##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 10-Q



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

SECURITIES EXCHANGE ACT OF 1934


For the quarter ended September 30, 1999

Commission File Number 000-26697



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MP3.com, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                            |  |                                                 
|--------------------------------------------------------------------------- |  | ------------------------------------------------
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Delaware
	(State or other jurisdiction of
	incorporation or organization)   |  | 33-0840026
	(I.R.S. Employer
	Identification No)
|                                                                           
|4790 Eastgate Mall, San Diego, CA
	(Address of principal executive offices) |  | 92121
	(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  [X]  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, 68,528,723 shares as of
 October 31, 1999.

This report contains 31 pages



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---

TABLE OF CONTENTS



|                                |                                                                                              |  |  |  |  |  |  | 
|------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1.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 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                                                     



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MP3.COM, INC.

FORM 10-Q

For The Quarter Ended September 30, 1999


INDEX

|                               |  |                                                                                        |  |        |    | 
|------------------------------ |  | -------------------------------------------------------------------------------------- |  | ------ | -- | 
|                               |  |                                                                                        |  | Page  
|                               |  |                                                                                        |  | Number
|                               |  |                                                                                        |  |       
|PART I  FINANCIAL INFORMATION
|                              
|                              
|                              
|                              
|Item  1.                       |  | Financial Statements                                                                   |  |        | 3  | 
|                              
|                              
|                              
|                              
|Item  2.                       |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |  |        | 9  | 
|                              
|                              
|                              
|                              
|Item  3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                             |  |        | 28 | 
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION   
|                              
|                              
|                              
|                              
|Item  2.                       |  | Changes in Securities and Uses of Proceeds                                             |  |        | 29 | 
|                              
|                              
|                              
|                              
|Item  4.                       |  | Submission of Matters To A Vote Of Security Holders                                    |  |        | 29 | 
|                              
|                              
|                              
|                              
|Item  6.                       |  | Exhibits and Reports on Form 8-K                                                       |  |        | 30 | 

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

MP3.COM, INC.

CONDENSED BALANCE SHEETS

(In thousands, except for share data)


ASSETS

|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |     |     | 
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------ | ------- | - | ---- | --- | --- | 
|                                                        |                                                                                                                                                                                                                                                            | September 30,              |         | December 31,
|                                                        |                                                                                                                                                                                                                                                            | 1999                       |         | 1998        
|                                                        |                                                                                                                                                                                                                                                            |                            |         |             
|                                                        |                                                                                                                                                                                                                                                            | (Unaudited)                |         |             
|                                                       
|                                                       
|                                                       
|                                                       
|Current assets:                                         |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Cash and cash equivalents                                                                                                                                                                                                                                  |                            | $       | 166,689      |         |   | $    | 39  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Short-term investments in marketable securities                                                                                                                                                                                                            |                            |         | 279,851      |         |   |      |    |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts receivable, net of allowance for doubtful accounts                                                                                                                                                                                                |                            |         | 1,808        |         |   |      | 293 |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Unbilled receivables                                                                                                                                                                                                                                       |                            |         | 781          |         |   |      | 65  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Prepaid expenses and other current assets                                                                                                                                                                                                                  |                            |         | 7,023        |         |   |      |    |    
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                        |                                                                                                                                                                                                                                                            | Total current assets       |         |              | 456,152 |   |      |     | 397 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, net of accumulated depreciation |                                                                                                                                                                                                                                                            |                            | 7,101   |              |         |   | 52   |    
|                                                       
|                                                       
|                                                       
|                                                       
|Long-term investments in marketable securities          |                                                                                                                                                                                                                                                            |                            | 4,971   |              |         |   |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|Other assets                                            |                                                                                                                                                                                                                                                            |                            | 6,229   |              |         |   | 14   |    
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                        |                                                                                                                                                                                                                                                            | Total assets               |         | $            | 474,453 |   |      | $   | 463 | 
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|                                                       
|                                                       
|                                                       
|                                                       
|Current liabilities:                                    |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts payable                                                                                                                                                                                                                                           |                            | $       | 3,437        |         |   | $    | 37  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accrued expenses                                                                                                                                                                                                                                           |                            |         | 4,432        |         |   |      | 104 |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Line of credit and capital lease obligations                                                                                                                                                                                                               |                            |         | 1,234        |         |   |      | 14  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred revenues                                                                                                                                                                                                                                          |                            |         | 31,336       |         |   |      | 15  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred income taxes                                                                                                                                                                                                                                      |                            |         |             |         |   |      | 94  |    
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                        |                                                                                                                                                                                                                                                            | Total current liabilities  |         |              | 40,439  |   |      |     | 264 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred revenue                                        |                                                                                                                                                                                                                                                            |                            | 14,000  |              |         |   |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred income taxes                                   |                                                                                                                                                                                                                                                            |                            |        |              |         |   | 4    |    
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity:                                   |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, par value $0.001 per share; none authorized,
	issued and outstanding at September 30, 1999 and
	December 31, 1998                                                                                                                         |                            |         |              |         |   |      |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Convertible preferred stock, par value $0.001 per share;
	authorized 15,500,000 and 5,000,000 at September 30, 1999
	and December 31, 1998, respectively; none issued and
	outstanding at September 30, 1999 and December 31, 1998                         |                            |         |              |         |   |      |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common stock, par value $0.001 per share; authorized 300,000,000
	and 51,000,000 at September 30, 1999 and December 31,
	1998, respectively; 68,376,920 and 29,249,999 issued and
	outstanding at September 30, 1999 and December  31,
	1998, respectively |                            |         | 68           |         |   |      | 29  |    
|                                                       
|                                                       
|                                                       
|                                                       
|Additional paid in capital                              |                                                                                                                                                                                                                                                            |                            | 474,673 |              |         |   | 701  |    
|                                                       
|                                                       
|                                                       
|                                                       
|Note receivable from stockholder                        |                                                                                                                                                                                                                                                            |                            | (258    | )            |         |   |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|Deferred compensation                                   |                                                                                                                                                                                                                                                            |                            | (26,474 | )            |         |   | (178 | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Unrealized loss on investments available-for-sale       |                                                                                                                                                                                                                                                            |                            | (19     | )            |         |   |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|Accumulated deficit                                     |                                                                                                                                                                                                                                                            |                            | (27,976 | )            |         |   | (357 | )  
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                        |                                                                                                                                                                                                                                                            | Total stockholders equity |         |              | 420,014 |   |      |     | 195 | 
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    
|                                                        |                                                                                                                                                                                                                                                            | $                          | 474,453 |              |         | $ | 463  |    
|                                                        |                                                                                                                                                                                                                                                            |                            |         |              |         |   |      |    

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

3



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##### Table of Contents



MP3.COM, INC.

