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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)



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



For the quarterly period ended December 31, 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 Jurisdictionof Incorporation orOrganization) |  | (I.R.S. EmployerIdentification 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)



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 $.001 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 February 9, 2005, there were 32,014,701 shares of the Registrants common stock, par value $0.001 outstanding.



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Intermix Media, Inc.



Form 10-Q

For the Three Months Ended December 31, 2004



INDEX



|                              |  |                                                                                                       |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                       |  | Page
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                  |  | 3   
|                              |  | Consolidated Balance Sheets  December 31, 2004 and March 31, 2004                                    |  | 3   
|                              |  | Consolidated Statements of Operations  Three months and nine months ended December 31, 2004 and 2003 |  | 4   
|                              |  | Consolidated Statements of Cash Flows  Nine months ended December 31, 2004 and 2003                  |  | 5   
|                              |  | Notes to Consolidated Financial Statements                                                            |  | 6   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 22  
|Item 3.                       |  | Quantitative and Qualitative Disclosure About Market Risk                                             |  | 40  
|Item 4.                       |  | Controls and Procedures                                                                               |  | 41  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                     |  | 42  
|Item 6.                       |  | Exhibits                                                                                              |  | 42  
|Signatures                    |  | 43                                                                                                   



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PART 1  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



Intermix Media, Inc.

Consolidated Balance Sheets

(in thousands, except par value data)



|                                                                                                                         |  |                              |         |   |                |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                         |  | December 31, 2004(Unaudited) |         |   | March 31, 2004 |  
|Assets                                                                                                                   |  |                              |         |   |                |   |         |  
|Current assets:                                                                                                          |  |                              |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                |  | $                            | 8,149   |   |                | $ | 6,245   |  
|Restricted cash                                                                                                          |  |                              | 1,861   |   |                |   | 2,116   |  
|Accounts receivable, net                                                                                                 |  |                              | 5,580   |   |                |   | 3,901   |  
|Inventories, net                                                                                                         |  |                              | 2,159   |   |                |   | 1,168   |  
|Net assets of SkillJam held for sale                                                                                     |  |                              |        |   |                |   | 102     |  
|Prepaid expenses and other assets                                                                                        |  |                              | 4,111   |   |                |   | 3,136   |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total current assets                                                                                                     |  |                              | 21,860  |   |                |   | 16,668  |  
|Property and equipment, net                                                                                              |  |                              | 4,342   |   |                |   | 2,454   |  
|Goodwill                                                                                                                 |  |                              | 17,829  |   |                |   | 14,882  |  
|Other intangible assets, net                                                                                             |  |                              | 4,239   |   |                |   | 2,520   |  
|Deposits and other assets                                                                                                |  |                              | 1,024   |   |                |   | 974     |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total assets                                                                                                             |  | $                            | 49,294  |   |                | $ | 37,498  |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Liabilities and Stockholders Equity                                                                                     |  |                              |         |   |                |   |         |  
|Current liabilities:                                                                                                     |  |                              |         |   |                |   |         |  
|Accounts payable                                                                                                         |  | $                            | 4,089   |   |                | $ | 5,793   |  
|Accrued expenses                                                                                                         |  |                              | 4,849   |   |                |   | 3,317   |  
|Deferred revenue                                                                                                         |  |                              | 2,304   |   |                |   | 892     |  
|Current portion of debt obligations                                                                                      |  |                              |        |   |                |   | 5,224   |  
|Current portion of capitalized lease obligations                                                                         |  |                              | 60      |   |                |   | 489     |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total current liabilities                                                                                                |  |                              | 11,302  |   |                |   | 15,715  |  
|Capitalized lease obligations, less current portion                                                                      |  |                              | 12      |   |                |   | 33      |  
|Other long term liabilities                                                                                              |  |                              | 80      |   |                |   |        |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total liabilities                                                                                                        |  |                              | 11,394  |   |                |   | 15,748  |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Stockholders equity:                                                                                                    |  |                              |         |   |                |   |         |  
|Preferred stock, $0.10 par value; 40,000 shares authorized; 9,026 and 7,627 shares issued and outstanding, respectively  |  |                              | 934     |   |                |   | 763     |  
|Common stock, $0.001 par value; 250,000 shares authorized; 31,903 and 28,819 shares issued and outstanding, respectively |  |                              | 32      |   |                |   | 29      |  
|Additional paid-in capital                                                                                               |  |                              | 93,682  |   |                |   | 82,178  |  
|Accumulated deficit                                                                                                      |  |                              | (56,748 | ) |                |   | (61,220 | )
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total stockholders equity                                                                                               |  |                              | 37,900  |   |                |   | 21,750  |  
|                                                                                                                         |  |                              |         |   |                |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                            | 49,294  |   |                | $ | 37,498  |  
|                                                                                                                         |  |                              |         |   |                |   |         |  



See Notes to
Consolidated Financial Statements



3



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Intermix Media, Inc.

Consolidated Statements of Operations

(in thousands, except per share data - unaudited)



|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months Ended December 31, |        |   | Nine Months Ended December 31, |  
|                                                             |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Revenues                                                     |  | $                               | 20,328 |   |                                | $ | 14,147 |      |  | $ | 54,837 |   |  | $ | 38,465 |  
|Cost of revenues                                             |  |                                 | 3,852  |   |                                |   | 2,780  |      |  |   | 11,903 |   |  |   | 8,681  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                 |  |                                 | 16,476 |   |                                |   | 11,367 |      |  |   | 42,934 |   |  |   | 29,784 |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                          |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Marketing and sales                                          |  |                                 | 9,756  |   |                                |   | 5,321  |      |  |   | 24,462 |   |  |   | 15,700 |  
|Product development                                          |  |                                 | 2,093  |   |                                |   | 1,459  |      |  |   | 5,328  |   |  |   | 4,331  |  
|General and administrative                                   |  |                                 | 4,209  |   |                                |   | 3,327  |      |  |   | 12,513 |   |  |   | 10,984 |  
|Restatement professional fees                                |  |                                 |       |   |                                |   | 862    |      |  |   | (281   | ) |  |   | 4,085  |  
|Amortization of other intangible assets                      |  |                                 | 370    |   |                                |   | 321    |      |  |   | 904    |   |  |   | 962    |  
|Impairment of goodwill and other intangible assets           |  |                                 |       |   |                                |   | 1,200  |      |  |   |       |   |  |   | 1,200  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                     |  |                                 | 16,428 |   |                                |   | 12,490 |      |  |   | 42,926 |   |  |   | 37,262 |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                               |  |                                 | 48     |   |                                |   | (1,123 | )    |  |   | 8      |   |  |   | (7,478 | )
|Interest income (expense), net                               |  |                                 | 6      |   |                                |   | (108   | )    |  |   | (166   | ) |  |   | (311   | )
|Gain on debt extinguished                                    |  |                                 |       |   |                                |   |       |      |  |   | 630    |   |  |   |       |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes |  |                                 | 54     |   |                                |   | (1,231 | )    |  |   | 472    |   |  |   | (7,789 | )
|Income taxes                                                 |  |                                 | (16    | ) |                                |   | (8     | )    |  |   | (43    | ) |  |   | (8     | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                     |  |                                 | 38     |   |                                |   | (1,239 | )    |  |   | 429    |   |  |   | (7,797 | )
|Loss from discontinued operations                            |  |                                 |       |   |                                |   | (854   | )    |  |   | (148   | ) |  |   | (942   | )
|Gain on sale of SkillJam                                     |  |                                 |       |   |                                |   |       |      |  |   | 4,647  |   |  |   |       |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  |                                 | 38     |   |                                |   | (2,093 | )    |  |   | 4,928  |   |  |   | (8,739 | )
|Preferred stock dividends and liquidation preference         |  |                                 | (117   | ) |                                |   | (123   | )    |  |   | (456   | ) |  |   | (157   | )
|Income allocated to preferred stockholders                   |  |                                 | (9     | ) |                                |   |       |      |  |   | (1,084 | ) |  |   |       |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) to common stockholders                         |  | $                               | (88    | ) |                                | $ | (2,216 | )    |  | $ | 3,388  |   |  | $ | (8,896 | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations:                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  | $                               |       |   |                                | $ | (0.05  | )    |  | $ |       |   |  | $ | (0.30  | )
|Diluted per share                                            |  |                                 |       |   |                                |   | (0.05  | )    |  |   |       |   |  |   | (0.30  | )
|Gain on sale of SkillJam:                                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  |                                 |       |   |                                |   |       |      |  |   | 0.12   |   |  |   |       |  
|Diluted per share                                            |  |                                 |       |   |                                |   |       |      |  |   | 0.12   |   |  |   |       |  
|Income (loss) to common stockholders:                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic per share                                              |  |                                 |       |   |                                |   | (0.08  | )    |  |   | 0.12   |   |  |   | (0.33  | )
|Diluted per share                                            |  |                                 |       |   |                                |   | (0.08  | )    |  |   | 0.12   |   |  |   | (0.33  | )



See Notes to
Consolidated Financial Statements



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Intermix Media, Inc.

