##### 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 quarterly period ended September 30, 2000

Commission File Number 000-26697

MP3.com, Inc.

(Exact name of registrant as specified in its
charter)


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

(858) 623-7000

(Registrants telephone number, including
area code)


N/A

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


Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past ninety
days.  Yes  [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, 68,469,793 shares
outstanding as of September 30, 2000.

This report contains 49 pages.



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---

TABLE OF CONTENTS



|                                                     |                                                                                                           |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                     
|                                                     | Item 1.Consolidated Financial Statements                                                                 
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                     | Item 2.Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations
|                                                     | Item 3.Quantitative and Qualitative Disclosures about Market Risk                                        
|PART II -- OTHER INFORMATION                        
|                                                     | Item 1.Legal Proceedings                                                                                 
|Item 2.Changes in Securities and Use of Proceeds    
|                                                     | Item 4.Submission of Matters to a Vote of Security Holders                                               
|                                                     | Item 5.Other Information                                                                                 
|                                                     | Item 6.Exhibits and Reports on Form 8-K                                                                  
|SIGNATURES                                          
|Exhibit 10.17                                       
|Exhibit 10.28                                       
|Exhibit 10.29                                       
|Exhibit 10.30                                       
|Financial Data Schedule                             



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MP3.COM, INC.

FORM 10-Q

For the Quarter Ended September 30, 2000


INDEX

|                                                                                                            |  |      |    | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                            |  | Page
|                                                                                                            |  |     
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|PART I  FINANCIAL INFORMATION                                                                             
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 1. Consolidated Financial Statements                                                                   |  |      | 1  | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 2. Managements Discussion and Analysis of
	Consolidated Financial Condition and Results of Operations |  |      | 12 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 3. Quantitative and Qualitative Disclosures about
	Market Risk                                         |  |      | 42 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|PART II  OTHER INFORMATION                                                                                
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 1. Legal Proceedings                                                                                   |  |      | 43 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 2. Changes in Securities and Use of Proceeds                                                           |  |      | 46 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 4. Submission of Matters to a Vote of Security
	Holders                                                |  |      | 46 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 5. Other Information                                                                                   |  |      | 46 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Item 6. Exhibits and Reports on Form 8-K                                                                    |  |      | 48 | 

i



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements

MP3.COM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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


ASSETS

|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |         |         | 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                        |                                                                                                                                                                                                                               | September 30,              |         | December 31,
|                                                        |                                                                                                                                                                                                                               | 2000                       |         | 1999        
|                                                        |                                                                                                                                                                                                                               |                            |         |             
|                                                        |                                                                                                                                                                                                                               | (Unaudited)                |         |             
|                                                       
|                                                       
|                                                       
|                                                       
|Current assets:                                         |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Cash and cash equivalents                                                                                                                                                                                                     |                            | $       | 183,211      |         |   | $       | 193,192 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Marketable securities                                                                                                                                                                                                         |                            |         | 52,775       |         |   |         | 220,039 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Short-term investments                                                                                                                                                                                                        |                            |         | 5,647        |         |   |         | 14,750  |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts receivable, net                                                                                                                                                                                                      |                            |         | 5,704        |         |   |         | 6,871   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Unbilled receivables                                                                                                                                                                                                          |                            |         | 2,545        |         |   |         | 1,279   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Prepaid expenses                                                                                                                                                                                                              |                            |         | 6,075        |         |   |         | 2,878   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other current assets                                                                                                                                                                                                          |                            |         | 513          |         |   |         | 3,456   |        
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                        |                                                                                                                                                                                                                               | Total current assets       |         |              | 256,470 |   |         |         | 442,465 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, net of accumulated depreciation |                                                                                                                                                                                                                               |                            | 19,884  |              |         |   | 13,849  |        
|                                                       
|                                                       
|                                                       
|                                                       
|Strategic investments                                   |                                                                                                                                                                                                                               |                            | 18,750  |              |         |   | 11,983  |        
|                                                       
|                                                       
|                                                       
|                                                       
|Prepaid marketing and promotions expense                |                                                                                                                                                                                                                               |                            | 3,999   |              |         |   | 2,162   |        
|                                                       
|                                                       
|                                                       
|                                                       
|Prepaid multimedia content royalties                    |                                                                                                                                                                                                                               |                            | 35,500  |              |         |   |        |        
|                                                       
|                                                       
|                                                       
|                                                       
|Other non-current assets                                |                                                                                                                                                                                                                               |                            | 7,362   |              |         |   | 1,423   |        
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                        |                                                                                                                                                                                                                               | Total assets               |         | $            | 341,965 |   |         | $       | 471,882 | 
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|                                                       
|                                                       
|                                                       
|                                                       
|Current liabilities:                                    |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts payable                                                                                                                                                                                                              |                            | $       | 4,384        |         |   | $       | 5,659   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Line of credit                                                                                                                                                                                                                |                            |         |             |         |   |         | 1,234   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accrued expenses                                                                                                                                                                                                              |                            |         | 17,716       |         |   |         | 5,019   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred revenues                                                                                                                                                                                                             |                            |         | 16,831       |         |   |         | 42,361  |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Reserve for litigation and copyright matters                                                                                                                                                                                  |                            |         | 116,885      |         |   |         |        |        
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                        |                                                                                                                                                                                                                               | Total current liabilities  |         |              | 155,816 |   |         |         | 54,273  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Other liabilities                                       |                                                                                                                                                                                                                               |                            | 350     |              |         |   | 59      |        
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity:                                   |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, par value $0.001 per share; 15,000,000
	authorized at September 30, 2000 and December 31, 1999;
	 none issued and outstanding at September 30, 2000 and
	December 31, 1999                                   |                            |         |             |         |   |         |        |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common stock, par value $0.001 per share; 300,000,000 authorized
	at September 30, 2000 and December 31, 1999; 68,469,793
	 and 68,620,913 issued and outstanding at September 30, 2000
	 and December 31, 1999, respectively |                            |         | 68           |         |   |         | 69      |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid in capital                                                                                                                                                                                                    |                            |         | 478,921      |         |   |         | 477,272 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Note receivable from stockholder                                                                                                                                                                                              |                            |         | (258         | )       |   |         | (258    | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred compensation                                                                                                                                                                                                         |                            |         | (6,154       | )       |   |         | (18,148 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated other comprehensive (loss) income                                                                                                                                                                                 |                            |         | (34          | )       |   |         | 1,454   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated deficit                                                                                                                                                                                                           |                            |         | (286,744     | )       |   |         | (42,839 | )      
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                        |                                                                                                                                                                                                                               | Total stockholders equity |         |              | 185,799 |   |         |         | 417,550 | 
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        
|                                                        |                                                                                                                                                                                                                               | $                          | 341,965 |              |         | $ | 471,882 |        
|                                                        |                                                                                                                                                                                                                               |                            |         |              |         |   |         |        

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

1



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##### Table of Contents



MP3.COM, INC.






CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


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


(Unaudited)


|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |            |       |        | 
|----------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ----------------- | ------ | ------------- | ------- | ------------- | ----- | ------ | -------- | ---------- | ------ | ------- | ------- | ---------- | ----- | ------ | 
|                                                                                                      |                                                                                                                                   |                    |                          |                  
|                                                                                                      |                                                                                                                                   | Three Months Ended |                          | Nine Months Ended
|                                                                                                      |                                                                                                                                   |                    |                          |                  
|                                                                                                      |                                                                                                                                   | September 30,      |                          | September 30,     |        | September 30, |         | September 30,
|                                                                                                      |                                                                                                                                   | 2000               |                          | 1999              |        | 2000          |         | 1999         
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |              
|Net revenues                                                                                          |                                                                                                                                   | $                  | 20,459                   |                   |        | $             | 4,051   |               |       | $      | 58,132   |            |        | $       | 6,628   |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Cost of revenues (excludes deferred compensation amortization of
	$, $153, $128, $162, respectively) |                                                                                                                                   |                    | 3,746                    |                   |        |               | 1,687   |               |       |        | 11,314   |            |        |         | 2,704   |           
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|                                                                                                      |                                                                                                                                   | Gross profit       |                          |                   | 16,713 |               |         |               | 2,364 |        |          |            | 46,818 |         |         |            | 3,924 |       
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Operating expenses:                                                                                   |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Sales and marketing (excludes deferred compensation amortization
	of $485, $6,371, $1,495, $7,277, respectively)                  |                    |                          | 14,029            |        |               |         | 8,897         |       |        |          | 42,992     |        |         |         | 12,227     |      
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Engineering and product development (excludes deferred
	compensation amortization of $507, $1,469, $1,981, $1,912,
	respectively) |                    |                          | 6,067             |        |               |         | 2,373         |       |        |          | 17,471     |        |         |         | 3,444      |      
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | General and administrative (excludes deferred compensation
	amortization of $468, $4,377, $4,193, $6,481, respectively)           |                    |                          | 8,896             |        |               |         | 3,110         |       |        |          | 23,255     |        |         |         | 4,874      |      
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Charge related to litigation and copyright matters                                                                                |                    |                          | 20,000            |        |               |         |              |       |        |          | 170,000    |        |         |         |           |      
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Costs related to acquisition activities                                                                                           |                    |                          |                  |        |               |         |              |       |        |          | 1,704      |        |         |         |           |      
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Amortization of deferred and other stock-based compensation                                                                       |                    |                          | 1,460             |        |               |         | 12,370        |       |        |          | 7,796      |        |         |         | 15,833     |      
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|                                                                                                      |                                                                                                                                   |                    | Total operating expenses |                   |        | 50,452        |         |               |       | 26,750 |          |            |        | 263,218 |         |            |       | 36,378 | 
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|Loss from operations                                                                                  |                                                                                                                                   |                    | (33,739                  | )                 |        |               | (24,386 | )             |       |        | (216,400 | )          |        |         | (32,454 | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Interest income, net                                                                                  |                                                                                                                                   |                    | 4,039                    |                   |        |               | 4,517   |               |       |        | 14,833   |            |        |         | 4,836   |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Impairment of strategic investments                                                                   |                                                                                                                                   |                    | (19,000                  | )                 |        |               |        |               |       |        | (40,670  | )          |        |         |        |           
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|Loss before minority interest                                                                         |                                                                                                                                   |                    | (48,700                  | )                 |        |               | (19,869 | )             |       |        | (242,237 | )          |        |         | (27,618 | )         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Minority interest in loss of an unconsolidated subsidiary                                             |                                                                                                                                   |                    |                         |                   |        |               |        |               |       |        | (1,668   | )          |        |         |        |           
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|Net loss                                                                                              |                                                                                                                                   | $                  | (48,700                  | )                 |        | $             | (19,869 | )             |       | $      | (243,905 | )          |        | $       | (27,618 | )         
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|Net loss per share:                                                                                   |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Basic and diluted                                                                                                                 |                    | $                        | (0.74             | )      |               | $       | (0.33         | )     |        | $        | (3.70      | )      |         | $       | (0.54      | )    
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           
|                                                                                                      | Weighted average shares  basic and diluted                                                                                       |                    |                          | 65,989,000        |        |               |         | 60,333,000    |       |        |          | 65,851,000 |        |         |         | 51,153,000 |      
|                                                                                                      |                                                                                                                                   |                    |                          |                   |        |               |         |               |       |        |          |            |        |         |         |           

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

2



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##### Table of Contents



MP3.COM, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)


|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |        |        |        | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------------- | ------------- | ------- | ------- | -------- | ------ | ------ | ------ | 
|                                                                                       |                                                                           |                                                                  
|                                                                                       |                                                                           | Nine Months Ended                                                
|                                                                                       |                                                                           |                                                                  
|                                                                                       |                                                                           | September 30,                                                     |                                                 | September 30,
|                                                                                       |                                                                           | 2000                                                              |                                                 | 1999         
|                                                                                       |                                                                           |                                                                   |                                                 |              
|Operating activities:                                                                  |                                                                           |                                                                   |                                                 |               |         |         |          |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss                                                                               |                                                                           | $                                                                 | (243,905                                        | )             |         | $       | (27,618  | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Adjustments to reconcile net loss to cash (used in) provided by
	operating activities: |                                                                           |                                                                   |                                                 |               |         |         |          |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Depreciation and amortization of goodwill                                 |                                                                   |                                                 | 5,513         |         |         |          | 470    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Stock-based charges associated with acceleration of stock option
	vesting |                                                                   |                                                 | 6,471         |         |         |          | 1,093  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Amortization of stock based marketing                                     |                                                                   |                                                 | 3,142         |         |         |          | 2,524  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Amortization of deferred and other stock based compensation               |                                                                   |                                                 | 7,846         |         |         |          | 16,970 |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Loss on sale of fixed assets                                              |                                                                   |                                                 | 90            |         |         |          |       |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Impairment of strategic investments                                       |                                                                   |                                                 | 40,670        |         |         |          |       |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Charge for litigation and copyright matters                               |                                                                   |                                                 | 170,000       |         |         |          |       |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Charge associated with facility relocation costs                          |                                                                   |                                                 |              |         |         |          | 815    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Deferred income taxes                                                     |                                                                   |                                                 |              |         |         |          | (98    | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Changes in operating assets and liabilities:                              |                                                                   |                                                 |               |         |         |          |        |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Accounts receivable                                               |                                                 |               | 1,166   |         |          |        | (1,515 | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Unbilled receivables                                              |                                                 |               | (1,266  | )       |          |        | (716   | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Prepaid expenses and other current assets                         |                                                 |               | (2,280  | )       |          |        | (6,040 | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Accounts payable                                                  |                                                 |               | (1,276  | )       |          |        | 3,399  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Accrued expenses and reserve for litigation and copyright matters |                                                 |               | (40,356 | )       |          |        | 3,235  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                                           | Deferred revenue                                                  |                                                 |               | (25,530 | )       |          |        | 45,320 |       
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       
|                                                                                       |                                                                           |                                                                   | Cash (used in) provided by operating activities |               |         | (79,715 | )        |        |        | 37,839 | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Investing activities:                                                                  |                                                                           |                                                                   |                                                 |               |         |         |          |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Purchase of property and equipment                                                     |                                                                           |                                                                   | (10,620                                         | )             |         |         | (8,248   | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Maturities (purchases) of marketable securities, net                                   |                                                                           |                                                                   | 167,176                                         |               |         |         | (284,841 | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Purchases of strategic investments                                                     |                                                                           |                                                                   | (39,738                                         | )             |         |         |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Acquisition of MP3Radio.com, net of cash acquired                                      |                                                                           |                                                                   | (3,816                                          | )             |         |         |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Issuance of note receivable                                                            |                                                                           |                                                                   | (4,000                                          | )             |         |         |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Prepaid multimedia content royalties                                                   |                                                                           |                                                                   | (35,500                                         | )             |         |         |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other assets                                                                           |                                                                           |                                                                   | (1,861                                          | )             |         |         | (5,299   | )     
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       
|Cash provided by (used in) investing activities                                        |                                                                           |                                                                   | 71,641                                          |               |         |         | (298,388 | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Financing activities:                                                                  |                                                                           |                                                                   |                                                 |               |         |         |          |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Payments under capital lease obligation                                                |                                                                           |                                                                   |                                                |               |         |         | (14      | )     
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from issuance of Series A, B, and C convertible
	preferred stock              |                                                                           |                                                                   |                                                |               |         |         | 60,577   |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from exercise of stock options for common stock and the
	sale of common stock |                                                                           |                                                                   | 1,725                                           |               |         |         | 365,402  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Repurchase of unvested common stock                                                    |                                                                           |                                                                   | (2,400                                          | )             |         |         |         |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|(Payments) proceeds on line of credit                                                  |                                                                           |                                                                   | (1,234                                          | )             |         |         | 1,234    |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Translation adjustment                                                                 |                                                                           |                                                                   | 2                                               |               |         |         |         |       
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       
|Cash (used in) provided by financing activities                                        |                                                                           |                                                                   | (1,907                                          | )             |         |         | 427,199  |       
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       
|(Decrease) increase in cash and cash equivalents                                       |                                                                           |                                                                   | (9,981                                          | )             |         |         | 166,650  |       
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cash and cash equivalents at beginning of period                                       |                                                                           |                                                                   | 193,192                                         |               |         |         | 39       |       
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       
|Cash and cash equivalents at end of period                                             |                                                                           | $                                                                 | 183,211                                         |               |         | $       | 166,689  |       
|                                                                                       |                                                                           |                                                                   |                                                 |               |         |         |          |       

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

3



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##### Table of Contents



MP3.COM, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1  The Company and Summary of Significant
Accounting Policies

The Company

MP3.com, Inc. (MP3.com) has created what it believes
is a unique and robust technology infrastructure for the storage,
 management, promotion and delivery of digital music. As the
Internets premier Music Service Provider (MSP),
 MP3.com is dedicated to providing consumers with anytime,
anywhere access to their music using any web-enabled device.
MP3.coms web site hosts what MP3.com believes is the
largest collection of digital music available on the Internet,
with more than 600,000 songs and audio files posted from over
100,000 digital artists and record labels. Dedicated to growing
the digital music space, MP3.coms products and services
include on-demand Subscription Music Channels, an innovative
Retail Music Program, a Syndicated Radio Division and others.
Additionally, through MP3.coms MSP initiative, MP3.com is
partnering with a variety of forward-looking technology companies
 to expand its digital music strategy. MP3.com shares are traded
on the Nasdaq National Market System under the symbol
MPPP. MP3.com was incorporated in the state of
Delaware on March 17, 1998 and commenced operations on that
date. MP3.com is headquartered in San Diego, California.

