##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




---

FORM 10-Q



---

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2001

Commission File Number 000-26697

MP3.com, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|Delaware                                                        |  | 33-0840026                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|4790 Eastgate Mall, San Diego, CA                               |  | 92121                                
|(Address of principal executive offices)                        |  | (Zip Code)                           

(858) 623-7000

(Registrants telephone number, including
area code)


N/A

(Former name, former address and former fiscal
year, if changed since last reported)


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 twelve
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 ninety
days.  Yes 
  No

Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date:

Common Stock, $0.001 per share par value, 68,665,728 shares
outstanding as of April 19, 2001.

This report contains 46 pages









---

TABLE OF CONTENTS



|                                             |                                                                                              |  |  |  |  |  |  | 
|-------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- CONSOLIDATED FINANCIAL INFORMATION
|                                             | Item 1.Consolidated Financial Statements                                                    
|                                             | Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 3.Quantitative and Qualitative Disclosures about Market Risk                           
|PART II -- OTHER INFORMATION                
|                                             | Item 1.Legal Proceedings                                                                    
|                                             | Item 2.Changes in Securities and Uses of Proceeds                                           
|                                             | Item 4.Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 6.Exhibits and Reports on Form 8-K                                                     
|EXHIBIT 10.31                               
|EXHIBIT 10.32                               
|EXHIBIT 10.33                               
|EXHIBIT 10.34                               
|EXHIBIT 10.35                               



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MP3.COM, INC.

FORM 10-Q

For the Quarter Ended March 31, 2001


INDEX

|                                                                                               |  |      |    | 
|---------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                               |  | Page
|                                                                                               |  |     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|PART I  CONSOLIDATED FINANCIAL INFORMATION                                                   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 1. Condensed Consolidated Financial Statements                                            |  |      | 3  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 2. Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 13 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 3. Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 39 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|PART II  OTHER INFORMATION                                                                   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 1. Legal Proceedings                                                                      |  |      | 41 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 2. Changes in Securities and Uses of Proceeds                                             |  |      | 45 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 4. Submission of Matters to a Vote of Security
	Holders                                   |  |      | 45 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Item 6. Exhibits and Reports on Form 8-K                                                       |  |      | 45 | 

2



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##### Table of Contents






PART I  CONSOLIDATED FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements

MP3.COM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)


ASSETS

|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |          |         | 
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                                                             |                                                                                                                                                                                                                      | March 31,                                  |        | December 31,
|                                                                                             |                                                                                                                                                                                                                      | 2001                                       |        | 2000        
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |             
|                                                                                             |                                                                                                                                                                                                                      | (Unaudited)                                |        |             
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Current assets:                                                                              |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Cash and cash equivalents                                                                                                                                                                                            |                                            | $      | 91,211       |         |  | $      | 83,858   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Short-term investments in marketable securities                                                                                                                                                                      |                                            |        |             |         |  |        | 14,988   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Accounts receivable, net                                                                                                                                                                                             |                                            |        | 4,812        |         |  |        | 4,409    |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Restricted cash                                                                                                                                                                                                      |                                            |        |             |         |  |        | 30,000   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Unbilled receivables                                                                                                                                                                                                 |                                            |        | 1,259        |         |  |        | 2,021    |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Prepaid expenses and other current assets                                                                                                                                                                            |                                            |        | 12,990       |         |  |        | 11,074   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Prepaid multimedia content royalties                                                                                                                                                                                 |                                            |        | 9,056        |         |  |        | 8,755    |        
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                             |                                                                                                                                                                                                                      | Total current assets                       |        |              | 119,328 |  |        |          | 155,105 | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Property and equipment, net of accumulated depreciation                                      |                                                                                                                                                                                                                      |                                            | 19,428 |              |         |  | 20,270 |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Prepaid marketing and promotions expense, net of accumulated
	amortization                   |                                                                                                                                                                                                                      |                                            | 3,511  |              |         |  | 3,579  |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Prepaid multimedia content royalties, net of accumulated
	amortization, less current portion |                                                                                                                                                                                                                      |                                            | 39,691 |              |         |  | 41,633 |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Strategic investments                                                                        |                                                                                                                                                                                                                      |                                            | 11,410 |              |         |  | 11,410 |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Other non-current assets                                                                     |                                                                                                                                                                                                                      |                                            | 5,998  |              |         |  | 6,602  |         
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                             |                                                                                                                                                                                                                      | Total assets                               |        | $            | 199,366 |  |        | $        | 238,599 | 
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Current liabilities:                                                                         |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Accounts payable                                                                                                                                                                                                     |                                            | $      | 4,810        |         |  | $      | 4,767    |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Accrued expenses                                                                                                                                                                                                     |                                            |        | 14,721       |         |  |        | 15,690   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Deferred revenues                                                                                                                                                                                                    |                                            |        | 1,654        |         |  |        | 1,104    |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Reserve for litigation and copyright matters                                                                                                                                                                         |                                            |        | 43,399       |         |  |        | 42,933   |        
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                             |                                                                                                                                                                                                                      | Total current liabilities                  |        |              | 64,584  |  |        |          | 64,494  | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Other liabilities                                                                            |                                                                                                                                                                                                                      |                                            | 427    |              |         |  | 389    |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Stockholders equity:                                                                        |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Preferred stock, par value $0.001 per share; 15,000,000
	authorized at March 31, 2001 and December 31, 2000;
	none issued and outstanding at March 31, 2001 and
	December 31, 2000.                                  |                                            |        |             |         |  |        |         |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Common stock, par value $0.001 per share; 300,000,000 authorized
	at March 31, 2001 and December 31, 2000; 68,664,790
	and 68,529,044 issued and outstanding at March  31, 2001
	and December 31, 2000, respectively |                                            |        | 69           |         |  |        | 69       |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Additional paid in capital                                                                                                                                                                                           |                                            |        | 501,125      |         |  |        | 501,194  |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Common shares issuable                                                                                                                                                                                               |                                            |        | 5,391        |         |  |        |         |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Note receivable from stockholder                                                                                                                                                                                     |                                            |        | (258         | )       |  |        | (258     | )      
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Deferred compensation                                                                                                                                                                                                |                                            |        | (3,501       | )       |  |        | (4,945   | )      
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Accumulated other comprehensive loss                                                                                                                                                                                 |                                            |        | (11          | )       |  |        | (12      | )      
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Accumulated deficit                                                                                                                                                                                                  |                                            |        | (368,460     | )       |  |        | (322,332 | )      
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                             |                                                                                                                                                                                                                      | Total stockholders equity                 |        |              | 134,355 |  |        |          | 173,716 | 
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         
|                                                                                             |                                                                                                                                                                                                                      | Total liabilities and stockholders equity |        | $            | 199,366 |  |        | $        | 238,599 | 
|                                                                                             |                                                                                                                                                                                                                      |                                            |        |              |         |  |        |         

The accompanying notes are an integral part of these condensed
consolidated financial statements.

3



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##### Table of Contents



MP3.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)


(Unaudited)


|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |            |        |        | 
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ---------- | ------ | ------ | ------- | ---------- | ------ | ------ | 
|                                                                                                |                                                                                                                   |                   
|                                                                                                |                                                                                                                   | Three Months Ended
|                                                                                                |                                                                                                                   |                   
|                                                                                                |                                                                                                                   | March 31,          |                          | March 31, 
|                                                                                                |                                                                                                                   | 2001               |                          | 2000      
|                                                                                                |                                                                                                                   |                    |                          |           
|Net revenues                                                                                    |                                                                                                                   | $                  | 21,750                   |            |        | $      | 17,495  |           
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Cost of revenues (excludes amortization of deferred compensation
	of $  and $71, respectively) |                                                                                                                   |                    | 4,875                    |            |        |        | 3,756   |           
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|                                                                                                |                                                                                                                   | Gross profit       |                          |            | 16,875 |        |         |            | 13,739 |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Operating expenses:                                                                             |                                                                                                                   |                    |                          |            |        |        |         |           
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Sales and marketing (excludes deferred compensation amortization
	of $321 and $591, respectively)                 |                    |                          | 10,491     |        |        |         | 17,002     |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Engineering and product development (excludes deferred
	compensation amortization of $325 and $805, respectively) |                    |                          | 5,595      |        |        |         | 5,279      |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | General and administrative (excludes deferred compensation
	amortization of $325 and $2,935, respectively)        |                    |                          | 6,218      |        |        |         | 7,762      |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Charge related to class action and derivative lawsuits                                                            |                    |                          | 41,428     |        |        |         |           |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Amortization of deferred compensation                                                                             |                    |                          | 971        |        |        |         | 4,402      |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Costs related to acquisition activities                                                                           |                    |                          |           |        |        |         | 1,704      |       
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|                                                                                                |                                                                                                                   |                    | Total operating expenses |            |        | 64,703 |         |            |        | 36,149 | 
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|Loss from operations                                                                            |                                                                                                                   |                    | (47,828                  | )          |        |        | (22,410 | )         
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Interest income, net                                                                            |                                                                                                                   |                    | 1,700                    |            |        |        | 5,678   |           
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|Loss before minority interest                                                                   |                                                                                                                   |                    | (46,128                  | )          |        |        | (16,732 | )         
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Minority interest in losses of an unconsolidated subsidiary                                     |                                                                                                                   |                    |                         |            |        |        | 1,405   |           
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|Net loss                                                                                        |                                                                                                                   | $                  | (46,128                  | )          |        | $      | (18,137 | )         
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|Net loss per share:                                                                             |                                                                                                                   |                    |                          |            |        |        |         |           
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Basic and diluted                                                                                                 |                    | $                        | (0.69      | )      |        | $       | (0.28      | )     
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           
|                                                                                                | Weighted average shares  basic and diluted                                                                       |                    |                          | 66,929,000 |        |        |         | 64,628,000 |       
|                                                                                                |                                                                                                                   |                    |                          |            |        |        |         |           

The accompanying notes are an integral part of these condensed
consolidated financial statements.

4



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##### Table of Contents



MP3.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


(Unaudited)


|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |       |        |        |  
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------- | --------- | ------ | ------ | ------- | ----- | ------ | ------ | -
|                                                                             |                                                                                                 |                                             
|                                                                             |                                                                                                 | Three Months Ended                          
|                                                                             |                                                                                                 |                                             
|                                                                             |                                                                                                 | March 31,                                    |                                   | March 31,
|                                                                             |                                                                                                 | 2001                                         |                                   | 2000     
|                                                                             |                                                                                                 |                                              |                                   |          
|Operating activities:                                                        |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net loss                                                                     |                                                                                                 | $                                            | (46,128                           | )         |        | $      | (18,137 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustments to reconcile net loss to cash used in operating
	activities:     |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation, amortization of goodwill and amortization of
	prepaid multimedia royalty licenses |                                              |                                   | 4,581     |        |        |         | 1,158 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Amortization of deferred compensation                                                           |                                              |                                   | 971       |        |        |         | 4,402 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Charge related to class action and derivative lawsuits (non-cash
	portion)                      |                                              |                                   | 5,391     |        |        |         |      |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Stock based charges associated with the acceleration of stock
	option vesting                   |                                              |                                   |          |        |        |         | 6,030 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Amortization of stock based marketing                                                           |                                              |                                   |          |        |        |         | 208   |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Loss on sale of fixed assets                                                                    |                                              |                                   |          |        |        |         | 19    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Changes in operating assets and liabilities:                                                    |                                              |                                   |           |        |        |         |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Restricted cash                              |                                   |           | 30,000 |        |         |       |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Accounts receivable                          |                                   |           | (403   | )      |         |       | 813    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Unbilled receivables                         |                                   |           | 762    |        |         |       | 466    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Prepaid expenses and other current assets    |                                   |           | 2,743  |        |         |       | 552    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Accounts payable                             |                                   |           | 43     |        |         |       | (3,580 | )     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Accrued expenses                             |                                   |           | (931   | )      |         |       | 9,339  |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Reserve for litigation and copyright matters |                                   |           | (2,776 | )      |         |       |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                 | Deferred revenue                             |                                   |           | 550    |        |         |       | (4,290 | )     
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                             |                                                                                                 |                                              | Cash used in operating activities |           |        | (5,197 | )       |       |        | (3,020 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Investing activities:                                                        |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchase of property and equipment                                           |                                                                                                 |                                              | (1,227                            | )         |        |        | (5,571  | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Maturities of marketable securities, net                                     |                                                                                                 |                                              | 14,977                            |           |        |        | 74,385  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of prepaid multimedia content royalties                            |                                                                                                 |                                              | (1,626                            | )         |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of strategic investments                                           |                                                                                                 |                                              |                                  |           |        |        | (31,637 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other assets                                                                 |                                                                                                 |                                              | 10                                |           |        |        | (1,845  | )    
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Cash provided by investing activities                                        |                                                                                                 |                                              | 12,134                            |           |        |        | 35,332  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Financing activities:                                                        |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from the issuance of common stock                                   |                                                                                                 |                                              | 404                               |           |        |        | 975     |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Repurchase of unvested common stock                                          |                                                                                                 |                                              |                                  |           |        |        | (2,400  | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments on line of credit                                                   |                                                                                                 |                                              |                                  |           |        |        | (217    | )    
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Cash provided by (used in) financing activities                              |                                                                                                 |                                              | 404                               |           |        |        | (1,642  | )    
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Translation adjustment                                                       |                                                                                                 |                                              | 12                                |           |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Increase in cash and cash equivalents                                        |                                                                                                 |                                              | 7,353                             |           |        |        | 30,670  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents at beginning of period                             |                                                                                                 |                                              | 83,858                            |           |        |        | 193,192 |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Cash and cash equivalents at end of period                                   |                                                                                                 | $                                            | 91,211                            |           |        | $      | 223,862 |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Supplemental disclosures of cash flow information:                           |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest paid                                                                |                                                                                                 | $                                            |                                  |           |        | $      | 27      |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Taxes paid                                                                   |                                                                                                 | $                                            | 5                                 |           |        | $      |        |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Supplemental schedule of non-cash activities:                                |                                                                                                 |                                              |                                   |           |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Unrealized loss on marketable securities, net                                |                                                                                                 | $                                            | 1                                 |           |        | $      | 5,773   |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      
|Reduction in deferred compensation associated with stock option
	forfeitures |                                                                                                 | $                                            | 473                               |           |        | $      | 3,558   |      
|                                                                             |                                                                                                 |                                              |                                   |           |        |        |         |      

The accompanying notes are an integral part of these condensed
consolidated financial statements.

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##### Table of Contents



MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1  The Company and Summary of Significant
Accounting Policies

The Company

MP3.com, Inc. (MP3.com) has created a unique and
robust technology infrastructure designed to facilitate the
storage, management, promotion, and delivery of digital music.
As a Music Service Provider (MSP), the company is dedicated to
providing consumers access to music when they want it, where
they want it, using any web-enabled device. The Companys
web site hosts large catalogs of digital music available on the
Internet. Dedicated to growing the digital music space, the
Companys products and services include on-demand
Subscription Music Channels, an innovative Business Music
Services program, a Radio Services program and others.
Additionally, through the Companys MSP technology
initiative and its Music InterOperating System, MP3.com is
partnering with a variety of forward-looking businesses to
expand its digital music strategy.

MP3.com shares of Common Stock are listed for trading on the
Nasdaq National Market System under the symbol MPPP.
MP3.com was incorporated in the state of Delaware on
March 17, 1998 and commenced operations on that date.
MP3.com is headquartered in San Diego, California.

Basis of Presentation

The accompanying condensed consolidated financial statements as
of March 31, 2001 and for the three months ended
March 31, 2001 and 2000 are unaudited and have been
prepared by MP3.com pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The
unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information included, in
accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included
in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to such SEC rules and regulations. The consolidated
results of operations for the three months ended March 31,
2001 are not necessarily indicative of the results which may be
reported for any other interim period or for the year ending
December 31, 2001. Certain prior period amounts have been
reclassified to conform to the current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of
MP3.com and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
equity and net income or loss attributable to the minority
stockholder interests which relate to MP3.coms
subsidiaries are shown separately in the consolidated balance
sheets and consolidated statements of operations, respectively.
Investments in entities over which MP3.com can exercise
significant influence, but which are less than majority owned
and not otherwise controlled by MP3.com, are accounted for under
the equity method. Under the equity method of accounting,
MP3.coms share of the investees earnings or losses
are included in consolidated statements of operations as
Minority interest in losses of an unconsolidated
subsidiary. All other investments, either in entities over
which MP3.com does not have the ability to exercise significant
influence or for which there is not a readily determinable
market value, are accounted for under the cost method of
accounting. Dividends and other distributions of earnings from
investees, if any, are included in income when declared.

Use of Estimates

The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Examples
include

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

provisions for returns, bad debts, valuation of privately held
strategic investments, the ultimate realizability of the prepaid
multimedia content royalties, the reserve for litigation and
copyright matters and the charge and reserve for class action
and derivative lawsuits. Actual results could differ from those
estimates.

Net Loss Per Share

MP3.com computes net loss per share following SFAS No. 128
Earnings Per Share and SEC Staff Accounting Bulletin
No. 98 (SAB 98). Under the provisions of SFAS
No. 128, basic net loss per share is computed by dividing
the net loss available to common stockholders for the period by
the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of
common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of unvested
restricted common shares, incremental common shares issuable
upon the exercise of stock options, and common shares issuable
upon the exercise of warrants for common stock, are included in
diluted net loss per share to the extent these shares are
dilutive. Common equivalent shares are not included in the
computation of dilutive net loss per share for the three months
ended March 31, 2001 and 2000 because the effect would be
anti-dilutive.