Consolidated Statements of Cash Flows

(in thousands - unaudited)



|                                                                                     |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                     |  | Nine Months Ended December 31, |       
|                                                                                     |  | 2004                           |        |   | 2003 |  
|Operating activities:                                                                |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                    |  | $                              | 4,928  |   |      | $ | (8,739 | )
|Net cash provided by discontinued operations                                         |  |                                |       |   |      |   | 304    |  
|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                              |  |                                | 1,081  |   |      |   | 1,306  |  
|Amortization of other intangible assets                                              |  |                                | 904    |   |      |   | 962    |  
|Impairment of goodwill and other intangible assets                                   |  |                                |       |   |      |   | 1,200  |  
|Gain on debt extinguished                                                            |  |                                | (630   | ) |      |   |       |  
|Other non-cash charges                                                               |  |                                | 37     |   |      |   | 139    |  
|Provision (benefit) for doubtful accounts                                            |  |                                | (361   | ) |      |   | 1,192  |  
|Changes in other current assets                                                      |  |                                | (1,239 | ) |      |   | (2,499 | )
|Changes in current liabilities                                                       |  |                                | (36    | ) |      |   | (1,581 | )
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                  |  |                                | 100    |   |      |   | (7,716 | )
|                                                                                     |  |                                |        |   |      |   |        |  
|Investing activities:                                                                |  |                                |        |   |      |   |        |  
|Purchases of property and equipment                                                  |  |                                | (2,876 | ) |      |   | (429   | )
|Purchases of other intangible assets                                                 |  |                                | (117   | ) |      |   | (51    | )
|Acquisitions of Focalex, Supernation and ResponseBase                                |  |                                | (2,464 | ) |      |   | (87    | )
|Proceeds from sale of SkillJam                                                       |  |                                | 4,647  |   |      |   |       |  
|Deposits and other                                                                   |  |                                |       |   |      |   | 427    |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                                |  |                                | (810   | ) |      |   | (140   | )
|                                                                                     |  |                                |        |   |      |   |        |  
|Financing activities:                                                                |  |                                |        |   |      |   |        |  
|Repayment of capital lease obligations                                               |  |                                | (450   | ) |      |   | (988   | )
|Proceeds from debt obligations                                                       |  |                                |       |   |      |   | 2,000  |  
|Repayment of debt obligations                                                        |  |                                | (2,204 | ) |      |   | (975   | )
|Proceeds from exercise of stock options                                              |  |                                | 1,268  |   |      |   | 149    |  
|Proceeds from issuance of preferred stock                                            |  |                                |       |   |      |   | 7,686  |  
|Proceeds from issuance of common stock                                               |  |                                | 4,000  |   |      |   | 2,472  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by financing activities                                            |  |                                | 2,614  |   |      |   | 10,344 |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Change in cash and cash equivalents                                                  |  |                                | 1,904  |   |      |   | 2,488  |  
|Cash and cash equivalents, beginning of period                                       |  |                                | 6,245  |   |      |   | 4,663  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                             |  | $                              | 8,149  |   |      | $ | 7,151  |  
|                                                                                     |  |                                |        |   |      |   |        |  
|Supplemental Cash Flow Information:                                                  |  |                                |        |   |      |   |        |  
|Cash paid for interest                                                               |  | $                              | 84     |   |      | $ | 203    |  
|Cash paid for income taxes                                                           |  |                                | 215    |   |      |   | 138    |  
|Supplemental Disclosures of Non-Cash Investing and Financing Activities:             |  |                                |        |   |      |   |        |  
|Issuance of common stock for the Supernation asset purchase                          |  |                                | 1,798  |   |      |   |       |  
|Issuance of common stock from the Focalex acquisition                                |  |                                | 1,700  |   |      |   |       |  
|Conversion of note into Series C-1 preferred stock                                   |  |                                | 2,500  |   |      |   |       |  
|Preferred stock dividends                                                            |  |                                | 425    |   |      |   | 106    |  
|Common stock issued to Sharman Networks                                              |  |                                |       |   |      |   | 975    |  
|Equipment acquired under capital leases                                              |  |                                |       |   |      |   | 121    |  



See Notes to
Consolidated Financial Statements



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Intermix Media, Inc.

Notes to Consolidated Financial Statements

(unaudited)



Note 1. The Company and Basis of Presentation



Intermix Media, Inc. (the Company, we or our), a Delaware Corporation, is an online media and entertainment enterprise
that utilizes proprietary technologies; analytical marketing tools; and unique viral and user generated content; to monetize its online network, and in its sale of high margin products directly to consumers across the Internet. The Company conducts
operations from facilities located in Los Angeles, California, Mount Vernon, Washington, and Newton, Massachusetts. 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 nine months ended December 31, 2004 are not necessarily indicative of
the results that may be expected for the fiscal year ended March 31, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles 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 impairment of goodwill and other intangible assets, 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 December 31, 2004 and March 31, 2004, the Company had
$1,861,000 and $1,699,000, respectively, of funds held by banks as reserves against possible charge backs and returns on credit card transactions that are not offset against the Companys daily sales deposit activity. These amounts are
classified as restricted cash. Restricted cash at December 31, 2004 also includes $1 million of funds held in escrow in connection with the sale of SkillJam. In addition, the Company also had $638,000 and $1,051,000 in certificates of deposit at
December 31, 2004 and March 31, 2004, respectively, that collateralize lease obligations. At March 31, 2004, a $417,000 certificate of deposit was classified as restricted cash, and subsequently closed in June 2004. The remaining certificates of
deposit at December 31, 2004 and March 31, 2004, with maturities greater than one year, are classified as long-term deposits.



Allowance for doubtful accounts



The Company computes its allowance for doubtful accounts receivable by reserving a portion of all accounts receivable outstanding over 60 days based upon
historical experience, and providing a specific reserve for accounts with a high likelihood



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of becoming uncollectible. Bad debt expense (benefit) was ($361,000) for the nine months ended December 31, 2004 and $1,192,000 for the nine months ended
December 31, 2003. The allowance for doubtful accounts was $410,000 at December 31, 2004 and $710,000 at March 31, 2004.



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 to Sharman Networks 500,000 shares of Company common stock. Sharman Networks bundled one of the Companys
applications with other applications that are downloaded from the Internet with the Kazaa Media Desktop through November 30, 2004. The agreement expired in accordance with its terms in November 2004, and the Company chose not to renew such
agreement.



Accrued expenses



Included in accrued expenses is accrued compensation of $1,200,000 at
December 31, 2004 and $797,000 at March 31, 2004.



Revenues



Product marketing revenue is generated primarily through the sale of
products to customers over the Internet. Sales to customers are primarily on a continuity basis, in which customers agree to accept regularly scheduled shipments of selected products, as well as through individual orders of products. Under the
Companys product continuity program, customers receive an initial shipment of the product they select on a risk-free trial basis. Revenue related to this initial shipment is deferred. If the customer returns the product within the risk-free
period, the customer will receive no further shipments and the deferred revenue is reversed. If the risk-free trial period expires without action by the customer, the customer is considered to have accepted the product. Upon expiration of the trial
period, the customers credit card is charged for the initial shipment; the deferred revenue related to the initial shipment of product is recognized. Revenue related to individual orders of products by customers is recognized upon shipment.
Fulfillment of product orders is handled both internally and through 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 advertising 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.



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 upon grant or ratably over the vesting period if the options vest over time. Common stock issued



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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 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 EndedDecember 31, |       |   | Nine Months EndedDecember 31, |  
|                                                                           |  | 2004                           |       |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Income (loss) to common stockholders:                                      |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |         |  
|As reported                                                                |  | $                              | (88   | ) |                               | $ | (2,216 | )    |  | $ | 3,388  |   |  | $ | (8,896  | )
|Less: stock-based compensation expense determined by the fair value method |  |                                | (776  | ) |                               |   | (763   | )    |  |   | (2,057 | ) |  |   | (2,540  | )
|Plus: expense allocated to preferred stockholders                          |  |                                | 178   |   |                               |   |       |      |  |   | 453    |   |  |   |        |  
|                                                                           |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |         |  
|Pro forma income (loss) to common stockholders                             |  | $                              | (686  | ) |                               | $ | (2,979 | )    |  | $ | 1,784  |   |  | $ | (11,436 | )
|                                                                           |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |         |  
|Income (loss) to common stockholders:                                      |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |         |  
|Basic per share  as reported                                              |  | $                              |      |   |                               | $ | (0.08  | )    |  | $ | 0.12   |   |  | $ | (0.33   | )
|Basic per share  pro forma                                                |  |                                | (0.02 | ) |                               |   | (0.11  | )    |  |   | 0.06   |   |  |   | (0.43   | )
|Diluted per share  as reported                                            |  |                                |      |   |                               |   | (0.08  | )    |  |   | 0.12   |   |  |   | (0.33   | )
|Diluted per share  pro forma                                              |  |                                | (0.02 | ) |                               |   | (0.11  | )    |  |   | 0.06   |   |  |   | (0.43   | )



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:



|                        |  |                                |  |              
|----------------------- |  | ------------------------------ |  | -------------
|                        |  | Nine Months Ended December 31,
|                        |  | 2004                           |  | 2003         
|Expected volatility     |  | 86% - 134%                     |  | 86% - 134%   
|Risk free interest rate |  | 2.33% - 5.72%                  |  | 3.86% - 5.72%
|Expected lives          |  | 5-6 years                      |  | 5 years      
|Dividend rate           |  |                               |  |             



Advertising costs



Advertising costs, except for costs associated with televised
direct-response advertising, are charged to marketing and sales expense when incurred. Included in marketing and sales expense for the first nine months of fiscal years 2005 and 2004, were $14,498,000 and $7,222,000 of advertising media and
affiliate costs, respectively. The cost to produce televised direct-response advertising are capitalized and amortized to cost of revenues over the period when future benefits are to be received. Furthermore, costs to air media related to a
televised direct-response advertising campaign are typically prepaid and expensed when broadcast. There were immaterial televised direct-response advertising costs included in continuing operations in the first nine months of either fiscal year 2005
or 2004. Included in discontinued operations for the first nine months of fiscal year 2004 is $2,628,000 of televised direct-response advertising costs. There were no televised direct response advertising costs included in discontinued operations in
the first nine months of fiscal year 2005.