Basis of Presentation

The accompanying condensed consolidated financial statements as
of September 30, 2000 and for the three and nine months
ended September 30, 2000 and 1999 are unaudited and have
been prepared by MP3.com pursuant to the rules and regulations of
 the Securities and Exchange Commission (SEC). The
unaudited consolidated financial statements have been prepared on
 the same basis as MP3.coms 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
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to such SEC rules and regulations. The consolidated
statements of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the
results which may be reported for any other interim period or for
 the year ending December 31, 2000. Certain prior period
amounts have been reclassified to conform to the current period
presentation.

Principles of Consolidation

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

Use of Estimates

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

4



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

provisions for returns, bad debts, valuation of privately-held
strategic investments and the litigation and copyright matters
charge and reserve. Actual results may differ from these
estimates.

Net Loss Per Share

MP3.com computes net loss per share following SFAS No. 128,
Earnings Per Share and SEC Staff Accounting Bulletin
No. 98 (SAB 98). Under the provisions of
SFAS No. 128, basic net 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, and incremental common shares issuable upon the
exercise of stock options 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
diluted net loss per share for the three and nine months ended
September 30, 2000 and 1999 because the effect would be
anti-dilutive.

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

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

|                                              |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |            |  
|--------------------------------------------- | ------------------------------------------------------------------------- | ------------------ | ---------- | ----------------- | - | ------------- | ---------- | ------------- | - |  | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                              |                                                                           |                    |            |                  
|                                              |                                                                           | Three Months Ended |            | Nine Months Ended
|                                              |                                                                           |                    |            |                  
|                                              |                                                                           | September 30,      |            | September 30,     |   | September 30, |            | September 30,
|                                              |                                                                           | 2000               |            | 1999              |   | 2000          |            | 1999         
|                                              |                                                                           |                    |            |                   |   |               |            |              
|Numerator:                                    |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss                                                                  |                    | $          | (48,700           | ) |               | $          | (19,869       | ) |  | $          | (234,905   | ) |  | $          | (27,618    | )
|                                              |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|Denominator:                                  |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                       |                    |            | 68,354,000        |   |               |            | 65,235,000    |   |  |            | 68,087,000 |   |  |            | 56,174,000 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject to repurchase
	agreements |                    |            | (2,365,000        | ) |               |            | (4,902,000    | ) |  |            | (2,236,000 | ) |  |            | (5,021,000 | )
|                                              |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|Denominator for basic and diluted calculation |                                                                           |                    | 65,989,000 |                   |   |               | 60,333,000 |               |   |  | 65,851,000 |            |   |  | 51,153,000 |           
|                                              |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|Net loss per share:                           |                                                                           |                    |            |                   |   |               |            |               |   |  |            |            |   |  |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                         |                    | $          | (0.74             | ) |               | $          | (0.33         | ) |  | $          | (3.70      | ) |  | $          | (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
4,705,000 and 5,752,000 common shares for the three and nine
months ended September 30, 2000, 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

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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

arrive at comprehensive income. There were no differences between
 MP3.coms net loss and its total comprehensive loss for the
 nine months ended September 30, 2000, except for unrealized
 loss on investments of approximately $34,000.

Segment Information

MP3.com has adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires public companies to report
financial and descriptive information about their reportable
operating segments. MP3.com identifies its operating segments
based on how management internally evaluates separate financial
information (if available), business activities and management
responsibility. MP3.com believes it operates in a single business
 segment. Through September 30, 2000, there were no
significant foreign operations.

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

|            |  |                    |        |                   |  |      |       |      |  |   |        |  |  |   |       | 
|----------- |  | ------------------ | ------ | ----------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ----- | 
|            |  |                    |        |                  
|            |  | Three Months Ended |        | Nine Months Ended
|            |  | September 30,      |        | September 30,    
|            |  |                    |        |                  
|            |  | 2000               |        | 1999              |  | 2000 |       | 1999
|            |  |                    |        |                   |  |      |       |     
|Advertising |  | $                  | 19,770 |                   |  | $    | 3,638 |      |  | $ | 56,024 |  |  | $ | 5,875 | 
|           
|           
|           
|           
|Merchandise |  |                    | 689    |                   |  |      | 413   |      |  |   | 2,108  |  |  |   | 753   | 
|            |  |                    |        |                   |  |      |       |      |  |   |        |  |  |   |       | 
|            |  | $                  | 20,459 |                   |  | $    | 4,051 |      |  | $ | 58,132 |  |  | $ | 6,628 | 
|            |  |                    |        |                   |  |      |       |      |  |   |        |  |  |   |       | 

Supplemental cash flow disclosures are as follows
(in thousands):

|                                                                                            |  |                   |       |      |  |   |       | 
|------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ---- |  | - | ----- | 
|                                                                                            |  |                  
|                                                                                            |  | Nine Months Ended
|                                                                                            |  | September 30,    
|                                                                                            |  |                  
|                                                                                            |  | 2000              |       | 1999
|                                                                                            |  |                   |       |     
|Supplemental disclosures of cash flow information:                                          |  |                   |       |      |  |   |       | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Interest paid                                                                               |  | $                 | 75    |      |  | $ | 89    | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Taxes paid                                                                                  |  | $                 |      |      |  | $ | 168   | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Supplemental schedule of non-cash financing activities:                                     |  |                   |       |      |  |   |       | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Stock based compensation associated with the acceleration of
	stock option vesting          |  | $                 | 6,471 |      |  | $ | 1,093 | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Unrealized loss on marketable securities, net                                               |  | $                 | 1,490 |      |  | $ |      | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Forfeiture of stock options                                                                 |  | $                 | 4,197 |      |  | $ |      | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Common stock issued for notes receivable                                                    |  | $                 |      |      |  | $ | 338   | 
|                                                                                            |  |                   |       |      |  |   |       | 
|Cancellation of stockholder notes 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   | 
|                                                                                            |  |                   |       |      |  |   |       | 

Note 2  Legal Proceedings

Record Label Lawsuits.On January 21, 2000, ten major
 recording companies filed a copyright infringement lawsuit
against MP3.com in the United States District Court for the
Southern District of New York. The complaint alleged that
MP3.com, in connection with certain content available in its
My.MP3.com service, made unauthorized copies of tens of thousands
 of audio CDs in violation of the Copyright Act. On
April 28, 2000, the court granted plaintiffs motion
for summary judgment and held that MP3.com was liable for
infringing plaintiffs copyrights, and the litigation
proceeded with discovery on the issues of willfulness and

6



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

damages. On May 10, 2000, MP3.com voluntarily disabled the
plaintiffs content within the My.MP3.com service.

Between June and August 2000, MP3.com entered into settlement and
 license agreements with Warner Music Group, BMG Entertainment,
Sony Music and Capitol Records, Inc. (EMI), which together
represented eight of the ten major recording companies that filed
 the copyright infringement lawsuit on January 21, 2000. The
 settlement agreements provide for a settlement amount to be paid
 in cash by MP3.com in exchange for a release from the settling
plaintiffs and their affiliated entities (as defined in the
settlement agreements) of all claims related to the
January 21, 2000 lawsuit and the My.MP3.com service.
Most-favored-nations provisions in these settlement agreements
require additional settlement amounts to be paid under certain
circumstances. MP3.com made no admission of wrongdoing in
connection with these settlements. Subject to certain affirmative
 obligations of MP3.com and other terms and conditions regarding
the implementation of the My.MP3.com service, the license
agreements permit MP3.com to utilize recordings owned by Warner
Music Group, BMG Entertainment, Sony Music and EMI as part of the
 My.MP3.com service. The license agreements have terms of
approximately three to ten years, and provide for on-going
royalty payments based on the greater of (i) a specified
percentage of net revenues generated from the My.MP3.com service
or (ii) a specified amount accrued each time a licensor
recording is streamed from My.MP3.com. In addition, the licenses
provide for on-going royalty payments based on the number of
times a licensor recording is added to My.MP3.com accounts.

As a result of the settlements described above, the
January 21, 2000 copyright infringement lawsuit was limited
to a dispute with UMG Recordings, Inc., which represents two of
the original plaintiffs. A trial in the case was held from
August 28 through September 6, 2000 on the issues of
willfulness and damages. After hearing evidence, the court ruled
on September 6, 2000 that MP3.com had willfully infringed
UMGs copyrights and awarded damages to UMG in an amount of
$25,000 per CD. A trial is scheduled to commence on
November 13, 2000 to determine the number of valid copyright
 registrations held by UMG, and hence the number of CDs for which
 UMG will be entitled to recover the per CD damage award. Based
on information presently available, the maximum number of such
registrations is estimated to be between 3,000 and 7,000.
Numerous factors could affect the ultimate size of the
determination.

Over the course of 2000, some other independent labels have filed
 lawsuits against us based on the same set of allegations as the
UMG case. These labels include Zomba Recording Corp., Tee Vee
Toons, Inc., and Koch Entertainment and Velvel Records LLC.
Additionally, several independent labels have sent us demand
letters alleging similar claims.

Publisher Lawsuits.On March 14, 2000, two large
music-publishing companies, MPL Communications, Inc. and Peer
International Corporation, filed a copyright infringement lawsuit
 against MP3.com in the United States District Court for the
Southern District of New York. The complaint alleged that
MP3.com, in connection with its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in
violation of the Copyright Act, and that MP3.com, in connection
with the streaming of audio content to users of the My.MP3.com
service, continued to make unauthorized digital phonorecords in
violation of the Copyright Act. The complaint further alleges
that MP3.coms actions constituted unauthorized copying and
willful infringement of plaintiffs copyrights. Plaintiffs
seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from
operating its My.MP3.com service or any other service that uses
unauthorized reproductions of plaintiffs copyrighted works.
 Additionally, Zomba Enterprises, Inc. has filed its own music
publishing case against us. In view of the courts rulings
in the UMG case, there is a substantial risk that the issues of
infringement, fair use, and willfulness may be adjudicated
against us in these cases with publishers. This could mean that
we would only be able to litigate the issue of damages. A motion
has been filed by MPL and Peer to amend their complaint to add
many additional copyrighted works to those at issue in the
action.

7



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

On October 17, 2000, MP3.com, the National Music
Publishers Association, Inc. and its licensing subsidiary,
The Harry Fox Agency, Inc. entered into a preliminary agreement
that  if approved by individual HFA music
publisher-principals  would permit the use of up to
one million musical compositions on the My.MP3.com service. In
addition, MP3.com, MPL and Peer agreed to settle the
March 14, 2000 litigation upon finalization of the
preliminary agreement, which requires ratification by individual
HFA music publisher-principals. MP3.com, MPL and Peer agreed to
stay the March 14, 2000 litigation until the ratification
process is completed. Accordingly, the court stayed all
proceedings in this litigation until January 2, 2001.

The proposed, 3-year licensing arrangement provides that MP3.com
will pay up to thirty million dollars ($30,000,000) to HFA for
the benefit of up to 25,000 music publishers and their songwriter
 partners as part of two equal funds. One fund will be used to
pay HFA publisher-principals for past uses of music on the
My.MP3.com service, in exchange for a release from HFA
publisher-principals and their affiliated entities of all claims
related to the March 14, 2000 lawsuit and the use of their
compositions on the My.MP3.com service. The other fund will
provide advance payments toward royalties earned under the
prospective license. The terms of the prospective license call
for a payment of one quarter cent each time a song is streamed on
 demand to a customer from his or her My.MP3.com locker, along
with a one-time fee per track added to the My.MP3.com service.

Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United States
 District Court for the Southern District of New York against
MP3.com and several major recording companies that claimed to own
 copyrights in sound recordings featuring the artists. The
complaint alleges that the recording company defendants, in their
 separate lawsuit against MP3.com (filed on January 21,
2000  see above), are claiming rights in
plaintiffs recordings that they do not possess. In
particular, the complaint alleges that the recording company
defendants do not possess any copyright protections with respect
to plaintiffs pre-1972 published and pre-1978 unpublished
recordings, do not possess the right to digitally transmit
plaintiffs pre-1996 recordings over the Internet, and do
not possess the right to control the conversion of
plaintiffs recordings into mp3 files. The complaint further
 alleges that MP3.com has used the names and likenesses of
plaintiffs without their consent or authorization and in a
deceptive manner, in violation of the federal Lanham Act, the New
 York Civil Rights Law, and unspecified unfair competition and
misappropriation laws. In their prayer for relief, plaintiffs ask
 to have their class action certified, to be awarded unspecified
damages and attorneys fees, to have the defendants enjoined
 from using plaintiffs names and likenesses to promote
downloading music over the Internet, and to receive declaratory
relief regarding plaintiffs rights in their pre- and
post-1972 recordings. This case has been dismissed in its
entirety with prejudice at the pleadings stage, and we have been
informed that the plaintiffs intend to appeal.

Settlement Discussions; Charge to Earnings.MP3.com has
pursued and continues to actively pursue settlement discussions
with the various plaintiffs and claimants in the cases and
disputes discussed above. The decision whether to enter into
settlement and/or license agreements with each party will be
based upon a number of factors related to both the lawsuits and
MP3.coms business in general. We cannot guarantee that we
will be able to enter into any additional settlement agreements
on terms favorable to MP3.com, if at all, or that any settlement
or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, we
recorded a charge for litigation and copyright matters of
$150.0 million. The charge for litigation and copyright
matters represented MP3.coms estimate of the total costs to
 be incurred in connection with the resolution of the various
litigation and copyright matters associated with the My.MP3.com
service, including the lawsuits filed by major recording
companies and other parties. Copyright issues associated with the
 My.MP3.com Service also include but are not limited to
publishing rights, non-major label content, and legal and
advisory fees. This charge did not reflect or include any amounts
 paid or payable in connection with forward-looking licenses to
use music recordings or compositions in connection with the
My.MP3.com service, or any additional amounts that might be
payable under the most-favored-nations provisions described
above. This charge reflected managements expectations as of
 July 26, 2000, and

8



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##### Table of Contents



MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

was based on currently available information as well as
significant assumptions made by management regarding the
litigation.