Under the provisions of SAB 98, common shares issued for nominal
consideration, if any, would be included in the per share
calculations as if they were outstanding for all periods
presented. No common shares have been issued for nominal
consideration.

The following table sets forth the computation of basic and
diluted net loss per share as follows (in thousands, except
share and per share data):

|                                              |                                                                           |                    |            |            |   |  |            |            |  
|--------------------------------------------- | ------------------------------------------------------------------------- | ------------------ | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                              |                                                                           |                   
|                                              |                                                                           | Three Months Ended
|                                              |                                                                           |                   
|                                              |                                                                           | March 31,          |            | March 31, 
|                                              |                                                                           | 2001               |            | 2000      
|                                              |                                                                           |                    |            |           
|Numerator:                                    |                                                                           |                    |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss                                                                  |                    | $          | (46,128    | ) |  | $          | (18,137    | )
|                                              |                                                                           |                    |            |            |   |  |            |           
|Denominator:                                  |                                                                           |                    |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                       |                    |            | 68,615,000 |   |  |            | 67,811,000 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject to repurchase
	agreements |                    |            | (1,686,000 | ) |  |            | (3,183,000 | )
|                                              |                                                                           |                    |            |            |   |  |            |           
|Denominator for basic and diluted calculation |                                                                           |                    | 66,929,000 |            |   |  | 64,628,000 |           
|                                              |                                                                           |                    |            |            |   |  |            |           
|Net loss per share:                           |                                                                           |                    |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                         |                    | $          | (0.69      | ) |  | $          | (0.28      | )
|                                              |                                                                           |                    |            |            |   |  |            |           

Diluted common stock equivalents include common stock options,
warrants for common stock as if converted and restricted stock
that has not yet fully vested. Potentially dilutive securities
totaled approximately 2,635,000 and 9,753,000 common shares as
of March 31, 2001 and 2000, respectively, and were excluded
from historical diluted earnings per share because of their
anti-dilutive effect.

Comprehensive Income

MP3.com has adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive income and its
components in consolidated financial statements. Comprehensive
income includes all changes in equity (net assets) during a
period from non-owner sources. Net loss and other comprehensive
loss, including foreign currency translation adjustments, and
unrealized gains and losses on investments shall be reported,
net of their related tax effect, to arrive at comprehensive
loss. There was no difference between MP3.coms net loss
and its total comprehensive loss for

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the three months ended March 31, 2001 and 2000, except for
unrealized losses on investments of approximately $1,000 and
$5,773,000, respectively.

Segment Information

MP3.com has adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires public companies to report
financial and descriptive information about their reportable
operating segments. MP3.com identifies its operating segments
based on how management internally evaluates separate financial
information, business activities and management responsibility.
MP3.com believes it operates in a single business segment.
Through March 31, 2001, MP3.com has had insignificant
foreign operations.

A summary of advertising and non-advertising revenue from
customers is as follows (in thousands):

|                |  |                    |        |      |  |   |        | 
|--------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|                |  |                   
|                |  | Three Months Ended
|                |  | March 31,         
|                |  |                   
|                |  | 2001               |        | 2000
|                |  |                    |        |     
|Advertising     |  | $                  | 20,011 |      |  | $ | 14,584 | 
|               
|               
|               
|               
|Non-advertising |  |                    | 1,739  |      |  |   | 2,911  | 
|                |  |                    |        |      |  |   |        | 
|                |  | $                  | 21,750 |      |  | $ | 17,495 | 
|                |  |                    |        |      |  |   |        | 

Note 2  Legal Proceedings

Copyright Litigation

Major Label Lawsuits.On January 21, 2000, ten major
recording companies filed a copyright infringement lawsuit
against MP3.com, Inc. in the United States District Court for
the Southern District of New York (the Major Label
Lawsuit). The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3 service,
made unauthorized copies of tens of thousands of audio CDs in
violation of the Copyright Act. On April 28, 2000, the
court granted plaintiffs motion for summary judgment and
held that MP3.com was liable for infringing plaintiffs
copyrights, and the litigation proceeded with discovery on the
issues of willfulness and damages. On May 10, 2000, MP3.com
disabled all content within the My.MP3 service except as
expressly authorized by the copyright holders.

Between June and August 2000, MP3.com entered into settlement
and license agreements with Warner Music Group, BMG
Entertainment, Sony Music, and Capitol Records, Inc. (EMI),
which together represented eight of the ten major recording
companies that filed the Major Label Lawsuit. The settlement
agreements provide for a settlement amount to be paid in cash by
MP3.com in exchange for a release from the settling plaintiffs
and their affiliated entities (as defined in the settlement
agreements) of all claims related to the lawsuit and the My.MP3
service. Most-favored-nation provisions in these
settlement agreements require additional settlement amounts to
be paid under certain circumstances.

As a result of these settlements, the Major Label Lawsuit was
limited to a dispute with UMG Recordings, Inc., which
represented two of the original plaintiffs. A trial in the case
was held from August 28 through September 6, 2000 on
the issues of willfulness and damages. After hearing evidence,
the court ruled on September 6, 2000 that MP3.com had
willfully infringed UMGs copyrights and awarded damages to
UMG in an amount of $25,000 per CD. The Court then scheduled a
period to allow MP3.com to conduct discovery concerning the
certificates of registration for which plaintiffs sought
damages. On November 16, 2000, UMG made a motion for entry
of judgment in the amount of $53,400,000 in statutory damages,
costs, and attorneys fees, which MP3.com did not oppose.
As a result, a judgment in that amount was entered.

MP3.com has also entered into a license agreement with UMG.
Subject to certain affirmative obligations of MP3.com and other
terms and conditions regarding the implementation of the My.MP3
service, MP3.com is

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

permitted to utilize the recordings owned by Warner Music Group,
BMG Entertainment, Sony Music, EMI, and UMG as part of the
My.MP3 service. The license agreements have terms of
approximately three to ten years, and provide for payment of a
one-time fee each time a licensors recording is added to a
separate My.MP3 account. These licenses also provide for
on-going royalty payments based on the greater of (i) a
specified percentage of net revenues generated from or in
connection with the My.MP3 service or (ii) a specified
amount accrued each time a licensors recording is streamed
from My.MP3. Although MP3.com has obtained license agreements
permitting the use of recordings from BMG Entertainment, Warner
Music Group, Sony Music, UMG, EMI, and certain other independent
labels, we cannot guarantee that MP3.com will be able to secure
similar license agreements from any other recording company.

Other Record Label Lawsuits.Over the course of 2000,
some other entities filed lawsuits against us based on the same
set of allegations as the Major Label Lawsuit. These include:
Tee Vee Toons, Inc.; Zomba Recording Corp. (the Zomba
case); Koch Entertainment and Velvel Records LLC (the
Koch case); EMusic.com, Inc., Fuel 2000 Records,
Spinart, Inc., Gig Records, Fearless Records, and Invisible
Records (the EMusic case); and Unity Entertainment
Corporation (the Unity case). Additionally, several
independent labels have sent us demand letters alleging similar
claims.

A jury trial in the Tee Vee Toons case commenced on
March 26, 2001. Prior to trial, in reliance on the
Courts rulings in the Major Label Lawsuit, the issues of
infringement, fair use, and willfulness were adjudicated against
us. As a result, the jury trial was limited to the issue of
damages. The trial concluded on April 6, 2001. The jury
considered 145 copyright certificates and returned a verdict
which the Court tabulated as totaling $292,968. Subsequently,
two jurors contacted the Court to inform it that the verdict
decided upon by the jurors contained discrepancies. The Court
has interviewed all the jurors and has set a briefing schedule
on the issue of the jurys verdict. The Court could reform
the verdict to an amount consistent with the jurys
purported intention, it could leave the verdict undisturbed and
enter judgment in the amount originally set by the jury, or it
could declare a mistrial. An immediate appeal is likely to be
taken by one party or the other depending upon the Courts
ruling.

Discovery in the Zomba case is currently being conducted and is
scheduled to close on May 21, 2001. The final pre-trial
conference is scheduled for June 29, 2001, and the case is
set for trial on July 9, 2001. Like the Tee Vee Toons case,
the trial in the Zomba case will be limited to only the issue of
damages. The Koch case has been settled and the case is now
closed. The complaint in the EMusic case was filed on
December 14, 2000. MP3.coms response to the complaint
was filed on February 8, 2001. Pursuant to the case
management plan, the case is to be ready for trial on
August 20, 2001. The Unity case, which purports to be
brought on behalf of Unity, an independent record company whose
works were allegedly used in the My.MP3 service, and all other
similarly situated entities or individuals, was filed on
November 7, 2000. MP3.com, Inc. answered the Complaint on
January 16, 2001. On April 16, 2001, the Court entered
an order denying plaintiffs motion for class certification
without prejudice to a renewal of the motion within 45 days.

Publisher Lawsuits.On March 14, 2000, two large
music publishing companies, MPL Communications, Inc. and Peer
International Corporation, with the assistance of The Harry Fox
Agency, Inc. (HFA), filed a copyright infringement
lawsuit against MP3.com in the United States District Court for
the Southern District of New York (the MPL/ Peer
case). The complaint alleged that MP3.com, in connection
with its My.MP3 service, made unauthorized copies of audio CDs
containing plaintiffs copyrighted works in violation of
the Copyright Act, and that MP3.com, in connection with the
streaming of audio content to users of the My.MP3 service,
continued to make unauthorized digital phonorecords in violation
of the Copyright Act. The complaint further alleged that
MP3.coms actions constituted unauthorized copying and
willful infringement of plaintiffs copyrights. Plaintiffs
sought damages (including statutory damages of up to $150,000
per violation) and injunctive relief prohibiting MP3.com from
operating its My.MP3 service or any other service that uses
unauthorized reproductions of plaintiffs copyrighted works.

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

On October 17, 2000, MP3.com, the National Music
Publishers Association, Inc., and its licensing
subsidiary, HFA, entered into a preliminary agreement to be
approved by individual HFA music publisher-principals for
settlement and use of musical compositions on the My.MP3 service
for a three year term. As a result, MPL and Peer settled the
MPL/ Peer case with MP3.com, and a stipulation of dismissal with
prejudice was subsequently signed by the parties on
December 28, 2000 and entered by the Court on
January 2, 2001.

The three-year licensing arrangement provided that MP3.com would
pay up to $30 million to HFA for the benefit of up to
25,000 music publishers and their songwriter partners, to
be allocated to two equal funds. One fund was used to pay HFA
publisher-principals for past uses of music on the My.MP3
service, in exchange for a release from HFA publisher-principals
and their affiliated entities of all claims related to those
asserted in the MPL/ Peer case and the use of their compositions
on the My.MP3 service. The other fund provides advance payments
toward royalties earned under the prospective license. The terms
of the prospective license call for a payment of one-quarter
cent each time a song is streamed on demand to a customer from
his or her My.MP3 locker, along with a one-time fee per track
added to the My.MP3 service. The preliminary agreement with HFA
was finalized on February 28, 2001. Approximately 78% of
the publisher-principals HFA represents accepted and are bound
by the settlement agreement and approximately 90% accepted and
are bound by the licensing agreement. In April 2001, HFA
refunded to MP3.com approximately $4.6 million pursuant to
the agreement, representing approximately $3.2 million and
$1.4 million for the proportion of HFA publisher-principals
that did not settle or license content to MP3.com, respectively.

Zomba Enterprises, Inc. has filed its own music publishing case
against us making allegations similar to those set forth in the
MPL/ Peer case. Additionally, several other publishers, not
affiliated with HFA, have sent us demand letters alleging
similar claims. In view of the Courts rulings in the Tee
Vee Toons and Zomba cases, there is a substantial risk that the
issues of infringement, fair use, and willfulness may be
adjudicated against us in any and all publisher cases. This
would mean that we would only be able to litigate the issue of
damages.

Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United
States District Court for the Southern District of New York
against MP3.com and several major recording companies that
claimed to own copyrights in sound recordings featuring the
artists. The complaint alleged that the recording company
defendants in the Major Label Lawsuit claimed rights in
plaintiffs recordings that they did not possess. In
particular, the complaint alleged that the recording company
defendants did not possess any copyright protections with
respect to plaintiffs pre-1972 published and pre-1978
unpublished recordings, did not possess the right to digitally
transmit plaintiffs pre-1996 recordings over the Internet,
and did not possess the right to control the conversion of
plaintiffs recordings into mp3 files. The complaint
further alleged that MP3.com has used the names and likenesses
of plaintiffs without their consent or authorization and in a
deceptive manner, in violation of the federal Lanham Act, the
New York Civil Rights Law, and unspecified unfair competition
and misappropriation laws. In their prayer for relief,
plaintiffs asked to have their class action certified, to be
awarded unspecified damages and attorneys fees, to have
the defendants enjoined from using plaintiffs names and
likenesses to promote downloading music over the Internet, and
to receive declaratory relief regarding plaintiffs rights
in their pre- and post-1972 recordings. On August 28, 2000,
the Court issued an oral ruling dismissing all claims against
MP3.com. On December 7, 2000, judgment was entered
dismissing, with prejudice, the federal claims against the
defendants. All state claims were dismissed for lack of an
independently sufficient jurisdictional basis. Plaintiffs filed
a Notice of Appeal on January 5, 2001. Briefing begins on
April 24, 2001.

Copyright Settlement Discussions; Charge to Operations.MP3.com has pursued and continues to actively pursue
settlement discussions with the various plaintiffs and claimants
in the cases and disputes discussed above. The decision whether
to enter into settlement and/or license agreements with each
party will be based upon a number of factors related to both the
lawsuits and MP3.coms business in general. We cannot
guarantee that we will be able to enter into any additional
settlement agreements on terms favorable to MP3.com, if at all,
or that any settlement or license agreement will prove
beneficial to our business or

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

stockholders. During the year ended December 31, 2000, we
recorded a charge for litigation and copyright matters of
$170.0 million. The charge for litigation and copyright
matters represented our estimate of the total costs to be
incurred only in connection with the resolution of the various
litigation and copyright matters associated with the My.MP3
service, including the lawsuits filed by major recording
companies and other parties. Copyright issues associated with
the My.MP3 service also include but are not limited to
publishing rights, non-major label content, and legal and
advisory fees. This charge did not reflect or include any
amounts paid or payable in connection with forward-looking
licenses to use music recordings or compositions in connection
with the My.MP3 service. This charge reflects managements
expectations as of the date of this report, and is based on
currently available information as well as significant
assumptions made by management regarding the various litigation
and copyright matters. Cash payments for the settlements and
judgments discussed above and other payments have reduced the
cumulative amount reserved as a result of this charge to
$43.4 million as of March 31, 2001. We cannot
guarantee that future events or results will conform to our
expectations or assumptions regarding the various litigation and
copyright matters. If these expectations and significant
assumptions prove to be erroneous in light of future events, the
actual amounts incurred by MP3.com to resolve all copyright
matters related to the My.MP3 service could be materially
different than those recorded as of March 31, 2001, and
could far exceed the resources and market capitalization of our
company.

Class Action and Derivative Lawsuits

MP3.com and certain of its employees, officers, and directors
have been named as defendants in several lawsuits alleging
violations of the federal securities laws. The complaints, which
were filed between September 19, 2000 and November 15,
2000 in the United States District Court for the Southern
District of California, each purport to be brought on behalf of
a class of stockholders. The complaints allege that MP3.com and
the other defendants violated the federal securities laws by
issuing materially false and misleading statements and failing
to disclose material information regarding its My.MP3 service
and the litigation surrounding the service. Between
September 14, 2000 and October 26, 2000, certain
stockholders of MP3.com filed shareholder derivative suits
against MP3.com and certain of its employees, officers, and
directors in the Superior Court of the State of California,
County of San Diego. These complaints allege various statutory
and common law claims relating to the My.MP3 service, including
breach of fiduciary duty, abuse of control, constructive fraud,
gross mismanagement, unjust enrichment, and waste of corporate
assets.

MP3.com and the representatives of the various plaintiffs for
both the class action lawsuits and derivative lawsuit executed
Stipulations of Settlement dated as of March 20, 2001
(Stipulations). Under the terms of the Stipulations,
the defendants, while continuing to deny all liability, have
paid into an escrow account $35,000,000 and agreed to issue
2.5 million shares of MP3.com common stock which MP3.com
valued at $5,391,000, in exchange for complete dismissals and
releases of all claims with prejudice. The escrow amount and the
2.5 million shares of common stock will be governed by the
Stipulations; however, except in certain circumstances, the
distribution will not occur prior to March 31, 2002. In
addition, under the Stipulations, MP3.com agreed to institute
certain corporate governance enhancements. In order to complete
the settlement, it will be necessary to secure appropriate
approvals from both the State Superior Court and Federal
District Court, and to provide notice to members of the class
and current stockholders.

Charge Related to Class Action and Derivative Lawsuits.In light of the settlements of the class action and
derivative lawsuits, the Company has recorded a charge of
$41,428,000 during the three months ended March 31, 2001.
The charge includes the cash paid into the escrow account, the
value of the 2.5 million shares of common stock to be
issued, and other legal costs. While the charge of $41,428,000
excludes any potential recovery from its insurance carriers, the
Company is seeking to recover from its carriers the full amount
of the settlement together with its legal expenses. If the
Company receives insurance proceeds, the Company will record the
recovery as a gain in the statement of operations caption
Charge related to class action and derivative
lawsuits.