8



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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 first nine months of fiscal year 2005 and
$3,108,000 in revenues and $3,388,000 in costs and expenses in the first nine 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. As of December 31, 2004, we have not received any percentage of net revenues from the sale of SkillJam. We have agreed to indemnify CES Software for certain contingent obligations up to the amount of the sale
proceeds. We believe these contingencies are remote.



In the
fourth quarter of fiscal year 2004, we sold the assets of the Body Dome product line. This product line had $6,018,000 in revenues and $6,680,000 in costs and expenses in the first nine months of fiscal year 2004.



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 third quarter and first nine months of fiscal year 2005, 7,813,962
and 8,913,718, respectively of stock options, 9,028,000 and 8,118,000, respectively of preferred stock and 352,000 and 352,000, respectively of stock purchase warrants were excluded from the computation of diluted income per share because their
effect is anti-dilutive. For the third quarter and first nine months of fiscal year 2004, 4,754,000 and 5,017,000, respectively of stock options, 5,746,000 and 3,411,000, 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.



9



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



|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Three Months EndedDecember 31, |        |   | Nine Months EndedDecember 31, |  
|                                                     |  | 2004                           |        |   | 2003                          |   |        | 2004 |  |   | 2003   |  
|Income (loss) from continuing operations:            |  | $                              | 38     |   |                               | $ | (1,239 | )    |  | $ | 429    |   |  | $ | (7,797 | )
|Preferred stock dividends and liquidation preference |  |                                | (117   | ) |                               |   | (123   | )    |  |   | (456   | ) |  |   | (157   | )
|Income allocated to preferred stockholders           |  |                                | (9     | ) |                               |   |       |      |  |   | (99    | ) |  |   |       |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Loss to common stockholders - basic                  |  |                                | (88    | ) |                               |   | (1,362 | )    |  |   | (126   | ) |  |   | (7,954 | )
|Loss from discontinued operations                    |  |                                |       |   |                               |   | (854   | )    |  |   | (148   | ) |  |   | (942   | )
|Gain on sale of SkillJam                             |  |                                |       |   |                               |   |       |      |  |   | 4,647  |   |  |   |       |  
|Income allocated to preferred stockholders           |  |                                |       |   |                               |   |       |      |  |   | (985   | ) |  |   |       |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) to common stockholders                 |  | $                              | (88    | ) |                               | $ | (2,216 | )    |  | $ | 3,388  |   |  | $ | (8,896 | )
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic weighted average common shares                 |  |                                | 30,212 |   |                               |   | 27,611 |      |  |   | 29,339 |   |  |   | 26,894 |  
|Conversion of preferred stock                        |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Exercise of stock options                            |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Exercise of stock purchase warrants                  |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Diluted weighted average common shares               |  |                                | 30,212 |   |                               |   | 27,611 |      |  |   | 29,339 |   |  |   | 26,894 |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic income (loss) per common share:                |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                |  | $                              |       |   |                               | $ | (0.05  | )    |  | $ |       |   |  | $ | (0.30  | )
|Discontinued operations                              |  |                                |       |   |                               |   | (0.03  | )    |  |   |       |   |  |   | (0.03  | )
|Gain on sale of SkillJam                             |  |                                |       |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                     |  | $                              |       |   |                               | $ | (0.08  | )    |  | $ | 0.12   |   |  | $ | (0.33  | )
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Diluted income (loss) per common share:              |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                |  | $                              |       |   |                               | $ | (0.05  | )    |  | $ |       |   |  | $ | (0.30  | )
|Discontinued operations                              |  |                                |       |   |                               |   | (0.03  | )    |  |   |       |   |  |   | (0.03  | )
|Gain on sale of SkillJam                             |  |                                |       |   |                               |   |       |      |  |   | 0.12   |   |  |   |       |  
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                     |  | $                              |       |   |                               | $ | (0.08  | )    |  | $ | 0.12   |   |  | $ | (0.33  | )
|                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  



Acquisition of Focalex, Inc.



We purchased all of the outstanding stock of Focalex,
Inc. (Focalex) on November 5, 2004 for $2.6 million in cash and 548,000 shares of common stock valued at $1.7 million. Focalex is a Massachusetts-based Internet advertising and affiliate marketing company. The 548,000 shares of Company
common stock were valued on the date of acquisition at the reported closing trading price as adjusted for a minor discount to reflect the illiquidity of the unregistered common stock issued. We accounted for this acquisition under the purchase
method of accounting, and we have consolidated the operating results of Focalex in the Companys financial statements since November 5, 2004.



The preliminary allocation of the purchase price to assets acquired, and liabilities assumed, based on the estimated fair values, is as follows (in
thousands):



|                                                          |  |   |       |  
|--------------------------------------------------------- |  | - | ----- | -
|Cash acquired                                             |  | $ | 312   |  
|Accounts receivable                                       |  |   | 710   |  
|Other assets                                              |  |   | 129   |  
|Goodwill                                                  |  |   | 1,192 |  
|Amortizable intangible assets                             |  |   |       |  
|Trade name, trademark and domain name                     |  |   | 658   |  
|Customer, affiliate and advertising-related relationships |  |   | 303   |  
|Developed technology                                      |  |   | 986   |  
|Other identifiable intangible assets                      |  |   | 382   |  
|Accounts payable                                          |  |   | (192  | )
|Other liabilities assumed                                 |  |   | (194  | )
|                                                          |  |   |       |  
|Total                                                     |  | $ | 4,286 |  
|                                                          |  |   |       |  



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The values assigned to goodwill and amortizable intangible assets are based upon a preliminary valuation
and may change based on the final results of an asset appraisal. A change in values may result in a reclassification of amounts between goodwill and intangible assets, and potentially require an adjustment to the accumulated intangible asset
amortization.



Pro-forma data (unaudited) for the three months
and nine months ended December 31, 2004 and 2003, as if this acquisition was effective as of April 1, 2003, using the pre-acquisition operating results reported by Focalex, is as follows (in thousands, except per share data):



|                         |  |                                 |       |                                |   |       |  |      |       |  |   |      
|------------------------ |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                         |  | Three Months Ended December 31, |       | Nine Months Ended December 31,
|                         |  | 2004                            |       | 2003                           |   | 2004  |  | 2003
|Revenues                 |  | $                               | 1,227 |                                | $ | 1,006 |  | $    | 3,072 |  | $ | 3,155
|Net income               |  |                                 | 180   |                                |   | 36    |  |      | 253   |  |   | 332  
|Basic income per share   |  |                                 | 0.01  |                                |   |      |  |      | 0.01  |  |   | 0.01 
|Diluted income per share |  |                                 | 0.01  |                                |   |      |  |      | 0.01  |  |   | 0.01 



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. EITF 03-6 had no impact on prior year per share amounts because of the net losses for the prior periods.



In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. This statement 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. SFAS 123R eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, and requires instead that such transactions be accounted for using a fair-value based method. The statement requires the cost of all forms of equity-based



11



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##### Table of Contents

compensation granted to employees be recognized in a companys income statement and that such cost be measured at the fair value of the stock options.
The new rules will be applied on one of two retroactive or prospective methods as defined in the statement, and will be effective for quarters beginning after June 30, 2005. The adoption of this standard will have a material impact on the
Companys future income statements by increasing compensation expense for the value of stock options issued to employees. We are currently evaluating alternative option valuation methodologies and assumptions in light of the new accounting
standard for 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 quarter ended September 30, 2005.



In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151 (SFAS 151), Inventory Costs, which amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of facility
expense, freight, handling costs, and wasted material (spoilage). ARB 43, Chapter 4, previously stated that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS 151 requires
that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. Although the Company will continue to
evaluate the application of SFAS 151, management does not currently believe adoption will have a material impact on the Companys results of operations or financial position.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), Exchanges
of Nonmonetary Assets, which amends Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. The guidance in APB Opinion 29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in APB Opinion 29, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. Although the Company will continue to evaluate the application of SFAS 153, management does not currently believe adoption will have a
material impact on the Companys results of operations or financial position.



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):



|                                                |  |                   |        |   |               |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                                                |  | December 31, 2004 |        |   | March 31,2004 |  
|Furniture and fixtures                          |  | $                 | 107    |   |               | $ | 75     |  
|Computers and equipment                         |  |                   | 5,288  |   |               |   | 2,656  |  
|Equipment under capital leases                  |  |                   | 2,495  |   |               |   | 2,495  |  
|Leasehold improvements                          |  |                   | 58     |   |               |   | 19     |  
|Purchased software                              |  |                   | 1,018  |   |               |   | 752    |  
|                                                |  |                   |        |   |               |   |        |  
|                                                |  |                   | 8,966  |   |               |   | 5,997  |  
|Less: accumulated depreciation and amortization |  |                   | (4,624 | ) |               |   | (3,543 | )
|                                                |  |                   |        |   |               |   |        |  
|                                                |  | $                 | 4,342  |   |               | $ | 2,454  |  
|                                                |  |                   |        |   |               |   |        |  



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Depreciation and amortization expense was $1,081,000 for the first nine months of fiscal year 2005 and
$1,306,000 for the first nine months of fiscal year 2004.



Note 4. Goodwill
and Other Intangible Assets



The net carrying value of
goodwill and other intangible assets was $22,068,000 as of December 31, 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 fiscal 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 nine months of fiscal years
2005. In the third quarter of fiscal year 2004, the ResponseBase divisions revenues declined $7.1 million compared to the year before. We recorded a $1,200,000 impairment charge in the third quarter of fiscal year 2004 due to the significant
reduction in ResponseBases revenue.



