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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q/A



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

Securities Exchange Act of 1934



For the quarterly period ended June 30, 2002



Commission file number: 000-26355



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eUNIVERSE, INC.

(Exact name of registrant as specified in its charter)



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



310-215-1001

(Registrants telephone number, including area code)



---



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



As of July 31, 2002, there were 24,268,034 shares of eUniverse, Inc. common stock outstanding.



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##### Table of Contents

eUNIVERSE, INC.



FORM 10-Q/A



This Form 10-Q/A is being filed for the purpose of amending and restating Items 1, 2 and 4 of Part I of Form 10-Q to reflect the restatement of our consolidated financial
statements as of and for the three months ended June 30, 2002. We have made no further changes to the previously filed Form 10-Q. This quarterly financial information was previously restated in the Annual Report on Form 10-K filed on August 22,
2003. All information in this Form 10-Q/A is as of June 30, 2002 and does not reflect any subsequent information or events other than the aforementioned restatement and changes to forward-looking statements as a result of the restatement. Item 4.
Controls and Procedures details the events leading up to the restatement and the enhancements and remedial actions designed to improve the Companys accounting and financial reporting procedures and controls. This filing should be read in
conjunction with the Companys Form 10-K for the fiscal year ended March 31, 2003.



FOR THE QUARTER ENDED JUNE 30, 2002



INDEX



|PART I  FINANCIAL INFORMATION                                                          |  |                                                                                      
|--------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|                                                                                        |  |                                                                                      
|ITEM 1.                                                                                 |  | FINANCIAL STATEMENTS (Unaudited)                                                     
|                                                                                        | 
|Consolidated Balance Sheets June 30, 2002 and March 31,2002                             |  | 3                                                                                    
|                                                                                        | 
|Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001 |  | 4                                                                                    
|                                                                                        | 
|Consolidated Statements of Cash Flows for the three months ended June 30, 2002 and 2001 |  | 5                                                                                    
|                                                                                        | 
|Notes to Financial Statements                                                           |  | 7                                                                                    
|                                                                                        |  |                                                                                      
|ITEM 2.                                                                                 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                        |  |                                                                                      
|ITEM 4.                                                                                 |  | CONTROLS AND PROCEDURES                                                              



2



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##### Table of Contents

PART I



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



eUniverse, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and par value data)



|                                                                                                                                     |  | June 30, 2002          |         |   | March 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | -------------- | -
|                                                                                                                                     |  | (Unaudited) (Restated) |         |   |                |  
|Assets                                                                                                                               |  |                        |         |   |                |  
|Current assets:                                                                                                                      |  |                        |         |   |                |  
|Cash and cash equivalents                                                                                                            |  | $                      | 6,828   |   |                | $
|Restricted cash                                                                                                                      |  |                        | 92      |   |                |  
|Accounts receivable (net of allowances for doubtful accounts of $361 and $452)                                                       |  |                        | 4,508   |   |                |  
|Inventories                                                                                                                          |  |                        | 332     |   |                |  
|Prepaid expenses                                                                                                                     |  |                        | 1,279   |   |                |  
|Deferred charges and other                                                                                                           |  |                        | 532     |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total current assets                                                                                                                 |  |                        | 13,571  |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Property and equipment, net of accumulated depreciation and amortization                                                             |  |                        | 2,530   |   |                |  
|                                                                                                                                     |  |                       
|Other assets:                                                                                                                        |  |                        |         |   |                |  
|Goodwill, net of accumulated amortization                                                                                            |  |                        | 12,273  |   |                |  
|Other intangible assets, net of accumulated amortization                                                                             |  |                        | 4,444   |   |                |  
|Deferred charges                                                                                                                     |  |                        | 59      |   |                |  
|Deposits and other                                                                                                                   |  |                        | 1,996   |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total assets                                                                                                                         |  | $                      | 34,873  |   |                | $
|                                                                                                                                     |  |                        |         |   |                |  
|Liabilities and Shareholders Equity                                                                                                 |  |                        |         |   |                |  
|Current liabilities:                                                                                                                 |  |                        |         |   |                |  
|Accounts payable                                                                                                                     |  | $                      | 1,763   |   |                | $
|Accrued expenses                                                                                                                     |  |                        | 3,697   |   |                |  
|Deferred revenue                                                                                                                     |  |                        | 340     |   |                |  
|Current portion of long-term debt                                                                                                    |  |                        | 3,482   |   |                |  
|Current portion of capitalized lease obligations                                                                                     |  |                        | 594     |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total current liabilities                                                                                                            |  |                        | 9,876   |   |                |  
|                                                                                                                                     |  |                       
|Long-term debt, less current portion                                                                                                 |  |                        | 1,183   |   |                |  
|Accrued interest                                                                                                                     |  |                        | 367     |   |                |  
|Capitalized lease obligations, less current portion                                                                                  |  |                        | 597     |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total liabilities                                                                                                                    |  |                        | 12,023  |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Shareholders equity:                                                                                                                |  |                        |         |   |                |  
|Preferred stock, $0.10 par value; 40,000,000 shares authorized; and 2,872,665 shares issued and outstanding                          |  |                        | 288     |   |                |  
|Common stock, $0.001 par value; 250,000,000 shares authorized; 23,587,067 and 23,542,219 shares issued and outstanding,
respectively |  |                        | 23      |   |                |  
|Additional paid-in capital                                                                                                           |  |                        | 68,866  |   |                |  
|Accumulated deficit                                                                                                                  |  |                        | (46,291 | ) |                |  
|Treasury stock                                                                                                                       |  |                        | (36     | ) |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total shareholders equity                                                                                                           |  |                        | 22,850  |   |                |  
|                                                                                                                                     |  |                        |         |   |                |  
|Total liabilities and shareholders equity                                                                                           |  | $                      | 34,873  |   |                | $
|                                                                                                                                     |  |                        |         |   |                |  