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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Other Litigation

MP3.com is also involved in other legal matters and claims of
various types, and from time to time we may also be involved in
litigation relating to claims arising out of our operations in
the normal course of business.

In particular, the music industry in the United States is
generally regarded as extremely litigious in nature compared to
other industries. As a result, in the future we may be engaged
in litigation with others in the music industry, including those
entities with whom we have ongoing license arrangements. For
example, some of the major recording companies that settled
their portion of the Major Label Lawsuit with us have asserted
in writing that they believe the amount paid by MP3.com to UMG
in satisfaction of the Courts judgment, together with the
concurrent issuance of warrants to UMG, triggered additional
payments to them under the most favored nations
clause in their settlement agreement with MP3.com. Although we
do not believe they are entitled to any such additional
payments, we cannot assure you that we will be successful in
ultimately concluding this particular matter in an amicable
fashion, or defending any resulting lawsuit. As a result, we may
be forced to defend one or more lawsuits on this and other
issues in the future, and in fact may be involved in a number of
litigation proceedings with the same group of related
plaintiffs. We have not recorded any charge related to any
claims for additional most favored nations payments
as of March 31, 2001.

We cannot assure you that we will be successful in ultimately
defending any of these lawsuits, and we may be required to pay
license fees or substantial damages, including statutory,
punitive, or other damages that far exceed the resources and
overall market capitalization of MP3.com, in which event we
might have to significantly limit or terminate our business
operations, particularly because our business is not yet
profitable. At the rate of $25,000 per work (which is the per CD
amount of statutory damages awarded by the court in the Major
Label Lawsuit), our aggregate potential liability resulting from
all of our copyright litigation proceedings could exceed one
billion dollars. If successful, any one of these lawsuits could
seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary
damages. Even if unsuccessful, these lawsuits still can harm our
business severely by damaging our reputation, requiring us to
incur legal costs, lowering our stock price and public demand
for our stock, and diverting managements attention away
from our primary business activities in general.

Note 3  Recent Events

In April 2001, MP3.com loaned the chief executive officer of the
Company approximately $4,820,000. The loan is secured by no less
than 19,700,000 shares of MP3.com Common Stock held by the
officer and certain other assets, and accrues interest at 6.75%.
Principal and interest are due in April 2002.

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

Forward-Looking Statements

This document contains forward-looking statements within the
meaning of the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements
relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by
terminology such as may, will,
going to, should, could,
expect, intend, plan,
anticipate, believe,
estimate, predict, potential
or continue, the negative of such terms or other
comparable terminology. These statements are only predictions
and reflect our expectations and assumptions as of the date of
this quarterly report based on currently available operating,
financial and competitive information.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future events or results, levels of activity, performance or
achievements, all of which may differ materially. Moreover,
neither we nor any other person assumes responsibility for the
accuracy or completeness of the forward-looking statements. We
are under no obligation to update any of the forward-looking
statements after the filing of this Form 10-Q to conform
such statements to actual results or to changes in our
expectations.

The following discussion should be read in conjunction with our
consolidated financial statements and the related notes and the
other financial information appearing elsewhere in this
Form 10-Q. Readers are also urged to carefully review and
consider the various disclosures made by us which attempt to
describe some of the factors which affect our business and may
cause such material differences, including without limitation,
the disclosures made under the captions Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors, and the audited
consolidated financial statements and related footnotes included
herein and in MP3.coms Form 10-K dated
February 1, 2001 (File No. 000-26697).

Overview

MP3.com has created a unique and robust technology
infrastructure designed to facilitate the storage, management,
promotion, and delivery of digital music. As the Internets
premier Music Service Provider (MSP), we are dedicated to
providing consumers access to music when they want it, where
they want it, using any web-enabled device. Our web site hosts
what we believe is the largest collection of digital music
available on the Internet, with more than 967,000 songs and
audio files posted from over 150,000 digital artists and record
labels. Dedicated to growing the digital music space, our
products and services include on-demand Subscription Music
Channels, an innovative Business Music Services program, a Radio
Services program and others. Additionally, through our MSP
technology initiative and Music InterOperating System, we are
partnering with a variety of forward-looking businesses to
expand its digital music strategy.

We devoted much of 2000 and the first quarter of 2001 to
enhancing and improving the MP3.com web site and its technology
infrastructure. In January 2000, we unveiled our upgraded My.MP3
service, a unique and robust service designed to facilitate the
storage, management, promotion and delivery of digital music,
and to enable users to listen to their music when they want,
where they want by accessing any web-enabled device. The My.MP3
service allows users to create online music lockers where they
can store, organize and manage their favorite songs from music
posted by digital artists on the MP3.com web site, and receive
personalized music services. In addition, with the introduction
of the Beam-It and Instant Listening features of the
My.MP3 service in January 2000, we began providing consumers the
ability to access, add to and manage their existing music CD
collections online without having to encode and store tracks
themselves. Under this system, once we are able to determine
that a consumer purchased a CD (through the Instant Listening
feature), or was already in possession of a CD (through the
proprietary Beam-It software), we made music from that CD
available in the consumers music locker.

We believe we have developed core competencies and created a
technology infrastructure system that will enable us to provide
a wide variety of data management and infrastructure services to
other businesses. Through our ongoing efforts to develop,
maintain and improve the MP3.com web site, we have amassed a
significant amount of expertise in data storage, delivery and
management; server-side security; and royalty

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We generate revenue from advertising; infrastructure products;
merchandising products; subscription products; music licensing
products; and business music services. For the quarters ended
March 31, 2001 and 2000, 92.0% and 83.4%, respectively, of
our revenues were from advertising.

MP3.com was incorporated in March 1998. During 1998, our
operations consisted largely of developing the infrastructure
necessary to download and stream music from the Internet.
Although we have experienced a slight drop in headcount during
the first quarter of 2001, since the beginning of 1999 our
growth has been dramatic. The number of employees increased from
eight on December 31, 1998 to 274 on December 31, 1999
to 308 on December 31, 2000 and decreased to 303 on
March 31, 2001. In March 2001, we added over
200 artists and over 1,300 new song and audio files on
average each day, which is an increase from over
100 artists and over 1,000 new song and audio files that
were added on average each day in March 2000. During March 2001,
visitors to our web site viewed over 165 million web pages
and listened to or downloaded over 59.0 million songs,
which is an increase from March 2000 when visitors viewed over
142 million web pages and listened to or downloaded over
27.7 million songs.

The Three Months Ended March 31, 2001 Compared to
March 31, 2000

Results of Consolidated Operations

Net Revenues

For the three months ended March 31, 2001, total net
revenues were $21,750,000 compared to $17,495,000 during the
same period a year ago, representing an increase of $4,255,000
or 24.3%. Total net revenues are derived from two primary
sources: advertising based products and non-advertising based
products and services. Advertising based product revenues
primarily consist of traditional web-based advertisements;
advertisements placed in e-mail campaigns and electronic
greeting cards; advertising spots on syndicated radio programs;
and sponsorships of free CD products. The duration of our
advertising commitments range from one month to over three
years. Non-advertising based products and services primarily
consist of contests and sweepstakes; online sales of Digital
Automatic Music (DAM) CDs and other music-related
merchandise; infrastructure and music licensing programs;
subscriptions to various music and artist-related services; and
web-based business music services. Infrastructure and music
licensing programs represent revenues derived from the licensing
of various technologies and artist content to outside third
parties. Subscription revenues consist of fees paid to access
the enhanced version of the My.MP3 service, various music
channels and premium services for artists. The business music
services program provides web-based management and delivery of
in-store music and messaging directly to businesses for a
monthly fee.

Revenues from Advertising.For the quarter ended
March 31, 2001, revenues from advertising based products
were $20,011,000 or 92.0% of total net revenues compared to
$14,584,000 or 83.4% of total net revenues for the same period a
year ago. The increase in advertising based product revenues was
primarily due to increases in traditional web-based advertising
products, an increase in e-mail and greeting card revenues and,
to a lesser extent, the introduction of syndicated radio
programs. These increases were offset by a decrease in the
sponsorship of free CD products.

Revenues from Non-Advertising Products and Services.For
the three months ended March 31, 2001, revenues from
non-advertising based products and services were $1,739,000 or
8.0% of net revenues compared to $2,911,000 or 16.6% of total
net revenues for the same period a year ago. The decrease in
revenues from non-advertising based products and services was
primarily due to a significant portion of the Montaigne
Participations Et Gestion (MPG) revenues allocated
to contests and sweepstakes during the first quarter of 2000
offset by the introduction of new products such as
infrastructure and music licensing programs, subscriptions and
business music services and, to a lesser extent, an increase in
the online sale of DAM CDs.

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Revenue Concentration.For the three months ended
March 31, 2001 and 2000, 92.0% and 83.4%, respectively, of
total net revenues were from advertising. Additionally, during
the three months ended March 31, 2001 and 2000, we
recognized revenue of $14,459,000 (net of certain financial
incentives of $541,000) or 66.5% of total net revenues and
$6,845,000 or 39.1% of total net revenues, respectively,
associated with our agreement with MPG. The significant increase
in MPG related revenues of $7,614,000 or 111.2% is related to
MPGs commitment to purchase advertising, promotion, and
marketing services from us through 2004. MPGs commitment
to purchase advertising, promotion, and marketing services from
us during each of the remaining calendar quarters of 2001 is
$12,250,000 with the possibility to earn financial incentives
during each of these quarters of an amount not to exceed
$1,000,000. Further, MPGs quarterly advertising
commitments are scheduled to decline after December 2001, from
approximately $12 million during the fourth quarter of 2001
to approximately $6 million in the first quarter of 2002.
For at least the remainder of this fiscal year, we expect that a
significant amount of our revenues will continue to be derived
from advertising products and our relationship with MPG.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2001
were $4,875,000 or 22.4% of net revenues compared to $3,756,000
or 21.5% of net revenues during the same period a year ago,
resulting in gross margins of 77.6% and 78.5%, respectively. The
increase in cost of revenues and resulting decrease in gross
margins, as a percentage of net revenues, was primarily due to
increases in the amortization of prepaid multimedia royalty
licensing arrangements with certain major recording companies of
$1,956,000 and bandwidth charges of $1,068,000, offset by
decreases in contest and sweepstakes costs of $1,680,000. Those
costs associated with prepaid multimedia royalty licensing
arrangements are included in cost of revenues at the greater of
straight-line amortization or units of measure. Currently,
listening activity dictates that we amortize the licenses on a
straight-line basis; however, if future activity increases,
thereby requiring us to expense the licenses using the units of
measure method, costs of revenues could increase accordingly. We
will continue to monitor the prepaid royalty licensing
arrangements for any indication that the assets value has
been impaired. If activity does not increase to a level that
more approximates straight-line amortization, this may be an
indication that the value of these prepaid royalty licenses
could be impaired which could result in a charge to earnings of
a significant portion of the prepaid royalty license value. An
impairment charge could have a material adverse effect on our
financial performance during the period it is recorded.
Additionally, we anticipate that future gross margins will
fluctuate depending on changes in our revenue mix and the amount
of MPG quarterly revenues allocated between various advertising
products, some of which have significantly lower gross margins
than other advertising products.

Sales and Marketing

During the three months ended March 31, 2001, sales and
marketing expense was $10,491,000 or 48.2% of net revenues
compared to $17,002,000 or 97.2% of net revenues during the same
period a year ago. The decrease in sales and marketing expense,
in both absolute dollar amounts and as a percentage of net
revenues, was primarily due to a decrease in cash and
stock-based compensation associated with the acceleration of
stock option vesting of approximately $6,401,000, a decrease in
amortization of various prepaid marketing costs of approximately
$2,394,000 and a decrease in sales and marketing payroll and
related expenses of approximately $936,000. These decreases were
offset by an increase in the cost of our Payback for Playback
program of approximately $2,383,000, an increase in commissions
paid to our affiliates of approximately $547,000 and an increase
in advertising of $358,000. We anticipate that overall sales and
marketing expense, in absolute dollar terms, will increase in
the foreseeable future; however, sales and marketing expense as
a percentage of total net revenues may fluctuate depending on
the level of future total net revenues, the timing of new
marketing programs and the addition of sales and marketing
personnel.

Engineering and Product Development

During the three months ended March 31, 2001, engineering
and product development expense was $5,595,000 or 25.7% of net
revenues compared to $5,279,000 or 30.2% of net revenues during
the same period a year ago. The increase in the level of
engineering and product development expense, in absolute dollar

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General and Administrative

During the three months ended March 31, 2001, general and
administrative expense was $6,218,000 or 28.6% of net revenues
compared to $7,762,000 or 44.4% of net revenues during the same
period a year ago. The decrease in general and administrative
expense, both in absolute dollar amounts and as a percentage of
net revenues, was primarily due to a decrease in legal and
accounting expenses of approximately $1,370,000, a decrease in
bad debt expense of approximately $1,036,000 and a decrease in
rent and facility related expenses of approximately $383,000.
These decreases were offset by an increase in the amortization
of goodwill associated with our purchase of the remaining
interest in mp3radio.com from Cox Interactive Media, Inc. of
approximately $662,000 and increased insurance costs of
approximately $646,000. We anticipate that overall sales and
marketing expense, in absolute dollar terms, will increase in
the foreseeable future; however, general and administrative
expense as a percentage of total net revenues may fluctuate
depending on the level of future total net revenues and the
timing of additional expenditures for general and administrative
infrastructure.

Charge Related to Class Action and Derivative
Lawsuits

MP3.com and certain of its employees, officers, and directors
have been named as defendants in several lawsuits alleging
violations of the federal securities laws. The complaints, which
were filed between September 19, 2000 and November 15,
2000 in the United States District Court for the Southern
District of California, each purport to be brought on behalf of
a class of stockholders. The complaints allege that MP3.com and
the other defendants violated the federal securities laws by
issuing materially false and misleading statements and failing
to disclose material information regarding its My.MP3 service
and the litigation surrounding the service. Between
September 14, 2000 and October 26, 2000, certain
stockholders of MP3.com filed shareholder derivative suits
against MP3.com and certain of its employees, officers, and
directors in the Superior Court of the State of California,
County of San Diego. These complaints allege various statutory
and common law claims relating to the My.MP3 service, including
breach of fiduciary duty, abuse of control, constructive fraud,
gross mismanagement, unjust enrichment, and waste of corporate
assets.

MP3.com and the representatives of the various plaintiffs for
both the class action lawsuits and derivative lawsuit executed
Stipulations of Settlement dated as of March 20, 2001
(Stipulations). Under the terms of the Stipulations,
the defendants, while continuing to deny all liability, have
paid into an escrow account $35,000,000 and agreed to issue
2.5 million shares of MP3.com common stock which MP3.com
valued at $5,391,000, in exchange for complete dismissals and
releases of all claims with prejudice. The escrow amount and the
2.5 million shares of common stock will be governed by the
Stipulations; however, except in certain circumstances, the
distribution will not occur prior to March 31, 2002. In
addition, under the Stipulations, MP3.com agreed to institute
certain corporate governance enhancements. In order to complete
the settlement, it will be necessary to secure appropriate
approvals from both the State Superior Court and Federal
District Court, and to provide notice to members of the class
and current stockholders.

Charge Related to Class Action and Derivative Lawsuits.In light of the settlements of the class action and
derivative lawsuits, the Company has recorded a charge of
$41,428,000 during the three months ended March 31, 2001.
The charge includes the cash paid into the escrow account, the
value of the 2.5 million shares of common stock to be
issued, and other legal costs. While the charge of $41,428,000
excludes any potential recovery from its insurance carriers, the
Company is seeking to recover from its carriers the full amount
of the settlement together with its legal expenses. If the
Company receives insurance proceeds, the Company will

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Amortization of Deferred Compensation

During the quarter ended March 31, 2001, total deferred
compensation of $971,000 was amortized to expense compared to
$4,402,000 during the quarter ended March 31, 2000.
Deferred compensation is being amortized over the vesting period
of the relevant granted stock options, which is generally four
years. The decrease in amortization is primarily a result of the
accelerated amortization method (as provided for in FASB
Interpretation No. 28) to amortize deferred compensation,
which resulted in a greater amount of amortization expense in
the earlier years of the amortization period.

Costs Related to Acquisition Activities

Acquisition related costs for the first quarter of 2001 were
zero compared to $1,704,000 for the same period one year ago.
The decrease in these costs was a result of certain costs
charged to expense in 2000 associated with the acquisition of
TransComputing International Corporation (d.b.a. seeUthere.com),
which was not completed. MP3.com has not incurred any such costs
during the three months ended March 31, 2001.

Interest Income, Net

During the three months ended March 31, 2001, interest
income (net of interest expense) was $1,700,000 compared to
$5,678,000 during the same period a year ago. The decrease in
interest income was primarily due to a reduction in cash, cash
equivalents and short-term investments in marketable securities
from $369,290,000 at March 31, 2000 to $91,211,000 at
March 31, 2001. The decrease in cash, cash equivalents and
short-term investments in marketable securities is primarily a
result of payments associated with litigation and copyright
matters, class action and derivative lawsuits, prepayments for
multimedia royalty licensing arrangements with certain major
recording companies, purchases of property and equipment,
purchases of strategic investments, the acquisition of the
remaining interest in mp3radio.com from Cox Interactive Media,
Inc. and normal operating costs.