CONDENSED STATEMENTS OF OPERATIONS

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


(Unaudited)


|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |            |        |        | 
|------------------------------ | ------------------------------------------- | ---------------------------------- | ------------------------ | ------------------- | ------ | ------------------ | --- | ---------- | --- | --- | ------- | ---------- | ------ | ------ | 
|                               |                                             |                                    |                          |                    
|                               |                                             | For The Three Months Ended         |                          | For The Nine Months
|                               |                                             |                                    |                          | Ended              
|                               |                                             | September 30, 1999                 |                          | September 30, 1998  |        | September 30, 1999
|                               |                                             |                                    |                          |                     |        |                   
|Net revenues                   |                                             | $                                  | 4,051                    |                     |        | $                  | 277 |            |     | $   | 6,629   |           
|                              
|                              
|                              
|                              
|Cost of revenues               |                                             |                                    | 1,687                    |                     |        |                    | 83  |            |     |     | 2,741   |           
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|                               |                                             | Gross profit                       |                          |                     | 2,364  |                    |     |            | 194 |     |         |            | 3,888  |       
|                              
|                              
|                              
|                              
|Operating expenses:            |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|                              
|                              
|                              
|                              
|                               | Sales and marketing                         |                                    |                          | 8,897               |        |                    |     | 26         |     |     |         | 12,114     |       
|                              
|                              
|                              
|                              
|                               | Product development                         |                                    |                          | 2,373               |        |                    |     | 67         |     |     |         | 3,375      |       
|                              
|                              
|                              
|                              
|                               | General and administrative                  |                                    |                          | 3,110               |        |                    |     | 38         |     |     |         | 5,021      |       
|                               | Amortization of deferred compensation       |                                    |                          |                     |        |                    |     |            |     |     |         |            |       
|                              
|                              
|                              
|                              
|                               |                                             | and other stock based compensation |                          |                     | 12,370 |                    |     |            | 83  |     |         |            | 15,834 |       
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|                               |                                             |                                    | Total operating expenses |                     |        | 26,750             |     |            |     | 214 |         |            |        | 36,344 | 
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|Loss from operations           |                                             |                                    | (24,386                  | )                   |        |                    | (20 | )          |     |     | (32,456 | )         
|                              
|                              
|                              
|                              
|Interest income (expense), net |                                             |                                    | 4,517                    |                     |        |                    | (1  | )          |     |     | 4,837   |           
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|Loss before income taxes       |                                             |                                    | (19,869                  | )                   |        |                    | (21 | )          |     |     | (27,619 | )         
|                              
|                              
|                              
|                              
|Provision for income taxes     |                                             |                                    |                         |                     |        |                    | 12  |            |     |     |        |           
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|Net loss                       |                                             | $                                  | (19,869                  | )                   |        | $                  | (33 | )          |     | $   | (27,619 | )         
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|Net loss per share:            |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|                              
|                              
|                              
|                              
|                               | Basic and diluted                           |                                    | $                        | (0.33               | )      |                    | $   | (0.00      | )   |     | $       | (0.54      | )     
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           
|                               | Weighted average shares  basic and diluted |                                    |                          | 60,333,000          |        |                    |     | 26,179,000 |     |     |         | 51,272,000 |       
|                               |                                             |                                    |                          |                     |        |                    |     |            |     |     |         |           

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

4



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##### Table of Contents



MP3.COM, INC.

CONDENSED STATEMENT OF CASH FLOWS

(In thousands)


(Unaudited)


|                                                                             |                                                             |                                           |          |       |        |  
|---------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | -------- | ----- | ------ | -
|                                                                             |                                                             | Nine Months                              
|                                                                             |                                                             | Ended                                    
|                                                                             |                                                             | September 30, 1999                       
|                                                                             |                                                             |                                          
|Operating activities:                                                        |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net loss                                                                     |                                                             | $                                         | (27,619  | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustments to reconcile net loss to cash provided by operating
	activities: |                                                             |                                           |          |      
|                                                                             | Amortization of deferred compensation and other stock based |                                           |          |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | compensation                              |          |       | 16,970 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Amortization of prepaid marketing costs                     |                                           |          | 2,524 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Charge associated with employee costs                       |                                           |          | 1,241 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Charge associated with facility relocation costs            |                                           |          | 815   |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation                                                |                                           |          | 470   |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Deferred income taxes                                       |                                           |          | (98   | )     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Changes in operating assets and liabilities:                |                                           |          |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Accounts receivable                       |          |       | (1,515 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Unbilled receivables                      |          |       | (716   | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Prepaid expenses and other current assets |          |       | (6,040 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Accounts payable                          |          |       | 3,400  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Deferred revenue                          |          |       | 45,320 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                             | Accrued expenses                          |          |       | 3,087  |  
|                                                                             |                                                             |                                           |          |      
|Cash provided by operating activities                                        |                                                             |                                           | 37,839   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Investing activities:                                                        |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of property and equipment                                          |                                                             |                                           | (8,248   | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of investments, net                                                |                                                             |                                           | (284,841 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other assets                                                                 |                                                             |                                           | (5,299   | )    
|                                                                             |                                                             |                                           |          |      
|Cash used in investing activities                                            |                                                             |                                           | (298,388 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Financing activities:                                                        |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from line of credit                                                 |                                                             |                                           | 1,234    |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payment of note payable                                                      |                                                             |                                           |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments under capital lease obligations                                     |                                                             |                                           | (14      | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Issuance of common stock                                                     |                                                             |                                           | 365,402  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net proceeds from issuance of Series A preferred stock                       |                                                             |                                           | 13,118   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of Series B preferred stock                           |                                                             |                                           | 2,500    |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net proceeds from issuance of Series C preferred stock                       |                                                             |                                           | 44,959   |      
|                                                                             |                                                             |                                           |          |      
|Cash provided by financing activities                                        |                                                             |                                           | 427,199  |      
|                                                                             |                                                             |                                           |          |      
|Increase in cash and cash equivalents                                        |                                                             |                                           | 166,650  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents at beginning of period                             |                                                             |                                           | 39       |      
|                                                                             |                                                             |                                           |          |      
|Cash and cash equivalents at end of period                                   |                                                             | $                                         | 166,689  |      
|                                                                             |                                                             |                                           |          |      
|Supplemental disclosures of cash flow information:                           |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest paid                                                                |                                                             | $                                         | 89       |      
|                                                                             |                                                             |                                           |          |      
|Taxes paid                                                                   |                                                             | $                                         | 168      |      
|                                                                             |                                                             |                                           |          |      
|Supplemental schedule of non-cash activities:                                |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Common stock issued for notes receivable                                     |                                                             | $                                         | 338      |      
|                                                                             |                                                             |                                           |          |      
|Cancellation of stockholder note receivable                                  |                                                             | $                                         | 78       |      
|                                                                             |                                                             |                                           |          |      
|Warrants for common stock and common stock issued in exchange                |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | for prepaid marketing costs                                 |                                           | $        | 2,302 |       
|                                                                             |                                                             |                                           |          |      
|Donation of 100,000 shares of MP3.com common stock to the                    |                                                             |                                           |          |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | MP3 Foundation                                              |                                           | $        | 767   |       
|                                                                             |                                                             |                                           |          |      

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

5



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##### Table of Contents



MP3.COM, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except per share data)


Note 1  The Company and Summary of Significant
Accounting Policies:

The Company

MP3.com, Inc. is developing a revolutionary approach to the
promotion and distribution of music. MP3.com uses the Internet
and file formats that make music files smaller to enable artists
to distribute and promote their music and to enable consumers to
conveniently access this music. Consumers can search, preview and
 download music free of charge.

Basis of Presentation

The financial statements as of September 30, 1999, for the
three and nine months ended September 30, 1999, and for the
three months ended September 30, 1998 are unaudited and have
 been prepared by MP3.com pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). The
unaudited financial statements have been prepared on the same
basis as the audited 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 financial statements prepared in
 accordance with generally accepted accounting principles have
been omitted pursuant to such SEC rules and regulations. The
results of operations for the interim period ended
September 30, 1999 are not necessarily indicative of the
results which may be reported for any other interim period or for
 the year ending December 31, 1999. The financial statements
 for the period from March 17, 1998 (inception) to
September 30, 1998 have not been presented as the operating
activity was insignificant and disclosure would not be
meaningful.

Use of Estimates

The preparation of 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 financial statements and the
reported amounts of revenues and expenses during the reporting
period. 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. Under the provisions of SFAS No. 128, basic net
 income (loss) per share is computed by dividing the net
income (loss) available to common stockholders for the
period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per
 share is computed by dividing the net income (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 on assumed conversion of
Series A, B, and C preferred stock, are included in diluted
net income (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 and nine
 months ended September 30, 1999 and the three months ended
September 30, 1998 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.