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 and participation by Supernation in future revenues derived from exploitation of the assets under
certain circumstances. Mr. Richard Rosenblatt, the Companys Chief Executive Officer, owned approximately 25% of the Supernation member interests. Mr. Rosenblatt agreed to sell his member interests in Supernation to avoid any interest in the
potential future revenue sharing. We allocated the purchase price to property and equipment for $17,000, to goodwill for $1,764,000 and to other intangible assets for $236,000.



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



|                               |  |                  |        |   |               |   |        |  
|------------------------------ |  | ---------------- | ------ | - | ------------- | - | ------ | -
|                               |  | December 31,2004 |        |   | March 31,2004 |  
|Customer lists                 |  | $                | 2,398  |   |               | $ | 2,243  |  
|Domain names                   |  |                  | 1,782  |   |               |   | 1,700  |  
|License agreements             |  |                  | 316    |   |               |   | 315    |  
|Websites                       |  |                  | 2,962  |   |               |   | 1,210  |  
|Other                          |  |                  | 1,317  |   |               |   | 684    |  
|                               |  |                  |        |   |               |   |        |  
|                               |  |                  | 8,775  |   |               |   | 6,152  |  
|Less: accumulated amortization |  |                  | (4,536 | ) |               |   | (3,632 | )
|                               |  |                  |        |   |               |   |        |  
|                               |  | $                | 4,239  |   |               | $ | 2,520  |  
|                               |  |                  |        |   |               |   |        |  



Amortization expense
for other intangible assets was $904,000 for the first nine months of fiscal 2005 and $962,000 for the first nine months of fiscal year 2004. Amortization expense for other intangible assets for future years ending March 31 is expected to be as
follows (in thousands):



|                              |  |   |      
|----------------------------- |  | - | -----
|2005 (remaining three months) |  | $ | 429  
|2006                          |  |   | 1,491
|2007                          |  |   | 864  
|2008                          |  |   | 401  
|Thereafter                    |  |   | 202  
|                              |  |   |      
|                              |  | $ | 3,387
|                              |  |   |      



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Note 5. Debt Obligations and Capital Leases



Debt obligations consist of the following (in thousands):



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



|(1) | 550 Digital Media Ventures, Inc. (550 DMV) is an indirect subsidiary of Sony Corporation of America. The due date of the principal and interest on this note 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 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
|--- | ---------------------------------------------------------------------------------------------------



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| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 three months)                      |  | $ | 41  |  
|2006                                               |  |   | 24  |  
|Thereafter                                         |  |   | 9   |  
|                                                   |  |   |     |  
|Total minimum lease payments                       |  |   | 74  |  
|Less: amounts representing interest                |  |   | (2  | )
|                                                   |  |   |     |  
|Present value of net minimum lease payments        |  |   | 72  |  
|Less: current portion of capital lease obligations |  |   | (60 | )
|                                                   |  |   |     |  
|Long-term obligations under capital leases         |  | $ | 12  |  
|                                                   |  |   |     |  



Equipment with a cost
of $495,182 at December 31, 2004 is collateral for the capital lease obligations.



Note 6. Commitments and Contingencies



Operating leases



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



|                              |  |   |      
|----------------------------- |  | - | -----
|2005 (remaining three months) |  | $ | 327  
|2006                          |  |   | 1,190
|2007                          |  |   | 437  
|2008                          |  |   | 68   
|                              |  |   |      
|Total                         |  | $ | 2,022
|                              |  |   |      



Rent expense was
$895,000 in the first nine months of fiscal year 2005 and $880,000 in the first nine 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. Arcade Planet alleges that the online skill-based gaming business owned and operated by the Company at the time of the filing of the lawsuit, and which the
Company subsequently sold in July of 2004, infringed a patent held by Arcade Planet entitled the 918 Patent. In the complaint, Arcade Planet 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



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##### Table of Contents

affecting certain claims underlying the 918 Patent. 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, a consolidated stockholder lawsuit styled as a class action under lead counsel and plaintiff is pending against the Company,
several of its current and former officers and/or employees, and the Companys former auditor in the United States District Court for the Central District of California (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 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 in order to allow the parties to pursue a mediated settlement of the claims asserted in the matter. As a result of the mediation, in November of 2004 lead plaintiff and the Company reached an agreement in principle to settle the lawsuit for
$5.5 million in cash, which the Companys insurance carriers have agreed to fund. 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. On January 11, 2005, the parties to the Securities Litigation entered into a Stipulation of Settlement setting forth the
additional terms and conditions of settlement to be proposed to the Court for approval. The parties are awaiting preliminary Court approval of the settlement after which time notice of the settlement is expected to be mailed to class members and a
hearing set for final Court approval.



Also as previously
reported, two purported stockholder derivative actions, which are substantially similar, were filed in May of 2003 against various current and former Company directors, officers, and/or employees. One of the actions remains pending in the United
States District Court for the Central District of California and the other, formerly two actions which were consolidated, was dismissed by the Superior Court of California for the County of Los Angeles (LASC) in October of 2004
(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. Plaintiff in the LASC derivative litigation has provided notice of his intent to appeal the decision of the
Court to dismiss the lawsuit and the Company expects to oppose the appeal and petition the Appellate Court to affirm the dismissal. The Federal Court derivative action was stayed by mutual agreement of the parties since its inception pending
determination of whether plaintiffs in the Securities Litigation will be able to state a claim against the defendants. In light of the anticipated settlement of the Securities Litigation, and unless a mutually acceptable resolution can be achieved,
the Company expects, upon expiration of the stay of the matter, to move to dismiss the Federal Court derivative action on substantially the same grounds as the LASC derivative action.



In the event that the Securities Litigation settlement is not consummated, the plaintiffs in the State Court derivative
action successfully appeal the decision of the court, or 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 would be covered by the insurance carrier.



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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 who resigned as CEO and was removed as Chairman in the Fall of 2003, filed a complaint against the Company, each of the Companys then-incumbent 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, and which Mr. Greenspan alleged unfairly restricted his ability to oppose, and/or solicit competing proxies for, business to be conducted at the annual meeting. The Company and
the Companys directors denied Mr. Greenspans allegations and claims as factually unfounded and otherwise without merit. Mr. Greenspan subsequently waged and lost a proxy contest in which he garnered 2% of the votes cast apart from his
own shares. On July 8, 2004, Mr. Greenspan filed a motion to dismiss the Delaware action as moot and for an award of attorneys fees and costs in the amount of $320,000. The Company stipulated to dismissal of the action and opposed Mr.
Greenspans application for fees and costs. In November of 2004, the Court dismissed Mr. Greenspans action as moot and awarded $50,000 in fees and costs.



Mr. Greenspan recently threatened to file a lawsuit for claims he allegedly has against the Company, various of its current
and former directors and officers, and VantagePoint Venture Partners, a large stockholder of the Company, and certain of its principals and affiliates. In a draft complaint Mr. Greenspan delivered to the Company, Mr. Greenspan alleged claims of
libel and fraud against Intermix and various of its current and former officers and directors, claims of intentional interference with contract and prospective economic advantage, unfair competition and fraud against VantagePoint and certain of its
affiliates and principals, and claims that the Companys forecasts of profitability leading up to the proxy contest were false and misleading. These purported claims generally related to the Companys decision to consummate the
VantagePoint financing in October of 2003, Mr. Greenspans contemporaneous separation from the Company and matters arising during the proxy contest in connection with the Companys annual meeting of stockholders at the end of January of
2004. Mr. Greenspans draft complaint also alleged that the Companys acquisition of the assets of Supernation LLC in July of 2004 involved breaches of fiduciary duty. More recently, Mr. Greenspan notified the Company of his intent to
instead fashion and pursue claims in a derivative action. On February 10, 2005, Mr. Greenspan filed a derivative complaint in Los Angeles Superior Court with substantially the same allegations as contained in the draft complaint provided to the
Company. The complaint includes claims for breach of fiduciary duty, indemnification, unfair competition and fraud. Mr. Greenspan seeks remittance of compensation received by the various current and former director and officer defendants,
unspecified damages, removal of various Company directors, disgorgement of unspecified profits, reformation of the Supernation purchase, punitive damages, fees and costs, injunctive relief and other remedies. The Company believes that the claims
alleged by Mr. Greenspan are without merit. The Company intends to pursue dismissal of the action as well as evaluate any claims the Company and/or its current and former directors and officers may have against Mr. Greenspan for the institution of a
frivolous lawsuit and/or baseless claims and allegations made in connection therewith. The Companys pursuit of the foregoing may require significant attention and resources of management and, regardless of the outcome, result in significant
legal expenses.



17



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##### Table of Contents

Note 7. Stockholders Equity and Equity Compensation Plans



On September 15, 2004, the Company purchased the assets of Supernation, LLC,
which includes the Superdudes gaming network, for $125,000 in cash, 900,000 shares of common stock valued at $1.8 million and a participation in certain future revenues. The 900,000 shares of Company common stock were valued on the date of
acquisition at the reported closing trading price as adjusted for a minor discount to reflect the illiquidity of the unregistered common stock issued.



We purchased all of the outstanding stock of Focalex on November 5, 2004 for $2.6 million in cash and 548,000 shares of common stock valued at $1.7
million. The 548,000 shares of Company common stock were valued on the date of acquisition at the reported closing trading price as adjusted for a minor discount to reflect the illiquidity of the unregistered common stock issued.



On December 17, 2004, we issued one million shares of Company common stock
and a five-year warrant to purchase an additional 150,000 shares of Company common stock at $4 per share to entities affiliated with Redpoint Ventures (collectively Redpoint Ventures) for a total purchase price of $4 million. The Company
and Redpoint also entered into registration rights agreement applicable to the common stock and shares to be issued upon exercise of the warrant.



