation.



We are negotiating a bank line of credit and we may need to raise additional capital. A bank line of credit and additional capital may not be available on
acceptable terms, if at all.



We are negotiating a $3
million bank line of credit to replace the cash portion of the purchase price we paid for Focalex, Inc. in November 2004 The proposed bank line of credit is expected to have a one-year term and would grant the bank a first priority lien on all of
the Companys assets. There can be no assurance that the bank line of credit will be completed on acceptable terms or at all.



We are exploring financing options to raise additional capital to fund the anticipated future growth in MySpace.com operations and data center needs, and
fund general corporate purposes, including potential future acquisitions. We do not know how much capital over the long term might be needed for MySpace.com to achieve its potential. We do not know if we will be able to raise this capital or what
the terms of such a financing might be. We might not be able to achieve the revenue potential for MySpace.com if we are not able to raise new capital.



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.



32



---

##### Table of Contents

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 18%, 15% and 45%, respectively of the first six months of fiscal year 2005 product marketing segment revenues. Most of the products we sold in the first six
months of fiscal year 2005 were purchased from three vendors. In addition, revenues from Advertising.com, Inc. and Overture Services, Inc. were approximately 10% and 30%, respectively of first six months of 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 believe 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.



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



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



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



A significant portion of our future growth and
profitability may depend in part upon our ability to identify companies that are suitable acquisition candidates, to acquire those companies upon acceptable terms, and to effectively integrate and expand their operations within our infrastructure.
We may not be able to identify additional candidates that are suitable for acquisition or to consummate desired acquisitions on favorable terms. Acquisitions involve a number of special risks including the diversion of managements attention to
the assimilation of the operations and personnel of the acquired companies, adverse short-term effects on our operating results, and the potential inability to integrate financial and management reporting systems. A significant portion of our
capital resources could be used for these acquisitions. Accordingly, we may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to us, if at all. Moreover, we may not be able to



33



---

##### Table of Contents

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.



34



---

##### Table of Contents

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



We have historically 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;
| | - | --------------------------------------------------------------------



| |  | our ability to retain existing users, attract new users 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 Internet advertising revenue and e-commerce revenue;
| | - | -------------------------------------------------------------------



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



| |  | 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



35



---

##### Table of Contents

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.



Changes in government regulation and legal uncertainties 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.



A
federal law that impacts the way certain commercial E-mails are sent over the Internet went into effect January 1, 2004 and preempts the future enforcement of most state commercial E-mail laws, including the 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 reduce our revenues.



The
Federal Trade Commission has increasingly focused on issues impacting online marketing practices. The marketing claims we make in advertisements we place to obtain new e-commerce customers are adequately supported in our judgment. The Federal Trade
Commission may make a different judgment about the adequacy of the support for the marketing claims we make. We could be fined for our past marketing practices and we could be required to make changes in our future marketing claims that could
adversely affect our revenues.



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 recently released Windows XP Service Pack 2 that adds pop-up
blocking features to Internet Explorer. In addition, Internet service providers and certain search engines have 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 will 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 blockages of our delivery of E-mails to their customers, which would limit the effectiveness of our E-mail marketing. Some Internet



36



---

##### Table of Contents

service providers also use proprietary technologies to handle and deliver E-mail. If Internet service providers
materially limit or block the delivery of our E-mails, or if our technology fails to be compatible with these Internet service providers E-mail technologies, then our business, results of operations or financial condition could be materially
and adversely affected. In addition, the effectiveness of E-mail marketing may decrease as a result of increased consumer resistance to E-mail marketing in general.



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



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



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



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



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 August 2003, the Company restated previously reported
financial results for the first three quarters of fiscal year 2003 due to the discovery of accounting errors in the Companys fiscal year 2003 quarterly financial statements. In response to the identified accounting errors, management
significantly expanded the size of the accounting and finance departments and reviewed the adequacy of internal controls over financial reporting. We identified various deficiencies in the design or operation of internal controls in major business
processes that could have an impact on financial reporting. Our independent auditors confirmed the continued existence of certain of these deficiencies during their audit of our fiscal year 2004 financial statements.



The Company implemented a number of remedial controls and other actions
designed to improve its accounting and financial reporting procedures and controls in fiscal year 2004. One of these changes was the purchase of a new general ledger system that is more appropriate to the size and complexity of the Companys
current business operations. The integration of the new general ledger system with the Companys existing business applications is ongoing and management expects the integration to be completed in six to nine months.