6



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)


Note 1  The Company and Summary of Significant
Accounting Policies (continued):

The following table sets forth the computation of basic and
diluted net loss per share as follows:

|                                              |                                                                           |                    |            |               |   |  |            |            |  
|--------------------------------------------- | ------------------------------------------------------------------------- | ------------------ | ---------- | ------------- | - |  | ---------- | ---------- | -
|                                              |                                                                           |                   
|                                              |                                                                           | Three Months Ended
|                                              |                                                                           |                   
|                                              |                                                                           | September 30,      |            | September 30,
|                                              |                                                                           | 1999               |            | 1998         
|                                              |                                                                           |                    |            |              
|Numerator:                                    |                                                                           |                    |            |               |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss                                                                  |                    | $          | (19,869       | ) |  | $          | (33        | )
|                                              |                                                                           |                    |            |               |   |  |            |           
|Denominator:                                  |                                                                           |                    |            |               |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                       |                    |            | 65,235,000    |   |  |            | 26,179,000 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject to repurchase
	agreements |                    |            | (4,902,000    | ) |  |            |           |  
|                                              |                                                                           |                    |            |               |   |  |            |           
|Denominator for basic and diluted calculation |                                                                           |                    | 60,333,000 |               |   |  | 26,179,000 |           
|                                              |                                                                           |                    |            |               |   |  |            |           
|Net loss per share:                           |                                                                           |                    |            |               |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                         |                    | $          | (0.33         | ) |  | $          | (0.00      | )
|                                              |                                                                           |                    |            |               |   |  |            |           

|                                              |                                                                           |               |            |            |  
|--------------------------------------------- | ------------------------------------------------------------------------- | ------------- | ---------- | ---------- | -
|                                              |                                                                           | Nine Months  
|                                              |                                                                           | Ended        
|                                              |                                                                           | September 30,
|                                              |                                                                           | 1999         
|                                              |                                                                           |              
|Numerator:                                    |                                                                           |               |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss                                                                  |               | $          | (27,619    | )
|                                              |                                                                           |               |            |           
|Denominator:                                  |                                                                           |               |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                       |               |            | 56,174,000 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject to repurchase
	agreements |               |            | (5,021,000 | )
|                                              |                                                                           |               |            |           
|Denominator for basic and diluted calculation |                                                                           |               | 51,153,000 |           
|                                              |                                                                           |               |            |           
|Net loss per share:                           |                                                                           |               |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                         |               | $          | (0.54      | )
|                                              |                                                                           |               |            |           

Diluted common stock equivalents include common stock options, as
 if converted, and restricted stock that has not yet fully
vested. Potentially dilutive securities total approximately
9,806,000 common shares for the three and nine months ended
September 30, 1999, respectively, and were excluded from
historical diluted earnings per share because of their
anti-dilutive effect.

Comprehensive Income

MP3.com adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as
defined, includes all changes in equity (net assets) during a
period from non-owner sources. Net income (loss) and other
comprehensive income (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 income. There were no differences
between MP3.coms net loss and its total comprehensive loss
for the three or nine months ended September 30, 1999,
except for unrealized losses on investments of approximately $19.

7



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)


Note 1  The Company and Summary of Significant
Accounting Policies (continued):

Segment Information

MP3.com 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 (if available), business activities and
management responsibility. MP3.com believes it operates in a
single business segment and adoption of this standard did not
have a material impact on MP3.coms financial statements.
Through September 30, 1999, there have been no foreign
operations.

A summary of advertising and merchandise revenue from customers
is as follows:

|            |  |                    |       | 
|----------- |  | ------------------ | ----- | 
|            |  | Nine Months Ended 
|            |  | September 30, 1999
|            |  |                   
|Advertising |  | $                  | 5,875 | 
|           
|           
|           
|           
|Merchandise |  |                    | 754   | 
|            |  |                    |       | 
|            |  | $                  | 6,629 | 
|            |  |                    |       | 

Note 2  Stockholders Equity

Issuance of Common Stock

On July 21, 1999, the Company effected its initial public
offering of common stock. A total of 13,697,233 shares were sold
at a price of $28.00 per share. The offering resulted in net
proceeds to the Company of approximately $361.3 million, net
 of an underwriting fee of $20.3 million and estimated
offering expenses of $1.9 million. Upon the closing of the
Companys initial public offering, all 12,871,681 shares of
the Series A, B, and C Convertible Preferred Stock converted
 into 19,307,516 shares of common stock.

Stock Options

During the nine months ended September 30, 1999,
MP3.com granted additional options to purchase 11,521,210 shares
of common stock at a weighted average exercise price of $3.00 per
 share. Included in the options to purchase 11,521,210 shares are
 options to purchase 450,000 shares granted at a weighted
average exercise price of $1.00 outside of MP3.coms equity
incentive plan. All options to purchase 450,000 shares were
exercised in their entirety in May 1999.

Note 3  Recent Events

During November 1999, MP3.com entered into an agreement with an
internationally known CD manufacturer and fulfillment company
(the Supplier) whereby the Supplier will perform
various manufacturing and fulfillment services for MP3.com for
10 years. In connection with execution of the Supplier
supply agreement, MP3.com purchased 1,500,000 shares of the
Suppliers common shares and a warrant for 1,780,000 common
shares for approximately $13.3 million. Our agreement
requires us to hold the common shares for at least one year.
 The warrant expires in October 2003, and the exercise price is
Cn$15.00 per share. The Supplier is a publicly traded company on
the Toronto Stock Exchange, Montreal Exchange, and NASDAQ.
Additionally, the Supplier entered into an advertising agreement
with MP3.com whereby MP3.com will deliver various advertising
products through March 2001 and receive $1.5 million in cash
 during the term of the advertising agreement.

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##### Table of Contents






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

Forward-Looking Statements

This document contains forward-looking statements. 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, should, except,
plan, anticipate, believe,
estimate, predict, potential
or continue, the negative of such terms or other
comparable terminology. These statements are only predictions.
Actual events or results may differ materially.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and 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
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 advise interested
 parties of the factors which affect our business, including
without limitation the disclosures made under the caption
Managements Discussion and Analysis of Financial
Condition and Results of Operations, under the caption
Risk Factors, in the audited financial statements and
 related footnotes included herein and in the Companys
Registration Statement on Form S-1 dated July 21, 1999
(No. 333-78545).

Given our short operating history and our limited operations
during 1998, we believe that comparisons between the
nine months ended September 30, 1999 and the period
from March 17, 1998 (inception) to September 30, 1998
would not be meaningful; therefore, these comparisons are not
discussed below.

Overview

MP3.com is pioneering a revolutionary approach to the promotion
and distribution of music. Our website has grown into a premier
online music destination. We use the Internet and file formats
that make music files smaller to enable a growing number of
artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music
catalog. Our website contains more than 208,000 songs available
for preview from over 35,000 artists, which we believe represents
 one of the largest collections of digital music available on the
 Internet. Consumers can search, preview and download music free
of charge.

We receive revenue from online advertising, electronic commerce
and offline advertising. For the nine months ended
September 30, 1999, 57% of our revenues were from the sale
of advertising space on our website. We also receive revenue from
 the sale of CDs online and from advertisers for their
sponsorship of CD samplers, which are distributed free of charge
to consumers and contain collections of music from artists that
have posted music on our website.

Our unique business model provides the following advantages for
artists and consumers:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | creates an easy and convenient way for consumers to listen to,
	download and purchase music;                              
|
| |  | dramatically lowers costs for artists to promote and distribute
	their music;                                             
|
| |  | enables artists to reach a large number of consumers worldwide;                                                           
|
| |  | enables consumers to discover local and lesser-known artists in
	ways they cannot through traditional music retailers; and

  facilitates direct communication between fans and
artists.