In the first nine months of fiscal year 2005, no shares of Series A preferred stock were converted into shares of common stock. As of December 31, 2004,
there are 194,000 shares of Series A preferred stock outstanding that are convertible into 261,000 shares of common stock at the applicable conversion rate. In the first nine 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 nine months of fiscal year 2005, the Company issued 250,000 and 25,000 shares of Series C and C-1 preferred stock respectively to Series C and C-1 stockholders as dividends and issued
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 December 31, 2004, there are 1,797,000 outstanding shares of Series B preferred stock and
7,035,000 outstanding shares of Series C and C-1 preferred stock that are convertible into 8,832,000 shares of common stock at the current conversion rates.



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



|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|-------------------------------- |  | ------------------------------ | - | ---- | ---------------------------- | ---- | --------------- | ------ | - | ---------------------------- | - | ----
|                                 |  | Nine Months Ended December 31,
|                                 |  | 2004                           |   | 2003
|                                 |  | NumberofOptions                |   |      | WeightedAverageExercisePrice |      | NumberofOptions |        |   | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 7,844                          |   |      | $                            | 2.28 |                 | 7,602  |   |                              | $ | 3.25
|Granted                          |  | 3,361                          |   |      |                              | 3.11 |                 | 828    |   |                              |   | 1.90
|Exercised                        |  | (454                           | ) |      |                              | 2.58 |                 | (73    | ) |                              |   | 2.31
|Cancelled                        |  | (844                           | ) |      |                              | 2.52 |                 | (3,603 | ) |                              |   | 3.90
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|Outstanding at end of period     |  | 9,907                          |   |      |                              | 2.53 |                 | 4,754  |   |                              |   | 2.53
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     
|Exercisable at end of period     |  | 3,764                          |   |      |                              | 2.49 |                 | 3,103  |   |                              |   | 2.67
|                                 |  |                                |   |      |                              |      |                 |        |   |                              |   |     



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The following table summarizes information about stock options outstanding at December 31, 2004 (in
thousands, except per share data):



|            |  |                     |  |                                 |      |        |       |                                 |   |     
|----------- |  | ------------------- |  | ------------------------------- | ---- | ------ | ----- | ------------------------------- | - | ----
|            |  | Options Outstanding |  | Options Exercisable            
|Price Range |  | Number              |  | Weighted Average Exercise Price |      | Number |       | Weighted Average Exercise Price
|$5.01-7.00  |  | 145                 |  | $                               | 5.94 |        | 141   |                                 | $ | 5.95
|3.01-5.00   |  | 1,728               |  |                                 | 3.95 |        | 153   |                                 |   | 3.89
|1.00-3.00   |  | 8,034               |  |                                 | 2.16 |        | 3,470 |                                 |   | 2.29
|            |  |                     |  |                                 |      |        |       |                                 |   |     
|            |  | 9,907               |  |                                 |      |        | 3,764 |                                 |   |     
|            |  |                     |  |                                 |      |        |       |                                 |   |     



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



|                                 |  |                                |   |      |                              |      |                  |      |   |                              |   |     
|-------------------------------- |  | ------------------------------ | - | ---- | ---------------------------- | ---- | ---------------- | ---- | - | ---------------------------- | - | ----
|                                 |  | Nine Months Ended December 31,
|                                 |  | 2004                           |   | 2003
|                                 |  | NumberofWarrants               |   |      | WeightedAverageExercisePrice |      | NumberofWarrants |      |   | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 258                            |   |      | $                            | 2.20 |                  | 353  |   |                              | $ | 2.05
|Granted                          |  | 150                            |   |      |                              | 4.00 |                  |     |   |                              |   |    
|Exercised                        |  | (56                            | ) |      |                              | 1.75 |                  | (235 | ) |                              |   | 2.07
|Cancelled                        |  |                               |   |      |                              |     |                  | (10  | ) |                              |   | 5.10
|                                 |  |                                |   |      |                              |      |                  |      |   |                              |   |     
|Outstanding at end of period     |  | 352                            |   |      |                              | 3.04 |                  | 108  |   |                              |   | 2.66
|                                 |  |                                |   |      |                              |      |                  |      |   |                              |   |     
|Exercisable at end of period     |  | 352                            |   |      |                              | 3.04 |                  | 108  |   |                              |   | 2.66
|                                 |  |                                |   |      |                              |      |                  |      |   |                              |   |     



Note 8. Income Taxes



At March 31, 2004, the Company had federal and state net
operating loss carry forwards of $43.7 million and $17.0 million, respectively. In addition, the Company had $2.8 million of loss carry forwards created by the exercise of non-qualified stock options and the early disposition of incentive stock
options. The utilization of net operating losses is subject to an annual limitation 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 is limited. The annual limitation is approximately $5 million of Federal and $3 million of state net operating
losses per year will be available for the next five years. The Company has $4 million of federal and $3.7 million of state net operating loss carry forwards



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that are not subject to the annual limit. At December 31, 2004, we fully reserved our deferred tax assets since we believe that realization is not reasonably
assured at this time.



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 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 EndedDecember 31, |        | Nine Months EndedDecember 31,
|                   |  | 2004                           |        | 2003                          |   | 2004   |  | 2003
|Revenues:          |  |                                |        |                               |   |        |  |      |        |  |   |       
|Product marketing  |  | $                              | 12,370 |                               | $ | 9,399  |  | $    | 34,340 |  | $ | 22,890
|Network            |  |                                | 7,958  |                               |   | 4,748  |  |      | 20,497 |  |   | 15,575
|                   |  |                                |        |                               |   |        |  |      |        |  |   |       
|Total revenues     |  | $                              | 20,328 |                               | $ | 14,147 |  | $    | 54,837 |  | $ | 38,465
|                   |  |                                |        |                               |   |        |  |      |        |  |   |       
|Gross profit:      |  |                                |        |                               |   |        |  |      |        |  |   |       
|Product marketing  |  | $                              | 8,685  |                               | $ | 6,857  |  | $    | 22,965 |  | $ | 15,383
|Network            |  |                                | 7,791  |                               |   | 4,510  |  |      | 19,969 |  |   | 14,401
|                   |  |                                |        |                               |   |        |  |      |        |  |   |       
|Total gross profit |  | $                              | 16,476 |                               | $ | 11,367 |  | $    | 42,934 |  | $ | 29,784
|                   |  |                                |        |                               |   |        |  |      |        |  |   |       



During the first nine
months of fiscal year 2005, sales to two customers exceeded 10% of segment revenues. In the network segment, sales to the top 10 customers were approximately 51% of segment revenues. Sales to these two customers represented 10% and 27%, respectively
of network segment revenues. In the product marketing segment, sales to the top 10 customers were less than 1% of segment revenues. Revenues from the sale of Body Shape, Dream Shape and Hydroderm products were approximately 15%, 12% and 54%,
respectively of first nine months of fiscal year 2005 product marketing revenues. Most of the products sold in the first nine months of fiscal year 2005 were purchased from three vendors.



During the first nine 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 51% 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 are as follows (in thousands):



|                  |  |                  |        |               |   |       
|----------------- |  | ---------------- | ------ | ------------- | - | ------
|                  |  | December 31,2004 |        | March 31,2004
|Product marketing |  | $                | 10     |               | $ | 86    
|Network           |  |                  | 22,058 |               |   | 17,316
|Corporate         |  |                  |       |               |   |      
|                  |  |                  |        |               |   |       
|                  |  | $                | 22,068 |               | $ | 17,402
|                  |  |                  |        |               |   |       



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Note 10. Subsequent Events



As previously disclosed, on December 7, 2004, the Company, Redpoint Ventures (Redpoint) and MySpace Ventures LLC
(MSV) signed a non-binding term sheet that contemplated the investment by Redpoint in a newly formed Company subsidiary that would own the Companys MySpace.com business. On February 11, 2005, the Company and its wholly owned
subsidiary Social Labs LLC, along with Redpoint and MSV, entered into a series of agreements, and consummated the transactions, contemplated by the term sheet. Under the terms of the deal, both the Company and MSV contributed their ownership
interests in the assets of the MySpace.com business to a newly formed Delaware corporation named MySpace, Inc. Simultaneously with the transfer of assets, MySpace, Inc. sold a combination of common and preferred stock to Redpoint for a total
purchase price of approximately $11.5 million. As a result of the transactions, the Company received approximately $2.8 million in cash, a note from MySpace Inc. in the principal amount of $1.5 million subject to post-closing adjustments, and a
majority ownership stake in MySpace, Inc. After payment to MSV of approximately $3.75 million in cash as partial consideration for its contribution of assets, the net financing proceeds to MySpace, Inc. were $5 million. Additional details concerning
the foregoing transactions are expected to be disclosed in a current report to be filed by the Company on Form 8-K.



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



Forward-Looking Statements



This Report contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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



In October 2004, the Pacific
Regional Office of the Securities and Exchange Commission (SEC) notified the Company that it had terminated its informal investigation concerning the Companys restatement of fiscal year 2003 quarterly financial results and that no
enforcement action had been recommended to the Commission. The SECs decision to terminate its informal investigation 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.



On October 18, 2004,
the American Stock Exchange informed us that they had 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.



On November 5, 2004, the Company purchased Focalex, Inc. for
$2.6 million in cash and 548,000 shares of common stock. Focalex is a Massachusetts-based Internet advertising and affiliate marketing company.