During the quarter ended September 30, 2000, we recorded an
additional charge for litigation and copyright matters of
$20.0 million. This additional charge reflects incremental
costs that management estimates will be incurred in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3.com service. The additional
charge and accrual reflect managements expectations as of
the date of this quarterly report and is based on currently
available information as well as significant assumptions made by
management regarding the various litigation and copyright
matters. Although we believe that the expectations and
assumptions reflected in this additional charge are reasonable,
we cannot guarantee that future events or results will conform to
 such expectations or assumptions. If these expectations and
significant assumptions prove to be erroneous in light of future
events, the actual amounts incurred by MP3.com to resolve all
matters could be materially different than those recorded as of
September 30, 2000.

Cash payments for the settlements discussed above and other
payments have reduced the cumulative amount reserved as a result
of these charges to $116.9 million as of September 30,
2000. Amounts payable for past issues in connection with the
HFA/Peer/MPL agreement described above are included in the
remaining amount reserved as of September 30, 2000.

Although MP3.com has obtained license agreements permitting the
use of recordings from BMG Entertainment, Warner Music Group,
Sony Music and EMI, we cannot guarantee that MP3.com will be able
 to secure similar license agreements from any other recording
company. Similarly, MP3.com has not yet secured any final
publishing license or other affirmative clearance (whether by
litigation or otherwise) to utilize within the My.MP3.com service
 the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment, Warner Music
Group, Sony Music and EMI), nor can we guarantee that any such
license or clearance will ever be obtained. If a final publishing
 license or other affirmative clearance to utilize such
compositions is not obtained, our ability to utilize in the
My.MP3.com service recordings from any recording company could be
 materially and adversely affected.

Class Action Lawsuits. We and certain of our
employees, officers and directors have been named as defendants
in several lawsuits alleging violations of the federal securities
 laws. The complaints, which were filed between September 19,
2000 and September 29, 2000 in the United States District
Court for the Southern District of California, each purport to be
 brought on behalf of a class of stockholders. The complaints
allege that we and the other the defendants violated the federal
securities laws by issuing materially false and misleading
statements and failing to disclose material information regarding
 our My.MP3.com service and the litigation surrounding the
service. The complaint does not specify the dollar amount of
damages alleged.

Derivative Lawsuits.Between September 14, 2000 and
September 18, 2000, certain stockholders of MP3.com filed
shareholder derivative suits against MP3.com and certain of its
employees, officers and directors in the Superior Court of the
State of California, County of San Diego. These complaints allege
 various statutory and common law claims relating to the
My.MP3.com service.

We cannot assure you that we will be successful in ultimately
defending any of these lawsuits, and we may be required to pay
license fees or substantial damages, including statutory,
punitive or other damages that far exceed the resources and
overall market capitalization of MP3.com, in which event we might
 have to significantly limit or terminate our business
operations, particularly because our business is not yet
profitable. At the rate of $25,000 per work, our aggregate
potential liability resulting from all of our copyright
litigation proceedings could exceed billions of dollars. If
successful, any one of these lawsuits could seriously harm our
business by forcing us to cease providing services to our
consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business severely
 by damaging our reputation, requiring

9



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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

us to incur legal costs, lowering our stock price and public
demand for our stock, and diverting managements attention
away from our primary business activities in general.

Note 3  Acquisition

In April 2000, MP3.com agreed to purchase the remaining 53.5%
ownership of mp3radio.com, a joint venture with Cox Interactive
Media, Inc. MP3.com paid approximately $4 million in cash,
received tangible net assets of $47,000 and assumed liabilities
of $231,000. During the transition period ending June 30,
2000, the costs of relocating the joint ventures operations
 to San Diego were shared pro rata based upon the parties
existing ownership percentages and included in minority interest
in loss of an unconsolidated subsidiary. The acquisition was
completed during the third quarter of 2000 and was accounted for
under the purchase method of accounting. The excess purchase
price over fair value of net assets acquired was generally
allocated to assembled work force; URLs, trademarks and names; a
radio station agreement; and goodwill. The excess purchase price
over fair value of the assets acquired of $4 million was
allocated to certain intangible assets and will be amortized over
 the following periods using the straight-line method as follows
(in thousands):

|                            |  |        |       |      |  |  |           | 
|--------------------------- |  | ------ | ----- | ---- |  |  | --------- | 
|                            |  | Amount |       | Life
|                            |  |        |       |     
|Assembled work force        |  | $      | 50    |      |  |  | 12 months | 
|                           
|                           
|                           
|                           
|URLs, trademarks and names |  | $      | 200   |      |  |  | 24 months | 
|                           
|                           
|                           
|                           
|Radio station agreement     |  | $      | 1,250 |      |  |  | 12 months | 
|                           
|                           
|                           
|                           
|Goodwill                    |  | $      | 2,500 |      |  |  | 24 months | 

Note 4  Commitments

In July 1999, we entered into an agreement with Montaigne
Participations Et Gestion (MPG) (formally named
Groupe Arnault) under which MPG committed to purchase an
aggregate of $150 million in advertising, promotion and
marketing services from us over three years. In July 1999, we
received prepayments from MPG totaling $45 million, which
represented payment for these services through the fourth quarter
 of 2000. In September 2000, we entered into an amended and
restated agreement with MPG. The restated agreement extended our
relationship with MPG through 2004, and reduced the aggregate
amount of services to be purchased by MPG over the life of the
agreement (see the revised commitment schedule below). Both MPG
and MP3.com believe that the revised commitment schedule will
allow for more efficient use of our marketing services for the
benefit of MPG and its various related companies. In addition,
the restated agreement provides for a more streamlined media
management process and creates certain exceptions to the favored
pricing granted to MPG under the original agreement. Under the
restated agreement, MPG is now committed to purchase an aggregate
 of $120 million in advertising, promotion and marketing
services from us (including the $45 million purchased
through the fourth quarter of 2000). The remaining
$75 million owed under the restated agreement remains
secured by an irrevocable letter of credit. The restated
agreement further provides MPG with potential additional
financial incentives of up to an aggregate of $5 million (up
 to $1 million in any one calendar quarter) based on the
number of different companies that use our services

10



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MP3.COM, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

under the agreement. The financial incentives could result in the
 reduction of the marketing and promotions commitment during the
period incurred.

|                              |    |                   |   |        |        | 
|----------------------------- | -- | ----------------- | - | ------ | ------ | 
|Quarterly Commitment Schedule |    | Commitment Amount
|                              |    |                  
|                              |    | (in thousands)   
|                             
|                             
|                             
|                             
|2000                          |    |                   |   |       
|                             
|                             
|                             
|                             
|                              | Q4 |                   | $ | 13,500 |       
|                             
|                             
|                             
|                             
|                             
|2001                          |    |                   |   |       
|                             
|                             
|                             
|                             
|                              | Q1 |                   | $ | 15,000 |       
|                             
|                             
|                             
|                             
|                              | Q2 |                   | $ | 12,250 |       
|                             
|                             
|                             
|                             
|                              | Q3 |                   | $ | 12,250 |       
|                             
|                             
|                             
|                             
|                              | Q4 |                   | $ | 12,250 |       
|                             
|                             
|                             
|                             
|                             
|2002                          |    |                   |   |       
|                             
|                             
|                             
|                             
|                              | Q1 |                   | $ | 6,000  |       
|                             
|                             
|                             
|                             
|                              | Q2 |                   | $ | 5,000  |       
|                             
|                             
|                             
|                             
|                              | Q3 |                   | $ | 5,000  |       
|                             
|                             
|                             
|                             
|                              | Q4 |                   | $ | 5,000  |       
|                             
|                             
|                             
|                             
|                             
|2003                          |    |                   |   |       
|                             
|                             
|                             
|                             
|                              | Q1 |                   | $ | 300    |       
|                             
|                             
|                             
|                             
|                              | Q2 |                   | $ | 300    |       
|                             
|                             
|                             
|                             
|                              | Q3 |                   | $ | 275    |       
|                             
|                             
|                             
|                             
|                              | Q4 |                   | $ | 275    |       
|                             
|                             
|                             
|                             
|                             
|2004                          |    |                   |   |       
|                             
|                             
|                             
|                             
|                              | Q1 |                   | $ | 275    |       
|                             
|                             
|                             
|                             
|                              | Q2 |                   | $ | 275    |       
|                             
|                             
|                             
|                             
|                              | Q3 |                   | $ | 275    |       
|                             
|                             
|                             
|                             
|                              | Q4 |                   | $ | 275    |       
|                              |    |                   |   |       
|                              |    | Total             |   | $      | 88,500 | 
|                              |    |                   |   |       

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

Forward-Looking Statements

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

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future events or results, levels of activity, performance or
achievements, all of which may differ materially. Moreover,
neither we nor any other person assumes responsibility for the
accuracy 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
consolidated financial statements and the related notes and the
other financial information appearing elsewhere in this
Form 10-Q. Readers are also urged to carefully review and
consider the various disclosures made by us which attempt to
describe some of the factors which affect our business and may
cause such material differences, including without limitation the
 disclosures made under the caption Risk Factors, the
 audited financial statements and related footnotes included
herein and in our Form 10-K dated March 30, 2000.

Overview

MP3.com, Inc. (MP3.com) has created what it believes
is a unique and robust technology infrastructure for the storage,
 management, promotion and delivery of digital music. As the
Internets premier Music Service Provider (MSP),
 MP3.com is dedicated to providing consumers with anytime,
anywhere access to their music using any web-enabled device.
MP3.coms web site hosts what MP3.com believes is the
largest collection of digital music available on the Internet,
with more than 600,000 songs and audio files posted from over
100,000 digital artists and record labels. Dedicated to growing
the digital music space, MP3.coms products and services
include on-demand Subscription Music Channels, an innovated
Retail Music Program, a Syndicated Radio Division and others.
Additionally, through MP3.coms MSP initiative, MP3.com is
partnering with a variety of forward-looking technology companies
 to expand its digital music strategy.

In addition to the wide variety of music available on our web
site, consumers have a substantial amount of music already in
their personal music collections that they want to access, manage
 and listen to in a variety of ways. Just as consumers use an
Internet Service Provider as the central mechanism through which
they interact with the Internet, individuals are increasingly
looking for one central resource, or a Music Service
Provider (or MSP), that allows them to access,
manage and listen to all of their music anywhere, anytime. In
January 2000, MP3.com launched the foundation of its Music
Service Provider initiative, the upgraded My.MP3.com
service. The My.MP3.com service was designed to, among a number
of other things, allow users to place CDs and mp3 files online,
organize their music and receive personalized music services. In
order to maintain MP3.coms position as the premier Music
Service Provider, MP3.com intends to work through strategic
partnerships with leading web sites, application developers,
device manufacturers, wireless carriers and connectivity
providers to enable our users to access their music anytime,
anywhere, on any web-enabled device or application.

MP3.com generates revenue from online advertising, offline
advertising and electronic commerce. For the three months ended
September 30, 2000, 96.6% of MP3.coms revenues were
from the sale of advertising. Advertising sales include revenue
from the sale of space on our website; sponsorship of contests
and sweepstakes, e-mail campaigns and greeting cards; and
sponsorship of CD samplers, which are distributed free

12



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##### Table of Contents





Since the beginning of 1999, MP3.coms growth has been
dramatic. The number of employees increased from 8 on
January 1, 1999 to 334 on September 30, 2000. In
September 2000, MP3.com added an average of over 180 artists and
an average of over 1,300 new songs and audio files each day.
During September 2000, visitors to MP3.coms web site viewed
 over 147 million web pages and listened to or downloaded
over 38.0 million songs.

The Three Months Ended September 30, 2000 Compared to
September 30, 1999

Results of Consolidated Operations

Net Revenues

For the three months ended September 30, 2000, net revenues
were $20,459,000, which were derived from online advertisements
on our web site; offline advertisements through various
promotions and events that were not hosted on our web site;
sponsorship of various contests, sweepstakes, e-mail campaigns,
and greeting cards; and the online sale of CDs and music-related
merchandise. This compares to $4,051,000 during the same period a
 year ago. The increase in net revenues during the third quarter
over the same period in 1999 was primarily attributable to a
significant increase in online and offline advertisements; the
introduction of various contests, sweepstakes, e-mail campaigns,
and greeting card advertisements; and, to a lesser extent, an
increase in CD sales on our web site.

Revenues from online advertising.For the quarter ended
September 30, 2000, revenues from online advertising were
$15,628,000 or 76.4% of net revenues compared to $1,971,000 or
48.7% of net revenues for the same period a year ago. Online
advertising revenues primarily consist of banner, button, portal
and sponsorship advertisements on MP3.coms web site in
addition to advertisements placed in e-mail and greeting card
campaigns. The duration of MP3.coms online advertising
commitments range from one month to approximately four years.
Banner, button and portal advertisements are impression based,
requiring the advertisement to be displayed a minimum number of
times over the contract period. Sponsorship advertising contracts
 involve static advertisements, whereby the advertisement is
continually displayed on a specified area of the MP3.com web site
 during the contract period. E-mails containing various
advertisements are sent to MP3.coms artists and users of
the MP3.com web site on a regular basis. Greeting cards also
contain advertisements and are sent electronically whenever a
user of the MP3.com web site requests that a card be delivered to
 a person(s) of their choice. The increase in revenues from
online advertising for the three months ended September 30,
2000 as compared to the comparable period one year ago was
primarily due to a significant increase in pageview volume
resulting from significant increases in unique visitors,
MP3.coms advertiser customer base, and the introduction of
new product lines such as e-mail and greeting cards.

Revenues from offline advertising.For the three months
ended September 30, 2000, revenues from offline advertising
were $4,142,000 or 20.2% of net revenues compared to $1,667,000
or 41.2% of net revenues for the same period a year ago. During
the third quarter of 2000, offline advertising revenues primarily
 consisted of contests, and to a lesser extent advertising
sponsorships of CD sampler products. MP3.com held contests during
 the quarter that were sponsored by various advertisers and
provided prizes to the winners of each contest. CD samplers are
multi-media CDs containing advertising, free software, videos and
 games as well as collections of music from artists that have
posted music on the MP3.com web site. These CDs are sponsored by
several different advertisers and distributed free of charge to
users of MP3.coms web site who register to receive the CD.
The increase in revenues from offline advertising is primarily
due to revenues from contests that did not exist during the same
period in 1999, offset by a significant decrease in CD sampler
products. The decrease in revenues from offline advertising, as a
 percentage of total revenues, is primarily attributable to the
significant increase in online advertising revenues, both in
absolute dollars and as a percentage of total revenues.

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##### Table of Contents



Revenues from online sales of CDs and other music-related
merchandise.For the three months ended September 30,
2000, revenues from online sales of CDs and other music-related
merchandise were $689,000 or 3.4% of net revenues compared to
$413,000 or 10.2% of net revenues for the same period a year ago.
 Online e-commerce sales consist of DAM CDs and, to a lesser
extent, other music-related merchandise. The increase in revenues
 from online sales of CDs and other music-related merchandise
during the third quarter of 2000 as compared to the same quarter
of 1999 was primarily due to an increase in the sales volume of
DAM CDs (approximately 36,000 units, or an 80% increase)
resulting from increased musical content available on
MP3.coms web site as a result of increased brand awareness.
 The decrease in revenues from online sales of CDs and other
music-related merchandise, as a percentage of total revenue, is
primarily attributable to the significant increase in online
advertising revenues, both in absolute dollars and as a
percentage of total revenues.

Revenue Concentration.We expect that most of our revenues
 will continue to be derived from third party advertising
agreements like those we have with Montaigne Participations Et
Gestion (MPG) (formally named Groupe Arnault). During
 the quarter ended September 30, 2000, MP3.com recognized
revenue of $11,500,000, or 56.2% of total revenues, associated
with the MPG agreement. MPG revenues will be distributed between
online and offline sources based on a changing percentage from
quarter to quarter.