Provision for Income Taxes

Due to the loss from operations for both book and tax purposes,
no provision or benefit for income taxes was recorded for either
the three months ended March 31, 2001 or 2000. Currently, we
provide a valuation allowance for all future tax benefits as
utilization of the future tax benefits are not known.

Minority Interest in Losses of an Unconsolidated
Subsidiary

Minority interest in losses of an unconsolidated subsidiary
during the quarter ended March 31, 2001 was zero compared
to $1,405,000 for the same period a year ago. The decrease in
minority interest in losses of an unconsolidated subsidiary is
directly related to our acquisition of the remaining 53.5% of
mp3radio.com, our former joint venture with Cox Interactive
Media, Inc. We accounted for the acquisition under the purchase
method of accounting, whereby the excess purchase price over
fair value of net assets acquired of $4,000,000 was generally
allocated to assembled work force; URLs, trademarks and names; a
radio station agreement; and goodwill. These intangibles are
amortized over twelve to twenty-four months using the
straight-line method. The amortization of goodwill is included
in general and administrative expense.

Liquidity and Capital Resources

Overview

To date, MP3.coms operations have been financed from
internally generated cash, proceeds from the sale of convertible
preferred stock, the proceeds from our initial public offering
and, to a lesser extent, the exercise of stock options and
equipment financing through a line of credit. As of
March 31, 2001, MP3.com had approximately
$91.2 million in cash and cash equivalents.

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Operating Activities

Net cash used in operating activities during the quarter ended
March 31, 2001 was approximately $5,197,000, consisting
primarily of the following:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | net loss of approximately $46,128,000;                                                                                      
|
| |  | depreciation, amortization of goodwill and amortization of
	prepaid multimedia royalty licenses of approximately $4,581,000;
|
| |  | amortization of deferred compensation of approximately $971,000;                                                            
|
| |  | non-cash charge related to class action and derivative lawsuits
	of $5,391,000;                                             
|
| |  | a decrease in restricted cash of $30,000,000;                                                                               
|
| |  | a decrease in accounts and unbilled receivables of approximately
	$359,000;                                                 
|
| |  | a decrease in prepaid expenses and other current assets of
	approximately $2,743,000;                                       
|
| |  | a decrease in accounts payable and accrued expenses of
	approximately $888,000;                                             
|
| |  | a decrease in the reserve for litigation and copyright matters
	of approximately $2,776,000; and                            
|
| |  | an increase in deferred revenue of approximately $550,000.                                                                  

The decrease in restricted cash was a result of the expiration
of the restrictions in an escrow arrangement in February 2001.
The entire principal amount of $30,000,000 became unrestricted
and freely available for general working capital purposes in
February 2001.

Investing Activities

Net cash provided by investing activities during the quarter
ended March 31, 2001 was approximately $12,134,000,
consisting primarily of net maturities of marketable securities
of $14,977,000, purchases of prepaid multimedia royalty licenses
of $1,626,000 and property and equipment expenditures of
$1,227,000.

Financing Activities

Net cash provided by financing activities during the quarter
ended March 31, 2001 was approximately $404,000, consisting
of proceeds from the issuance of common stock in connection with
our employee stock purchase plan and the exercise of stock
options.

Financial Commitments

As of March 31, 2001, we have no material financial
commitments other than obligations under our operating leases
and funding a note receivable for approximately $4,800,000 to
our chief executive officer. We expect to continue to make
investments in the following:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | web site computer equipment;                              
|
| |  | bandwidth and networking equipment and infrastructure; and
|
| |  | additional sales and marketing employees;.                

We expect to pay these expenses principally in cash, though we
may elect to enter into additional financing arrangements or
expand existing financing arrangements to pay certain types and
amounts of expenses. Additionally, we prepaid substantial
multimedia content royalties in connection with certain
litigation settlements. In the future, we may continue to
advance prepaid multimedia content royalties as we settle
certain independent music label copyright claims. Capital
requirements in any particular period will depend on the timing
of these expenditures.

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Recent Event

In April 2001, we loaned our chief executive officer
approximately $4,820,000. The loan is secured by no less than
19,700,000 shares of MP3.com Common Stock held by the
officer and certain other assets, and accrues interest at 6.75%.
Principal and interest are due in April 2002.

Future Capital Requirements

We believe that our cash and cash equivalent balances will be
sufficient to satisfy our cash requirements for at least the
next 12 months, after taking into consideration the payment
of our reserves for litigation and copyright matters accrued as
of March 31, 2001. We intend to invest our cash in excess
of current operating requirements in short-term,
interest-bearing, investment-grade securities.

To the extent our net revenues increase in the future, we
anticipate increases in our working capital requirements to
finance higher relative levels of associated accounts
receivable, unbilled receivables and other assets, offset by
increases in accounts payable and other liabilities. However, we
do not expect that the increases in accounts payable and other
liabilities will offset the increases in accounts receivable,
unbilled receivables and other assets.

We may need to raise additional capital if our business expands
more rapidly than initially planned, to satisfy any damage
awards or unanticipated settlement costs related to our current
or potential future litigation proceedings, to finance
unanticipated working capital requirements, to obtain additional
licenses in order to provide certain music services and/or
specific content to consumers, to develop new or enhance
existing services or products, to fund distribution
relationships, to respond to competitive pressures, or to
acquire complementary businesses, technologies, content or
products. If additional funds are raised through the sale of
equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, our stockholders may
experience additional dilution and these securities may have
rights, preferences or privileges senior to those of our
stockholders. There can be no assurance that additional
financing will be available at all or on terms favorable to us.
If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take
advantage of unanticipated opportunities, develop or enhance
products or services or otherwise respond to competitive
pressures could be significantly limited. Our business may be
harmed by these limitations.

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RISK FACTORS

Litigation Risk

We Have Been And Are Engaged In A Number Of Ongoing Lawsuits.
We Have Settled Some Of The Lawsuits At Significant Expense, And
These Expenses Together With Any Monetary Damages And/Or
Settlement Expenses From Remaining Lawsuits Could Severely
Impact Our Financial Condition. Litigation Could Also Result In
The Discontinuation Or Interruption Of Services To Our
Consumers.

We are currently a named defendant in a number of copyright
lawsuits, including a class-action lawsuit and several
individual lawsuits brought by independent record companies and
publishers, each alleging that, among other things, portions of
our My.MP3 and related services violated their respective
copyrights. See Part II 
Item 1  Legal Proceedings. We were also
involved in similar significant litigation proceedings that
either settled or were brought to judgment in 2000 or the first
quarter of 2001. These included a lawsuit brought by two major
publishing companies and a lawsuit brought by ten major music
recording companies (the UMG case), each concerning
copyright claims like those described above. In the UMG case, we
were found by the court to have willfully infringed
plaintiffs copyrights. Eight plaintiffs in that case
settled through various agreements and two plaintiffs in that
case proceeded through judgment. In reliance upon the
courts rulings in the UMG case, the issues of
infringement, fair use, and willfulness have been adjudicated
against us in other copyright cases still pending. Thus, we are
only able to litigate the issue of damages. At this juncture, we
are unable to determine the number of valid copyright
registration certificates that may be appropriately subject to
an award of statutory or actual damages in these pending cases.
We do not yet know, for example, whether other plaintiffs will
ultimately elect to recover statutory damages in lieu of actual
damages, nor are we able to speculate as to the likely size of
any award of statutory damages in these cases. At the rate of
$25,000 per work (which is the per CD amount of statutory
damages awarded by the court in the UMG case), our aggregate
potential liability resulting from all of our copyright
litigation proceedings could still exceed one billion dollars.

During the year ended December 31, 2000, we recorded a
charge for litigation and copyright matters of
$170.0 million. The charge for litigation and copyright
matters represented our estimate of the total costs to be
incurred only in connection with the resolution of the various
litigation and copyright matters associated with the My.MP3
service, including the lawsuits filed by major recording
companies and other parties. Copyright issues associated with
the My.MP3 service also include but are not limited to
publishing rights, non-major label content, and legal and
advisory fees. This charge did not reflect or include any
amounts paid or payable in connection with forward-looking
licenses to use music recordings or compositions in connection
with the My.MP3 service. This charge reflects managements
expectations as of the date of this report, and is based on
currently available information as well as significant
assumptions made by management regarding the various litigation
and copyright matters. Cash payments for the settlements and
judgments discussed above and other payments have reduced the
cumulative amount reserved as a result of this charge to
$43.4 million as of March 31, 2001. We cannot
guarantee that future events or results will conform to our
expectations or assumptions regarding the various litigation and
copyright matters. If these expectations and significant
assumptions prove to be erroneous in light of future events, the
actual amounts incurred by MP3.com to resolve all copyright
matters related to the My.MP3 service could be materially
different than those recorded as of March 31, 2001, and
could far exceed the resources and market capitalization of our
company.

In addition to the copyright litigation discussed above, we and
certain of our employees, officers and directors have been named
as defendants in several lawsuits alleging violations of the
federal securities laws. The complaints, which were filed
between September 19, 2000 and November 15, 2000 in
the United States District Court for the Southern District of
California, each purport to be brought on behalf of a class of
stockholders. The complaints allege that we and the other the
defendants violated the federal securities laws by issuing
materially false and misleading statements and failing to
disclose material information regarding our My.MP3 service and
the litigation surrounding the service. Also, between
September 14, 2000 and October 26, 2000, certain
stockholders of MP3.com filed shareholder derivative suits
against MP3.com and certain of its employees, officers and
directors in the Superior Court of the State of California,
County of San Diego. These complaints allege various statutory
and common law claims relating to the My.MP3 service.

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We are also involved in other legal matters and claims of
various types, and from time to time may also be involved in
litigation relating to claims arising out of our operations in
the normal course of business. We cannot assure you that we will
be successful in ultimately defending any of these lawsuits, and
we may be required to pay license fees or substantial damages,
including statutory, punitive or other damages that far exceed
the resources and overall market capitalization of MP3.com, in
which event we might have to significantly limit or terminate
our business operations, particularly because our business is
not yet profitable. If successful, any one of these lawsuits
could seriously harm our business by forcing us to cease
providing services to our consumers or requiring us to pay
monetary damages. Even if unsuccessful, these lawsuits still can
harm our business severely by damaging our reputation, requiring
us to incur legal costs, lowering our stock price and public
demand for our stock, and diverting managements attention
away from our primary business activities in general.

Risks Related To Our Business Model

We Have A Limited Operating History That Makes An Evaluation
Of Our Business Difficult.

MP3.com, Inc. was incorporated in March 1998. Due to our limited
operating history, and due to the risks described in this
report, it is difficult to evaluate our current business and
prospects and accurately predict our future revenues or results
of operations. This uncertainty may result in one or more future
quarters where our financial results may fall below the
expectation of analysts and investors. As a result, the trading
price of our common stock might decline significantly. Operating
results may vary depending on a number of factors, many of which
are outside our control.

Our Business Model Is Not Typical Of Traditional, More
Established Business Enterprises And May Not Generate Sufficient
Revenues For Our Business To Survive.

Our model for conducting business and generating revenues is new
and unproven and may evolve rapidly. Our business model depends
upon our ability to generate revenue streams from multiple
sources including:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | web site advertising fees from third parties;                 
|
| |  | online sales of CDs and music-related merchandise;            
|
| |  | syndicated radio advertising revenues;                        
|
| |  | business music services revenues;                             
|
| |  | subscription channel revenues;                                
|
| |  | artist and consumer data;                                     
|
| |  | label promotional activity fees;                              
|
| |  | My.MP3 subscription revenues; and                             
|
| |  | service and licensing fees from our technology infrastructure.

Our historical revenue sources and our projected revenue sources
have changed as our business has evolved, and our revenue
sources may change significantly in the future. Since our
business may continue to evolve

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It is uncertain whether a music-based web site that relies on
attracting people to learn about, listen to and download music,
mostly from lesser-known artists, or a company that markets the
technology and related services that drive the web site, can
generate sufficient revenues to survive. We cannot assure you
that our business model will succeed or will be sustainable as
our business grows. In order for our business to be successful,
we must not only develop services that directly generate
revenue, but also provide content and services that attract
consumers and businesses to our web site frequently. We will
need to develop new offerings as consumer and business
preferences change and new competitors emerge. We cannot assure
you that we will be able to provide consumers with an acceptable
blend of products, services, and informational and community
offerings that will attract consumers and businesses to our web
site frequently. We provide many of our products and services
without charge, and we may not be able to generate sufficient
revenue to pay for these products and services. Moreover, for
those services that we provide for a fee, we may not generate
sufficient revenue to offset the loss of advertising revenue on
those services, or to cover the cost of the royalties that we
must pay to content providers. Accordingly, we are not certain
that our business model will be successful or that we can
sustain revenue growth or be profitable.

We Recently Re-Introduced Our My.MP3 Service, Which May Not
Be Successful, And Which May Adversely Impact Our Overall
Business By Requiring A Substantial Investment And
Disproportionate Amount Of Attention From Our Management And
Employees. Also, Our My.MP3 Service May Not Generate Sufficient
Revenues To Offset Our Ongoing Royalty Obligations To Licensors.
In Addition, We Will Likely Need Additional Licenses To Enhance
The Attractiveness Of The My.MP3 Services To Consumers.

In December 2000, we re-introduced the My.MP3 service and began
offering the service to customers in two versions. A limited
version of the service contains advertising and is offered for
free. A premier version of My.MP3 contains less advertising than
the free service. These and our other efforts to generate
revenue from My.MP3 and other MSP services in development may
not be successful or may meet significant consumer resistance.
The development, maintenance and growth of the My.MP3 service
will continue to require substantial resources and a substantial
amount of managements time and focus. If the revenues
recognized as a result of the My.MP3 service are not sufficient
to offset this investment of resources and time, our business
may be harmed substantially.

Also, in connection with the launch of our upgraded My.MP3
service in 2000 and the subsequent litigation proceedings
involving My.MP3, we entered into several license agreements
with major recording companies covering the use of certain
master recordings in My.MP3. These license agreements provide
for payment of a one-time fee each time a licensors
recording is added to a separate My.MP3 account. These licenses
also provide for on-going royalty payments based on the greater
of (i) a specified percentage of net revenues generated
from or in connection with the My.MP3 service or (ii) a
specified amount accrued each time a licensors recording
is streamed from My.MP3. Similarly, we entered into an agreement
with the National Music Publishers Association, Inc. and
its licensing subsidiary, The Harry Fox Agency, Inc., covering
the use of certain musical compositions in My.MP3. The terms of
this license with HFA call for a payment of one-quarter cent
each time a song is streamed on demand to a customer from his or
her My.MP3 locker, along with a one-time fee per track added to
the My.MP3 service. Some of our master recording and musical
composition licenses required us to make advance payments toward
royalties earned under the respective license, and we may be
required to make similar payments in the future. We cannot
assure you that such advance payments will be fully recouped
over the term of the relevant licenses, if ever, nor can we
assure you that we will be able to generate revenues from the
My.MP3 service in a manner sufficient to cover our ongoing
royalty obligations under our various license agreements. If the
revenues generated by the My.MP3 service are not sufficient to
offset our ongoing royalty obligations, our business may be
harmed substantially. Accordingly, we are not certain that our
business model will be successful or that we can sustain revenue
growth or be profitable. Also, in the event we are unable to
fully recoup any advance payments made under our various license
agreements, we may be required to write-off a significant
portion of the prepaid amounts. This may

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Consumers May Not React Favorably To The Current
Configuration Of Our My.MP3 Service; We Will Need Additional
Licenses From A Large Number Of Third Parties In Order To
Enhance the Attractiveness Of The My.MP3 Service And Deliver
Some Content. We May Not Be Able To Secure A Sufficient Number
Of Licenses On Acceptable Terms In Order To Provide A Necessary
Level Of Service.

In light of our past litigation proceedings, we have modified
the My.MP3 service so that individual tracks are made available
only if they are covered by one of our master recording and
musical composition licenses. Currently, significantly less than
all of the tracks contained on any one CD may be made available
through My.MP3s Beam-It and Instant Listening features. In
order to enhance the attractiveness of the My.MP3 service to
consumers, and relatedly increase the potential revenues to be
generated by the service, we will need to obtain additional
licenses covering more content from record companies, music
publishing companies, performing arts societies and other third
parties, and allowing users outside the current licensed
territories to access restricted content. Although we have
obtained several such licenses, including some in connection
with the settlement of lawsuits as described above, the success
of the My.MP3 service may require that we be able to obtain
licenses from enough parties to be able to offer a broad range
of content. Because of the large number of potential parties
from which we must obtain a license, we may never be able to
obtain a sufficient number of licenses to allow us to provide
services that will meet our customers expectations. The
difficulty of obtaining negotiated license agreements with all
the various third parties in the fragmented music recording and
publishing industries continues to pose a substantial obstacle
to our efforts to provide consumers with a fully satisfactory
product. In particular, users of our My.MP3 service may decide
that we are not able to provide them with access to enough of
their music to make the service valuable, and they may choose
not to subscribe to the fee-based My.MP3 service or to use other
methods of accessing their music altogether. Even if we are able
to obtain a sufficient number of licenses, those licenses may
not be on favorable terms, and we may have to increase the
amount that we charge consumers for our services in order to
cover the costs of these licenses. Consumers may not be willing
to pay the increased costs, and may discontinue the use of our
services.

A Substantial Portion Of Our Revenues For At Least The Next
Year Will Come From MPG. If Other Significant Sources Of Revenue
Are Not Developed Or If This Relationship Is Prematurely
Terminated, Modified Substantially Or Is Not Renewed, We May Not
Have Sufficient Revenues To Sustain Our Growth And Our Stock
Price May Fall.