On January 11, 2005, the parties to the Securities Litigation entered into a Stipulation of Settlement setting forth the additional terms and conditions
of a settlement in principle reached in November 2005 to settle the lawsuit for approximately $5.5 million in cash. The parties are awaiting preliminary Court approval of the settlement after which time, notice of the settlement is expected to be
mailed to class members, and a hearing is set for final Court approval. The Companys insurance carriers have conditionally agreed to fund the entire settlement.



On December 7, 2004, Jeffrey Edell resigned from the Companys Board of Directors. In addition, on or about December 7,
2004, Thomas Flahie, Chief Financial Officer of the Company, informed the Companys Board of Directors of his intent to resign. On January 13, 2005, Mr. Flahie provided his formal resignation as Chief Financial Officer to the Companys
Board of Directors. Mr. Flahie has agreed to remain employed by the Company through March 31, 2005 in order to continue to provide any additional assistance necessary in connection with the transition of his responsibilities.



On December 7, 2004, the Company, Redpoint Ventures (Redpoint)
and MySpace Ventures LLC (MSV) signed a non-binding term sheet that contemplated the investment by Redpoint in a newly formed Company subsidiary that would own the Companys MySpace.com business. On February 11, 2005, the Company
and its wholly owned subsidiary Social Labs LLC, along with Redpoint and MSV, entered into a series of agreements, and consummated the transactions, contemplated by the term sheet.



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Under the terms of the deal, both the Company and MSV contributed their ownership interests in the assets of the MySpace.com business to a newly formed
Delaware corporation named MySpace, Inc. Simultaneously with the transfer of assets, MySpace, Inc. sold a combination of common and preferred stock to Redpoint for a total purchase price of approximately $11.5 million. As a result of the
transactions, the Company received approximately $2.8 million in cash, a note from MySpace Inc. in the principal amount of $1.5 million subject to post-closing adjustments, and a majority ownership stake in MySpace, Inc. After payment to MSV of
approximately $3.75 million in cash as partial consideration for its contribution of assets, the net financing proceeds to MySpace, Inc. were $5 million. Additional details concerning the foregoing transactions are expected to be disclosed in a
current report to be filed by the Company on Form 8-K. Also, as previously disclosed, MSV, in connection with the December 17, 2004 Redpoint financing and execution of the non-binding term sheet, agreed to invest $300,000 in the Company in exchange
for 75,000 shares of Company common stock and a five-year warrant to purchase 11,250 shares of Company common stock at $4 per share. The owners of MSV are Company employees. The sale of stock to MSV was conditioned on, among other things, the
completion of the transactions contemplated by the non-binding term sheet.



On December 17, 2004, we sold 1 million shares of common stock and a warrant to purchase an additional 150,000 shares of common stock at $4 per share, for $4 million to entities affiliated with Redpoint Ventures.



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, which was
previously referred to as the media and advertising business segment. 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 directly
to consumers through the Internet. We also sold subscriptions to our websites and collected activity-based fees in prior years. We sell various products through our ecommerce websites. We reach our customers predominately through online advertising,
on both Company-owned and third party websites, and from time-to-time television, radio and print advertising. These products change over time and include health and beauty products, cosmetic products, and to a small extent our legacy ink cartridge
business. In prior years, we sold a greater amount of ink cartridges and also collectibles, fitness products and various niche products. The Company continuously tests product offerings to determine customer acquisition costs and revenue potential,
as well as to identify the most effective marketing programs.



The network business segment is comprised of a diverse network of websites that provide entertainment and community oriented content (the Intermix Network). We earn 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 in response to an ad. The Intermix Network has websites that generate subscription revenues, transaction-based revenues, and provide marketing services, in addition to
websites that are primarily 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



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our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe that impairment of goodwill and other intangible
assets, 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.



Impairment of goodwill and other intangible assets



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 of the product or service 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 upon provision of services or on shipment of products, unless such product is subject to a risk-free return period, in which case
revenue is recognized upon the expiration of the risk-free period. Revenue includes shipping and handling charges. Product warehousing and fulfillment is handled internally as well as by 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.



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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 December 31, 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 in the future, we intend to reassess the need to continue to fully reserve our deferred tax assets.



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Results of Operations



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



|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|------------------------------------------------------------ |  | ------------------------------- | - |  | ------------------------------ | -- |  | ----- | - |  | ----- | --
|                                                             |  | Three Months Ended December 31, |   |  | Nine Months Ended December 31, |   
|                                                             |  | 2004                            |   |  | 2003                           |    |  | 2004  |   |  | 2003  |   
|Revenues:                                                    |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Product marketing                                            |  | 60.8                            | % |  | 66.4                           | %  |  | 62.6  | % |  | 59.5  | % 
|Network                                                      |  | 39.2                            |   |  | 33.6                           |    |  | 37.4  |   |  | 40.5  |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Total                                                        |  | 100.0                           |   |  | 100.0                          |    |  | 100.0 |   |  | 100.0 |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Cost of revenues:                                            |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Product marketing                                            |  | 18.1                            |   |  | 18.0                           |    |  | 20.8  |   |  | 19.5  |   
|Network                                                      |  | 0.8                             |   |  | 1.7                            |    |  | 0.9   |   |  | 3.1   |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Total                                                        |  | 18.9                            |   |  | 19.7                           |    |  | 21.7  |   |  | 22.6  |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Operating expenses:                                          |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Marketing and sales                                          |  | 48.0                            |   |  | 37.6                           |    |  | 44.6  |   |  | 40.8  |   
|Product development                                          |  | 10.3                            |   |  | 10.3                           |    |  | 9.7   |   |  | 11.3  |   
|General and administrative                                   |  | 20.7                            |   |  | 23.4                           |    |  | 22.8  |   |  | 28.5  |   
|Restatement professional fees                                |  |                                |   |  | 6.1                            |    |  | (0.5  | ) |  | 10.6  |   
|Amortization of other intangible assets                      |  | 1.8                             |   |  | 2.3                            |    |  | 1.7   |   |  | 2.5   |   
|Impairment of goodwill and other intangible assets           |  |                                |   |  | 8.5                            |    |  |      |   |  | 3.1   |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Total operating expenses                                     |  | 80.8                            |   |  | 88.2                           |    |  | 78.3  |   |  | 96.8  |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Operating income (loss)                                      |  | 0.3                             |   |  | (7.9                           | )  |  |      |   |  | (19.4 | ) 
|Interest income (expense), net                               |  | 0.1                             |   |  | (0.8                           | )  |  | (0.3  | ) |  | (0.8  | ) 
|Gain on debt extinguished                                    |  |                                |   |  |                               |    |  | 1.2   |   |  |      |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Income (loss) from continuing operations before income taxes |  | 0.3                             |   |  | (8.7                           | )  |  | 0.9   |   |  | (20.2 | ) 
|Income taxes                                                 |  | (0.1                            | ) |  | (0.1                           | )  |  | (0.1  | ) |  | (0.1  | ) 
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Income (loss) from continuing operations                     |  | 0.2                             |   |  | (8.8                           | )  |  | 0.8   |   |  | (20.3 | ) 
|Loss from discontinued operations                            |  |                                |   |  | (6.0                           | )  |  | (0.3  | ) |  | (2.4  | ) 
|Gain on sale of SkillJam                                     |  |                                |   |  |                               |    |  | 8.5   |   |  |      |   
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   
|Net income (loss)                                            |  | 0.2                             | % |  | (14.8                          | )% |  | 9.0   | % |  | (22.7 | )%
|                                                             |  |                                 |   |  |                                |    |  |       |   |  |       |   



Revenues



Revenues increased 44% to $20.3 million in the third quarter of fiscal year
2005 from $14.1 million in the third quarter of fiscal year 2004. The increase in revenues was attributable to growth in both



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business segments, with the product marketing segment producing $12.4 million in revenues in the third quarter of fiscal year 2005 compared to $9.4 million
in the same quarter last year, and the network segment producing $7.9 million in revenues in the third quarter of fiscal year 2005 compared to $4.7 million in the same quarter last year.



Revenues increased 43% to $54.8 million in the first nine months of fiscal year 2005 from $38.5 million in the first nine
months of fiscal year 2004. The increase in revenues was attributable to both business segments with the product marketing segment producing $34.3 million in revenues in the first nine months of fiscal year 2005 compared to $22.9 million in the same
period last year, and the network segment producing $20.5 million in revenues in the first nine months of fiscal year 2005 compared to $15.6 million in the same period last year.



For the third quarter of fiscal year 2005, product marketing segment revenues increased by 32% to $12.4 million compared to
the same quarter last year. The Alena business unit produced $3.0 million in increased revenues in the third 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 and other discontinued product and service revenues declined by $2.6 million in the third quarter of fiscal year 2005 compared to the same quarter last year due to the Company
discontinuing sales of seasonal and limited life products, and other discontinued products and services in the current quarter. Consequently, the ResponseBase business unit was merged into the Alena business unit as of December 31, 2003. We also
experienced a $299,000 decline in revenues at our ink cartridge business unit in the third quarter of fiscal year 2005, compared to the same quarter last year, due to lower spending on the acquisition of new customers.



For the third quarter of fiscal year 2005, network segment revenues increased
by 68% to $7.9 million compared to the same quarter last year. The increase in revenues was due to $3.2 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 saw an increase of $111,000 in subscription revenues at our Cases Ladder business due to an increase in the number of customers purchasing memberships and
services.



Cost of Revenues



Cost of revenues is primarily associated with the product marketing segment
and consists of the cost of products, warehouse, fulfillment and shipping, as well as credit card fees. The gross profit margin of the product marketing segment was 70% in the third quarter of fiscal year 2005 compared to 73% in the same quarter
last year, and 67% for the first nine months of fiscal year 2005 and 2004. The decrease in gross profit margin in the third quarter of fiscal year 2005, compared to the same quarter in fiscal year 2004, is due to a change in the product sales mix to
a higher per item cost, which was partly offset by a reduction in packing material costs, lower shipping costs, and the elimination of certain merchant credit card processing fees. We expect the gross profit margin for the product marketing segment
to remain consistent for the remainder of fiscal year 2005.