In July 1999, we entered into an agreement with MPG under which
MPG committed to purchase an aggregate of $150 million in
advertising, promotion and marketing services from us over three
years. In July 1999, we received prepayments from MPG totaling
$45 million, which represented payment for these services
through the fourth quarter of 2000. In September 2000, we entered
 into an amended and restated agreement with MPG. The restated
agreement extended our relationship with MPG through 2004, and
reduced the aggregate amount of services to be purchased by MPG
over the life of the agreement (see the revised commitment
schedule below). Both MPG and MP3.com believe that the revised
commitment schedule will allow for more efficient use of our
marketing services for the benefit of MPG and its various related
 companies. In addition, the restated agreement provides for a
more streamlined media management process and creates certain
exceptions to the favored pricing granted to MPG under the
original agreement. Under the restated agreement, MPG is now
committed to purchase an aggregate of $120 million in
advertising, promotion and marketing services from us (including
the $45 million purchased through the fourth quarter of
2000). The remaining $75 million owed under the restated
agreement remains secured by an irrevocable letter of credit. The
 restated agreement further provides MPG with potential
additional financial incentives of up to an aggregate of
$5 million (up to $1 million in any one calendar
quarter) based on the number of different

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|                               |    |                   |   |        |        | 
|------------------------------ | -- | ----------------- | - | ------ | ------ | 
|Quarterly Commitment Schedule: |    | Commitment Amount
|                               |    |                  
|                               |    | (in thousands):  
|                              
|                              
|                              
|                              
|2000                           |    |                   |   |       
|                              
|                              
|                              
|                              
|                               | Q4 |                   | $ | 13,500 |       
|                              
|                              
|                              
|                              
|2001                           |    |                   |   |       
|                              
|                              
|                              
|                              
|                               | Q1 |                   | $ | 15,000 |       
|                              
|                              
|                              
|                              
|                               | Q2 |                   | $ | 12,250 |       
|                              
|                              
|                              
|                              
|                               | Q3 |                   | $ | 12,250 |       
|                              
|                              
|                              
|                              
|                               | Q4 |                   | $ | 12,250 |       
|                              
|                              
|                              
|                              
|2002                           |    |                   |   |       
|                              
|                              
|                              
|                              
|                               | Q1 |                   | $ | 6,000  |       
|                              
|                              
|                              
|                              
|                               | Q2 |                   | $ | 5,000  |       
|                              
|                              
|                              
|                              
|                               | Q3 |                   | $ | 5,000  |       
|                              
|                              
|                              
|                              
|                               | Q4 |                   | $ | 5,000  |       
|                              
|                              
|                              
|                              
|2003                           |    |                   |   |       
|                              
|                              
|                              
|                              
|                               | Q1 |                   | $ | 300    |       
|                              
|                              
|                              
|                              
|                               | Q2 |                   | $ | 300    |       
|                              
|                              
|                              
|                              
|                               | Q3 |                   | $ | 275    |       
|                              
|                              
|                              
|                              
|                               | Q4 |                   | $ | 275    |       
|                              
|                              
|                              
|                              
|2004                           |    |                   |   |       
|                              
|                              
|                              
|                              
|                               | Q1 |                   | $ | 275    |       
|                              
|                              
|                              
|                              
|                               | Q2 |                   | $ | 275    |       
|                              
|                              
|                              
|                              
|                               | Q3 |                   | $ | 275    |       
|                              
|                              
|                              
|                              
|                               | Q4 |                   | $ | 275    |       
|                               |    |                   |   |       
|                               |    | Total:            |   | $      | 88,500 | 
|                               |    |                   |   |       

During 1999 and 2000, we have made certain strategic investments
and entered into certain marketing and promotion arrangements. In
 certain circumstances, we have recognized revenue in connection
with these marketing and promotion arrangements pursuant to our
accounting policies. Due to the recent financial uncertainty
related to certain strategic investments, we have determined that
 we are unable to recognize revenue in connection with certain
marketing and promotion arrangements until the significant
uncertainties have been satisfactorily resolved. These above
factors, current financial and economic conditions, and the
current litigation could have an adverse effect on MP3.coms
 future revenues.

Cost of Revenues

Cost of revenues for the three months ended September 30,
2000 were $3,746,000 or 18.3% of net revenues compared to
$1,687,000 or 41.6% of net revenues during the same period a year
 ago, resulting in gross margins of 81.7% and 58.4%,
respectively. The increase in cost of revenues, in absolute
dollar terms, was primarily due to increases in bandwidth
requirements, royalties to artists, and costs related to contests
 and sweepstakes, offset by a significant decrease in CD sampler
costs. The increase in gross margins was primarily due to a
significant amount of the MPG revenues allocated to online
advertising, which has higher gross margins. Additionally,
revenue from offline contests typically have increased gross
margins when compared to other offline product margins. CD and
other music-related merchandise sales typically have lower gross
margins which decrease the higher gross margins from online and
offline advertising products. MP3.com anticipates that future
gross margins will fluctuate depending on changes in its revenue
mix and the timing of expenditures in web site and fulfillment
operations. Additionally, future gross margins could fluctuate
depending on the amount of MPG quarterly revenues allocated
between online and offline advertising products. Further, when we
 begin using certain multimedia licenses obtained as part of our
settlement with

15



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Sales and Marketing

During the three months ended September 30, 2000, sales and
marketing expense was $14,029,000 or 68.6% of net revenues
compared to $8,897,000 or 219.6% of net revenues during the same
period a year ago. The increase in sales and marketing expense,
in absolute dollar amounts, was primarily a result of a charge of
 $2,587,000 associated with the impairment of certain prepaid
marketing expenses in connection with arrangements with
internationally known artists, an increase of approximately
$700,000 in sales and marketing payroll and related expenses, an
increase of approximately $3,000,000 related to the cost of our
Payback for Playback program, new and increased marketing
programs of approximately $1,669,000, and costs associated with
the growth of our business. Additionally, these increases were
offset by approximately $1,241,000 in stock-based charges
associated with acceleration of stock option vesting and
approximately $2,114,000 related to marketing and promotion costs
 associated with the 1999 Alanis Morissette and Tori Amos
5 1/2 Weeks Summer tour sponsorship that were
incurred during the third quarter of 1999 but did not occur
during the same quarter ended in 2000. The decrease in sales and
marketing costs as a percentage of revenues is primarily due to
the significant increase in net revenues and decreased costs in
connection with stock-based charges associated with the
acceleration of stock option vesting, and marketing and promotion
 costs associated with the 1999 Alanis Morissette and Tori Amos
5 1/2 Weeks Summer tour sponsorship. These
costs were offset by the impairment of certain prepaid marketing
expenses related to arrangements with internationally known
artists and our Payback for Playback program. MP3.com anticipates
 that overall sales and marketing expense will continue to
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.

In the future, MP3.com may enter into arrangements with
additional 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. Proceeds from these events, if any,
will be credited against promotional expenses incurred. Depending
 upon the terms and timing of promotional activities, substantial
 sales and marketing expenses may be incurred in any quarterly or
 annual period.

Engineering and Product Development

During the three months ended September 30, 2000,
engineering and product development expense was $6,067,000 or
29.7% of net revenues compared to $2,373,000 or 58.6% of net
revenues during the same period a year ago. The increase in the
level of engineering and product development expense, in absolute
 dollar amounts, was primarily due to an increase in payroll and
related expenses of approximately $1,791,000, increased computer
equipment depreciation of approximately $1,215,000, increased
consulting and temporary labor, and costs associated with the
growth of MP3.coms business. The decrease in engineering
and product development expense as a percentage of net revenue is
 primarily due to the significant increase in net revenues.
MP3.com anticipates that overall engineering and product
development expenses will increase in the foreseeable future;
however, engineering and 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
engineering and product development and hiring.

General and Administrative

General and administrative expense was $8,896,000 or 43.5% of net
 revenues during the quarter ended September 30, 2000
compared to $3,110,000 or 76.8% of net revenues during the same
period a year ago. The increase in general and administrative
expense, in absolute dollar amounts, was primarily a result of an
 increase in finance and administrative payroll and related
expenses of approximately $1,700,000; legal expenses of
approximately $1,207,000; bad debt expense of approximately
$934,000; amortization of goodwill

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Charge for Litigation and Copyright Matters

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

Between June and August 2000, MP3.com entered into settlement and
 license agreements with Warner Music Group, BMG Entertainment,
Sony Music and Capitol Records, Inc.(EMI), which together
represented eight of the ten major recording companies that filed
 the copyright infringement lawsuit on January 21, 2000. The
 settlement agreements provide for a settlement amount to be paid
 in cash by MP3.com in exchange for a release from the settling
plaintiffs and their affiliated entities (as defined in the
settlement agreements) of all claims related to the
January 21, 2000 lawsuit and the My.MP3.com service.
Most-favored-nations provisions in these settlement agreements
require additional settlement amounts to be paid under certain
circumstances. MP3.com made no admission of wrongdoing in
connection with these settlements. Subject to certain affirmative
 obligations of MP3.com and other terms and conditions regarding
the implementation of the My.MP3.com service, the license
agreements permit MP3.com to utilize recordings owned by Warner
Music Group, BMG Entertainment, Sony Music and EMI as part of the
 My.MP3.com service. The license agreements have terms of
approximately three to ten years, and provide for on-going
royalty payments based on the greater of (i) a specified
percentage of net revenues generated from the My.MP3.com service
or (ii) a specified amount accrued each time a licensor
recording is streamed from My.MP3.com. In addition, the licenses
provide for on-going royalty payments based on the number of
times a licensor recording is added to My.MP3.com accounts.

As a result of the settlements described above, the
January 21, 2000 copyright infringement lawsuit was limited
to a dispute with UMG Recordings, Inc., which represents two of
the original plaintiffs. A trial in the case was held from
August 28 through September 6, 2000 on the issues of
willfulness and damages. After hearing evidence, the court ruled
on September 6, 2000 that MP3.com had willfully infringed
UMGs copyrights and awarded damages to UMG in an amount of
$25,000 per CD. A trial is scheduled to commence on
November 13, 2000 to determine the number of valid copyright
 registrations held by UMG, and hence the number of CDs for which
 UMG will be entitled to recover the per CD damage award. Based
on information presently available, the maximum number of such
registrations is estimated to be between 3,000 and 7,000.
Numerous factors could affect the ultimate size of the
determination.

Over the course of 2000, some other independent labels have filed
 lawsuits against us based on the same set of allegations as the
UMG case. These labels include Zomba Recording Corp., Tee Vee
Toons, Inc., and Koch Entertainment and Velvel Records LLC.
Additionally, several independent labels have sent us demand
letters alleging similar claims.

Publisher Lawsuits.On March 14, 2000, two large
music-publishing companies, MPL Communications, Inc. and Peer
International Corporation, filed a copyright infringement lawsuit
 against MP3.com in the United States District Court for the
 Southern District of New York. The complaint alleged that
MP3.com, in

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On October 17, 2000, MP3.com, the National Music
Publishers Association, Inc. and its licensing subsidiary,
The Harry Fox Agency, Inc. entered into a preliminary agreement
that  if approved by individual HFA music
publisher-principals  would permit the use of up to
one million musical compositions on the My.MP3.com service. In
addition, MP3.com, MPL and Peer agreed to settle the
March 14, 2000 litigation upon finalization of the
preliminary agreement, which requires ratification by individual
HFA music publisher-principals. MP3.com, MPL and Peer agreed to
stay the March 14, 2000 litigation until the ratification
process is completed. Accordingly, the court stayed all
proceedings in this litigation until January 2, 2001.

The proposed, 3-year licensing arrangement provides that MP3.com
will pay up to thirty million dollars ($30,000,000) to HFA for
the benefit of up to 25,000 music publishers and their songwriter
 partners as part of two equal funds. One fund will be used to
pay HFA publisher-principals for past uses of music on the
My.MP3.com service, in exchange for a release from HFA
publisher-principals and their affiliated entities of all claims
related to the March 14, 2000 lawsuit and the use of their
compositions on the My.MP3.com service. The other fund will
provide advance payments toward royalties earned under the
prospective license. The terms of the prospective license call
for a payment of one quarter cent each time a song is streamed on
 demand to a customer from his or her My.MP3.com locker, along
with a one-time fee per track added to the My.MP3.com service.

Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United States
 District Court for the Southern District of New York
against MP3.com and several major recording companies that
claimed to own copyrights in sound recordings featuring the
artists. The complaint alleges that the recording company
defendants, in their separate lawsuit against MP3.com (filed on
January 21, 2000  see above), are claiming rights
 in plaintiffs recordings that they do not possess. In
particular, the complaint alleges that the recording company
defendants do not possess any copyright protections with respect
to plaintiffs pre-1972 published and pre-1978 unpublished
recordings, do not possess the right to digitally transmit
plaintiffs pre-1996 recordings over the Internet, and do
not possess the right to control the conversion of
plaintiffs recordings into mp3 files. The complaint further
 alleges that MP3.com has used the names and likenesses of
plaintiffs without their consent or authorization and in a
deceptive manner, in violation of the federal Lanham Act, the New
 York Civil Rights Law, and unspecified unfair competition and
misappropriation laws. In their prayer for relief, plaintiffs ask
 to have their class action certified, to be awarded unspecified
damages and attorneys fees, to have the defendants enjoined
 from using plaintiffs names and likenesses to promote
downloading music over the Internet, and to receive declaratory
relief regarding plaintiffs rights in their pre- and
post-1972 recordings. This case has been dismissed in its
entirety with prejudice at the pleadings stage, and we have been
informed that the plaintiffs intend to appeal.

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

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During the quarter ended September 30, 2000, we recorded an
additional charge for litigation and copyright matters of
$20.0 million. This additional charge reflects incremental
costs that management estimates will be incurred in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3.com service. The additional
charge and accrual reflect managements expectations as of
the date of this quarterly report and is based on currently
available information as well as significant assumptions made by
management regarding the various litigation and copyright
matters. Although we believe that the expectations and
assumptions reflected in this additional charge are reasonable,
we cannot guarantee that future events or results will conform to
 such expectations or assumptions. If these expectations and
significant assumptions prove to be erroneous in light of future
events, the actual amounts incurred by MP3.com to resolve all
matters could be materially different than those recorded as of
September 30, 2000.

Cash payments for the settlements described above and other
payments have reduced the cumulative amount reserved as a result
of these charges to $116.9 million as of September 30,
2000. Amounts payable for past issues in connection with the
HFA/Peer/MPL agreement described above are included in the
remaining amount reserved as of September 30, 2000.

Although MP3.com has obtained license agreements permitting the
use of recordings from BMG Entertainment, Warner Music Group,
Sony Music and EMI, we cannot guarantee that MP3.com will be able
 to secure similar license agreements from any other recording
company. Similarly, MP3.com has not yet secured any final
publishing license or other affirmative clearance (whether by
litigation or otherwise) to utilize within the My.MP3.com service
 the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment, Warner Music
Group, Sony Music and EMI), nor can we guarantee that any such
license or clearance will ever be obtained. If a final publishing
 license or other affirmative clearance to utilize such
compositions is not obtained, our ability to utilize in the
My.MP3.com service recordings from any recording company could be
 materially and adversely affected.

Class Action Lawsuits. We and certain of our
employees, officers and directors have been named as defendants
in several lawsuits alleging violations of the federal securities
 laws. The complaints, which were filed between
September 19, 2000 and September 29, 2000 in the United
 States District Court for the Southern District of California,
each purport to be brought on behalf of a class of stockholders.
The complaints allege that we and the other the defendants
violated the federal securities laws by issuing materially false
and misleading statements and failing to disclose material
information regarding our My.MP3.com service and the litigation
surrounding the service. The complaint does not specify the
dollar amount of damages alleged.