See Notes to
Consolidated Financial Statements



3



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##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(In thousands, except
share and per share data)



|                                                 |  | Three months ended June 30, |           
|------------------------------------------------ |  | --------------------------- | ----------
|                                                 |  | 2002                        |           
|                                                 |  | (Restated)                  |           
|Revenues                                         |  | $                           | 10,782    
|Cost of sales                                    |  |                             | 2,164     
|                                                 |  |                             |           
|Gross profit                                     |  |                             | 8,618     
|                                                 |  |                             |           
|Operating expenses:                              |  |                             |           
|Marketing and sales                              |  |                             | 2,798     
|Product development                              |  |                             | 2,069     
|General and administrative                       |  |                             | 2,175     
|Amortization of other intangible assets          |  |                             | 214       
|                                                 |  |                             |           
|Total operating expenses                         |  |                             | 7,256     
|                                                 |  |                             |           
|Operating income                                 |  |                             | 1,362     
|                                                 |  |                            
|Non-operating income (expense):                  |  |                             |           
|Interest income                                  |  |                             | 16        
|Interest expense and other financing costs       |  |                             | (125      
|Cancellation of stock options                    |  |                             | (452      
|Gain on extinguishment of debt                   |  |                             | 1,269     
|                                                 |  |                             |           
|Income from operations before income taxes       |  |                             | 2,070     
|                                                 |  |                            
|Income tax expense                               |  |                             | 4         
|                                                 |  |                             |           
|Net income                                       |  |                             | 2,074     
|                                                 |  |                            
|Accretion of preferred stock redemption value    |  |                             | 42        
|                                                 |  |                             |           
|Income available to common shares                |  | $                           | 2,032     
|                                                 |  |                             |           
|Basic earnings per common share                  |  | $                           | 0.09      
|                                                 |  |                             |           
|Diluted earnings per common share                |  | $                           | 0.06      
|                                                 |  |                             |           
|Basic weighted average common shares outstanding |  |                             | 23,609,260
|                                                 |  |                             |           
|Diluted weighted average shares outstanding      |  |                             | 32,199,797
|                                                 |  |                             |           



See Notes to
Consolidated Financial Statements



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##### Table of Contents

eUniverse, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)



|                                                                 |  | Three Months ended June 30, |       
|---------------------------------------------------------------- |  | --------------------------- | ------
|                                                                 |  | 2002                        |       
|                                                                 |  | (Restated)                  |       
|Operating activities                                             |  |                             |       
|Net income                                                       |  | $                           | 2,074 
|Transactions not requiring cash:                                 |  |                             |       
|Depreciation                                                     |  |                             | 125   
|Amortization of intangible assets                                |  |                             | 214   
|(Gain) from extinguishment of debt                               |  |                             | (1,269
|Allowance for doubtful accounts                                  |  |                             | 149   
|Stock and warrants granted to outside consultants and affiliates |  |                             |      
|Changes in current assets                                        |  |                             | 170   
|Changes in current liabilities                                   |  |                             | (1,274
|Changes in other                                                 |  |                             | 111   
|                                                                 |  |                             |       
|Net cash provided by operating activities                        |  |                             | 300   
|                                                                 |  |                             |       
|                                                                 |  |                            
|Investing activities                                             |  |                             |       
|Deposits and other                                               |  |                             | (1,853
|Purchases of fixed assets                                        |  |                             | (270  
|Purchases of intangible assets                                   |  |                             |      
|                                                                 |  |                             |       
|Net cash used in investing activities                            |  |                             | (2,123
|                                                                 |  |                             |       
|Financing activities                                             |  |                             |       
|Proceeds from capital leases                                     |  |                             | 1,183 
|Repayment of capital leases                                      |  |                             | (123  
|Advances to investors                                            |  |                             |      
|Repayment of long-term notes                                     |  |                             | (516  
|Proceeds from issuance of stock options                          |  |                             | 99    
|                                                                 |  |                             |       
|Net cash provided (used) by financing activities                 |  |                             | 643   
|                                                                 |  |                             |       
|Change in cash and cash equivalents                              |  |                             | (1,180
|Cash and cash equivalents, beginning of period                   |  |                             | 8,008 
|                                                                 |  |                             |       
|Cash and cash equivalents, end of period                         |  | $                           | 6,828 
|                                                                 |  |                             |       
|Cash paid during the year for:                                   |  |                             |       
|Interest                                                         |  | $                           | 38    
|                                                                 |  |                             |       
|Income taxes                                                     |  | $                           |      
|                                                                 |  |                             |       



See Notes to
Consolidated Financial Statements



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|                                                                              |  | Three Months Ended June 30, | 
|----------------------------------------------------------------------------- |  | --------------------------- | 
|                                                                              |  | 2002                        | 
|OTHER NON-CASH FINANCIAL ACTIVITIES                                           |  |                             | 
|                                                                              |  |                            
|Stock issued in connection with acquisitions                                  |  |                             | 
|Acquisition Gamers Alliance                                                  |  |                            | 
|Acquisition of Ratedfun.com                                                   |  |                            | 
|Stock issued to employees                                                     |  |                            | 
|Warrants issued in connection with services performed and to be performed (1) |  |                            | 
|Shares cancelled in payment of amounts due from employees                     |  |                            | 
|Shares issued to Isosceles (2)                                                |  |                            | 
|Capital lease obligations for software and hardware equipment                 |  | 1,276                       | 

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

|(2) | Shares issued in satisfaction of settlement agreement February 2, 2002 with the Isosceles Fund Limited.
|--- | -------------------------------------------------------------------------------------------------------



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eUNIVERSE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002 and 2001



1. ORGANIZATION AND LINE OF BUSINESS



eUniverse, Inc. (the Company, we or our) is a Nevada Corporation engaged in developing and operating a network of
websites providing entertainment-oriented content and certain proprietary products and services. During the reporting period, the Company had two primary reporting segments: (1) Media/Advertising, and (2) Products and Services. The Company conducts
operations from facilities located in Los Angeles, CA; New York, NY and Mount Vernon, WA. The financial statements being presented include the accounts of eUniverse, Inc. and its wholly owned subsidiaries. Prior to fiscal year 2002, the Company
engaged in sales of audio CDs, videotapes (VHS), and digital videodisks (DVDs) over the Internet. This business was discontinued in October 2000. All significant inter-company transactions and balances have been eliminated in
consolidation.