Cost of network segment revenues relates to non-advertising revenues and was $167,000 in the third quarter of fiscal year 2005 compared to $238,000 in the same quarter last year, and $528,000 in the first nine months of fiscal year 2005
compared to $1.2 million in the same period last year. The decrease in the cost of network segment revenues in fiscal year 2005, partly relates to the elimination of revenues that incurred list partner fees in the ResponseBase business unit. We
expect the gross profit margin for the network segment to improve as revenues increase.



Marketing and Sales



Marketing and sales
expenses consist primarily of fees paid to third parties for media space, bad debts, advertising revenue sharing arrangements, promotional and advertising costs, personnel costs,



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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 $9.8 million in the third quarter of fiscal year 2005 compared to $5.3 million in the third quarter of fiscal year 2004, and were 48% of revenues for the third quarter of fiscal year 2005 compared to 38% of revenues for the same quarter
last year. Marketing and sales costs were $24.5 million in the first nine months of fiscal year 2005 compared to $15.7 million in the same period last year, and were 45% of revenues for the first nine months of fiscal years 2005 compared to 41% same
period last year. Advertising and related revenue sharing expenses increased by $3.2 million in the third quarter of fiscal year 2005 due to the purchasing of more advertising to acquire more product marketing customers and download advertising
revenue sharing arrangements. Advertising and related revenue sharing expenses are expected to trend higher in the fourth quarter, but will remain at a relatively consistent percent of revenues. In the third quarter of fiscal year 2005, salary
expense increased by $313,000 due to the hiring of additional salespeople. 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.
Furthermore, royalty expense increased by $459,000 due to the amortization relating to the Sharman Networks distribution agreement. Due to an improved credit granting process, and more stringent collection procedures, the increase in the provision
for doubtful accounts was only $45,000 in the latest quarter, which correlates to the percent increase in trade accounts receivable. 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 $2.1 million or 10% of revenues for the third quarter of fiscal year 2005, from $1.5 million or
10% of revenues for the same quarter last year. Product development costs increased to $5.3 million or 10% of revenues for the first nine months of fiscal year 2005, from $4.3 million or 11% of revenues for the same period last year. The current
quarter expense increase was a result of higher salaries, and an increase of $225,000 in costs due to outside services. We expect product development costs in fiscal year 2005 to increase over fiscal year 2004 due to increased quality control
measures related to custom programming, and a substantial investment in personnel in the MySpace business unit.



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 bandwidth, rent, insurance, depreciation and amortization and other general corporate expenses. General and administrative costs increased to $4.2 million, amounting to 21% of revenues for the third quarter
of fiscal year 2005, from $3.3 million or 23% of revenues for the third quarter of fiscal year 2004. General and administrative costs increased to $12.5 million, amounting to 23% of revenues for the first nine months of fiscal year 2005, from $11.0
million or 29% of revenues for the same period last year. Salaries expense decreased $92,000 in the third quarter of fiscal year 2005 compared to the same quarter last year due to fewer personnel in the current quarter. Insurance expense increased
$241,000 in the current quarter due to insurance rate increases and increased revenue-based insurance costs. The current quarter also includes $163,000 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.



Restatement Professional Fees



There were no restatement professional fees in the third quarter of fiscal year 2005. Restatement professional fees for the first nine months of fiscal
year 2005 were $56,000. These costs consist of legal



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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 do not know how long the litigation matters will continue or how much each will cost. In the third quarter and first nine months of fiscal year 2004, we incurred
approximately $862,000 and $4.1 million, respectively of restatement professional fees.



Amortization of Other Intangible Assets



In
the third quarter of fiscal year 2005, amortization of other intangible assets was $371,000 compared to $321,000 in the same quarter last year. Amortization of other intangible assets was $904,000 in the first nine months of fiscal year 2005
compared to $962,000 in the same period last year. The increases were attributable to intangible assets acquired in the Focalex and Supernation acquisitions. We expect amortization expense for the last quarter of fiscal year 2005 to be approximately
$429,000, which is higher than the previous quarter, due to the effect of a full quarter of amortization of the Focalex acquisition.



Income Taxes



We recorded $43,000 of income tax expense in the first nine months of fiscal year 2005 for minimum taxes after the utilization of net operating loss carry
forwards. The Company recorded an $8,000 tax provision for the first nine months of fiscal year 2004 for state income taxes.



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 first nine months of fiscal year 2005 and $3,108,000 in revenues and $3,388,000 in costs and expenses in the first nine 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 $6,018,000 in revenues and $6,680,000 in costs and expenses in the first nine 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 these contingencies are remote.



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Liquidity and Capital Resources



Net cash provided by operating activities was $100,000 in the first nine months of fiscal year 2005 compared to usage of
$7.7 million in the first nine months of fiscal year 2004. The net cash provided by operating activities in the first nine 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 nine months of fiscal year 2004 was primarily due to the loss from operations, a decrease in current liabilities and an increase in
current assets, partially offset by non-cash expenses.



Net
cash used in investing activities was $810,000 in the first nine months of fiscal year 2005 compared to usage of $140,000 in the first nine months of fiscal year 2004. Net cash used by investing activities in the first nine months of fiscal year
2005 was attributable to the cash payments for the acquisitions of Focalex and Supernation, purchases of computer and network equipment, and purchases of intangible assets, offset by proceeds from the sale of SkillJam. Net cash used in investing
activities in the first nine months of fiscal year 2004 was from the purchase of computer equipment and intangible assets, partially offset by the reduction in a certificate of deposit used to secure a capital lease obligation.



Net cash provided by financing activities was $2.6 million in the first nine
months of fiscal year 2005 compared to $10.3 million in the first nine months of fiscal year 2004. Net cash provided by financing activities in the first nine months of fiscal year 2005 was due to proceeds from the issuance of common stock and
warrants and proceeds from the exercise of stock options; partially offset by the repayment of capital lease and debt obligations. Net cash provided by financing activities in the first nine months of fiscal year 2004 was due to proceeds from the
issuance of preferred and common stock and proceeds from a debt obligation, partially offset by the repayment of capital lease and debt obligations.



As of December 31, 2004, we had $8.1 million of cash and cash equivalents and $1.9 million in restricted cash, and $10.6 million in working capital. As of
March 31, 2004, we had $6.2 million in cash and cash equivalents, $2.8 million in restricted cash, and $953,000 in working capital. The increase in total cash from March 31, 2004 to December 31, 2004 was primarily due to proceeds from the sale of
SkillJam and the issuance of common stock and warrants, partially offset by an increase in current assets, a decrease in current liabilities, purchases of property and equipment, acquisitions of Focalex and Supernation, and the repayment of capital
lease and debt obligations. The increase in working capital from March 31, 2004 to December 31, 2004 was primarily due to the proceeds from the sale of Skilljam and the issuance of common stock and warrants, and the repayment or 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 July 30, 2004, we sold our SkillJam business unit to CES Software PLC. 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 these contingencies are remote.



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



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conversion of the VantagePoint note resulted in the retirement of all senior secured debt other than a minor amount of capital lease obligations.



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 and a participation in certain future revenues.



On November 5, 2004, we also purchased the common and preferred stock of Focalex for $2.6 million in cash and 548,000 shares of common stock. Focalex is a
Massachusetts-based Internet advertising and affiliate marketing company



On December 17, 2004, we issued 1 million shares of Company common stock and a five-year warrant to purchase an additional 150,000 shares of Company common stock at $4 per share to entities affiliated with Redpoint
Ventures (collectively Redpoint Ventures) for a total purchase price of $4 million. We also granted Redpoint Ventures mandatory, demand and piggyback registration rights for the common stock and warrant.



On December 7, 2004, the Company, Redpoint Ventures (Redpoint)
and MySpace Ventures LLC (MSV) signed a non-binding term sheet that contemplated the investment by Redpoint in a newly formed Company subsidiary that would own the Companys MySpace.com business. On February 11, 2005, the Company
and its wholly owned subsidiary Social Labs LLC, along with Redpoint and MSV, entered into a series of agreements, and consummated the transactions, contemplated by the term sheet. Under the terms of the deal, both the Company and MSV contributed
their ownership interests in the assets of the MySpace.com business to a newly formed Delaware corporation named MySpace, Inc. Simultaneously with the transfer of assets, MySpace, Inc. sold a combination of common and preferred stock to Redpoint for
a total purchase price of approximately $11.5 million. As a result of the transactions, the Company received approximately $2.8 million in cash, a note from MySpace Inc. in the principal amount of $1.5 million subject to post-closing adjustments,
and a majority ownership stake in MySpace, Inc. After payment to MSV of approximately $3.75 million in cash as partial consideration for its contribution of assets, the net financing proceeds to MySpace, Inc. were $5 million. Additional details
concerning the foregoing transactions are expected to be disclosed in a current report to be filed by the Company on Form 8-K. Also, as previously disclosed, MSV, in connection with the December 17, 2004 Redpoint financing and execution of the
non-binding term sheet, agreed to invest $300,000 in the Company in exchange for 75,000 shares of Company common stock and a five-year warrant to purchase 11,250 shares of Company common stock at $4 per share. The owners of MSV are Company
employees. The sale of stock to MSV was conditioned on, among other things, the completion of the transactions contemplated by the non-binding term sheet.



We believe that the combination of cash on hand and anticipated cash generated from operations will be sufficient to fund our existing business for at
least the next twelve months.