Derivative Lawsuits.Between September 14, 2000 and
September 18, 2000, certain stockholders of MP3.com filed
shareholder derivative suits against MP3.com and certain of its
employees, officers and directors in the Superior Court of the
State of California, County of San Diego. These complaints allege
 various statutory and common law claims relating to the
My.MP3.com service.

We cannot assure you that we will be successful in ultimately
defending any of these lawsuits, and we may be required to pay
license fees or substantial damages, including statutory,
punitive or other damages that far exceed the resources and
overall market capitalization of MP3.com, in which event we might
 have to significantly limit or terminate our business
operations, particularly because our business is not yet
profitable.

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Amortization of Deferred Compensation

During the quarter ended September 30, 2000, total deferred
compensation of $1,460,000 was amortized to expense compared to
$12,370,000 during the quarter ended September 30, 1999.
Deferred compensation is being amortized over the vesting period
of the relevant granted stock options, which is generally four
years. The decrease in the amortization is primarily a result of
the accelerated amortization method (as provided for in FASB
Interpretation No. 28) to amortize deferred compensation,
which resulted in a greater amount of amortization expense in the
 earlier years of the amortization period.

Interest Income, Net

Interest income (net of interest expense) during the quarter
ended September 30, 2000 was $4,039,000 compared to
$4,517,000 during the same period a year ago. Interest income
during the quarter ended September 30, 2000 is directly
related to interest earned on cash, cash equivalent balances and
marketable securities associated with proceeds of an aggregate of
 approximately $426,300,000 during 1999 from (i) the
issuance of common stock in connection with MP3.coms
initial public offering in July 1999, (ii) the exercise of
stock options and a warrant for the purchase of common stock, and
 (iii) the issuance of Series A, B, and C convertible
preferred stock. The net decrease in interest income is mainly
attributed to the decrease in our cash, cash equivalent balances
and marketable securities average balances offset by an increase
in the weighted average interest rate earned on such invested
balances.

Impairment of Strategic Investments

During the quarter ended September 30, 2000, MP3.com
recorded a charge of $19,000,000 for the estimated impairment of
its strategic investment portfolio and short-term investments.
The impairment is associated with a decrease in fair value of
certain strategic investments and an investment classified as
short-term investments where the decrease in the fair market
value of the stock is considered other than temporary.

Provision for Income Taxes

Due to the loss from operations for both book and tax purposes,
no provision or benefit for income taxes was recorded for the
three months ended September 30, 2000 and 1999. Currently,
we provide a valuation allowance for all future tax benefits.

The Nine Months Ended September 30, 2000 Compared to
September 30, 1999

Results of Consolidated Operations

Net Revenues

For the nine months ended September 30, 2000, net revenues
were $58,132,000, which were derived from online advertisements
on our web site; offline advertisements through various
promotions and events that were not hosted on our web site;
sponsorship of various contests, sweepstakes, e-mail campaigns,
greeting cards and the MP3 Summit; and the online
sale of CDs and music-related merchandise. This compares to
$6,628,000 during the same period a year ago. The increase in net
 revenues during the first nine months of 2000 over the same
period in 1999 was mostly attributable to a significant increase
in online advertisements and introduction of new online
advertisement products such as e-mail campaigns and greeting card
 advertisements; the introduction of various offline
advertisement products such as contests and sweepstakes; and to a
 lesser extent an increase in CD sales on our web site.

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Revenues from online advertising.For the nine months
ended September 30, 2000, revenues from online advertising
were $45,036,000 or 77.5% of net revenues compared to $3,796,000
or 57.2% of net revenues for the same period a year ago. Online
advertising revenues primarily consist of banner, button, portal
and sponsorship advertisements on MP3.coms web site in
addition to advertisements placed in e-mail and greeting card
campaigns. The duration of MP3.coms online advertising
commitments range from one month to approximately four years.
Banner, button and portal advertisements are impression based,
requiring the advertisement to be displayed a minimum number of
times over the contract period. Sponsorship advertising contracts
 involve static advertisements, whereby the advertisement is
continually displayed on a specified area of the MP3.com web site
 during the contract period. E-mails containing various
advertisements are sent to MP3.coms artists and users of
the MP3.com web site on a regular basis. Greeting cards also
contain advertisements and are sent electronically whenever a
user of the MP3.com web site requests that a card be delivered to
 a person(s) of their choice. The increase in revenues from
online advertising for the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999
 was primarily due to a significant increase in pageview volume
resulting from significant increases in unique visitors,
MP3.coms advertiser customer base, and the introduction of
new online advertisement product lines such as e-mail and
greeting cards.

Revenues from offline advertising.For the nine months
ended September 30, 2000, revenues from offline advertising
were $10,988,000 or 18.9% of net revenues compared to $2,079,000
or 31.4% of net revenues for the same period a year ago. During
the first nine months of 2000, offline advertising revenues
primarily consisted of contests and sweepstakes, and to a lesser
extent advertising sponsorships of CD sampler products. MP3.com
held contests and sweepstakes during the year that were sponsored
 by various advertisers and provided prizes to the winners of
each contest. CD samplers are multi-media CDs containing
advertising, free software, videos and games as well as
collections of music from artists that have posted music on the
MP3.com web site. These CDs are sponsored by several different
advertisers and distributed free of charge to users of
MP3.coms web site who register to receive the CD. The
increase in revenues from offline advertising is primarily due to
 the introduction of contests and sweepstakes, and to a lesser
extent increased revenues associated with the MP3
Summit. The decrease in revenues from offline advertising,
as a percentage of total net revenues, is primarily attributable
to the significant increase in online advertising revenues, both
in absolute dollars and as a percentage of total revenues.

Revenues from online sales of CDs and other music-related
merchandise.For the nine months ended September 30,
2000, revenues from online sales of CDs and other music-related
merchandise were $2,108,000 or 3.6% of net revenues compared to
$753,000 or 11.4% of net revenues for the same period a year ago.
 Online e-commerce sales consist of DAM and compilation CDs and,
to a lesser extent, other music-related merchandise. The increase
 in revenues from online sales of CDs and other music-related
merchandise during the first nine months of 2000 as compared to
the same period one year ago was primarily due to an increase in
the sales volume of DAM CDs (an increase of approximately 170,000
 units or 227%) resulting from increased musical content
available on MP3.coms web site as a result of increased
brand awareness and an increase in the average selling price of
CDs. The decrease in revenue from online sales of CDs and other
music-related merchandise, as a percentage of total revenues, is
primarily attributable to the significant increase in, both
absolute dollars and as a percentage of total revenues, online
advertising revenues.

Revenue Concentration.We expect that most of our revenues
 will continue to be derived from third party advertising
agreements like those we have with MPG. During the nine months
ended September 30, 2000, MP3.com recognized revenue of
$26,845,000, or 46.2% of the total revenues, associated with the
MPG agreement. MPG revenues will be distributed between online
and offline sources based on a changing percentage from quarter
to quarter.

In July 1999, we entered into an agreement with MPG under which
MPG committed to purchase an aggregate of $150 million in
advertising, promotion and marketing services from us over three
years. In July 1999, we received prepayments from MPG totaling
$45 million, which represented payment for these services
through the fourth quarter of 2000. In September 2000, we entered
 into an amended and restated agreement with MPG. The restated
agreement extended our relationship with MPG through 2004, and
reduced the aggregate amount of services to be purchased by MPG
over the life of the agreement (see the revised

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|                            |    |                 |   |        |        | 
|--------------------------- | -- | --------------- | - | ------ | ------ | 
|Quarterly Payment Schedule: |    | Purchase Amount
|                            |    |                
|                            |    | (in thousands):
|                           
|                           
|                           
|                           
|2000                        |    |                 |   |       
|                           
|                           
|                           
|                           
|                            | Q4 |                 | $ | 13,500 |       
|                           
|                           
|                           
|                           
|                           
|2001                        |    |                 |   |       
|                           
|                           
|                           
|                           
|                            | Q1 |                 | $ | 15,000 |       
|                           
|                           
|                           
|                           
|                            | Q2 |                 | $ | 12,250 |       
|                           
|                           
|                           
|                           
|                            | Q3 |                 | $ | 12,250 |       
|                           
|                           
|                           
|                           
|                            | Q4 |                 | $ | 12,250 |       
|                           
|                           
|                           
|                           
|                           
|2002                        |    |                 |   |       
|                           
|                           
|                           
|                           
|                            | Q1 |                 | $ | 6,000  |       
|                           
|                           
|                           
|                           
|                            | Q2 |                 | $ | 5,000  |       
|                           
|                           
|                           
|                           
|                            | Q3 |                 | $ | 5,000  |       
|                           
|                           
|                           
|                           
|                            | Q4 |                 | $ | 5,000  |       
|                           
|                           
|                           
|                           
|                           
|2003                        |    |                 |   |       
|                           
|                           
|                           
|                           
|                            | Q1 |                 | $ | 300    |       
|                           
|                           
|                           
|                           
|                            | Q2 |                 | $ | 300    |       
|                           
|                           
|                           
|                           
|                            | Q3 |                 | $ | 275    |       
|                           
|                           
|                           
|                           
|                            | Q4 |                 | $ | 275    |       
|                           
|                           
|                           
|                           
|                           
|2004                        |    |                 |   |       
|                           
|                           
|                           
|                           
|                            | Q1 |                 | $ | 275    |       
|                           
|                           
|                           
|                           
|                            | Q2 |                 | $ | 275    |       
|                           
|                           
|                           
|                           
|                            | Q3 |                 | $ | 275    |       
|                           
|                           
|                           
|                           
|                            | Q4 |                 | $ | 275    |       
|                            |    |                 |   |       
|                            |    | Total:          |   | $      | 88,500 | 
|                            |    |                 |   |       

During 1999 and 2000, we have made certain strategic investments
and entered into certain marketing and promotion arrangements. In
 certain circumstances we have recognized revenue in connection
with these marketing and promotion arrangements pursuant to our
accounting policies. Due to the recent financial uncertainty
related to certain strategic investments, we have determined that
 we are unable to recognize revenue in connection with certain
marketing and promotion arrangements until the significant
uncertainties have been satisfactorily resolved. These above
factors, current financial and economic conditions, and the
current litigation could have an adverse effect on MP3.coms
 future revenues.

Cost of Revenues

Cost of revenues for the nine months ended September 30,
2000 were $11,314,000 or 19.5% of net revenues compared to
$2,704,000 or 40.8% of net revenues during the same period a year
 ago, resulting in gross margins of 80.5% and 59.2%,
respectively. The increase in cost of revenues, in absolute
dollar amounts,

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Sales and Marketing

During the nine months ended September 30, 2000, sales and
marketing expense was $42,992,000 or 74.0% of net revenues
compared to $12,227,000 or 184.5% of net revenues during the same
 period a year ago. The increase in sales and marketing expense,
in absolute dollar amounts, was primarily due to stock-based
charges of approximately $5,758,000 associated with the
acceleration of stock option vesting, the cost of our Payback for
 Playback program of approximately $5,845,000, an increase in
sales and marketing payroll and related expenses of approximately
 $7,588,000, a charge associated with the impairment of certain
prepaid marketing expenses related to arrangements with
internationally known artists of approximately $2,587,000, new
and increased marketing programs of approximately $9,017,000, and
 costs associated with the growth of our business. Additionally,
the increase was reduced by marketing and promotion costs of
approximately $2,114,000 associated with the 1999 Alanis
Morissette and Tori Amos 5 1/2 Weeks Summer tour
 sponsorship, and the contribution of 100,000 shares of our
common stock to the MP3 Foundation of $767,000 that were incurred
 during the third quarter of 1999 but not incurred during the
same quarter ended in 2000. The decrease in sales and marketing
costs as a percentage of revenues is primarily due to the
significant increase in net revenues. MP3.com anticipates that
overall sales and marketing expense will continue to 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.

In the future, MP3.com may enter into arrangements with
additional 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. Proceeds from these events, if any,
will be credited against promotional expenses incurred. Depending
 upon the terms and timing of promotional activities, substantial
 sales and marketing expenses may be incurred in any quarterly or
 annual period.

Engineering and Product Development

During the nine months ended September 30, 2000, engineering
 and product development expense was $17,471,000 or 30.1% of net
revenues compared to $3,444,000 or 52.0% of net revenues during
the same period a year ago. The increase in the level of
engineering and product development expense, in absolute dollar
amounts, was primarily due to an increase in payroll and related
expenses of approximately $7,913,000, increased computer
equipment depreciation of approximately $3,267,000, increased
consulting and temporary labor of $926,000, expensed computer
supplies and maintenance of approximately $842,000, and costs
associated with the growth of MP3.coms business. The
decrease in engineering and product development expense as a
percentage of net revenue is primarily due to a significant
increase in net revenues. MP3.com anticipates that overall
engineering and product development expenses will increase in the
 foreseeable future; however, engineering and 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 engineering and product development and hiring.

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General and Administrative

During the nine months ended September 30, 2000, general and
 administrative expense was $23,255,000 or 40.0% of net revenues
compared to $4,874,000 or 73.5% of net revenues during the same
period a year ago. The increase in general and administrative
expense, in absolute dollar amounts, was primarily a result of an
 increase in finance and administrative payroll and related
expenses of approximately $6,784,000; increased legal,
accounting, and public relations expenses of approximately
$4,468,000; insurance costs of approximately $1,509,000; bad debt
 expense of approximately $1,798,000; goodwill amortization of
approximately $975,000; consulting and temporary labor of
approximately $1,346,000; and costs associated with the growth of
 MP3.coms business. General and administrative expense as a
 percentage of net revenues decreased primarily due to increased
net revenues. MP3.com anticipates that overall general and
administrative expenses will increase in the foreseeable future;
however, general and administrative expense as a percentage of
net revenues may fluctuate depending on the level of future net
revenues and the timing of additional investments in general and
administrative infrastructure.

Charge for Litigation and Copyright Matters

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

Between June and August 2000, MP3.com entered into settlement and
 license agreements with Warner Music Group, BMG Entertainment,
Sony Music and Capitol Records, Inc.(EMI), which together
represented eight of the ten major recording companies that filed
 the copyright infringement lawsuit on January 21, 2000. The
 settlement agreements provide for a settlement amount to be paid
 in cash by MP3.com in exchange for a release from the settling
plaintiffs and their affiliated entities (as defined in the
settlement agreements) of all claims related to the
January 21, 2000 lawsuit and the My.MP3.com service.
Most-favored-nations provisions in these settlement agreements
require additional settlement amounts to be paid under certain
circumstances. MP3.com made no admission of wrongdoing in
connection with these settlements. Subject to certain affirmative
 obligations of MP3.com and other terms and conditions regarding
the implementation of the My.MP3.com service, the license
agreements permit MP3.com to utilize recordings owned by Warner
Music Group, BMG Entertainment, Sony Music and EMI as part of the
 My.MP3.com service. The license agreements have terms of
approximately three to ten years, and provide for on-going
royalty payments based on the greater of (i) a specified
percentage of net revenues generated from the My.MP3.com service
or (ii) a specified amount accrued each time a licensor
recording is streamed from My.MP3.com. In addition, the licenses
provide for on-going royalty payments based on the number of
times a licensor recording is added to My.MP3.com accounts.

As a result of the settlements described above, the
January 21, 2000 copyright infringement lawsuit was limited
to a dispute with UMG Recordings, Inc., which represents two of
the original plaintiffs. A trial in the case was held from
August 28 through September 6, 2000 on the issues of
willfulness and damages. After hearing evidence, the court ruled
on September 6, 2000 that MP3.com had willfully infringed
UMGs copyrights and awarded damages to UMG in an amount of
$25,000 per CD. A trial is scheduled to commence on
November 13, 2000 to determine the number of valid copyright
 registrations held by UMG, and hence the number of CDs for which
 UMG will be entitled to recover the per CD damage award. Based
on information presently available, the maximum number of such
registrations is estimated to be between 3,000 and 7,000.
Numerous factors could affect the ultimate size of the
determination.