In July 1999, we entered into an advertising, promotion and
marketing agreement with MPG. This agreement was amended
effective September 2000. As amended, the agreement provides for
a significant scheduled decrease in advertising commitments over
the next two years, which we may not be able to make up in
revenue from other sources. For the quarter ended March 31,
2001, 66.5% of our revenues came from sales of our advertising,
promotion and marketing services under this agreement. We
anticipate that if we do not develop significant alternative
revenue sources, a substantial portion of our revenues for the
next year will come from sales under this agreement. Further,
MPGs quarterly advertising commitments are scheduled to
decline after December 2001, from approximately $12 million
during the fourth quarter of 2001 to approximately $6 million in
the first quarter of 2002. Moreover, after December 2002,
MPGs quarterly commitments are scheduled to sharply
decrease again, to only 2% or less of the scheduled quarterly
commitment for the first quarter of 2001.

MPG is under no obligation to renew its relationship with us
after the current agreement terminates at the end of December
2004 or to increase its advertising commitments with us when
they significantly decrease under the agreement at the end of
December 2001. If MPG does not increase its advertising
commitments with us when they significantly decrease under the
agreement at the end of December 2001 or renew its relationship
after termination of the current agreement at the end of
December 2004, and we do not gain alternative revenue sources,
our revenues or growth rate will decline. In addition, if the
parties agree to terminate or to substantially modify the
agreement prior to its scheduled termination, our revenues,
growth rate and stock price may also drop dramatically. We may
not be able to develop enough additional revenue to offset the
loss

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We Face Tremendous Competition For Online Users Of
File-Sharing Applications And Web Sites.

There are a number of so-called file-sharing
applications and web sites which allow users to swap
music files online such as Napster, Freenet, Napigator and
Gnutella. Although the legality of such applications is
currently in question, these applications boast large numbers of
online users which far exceed our current user base. The alleged
popularity of these applications and web sites may continue
indefinitely whether or not such applications and/or web sites
may be deemed illegal in certain jurisdictions. Moreover, in
November 2000 Napster Inc. entered into a partnership with
Bertelsmann AG to potentially develop a record industry-friendly
version of its file-sharing application. The success of these
relationships and the continued development and proliferation of
file-sharing applications in general may serve to decrease the
number of persons that turn to our company to obtain and listen
to music, and may harm our overall business.

Our My.MP3 Licenses Could Result In Operational Complexity
That May Divert Resources Or Make Our Business More Expensive To
Conduct.

The large number of licenses which we have to maintain also
creates operational difficulties in connection with tracking the
rights that we have acquired and the royalty payments that we
must pay. For example, we have modified the My.MP3 service so
that individual tracks are made available only if they are
covered by one of our master recording and musical composition
licenses. We are largely dependent on third party information
when determining whether a track is covered by a license. Third
parties erroneously may indicate themselves as the appropriate
rights holder with respect to a particular track, or we may
misinterpret data sent to us by our numerous licensors. As a
result, we may inadvertently activate a track in the My.MP3
service that is not covered by one of our licenses, and
accordingly may face litigation related to that track. In
addition, our licensing agreements typically allow the third
party to audit our royalty tracking and payment mechanisms to
ensure that we are accurately reporting and paying the royalties
owed. If we are unable to accurately track the numerous parties
that we must pay in connection with each delivery of a musical
work and deliver the appropriate payment in a timely fashion, we
may risk termination of certain licenses.

We May Encounter Problems With Our Copyright Licenses, Which
May Negatively Impact Our Ability To Provide Our Services.

We have significant licensing arrangements with major record
labels and music publishers that were only recently entered
into, and were structured in the context of litigation
settlements or judgments rather than in the pursuit of mutual
business objectives on an arms-length basis. As a result, we may
face problems trying to run our business under these agreements,
which may have terms that are less favorable to us than would
have been the case had they been negotiated outside of the
litigation context. Our ability to utilize, for example,
recordings from recording companies in the My.MP3 service could
be materially and adversely affected by current litigation and
future settlements, and also by difficulties involved with
operating under our existing settlement and licensing
arrangements. Over time, we will be forced to periodically renew
these licenses in order to continue to provide our My.MP3
service. When the current licenses expire we may not be able to
secure renewals of these licenses on favorable terms, or at all,
and the other parties may demand greater royalties as a
condition of renewal. Also, we may encounter further disputes
with the other parties to these licenses as they are performed
because they may contain provisions that are difficult to
implement, create disagreement or are economically unattractive
when applied in the regular course of operating our business.

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The United States Music Industry Is Extremely Litigious; We
May Continue To Be Engaged In Litigation Even After All
Copyright Issues Related To The My.MP3 Service Are Resolved.
Expenses Related to This Ongoing Litigation Could Severely
Impact Our Financial Condition, And Could Also Result In The
Discontinuation Or Interruption Of Services To Our Consumers.

The music industry in the United States is generally regarded as
extremely litigious in nature compared to other industries. As a
result, in the future we may be engaged in litigation with
others in the music industry, including those entities with whom
we have ongoing license arrangements. For example, some of the
major recording companies that settled their portion of the UMG
case with us have asserted in writing that they believe the
amount paid by MP3.com to UMG in satisfaction of the
Courts judgment, together with the concurrent issuance of
warrants to UMG, triggered additional payments to them under the
most favored nations clause in their settlement
agreement with MP3.com. Although we do not believe they are
entitled to any such additional payments, we cannot assure you
that we will be successful in ultimately concluding this matter
in an amicable fashion, or defending any resulting lawsuit. As a
result, we may be forced to defend one or more lawsuits on this
and other issues in the future, and in fact may be involved in a
number of litigation proceedings with the same group of related
plaintiffs. These lawsuits could harm our business severely by
damaging our reputation, requiring us to incur legal costs,
lowering our stock price and public demand for our stock, and
diverting managements attention away from our primary
business activities in general. We have not recorded any charge
related to claims for additional most favored
nations payments as of March 31, 2001.

Because Our My.MP3 Licenses Cover Limited Geographic Regions,
We May Encounter Copyright Problems Outside The Licensed
Territory, Which May Negatively Impact Our Ability To Provide
Our Services.

Our My.MP3 licenses are geographically limited in scope and do
not authorize us, by their own terms, to provide our My.MP3 and
certain other MSP-related services on a worldwide basis. We
attempt to restrict persons located outside the licensed
territories from accessing restricted content within the My.MP3
service. However, because the Internet cannot be constrained by
any geographic limitations we are unable to ensure with any
certainty that individuals outside the territory will not be
able to access restricted content. As a result, we may face
copyright litigation in countries outside the licensed
territories stemming from the ability of foreign users to access
restricted content with the My.MP3 service. We cannot assure you
that we would be successful in ultimately defending any of these
lawsuits, and we may be required to pay license fees or damages
as a result of any such litigation, or we might have to
significantly limit or terminate the My.MP3 service. If
successful, any one of these lawsuits could seriously harm our
business by forcing us to cease providing services to our
consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business
severely by damaging our reputation, requiring us to incur legal
costs, lowering our stock price and public demand for our stock,
and diverting managements attention away from our primary
business activities in general.

We Are Competing In A New Market Which May Not Develop Or
Where We May Fail To Gain Market Acceptance For Our Products And
Services.

The market for online music promotion and distribution is new
and rapidly evolving. As a result, demand and market acceptance
for our products and services expose us to a high degree of
uncertainty and risk. We have historically and are now largely
attempting to capitalize on a talent pool of artists not
currently served by the traditional recording industry. We
cannot assure you that consumers will continue to be interested
in listening to or purchasing music from our artists or that the
traditional music industry will not successfully serve these
artists in the future. If this new market fails to develop,
develops more slowly than expected or becomes saturated with
competitors, or our products and services do not achieve or
sustain market acceptance, our business could be harmed. We
believe the future popularity of downloadable digital music will
depend, in part, on the availability of portable devices to
store and replay this music. In addition, we are attempting to
develop new features and services for our consumers based on our
My.MP3 and other MSP-related services to allow consumers
additional ways to access, manage and listen to their music on
any web-enabled device or application. These efforts may not be
successful and may meet significant consumer and industry
resistance. To the extent that consumer acceptance or
distribution of these portable devices and/or MSP services is

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As Currently Contemplated, The Success Of Our Business Model
Depends On Our Ability To Generate Substantially Increased
Revenues From Subscription-Based Products And Services Such As
Our Subscription Channels And My.MP3 Services.

In May 2000, our first subscription channel, offering classical
music to our consumers, was introduced. Since then, we have also
launched a childrens music channel, and we intend to
pursue the creation of additional channels. When we
re-introduced our My.MP3 service, we included a
subscription-based alternative to the free service. The creation
of these services is costly, both in terms of the cost of the
required licenses and in the labor and systems expenses we incur
to develop and maintain them. Consumers, who are accustomed to
purchasing CDs and then listening to them for free, may not be
willing to pay for such music again on a subscription basis.
Previous efforts by other companies to convince consumers to
adopt a subscription-based music delivery model have been
relatively unsuccessful when compared to traditional methods of
music distribution. If consumers resist our subscription-based
programs, we may never generate sufficient revenues from our
subscription channels or other subscription-based services to
overcome the high cost of providing such services.

We Expect Competition To Increase Significantly In The Future
Which Could Reduce Our Revenues, Potential Profits And Overall
Market Share.

The market for the online promotion and distribution of music
and music-related products is competitive. Barriers to entry on
the Internet are relatively low, and we expect competition to
increase significantly in the future. Although we have secured
licenses from record companies and other third parties for some
of the content that we deliver, these licenses are generally
non-exclusive. Moreover, much of our technology, including our
Beam-it and Instant Listening services, subscription channels,
the business music services and web site technology and
software, are currently not protected by patents or other
protection which would prevent third parties, including record
companies and other rights holders, from duplicating the
technology and providing services identical to ours. Although we
have applied for patents with regard to a number of these and
other core technologies of our business, none of these patents
have yet been issued, nor is there any guarantee that they will
ever be issued in the future. We face competitive pressures from
numerous actual and potential competitors, many of which have
longer operating histories, greater brand name recognition,
larger consumer bases and significantly greater financial,
technical and marketing resources than we do.

For example, Sony Music Entertainment and Universal Music Group,
two of the worlds largest music companies, recently
announced the roll-out of a new subscription service, called
Duet, on the Internet portal Yahoo!. In addition, Warner Music
Group, BMG Entertainment and EMI Recorded Music, the other three
major music companies, announced the formation of a similar
service, called MusicNet, offered through America Online and
elsewhere. Both services are expected to offer music for
downloading and streaming for a monthly fee. There is also the
possibility that one combined service would offer music from all
five of these music companies. In addition, MTVi Group, a music
entertainment company, and web site operator RioPort.com
announced that they will offer paid music downloads by song from
all five major music companies.

We cannot assure you that the web sites, software or services
offered by our existing and potential competitors will not be
perceived by consumers, artists, talent management companies and
other music-related vendors or advertisers as being superior to
ours. We also cannot assure you that we will be able to maintain
or increase our web site traffic levels, purchase inquiries and
number of click-throughs on our online advertisements or that
competitors will not experience greater growth in these areas
than we do. Increased competition could result in advertising
price reduction, reduced margins or loss of market share, any of
which could damage the long-term or short-term prospects of our
business.

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Our Continued Reliance On Revenue From Advertising May Not
Provide Sufficient Financial Returns For Our Business To Grow Or
Survive. We Currently Depend On A Small Group Of Customers For
Our Advertising Revenue.

Although our business model contemplates multiple sources of
revenue, we anticipate that in the foreseeable future we will
depend substantially on revenue from advertising. During the
quarter ended March 31, 2001, revenue from advertising
accounted for 92.0% of our net revenues, an increase of
approximately 9% from the comparable quarter one year ago. We
currently depend on a small group of customers for our revenue
from advertising. During the first quarter of 2001, one customer
accounted for approximately 66.5% of net revenues, and our top
ten customers accounted for approximately 83.8% of net revenues.
We expect that most of our revenues will continue to be derived
from third party advertising agreements. If any of our important
customers were to leave us, our business could be harmed.
Similarly, our revenues may also be adversely affected by the
future insolvency of individual major customers or multiple
other customers within the volatile Internet and technology
industries. If we do not increase revenue from online
advertising, our business may not grow or survive. Increasing
our revenue from online advertising depends largely on our
ability to:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conduct successful selling and marketing efforts aimed at
	advertisers;                                                                                     
|
| |  | increase the size of the MP3.com audience by increasing both our
	artist and consumer bases;                                                                
|
| |  | increase or at least maintain the amount of revenues per
	advertisement in the face of a recent industry-wide decline in
	online advertising prices and use;



|  |                                                                              
|- | -----------------------------------------------------------------------------
| | increase the size of our sales force, where appropriate;                     
| 
| | target advertising to appropriate segments of our audience; and              
| 
| | measure accurately the size and demographic characteristics of
	our audience.

Our failure to achieve these objectives could reduce our revenue
from online advertising and ultimately prevent us from
generating the revenues we expect.

The Market For Online Advertising Is Currently Undergoing An
Industry-Wide Decline In Prices, Usage And Perceived
Desirability Which May Cripple Our Ability To Generate
Revenue.

Standard industry-wide rates for online advertising have
declined during the past year, and many advertising customers
are using the Internet less for advertising, as well as
demanding lower rates per advertisement. Our revenues depend
heavily on online advertising and our company may not be able to
survive a sustained continuation of this industry-wide decline
in prices and the decreased desirability of online advertising
in general. There has also been a decline in the number of
viable dot-com businesses and technology companies
in general, and the private and public equity markets on which
those companies previously relied for capital have become
increasingly unreceptive. As a result, even those companies that
remain viable can be expected to continue to spend less on
advertising, which may make it increasingly difficult for us to
meet existing revenue expectations.

Many Of Our New Business Initiatives Are Untested And May Not
Be Successful. Our Syndicated Radio, Business Services Or
Infrastructure Licensing Initiatives May Not Succeed Due To
Technological Challenges, Intense Competition And The Type Of
Music That We Deliver.

During 2000 we launched several new business initiatives, which
are untested and may not be successful. We expect to launch new
initiatives in the future, such as label marketing and
promotion, which will be similarly challenging. Several of these
initiatives are based on a subscription model, which may not
successfully generate revenue. We also may not successfully
extend our business to serve personal Internet devices or new
international regions. These new initiatives require significant
investment of resources and time that could strain our resources
beyond capacity. We may never realize benefits sufficient to
offset such investment.

For example, we hope to grow our syndicated radio and business
music services divisions into significant revenue-generating
components of our business. However, our ability to syndicate
and sell content to radio

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Our infrastructure licensing initiative is in its infancy, and
our ability to provide a comprehensive technology infrastructure
solution to other businesses may be significantly limited by
existing competition. The business music industry is currently
served by competitors who have a substantially longer track
record and operating history and have established customer
relationships. We may not be able to compete with these
companies effectively. This initiative may not be able to
attract a sufficient number of customers in order to be a
significant source of revenues, and we may never realize revenue
from infrastructure licensing.

Record Companies With Whom We Enter Into Marketing And
Promotional Arrangements May Choose Not To Renew Their
Arrangements With Us, If Any, And We May Lose The Promotional
Value Of Being Able To Feature Their Well-Known Artists On Our
Web Site.

In December 2000, we entered into an agreement with a major
label record company to provide, among other things, targeted
promotional services in exchange for the right to feature
well-known artists on our web site. We intend to enter into more
such agreements in the future. If the record companies decide
that our services are not as valuable as an alternative means of
marketing or develop substantially equivalent promotional
abilities themselves, then they may choose not to sign or renew
such agreements, and we will lose the additional exposure
associated with being able to feature well-known artists,
consequently harming our business.

Rapid Growth In Our Operations And Infrastructure Is Placing
A Significant Strain On Our Resources, And Failure To Manage
This Growth Effectively Could Disrupt Our Operations And Prevent
Us From Generating The Revenues We Expect.

Since our inception in March of 1998 until recently, we have
experienced extended periods of rapid expansion in our web site
traffic, personnel, facilities and infrastructure. For example,
the number of monthly page views on our web site increased
approximately 18% from March 2000 to December 2000, but
decreased modestly by approximately 1% from December 2000 to
March 2001. In addition, our employees increased from eight on
December 31, 1998, to 274 on December 31, 1999, to 308
on December 31, 2000, but decreased slightly to 303 on
March 31, 2001. Further expansion may be required to
address potential growth in our artist and consumer bases, the
breadth of our product and service offerings, and other
opportunities. Our expansion has placed, and we expect it will
continue to place, a significant strain on our management,
operational and financial resources. Our failure to manage
growth could disrupt our operations and ultimately prevent us
from generating the revenues we expect.

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Mp3 Technology Is Controversial Within The Traditional Music
Industry And May Face Continued Opposition, Which May Negatively
Affect The Perception Of Our Business, Lead To Market Confusion,
Alienate Advertisers And Consumers, And Reduce Our Revenue.