2. RESTATEMENT



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



As a result of these items, for the
three-month period ended June 30, 2002, the Company has reduced its previously reported revenue by approximately $630 thousand, and decreased its net income by approximately $418 thousand and decreased its basic earnings per share to $0.9 from
$0.11.



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



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eUniverse, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

(In thousands, except share and par value data)



|                                                                                                                                     |  | June 30, 2002 |        
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------
|                                                                                                                                     |  | As reported   |        
|Assets                                                                                                                               |  |               |        
|Current assets:                                                                                                                      |  |               |        
|Cash and cash equivalents                                                                                                            |  | $             | 7,284  
|Restricted cash                                                                                                                      |  |               |       
|Accounts receivable (net of allowances for doubtful accounts of $361)                                                                |  |               | 5,083  
|Inventories                                                                                                                          |  |               | 332    
|Prepaid expenses                                                                                                                     |  |               | 1,736  
|Deferred charges and other                                                                                                           |  |               | 532    
|                                                                                                                                     |  |               |        
|Total current assets                                                                                                                 |  |               | 14,967 
|                                                                                                                                     |  |               |        
|Property and equipment, net of accumulated depreciation and amortization                                                             |  |               | 2,473  
|                                                                                                                                     |  |               |        
|Other assets:                                                                                                                        |  |               |        
|Goodwill, net of accumulated amortization                                                                                            |  |               | 12,333 
|Other intangible assets, net of accumulated amortization                                                                             |  |               | 4,588  
|Deferred charges                                                                                                                     |  |               | 59     
|Deposits and other                                                                                                                   |  |               | 1,724  
|                                                                                                                                     |  |               |        
|Total assets                                                                                                                         |  | $             | 36,144 
|                                                                                                                                     |  |               |        
|Liabilities and Shareholders Equity                                                                                                 |  |               |        
|Current liabilities:                                                                                                                 |  |               |        
|Accounts payable                                                                                                                     |  | $             | 1,984  
|Accrued expenses                                                                                                                     |  |               | 4,736  
|Deferred revenue                                                                                                                     |  |               | 485    
|Current portion of long-term debt                                                                                                    |  |               | 3,039  
|Current portion of capitalized lease obligations                                                                                     |  |               | 510    
|                                                                                                                                     |  |               |        
|Total current liabilities                                                                                                            |  |               | 10,754 
|                                                                                                                                     |  |               |        
|Long-term debt, less current portion                                                                                                 |  |               | 1,164  
|Accrued interest                                                                                                                     |  |               |       
|Capitalized lease obligations, less current portion                                                                                  |  |               | 538    
|                                                                                                                                     |  |               |        
|Total liabilities                                                                                                                    |  |               | 12,456 
|                                                                                                                                     |  |               |        
|Shareholders equity:                                                                                                                |  |               |        
|Preferred stock, $0.10 par value; 40,000,000 shares authorized; 2,872,665 shares issued and outstanding                              |  |               | 287    
|Common stock, $0.001 par value; 250,000,000 shares authorized; 23,587,067 and 23,542,219 shares issued and outstanding,
respectively |  |               | 24     
|Additional paid-in capital                                                                                                           |  |               | 69,497 
|Deferred stock compensation cost                                                                                                     |  |               | (212   
|Accumulated deficit                                                                                                                  |  |               | (45,872
|Treasury stock                                                                                                                       |  |               | (36    
|                                                                                                                                     |  |               |        
|Total shareholders equity                                                                                                           |  |               | 23,688 
|                                                                                                                                     |  |               |        
|Total liabilities and shareholders equity                                                                                           |  | $             | 36,144 
|                                                                                                                                     |  |               |        



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eUniverse, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(In thousands, except share and per share data)



|                                                      |  | Three Months Ended June 30, 2002 |           
|----------------------------------------------------- |  | -------------------------------- | ----------
|                                                      |  | As reported and reclassified     |           
|Revenues                                              |  | $                                | 11,412    
|Cost of sales                                         |  |                                  | 2,600     
|                                                      |  |                                  |           
|Gross profit                                          |  |                                  | 8,812     
|                                                      |  |                                  |           
|Operating expenses:                                   |  |                                  |           
|Marketing and sales                                   |  |                                  | 2,089     
|Product development                                   |  |                                  | 2,089     
|General and administrative                            |  |                                  | 2,559     
|Amortization of other intangible assets               |  |                                  | 187       
|                                                      |  |                                  |           
|Total operating expenses                              |  |                                  | 6,924     
|                                                      |  |                                  |           
|Operating income                                      |  |                                  | 1,888     
|                                                      |  |                                  |           
|Non-operating income (expense):                       |  |                                  |           
|Interest income                                       |  |                                  | 11        
|Interest expense and other financing costs            |  |                                  | (155      
|Cancellation of stock options                         |  |                                  | (452      
|Gain on extinguishment of debt                        |  |                                  | 1,242     
|                                                      |  |                                  |           
|Income from continuing operations before income taxes |  |                                  | 2,534     
|                                                      |  |                                  |           
|Income tax expense                                    |  |                                  |          
|                                                      |  |                                  |           
|Income from continuing operations                     |  |                                  | 2,534     
|                                                      |  |                                  |           
|Discontinued operations:                              |  |                                  |           
|Loss from operations of discontinued segment          |  |                                  | (41       
|                                                      |  |                                  |           
|Net income                                            |  |                                  | 2,493     
|                                                      |  |                                  |           
|Accretion of preferred stock redemption value         |  |                                  |          
|                                                      |  |                                  |           
|Income available to common shares                     |  | $                                | 2,493     
|                                                      |  |                                  |           
|Basic earnings per common share                       |  | $                                | 0.11      
|                                                      |  |                                  |           
|Diluted earnings per common share                     |  | $                                | 0.08      
|                                                      |  |                                  |           
|Basic weighted average common shares outstanding      |  |                                  | 23,609,260
|                                                      |  |                                  |           
|Diluted weighted average shares outstanding           |  |                                  | 32,199,797
|                                                      |  |                                  |           