Over the course of 2000, some other independent labels have filed
 lawsuits against us based on the same set of allegations as the
UMG case. These labels include Zomba Recording Corp., Tee Vee
Toons, Inc., and

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Publisher Lawsuits.On March 14, 2000, two large
music-publishing companies, MPL Communications, Inc. and Peer
International Corporation, filed a copyright infringement lawsuit
 against MP3.com in the United States District Court for the
Southern District of New York. The complaint alleged that
MP3.com, in connection with its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in
violation of the Copyright Act, and that MP3.com, in connection
with the streaming of audio content to users of the My.MP3.com
service, continued to make unauthorized digital phonorecords in
violation of the Copyright Act. The complaint further alleges
that MP3.coms actions constituted unauthorized copying and
willful infringement of plaintiffs copyrights. Plaintiffs
seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from
operating its My.MP3.com service or any other service that uses
unauthorized reproductions of plaintiffs copyrighted works.
 Additionally, Zomba Enterprises, Inc. has filed its own music
publishing case against us. In view of the courts rulings
in the UMG case, there is a substantial risk that the issues of
infringement, fair use, and willfulness may be adjudicated
against us in these cases with publishers. This would mean that
we would only be able to litigate the issue of damages. A motion
has been filed by MPL and Peer to amend their complaint to add
many additional copyrighted works to those at issue in the
action. On October 17, 2000, MP3.com, the National Music
Publishers Association, Inc. and its licensing subsidiary,
The Harry Fox Agency, Inc. entered into a preliminary agreement
that  if approved by individual HFA music
publisher-principals  would permit the use of up to
one million musical compositions on the My.MP3.com service. In
addition, MP3.com, MPL and Peer agreed to settle the
March 14, 2000 litigation upon finalization of the
preliminary agreement, which requires ratification by individual
HFA music publisher-principals. MP3.com, MPL and Peer agreed to
stay the March 14, 2000 litigation until the ratification
process is completed. Accordingly, the court stayed all
proceedings in this litigation until January 2, 2001.

The proposed, 3-year licensing arrangement provides that MP3.com
will pay up to thirty million dollars ($30,000,000) to HFA for
the benefit of up to 25,000 music publishers and their songwriter
 partners as part of two equal funds. One fund will be used to
pay HFA publisher-principals for past uses of music on the
My.MP3.com service, in exchange for a release from HFA
publisher-principals and their affiliated entities of all claims
related to the March 14, 2000 lawsuit and the use of their
compositions on the My.MP3.com service. The other fund will
provide advance payments toward royalties earned under the
prospective license. The terms of the prospective license call
for a payment of one quarter cent each time a song is streamed on
 demand to a customer from his or her My.MP3.com locker, along
with a one-time fee per track added to the My.MP3.com service.

Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United States
 District Court for the Southern District of New York against
MP3.com and several major recording companies that claimed to own
 copyrights in sound recordings featuring the artists. The
complaint alleges that the recording company defendants, in their
 separate lawsuit against MP3.com (filed on January 21, 2000
  see above), are claiming rights in plaintiffs
recordings that they do not possess. In particular, the complaint
 alleges that the recording company defendants do not possess any
 copyright protections with respect to plaintiffs pre-1972
published and pre-1978 unpublished recordings, do not possess the
 right to digitally transmit plaintiffs pre-1996 recordings
 over the Internet, and do not possess the right to control the
conversion of plaintiffs recordings into mp3 files. The
complaint further alleges that MP3.com has used the names and
likenesses of plaintiffs without their consent or authorization
and in a deceptive manner, in violation of the federal Lanham
Act, the New York Civil Rights Law, and unspecified unfair
competition and misappropriation laws. In their prayer for
relief, plaintiffs ask to have their class action certified, to
be awarded unspecified damages and attorneys fees, to have
the defendants enjoined from using plaintiffs names and
likenesses to promote downloading music over the Internet, and to
 receive declaratory relief regarding plaintiffs rights in
their pre- and post-1972 recordings. This case has been dismissed
 in its entirety with prejudice at the pleadings stage, and we
have been informed that the plaintiffs intend to appeal.

Settlement Discussions; Charge to Earnings.MP3.com has
pursued and continues to actively pursue settlement discussions
with the various plaintiffs and claimants in the cases and
disputes discussed above. The

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During the quarter ended September 30, 2000, we recorded an
additional charge for litigation and copyright matters of
$20.0 million. This additional charge reflects incremental
costs that management estimates will be incurred in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3.com service. The additional
charge and accrual reflect managements expectations as of
the date of this quarterly report and is based on currently
available information as well as significant assumptions made by
management regarding the various litigation and copyright
matters. Although we believe that the expectations and
assumptions reflected in this additional charge are reasonable,
we cannot guarantee that future events or results will conform to
 such expectations or assumptions. If these expectations and
significant assumptions prove to be erroneous in light of future
events, the actual amounts incurred by MP3.com to resolve all
matters could be materially different than those recorded as of
September 30, 2000.

Cash payments for the settlements described above and other
payments have reduced the cumulative amount reserved as a result
of these charges to $116.9 million as of September 30,
2000. Amounts payable for past issues in connection with the
HFA/Peer/MPL agreement described above are included in the
remaining amount reserved as of September 30, 2000.

Although MP3.com has obtained license agreements permitting the
use of recordings from BMG Entertainment, Warner Music Group,
Sony Music and EMI, we cannot guarantee that MP3.com will be able
 to secure similar license agreements from any other recording
company. Similarly, MP3.com has not yet secured any final
publishing license or other affirmative clearance (whether by
litigation or otherwise) to utilize within the My.MP3.com service
 the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment, Warner Music
Group, Sony Music and EMI), nor can we guarantee that any such
license or clearance will ever be obtained. If a final publishing
 license or other affirmative clearance to utilize such
compositions is not obtained, our ability to utilize in the
My.MP3.com service recordings from any recording company could be
 materially and adversely affected.

Class Action Lawsuits. We and certain of our
employees, officers and directors have been named as defendants
in several lawsuits alleging violations of the federal securities
 laws. The complaints, which were filed between
September 19, 2000 and September 29, 2000 in the United
 States District Court for the Southern District of California,
each purport to be brought on behalf of a class of stockholders.
The complaints allege that we and the other the defendants
violated the federal securities laws by issuing materially false
and misleading statements and failing to disclose material
information regarding our My.MP3.com service and the litigation
surrounding the service. The complaint does not specify the
dollar amount of damages alleged.

Derivative Lawsuits.Between September 14, 2000 and
September 18, 2000, certain stockholders of MP3.com filed
shareholder derivative suits against MP3.com and certain of its
employees, officers and directors in the Superior Court of the
State of California, County of San Diego. These complaints allege
 various statutory and common law claims relating to the
My.MP3.com service.

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

Costs Related to Acquisition Activities

Acquisition related costs for the first nine months of 2000 were
$1,704,000 compared to zero for the same period one year ago. The
 increase in these costs was a result of certain costs charged to
 expense associated with the previously announced acquisition of
TransComputing International Corporation (TCI) d.b.a.
 seeUthere.com, which was not completed.

Amortization of Deferred Compensation

During the nine months ended September 30, 2000, total
deferred compensation of $7,796,000 was amortized to expense
compared to $15,833,000 during the same period one year ago.
Deferred compensation is being amortized over the vesting period
of the relevant granted stock options, which is generally four
years. The decrease in the amortization is primarily a result of
the accelerated amortization method (as provided for in FASB
Interpretation No. 28) to amortize deferred compensation, which
resulted in a greater amount of amortization expense in the
earlier years of the amortization period. Additionally, we
recognized the intrinsic value of $369,000 of stock-based
compensation during the nine months ended September 30, 1999
 that was not present during the same period of 2000.

Interest Income, Net

Interest income (net of interest expense) during the nine months
ended September 30, 2000 was $14,833,000 compared to
$4,836,000 during the same period a year ago. Interest income
during the quarter ended September 30, 2000 is directly
related to interest earned on cash, cash equivalent balances and
marketable securities associated with proceeds of an aggregate of
 approximately $426,300,000 during 1999 from (i) the
issuance of common stock in connection with MP3.coms
initial public offering in July 1999, (ii) the exercise of
stock options and a warrant for the purchase of common stock, and
 (iii) the issuance of Series A, B, and C convertible
preferred stock.

Impairment of Strategic Investments

During the nine months ended September 30, 2000, MP3.com
recorded a reserve of $40,670,000 for the estimated impairment of
 its strategic investment portfolio and short-term investments.
The impairment is associated with a decrease in fair value of
certain strategic investments and an investment classified as
short-term investments where the decrease in the fair market
value of the stock is considered other than temporary.

Provision for Income Taxes

Due to the loss form operations for both book and tax purposes,
no provision or benefit for income taxes was recorded for the
first nine months of 2000 and 1999. Currently, we provide a
valuation allowance for all future tax benefits.

Minority Interest in Losses of an Unconsolidated
Subsidiary

Minority interest in the losses of an unconsolidated subsidiary
during the nine months ended September 30, 2000 was
$1,668,000 compared to zero for the same period a year ago. The
increase in minority interest

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In April 2000, MP3.com agreed to purchase the remaining 53.5%
ownership of mp3radio.com, a joint venture with Cox Interactive
Media, Inc., and paid approximately $4 million in cash.
During the transition period ending June 30, 2000, the costs
 of relocating the joint ventures operations to San Diego
were shared pro rata based upon the parties existing
ownership percentages and included in minority interest in losses
 of an unconsolidated subsidiary. The acquisition was completed
during the third quarter of 2000 and was accounted for under the
purchase method of accounting. The excess purchase price over
fair value of net assets acquired was generally allocated to
assembled work force; URLs, trademarks and names; a radio
station agreement; and goodwill. The excess purchase price over
fair value of the assets acquired of $4.0 million was allocated
to certain assets and amortized over twelve to twenty-four months
 using the straight-line method.

Liquidity and Capital Resources

Overview

To date, MP3.com has generated cash from internal operations,
proceeds from the sale of convertible preferred stock, the
proceeds from its initial public offering and, to a lesser
extent, the exercise of stock options and equipment financing
through a line of credit. As of September 30, 2000, MP3.com
had approximately $235,986,000 in cash, cash equivalents and
marketable securities.

Operating Activities

Net cash used in operating activities during the nine months
ended September 30, 2000 was approximately $79,715,000,
consisting primarily of the following:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | net loss of approximately $243,905,000;                                                                       
|
| |  | amortization of deferred compensation of approximately
	$7,846,000;                                           
|
| |  | depreciation of property and equipment and amortization of
	goodwill of approximately $5,513,000;             
|
| |  | amortization of stock based marketing costs of approximately
	$3,142,000;                                     
|
| |  | stock-based charges associated with the acceleration of stock
	option vesting of approximately $6,471,000;    
|
| |  | impairment of strategic investments of $40,670,000;                                                           
|
| |  | a charge for litigation and copyright matters of $170,000,000;                                                
|
| |  | an increase in prepaid expenses and other assets of approximately
	 $2,280,000;                               
|
| |  | a decrease in accounts payable of approximately $1,276,000;                                                   
|
| |  | a net decrease in accrued expenses and accrued amounts for
	copyright claims of approximately $41,246,000; and
|
| |  | a decrease in deferred revenue of approximately $25,530,000.                                                  

Investing Activities

Net cash provided by investing activities during the nine months
ended September 30, 2000 was approximately $71,641,000,
consisting primarily of net maturities of marketable securities
of $167,176,000 reduced by property and equipment expenditures of
 $10,620,000, purchases of strategic equity investments of
approximately $39,738,000, issuance of a note receivable of
$4,000,000, prepaid multimedia content royalties of $35,500,000,
and the acquisition of the remaining 53.5% of mp3radio.com of
$3,816,000.

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Financing Activities

Net cash used in financing activities during the nine months
ended September 30, 2000 was approximately $1,907,000,
consisting primarily of the repurchase of common stock from an
executive officer offset by the exercise of stock options.

MP3.com has no material financial commitments. MP3.com expects to
 substantially increase expenditures for the following:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | computer equipment and furniture and fixtures associated with new
	 employees and facility expansion;
|
| |  | web site computer equipment;                                                                         
|
| |  | bandwidth and networking equipment and infrastructure;                                               
|
| |  | additional sales and marketing employees;                                                            
|
| |  | equipment and additional employees related to product
	development;                                  
|
| |  | increased advertising, 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.

Future Capital Requirements

MP3.com believes that its cash and cash equivalent balances and
marketable securities will be sufficient to satisfy its cash
requirements for at least the next 12 months, including
certain litigation settlement payments that may be required in
connection with claims related to our My.MP3.com service to the
extent we have accrued such amounts as of September 30,
2000. MP3.com intends to invest its cash in excess of current
operating requirements in short-term, interest-bearing,
investment-grade securities.

To the extent MP3.coms net revenues increase in the future,
 MP3.com anticipates significant increases in its 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, MP3.com does not expect that the increases in accounts
payable and other liabilities will offset the increases in
accounts receivable, unbilled receivables and other assets.

MP3.com may need to raise additional capital if it expands more
rapidly than initially planned, to develop new or enhanced
products and/or services, to pay any damage awards or settlement
costs related to our current litigation proceedings, 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 MP3.coms stockholders will be
reduced, its stockholders may experience additional dilution and
these securities may have rights, preferences or privileges
senior to those of its stockholders. There can be no assurance
that additional financing will be available at all or on terms
favorable to MP3.com. If adequate funds are not available or are
not available on acceptable terms, MP3.coms ability to fund
 its expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, pay unexpected damage
awards or otherwise respond to competitive pressures could be
significantly limited. MP3.coms business may be harmed by
these limitations.

Commitments

In July 1999, we entered into an agreement with Montaigne
Participations Et Gestion (MPG) (formally named
Groupe Arnault) under which MPG committed to purchase an
aggregate of $150 million in advertising, promotion and
marketing services from us over three years. In July 1999, we
received prepayments from MPG totaling $45 million, which
represented payment for these services through the fourth quarter
 of 2000. In September 2000, we entered into an amended and
restated agreement with MPG. The

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|                           |    |                 |   |        |        | 
|-------------------------- | -- | --------------- | - | ------ | ------ | 
|Quarterly Payment Schedule |    | Purchase Amount
|                           |    |                
|                           |    | (in thousands) 
|                          
|                          
|                          
|                          
|2000                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 13,500 |       
|                          
|                          
|                          
|                          
|2001                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 15,000 |       
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 12,250 |       
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 12,250 |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 12,250 |       
|                          
|                          
|                          
|                          
|2002                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 6,000  |       
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 5,000  |       
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 5,000  |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 5,000  |       
|                          
|                          
|                          
|                          
|2003                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 300    |       
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 300    |       
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 275    |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 275    |       
|                          
|                          
|                          
|                          
|2004                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 275    |       
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 275    |       
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 275    |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 275    |       
|                           |    |                 |   |       
|                           |    | Total           |   | $      | 88,500 | 
|                           |    |                 |   |       

During 1999 and 2000, we have made certain strategic investments
and entered into certain marketing and promotion arrangements. In
 certain circumstances we have recognized revenue in connection
with these marketing and promotion arrangements pursuant to our
accounting policies. Due to the recent financial uncertainty
related to certain strategic investments, we have determined that
 we are unable to recognize revenue in connection with certain
marketing and promotion arrangements until the significant
uncertainties have been satisfactorily resolved. These above
factors, current financial and economic conditions, and the
current litigation could have an adverse effect on MP3.coms
 future revenues.

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Risks Related To Our Business Model



| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Are Currently Engaged In A Number Of Ongoing Lawsuits
	Relating To Our My.MP3.com Service, Which May Result In Monetary
	Damages Substantially Greater Than Our Overall Market
	Capitalization And The Discontinuation Or Interruption Of
	Services To Our Consumers.