The traditional music industry has not embraced the development
of the mp3 format to deliver music, in part because users of mp3
technology can download and distribute unauthorized or
pirated copies of copyrighted recorded music over
the Internet. Although our business model for the digital
distribution of music supports more than one audio compression
format and method of delivery, and is intended to discourage
music piracy and ensure that only legitimate music is posted on
our web site, our brand identity is currently linked to the mp3
technology and possibly with other companies that may not use
mp3 or other similar technologies in a legal or scrupulous
manner. As a result, we sometimes face and may continue to face
opposition from a number of different music industry sources
including record companies and studios, the Recording Industry
Association of America and established artists with record
contracts, due to our current brand identity and its potentially
negative associations. In addition, adverse news or events
relating to mp3 technology may lead to confusion in the public
markets regarding our company and its prospects, alienate
advertisers and consumers, reduce revenues and harm our overall
financial results. This is in part evidenced by our current and
past litigation proceedings, but additional disputes could arise
in the future.

We May Have Difficulty Competing For Or Executing Business
Partnerships And Making Acquisitions That We May Need To Expand
Our Content And Distribution Channels, Which Could Impair Our
Overall Strategic Goals.

Our business strategy includes entering into business
partnerships and may include acquiring complementary businesses,
technologies, content or products. We may be unable to complete
suitable business partnerships and acquisitions on commercially
reasonable terms, if at all. We expect to face competition for
business partnerships and acquisition candidates and
sponsorships. This competition could impair our ability to
successfully pursue these aspects of our business strategy.
Business partnerships or acquisitions could disrupt our ongoing
business, distract our management and employees and increase our
expenses. If we acquire a company, we could face difficulties
assimilating that companys personnel, culture and
operations. In addition, the key personnel of the acquired
company may decide not to work for us. Acquisitions of
additional services or technologies also involve risks of
incompatibility and lack of integration into our existing
operations. If we finance the acquisitions by issuing equity
securities, this could dilute our existing stockholders. Any
amortization of goodwill or other assets, or other charges
resulting from the costs of acquisitions, could adversely affect
our operating results.

Without The Continued Development And Maintenance Of The
Internet And The Availability Of Increased Bandwidth To
Consumers, Our Business May Not Succeed.

Without the continued development and maintenance of the
Internet infrastructure, we could fail to meet our overall
strategic objectives and ultimately fail to generate the web
site traffic and revenues we expect. This continued development
of the Internet includes maintenance of a reliable network with
the necessary speed, data capacity and security, as well as
timely development of complementary products including high
speed modems, hand-held Internet devices or personal
digital assistants, for providing reliable Internet access
and services. The success of our business will rely on the
continued improvement of the Internet and related products and
services as a convenient means of consumer interaction and
commerce, as well as an efficient medium for the delivery and
distribution of music.

Our business will depend on the ability of our artists and
consumers to continue to upload and download mp3 and other music
files, as well as to conduct commercial transactions with us,
without significant delays or aggravation that may be associated
with decreased availability of Internet bandwidth and access to
our web site. Our penetration of a broader consumer market will
depend, in part, on continued proliferation of high speed
Internet access. Even compressed in mp3 format, a typical three
minute song file can occupy more than three megabytes of storage
space. This file could take as much as two minutes to download
over an xDSL or cable modem compared to 10 to 20 minutes over a
conventional 56Kbps modem. Since the Internet is likely to
continue to experience significant growth in the numbers of
users and amount of traffic, the Internet

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Our Business Strategy Depends In Part On Our Ability To
Deliver Music To Non-PC Devices And We May Not Be Successful In
Developing A Version Of Our Service That Will Operate On Such
Devices, That Manufacturers Of Such Devices Will Incorporate
Into Their Products, And That Will Gain Widespread Adoption By
Users.

In the coming years, the number of individuals who access the
Internet through devices other than a personal computer, such as
personal digital assistants and cellular telephones, as well as
automobile, portable and component or home-based
Internet-enabled radios and television set-top devices, is
expected to increase dramatically. A key part of our business
strategy as an MSP is to deliver music digitally to as many of
these types of devices as possible. Our services are designed to
use rich graphical, audio and other resources such as those
available on personal and laptop computers. The lower
resolution, poorer sound quality, lower functionality, lower
memory and typically slower Internet access speeds associated
with alternative devices may make the use of our services
through such devices difficult and we may be unsuccessful in our
efforts to modify our services to provide a compelling service
for users of alternative devices. As we have limited experience
to date in operating versions of our service developed or
optimized for users of alternative devices, it is difficult to
predict the problems we may encounter in doing so and we may
need to devote significant resources to the creation, support
and maintenance of such versions.

If we are unsuccessful in developing versions of our services
that can be distributed to alternative device users or if we are
unable to attract and retain a substantial number of alternative
device users to our online services, we will fail to capture a
sufficient share of an increasingly important portion of the
market for digital music delivery. Further, as the majority of
our revenues are derived through the sale of banner and other
advertising optimized for a personal computer screen, we may not
be successful at developing a viable strategy for deriving
substantial revenues from the delivery of digital music to users
through alternative devices. Any failure to develop
revenue-generating services that are adopted by a significant
number of alternative device users could limit our growth and
prevent us from becoming profitable, which could negatively
impact our stock price.

Third-Party Manufacturers Must Choose To Develop, And
Consumers Must Purchase, Alternative Music Delivery Devices
Through Which We Can Deliver Music To Consumers. If They Do Not,
We May Not Be Able To Operate As An MSP As We Have Described,
And Our Business May Fail.

Currently, substantially all of the music that we deliver is
delivered to consumers on their personal computers, since
relatively few alternative devices are available that have the
capability to receive and use digitally distributed music. In
order for our business to be successful, third parties must
design and manufacture such alternative devices, including
automobile, portable and home-based Internet radios, personal
digital assistants and mobile phones that are compatible with
the technology that we use to deliver music. We cannot guarantee
that such devices will ever become available or that they will
be purchased by consumers. If they are not manufactured and
purchased, we will not be able to operate as an MSP as we have
described in this report and elsewhere, and our revenues and
stock price may fall.

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Financial Risks

Our Quarterly Revenues And Operating Results Are Not
Indicative Of Future Performance And Are Difficult To Forecast,
And Our Stock Price May Fall If Our Performance Does Not Meet
Analysts Or Investors Expectations.

As a result of our limited operating history, we do not have
historical financial data for a significant number of periods
upon which to forecast quarterly revenues and results of
operations. We believe that period-to-period comparisons of our
operating results may not be meaningful and should not be relied
upon as indicators of future performance. In addition, our
revenue and earnings may vary substantially as a result of
seasonal Internet use and/or the business cycles of the music
industry, online advertisers and of Internet commerce in
general. Moreover, our gross margin and net losses may fluctuate
from quarter-to-quarter due to changes in our revenue mix and
the timing of expenditures in our web site and operating
expenses. However, the actual effect of these factors on the
price of our stock will be difficult to assess due to our
limited operating history. In one or more future quarters our
results of operations may fall below the expectations of
securities analysts and investors, and the trading price of our
common stock may be affected.

We Expect Net Losses In The Future And May Never Achieve
Profitability, Which May Cause Our Stock Price To Fall.

In 2000 and during the three months ended March 31, 2001,
we had a net loss of approximately $279.5 million and
$46.1 million, respectively. We expect substantial net
losses and negative cash flow for the foreseeable future. We
believe it is critical to our long term success that we continue
to develop MP3.com brand awareness and loyalty through marketing
and promotion, expand our artist and consumer networks, develop
our online content and expand the commercial application of our
other services. Our operating expenses may continue to increase
significantly during the next several years, especially in sales
and marketing and product development. We may also incur
significant litigation and settlement expenses, as we did in
2000 and in the first quarter of 2001, due to our pending
litigation and any other lawsuits that may arise. With increased
expenses, we will need to generate significant additional
revenues to achieve profitability, especially in light of the
dramatic scheduled reduction in revenues from our agreement with
MPG, discussed elsewhere. As a result, we may never achieve or
sustain profitability and, if we do achieve profitability in any
period, we may not be able to sustain or increase profitability
on a quarterly or annual basis.

Unless We Obtain Additional Financing, We May Not Be Able To
Meet Our Strategic Business Objectives.

Our available cash and equivalents are expected to be sufficient
to meet our cash requirements for at least the next
12 months, even taking into account certain litigation
settlement payments that may be required in connection with
claims related to our My.MP3 service to the extent we have
accrued such amounts as of March 31, 2001. However, we may
need to raise additional funds in order to:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | satisfy any damage awards or unanticipated settlement costs
	related to our current or potential future litigation
	proceedings;
|
| |  | finance unanticipated working capital requirements;                                                                             
|
| |  | obtain additional licenses in order to provide certain music
	services and/or specific content to consumers;                    
|
| |  | develop or enhance existing services or products;                                                                               
|
| |  | fund distribution relationships;                                                                                                
|
| |  | respond to competitive pressures; or                                                                                            
|
| |  | acquire complementary businesses, technologies, content or
	products.                                                           

We cannot assure you that additional financing will be available
on terms favorable to us, or at all. In particular, potential
investors or lenders might be deterred from financing our
company given its past, current and potential litigation and
other legal challenges, or might demand terms unfavorable to us
as conditions to

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We May Be Required To Record A Charge For The Impairment Of
Certain Prepaid Multimedia Royalty Licenses, Which Could
Significantly Impact Our Financial Results.

In connection with our various multimedia content license
agreements entered into with certain major and independent
record labels, we advanced significant recoupable,
non-refundable pre-payments in order to cover future royalty
payments owed under such licenses. We cannot assure you that
such advance payments will be fully recouped over the term of
the relevant licenses and we will not receive a refund for the
amounts not recouped. If in the future, there are indications of
impaired value, we may be required to write down a significant
portion, if not all, of the impaired license. These potential
charges to operations could significantly affect one or more of
our future quarterly financial results and cause us to miss the
performance expectations of analysts and investors, thus
potentially lowering the trading price of our common stock
significantly.

We Have Made Investments In Other Companies From Which We May
Never Be Able To Derive Income And In Relation To Which We Have
Had To And May In The Future Have To Record Impairment Expenses,
Which Will Impact Our Financial Results.

We have made investments in and other business arrangements with
companies that have experienced financial and operational
difficulties, including bankruptcy, which could impair the
overall value and potential value of these investments and
arrangements. This could, in turn, negatively impact our
business operations, financial accounting results and stock
price. During the year ended December 31, 2000, we recorded
expenses related to the impairment of our strategic investments
equal to $50.7 million. We may have to record additional
impairment expenses in future quarters, and there can be no
assurance that we will ever benefit from these investments.

Our Stock Price And Trading Volume Has Been And May Continue
To Be Extremely Volatile.

The trading price of our common stock has been and is likely to
continue to be extremely volatile. Our stock price could be
subject to wide fluctuations in response to a variety of
factors, including the following:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | developments related to our current or future legal proceedings;                                                                    
|
| |  | actual or anticipated variations in quarterly and/or annual
	operating results;                                                     
|
| |  | announcements of technological innovations;                                                                                         
|
| |  | new products or services offered by us or our competitors;                                                                          
|
| |  | changes in financial estimates and/or ratings by securities
	analysts;                                                              
|
| |  | announcements of significant acquisitions, strategic
	partnerships, joint ventures or capital commitments by us or our
	competitors;
|
| |  | additions or departures of key personnel;                                                                                           
|
| |  | sales of common stock;                                                                                                              
|
| |  | the granting and/or exercise of warrants to purchase our common
	stock;                                                             
|
| |  | perceived and/or actual sales of our stock by company insiders;
	and                                                                
|
| |  | other events or factors, many of which are beyond our control.                                                                      

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In addition, the stock market in general, and the Nasdaq
National Market and the stock prices of Internet-related
companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies.
In addition, the market reaction to companies in the Internet
sector is often tied to the success of a few established
companies such as AOL-Time Warner, Inc., Yahoo! Inc., eBay Inc.
and Amazon.com, Inc., regardless of such companies
relation to a particular company, including ours. These broad
market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual
operating performance. In the past, following periods of
volatility in the market price of a companys securities,
securities class action litigation has often been instituted
against companies. Class action and derivative lawsuits have
been filed against us arising in part from the decline in our
stock price throughout 2000, as described elsewhere in these
risk factors. This litigation could result in substantial costs
and a diversion of managements attention and resources,
which could adversely affect our business, financial condition
and the market price of our common stock.

Substantial Future Sales Of Our Common Stock In The Public
Market Could Cause Our Stock Price To Fall.

Sales of a large number of shares of our common stock in the
public market or the perception that such sales could occur
could cause the market price of our common stock to drop. The
majority of our shares are freely transferable without
restriction or registration under the Securities Act of 1933,
unless such shares are held by our affiliates, as that term is
defined in Rule 144 under the Securities Act. Once issued,
any shares registered on a Form S-8 registration statement,
as all of our shares subject to outstanding options are, may be
freely transferable without restriction or registration under
the Securities Act of 1933, with the exception of certain shares
held by our affiliates, as that term is defined in Rule 144
under the Securities Act. Sales of common stock by existing
stockholders in the public market, or the availability of such
shares for sale, could adversely affect the market price of the
common stock.

As of March 31, 2001, holders of up to 17,088,152 shares of
our common stock, as well as holders of warrants to purchase up
to 5,400,000 shares of common stock, have certain registration
rights. If such holders, by exercising either their registration
rights or their rights under Rule 144 or Rule 701,
cause a large number of securities to be registered and/or sold
in the public market, such sales could have an adverse effect on
the market price for our common stock. If we were to include in
a company-initiated registration shares held by such holders
pursuant to the exercise of their registration rights, such
sales may have an adverse effect on our ability to raise needed
capital.

Risks Related To Sales And Marketing

Our Brand Name And Revenues Could Be Damaged If The Music
Provided By Lesser-Known Artists Fails To Meet Consumer
Expectations.

Many artists, including most widely-recognized artists,
typically sign multi-year exclusive recording contracts that may
prevent them from posting music on our web site. To post music
on our web site, these artists must typically get permission
from their record company. As a result, our access to
widely-recognized artists is limited. If the music provided by
these lesser-known and local artists fails to meet consumer
expectations, our brand name could be damaged and our business
may not generate sufficient revenues to survive.

Development Of New Standards For The Electronic Delivery Of
Music May Diminish Our Brand Identity And Disrupt The Way We Do
Business.

We currently rely on mp3 technology for both brand identity and
as a delivery method for the digital distribution of music. We
do not own or control mp3 technology. The onset of competing
industry standards for the electronic delivery of music could
significantly affect the way we operate our business as well as
the publics perception of MP3.com as a company. For
example, for almost two years, some of the major recording
studios devoted significant resources into developing a
universal standard for the electronic delivery of music, called
the Secure Digital Music Initiative, or SDMI. Although at this
time SDMI does not appear to be a viable standard, the
development of which may be abandoned entirely, the recording
companies may

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Although we are not tied exclusively to the use of mp3
technology or to any other specific standard for the digital
delivery of music, if a proprietary, or closed, music delivery
format receives widespread industry and consumer acceptance, we
may be required to license additional technology and information
from third parties in order to adopt that format. We cannot
assure you that this third-party technology and information will
be available to us on commercially reasonable terms, if at all.
Any failure to obtain any of these technology and information
licenses or to successfully reconfigure our music library to
support these technologies could prevent us from making our
music available in the most widely accepted formats, which could
make our offerings less popular or inaccessible to both
consumers and artists and thus harm our business.

Unless We Develop A Strong Brand Identity, Our Business May
Not Continue To Grow And Our Financial Results May Suffer.

We believe that our historical growth and brand recognition have
been largely attributable to frequent and visible national and
local media exposure as well as promotion of our web site. The
frequency or quality of this media exposure or promotion may not
continue. Widespread industry and consumer acceptance of a music
delivery platform other than the mp3 format may greatly reduce
the frequency and quality of this media exposure and promotion
and, as a result, our brand recognition. Further, negative
publicity from our litigation proceedings, or from negative
perceptions in the public and financial community of
dot-com, e-commerce or Internet
content companies, could hurt public perception of our
brand and cause consumers and artists to use other web sites or
other means of accessing and distributing their music. We
believe that continuing to strengthen our brand will be critical
to achieve widespread acceptance of our products and services.
Favorable public perception of our brand will depend largely on
our ability to continue providing users with high quality
products and services and the success of our marketing efforts.
We plan to increase our marketing expenditures to create and
maintain brand recognition. However, brand promotion activities
may not yield increased revenues and, even if they do, any
increased revenues may not offset the expenses we incur in
building our brand.

If We Do Not Transcend A Mere Association Between Our Company
And The Mp3 Format In The Minds Of Consumers, Our Brand Identity
And Financial Results Could Suffer.

The growth of our business will also depend in significant part
on our ability to develop a brand identity that transcends a
mere association with the mp3 format. We must pursue a brand
development strategy that identifies our company as a primary
source for interesting and diverse high quality music and
artists above and beyond mp3 technology. Although MP3.com is not
tied exclusively to the use of mp3 technology or to any other
specific standard for the digital delivery of music, failure to
achieve brand recognition apart from the mp3 format could
significantly affect the future viability of our brand name and
our ability to generate revenues.

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If We Fail To Collect Accurate And Useful Data About Our
Consumers, Potential Advertisers May Not Advertise On Our Web
Site, Which May Result In Reduced Advertising Revenues.

We plan to use consumer data to expand, refine and target our
marketing and sales efforts. We collect most of our data from
users who report information to us as they conduct transactions
on our web site. If a large proportion of users impede our
ability to collect data or if they falsify data, our marketing
and sales efforts would be less effective since advertisers
generally require detailed demographic data on their target
audiences. In addition, laws relating to privacy and the use of
the Internet to collect personal information, including strict
laws relating to collecting information from children, could
limit our ability to collect data and utilize our database.
Failure to collect accurate and useful data could result in a
substantial reduction in advertising revenues, which represented
approximately 81.4% of our total revenues during 2000 and
approximately 92.0% for the three months ended March 31,
2001. Because we use e-mail for direct marketing, any
legislative or consumer efforts to regulate unsolicited bulk
e-mails, commonly referred to as spam, as well as
other laws regulating the use of e-mail, could significantly
impair our sales and marketing efforts and our associated
advertising revenue.