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3. ACCOUNTING POLICIES



Interim financial information



The accompanying unaudited interim financial statements have been prepared by the Company, in accordance with United States generally accepted accounting
principles pursuant to Regulation S-K of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Companys financial statements and related notes as contained in Form 10-K for the year ended March 31, 2002. In the opinion of
management, the interim financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of operations for the three months ended June 30, 2002 are
not necessarily indicative of results of operations to be expected for the full year.



Business combinations



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



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



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



Principles of consolidation



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



Restricted cash and deposits



At June 30, 2002, the Company has $0.1 million of funds held by the bank as a reserve against any possible chargebacks/returns on credit card transaction related to customer disputes, that are not offset against the
Companys daily sales deposit activity. This amount is reflected as restricted cash.



The Company also has approximately $1.3 million in certificates of deposit which collateralize operating and capital lease obligations. These amounts are classified as long term deposits.



Estimates and assumptions



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



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##### Table of Contents

Revenue recognition



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



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



Barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the advertisements
given with the difference recorded as an advance or prepaid. During the quarters ended June 30, 2002 and 2001, the Company recorded $488 thousand and $325 thousand as bartered advertising revenue, respectively.



Inventory



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



Property and equipment



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



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



Intangible assets



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



Advertising costs



Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of direct-response advertising, if any, are capitalized and amortized over the period during which future benefits are expected to be received. During the three months ended June 30,
2002 and 2001 advertising expense amounted to $186 and $426 thousand respectively. The Company had no direct-response advertising during the periods presented.



Earnings per share



Basic earnings per share is computed as net income less accretion of the Series A redeemable convertible preferred stock divided by the weighted average
number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect. For the three months ended June 30, 2002, 1,467 thousand stock options have been excluded from the computation of diluted earning per share because their effect is currently anti-dilutive.



11



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4. MAJOR CUSTOMERS



In the quarter ended June 30, 2002, approximately 13% of the Companys revenues resulted from five customers ranging from 2% to 3% of revenues each.
In the quarter ended June 30, 2001, approximately 52% of revenues were generated from the top five customers.



5. AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS



The net carrying value of goodwill and other intangibles recorded through acquisitions is $16,717 thousand and $16,875 thousand as of June 30, 2002 and March 31, 2002, respectively. Effective April 1, 2001, the
Company adopted SFAS 141 and SFAS 142. These assets are now assessed for impairment at least annually or upon an adverse change in operations. The assets were amortized on a straight-line basis over two to five years beginning January 1, 2001. Prior
to that date, the Company amortized goodwill and other intangibles on a straight-line basis over ten years. Since March 31, 2002, the Company has not noted any material adverse events that could cause an impairment of the net carrying value of
goodwill or other intangible assets as of June 30, 2002.



Goodwill in the amount of approximately $12,273,000 at June 30, 2002 is not amortized.



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



|                               |  | June 30, 2002 |       |   | March 31, 2002 |  
|------------------------------ |  | ------------- | ----- | - | -------------- | -
|Customer lists                 |  | $             | 1,393 |   |                | $
|Domain names                   |  |               | 1,740 |   |                |  
|License agreements             |  |               | 315   |   |                |  
|Websites                       |  |               | 1,574 |   |                |  
|Other                          |  |               | 260   |   |                |  
|                               |  |               |       |   |                |  
|                               |  |               | 5,282 |   |                |  
|Less: accumulated amortization |  |               | (838  | ) |                |  
|                               |  |               |       |   |                |  
|Other Intangibles, net         |  | $             | 4,444 |   |                | $
|                               |  |               |       |   |                |  



The intangible assets
categorized above, valued at the lesser of historical cost or current fair valued based on managements judgment, are being amortized on the straight-line over the period of three to seven years. Amortization expense for goodwill and intangible
assets for the three months ending June 30, 2002 and 2001 was approximately $214 thousand and $0, respectively.



6. FIXED ASSETS



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



|                               |  | June 30, 2002 |       |   | March 31, 2002 |  
|------------------------------ |  | ------------- | ----- | - | -------------- | -
|Furniture and fixtures         |  | $             | 27    |   |                | $
|Computers and equipment        |  |               | 1,647 |   |                |  
|Equipment under capital lease  |  |               | 1,279 |   |                |  
|Leasehold improvements         |  |               | 4     |   |                |  
|Purchased software             |  |               | 262   |   |                |  
|                               |  |               |       |   |                |  
|                               |  |               | 3,219 |   |                |  
|Less: accumulated depreciation |  |               | (689  | ) |                |  
|                               |  |               |       |   |                |  
|Fixed assets, Net              |  | $             | 2,530 |   |                | $
|                               |  |               |       |   |                |  



Depreciation expense for the three months ended June 30, 2002 and 2001 was $125 and $107 thousand, respectively.