We believe that large numbers of artists and consumers are drawn
to MP3.com because they have historically been under served by
the traditional music industry. We expect to continue introducing
 new products and services designed to meet their entertainment,
electronic commerce, communications and information needs.
MP3.com was incorporated in March 1998. During 1998, our
operations consisted largely of developing the infrastructure
necessary to download music on the Internet. Since the beginning
of 1999, our

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The Three Months Ended September 30, 1999 Compared To
September 30, 1998:

Results of Operations

Net Revenues

For the three months ended September 30, 1999, net revenues
were $4,051,000 consisting of online advertisements (49% of net
revenues) on our website, offline advertisements through the
distribution of our CD sampler products (41% of net revenues),
and the online sale of CDs and music-related merchandise (10% of
net revenues). This compares to $277,000 during the same period
one year ago, and $1,911,000 during the second quarter of 1999.
The increase in net revenues during the third quarter of 1999
over the same period in 1998 was mostly attributable to a
significant increase in online banner and sponsorship
advertisements, offline advertisements, and CD sales on our
website.

Revenue from online advertising. For the third quarter of
1999, revenues from online advertising were $1,971,000 or 49% of
net revenues compared to $233,000 (84% of net revenues) for the
comparable period one year ago and $1,264,000 (66% of net
revenues) for the second quarter of 1999. Online advertising
revenues consist of banner and sponsorship advertisements on our
website. The increase in the level of advertising revenue in the
third quarter of 1999 when compared to both the third quarter of
1998 and the second quarter of 1999 was primarily due to the
expansion of our customer base, increased awareness regarding
MP3.com and the mp3 technology, and development and expansion of
music and our websites content. The duration of our banner
advertising commitments range from one month to in excess of
three years. Sponsorship advertising contracts involve more
integration with our website, including the placement of buttons
that provide users with direct links to the advertisers
website.

Revenue from offline advertising. For the three months
ended September 30, 1999, revenues from offline advertising
were $1,667,000 (41% of net revenues), compared to zero for the
comparable period one year ago and $382,000 (20% of net revenues)
 during the second quarter of 1999. During the three months ended
 September 30, 1999, offline advertising revenues consisted
of CD sampler products. The increase in offline advertising
revenue is primarily due to the recent introduction during the
second quarter of 1999 of our CD sampler product.

Revenue from online sales of CDs and other music-related
merchandise. During the third quarter of 1999, revenues from
online sales of CDs and other music-related merchandise was
$413,000 (10% of net revenues) compared to $44,000 (16% of net
revenues) for the comparable period one year ago and $265,000
(14% of net revenues) for the second quarter of 1999. Online
e-commerce sales consist of our DAM and compilation CDs and, to a
 lesser extent, other music-related merchandise. Since these
products were released during September 1998, there was minimal
revenue from online sales of CDs and music-related merchandise
during the period ended September 30, 1998. The increase in
online sales of CDs and other music-related merchandise during
third quarter of 1999 as compared to the second quarter of 1999
was primarily due to increased musical content available on our
website and increased brand awareness. In the future, if the
number of visitors to our website continues to grow and the
quantity and quality of the musical content available continues
to improve, revenue from the online sale of CDs could constitute
an increasing portion of total net revenues. In the future, if
the number of visitors to our website continues to grow and the
quantity and quality of the musical content available continues
to improve, revenue from the online sale of CDs could constitute
an increasing portion of total net revenues.

Cost of Revenues

Cost of revenues for the three months ended September 30,
1999 was $1,687,000 (42% of net revenues) compared to $83,000
(30% of net revenues) during the comparable period one year ago
resulting in gross margins of 58% and 70%, respectively. The cost
 of revenues increased, as a percentage of net revenue, due
primarily to increased fulfillment costs associated with
increased CD volume, associated with increased

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Sales and Marketing

During the three months ended September 30, 1999, sales and
marketing expense was $8,897,000 (220% of net revenues) compared
to $26,000 (9% of net revenues) during the third quarter of 1998.
 The increase in sales and marketing expense, both in absolute
dollar amounts and as a percentage of net revenue, was primarily
due to new marketing programs, substantial increases in sales and
 marketing payroll and related expenses, a one-time charge
related to employee costs, marketing and promotion costs
associated with the Alanis Morissette and Tori Amos
5 1/2 Weeks Summer 1999 tour sponsorship,
amortization of prepaid marketing expenses with our arrangements
with internationally known artists, and costs associated with the
 growth of our business. We anticipate that overall sales and
marketing expense will increase significantly in the foreseeable
future; however, sales and marketing expense as a percentage of
net revenues may fluctuate depending on the timing of new
marketing programs and the addition of sales and marketing
personnel.

On May 12, 1999, we entered into a three-year agreement with
 Boutit, Inc., which also does business under the name No
Limit Records. Under this agreement, we obtained rights to
a number of No Limit master recordings. Some of the artists
represented by No Limit include Master P and Snoop Dogg, along
with other respected platinum-selling artists. No Limit artists
also may participate in our chatrooms, display MP3.com signs at
concert performances, hold concerts with artists that have posted
 music on our website and cooperate with us on other promotional
activities. We will record all revenues generated under the
agreement and will recognize royalty expense (to be included in
cost of sales) representing the royalties payable to No Limit.
The royalty percentage due to No Limit will vary depending on the
 source of revenue. No Limit also became a stockholder of MP3.com
 at the closing of our initial public offering in July 1999. As
part of our agreement, we issued 89,285 shares of our common
stock in a private placement concurrent with the closing of our
initial public offering at the initial public offering price of
$28.00. We are amortizing a $2.5 million charge over the
term of the agreement to reflect this issuance.

In the future, we anticipate that we will enter into arrangements
 with additional leading artists and creative talent agencies to
secure their promotional and marketing services and obtain rights
 to their music. Future expenses may include costs related to
promotional events, which will be expensed to sales and marketing
 in the period the event is held. Depending upon the terms and
timing of promotional activities, substantial sales and marketing
 expenses may be incurred in any quarterly or annual period.

Product Development

During the third quarter of 1999, product development expense was
 $2,373,000 (59% of net revenues) compared to $67,000 (24% of net
 revenues) during the same quarter of 1998. The increase in the
level of product development expense, as a percentage of net
revenue, was primarily due to increased payroll and related
expenses associated with hiring more employees, expensed computer
 supplies, increased computer equipment depreciation, and costs
associated with the growth of our business. We anticipate that
overall product development expenses will increase in the
foreseeable future; however, product development expenses as a
percentage of net revenues may fluctuate depending on the level
of future net revenues and the timing of investments in product
development and hiring.

General and Administrative

General and administrative expense was $3,110,000 (77% of net
revenues) during the third quarter of 1999 compared to $38,000
(14% of net revenues) during the same quarter of 1998. The
increase in general and administrative expense, both in absolute
dollar amount and as a percentage of net revenue, was primarily a

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Amortization of Deferred Compensation and Other
Stock Based Compensation

During the three months ended September 30, 1999, we
recorded aggregate deferred compensation of $21,030,000 for the
grant of stock options which were granted at exercise prices less
 than the deemed fair value on the grant date. Deferred
compensation is being amortized over the vesting period of the
options, which is generally four years. Of total deferred
compensation, $12,370,000 was amortized to expense during the
third quarter of 1999 compared to $83,000 during the comparable
period one year ago. The increase is primarily related to the
increase in the granting of stock options to newly hired
executive management and employees.

Interest Income (Expense), Net

Interest income (net of interest expense), during the three
months ended September 30, 1999 was $4,517,000 compared to
interest expense of $1,000 during the same period of 1998. The
interest income during the third quarter of 1999 is directly
related to interest income earned on cash and cash equivalent
balances, short and long term investments associated with
proceeds from the issuance of common stock in connection with our
 initial public offering in July 1999, the exercise of stock
options, and the issuance of Series A, B, and C convertible
preferred stock of an aggregate of approximately
$423.7 million during 1999. Interest expense during the same
 period of 1998 is due to interest incurred on a capital lease,
partially offset by interest income earned on cash balances.

Provision For Income Taxes

Due to the loss from operations for both book and tax purposes,
no provision for income taxes was recorded for the three months
ended September 30, 1999. For the same period of 1998, we
recorded a provision for income taxes of $12,000, related to the
amortization of deferred compensation, which is not deductible
for income tax purposes.