Off Balance Sheet Arrangements



At December 31, 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 December 31, 2004 are as follow (in
thousands):



|                              |  |                       |       |                             |   |                |  |            |       |  |   |    
|----------------------------- |  | --------------------- | ----- | --------------------------- | - | -------------- |  | ---------- | ----- |  | - | ---
|Contractual Obligations       |  | TotalAmountsCommitted |       | 3 MonthsEndedMarch 31, 2005 |   | March 31, 2006 |  | Thereafter
|Capital lease obligations     |  | $                     | 74    |                             | $ | 41             |  | $          | 24    |  | $ | 9  
|Operating lease obligations   |  |                       | 2,022 |                             |   | 327            |  |            | 1,190 |  |   | 505
|                              |  |                       |       |                             |   |                |  |            |       |  |   |    
|Total contractual obligations |  | $                     | 2,096 |                             | $ | 368            |  | $          | 1,214 |  | $ | 514
|                              |  |                       |       |                             |   |                |  |            |       |  |   |    



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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 6 of Notes to Consolidated Financial Statements 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, were filed
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 and 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 that 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.



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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.



We are exposed to potential risks
resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002



We are currently evaluating our internal controls in order to allow management to report on, and our independent auditors to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of
2002. While we are working diligently to complete these evaluations on a timely basis, it is possible that we may encounter unexpected delays in implementing the requirements relating to internal controls. Therefore, we cannot be certain about the
timing of the completion of our evaluation, testing and remediation actions or the impact that these activities will have on our operations since there is no precedent yet available by which to measure the adequacy of our compliance. We also expect
to continue to incur significant expenses as a result of performing the continuing system and process evaluation, testing and remediation required in order to comply with the management certification and auditor attestation requirements. If we are
not able to timely comply with the requirements set forth in Section 404, we might be subject to sanctions or investigation by regulatory authorities. Any such action could adversely affect our business and results of operations.



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 December 31, 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
56% 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



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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 December 31, 2004, we had 9,907,000 outstanding stock options and 352,000 outstanding warrants to purchase our common stock.



As of December 31, 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 $4.84 as of December 31, 2004. Because of the 6% accretion
factor, each share of Series A preferred stock will be converted into greater than one share of common stock. Prior to any conversion, the conversion price is also adjusted to account for any increase or decrease in the number of outstanding shares
of common stock by stock split, stock dividend, issuance of additional equity securities (other than those reserved as employee shares pursuant to any employee stock option plan) at a purchase price less than the then-current conversion price.



As of December 31, 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.



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As of December 31, 2004, we had 7,035,000 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 00,000 shares of Series C-1 preferred stock as
dividends through September 30, 2005.



The issuance of common
stock upon the exercise of outstanding options and warrants, or the conversion of the Series A, Series B, Series C or Series C-1 or any newly issued series of preferred stock, will cause dilution to existing common stockholders and could adversely
affect the market price of our common stock. In addition, the Series A, Series B, Series C and Series C-1 preferred stock, the 1,643,000 shares of common stock issued in November 2003 and the 1,000,000 shares of common stock and warrant to purchase
150,000 shares of common stock issued in December 2004 are unregistered and these stockholders have registration rights. We anticipate filing a Form S-3, if available to us; to register the 1,000,000 of common stock and 150,000 warrants to purchase
common stock that were issued in December 2004. When the registration statement is filed and if the other registration rights are exercised and the stock is re-sold in the market, the market price of our common stock could be adversely affected.



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. 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.



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



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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.



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 15%, 12% and 54%, respectively of the first nine months of fiscal year 2005 product marketing segment revenues. Most of the products we sold in the first nine
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 27%, respectively of first nine 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



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



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



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



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. 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



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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.



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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We may face litigation for information retrieved from the Internet.



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



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, the adoption of new laws and regulations in the future, or increased regulatory scrutiny with respect to issues such as user privacy, pricing, taxation and the characteristics and quality of products and
services, could create uncertainty in the Internet marketplace. The uncertainty created could reduce demand for our products and services, or increase the cost of doing business, due to increased costs of litigation, regulatory inquiries 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 and
other governmental or regulatory bodies have increasingly focused on issues impacting online marketing practices and consumer protection. In our judgment, the marketing claims we make in advertisements we place to obtain new e-commerce customers are
adequately supported. The Federal Trade Commission may make a different judgment about the adequacy of the support for the marketing claims we make. We could be subject to regulatory proceedings for past marketing campaigns, 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, is 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 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



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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 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 other natural disasters. 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
|------- | ----------------------------------------------------------



The Companys short-term investment policy and strategy is to ensure the preservation of capital, meet liquidity requirements, and optimize return in
light of current credit and interest rate trends. The Company benchmarks its performance by utilizing external banking executives to manage the short-term investments. The external banking executives adhere to the Companys investment policies
and also provide occasional research and market information that supplements internal research used to make credit decisions in the investment process.



The Company places its short-term investments in highly liquid securities issued by high credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. The Companys general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with initial maturities of three
months or less are classified as cash equivalents. The Company does not have investments with maturities of greater than three months, except for certificates of deposit used as collateral on certain long-term operating leases.



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|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 years 2004 and 2005. These changes constituted enhancing and restructuring the general
ledger system, so that is more appropriate to the anticipated size and complexity of the Companys business operations. The integration of the enhanced 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.



The Company adopted supplemental control measures in fiscal years 2004 and 2005 that were designed to mitigate the effect of the identified control deficiencies, including the deficiencies confirmed by our independent
auditors during their audit of our fiscal year 2004 financial statements. The supplemental control measures will be eliminated once the integrated general ledger system is fully implemented and other identified control deficiencies over financial
reporting are corrected.



We are currently evaluating our
internal controls in order to allow management to report on, and our independent auditors to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. While we are working diligently to complete these
evaluations on a timely basis, it is possible that we may encounter unexpected delays in implementing the requirements relating to internal controls. Therefore, we cannot be certain about the timing of the completion of our evaluation, testing and
remediation actions or the impact that these activities will have on our operations since there is no precedent yet available by which to measure the adequacy of our compliance. We also expect to continue to incur significant expenses as a result of
performing the continuing system and process evaluation, testing and remediation required in order to comply with the management certification and auditor attestation requirements. If we are not able to timely comply with the requirements set forth
in Section 404, we might be subject to sanctions or investigation by regulatory authorities. Any such action could adversely affect our business and results of operations.



Evaluation of Disclosure Controls and Procedures



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



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



The Companys Chief Executive Officer and Principal Financial Officer have concluded that, as of December 31, 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 December 31, 2004. The implementation process constitutes a significant change in internal control over financial reporting.



PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



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



|Item 6. | Exhibits
|------- | --------



See
Exhibit Index.



Available Information



The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on its website at http://www.intermix.com when such reports are available on the Securities
and Exchange Commission (SEC) website. The public may read and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Companys references to the URLs for these websites are intended to be inactive textual references only.



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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/ Richard M. RosenblattRichard M. RosenblattChief Executive OfficerBy:

/s/ Michael J. MincieliMichael J. MincieliVice President and Corporate Controller(Principal Financial Officer)




Dated: February 14, 2005



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Exhibit Index



|              |  |                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                            
|              | 
|10.01         |  | Asset Purchase Agreement, dated as of July 1, 2004, by and between eUniverse, Inc. and Supernation, LLC. (1)                                                           
|              | 
|10.02         |  | 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 (2)     
|              | 
|10.03         |  | Voting rights agreement with affiliates of VantagePoint Venture Partners, dated October 14, 2004. (3)                                                                  
|              | 
|10.04         |  | Letter regarding agreement in principle between Intermix Media, Inc. and lead plaintiff in Sands v. eUniverse, Inc. securities class action. (4)                       
|              | 
|10.05         |  | Asset Acquisition Agreement, dated as of December 17, 2003, by and between eUniverse, Inc. and MySpace Ventures LLC. (5)                                               
|              | 
|10.06         |  | Employment Agreement between Intermix Media, Inc. and Sherman Atkinson, dated December 3, 2004. (6)                                                                    
|              | 
|10.07         |  | Common Stock Purchase Agreement between Intermix Media, Inc. and entities affiliated with Redpoint Ventures, dated December 7, 2004. (7)                               
|              | 
|10.08         |  | Amendment No. 1 to Common Stock Purchase Agreement between Intermix Media, Inc. and entities affiliated with Redpoint Ventures, dated December 17, 2004. (8)           
|              | 
|10.09         |  | Investor Rights Agreement between Intermix Media, Inc. and entities affiliated with Redpoint Ventures, dated December 17, 2004. (8)                                    
|              | 
|10.10         |  | Sublease by and between Rubin Postaer and Associates and Intermix Media, Inc.*                                                                                         
|              | 
|10.11         |  | Standard Industrial/Commercial Multi-Tenant Lease between Richard E. Solomon and Intermix Media, Inc.*                                                                 
|              | 
|31            |  | Certification of the Chief Executive Officer and Principal 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 Principal 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 16, 2004.
|--- | ------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on October 13, 2004.
|--- | ---------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on October 19, 2004.
|--- | ---------------------------------------------------------------------------------------



|(4) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on November 10, 2004.
|--- | ----------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Intermix Media, Inc.s Form 10-Q filed on November 12, 2004.
|--- | -----------------------------------------------------------------------------------------



|(6) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on December 9, 2004.
|--- | ---------------------------------------------------------------------------------------



|(7) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on December 10, 2004.
|--- | ----------------------------------------------------------------------------------------



|(8) | Incorporated by reference to Intermix Media, Inc.s Form 8-K filed on December 22, 2004.
|--- | ----------------------------------------------------------------------------------------



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