We are currently a named defendant in a number of lawsuits,
including an action initially brought by ten major music
recording companies, a lawsuit filed by two major music
publishing companies, an artists class-action lawsuit in
which we are named as co-defendants with several major recording
companies, lawsuits brought by independent record companies (each
 alleging that, among other things, portions of our My.MP3.com
and related services violated their respective copyrights and/or
misappropriated artists names and likenesses), several
class action lawsuits alleging securities law violations, and
certain derivative lawsuits alleging statutory and common law
claims.

As of September 30, 2000, we have only reached settlement
with four major recording companies, which together represent
eight plaintiffs in the lawsuit brought by the ten major music
recording companies. We cannot assure you that we will be
successful in reaching settlements with any additional parties to
 such litigation proceedings or in defending these lawsuits, and
we may be required to pay license fees or substantial damages,
including punitive, statutory or other damages that far exceed
the resources and overall market capitalization of our company,
in which event we might have to significantly limit or terminate
our business operations, particularly because our business is not
 yet profitable. Moreover, MP3.com has not yet secured any final
publishing license or other affirmative clearance to utilize
within the My.MP3.com service the compositions embodied in the
recordings owned by any recording company (including those with
whom we have reached settlement agreements), nor can we guarantee
 that any such license or clearance will ever be obtained. If a
final publishing license or other affirmative clearance to
utilize such compositions is not obtained, our ability to utilize
 in the My.MP3.com service recordings from any recording company
could be materially and adversely affected. At the maximum
statutory rate of $150,000 per work, our aggregate potential
liability resulting from all of our litigation proceedings could
exceed billions of dollars. If successful, any one of these
lawsuits could seriously harm our business by forcing us to cease
 providing services to our consumers or requiring us to pay
monetary damages. Even if unsuccessful, these lawsuits still can
harm our business severely by damaging our reputation, requiring
us to incur legal costs, lowering our stock price and public
demand for our stock, and diverting managements attention
away from our primary business activities in general.

During the quarter ended September 30, 2000, we recorded an
additional charge for litigation and copyright matters of
$20.0 million. This additional charge reflects incremental
costs that management estimates will be incurred in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3.com service. The additional
charge and accrual reflect managements expectations as of
the date of this quarterly report and is based on currently
available information as well as significant assumptions made by
management regarding the various litigation and copyright
matters. Although we believe that the expectations and
assumptions reflected in this additional charge are reasonable,
we cannot guarantee that future events or results will conform to
 such expectations or assumptions. If these expectations and
significant assumptions prove to be erroneous in light of future
events, the actual amounts incurred by MP3.com to resolve all
matters could be materially different than those recorded as of
September 30, 2000.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 web site, including:



| |   |                                       
| | - | --------------------------------------
| |  | subscription revenues;                
|
| |  | retail music revenues;                
|
| |  | syndicated radio advertising revenues;

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

Since our business revenues may evolve rapidly, these sources of
revenues, including those derived from the development of our
My.MP3.com and other MSP services may change or increase or
decrease in importance, as well. It is uncertain whether a
music-based web site that relies on attracting people to learn
about, listen to and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. In
addition, our efforts to exploit sources of revenue from the
My.MP3.com and other MSP services in development may not be
successful or may meet significant consumer resistance. We cannot
 assure you that our business model will succeed or will be
sustainable as our business grows. In order for our business to
be successful, we must not only develop services that directly
generate revenue, but also provide content and services that
attract consumers to our web site 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 web site frequently. We provide many of our
products and services, including our My.MP3.com and MSP services
in development, 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 our artists or that the traditional music industry will not
successfully serve these artists in the future. If this new
market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or our products and services
do not achieve or sustain market acceptance, our business could
be harmed. We believe the future popularity of downloadable
digital music will depend, in part, on the availability of
portable devices to store and replay this music. In addition, we
are attempting to develop new features and services for our
consumers based on the My.MP3.com and other MSP services to allow
 consumers additional ways to access, manage and listen to their
music on any web-enabled device or application. These efforts may
 not be successful and may meet significant consumer and industry
 resistance. To the extent that consumer acceptance or
distribution of these portable devices and/or MSP services is
delayed or these devices or services 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.

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

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

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| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
web site traffic, personnel, facilities and infrastructure. For
example, the number of monthly page views on our web site
increased approximately 51.52% from the month of December 1999 to
 the month of September 2000. Our number of employees increased
from eight on December 31, 1998, to 274 on December 31,
 1999, to 334 on September 30, 2000. 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 Advertising May Not
	Provide Sufficient Financial Returns For Our Business To Grow Or
	Survive. We Currently Depend On A Small Group Of Customers For
	Our Advertising Revenue.

Although our business model contemplates multiple sources of
revenue, we anticipate that in the foreseeable future we will
depend substantially on revenue from advertising. During the
third quarter of 2000, revenue from advertising accounted for
96.6% of our net revenues, a higher percentage than the same
period the previous year. We currently depend on a small group of
 customers for our revenue from advertising. During the third
quarter of 2000, one customer accounted for approximately 56.2%
of net revenues, and our top ten customers accounted for
approximately 82.3% of net revenues. We expect that most of our
revenues will continue to be derived from third party advertising
 agreements like those we have with MPG, Buy.com and Voquette. If
 any of these important customers were to leave us, our business
could be harmed. Our revenues may also be adversely affected by
the future insolvency of major customers within the volatile
Internet and software industries. If we do not increase revenue
from online advertising, our business may not grow or survive.
Increasing our revenue from online advertising depends largely on
 our ability to:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | conduct successful selling and marketing efforts aimed at
	advertisers;                     
|
| |  | increase the size of 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 Two Years Will Come From MPG. If This
	Relationship Is Prematurely Terminated, Modified Substantially Or
	 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.

In July 1999, we entered into an advertising, promotion and
marketing agreement with MPG. This agreement was amended
effective September 2000. We anticipate that for at least the
next two years a substantial portion of our revenues will come
from sales of our advertising, promotion and marketing services
under this agreement. MPG is under no obligation to renew its
relationship with us after the current agreement terminates at
the end of December 2004 or to increase its advertising
commitments with us when they significantly decrease under the
agreement at the end of December 2001. Historically, most of our
revenue sources have not provided for a similarly-scheduled
growth (or decrease) in revenues. If we do not develop
significant additional revenue sources in the future, our
business will be substantially dependent on the

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| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 web site traffic and revenues we
expect. This continued development of the Internet includes
maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of
complementary products including high speed modems, 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 web site. Our penetration of a
broader consumer market will depend, in part, on continued
proliferation of high speed Internet access. Even compressed in
mp3 format, a typical three minute song file can occupy more than
 three megabytes of storage space. This file could take as much
as two minutes to download over an xDSL or cable modem compared
to 10 to 20 minutes over a conventional 56Kbps modem. 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 increased
bandwidth requirements, the Internet infrastructure may be unable
 to support the demands placed on it. In addition, increased
users or bandwidth requirements may harm the performance of the
Internet. The Internet has experienced a variety of outages and
other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the
future. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result
in the Internet becoming an inconvenient or uneconomical source
of music and music-related products and services. The
infrastructure and complementary products or services necessary
to make the Internet a viable commercial marketplace for the long
 term may not be developed successfully or in a timely manner.
Even if these products or services are developed, the Internet
may not become a viable commercial marketplace for the products
or services that we offer.



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

Our success depends on having a web site that offers high quality
 and diverse music choices, 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 web site and harm
our business. Because our contracts with artists are, with few
exceptions, non-exclusive and can be terminated by the artist at
any time, our retention of artists requires that we offer
sufficient benefits, including artist services and artist-
oriented content, to encourage them to continue providing us with
 content. If we are not able to maintain our ability to serve and
 provide valuable tools to artists, artists may leave our web
site and remove their music and other content. This could also
prevent us from attracting new artists. We may also lose artists
who gain

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| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 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 web site 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 web site. To post music on our web site, these
artists must typically get permission from their record company.
As a result, our access to internationally-recognized artists and
 our ability to distribute their music or place their music on
our web site and on our DAM CDs is limited. For this reason, and
because of the emphasis of our business model on under-served
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 devoted resources to develop a universal standard
for the electronic delivery of music, called the Secure Digital
Music Initiative, or SDMI. This delivery method may be available
during 2000. In addition, major corporations including Microsoft
Corporation, IBM Corporation, AT&T Corp. and Sony Corporation
 have launched efforts to establish proprietary audio formats
that will compete with the mp3 format. Some competitive formats
offer security and features that track the number of copies made.
 The mp3 technology we currently use does not offer these
features. These features are especially popular among groups
associated with the traditional music industry, and are being
promoted by some of our competitors. Widespread industry and
consumer acceptance of any of these audio formats could
significantly harm our business if we are unable to adapt and
respond to these changing standards. Although we are not tied
exclusively to the use of mp3 technology or to any other specific
 standard for the electronic delivery of music, if a proprietary,
 or closed, music delivery format receives widespread industry
and consumer acceptance, we may be required to license additional
 technology and information from third parties in order to adopt
that format. We cannot assure you that this third-party
technology and information will be available to us on
commercially reasonable terms, if at all. Any failure to obtain
any of these technology and information licenses or to
successfully reconfigure our music library to support these
technologies could prevent us from making our music available in
the most widely accepted formats, which could make our offerings
less popular or inaccessible to both consumers and artists and
thus harm our business.



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 web site, our brand identity is currently linked to the mp3
technology and possibly with other companies that may not use mp3
 or other similar technologies in a legal or scrupulous manner.
As a result, we sometimes face and may continue to face

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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. 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, culture and operations. In addition,
the key personnel of the acquired company may decide not to work
for us. Acquisitions of additional services or technologies also
involve risks of incompatibility and lack of integration into our
 existing operations. If we finance the acquisitions by 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 may not be meaningful and should not be relied
upon as indicators of future performance. In addition, our
revenue and earnings may vary substantially as a result of
holiday-based buying and the business cycles of the music
industry, online advertisers 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 be
affected.



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

In 1999 and the first nine months of 2000, we had a net loss of
approximately $42.5 and $243.9 million, respectively. We
expect substantial net losses and negative cash flow for the
foreseeable future. We believe it is critical to our long term
success that we continue to develop MP3.com brand awareness and
loyalty through marketing and promotion, expand our artist and
consumer networks, develop our online content and expand our
other services. We expect that our operating expenses will
increase significantly during the next several years, especially
in sales and marketing and product development. With increased
expenses, we will need to generate significant additional
revenues to achieve profitability. As a result, we may never
achieve or sustain profitability and, if we do achieve
profitability in any period, we may not be able to sustain or
increase profitability on a quarterly or annual basis.

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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 including certain litigation settlement payments
that may be required in connection with claims related to our
My.Mp3.com service to the extent we have accrued such amounts as
of September 30, 2000. However, we may need to raise
additional funds in order to:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | satisfy any damage awards or unanticipated settlement costs
	related to our current or potential future litigation
	proceedings;
|
| |  | finance unanticipated working capital requirements;                                                                             
|
| |  | 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:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | developments related to our current or future legal proceedings;                                                                    
|
| |  | actual or anticipated variations in quarterly and/or annual
	operating results;                                                     
|
| |  | announcements of technological innovations;                                                                                         
|
| |  | new products or services offered by us or our competitors;                                                                          
|
| |  | changes in financial estimates and/or ratings by securities
	analysts;                                                              
|
| |  | announcements of significant acquisitions, strategic
	partnerships, joint ventures or capital commitments by us or our
	competitors;
|
| |  | additions or departures of key personnel;                                                                                           
|
| |  | sales of common stock;                                                                                                              
|
| |  | perceived and/or actual sales of our stock by company insiders;
	and                                                                
|
| |  | other events or factors, many 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 Our Common Stock In The Public
	Market Could Cause Our Stock Price To Fall.

Sales of a large number of shares of our common stock in the
public market or the perception that such sales could occur could
 cause the market price of our common stock to drop. The majority
 of our shares are freely transferable without restriction or
registration under the Securities Act of 1933, unless such shares
 are held by our affiliates, as that term is defined in
Rule 144 under the Securities Act. We are filing a
registration statement on Form S-8 with the Securities and
Exchange Commission covering an additional 10,600,000 shares of
common stock reserved for issuance under our 1998 and 2000 equity
 incentive plans and for options issued outside such plans. Once
issued, any shares registered on such Form S-8 registration
statement may be freely transferable without restriction or
registration under the Securities Act of 1933, with the exception
 of certain shares held by our affiliates, as that term is
defined in Rule 144 under the Securities Act. Sales of
common stock by existing stockholders in the public market, or
the availability of such shares for sale, could adversely affect
the market price of the common stock.

Holders of approximately 17,088,152 shares of our Common Stock
have certain registration rights. If such holders, by exercising
either their registration rights or their rights under
Rule 144 or Rule 701, cause a large number of
securities to be registered and/or sold in the public market,
such sales could have an adverse effect on the market price for
our common stock. If we were to include in a company-initiated
registration shares held by such holders pursuant to the exercise
 of their registration rights, such sales may have an adverse
effect on our ability to raise needed capital.

Risks Related To Sales, 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 frequent and visible national and
local media exposure as well as individual, unsolicited promotion
 of our web site. The frequency or quality of this media exposure
 or promotion may not continue. Negative publicity from our
litigation proceedings could hurt public perception of our brand
and cause consumers and artists to use other web sites. We
believe that continuing to strengthen our brand will be critical
to achieve widespread acceptance of our products and services.
Favorable public perception of our brand will depend largely on
our ability to continue providing users with high quality
products and services and the success of our marketing efforts.
We plan to increase our marketing expenditures to create and
maintain brand recognition. However, brand promotion activities
may not yield increased revenues and, even if they do, any
increased revenues may not offset the expenses we incur in
building our brand.



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

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



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

We plan to use consumer data to expand, refine and target our
marketing and sales efforts. We collect most of our data from
users who report information to us as they conduct transactions
on our web site. If a large proportion of users impede our
ability to collect data or if they falsify data, our marketing
and sales efforts would be less effective since advertisers
generally require detailed demographic data on their target

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| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 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 web sites 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 web
site traffic levels, purchase inquiries and number of
click-throughs on our online advertisements or that competitors
will not experience greater growth in these areas than we do.
Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which
could damage the long-term or short-term prospects of our
business.

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

In November 1999, we outsourced exclusively to Cinram
International, Inc. our just-in-time DAM CD production and
fulfillment process, as well as the production and fulfillment of
 our other promotional CD products. The transition of fulfillment
 operations to Cinram was completed at the end of March 2000. For
 redundancy, we also currently maintain certain minimal
fulfillment capabilities at our main facility in San Diego.
Should Cinram cease to provide us with production and fulfillment
 services for any reason, we cannot assure you that we will be
able to fulfill any of our customers orders for
DAM CDs and other merchandise without significant delays or
expense, or at all. Any such loss of fulfillment operations, for
any period of time no matter how brief, may substantially and
irreparably harm our business reputation and significantly
decrease our revenues and our total number of consumers, artists
and users.

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

Our future success will depend on our ability to attract, train,
retain and motivate other highly skilled technical, managerial,
marketing and customer support personnel. Competition for these
personnel is intense, especially for engineers, web designers and
 advertising sales personnel, and we may be unable to
successfully attract sufficiently qualified personnel.
Substantially all of our employees have joined us since 1999. If
we cannot integrate these employees into our business, we will
not be able to effectively manage our growth. Also, our inability
 to hire, integrate and retain qualified personnel in sufficient
numbers may reduce the quality of our programs, products and
services.