The Nine Months Ended September 30, 1999

Results of Operations

Net Revenues

For the nine months ended September 30, 1999, net revenues
were $6,629,000 consisting primarily of the sale of online
advertisements (57% of net revenues) on our website, offline
advertisements (31% of net revenues) and, to a lesser extent, the
 online sale of CDs and music-related merchandise (12% of net
revenues). The level of net revenues during the first nine months
 of 1999 reflected increased banner and sponsorship
advertisements, the sale of new offline advertising in the form
of sponsorship CD samplers and an artist service convention known
 as the MP3 Summit that were introduced during 1999,
and CD sales on our website.

Revenue from online advertising.For the first nine months
 of 1999, banner and sponsorship advertisements on our website
were $3,795,000 (57% of net revenues). Sponsorship advertising
contracts involve more integration with our website, including
the placement of buttons that provide users with direct links to
the advertisers website. The increase in the level of
advertising revenues is primarily due to an increase in number of
 advertisers, increased awareness regarding MP3.com and the mp3
technology, and development and expansion of our music content.

12



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##### Table of Contents



Revenue from offline advertising.For the nine months
ended September 30, 1999, revenues from offline advertising
were $2,079,000 (31% of net revenues). The increase in offline
advertising revenue is primarily due to the initial introduction
of our new CD sampler product that did not exist previously, and
to a lesser extent, the MP3 Summit.

Revenue from online sales of CDs and other music-related
merchandise. Revenue from the online sale of CDs and
music-related merchandise was $755,000 (12% of net revenues)
during the nine months ended September 30, 1999. Revenue
from online sales of CDs and music-related merchandise increased
primarily due to increased musical content available on our
website and increased brand awareness.

Cost of Revenues

Cost of revenues for the nine months ended September 30,
1999 was $2,741,000 (41% of net revenues) representing gross
profit as a percentage of sales of 59%. The level of cost of
revenues increased, as a percentage of net revenue, due primarily
 to increased fulfillment costs associated with increased CD
volume, bandwidth costs, royalties to artists, CD sampler
production costs, costs associated with the MP3 Summit, as well
as an increase, as a percentage of net revenues, in CD and other
music-related merchandise sales (which typically have lower
associated gross margins).

Sales and Marketing

Sales and marketing expense for the first nine months of 1999 was
 $12,114,000 (183% of net revenues). Sales and marketing expense,
 both in absolute dollar amounts and as a percentage of net
revenue, was primarily due to new marketing programs, substantial
 increases in sales and marketing payroll and related expenses, a
 one-time charge related to employee costs, marketing and
promotions costs associated with the Alanis Morissette and Tori
Amos 5 1/2 Weeks summer 1999 tour sponsorship,
the contribution of 100,000 shares of our common stock to the MP3
 Foundation, amortization of the No Limit and other
internationally known artists prepaid marketing, and the costs
associated with the growth of our business.

Product Development

Product development expense during the nine months ended
September 30, 1999 was $3,375,000 (51% of net revenues).
Product development expense, as a percentage of net revenue, was
primarily due to payroll and related expenses associated with
hiring more employees, expensed computer supplies, computer
equipment depreciation and the costs associated with the increase
 in our size.

General and Administrative

General and administrative expense during the first nine months
of 1999 was $5,021,000 (76% of net revenues). General and
administrative expense, both in absolute dollar amount and as a
percentage of net revenue, was primarily a result of finance and
administrative payroll and related expenses, legal and accounting
 expenses, facility related costs, the charge associated with the
 relocation to our new corporate facility and costs associated
with the increase in our infrastructure.

Amortization of Deferred Compensation and Other
Stock Based Compensation

During the nine months ended September 30, 1999, we recorded
 aggregate deferred compensation of $39,218,000 for the grant of
stock options that were granted at exercise prices less than the
deemed fair value on the grant date, resulting in amortization of
 deferred compensation of $15,465,000. Additionally, in
connection with the sale of preferred stock to a director of
MP3.com, we recognized the intrinsic value of $369,000 as stock
based compensation during the nine months ended
September 30, 1999.

Interest Income (Expense), Net

Interest income (net of interest expense) during the first nine
months of 1999 was $4,837,000 resulting from interest incurred on
 cash and cash equivalent balances and short and long-term
investments in

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Provision For Income Taxes

There was no provision for income taxes due to the loss before
income taxes during the first nine months of 1999.

Liquidity and Capital Resources

Overview

To date, our operations have been financed from internally
generated cash, the sale of convertible preferred stock in 1999,
the proceeds from our initial public offering and, to a lesser
extent, capital equipment lease arrangements and equipment
financing through our line of credit with Imperial Bank. As of
September 30, 1999, we had approximately $166.7 million
 in cash and cash equivalents and short-term investment grade
investments of $279.8 million. Additionally, a $3,000,000
line of credit with Imperial Bank with a sub-limit of $1,500,000
for equipment financing was available to fund our operations.
Borrowings under the line of credit accrue interest at the
banks prime rate plus 1% (9.25% as of September 30,
1999), mature in February 2000, and are secured by most of our
assets. We are required to comply with debt covenants, the most
restrictive of which is a minimum liquidity ratio which requires
MP3.com to maintain a cash balance of two times current
liabilities plus all bank debt or a cash balance equal to
six months historical cash spending. Currently, due to our
cash balance after our initial public offering during July 1999,
we do not believe the debt covenants will place limitations on
our growth strategy. As of September 30, 1999, we were in
compliance with all debt covenants. As of September 30,
1999, there was approximately $1.2 million outstanding under
 the line of credits equipment financing sub-limit. This
indebtedness requires monthly payments of interest only through
August 1999, at which time the outstanding principal amount for
the equipment sub-limit will be converted into a three-year fully
 amortizing term loan with the bank.

Operating Activities

Net cash provided by operating activities during the
nine months ended September 30, 1999 was approximately
$37.8 million and consisted primarily of the following:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | net loss of approximately $27,619,000;                                                                 
|
| |  | amortization of deferred compensation and other stock based
	compensation of approximately $16,970,000;
|
| |  | amortization of prepaid marketing costs of approximately
	$2,524,000;                                  
|
| |  | charge associated with employee costs of approximately
	$1,241,000;                                    
|
| |  | charge associated with the relocation of our facilities of
	approximately $815,000;                    
|
| |  | an increase in accounts and unbilled receivables of approximately
	 $2,232,000;                        
|
| |  | an increase in prepaid expenses and other assets of approximately
	 $6,040,000;                        
|
| |  | an increase in accounts payable and accrued expenses of
	approximately $6,487,000; and                 
|
| |  | an increase in deferred revenue of approximately $45,320,000.                                          

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Investing Activities

Cash used in investing activities during the nine months ended
September 30, 1999 was approximately $298.4 million
consisting primarily of property and equipment expenditures of
$8,248,000, net purchases of short and long-term investment grade
 investments of $284,841,000, and purchases of equity investments
 of approximately $3,325,000.

Financing Activities

Cash provided by financing activities during 1999 was
approximately $427,199,000, and consisted primarily of proceeds
from the issuance of common stock in connection with our initial
public offering during July 1999s the exercise of stock options
and the issuance of Series A, B, and C convertible preferred
 stock.

We have no material financial commitments other than obligations
under our credit facilities and operating leases. We expect to
substantially increase expenditures for applications including:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | computer equipment and furniture and fixtures associated with new
	 employees and facility expansion;
|
| |  | website computer equipment;                                                                          
|
| |  | product fulfillment equipment, infrastructure and new employees;                                     
|
| |  | bandwidth and networking equipment and infrastructure;                                               
|
| |  | additional sales and marketing employees;                                                            
|
| |  | equipment and additional employees related to product
	development;                                  
|
| |  | increased promotion and branding efforts;                                                            
|
| |  | investments in entities with whom we have collaborative
	arrangements; and                           
|
| |  | development and acquisition of content.                                                              

Capital requirements in any particular period will depend on the
timing of these expenditures.