12



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7. PREPAID EXPENSES



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



|                              |  | June 30, 2002 |       | March 31, 2002
|----------------------------- |  | ------------- | ----- | --------------
|Co-marketing agreement shares |  | $             | 327   |               
|eGames earnout advance        |  |               | 300   |               
|Marketing expenses            |  |               | 359   |               
|Investment banking expenses   |  |               | 23    |               
|Investor relations expenses   |  |               | 10    |               
|Licensing agreements          |  |               | 188   |               
|Insurance, advances & other   |  |               | 67    |               
|Consulting fees               |  |               | 5     |               
|Inventory                     |  |               |      |               
|                              |  |               |       |               
|Total                         |  | $             | 1,279 |               
|                              |  |               |       |               



8. DEFERRED CHARGES



Deferred charges consist of the unamortized fair value of warrants or
options issued principally in connection with the securing of financing and investor relations services. Options issued to advertising affiliates for continued online advertising services are also included. All such options and warrants have been
valued using the Black-Scholes method option pricing model (see also Note 14 - Warrants). (In thousands)



|                          |  | June 30, 2002 |     |   | March 31, 2002 |  
|------------------------- |  | ------------- | --- | - | -------------- | -
|Warrants:                 |  |               |     |   |                |  
|Granted for services      |  | $             | 591 |   |                | $
|                          |  |               |     |   |                |  
|                          |  |               | 591 |   |                |  
|                          |  |              
|Less: Non-current portion |  |               | (59 | ) |                |  
|                          |  |               |     |   |                |  
|Total                     |  | $             | 532 |   |                | $
|                          |  |               |     |   |                |  



9. SHORT-TERM NOTES PAYABLE



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



|                                                  |  | June 30, 2002 |       |   | March 31, 2002 |  
|------------------------------------------------- |  | ------------- | ----- | - | -------------- | -
|Notes payable:                                    |  |               |       |   |                |  
|550 Digital Media Ventures - Affiliate (Sony) (1) |  | $             | 2,290 |   |                | $
|FunBug                                            |  |               | 200   |   |                |  
|Funny Greetings (3)                               |  |               | 394   |   |                |  
|Saggi Capital                                     |  |               | 450   |   |                |  
|SFX Entertainment, Inc. (2)                       |  |               | 253   |   |                |  
|                                                  |  |               |       |   |                |  
|                                                  |  |               | 3,587 |   |                |  
|Less: Discount on FunnyGreetings Note             |  |               | (105  | ) |                |  
|                                                  |  |               |       |   |                |  
|Total                                             |  | $             | 3,482 |   |                | $
|                                                  |  |               |       |   |                |  

---

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



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##### Table of Contents

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

|(3) | In July 2001, the Company amended its agreement with an employee for the purchase of Funnygreetings.com. Under the prior agreement, the Company was obligated to pay $2 million.
Under the new agreement, the Company reduced the obligation to $1.2 million, less $86 thousand already received by the seller, and restructured the payment terms as described below. The Company made an additional payment of $130 thousand in
connection with Company financing which closed October 23, 2001 with 550 Digital Media Ventures as previously reported. The remaining balance of $984 thousand is payable in thirty monthly installments subject to certain advertising revenues being
achieved on the Funnygreetings.com Web site. Whenever revenue performance is not achieved in a given month, the monthly payment is reduced to a minimum of $20 thousand. The total current portion of this debt is $394 thousand. The remaining long term
portion of this note is $271 thousand.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10. LONG-TERM NOTES
PAYABLE



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



|                            |  | June 30, 2002 |       | March 31, 2002
|--------------------------- |  | ------------- | ----- | --------------
|Notes Payable:              |  |               |       |               
|Debs Fun Pages (1)         |  | $             | 287   |               
|FunBug                      |  |               |      |               
|FunnyGreetings (2)          |  |               | 271   |               
|FunPageLand (1)             |  |               | 113   |               
|JustSayWow(1) (3)           |  |               |      |               
|Send4Fun(1) (3)             |  |               |      |               
|SFX Entertainment, Inc. (4) |  |               | 512   |               
|                            |  |               |       |               
|Total                       |  | $             | 1,183 |               
|                            |  |               |       |               

---

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

|(2) | In July 2001, the Company amended its agreement with an employee for the purchase of Funnygreetings.com. Under the prior agreement, the Company was obligated to pay $2 million.
Under the new agreement, the Company reduced the obligation to $1.2 million less $86 thousand already received by the seller. The Company made an additional payment of $130 thousand in connection with Company financing which closed October 23, 2001
with 550 Digital Media Ventures as previously reported. The remaining balance of $984 thousand shall be payable in thirty monthly installments subject to certain advertising revenues being achieved on the Funnygreetings.com web site. In the event
revenue performance is not achieved in a given month, the monthly payment is reduced to $20,000. The total current portion of this debt is $394 thousand. The remaining long term portion of this note is $271 thousand.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | In January 2002, the payment terms of this note were extended to January 1, 2004 from August 26, 2002. The note is collateralized by 2,600,000 shares of common stock owned by Brad
D. Greenspan. Principal and interest payments are quarterly over the life of the note with an effective interest rate of 18.51%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11. CAPITALIZED LEASE OBLIGATIONS



On May 3, 2002, the Company entered into a 24 month master lease and security agreement to borrow $1.1 million from Transamerica Equipment Financial
Services Corporation for the sales leaseback of certain equipment necessary to run the eUniverse network of websites. The lease rate excluding applicable sales taxes is $53 thousand per month and is secured by an $825 thousand letter of credit, or
75% of the principal due at the origination of the lease.