37



---

##### Table of Contents

The Company adopted supplemental control measures in fiscal year 2004 that were designed to mitigate the
effect of the identified control deficiencies, including the deficiencies confirmed by our auditors during their audit of our fiscal year 2004 financial statements. The Company expects that the full implementation of its integrated general ledger
system and the correction of the other identified control deficiencies over financial reporting will render these supplemental control measures redundant and they will be eliminated.



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.



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 September 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 general ledger system continued during the quarter ended September 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.



38



---

##### Table of Contents

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



We held our annual meeting of stockholders on August 31, 2004. The Board of Directors submitted to a vote of the Companys stockholders and solicited proxies for, a slate of directors to hold office until the
next annual meeting of stockholders and three additional matters.



Proposal 1. Election of Directors:



|                   |  |            |  |          
|------------------ |  | ---------- |  | ---------
|                   |  | For        |  | Withheld 
|Richard Rosenblatt |  | 26,327,996 |  | 5,473,218
|Brett Brewer       |  | 26,287,996 |  | 5,513,218
|Daniel Mosher      |  | 26,278,041 |  | 5,523,173
|Lawrence Moreau    |  | 26,327,396 |  | 5,473,818
|Jeffrey Edell      |  | 26,327,996 |  | 5,473,218
|James Quandt       |  | 26,327,396 |  | 5,473,818



Proposal 2. To approve
the issuance of common stock to Series C preferred stockholders under certain circumstances:



| |  |           |  |           |  |           
| |  | --------- |  | --------- |  | ----------
| |  | For       |  | Against   |  | Abstain   
| |  | 7,567,152 |  | 6,745,992 |  | 10,500,121



Proposal 3. To approve
the adoption of the Intermix Media, Inc. 2004 Stock Awards Plan:



| |  |            |  |           |  |        
| |  | ---------- |  | --------- |  | -------
| |  | For        |  | Against   |  | Abstain
| |  | 17,206,972 |  | 7,536,945 |  | 69,348 



Proposal 4. To ratify
the appointment of Moss Adams LLP as the Companys independent auditors for fiscal year 2005:



| |  |            |  |         |  |        
| |  | ---------- |  | ------- |  | -------
| |  | For        |  | Against |  | Abstain
| |  | 32,749,981 |  | 42,720  |  | 12,800 



Item 6. Exhibits



See Exhibit
Index.



39



---

##### Table of Contents

SIGNATURE



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



Intermix Media, Inc. (Registrant)By:

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




Dated: November 11, 2004



40



---

##### Table of Contents

Exhibit Index



|              |  |                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                        
|2.01          |  | Certificate of Ownership and Merger Merging Intermix Media, Inc. into eUniverse, Inc., effective July 15, 2004. (1)                                                
|              | 
|10.01         |  | Employment Agreement with Adam Goldenberg, dated April 6, 2004. (2)                                                                                                
|              | 
|10.02         |  | Asset Purchase Agreement, dated as of July 13, 2004, by and between eUniverse, Inc. and Supernation, LLC. (3)                                                      
|              | 
|10.03         |  | Asset Purchase Agreement, dated as of June 30, 2004, by and among CES Software, PLC and eUniverse, Inc., et. al. (4) **                                            
|              | 
|10.04         |  | Intermix Media, Inc. 2004 Stock Awards Plan. (5)                                                                                                                   
|              | 
|10.05         |  | Agreement and Plan of Merger, dated October 7, 2004, by Intermix Media, Inc., FL Acquisition Corp., Focalex, Inc., Jonathan A. Lieberman and Seth W. Lieberman (6) 
|              | 
|10.06         |  | Voting rights agreement with affiliates of VantagePoint Venture Partners, dated October 14, 2004. (7)                                                              
|              | 
|10.07         |  | Asset Acquisition Agreement, dated as of December 17, 2003, by and between eUniverse, Inc. and MySpace Ventures, LLC. *                                            
|              | 
|10.08         |  | Letter regarding agreement in principle between Intermix Media, Inc. and lead plaintiff in Sands v. eUniverse, Inc. securities class action. (8)                   
|              | 
|31            |  | Certification of the Chief Executive Officer and Chief Financial Officer, adopted pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. *
|              | 
|32            |  | Certification of the 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 July 15, 2004.
|--- | ------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Intermix Media, Inc.s Form 10-K filed on June 15, 2004.
|--- | -------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on July 16, 2004.
|--- | ------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on August 5, 2004.
|--- | -------------------------------------------------------------------------------------

|(5) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on September 3, 2004.
|--- | ----------------------------------------------------------------------------------------

|(6) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on October 13, 2004.
|--- | ---------------------------------------------------------------------------------------

|(7) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on October 19, 2004.
|--- | ---------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on November 10, 2004.
|--- | ----------------------------------------------------------------------------------------



41