Recent Events

During November 1999, we entered into an agreement with an
internationally known CD manufacturer and fulfillment
company (the Supplier) whereby the Supplier will
perform various manufacturing and fulfillment services for
MP3.com for 10 years. In connection with execution of the
supply agreement with the Supplier, MP3.com purchased 1,500,000
shares of the Suppliers common shares and a warrant for
1,780,000 shares of common shares for approximately
$13.3 million. The common shares purchased are subject to a
restriction for one year. The warrant expires in October 2003 and
 the exercise price is Cn$15.00 per share. The Supplier is a
publicly traded company on the Toronto Stock Exchange, Montreal
Exchange, and NASDAQ. Additionally, the Supplier entered into an
advertising agreement with MP3.com whereby MP3.com will deliver
various advertising products through March 2001 and receive
$1.5 million during the term of the advertising agreement.

Future Capital Requirements

We believe that our cash and cash equivalent balances, short and
long-term investments in marketable securities, funds available
under our existing line of credit reduced by our financing
commitment to the Cox Interactive Media joint venture will be
sufficient to satisfy our cash requirements for at least the next
 12 months. 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 significant 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 the

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We may need to raise additional capital if we expand more rapidly
 than initially planned, to develop new or enhanced products
and/or services, to respond to competitive pressures or to
acquire complementary products, content, businesses or
technologies. 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.

Year 2000 Readiness Disclosure

Many existing computer programs cannot distinguish between a year
 beginning with "20 and a year beginning
with "19 because they use only the last two digits
 to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As
a result, these programs may malfunction or fail completely.

Since our business and, consequently, our hardware,
telecommunication and software systems are new, we believe most
of these systems are already year 2000 compliant and we do
not expect internal year 2000 problems to materially affect
us. Nevertheless, because our business relies heavily on the
Internet and on computer and telecommunication systems, including
 those of our suppliers, customers and other third parties, the
year 2000 problem could seriously harm us. Therefore, we
established a year 2000 readiness team to assess the effect
that the year 2000 problem may have on us and to develop a
year 2000 readiness plan.

We have assessed the corporate systems and operations that we
believe could be affected by the year 2000 problem. We have
focused our year 2000 review on three areas:



| |   |                                        
| | - | ---------------------------------------
| |  | information technology infrastructure; 
|
| |  | non-information technology systems; and
|
| |  | third-party compliance.                

Information Technology Infrastructure

Because our consumer and business systems are essential to our
business, our year 2000 team has assessed and evaluated our
information technology systems, including our computers,
hardware, and software systems. As the team has identified
critical computer, hardware, or software information technology
systems that require replacement, upgrade, or modification, we
have made the required replacement, upgrade, or modification
immediately. We use the following information technology for our
internal infrastructure:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | website and Internet ordering systems;                                                                           
|
| |  | main enterprise software systems, including those used for music
	delivery, production, shipping, and accounting;
|
| |  | individual workstations, including personal computers; and                                                       
|
| |  | networking related hardware and software systems.                                                                

We currently believe that all of our critical information
technology systems are year 2000 compliant. In addition, we
are in the process of implementing a new accounting system which
is certified year 2000 compliant by the vendor. We expect
this system to be in place by the end of 1999. We have conducted
and continue to conduct year 2000 compliance testing of our
individual workstations and networking related

16



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Non-Information Technology Systems

Some non-information technology systems used in our business,
including air conditioning, fire sprinkler and telephone systems,
 our facilitys security system, the security system for our
 facilitys campus, and other equipment, may contain
software that is vulnerable to year 2000 problems. The
year 2000 problem could cause failures in these systems
which could disrupt our operations. We have assessed the
year 2000 readiness of many of these systems and equipment
and have determined that all significant non-information
technology systems are year 2000 compliant.

Third-Party Compliance

Our material third party business relationships include:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | customers who place orders for products using the Internet;                 
|
| |  | our Internet service providers; and                                         
|
| |  | vendors and suppliers who provide the goods that we offer to our
	customers.

We are unable to predict, and have not attempted to assess, the
year 2000 readiness of our customers or the systems they use
 to interact with us. Since we take all of our product orders and
 offer most of our artist services over the Internet, our
operations would be harmed if a significant number of our
customers were unable to use the Internet and place orders due to
 year 2000 problems.

We have assessed the year 2000 readiness of our Internet
service providers and the systems they use to interact with us
and determined that they have implemented strategies for becoming
 year 2000 compliant. Our Internet service providers expect
to be year 2000 compliant prior to December 31, 1999.
Since our business is reliant on the ability of our Internet
service providers to direct customers to our website, our
operations would be materially and adversely affected if those
providers were unable to provide their services.

Year 2000 disruptions in the systems or equipment used by
our suppliers could result in our customers being unable to
obtain products and services in a timely manner. We have reviewed
 our vendors year 2000 compliance plans and
statements, and have determined most all are year 2000
compliant.

Most Reasonable Worst Case Scenario

It is possible that year 2000 problems could disrupt one or
more of the following:



| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | customers access to the Internet and their ability to place
	 orders using our website (we believe this is more likely for
	international customers than domestic customers);
|
| |  | artists uploading of music content to our website;                                                                                                                           
|
| |  | the fulfillment of customer orders; and                                                                                                                                       
|
| |  | credit card transactions.                                                                                                                                                     

In the first case, there is no alternative technology available
known to us which would allow us to continue to run our business.
 In the last three cases, there is a less efficient higher cost
alternative which would allow us to continue to run our business.
 In any event, any of these alternatives would result in
increased costs, reduced revenues or service delays, which would
increase our operating losses. Extended disruptions may impact
both short-term and long-term customer and supplier relationships
 and further impact our future profitability.

Costs

Our year 2000 assessment, remediation and testing activities
 have been conducted by internal personnel, and we have not
tracked the amount of employee time expended on these tasks.
Accordingly, we are unable to

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Contingency Plan

In addition to the less efficient higher cost alternatives
discussed above, we are currently developing contingency plans to
 be implemented if we encounter year 2000 problems. We have
completed these plans. However, notwithstanding these plans and
the other efforts of our year 2000 team, we cannot assure
you that we will be year 2000 ready, or that year 2000
problems will not adversely affect our business, financial
condition and results of operations.

Risks Related To Our Business Model



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 through our website, including:



| |   |                                                   
| | - | --------------------------------------------------
| |  | website advertising fees from third parties;      
|
| |  | online sales of CDs and music-related merchandise;
|
| |  | promotional activity fees; and                    
|
| |  | marketing our artist and consumer information.    

Since our business revenue may evolve rapidly, these sources of
revenue may change or increase or decrease in importance, as
well. It is uncertain whether a music-based website that relies
on attracting people to learn about, listen to and download
music, mostly from lesser-known artists, can generate sufficient
revenues to survive. We cannot assure you that this 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 to our website
frequently. We will need to develop new offerings as consumer
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 to our website 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. Accordingly, we are not certain that
 our business model will be successful or that we can sustain
revenue growth or be profitable.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | 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 are 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 these 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. To the extent
that consumer acceptance or distribution of these portable
devices is delayed or these devices are not available at
affordable prices, our market and thus a portion of our revenues,
 may not grow at a sufficient pace and our business could be
harmed.

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

MP3.com was incorporated in March 1998. During 1998, our
operating activities consisted largely of developing the
infrastructure necessary to download music on the Internet. Our
limited operating history makes it difficult to evaluate our
current business and prospects. Due to our limited operating
history, it will be difficult to accurately predict our future
revenues or results of operations. This 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. Operating results may
vary depending on a number of factors, many of which are outside
our control.