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##### Table of Contents

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



|2003 (remaining nine months)                           |  | $ | 534   |  
|------------------------------------------------------ |  | - | ----- | -
|2004                                                   |  |   | 702   |  
|2005                                                   |  |   | 111   |  
|                                                       |  |   |       |  
|Total minimum lease payments                           |  |   | 1,347 |  
|Less: Amounts representing interest                    |  |   | (156  | )
|                                                       |  |   |       |  
|Present value of net minimum lease payments            |  |   | 1,191 |  
|Less: Current portion of capitalized lease obligations |  |   | (594  | )
|                                                       |  |   |       |  
|Long-term capitalized lease obligations                |  | $ | 597   |  
|                                                       |  |   |       |  



Equipment with a cost
basis of $1,279 thousand is collateral for the obligations under capital leases. During fiscal year 2003, the Company entered into several sale-leaseback transactions for computer equipment. Under the terms of the agreements, the Company, as lessee,
is required to maintain the equipment and provide public liability insurance coverage in the minimum amount of $1 million. As additional security relating to the sale-leaseback of equipment, the Company is required to maintain an $825 thousand
irrevocable standby letter for the first twelve months of the lease term and $413 thousand for the remaining twelve months of the lease term.



12. ACCRUED EXPENSES



Accrued expenses consist of the following (in thousands):



|                      |  | June 30, 2002 |       | March 31, 2002
|--------------------- |  | ------------- | ----- | --------------
|Professional services |  | $             |      |               
|Acquisition payments  |  |               | 454   |               
|Compensation          |  |               | 799   |               
|Affiliate payments    |  |               | 41    |               
|Marketing             |  |               |      |               
|Interest              |  |               | 45    |               
|Royalties             |  |               | 487   |               
|Sales tax             |  |               | 251   |               
|Legal settlement      |  |               | 312   |               
|Sales returns         |  |               | 427   |               
|Customer deposit      |  |               | 163   |               
|Stock option buyout   |  |               | 452   |               
|Other                 |  |               | 266   |               
|                      |  |               |       |               
|Total                 |  | $             | 3,697 |               
|                      |  |               |       |               



13. COMMITMENTS AND CONTINGENCIES



Operating Leases



The Company leases various facilities under non-cancelable operating lease
agreements that expire within the next five years. Future minimum lease payments under these non-cancelable operating leases at June 30, 2002 are as follows (in thousands):



|Years ending March 31,       |  |   |      
|---------------------------- |  | - | -----
|2003 (remaining nine months) |  | $ | 656  
|2004                         |  |   | 1,174
|2005                         |  |   | 1,042
|2006                         |  |   | 714  
|2007                         |  |   |     
|                             |  |   |      
|                             |  | $ | 3,586
|                             |  |   |      



On May 6, 2002, the
Company entered into an agreement to sublease additional office space for its new headquarters in Los Angeles, CA. The agreement expires May 6, 2006. The rental rate is $44,613 per month with 3% annual escalation through the expiration date.



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##### Table of Contents

Rent expense for the three months ended June 30, 2002 and 2001was $254 thousand and $114 thousand,
respectively.



Litigation



As previously disclosed, on July 6, 2001, Adolph Komorsky Investments, Inc.
(AKI), an Illinois corporation with its principal place of business in Tarrytown, New York, filed a complaint against the Company in the Supreme Court of the State of New York, County of Westchester. AKI alleges that the Company breached
a consulting agreement with AKI by failing and refusing to pay AKI cash and warrant consideration called for under the agreement. The Company denies AKIs allegations and has asserted defenses to the claims including the failure of AKI to
perform its obligations under the consulting agreement, which the Company formally terminated on June 29, 2001, approximately 45 days after the effective date of the agreement. There have been no material developments in this matter since the
Companys last filing.



14. EQUITY COMPENSATION PLAN



Stock Options



Under the Companys 1999 Stock Award Plan, stock options may be granted to officers, directors, employees and
consultants. An aggregate of 9 million shares of common stock have been reserved for issuance under the Plan. Typically, options granted under the plan will vest ratably over 3 years with 1/3 vesting after 12 months and the remaining vesting in 1/8
increments each 3 months thereafter. During the quarter ended June 30, 2002, the Company issued 97 thousand shares with exercise prices ranging from $4.27 to $5.41. As of June 30, 2002, 8,249 thousand options were outstanding at a weighted average
price of $3.13 and 3,729 thousand were exercisable at a weighted average price of $3.68.



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



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



In June of 2002, the Company agreed to pay approximately $452 thousand to various stock option holders in exchange for the cancellation of approximately
925 thousand options. (See Note 16 -Subsequent Events).



Warrants:



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



Warrants
outstanding and exercisable as of June 30, 2002 were 2,268 thousand; with exercise prices ranging from $1.00 to $5.10 per share.



15. SEGMENT INFORMATION



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



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



Three Months Ended June 30, 2002:



|             |  | Media/Advertising |       | Products and Services |   | Total
|------------ |  | ----------------- | ----- | --------------------- | - | -----
|Revenues     |  | $                 | 5,699 |                       | $ | 5,083
|Gross profit |  | $                 | 5,699 |                       | $ | 2,919



16



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##### Table of Contents

(16) SUBSEQUENT EVENTS



On July 12, 2002, the Company paid for agreement to cancel options granted to certain option holders. Approximately 925 thousand options were cancelled
with a charge of approximately $452 thousand.



On July 3, 2002,
the Company was refunded a deposit of $460 thousand in connection with a possible acquisition that was not consummated.