Risks Related To Operations

Our International Operations Involve Numerous Risks That
Could Harm Our Business.

We currently operate a small branch office in London, England,
through which we manage our European operations and attempt to
market and sell our services in several other countries. Our
artists resided in approximately 200 countries as of
March 31, 2001, and customers visit our web site from all
over the world. We have also entered into relationships with
third parties outside of the U.S., in particular Japan, to
assist with our penetration of foreign markets.

To date, we have developed four translated versions of our web
site and have limited experience selling and marketing our
products and services internationally. We believe we need to
continue to expand quickly into international markets in order
to effectively obtain and maintain market share. In most
countries, we will have to compete with local companies who
understand the local markets better than we do and who may have
established local brand identity and customer loyalty. As a
result, we may not enjoy some of the first-to-market advantages
that we may have enjoyed in the United States.

In addition, international markets that we have selected may not
develop at a rate that supports our level of investment. In
particular, international markets typically have been slower to
adopt the Internet as an advertising and commerce medium.
Moreover, expansion into international markets will require
substantial management attention and financial resources. We
cannot be certain that revenues derived from our international
expansion will offset the significant investment required to
establish and maintain international web sites and an
international presence. In addition to uncertainty about our
ability to generate revenues from our foreign operations and
expand our international presence, there are certain risks
inherent in doing business on an international level. We are
subject to the normal risks of doing business internationally,
as well as risks specific to Internet-based companies in foreign
markets. These risks include:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays in the development of the Internet as a music delivery,
	advertising and commerce medium in international markets;                                                                         
|
| |  | difficulties in managing operations due to distance, language
	and cultural differences, including issues associated with
	establishing management systems infrastructures in individual
	markets;
|
| |  | unexpected changes in regulatory requirements;                                                                                                                                                    
|
| |  | the inability to obtain workable licenses to operate our My.MP3
	or other MSP-related services internationally;                                                                                   
|
| |  | government-imposed restrictions on the publics access to
	the Internet;                                                                                                                          
|
| |  | legal uncertainty regarding liability for the content posted on
	our web site and the lack of clear legal precedent or applicable
	law;                                                           
|
| |  | legal systems that are less Internet-friendly than those in the
	United States;                                                                                                                   

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| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | different accounting practices;                                                                                      
|
| |  | potential adverse tax consequences, such as those associated
	with cross-border use of intangible assets, and others;
|
| |  | more stringent consumer protection laws;                                                                             
|
| |  | higher costs of doing business in foreign countries;                                                                 
|
| |  | difficulties and costs of staffing and managing foreign
	operations;                                                 
|
| |  | increased risk of piracy and limits on our ability to enforce
	our intellectual property rights;                     
|
| |  | the need to comply with different and often conflicting laws and
	regulations;                                       
|
| |  | political and economic instability; and                                                                              
|
| |  | other legal and political risks.                                                                                     

Any of these factors could harm our future international
operations, and consequently our business, operating results and
financial condition. In addition, we do not currently hedge our
foreign currency exposures.

For Content, We Rely Heavily On The Contributions Of Artists
Who, Over Time, May Be Difficult To Attract And Retain.

Our success depends on having a web site that offers high
quality and diverse music choices. Our failure to attract and
retain artists who can provide us with music and other content
would limit the overall quality and quantity of the offerings on
our web site and harm our business. Because our contracts with
artists are, with few exceptions, non-exclusive and can be
terminated by the artist at any time, our retention of artists
requires that we offer sufficient benefits, including artist
services and artist-oriented content, to encourage them to
continue providing us with content. If we are not able to
maintain our ability to serve and provide valuable tools to
artists, artists may leave our web site and remove their music
and other content. This could also prevent us from attracting
new artists. We may also lose artists who gain recognition on
our web site and then are recruited by or attracted to the
traditional music industry. The loss of artists and the
inability to attract new artists would impair our ability to
generate advertising revenue, generate CD revenues and offer a
broad selection of content through our syndicated radio and
business music services.

Our Business Operations Could Be Significantly Disrupted If
We Lose Members Of, Or Fail To Properly Integrate, Our
Management Team.

Our future performance will be substantially dependent on the
continued services of our management and our ability to retain
and motivate them. The loss of the services of any of our
officers or senior managers could harm our business. We do not
have long-term employment agreements with any of our key
personnel, other than our Chief Executive Officer, and we do not
maintain any key person life insurance policies
except on our Chief Executive Officer. Almost all of our
management team joined MP3.com in 1999. Since the completion of
our initial public offering in July 1999, we have experienced
turnover in our management team, and we may continue to
experience turnover. Most of these individuals have not
previously worked together and are currently being integrated as
a management team. If our senior managers are unable to work
effectively as a team, our business operations could be
significantly disrupted.

We Rely On Cinram International, Inc. To Fulfill The
Production And Delivery Of Substantially All Of Our DAM CDs And
Other Merchandise, And We May Be Vulnerable To Unexpected
Interruptions Or Discontinuation Of Our Fulfillment
Operations.

In November 1999, we outsourced exclusively to Cinram
International, Inc. our just-in-time DAM CD production and
fulfillment process, as well as the production and fulfillment
of our other promotional CD products. The transition of
fulfillment operations to Cinram was completed at the end of
March 2000. For redundancy, we also currently maintain certain
minimal fulfillment capabilities at our main facility in San
Diego. Should Cinram cease to provide us with production and
fulfillment services for any reason, we cannot assure you that
we will be able to fulfill any of our customers orders for
DAM CDs and other merchandise without significant delays or
expense, or at all. Any such loss of fulfillment operations, for
any period of time

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We May Not Be Able To Hire And Retain A Sufficient Number Of
Qualified Employees, And As A Result We May Not Be Able To Grow
As We Expect, Or Maintain The Quality Of Our Services.

Our future success will depend on our ability to attract, train,
retain and motivate other highly skilled technical, managerial,
marketing and customer support personnel. Despite the recent
downturn in the viability and attractiveness of
dot-com companies to the general workforce,
competition for these personnel has historically been intense,
especially for engineers, web designers and advertising sales
personnel, and we may be unable to successfully attract
sufficiently qualified personnel. Moreover, we may experience
significant turnover of our current employee workforce.
Substantially all of our employees joined us in 1999. If we
cannot integrate these employees into our business, we will not
be able to effectively manage our growth. Also, our inability to
hire, integrate and retain qualified personnel in sufficient
numbers may reduce the quality of our programs, products and
services.

We Must Continue To Upgrade Our Technology Infrastructure, Or
We Will Be Unable To Effectively Meet Demand On Our Web Site.

In the first quarter of 2001, approximately 880 gigabytes
of musical content, 25,000 artists and 167,000 songs
and audio files were added to our web site; however, the number
of monthly page views to our web site decreased approximately 1%
from December 2000 to March 2001. We must continue to add
hardware and enhance software to accommodate the increased
content and continued use of our web site. If we are unable to
increase the data storage and processing capacity of our systems
at least as fast as the growth in demand, our web site may
become unstable and may fail to operate for unknown periods of
time. Unscheduled downtime could harm our business and also
could discourage users of our web site and reduce future
revenues.

Our Data Warehousing And Web Server Systems May Stop Working
Or Work Improperly Due To Natural Disasters, Failure Of
Third-Party Services, Rolling Blackouts And Other Unexpected
Problems.

Since our data warehousing, web server and network facilities
are all located in California, an earthquake or other natural
disaster could affect all of our facilities simultaneously. An
unexpected event like a power or telecommunications failure,
fire, flood or earthquake at our on-site data warehousing
facility or at either of our three Internet service
providers facilities could cause the loss of critical data
and prevent us from offering our services to artists and
consumers. In addition, California utility companies are
currently experiencing a financial crisis which have led to
brownouts, rolling blackouts and other
disruptions of power services to consumers. These losses of
power could continue or worsen due to circumstances out of our
control and adversely affect our business or shut down our web
site and other operations entirely. Our business interruption
insurance may not adequately compensate us for any losses that
may occur, and our web site may suffer irreparable harm in the
eyes of consumers and artists. In addition, we rely on third
parties to securely store our archived data, house our web
server and network systems, and connect us to the Internet. A
failure by any of these third parties to provide these services
satisfactorily would impair our ability to access archives and
operate our web site.

We May Lose Visitors To Our Web Site And Lose Revenues If Our
Online Security Measures Fail.

If the security measures that we use to protect personal
information are ineffective, we may lose visitors to our web
site that could reduce our revenues. We rely on security and
authentication technology licensed from third parties. With this
technology, we perform real-time credit card authorization and
verification. We cannot predict whether new technological
developments could allow these security measures to be
circumvented. In addition, our software, databases and servers
may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to spend
significant resources to protect against security breaches or to
alleviate problems caused by any breaches. We cannot assure that
we can prevent all security breaches.

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Government Regulation May Require Us To Change The Way
We Do Business.

The laws and regulations that govern our business change
rapidly. Although our operations are currently based in
California, the United States government and the governments of
other states and foreign countries have attempted to regulate
activities on the Internet. We do not know for certain how
existing laws governing issues such as property ownership,
copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media, and
personal privacy and data protection may apply to the Internet.
The vast majority of such laws were adopted before the advent of
the Internet and related technologies and do not address the
unique issues associated with the Internet and related
technologies. In addition, most of the laws that relate to the
Internet have not yet been fully interpreted by the various
courts and other authorities.

Furthermore, we have entered into agreements with international
entities, and anticipate entering into additional agreements, to
conduct business activities in foreign jurisdictions. Because
our services are accessible worldwide, and because we facilitate
sales of goods and provide services to users worldwide, foreign
jurisdictions may claim that we are required to comply with
their laws. For example, a French court has recently ruled that
a U.S. web site must comply with French laws regarding content
and, in December 2000, the highest court in Germany ruled
similarly with regard to German law.

On October 28, 1998, the Digital Millennium Copyright Act
(or DMCA) was enacted. The DMCA includes statutory
licenses for the performance of sound recordings and for the
making of recordings to facilitate transmissions. Under these
statutory licenses, depending on our future business activities,
we and our business partners may be required to pay licensing
fees for digital sound recordings we deliver on our web site and
through retransmissions of radio broadcasts and/or other audio
content. The DMCA does not specify the rate and terms of such
licenses, which will be determined either through voluntary
inter-industry negotiations or arbitration. Moreover, with
respect to digital publishing, sound recording and other music
licenses not directly covered by the DMCA, we plan to engage in
a proceeding before a tribunal of the United States Copyright
Office along with the Recording Industry Association of America
during 2001 to determine what, if any, licensee fees should be
paid to various rights holders. Depending on the rates and terms
adopted for the statutory licenses, our business could be harmed
both by increasing our own cost of doing business, and by
increasing the cost of doing business for our customers.

The Child Online Protection Act and the Child Online Privacy
Protection Act (or COPPA) were enacted in October
1998. COPPA imposes civil and criminal penalties on persons
distributing material harmful to minors over the Internet to
persons under the age of 17, or collecting personal information
from children under the age of 13. We do not knowingly collect
and disclose personal information from such minors. The manner
in which COPPA may be interpreted and enforced cannot be fully
determined, and future legislation similar to COPPA could
subject us to potential liability, which in turn could harm our
business. Such laws could also damage the growth of the Internet
generally and decrease the demand for our products and services.

Finally, there are a large number of legislative proposals
before the United States Congress and various state legislatures
regarding online and other issues related to our business. It is
not possible to predict whether or when such legislation may be
adopted, and certain proposals, if adopted, could materially and
adversely affect our business through a decrease in user
registration and revenue, and influence how and whether we can
communicate with our customers.

Because of this rapidly evolving and uncertain regulatory
environment, both domestically and internationally, we cannot
predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to
ensure compliance with the laws and regulations governing the
Internet. These laws and regulations could harm us by subjecting
us to liability or forcing us to change how we do business.

We May Be Liable To Third Parties For Music, Software And
Other Content That Is Available On Our Web Site And On The CDs
We Distribute.

We may be liable to third parties for the content on our web
site and on the CDs we distribute:



|  |                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | if the music, text, graphics, software or other content on our
	web site or CDs violates their copyright, trademark, or other
	intellectual property rights;

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|  |                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------
| | if our artists violate their contractual obligations to others
	by providing content on our web site or CDs; or
| 
| | if anything on our web site or CDs is deemed obscene, indecent,
	harmful to minors or defamatory.              

Risks Related To Government Regulation, Content and
Intellectual Property.

We may also be liable for anything that is accessible from our
web site through links to other web sites. We attempt to
minimize these types of liability by requiring representations
and warranties relating to our artists ownership of and
rights to distribute and submit their content and by taking
related measures to review content on our web site and on our
CDs. However, alleged liability could harm our business by
damaging our reputation, requiring us to incur legal costs in
defense, exposing us to awards of damages and costs and
diverting managements attention away from our business. We
are currently involved in multiple litigation proceedings.

We May Not Be Able To Prevent Others From Using Our
Trademarks, Copyrights, Software And Other Intellectual Property
Assets. If Others Do Use These Assets, Their Value To Us, And
Our Ability To Use Them To Generate Revenue, May Decrease.

Our intellectual property includes our trademarks and
copyrights, proprietary software, and other proprietary rights.
We believe that our intellectual property is important to our
success and our competitive position, and we try to protect it.
However, our efforts may be inadequate. Although we have applied
for a trademark registration for the MP3.com name in
numerous jurisdictions worldwide, we do not currently have a
registered trademark in nearly all of these jurisdictions,
including the most important jurisdictions such as the United
States, and we may not be able to prevent others from using
mp3 or MP3.com. Use of the
MP3.com name by others could dilute our brand
identity and confuse the market. Moreover, much of our
technology, including our Beam-it and Instant Listening
services, subscription channels, the business music services and
web site technology and software, are currently not protected by
patents or other protection which would prevent third parties,
including record companies and other rights holders, from
duplicating the technology and providing services identical to
ours. Although we have applied for patents with regard to a
number of these and other core technologies of our business,
none of these patents have yet been issued, nor is there any
guarantee that they will ever be issued (or prosecutable) in the
future. In addition, our ability to conduct our business may be
harmed if others claim we violate their intellectual property
rights. For example, certain entities have asserted that many
online music providers, including MP3.com, violate patent rights
that they allegedly own covering forms of distribution of music
over the Internet (including the sale of digital downloads and
certain music streaming technologies). If successful, these
claims, or similar claims by others, could seriously harm our
business by forcing us to cease using important intellectual
property or requiring us to pay monetary damages. Even if
unsuccessful, these claims could harm our business by damaging
our reputation, requiring us to incur legal costs and diverting
managements attention away from our business.




Item 3. Quantitative and Qualitative Disclosures
about Market Risk

Interest Rate Risk

The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this
objective, we maintain a portfolio of cash equivalents in a
variety of securities, including U.S. government agencies,
commercial paper, and money market funds. As of March 31,
2001, 100% of our total portfolio matures in one year or less.

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Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest
rates along the entire interest rate yield curve would not
materially affect the fair value of interest sensitive financial
instruments at March 31, 2001. The following table presents
the fair value balances of our cash equivalents that are subject
to interest rate risk by year of expected maturity and average
interest rates as of March 31, 2001 (dollars in thousands):

|                       |  |      |        |  
|---------------------- |  | ---- | ------ | -
|                       |  | 2001
|                       |  |     
|Cash equivalents       |  | $    | 91,211 |  
|                      
|                      
|                      
|                      
|Average interest rates |  |      | 5.02   | %

Strategic Portfolio Liquidity Risk

We have made strategic investments in certain privately-held
companies. As of March 31, 2001, these investments had a
net book value of approximately $11.4 million. Since these
companies are not publicly traded, the ability for us to
liquidate or sell all or part of our ownership interest in one
or all of these companies may be very difficult. In the event we
are able to sell all or a portion of our ownership interest, we
may need to do so at a substantial discount from our cost or
recorded basis. Additionally, the ability of these companies to
obtain additional capital, if necessary, to continue to operate
may be very difficult. If one or all of these companies are
unable to obtain necessary capital to continue their operations,
they may file for bankruptcy or be forced into bankruptcy by
their creditors. This could further impair our ability to sell
or liquidate our ownership interest, which could result in a
significant charge to income for impairment of these strategic
investments.

Foreign Currency Risk

Currently, nearly all of our revenues and expenses are
denominated in U.S. dollars and as a result, we have not
experienced any significant foreign exchange gains or losses.

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PART II  OTHER INFORMATION




Item 1. Legal Proceedings

Copyright Litigation

Major Label Lawsuits.On January 21, 2000, ten major
recording companies filed a copyright infringement lawsuit
against MP3.com, Inc. in the United States District Court for
the Southern District of New York (the Major Label
Lawsuit). The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3 service,
made unauthorized copies of tens of thousands of audio CDs in
violation of the Copyright Act. On April 28, 2000, the
court granted plaintiffs motion for summary judgment and
held that MP3.com was liable for infringing plaintiffs
copyrights, and the litigation proceeded with discovery on the
issues of willfulness and damages. On May 10, 2000, MP3.com
disabled all content within the My.MP3 service except as
expressly authorized by the copyright holders.