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

We currently are experiencing a period of rapid expansion in our
website traffic, personnel, facilities and infrastructure. For
example, the number of daily visitors to our website increased
approximately 89% from December 1998 to
September 1999. Our number of employees increased from eight
 on December 31, 1998 to 253 on October 31, 1999. We
expect further significant expansion will be required to address
potential growth in our artist and consumer bases, the breadth of
 our product and service offerings, and other opportunities. This
 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.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our Continued Reliance On Revenue From Online Advertising May
	Not Provide Sufficient Financial Returns For Our Business To Grow
	 Or Survive.

Although our business model contemplates multiple sources of
revenue, we anticipate that in the foreseeable future we will
depend substantially on revenue from online advertising. In 1998,
 revenue from online advertising accounted for 91% of our net
revenues, and in the third quarter of 1999 accounted
for 49% of our net revenues. We currently depend on a small
group of customers for our revenue from online advertising. In
the third quarter of 1999, one customers accounted for
approximately 12% of net revenues, and our top ten customers
 accounted for approximately 54% of net revenues. If any of
these important customers were to leave us, our business could be
 harmed. 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 our sales force;                                                       
|
| |  | increase the size of the MP3.com audience by increasing both our
	artist and consumer bases;
|
| |  | increase the amount of revenues per advertisement;                                          
|
| |  | target advertisements 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.



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Substantial Portion Of Our Revenues And Revenue Growth For
	At Least The Next Three Years Will Come From Groupe Arnault. If
	This Relationship Is Not Renewed, Or If Other Significant Sources
	 Of Revenue Are Not Developed, We May Not Have Sufficient
	Revenues To Sustain Our Growth And Our Stock Price May Fall.

We have recently entered into a three-year advertising, promotion
 and marketing agreement with Groupe Arnault. We anticipate that
for at least the next three years a substantial portion of our
revenues will come

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| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In Order To Provide Music And Other Content On Our Website, We
	 Rely Heavily On The Contributions Of Artists Who, Over Time, May
	 Be Difficult To Attract And Retain.

Our success depends on having a website that offers high quality
and diverse music choices, all of which come from outside
artists. 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 website 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 website 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 website 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 targeted to
our artist community and generate CD revenues.



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

Although most of the artists that post music on our website are
not bound by record contracts, some artists, including most
internationally-recognized artists, typically sign multi-year
exclusive recording contracts that may prevent them from posting
music on our website. To post music on our website, these artists
 must typically get permission from their record company. As a
result, our access to internationally-recognized artists and our
ability to distribute this music or place their music on our
website and on our CDs are limited. For this reason, and because
of the emphasis of our business model on underserved artists, we
expect our music to continue to concentrate principally on
lesser-known and local artists. 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. Mp3
is an open standard adopted by the Moving Picture Experts Group
that makes music files smaller. 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, some of the major recording
 studios have recently announced a plan to develop a universal
standard for the electronic delivery of music, called the

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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 can support 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 website, our brand identity is currently linked to the mp3
technology. As a result, we may 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.



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

Given the online nature of our business, 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 website 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, for providing
 reliable Internet access and services. Because global commerce
on the Internet and the online exchange of information is new and
 evolving, we cannot predict whether the Internet will prove to
be a viable commercial marketplace in the long term. The success
of our business will rely on the continued improvement of the
Internet 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 website. 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. The Internet has experienced, and is likely to continue
to experience, significant growth in the numbers of users and
amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and

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| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. For example, in June 1999 we
entered into a joint venture with Cox Interactive Media to create
 and operate music-related websites. We cannot assure you that
this joint venture or any other business partnership will be
successful. In addition, in July 1999 we entered into an
agreement with Groupe Arnault under which Groupe Arnault had an
exclusive right through December 1999 to negotiate the terms of a
 joint venture with us covering the territories of Europe and
Asia which was extended until November 18, 1999. We cannot
guarantee that we and Groupe Arnault will establish this joint
venture or that, if established, this joint venture will be
successful and provide us with desired international presence or
branding. 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 partnership
 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 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 incurring debt or
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.

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 are not 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
holiday-based buying and the business cycles of the music
industry and of Internet commerce in general. 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 drop.



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

In 1998, we had a net loss of approximately $360,000. During the
first nine months of 1999, we had a net loss of approximately
$27.6 million. We expect substantial net losses and negative
 cash flow for the foreseeable

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

Our available cash and equivalents and short and long-term
investments in marketable securities are expected to be
sufficient to meet our cash requirements for at least the next
12 months. However, we may need to raise additional funds in
 order to:



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | finance unanticipated working capital requirements;                  
|
| |  | 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. 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 services or products or
otherwise respond to competitive pressures would be significantly
 limited. If we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced, and these securities may have
rights, preferences or privileges senior to those of our
stockholders.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in quarterly operating results;                                                                    
|
| |  | announcements of technological innovations;                                                                                         
|
| |  | new products or services offered by us or our competitors;                                                                          
|
| |  | changes in financial estimates 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; and                                                                                                          
|
| |  | other events or factors, may of which are beyond our control.                                                                       

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. 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 such companies. Such litigation, if instituted, 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.

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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Substantial Future Sales of MP3.coms Common Stock in the
	 Public Market Could Cause Its 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. As of
September 30, 1999, we have 68,376,920 shares of common
stock outstanding, of which approximately 10,350,000 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. The officers and directors and all of our
existing stockholders have agreed with Credit Suisse First Boston
 or have otherwise agreed with us not to sell or otherwise
dispose of any of their shares until January 17, 2000.

However, Credit Suisse First Boston may, in its sole discretion,
at any time without notice, release all or any portion of the
shares subject to lock-up agreements. 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.

In July 1999 we filed a registration statement on Form S-8
with the Securities and Exchange Commission covering the
7,606,781 shares of common stock reserved for issuance under our
1998 Equity Incentive Plan and 1999 Employee Stock Purchase Plan
and for options issued outside such plans. On January 17,
2000 at least 1,780,000 shares, most of which have been exercised
 on or before September 30, 1999, will no longer be
restricted under the lock-up agreements. These shares could be
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. Sales of a large number of shares could have an
adverse effect on the market price for our common stock.

On January 17, 2000, holders of 34,536,187 shares of common
stock, of which 17,088,152 have certain registration rights, will
 be released from their lock-up agreements with Credit Suisse
First Boston Corporation. These shares could become available for
 sale in the public market under Rule 144 or Rule 701.
Additionally, 10% of the 3,347,233 shares purchased by Arkaro
Holding B.V. will be available to sale to the public market on
January 21, 2000, with an additional 10% becoming eligible
on the 21st day of each of the next five months. 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, Marketing And Competition



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | 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 word of mouth. We have benefited
from frequent and visible national and local media exposure. The
frequency or quality of this media exposure may not continue. 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

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| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail To Collect Accurate And Useful Data About Our
	Consumers, Potential Advertisers May Not Advertise On Our
	Website, 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 website. 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 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 89% of our total revenues
 during the first nine months of 1999. 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.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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. We
cannot assure you that websites maintained 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
website 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.

Risks Related To Operations



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | 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 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. Competition for these
personnel is intense, especially for engineers, web designers and
 advertising sales personnel, and we may be unable to
successfully

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| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We Must Continue To Upgrade Our Technology Infrastructure, Or
	We Will Be Unable To Effectively Meet Demand On Our Website.

In May 1999, an average of approximately 20 gigabytes of musical
content was added to our website each week and traffic to the
site increased by approximately 14% from the previous month. We
must continue to add hardware and enhance software to accommodate
 the increased content and use of our website. 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 website 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 website and reduce future revenues.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our New Financial Accounting System And Other Internal Systems
	 May Not Work Effectively And As A Result We May Not Have The
	Information We Need To Record Transactions And Meet Our
	Accounting And Reporting Obligations, Which In Turn Could Affect
	Our Ability To Run Our Business Efficiently Or Profitably.