17



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##### Table of Contents

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



The following discussion should be read in conjunction with our financial statements and the accompanying notes that appear elsewhere in this report. The
results for the current quarter reflect the consolidated operations of eUniverse, Cases Ladder (effective from May 30, 1999), VIZX Corporation (effective from November 20, 2001), eCommerce Transactions (effective from June 12, 2001), Indimi
LLC (effective from July 13, 2001), North Plains LLC (effective from May 13, 2001), and Ultra Conversions, LLC (effective from May 15, 2002). Results for the comparable period in 2001 include only those of eUniverse, Cases Ladder, and
Gamers Alliance. Gamers Alliance ceased operations during the quarter ended June 2001.



Effective October 10, 2000 the asset of CD Universe which made up the products business segment of eUniverse was sold to CLBL, Inc. and the results of
that segment are treated as a discontinued operation in the financial statements.



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



RESULTS OF OPERTIONS



Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001



Net Revenues



In the quarter ended June 30, 2002 (current quarter), approximately 50% of the Companys revenues were
derived from paid third party advertising and the remaining 50% of revenue coming from the Products and Services segment, which was launched in June, 2001. During the quarter ended June 30, 2001, 100% of the Companys revenues from continuing
operations were derived from paid third party advertising. The Company is continuing to pursue its strategy of diversifying its revenues by introducing and enhancing various proprietary products and services. Management of the Company believes that
the percentage of revenue generated from the Products and Services segment will continue to increase and that this segment will eventually become the dominant revenue driver of the Company.



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



Services revenues include fees from the sale of non-refundable memberships and sponsorships that are recognized ratably as earned. Service revenues also include fees from the sale of non-refundable dating credits,
which are recognized at the time of purchase. These credits are utilized in the Companys dating service. The Company launched an online dating site called Cupid Junction in June 2001 as a first step in diversifying the revenue base beyond
advertisement. Cupid Junction sells packages of credits to use to contact desired members. Electronic commerce transactions include product sales for items such as laser and inkjet printer supplies. For these transactions, the Company recognizes
revenue upon shipment of its products. Revenue includes shipping and handling charges. Product fulfillment is outsourced to independent third parties.



Revenues from barter transactions are recorded at the lower of the estimated fair value of advertisements received or the estimated fair value of the
advertisements given with the difference recorded as an advance or prepaid.



We recognize as revenues the amount paid to us upon the delivery and fulfillment of advertising, provided that the collection of the resulting receivable is probable.



|                      |  | Three Months Ended June 30, |       
|--------------------- |  | --------------------------- | ------
|                      |  | 2002                        |       
|                      |  | (in thousands)              |       
|Revenues              |  |                             |       
|Media / Advertising   |  | $                           | 5,699 
|Products and Services |  |                             | 5,083 
|                      |  |                             |       
|Total Revenues        |  | $                           | 10,782
|                      |  |                             |       

---

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



Net Revenue. Net revenue increased to $10.8 million for the quarter ended June 30, 2002 from $5.1 million for the quarter ended June 30, 2001, an
increase of $5.7 million. The increase is due primarily to the introduction of the Products and Services segment which contributed 89% of the overall increase. The revenues produced from this segment were primarily from recurrent transaction
products (e.g. ink jet cartridges), subscription-based services (e.g. dating, fitness, premium memberships) and the sale of impulse merchandise. The Company plans to continue to add to and upgrade its product and service offerings during fiscal year
2003.



18



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##### Table of Contents

Revenues from Media and Advertising increased approximately 13% to $5.7 million due primarily to an
increase in available advertising space, from newly launched and acquired sites, and an increase in the overall yield from available advertising inventory.



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



Revenue also includes barter and non-cash
advertising where we exchange advertising on our sites for similarly valued online advertising or other services. The barter value was $488,000, or 4.5% of total revenue, for the current quarter. The Companys barter and non-cash advertising
constituted $325,000, or 6.4% of total revenue, in the quarter ended June 30, 2001. The Company typically uses barter transactions to test prospective media/advertising purchases or sales campaigns.



Cost of Sales and Operating Costs



Our cost of sales and operating costs were as follow:



|                                        |  | Three months ended June 30, |      
|--------------------------------------- |  | --------------------------- | -----
|                                        |  | 2002                        |      
|                                        |  | (in thousands)              |      
|Cost of sales                           |  | $                           | 2,164
|Operating costs:                        |  |                             |      
|Marketing and Sales                     |  |                             | 2,798
|Product development                     |  |                             | 2,069
|General and administrative              |  |                             | 2,175
|Amortization of other intangible assets |  |                             | 214  
|                                        |  |                             |      
|Total cost of sales and operating costs |  | $                           | 9,420
|                                        |  |                             |      

---

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



Cost of Sales. Cost of sales consists primarily of the cost of products for the commerce offerings within the Products and Services segment,
license arrangements, shipping costs and credit card merchant fees. For the three months ended June 30, 2002, cost of revenues increased 961% to $2.2 million, or 20% of total revenues from $204 thousand, or 4% of total revenues for the three months
ended June 30, 2001. The increase was mainly due to costs of the Products and Services segment.



The Company expects cost of revenues to continue to increase as a percentage of overall revenues as the Products and Services segment continues its rapid
growth. Cost of revenues may increase to as much as 25% to 30% of overall revenues during fiscal year 2003.



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



Marketing and Sales costs increased by 55% to $2.8 million, or 26% of total
revenues, for the current quarter, from $1.8 million, or 36% of total revenues, for the comparable quarter last year. The increase was due to increases in promotional and advertising costs, facilities costs, marketing consulting costs and
compensation costs.



During fiscal year 2003, we plan to expand
our direct sales, marketing and customer care teams to increase customer retention and drive new revenue growth. The core strategy of the Company is to develop a longer-term relationship with its customers and enhance the lifetime value of each
consumer and advertiser relationship. The Company expects that marketing and sales costs will increase in absolute terms and as a percentage of overall revenue.