Between June and August 2000, MP3.com entered into settlement
and license agreements with Warner Music Group, BMG
Entertainment, Sony Music, and Capitol Records, Inc. (EMI),
which together represented eight of the ten major recording
companies that filed the Major Label Lawsuit. The settlement
agreements provide for a settlement amount to be paid in cash by
MP3.com in exchange for a release from the settling plaintiffs
and their affiliated entities (as defined in the settlement
agreements) of all claims related to the lawsuit and the My.MP3
service. Most-favored-nation provisions in these
settlement agreements require additional settlement amounts to
be paid under certain circumstances.

As a result of these settlements, the Major Label Lawsuit was
limited to a dispute with UMG Recordings, Inc., which
represented two of the original plaintiffs. A trial in the case
was held from August 28 through September 6, 2000 on
the issues of willfulness and damages. After hearing evidence,
the court ruled on September 6, 2000 that MP3.com had
willfully infringed UMGs copyrights and awarded damages to
UMG in an amount of $25,000 per CD. The Court then scheduled a
period to allow MP3.com to conduct discovery concerning the
certificates of registration for which plaintiffs sought
damages. On November 16, 2000, UMG made a motion for entry
of judgment in the amount of $53,400,000 in statutory damages,
costs, and attorneys fees, which MP3.com did not oppose.
As a result, a judgment in that amount was entered.

MP3.com has also entered into a license agreement with UMG.
Subject to certain affirmative obligations of MP3.com and other
terms and conditions regarding the implementation of the My.MP3
service, MP3.com is permitted to utilize the recordings owned by
Warner Music Group, BMG Entertainment, Sony Music, EMI, and UMG
as part of the My.MP3 service. The license agreements have terms
of approximately three to ten years, and provide for payment of
a one-time fee each time a licensors recording is added to
a separate My.MP3 account. These licenses also provide for
on-going royalty payments based on the greater of (i) a
specified percentage of net revenues generated from or in
connection with the My.MP3 service or (ii) a specified
amount accrued each time a licensors recording is streamed
from My.MP3. Although MP3.com has obtained license agreements
permitting the use of recordings from BMG Entertainment, Warner
Music Group, Sony Music, UMG, EMI, and certain other independent
labels, we cannot guarantee that MP3.com will be able to secure
similar license agreements from any other recording company.

Other Record Label Lawsuits.Over the course of 2000,
some other entities filed lawsuits against us based on the same
set of allegations as the Major Label Lawsuit. These include:
Tee Vee Toons, Inc.; Zomba Recording Corp. (the Zomba
case); Koch Entertainment and Velvel Records LLC (the
Koch case); EMusic.com, Inc., Fuel 2000 Records,
Spinart, Inc., Gig Records, Fearless Records, and Invisible
Records (the EMusic case); and Unity Entertainment
Corporation (the Unity case). Additionally, several
independent labels have sent us demand letters alleging similar
claims.

A jury trial in the Tee Vee Toons case commenced on
March 26, 2001. Prior to trial, in reliance on the
Courts rulings in the Major Label Lawsuit, the issues of
infringement, fair use, and willfulness were adjudicated against
us. As a result, the jury trial was limited to the issue of
damages. The trial concluded on April 6, 2001. The jury
considered 145 copyright certificates and returned a verdict
which the Court tabulated as totaling $292,968. Subsequently,
two jurors contacted the Court to inform it that the verdict
decided upon by the

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Discovery in the Zomba case is currently being conducted and is
scheduled to close on May 21, 2001. The final pre-trial
conference is scheduled for June 29, 2001, and the case is
set for trial on July 9, 2001. Like the Tee Vee Toons case,
the trial in the Zomba case will be limited to only the issue of
damages. The Koch case has been settled and the case is now
closed. The complaint in the EMusic case was filed on
December 14, 2000. MP3.coms response to the complaint
was filed on February 8, 2001. Pursuant to the case
management plan, the case is to be ready for trial on
August 20, 2001. The Unity case, which purports to be
brought on behalf of Unity, an independent record company whose
works were allegedly used in the My.MP3 service, and all other
similarly situated entities or individuals, was filed on
November 7, 2000. MP3.com, Inc. answered the Complaint on
January 16, 2001. On April 16, 2001, the Court entered
an order denying plaintiffs motion for class certification
without prejudice to a renewal of the motion within 45 days.

Publisher Lawsuits.On March 14, 2000, two large
music publishing companies, MPL Communications, Inc. and Peer
International Corporation, with the assistance of The Harry Fox
Agency, Inc. (HFA), filed a copyright infringement
lawsuit against MP3.com in the United States District Court for
the Southern District of New York (the MPL/ Peer
case). The complaint alleged that MP3.com, in connection
with its My.MP3 service, made unauthorized copies of audio CDs
containing plaintiffs copyrighted works in violation of
the Copyright Act, and that MP3.com, in connection with the
streaming of audio content to users of the My.MP3 service,
continued to make unauthorized digital phonorecords in violation
of the Copyright Act. The complaint further alleged that
MP3.coms actions constituted unauthorized copying and
willful infringement of plaintiffs copyrights. Plaintiffs
sought damages (including statutory damages of up to $150,000
per violation) and injunctive relief prohibiting MP3.com from
operating its My.MP3 service or any other service that uses
unauthorized reproductions of plaintiffs copyrighted works.

On October 17, 2000, MP3.com, the National Music
Publishers Association, Inc., and its licensing
subsidiary, HFA, entered into a preliminary agreement to be
approved by individual HFA music publisher-principals for
settlement and use of musical compositions on the My.MP3 service
for a three year term. As a result, MPL and Peer settled the
MPL/ Peer case with MP3.com, and a stipulation of dismissal with
prejudice was subsequently signed by the parties on
December 28, 2000 and entered by the Court on
January 2, 2001.

The three-year licensing arrangement provided that MP3.com would
pay up to $30 million to HFA for the benefit of up to 25,000
music publishers and their songwriter partners, to be allocated
to two equal funds. One fund was used to pay HFA
publisher-principals for past uses of music on the My.MP3
service, in exchange for a release from HFA publisher-principals
and their affiliated entities of all claims related to those
asserted in the MPL/ Peer case and the use of their compositions
on the My.MP3 service. The other fund provides advance payments
toward royalties earned under the prospective license. The terms
of the prospective license call for a payment of one-quarter
cent each time a song is streamed on demand to a customer from
his or her My.MP3 locker, along with a one-time fee per track
added to the My.MP3 service. The preliminary agreement with HFA
was finalized on February 28, 2001. Approximately 78% of
the publisher-principals HFA represents accepted and are bound
by the settlement agreement and approximately 90% accepted and
are bound by the licensing agreement. In April 2001, HFA
refunded to MP3.com approximately $4.6 million pursuant to
the agreement, representing approximately $3.2 million and
$1.4 million for the proportion of HFA publisher-principals
that did not settle or license content to MP3.com, respectively.

Zomba Enterprises, Inc. has filed its own music publishing case
against us making allegations similar to those set forth in the
MPL/ Peer case. Additionally, several other publishers, not
affiliated with HFA, have sent us demand letters alleging
similar claims. In view of the Courts rulings in the Tee
Vee Toons and Zomba cases, there is a substantial risk that the
issues of infringement, fair use, and willfulness may be
adjudicated against us in any and all publisher cases. This
would mean that we would only be able to litigate the issue of
damages.

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Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United
States District Court for the Southern District of New York
against MP3.com and several major recording companies that
claimed to own copyrights in sound recordings featuring the
artists. The complaint alleged that the recording company
defendants in the Major Label Lawsuit claimed rights in
plaintiffs recordings that they did not possess. In
particular, the complaint alleged that the recording company
defendants did not possess any copyright protections with
respect to plaintiffs pre-1972 published and pre-1978
unpublished recordings, did not possess the right to digitally
transmit plaintiffs pre-1996 recordings over the Internet,
and did not possess the right to control the conversion of
plaintiffs recordings into mp3 files. The complaint
further alleged that MP3.com has used the names and likenesses
of plaintiffs without their consent or authorization and in a
deceptive manner, in violation of the federal Lanham Act, the
New York Civil Rights Law, and unspecified unfair competition
and misappropriation laws. In their prayer for relief,
plaintiffs asked to have their class action certified, to be
awarded unspecified damages and attorneys fees, to have
the defendants enjoined from using plaintiffs names and
likenesses to promote downloading music over the Internet, and
to receive declaratory relief regarding plaintiffs rights
in their pre- and post-1972 recordings. On August 28, 2000,
the Court issued an oral ruling dismissing all claims against
MP3.com. On December 7, 2000, judgment was entered
dismissing, with prejudice, the federal claims against the
defendants. All state claims were dismissed for lack of an
independently sufficient jurisdictional basis. Plaintiffs filed
a Notice of Appeal on January 5, 2001. Briefing begins on
April 24, 2001.

Copyright Settlement Discussions; Charge to Operations.MP3.com has pursued and continues to actively pursue
settlement discussions with the various plaintiffs and claimants
in the cases and disputes discussed above. The decision whether
to enter into settlement and/or license agreements with each
party will be based upon a number of factors related to both the
lawsuits and MP3.coms business in general. We cannot
guarantee that we will be able to enter into any additional
settlement agreements on terms favorable to MP3.com, if at all,
or that any settlement or license agreement will prove
beneficial to our business or stockholders. During the year
ended December 31, 2000, we recorded a charge for
litigation and copyright matters of $170.0 million. The
charge for litigation and copyright matters represented our
estimate of the total costs to be incurred only in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3 service, including the
lawsuits filed by major recording companies and other parties.
Copyright issues associated with the My.MP3 service also include
but are not limited to publishing rights, non-major label
content, and legal and advisory fees. This charge did not
reflect or include any amounts paid or payable in connection
with forward-looking licenses to use music recordings or
compositions in connection with the My.MP3 service. This charge
reflects managements expectations as of the date of this
report, and is based on currently available information as well
as significant assumptions made by management regarding the
various litigation and copyright matters. Cash payments for the
settlements and judgments discussed above and other payments
have reduced the cumulative amount reserved as a result of this
charge to $43.4 million as of March 31, 2001. We
cannot guarantee that future events or results will conform to
our expectations or assumptions regarding the various litigation
and copyright matters. If these expectations and significant
assumptions prove to be erroneous in light of future events, the
actual amounts incurred by MP3.com to resolve all copyright
matters related to the My.MP3 service could be materially
different than those recorded as of March 31, 2001, and
could far exceed the resources and market capitalization of our
company.

Class Action and Derivative Lawsuits

MP3.com and certain of its employees, officers, and directors
have been named as defendants in several lawsuits alleging
violations of the federal securities laws. The complaints, which
were filed between September 19, 2000 and November 15,
2000 in the United States District Court for the Southern
District of California, each purport to be brought on behalf of
a class of stockholders. The complaints allege that MP3.com and
the other defendants violated the federal securities laws by
issuing materially false and misleading statements and failing
to disclose material information regarding its My.MP3 service
and the litigation surrounding the service. Between
September 14, 2000 and October 26, 2000, certain
stockholders of MP3.com filed shareholder derivative suits
against MP3.com and certain of its employees, officers, and
directors in the Superior Court of the State of California,
County of San Diego. These complaints allege

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MP3.com and the representatives of the various plaintiffs for
both the class action lawsuits and derivative lawsuit executed
Stipulations of Settlement dated as of March 20, 2001
(Stipulations). Under the terms of the Stipulations,
the defendants, while continuing to deny all liability, have
paid into an escrow account $35,000,000 and agreed to issue
2.5 million shares of MP3.com common stock which MP3.com
valued at $5,391,000, in exchange for complete dismissals and
releases of all claims with prejudice. The escrow amount and the
2.5 million shares of common stock will be governed by the
Stipulations; however, except in certain circumstances, the
distribution will not occur prior to March 31, 2002. In
addition, under the Stipulations, MP3.com agreed to institute
certain corporate governance enhancements. In order to complete
the settlement, it will be necessary to secure appropriate
approvals from both the State Superior Court and Federal
District Court, and to provide notice to members of the class
and current stockholders.

Charge Related to Class Action and Derivative Lawsuits.In light of the settlements of the class action and
derivative lawsuits, the Company has recorded a charge of
$41,428,000 during the three months ended March 31, 2001.
The charge includes the cash paid into the escrow account, the
value of the 2.5 million shares of common stock to be
issued, and other legal costs. While the charge of $41,428,000
excludes any potential recovery from its insurance carriers, the
Company is seeking to recover from its carriers the full amount
of the settlement together with its legal expenses. If the
Company receives insurance proceeds, the Company will record the
recovery as a gain in the statement of operations caption
Charge related to class action and derivative
lawsuits.

Other Litigation

MP3.com is also involved in other legal matters and claims of
various types, and from time to time we may also be involved in
litigation relating to claims arising out of our operations in
the normal course of business.

In particular, the music industry in the United States is
generally regarded as extremely litigious in nature compared to
other industries. As a result, in the future we may be engaged
in litigation with others in the music industry, including those
entities with whom we have ongoing license arrangements. For
example, some of the major recording companies that settled
their portion of the Major Label Lawsuit with us have asserted
in writing that they believe the amount paid by MP3.com to UMG
in satisfaction of the Courts judgment, together with the
concurrent issuance of warrants to UMG, triggered additional
payments to them under the most favored nations
clause in their settlement agreement with MP3.com. Although we
do not believe they are entitled to any such additional
payments, we cannot assure you that we will be successful in
ultimately concluding this particular matter in an amicable
fashion, or defending any resulting lawsuit. As a result, we may
be forced to defend one or more lawsuits on this and other
issues in the future, and in fact may be involved in a number of
litigation proceedings with the same group of related
plaintiffs. We have not recorded any charge related to any
claims for additional most favored nations payments
as of March 31, 2001.

We cannot assure you that we will be successful in ultimately
defending any of these lawsuits, and we may be required to pay
license fees or substantial damages, including statutory,
punitive, or other damages that far exceed the resources and
overall market capitalization of MP3.com, in which event we
might have to significantly limit or terminate our business
operations, particularly because our business is not yet
profitable. At the rate of $25,000 per work (which is the per CD
amount of statutory damages awarded by the court in the Major
Label Lawsuit), our aggregate potential liability resulting from
all of our copyright litigation proceedings could exceed one
billion dollars. If successful, any one of these lawsuits could
seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary
damages. Even if unsuccessful, these lawsuits still can harm our
business severely by damaging our reputation, requiring us to
incur legal costs, lowering our stock price and public demand
for our stock, and diverting managements attention away
from our primary business activities in general.

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Item 2. Changes in Securities and Uses of
Proceeds

Changes in Securities

None.

Use of Proceeds

MP3.coms registration statement (No. 333-78545) under
the Securities Act for its initial public offering (the
Registration Statement) was declared effective by
the SEC on July 20, 1999. Offering proceeds, net of
aggregate expenses of approximately $20.6 million, were
approximately $360.4 million. As of March 31, 2001,
MP3.com has used the net proceeds of $360.4 million as
follows: approximately $79.7 million of the net offering
proceeds for working capital paid directly or indirectly to
third parties; approximately $8.5 million for the purchase
or installation of machinery and equipment; approximately
$12.0 million for the purchase of various strategic
investments and issuance of a note receivable; approximately
$92.8 million for the settlement of certain litigation and
copyright matters; approximately $35.0 million for the
settlement of derivative and shareholder lawsuits; approximately
$40.1 million for prepaid multimedia content royalties;
approximately $4.0 million for the acquisition of the
remaining 53.5% of MP3Radio.com; and approximately
$88.3 million for the purchase of temporary investments in
corporate commercial paper, U.S. government and agency notes,
and money market funds. As of March 31, 2001, no payments
had been made to directors, officers, or affiliates of MP3.com
or owners of 10% or more of the outstanding Shares of Common
Stock of MP3.com, other than compensation payments to officers
of MP3.com.




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

There were no matters submitted to a vote of the security
holders.




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

|        |        |                         |  |                                                                                                                                                                                
|------- | ------ | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.31 |                         |  | Letter Agreement regarding employment between MP3.com and
	Gregory P. Kostello dated May 26, 1999.                                                                             
|        | 10.32  |                         |  | Second Amendment to Settlement Agreement between MP3.com and The
	Harry Fox Agency, Inc., MPL Communications, Inc. and Peer
	International Corporation dated February 28, 2001.
|        | 10.33 |                         |  | Amendment to Consulting Agreement between MP3.com and Howard B.
	Wiener dated March 1, 2001.                                                                                   
|        | 10.34  |                         |  | Stipulation of Settlement in the Class Action Litigation,
	dated as of March 20, 2001.                                                                                         
|        | 10.35  |                         |  | Stipulation of Settlement in the Derivative Litigation, dated as
	of March 20, 2001.                                                                                           




| |                                                                        
| | -----------------------------------------------------------------------
| |            
	 Management contract or compensatory plan or arrangement.

(b)  Reports on Form 8-K:

None

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SIGNATURES

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



| |              
| | -------------
| | MP3.COM, INC.
| | (Registrant) 

Date: April 27, 2001

| |     |                     
| | --- | --------------------
| | By: | /s/ PAUL L.H. OUYANG

| |                                             
| | --------------------------------------------
| |                                             
| | Paul L.H. Ouyang                            
| | Executive Vice President and Chief Financial
| | Officer (Authorized Officer)                
| | (Principal Financial and Accounting Officer)

46