In May 1999, we began installing a new financial accounting
system. We anticipate this installation will be completed in
stages through the remainder of 1999. If the accounting system
does not work effectively, we may experience delays or failures
in our accounting processes. This could adversely impact the
promptness and accuracy of our transaction processes, and our
financial accounting and reporting. To manage the expected growth
 of our operations and personnel, we will need to improve our
operational and financial systems, transaction processing,
procedures and controls. Our current and planned systems,
transaction processing, procedures and controls may not be
adequate to support future operations.



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

Since our data warehousing, web server and network facilities are
 all located in Southern 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 two
Internet service providers facilities could cause the loss
of critical data and prevent us from offering our services to
artists and consumers. Our business interruption insurance may
not adequately compensate us for losses that may occur. 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 website.



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | We May Lose Visitors To Our Website 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 website
which 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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| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Year 2000 Problems Could Lead To Malfunctions Of Our Computer
	And Communications Systems, And Prevent Us From Running Our
	Business.

Many existing computer programs cannot distinguish between a year
 beginning with 20 and a year beginning with
19 because they use only the last two digits to refer
 to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result,
these programs may malfunction or fail completely. If we or any
third parties with whom we have a material relationship fail to
achieve year 2000 readiness, our business may be seriously
harmed. In particular, year 2000 problems could temporarily
prevent us from offering our goods and services.

Risks Related To Government Regulation, Content and
Intellectual Property



| |                                                                         
| | ------------------------------------------------------------------------
| | 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. Evolving areas of law that are relevant to our business
 include privacy law, proposed encryption laws, content
regulation and sales and use tax laws and regulations. Because of
 this rapidly evolving and uncertain regulatory environment, 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 Website And On the CDs We
	Distribute.

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



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the music, text, graphics, software or other content on our
	website or CDs violates their copyright, trademark, or other
	intellectual property rights;
|
| |  | if our artists violate their contractual obligations to others by
	 providing content on our website or CDs; or                                            
|
| |  | if anything on our website or CDs is deemed obscene, indecent or
	defamatory.                                                                              

We may also be liable for anything that is accessible from our
website through links to other websites. 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 website 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. See
Business  Intellectual Property.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. We do not have a registered trademark
for the MP3.com name and 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. In addition, our ability to
conduct our business may be harmed if others claim we violate
their intellectual property rights. For example, Sightsound.com,
Inc. has asserted that many online music providers, including
MP3.com, violate patent rights that it allegedly owns covering
the sale of music over the Internet through digital downloads. 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

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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, short-term and
long-term investments in a variety of securities, including both
government and corporate obligations.

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 December 31, 1998 or
September 30, 1999.

The following table presents the fair value balances of our cash
equivalents and short-term and long-term investments that are
subject to interest rate risk by year of expected maturity and
average interest rates as of September 30, 1999 (dollars in
thousands):

|                                                    |                        |      |             |      |   |      |             |      |   |   |           |      |  
|--------------------------------------------------- | ---------------------- | ---- | ----------- | ---- | - | ---- | ----------- | ---- | - | - | --------- | ---- | -
|                                                    |                        | 1999 |             | 2000 |   | 2001
|                                                    |                        |      |             |      |   |     
|Cash equivalents                                    |                        | $    | 160,871,000 |      |   | $    |            |      |   | $ |          |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Average interest rates |      |             | 5.40 | % |      |             |      |   |   |           |      |  
|                                                   
|                                                   
|                                                   
|                                                   
|Shot term investments                               |                        | $    |            |      |   | $    | 279,851,000 |      |   | $ |          |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Average interest rates |      |             |      |   |      |             | 5.87 | % |   |           |      |  
|                                                   
|                                                   
|                                                   
|                                                   
|Long term investments, excluding equity investments |                        | $    |            |      |   | $    |            |      |   | $ | 4,971,000 |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Average interest rate  |      |             |      |   |      |             |      |   |   |           | 6.31 | %

We did not hold derivative financial instruments as of
September 30, 1999, and we have never held such instruments
in the past. In addition, we had outstanding debt as of
September 30, 1999 of approximately $1.2 million.

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PART II  OTHER INFORMATION




Item 2. Changes in Securities and Uses of Proceeds

Changes in securities

On July 16, 1999, the Company filed an amendment to and
restatement of the Companys Certificate of Incorporation
effecting a three-for-two stock split of the Companys
outstanding common stock and adopting certain anti-takeover and
stockholder protection mechanisms.

On July 28, 1999, the Company filed an amendment to and
restatement of the Companys Certificate of Incorporation
removing all references to the Companys Series A, B
and C preferred stock.

Recent Sales of Unregistered Securities

On May 12, 1999, the Company and Boutit, Inc., d/b/a No
Limit Records, entered into a strategic partnership pursuant to a
 binding Memorandum of Agreement. Pursuant to this agreement, No
Limit is bound to provide website content to the Company and
perform promotional and other activities and the Company issued
89,286 shares of common stock to Boutit, Inc., an accredited
investor, at $28.00 per share in a private placement concurrent
with the closing of the Companys IPO. The Company relied
upon the exemption provided by Section 4(2) under the
Securities Act and Regulation D promulgated thereunder.

Use of Proceeds

The effective date of the Companys first registration
statement on Form S-1 under the Securities and Exchange Act
of 1933 (No. 333-78545) relating to the Companys
initial public offering of its common stock, was July 20,
1999. A total of 13,697,233 shares of the Companys common
stock in the aggregate were sold at a price of $28.00 per share
to (i) an underwriting syndicate led by Credit Suisse First
Boston, Hambrecht & Quest, and BancBoston Robertson Stephens,
 Inc. and (ii) Arkaro Holding B.V. The offering commenced on
 July 21, 1999, and closed on July 26, 1999. The
initial public offering resulted in gross proceeds of
approximately $383.5 million, of which $20.3 million
was applied toward the underwriting discount. Expenses related to
 the offering totaled approximately $1.9 million. Net
proceeds to the Company were $361.3 million. From the time
of receipt through September 30, 1999, the net proceeds were
 all applied to temporary investments in corporate commercial
paper and notes, municipal bonds and notes.




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

During the quarter ended September 31, 1999, the Company
solicited the consent of stockholders for the following matters:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  On July 13, 1999, in an action by written consent,
	 the Stockholders approved an amendment to the Companys
	Certificate of Incorporation to become effective prior to the
	Companys IPO effecting a stock split, approved an amendment
	 to the Companys Certificate of Incorporation to become
	effective after the Companys IPO removing all references to
	 the series A, B and C preferred stock, and approved an
	amendment to the Companys bylaws. Stockholders holding
	25,337,010 shares of common stock and 14,736,000 shares of
	preferred stock consented to this action;
|
| | (2)  On July 13, 1999, in an action by written consent,
	 the Stockholders approved an amendment to the Companys
	1998 Equity Incentive Plan and approved the Companys 1999
	Employee Stock Purchase Plan and related offering documents.
	Stockholders holding 27,642,811 shares of common stock and
	14,736,000 shares of preferred stock consented to this action;
	and                                                                                                                                                                                                                   
|
| | (3)  On July 20, 1999, in an action by written consent,
	 the Stockholders approved an amendment to the Companys
	Certificate of Incorporation amending the Companys 1998
	Stock Option Plan to reduce the minimum exercise price for
	incentive stock options to 50% of the fair market value of the
	Companys Common Stock on the date of grant. Stockholders
	holding 27,324,061 shares of common stock and 10,987,012 shares
	of preferred stock consented to this action.                                                                                                              

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Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:



| |                |                                                                                               
| | -------------- | ----------------------------------------------------------------------------------------------
| | Exhibit 10.1  | Sublease by and between the Company and ADC Wireless Systems, Inc
	 dated as of July 22, 1999.

Exhibit 27.1  Financial Data Schedule

(b)  Reports on Form 8-K:

None

30



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##### Table of Contents



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:  November 12, 1999



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

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

31