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



Product and development costs increased to $2.1 million for the three months
ended June 30, 2002 from $1 million for the three months ended June 30, 2001.



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



General and administrative costs increased by 47% to $2.2 million, or 20% of total revenues, for the current quarter, from
$1.5 million, or 29% of total revenues, for the comparable quarter last year. The increase was due to growth in the number of management, legal and finance personnel, expansion of facilities and computer systems, and an increase in legal and
accounting services to support the growth of our operations and infrastructure.



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



Amortization of Goodwill and other Intangible assets.For the quarter
ended June 30, 2002, amortization of intangibles amounted to approximately $0.2 million, including a change from indefinite life to a definite life of 7 years for intangible assets associated with the Flowgo Network.



The Company adopted FAS141 and FAS142 effective April 1, 2001. In accordance
with the new accounting standards, the Company will evaluate the purchased goodwill and other intangible amounts for potential impairment on an at least an annual basis or upon the occurrence of a material adverse event in accordance with FAS141 and
FAS142. Amortization of acquisition-related intangible assets for the quarter ending June 30, 2002 reflects the stock acquisitions of Infobeat and VIZX and the asset acquisitions of FunnyGreetings, Spreading Joy, FunOne, Send4Fun, Flowgo Network,
and certain customer name lists.



Interest and Other Income and Other
Non-Operating Expense



|                                      |  | Three Months ended June 30, |      
|------------------------------------- |  | --------------------------- | -----
|                                      |  | 2002                        |      
|                                      |  | (in thousands)              |      
|Interest income                       |  | $                           | 16   
|Interest and other financing expenses |  |                             | (125 
|Cancellation of stock options         |  |                             | (452 
|Gain on extinguishment of debt        |  |                             | 1,269



The Company paid
approximately $452 thousand to various stock option holders for the cancellation of approximately 925 thousand options. During the current quarter, the Company into an agreement for the retirement of approximately $1.7 million of long-term notes
payable, resulting in a gain on extinguishment of debt of approximately $1.3 million.



Income Taxes



Due to operating losses incurred
since inception, we did not record a provision for income taxes for the year ended March 31, 2002. As of March 31, 2002, the balance of net deferred tax assets was approximately $8.6 million. Utilization of the Companys net operating loss
carry forwards, which begin to expire in 2020, may be subject to certain limitations under section 382 of the Internal Revenue Code of 1986, as amended. Due to uncertainties regarding recovery of the deferred tax assets, the Company has provided a
valuation allowance on deferred tax asset in an amount necessary to reduce the net deferred tax asset to zero.



LIQUIDITY AND CAPITAL RESOURCES



Liquidity and Capital Resources



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



For the current quarter, net cash generated from operating activities was approximately $300 thousand compared to $351
thousand in the quarter ended June 30, 2001.



During the
remainder of fiscal year 2003, the Company intends to continue to invest in staff and technology that may cause net operating cash flows to fluctuate from quarter to quarter.



Net operating cash flows for the current quarter consist of $2.1 million in net income and non-cash expenses, including
depreciation and amortization of $339 thousand. These sources of operating cash flow were offset by the non-cash gain from the extinguishment of debt and a decrease in current liabilities of $1.3 million.



In the quarter ended June 30, 2001, net operating cash flows consist of $395
thousand of net income, an increase in the allowance for



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uncollectible accounts of $292 thousand, amortization of stock and warrants granted to consultants and affiliates of $169
thousand, depreciation of $107 thousand and a net increase in current liabilities of $354 thousand. These increases in operating cash flows were partially offset by an increase in current assets of $885 thousand



For the current quarter, net cash used in investing activities was $2.1
million compared to $469 thousand for the comparable quarter last year. Investing activities included fixed assets purchased of $270 thousand to support growth in sales traffic requirements and the number of staff and restricted cash deposits of
approximately $1.3 million as security for capital lease and operating lease obligations.



Net cash used in investing activities was $469 thousand for the quarter ended June 30, 2001. In the three months ended June 30, 2001, $400 thousand was used to purchase a database of subscribers, and the remainder for
the purchase of computers and other fixed assets.



Net cash
provided by financing activities was $643 thousand in the current quarter. This resulted from the proceeds of a two year capitalized lease obligation of $1.1 and proceeds from issuance of stock options, of $99 thousand, partially offset by repayment
of capital leases of $123 thousand and repayment of long-term debt of $516 thousand.



Net cash used in the quarter ended June 30, 2001 of $100 thousand was due to the repayment of an advance made from an investor.



In the current quarter, the Company entered into a settlement agreement with certain website developers to retire approximately $1.7 million of debt
and related accrued interest for $403 thousand resulting in a non-cash gain of $1,269 thousand. Other non-cash activity included the conversion of $450 thousand of debt and related accrued interest into shares of Company common stock.



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



At June 30, 2002, the Company had no off-balance sheet financing arrangements or undisclosed liabilities related to special purpose, related party or
unconsolidated entities.



Contractual Obligations



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



Our material contractual obligations at
June 30, 2002 are as follow (in thousands):



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



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ITEM 4. Controls and Procedures



Overview



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Evaluation of Disclosure Controls and Procedures



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



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



Based in part on the foregoing, the Companys Principal Executive Officer and Chief Financial Officer have concluded
that, as of the end of the period covered by this report, June 30, 2002, our disclosure controls and procedures were not effective to ensure that information the Company is required to disclose in the reports that it files with the Securities and
Exchange Commission was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



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



Changes to Internal Control Over Financial Reporting



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



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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.



|                        |  | eUNIVERSE, INC.Registrant
|----------------------- |  | -------------------------
|                        |  |                          
|Dated: October 30, 2003 |  | By                       
|                        |  |                          
|                        |  |                          
|                        |  |                          



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