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

In the third quarter of 2000, an average of approximately
42.8 gigabytes of musical content was added to our web site
each week and the number of monthly page views to our web site
increased approximately 51.5% from the month of December 1999 to
the month of September 2000. We must continue to add hardware and
 enhance software to accommodate the increased content and use of
 our web site. If we are unable to increase the data storage and
processing capacity of our systems at least as fast as the growth
 in demand, our web site may become unstable and may fail to
operate for unknown periods of time. Unscheduled downtime could
harm our business and also could discourage users of our web site
 and reduce future revenues.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our 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 1999, we installed a new financial accounting system. If our
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 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 web
site.



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

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

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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. Furthermore, we anticipate entering into agreements
with international entities and possibly conducting material
business activities in foreign jurisdictions. Evolving areas of
law that are relevant to our business include privacy and data
collection laws, proposed encryption laws, content regulation and
 sales and use tax laws and regulations. Because of this rapidly
evolving and uncertain regulatory environment, both domestically
and internationally, we cannot predict how these laws and
regulations might affect our business. In addition, these
uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or
forcing us to change how we do business.



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

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



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

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



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

Our intellectual property includes our trademarks and copyrights,
 proprietary software, and other proprietary rights. We believe
that our intellectual property is important to our success and
our competitive position, and we try to protect it. However, our
efforts may be inadequate. 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, certain entities
 have asserted that many online music providers, including
MP3.com, violate patent rights that they allegedly own covering
forms of distribution of music over the Internet (including the
sale of digital downloads and certain music streaming
technologies). If successful, these claims, or similar claims by
others, could seriously harm our business by forcing us to cease
using important intellectual property or requiring us to pay
monetary damages. Even if unsuccessful, these claims could harm
our business by damaging our reputation, requiring us to incur
legal costs and diverting managements attention away from
our business.

41



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##### Table of Contents






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 and marketable
securities, including U.S. government agencies, corporate debt
securities, commercial paper, and money market funds. As of
September 30, 2000, approximately 98.4% of our total
portfolio matures in one year or less, with the remainder
maturing in less than two years.

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 September 30, 2000.

The following table presents the fair value balances of our cash
equivalents and short-term investments that are subject to
interest rate risk as of June 30, 2000 (dollars in
thousands):

|                                                     |                        |               |         |                  |   |   |       |      |  
|---------------------------------------------------- | ---------------------- | ------------- | ------- | ---------------- | - | - | ----- | ---- | -
|                                                     |                        | Maturing Less |         | Maturing Greater
|                                                     |                        | Than 1 Year   |         | Than 1 Year     
|                                                     |                        |               |         |                 
|Cash equivalents                                     |                        | $             | 179,803 |                  |   | $ |      |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |               |         | 6.60             | % |   |       |     |  
|                                                    
|                                                    
|                                                    
|                                                    
|Short term investments, excluding equity investments |                        | $             | 48,788  |                  |   | $ | 4,002 |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |               |         | 6.63             | % |   |       | 7.05 | %

As of September 30, 2000, we held one derivative financial
instrument, a warrant to purchase 1.5 million shares of
Cinram International, Inc., and one marketable equity investment.
 The deemed fair value of the warrant and equity investment were
$5,647,000. In addition, we had no outstanding bank debt as of
September 30, 2000.

Foreign Currency Risk

Currently, all of MP3.com, Inc.s sales and a significant
portion of its expenses are denominated in U.S. dollars and, as a
 result, MP3.com has experienced an insignificant amount of
foreign exchange gains and losses.

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##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

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

Between June and August 2000, MP3.com entered into settlement and
 license agreements with Warner Music Group, BMG Entertainment,
Sony Music and Capitol Records, Inc.(EMI), which together
represented eight of the ten major recording companies that filed
 the copyright infringement lawsuit on January 21, 2000. The
 settlement agreements provide for a settlement amount to be paid
 in cash by MP3.com in exchange for a release from the settling
plaintiffs and their affiliated entities (as defined in the
settlement agreements) of all claims related to the
January 21, 2000 lawsuit and the My.MP3.com service.
Most-favored-nations provisions in these settlement agreements
require additional settlement amounts to be paid under certain
circumstances. MP3.com made no admission of wrongdoing in
connection with these settlements. Subject to certain affirmative
 obligations of MP3.com and other terms and conditions regarding
the implementation of the My.MP3.com service, the license
agreements permit MP3.com to utilize recordings owned by Warner
Music Group, BMG Entertainment, Sony Music and EMI as part of the
 My.MP3.com service. The license agreements have terms of
approximately three to ten years, and provide for on-going
royalty payments based on the greater of (i) a specified
percentage of net revenues generated from the My.MP3.com service
or (ii) a specified amount accrued each time a licensor
recording is streamed from My.MP3.com. In addition, the licenses
provide for on-going royalty payments based on the number of
times a licensor recording is added to My.MP3.com accounts.

As a result of the settlements described above, the
January 21, 2000 copyright infringement lawsuit was limited
to a dispute with UMG Recordings, Inc., which represents two of
the original plaintiffs. A trial in the case was held from
August 28 through September 6, 2000 on the issues of
willfulness and damages. After hearing evidence, the court ruled
on September 6, 2000 that MP3.com had willfully infringed
UMGs copyrights and awarded damages to UMG in an amount of
$25,000 per CD. A trial is scheduled to commence on
November 13, 2000 to determine the number of valid copyright
 registrations held by UMG, and hence the number of CDs for which
 UMG will be entitled to recover the per CD damage award. Based
on information presently available, the maximum number of such
registrations is estimated to be between 3,000 and 7,000.
Numerous factors could affect the ultimate size of the
determination.

Over the course of 2000, some other independent labels have filed
 lawsuits against us based on the same set of allegations as the
UMG case. These labels include Zomba Recording Corp., Tee Vee
Toons, Inc., and Koch Entertainment and Velvel Records LLC.
Additionally, several independent labels have sent us demand
letters alleging similar claims.

Publisher Lawsuits.On March 14, 2000, two large
music-publishing companies, MPL Communications, Inc. and Peer
International Corporation, filed a copyright infringement lawsuit
 against MP3.com in the United States District Court for the
Southern District of New York. The complaint alleged that
MP3.com, in connection with its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in
violation of the Copyright Act, and that MP3.com, in connection
with the streaming of audio content to users of the My.MP3.com
service, continued to make unauthorized digital phonorecords in
violation of the Copyright Act. The complaint further alleges
that MP3.coms actions constituted unauthorized copying and
willful infringement of plaintiffs copyrights. Plaintiffs
seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from
operating its My.MP3.com service or any other service that uses
unauthorized reproductions of plaintiffs copyrighted works.
 Additionally, Zomba

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The proposed, 3-year licensing arrangement provides that MP3.com
will pay up to thirty million dollars ($30,000,000) to HFA for
the benefit of up to 25,000 music publishers and their songwriter
 partners as part of two equal funds. One fund will be used to
pay HFA publisher-principals for past uses of music on the
My.MP3.com service, in exchange for a release from HFA
publisher-principals and their affiliated entities of all claims
related to the March 14, 2000 lawsuit and the use of their
compositions on the My.MP3.com service. The other fund will
provide advance payments toward royalties earned under the
prospective license. The terms of the prospective license call
for a payment of one quarter cent each time a song is streamed on
 demand to a customer from his or her My.MP3.com locker, along
with a one-time fee per track added to the My.MP3.com service.

Artists Class Action.On April 12, 2000,
several artists filed a class action lawsuit in the United States
 District Court for the Southern District of New York against
MP3.com and several major recording companies that claimed to own
 copyrights in sound recordings featuring the artists. The
complaint alleges that the recording company defendants, in their
 separate lawsuit against MP3.com (filed on January 21,
2000  see above), are claiming rights in
plaintiffs recordings that they do not possess. In
particular, the complaint alleges that the recording company
defendants do not possess any copyright protections with respect
to plaintiffs pre-1972 published and pre-1978 unpublished
recordings, do not possess the right to digitally transmit
plaintiffs pre-1996 recordings over the Internet, and do
not possess the right to control the conversion of
plaintiffs recordings into mp3 files. The complaint further
 alleges that MP3.com has used the names and likenesses of
plaintiffs without their consent or authorization and in a
deceptive manner, in violation of the federal Lanham Act, the New
 York Civil Rights Law, and unspecified unfair competition and
misappropriation laws. In their prayer for relief, plaintiffs ask
 to have their class action certified, to be awarded unspecified
damages and attorneys fees, to have the defendants enjoined
 from using plaintiffs names and likenesses to promote
downloading music over the Internet, and to receive declaratory
relief regarding plaintiffs rights in their pre- and
post-1972 recordings. This case has been dismissed in its
entirety with prejudice at the pleadings stage, and we have been
informed that the plaintiffs intend to appeal.

Settlement Discussions; Charge to Earnings. MP3.com has
pursued and continues to actively pursue settlement discussions
with the various plaintiffs and claimants in the cases and
disputes discussed above. The decision whether to enter into
settlement and/or license agreements with each party will be
based upon a number of factors related to both the lawsuits and
MP3.coms business in general. We cannot guarantee that we
will be able to enter into any additional settlement agreements
on terms favorable to MP3.com, if at all, or that any settlement
or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, we
recorded a charge for litigation and copyright matters of
$150.0 million. The charge for litigation and copyright
matters represented MP3.coms estimate of the total costs to
 be incurred in connection with the resolution of the various
litigation and copyright matters associated with the My.MP3.com
service, including the lawsuits filed by major recording
companies and other parties. Copyright issues associated with the
 My.MP3.com Service also include but are not limited to
publishing rights, non-major label content, and legal and
advisory fees. This charge did not reflect or include any amounts
 paid or payable in connection with forward-looking licenses to
use music recordings or compositions in connection with the
My.MP3.com service, or any additional amounts that might be
payable under the most-favored-

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During the quarter ended September 30, 2000, we recorded an
additional charge for litigation and copyright matters of
$20.0 million. This additional charge reflects incremental
costs that management estimates will be incurred in connection
with the resolution of the various litigation and copyright
matters associated with the My.MP3.com service. The additional
charge and accrual reflect managements expectations as of
the date of this quarterly report and is based on currently
available information as well as significant assumptions made by
management regarding the various litigation and copyright
matters. Although we believe that the expectations and
assumptions reflected in this additional charge are reasonable,
we cannot guarantee that future events or results will conform to
 such expectations or assumptions. If these expectations and
significant assumptions prove to be erroneous in light of future
events, the actual amounts incurred by MP3.com to resolve all
matters could be materially different than those recorded as of
September 30, 2000.

Cash payments for the settlements discussed above and other
payments have reduced the cumulative amount reserved as a result
of these charges to $116.9 million as of September 30,
2000. Amounts payable for past issues in connection with the
HFA/Peer/MPL agreement described above are included in the
remaining amount reserved as of September 30, 2000.

Although MP3.com has obtained license agreements permitting the
use of recordings from BMG Entertainment, Warner Music Group,
Sony Music and EMI, we cannot guarantee that MP3.com will be able
 to secure similar license agreements from any other recording
company. Similarly, MP3.com has not yet secured any final
publishing license or other affirmative clearance (whether by
litigation or otherwise) to utilize within the My.MP3.com service
 the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment, Warner Music
Group, Sony Music and EMI), nor can we guarantee that any such
license or clearance will ever be obtained. If a final publishing
 license or other affirmative clearance to utilize such
compositions is not obtained, our ability to utilize in the
My.MP3.com service recordings from any recording company could be
 materially and adversely affected.

Class Action Lawsuits. We and certain of our
employees, officers and directors have been named as defendants
in several lawsuits alleging violations of the federal securities
 laws. The complaints, which were filed between September 19,
2000 and September 29, 2000 in the United States District
Court for the Southern District of California, each purport to be
 brought on behalf of a class of stockholders. The complaints
allege that we and the other the defendants violated the federal
securities laws by issuing materially false and misleading
statements and failing to disclose material information regarding
 our My.MP3.com service and the litigation surrounding the
service. The complaint does not specify the dollar amount of
damages alleged.

Derivative Lawsuits.Between September 14, 2000 and
September 18, 2000, certain stockholders of MP3.com filed
shareholder derivative suits against MP3.com and certain of its
employees, officers and directors in the Superior Court of the
State of California, County of San Diego. These complaints allege
 various statutory and common law claims relating to the
My.MP3.com service.

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

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Item 2. Changes in Securities and Use of Proceeds

Changes in Securities

None.

Use of Proceeds

MP3.coms registration statement (No. 333-78545) under
the Securities Act for its initial public offering (the
Registration Statement) was declared effective by the
 SEC on July 20, 1999. Offering proceeds, net of aggregate
expenses of approximately $20.6 million, were approximately
$360.4 million. As of September 30, 2000, MP3.com has
used the net proceeds of $360.4 million as follows:
approximately $55.8 million of the net offering proceeds for
 working capital paid directly or indirectly to third parties;
approximately $5.0 million for the purchase or installation
of machinery and equipment; approximately $12.0 million for
the purchase of various strategic investments and issuance of a
note receivable; approximately $24.6 million for the
settlement of certain litigation and copyright matters;
approximately $23.0 million for prepaid multimedia content
royalties; approximately $4.0 million for the acquisition of
 the remaining 53.5% of MP3Radio.com; and approximately
$236.0 million for the purchase of temporary investments in
corporate commercial paper and notes, U.S. government and agency
notes, and money market funds. No payments were made to
directors, officers, or affiliates of the Company or owners of
10% or more of the outstanding Shares of Common Stock of the
Company, other than compensation payments to officers of the
Company.




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

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




Item 5. Other Information

In July 1999, we entered into an agreement with Montaigne
Participations Et Gestion (MPG) (formally named
Groupe Arnault) under which MPG committed to purchase an
aggregate of $150 million in advertising, promotion and
marketing services from us over three years. In July 1999, we
received prepayments from MPG totaling $45 million, which
represented payment for these services through the fourth quarter
 of 2000. In September 2000, we entered into an amended and
restated agreement with MPG. The restated agreement extended our
relationship with MPG through 2004, and reduced the aggregate
amount of services to be purchased by MPG over the life of the
agreement (see the revised commitment schedule below). Both MPG
and MP3.com believe that the revised commitment schedule will
allow for more efficient use of our marketing services for the
benefit of MPG and its various related companies. In addition,
the restated agreement provides for a more streamlined media
management process and creates certain exceptions to the favored
pricing granted to MPG under the original agreement. Under the
restated agreement, MPG is now committed to purchase an aggregate
 of $120 million in advertising, promotion and marketing
services from us (including the $45 million purchased
through the fourth quarter of 2000). The remaining
$75 million owed under the restated agreement remains
secured by an irrevocable letter of credit. The restated
agreement further provides MPG with potential additional
financial incentives of up to an aggregate of $5 million (up
 to $1 million in any one calendar quarter) based on the
number of different companies that use our services

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##### Table of Contents





|                           |    |                 |   |        |         | 
|-------------------------- | -- | --------------- | - | ------ | ------- | 
|Quarterly Payment Schedule |    | Purchase Amount
|                           |    |                
|                           |    | (in thousands) 
|                          
|                          
|                          
|                          
|1999                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 5,000  |        
|                          
|                          
|                          
|                          
|2000                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 6,500  |        
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 8,500  |        
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 11,500 |        
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 13,500 |        
|                          
|                          
|                          
|                          
|2001                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 15,000 |        
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 12,250 |        
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 12,250 |        
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 12,250 |        
|                          
|                          
|                          
|                          
|2002                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 6,000  |        
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 5,000  |        
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 5,000  |        
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 5,000  |        
|                          
|                          
|                          
|                          
|2003                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 300    |        
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 300    |        
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 275    |        
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 275    |        
|                          
|                          
|                          
|                          
|2004                       |    |                 |   |       
|                          
|                          
|                          
|                          
|                           | Q1 |                 | $ | 275    |        
|                          
|                          
|                          
|                          
|                           | Q2 |                 | $ | 275    |        
|                          
|                          
|                          
|                          
|                           | Q3 |                 | $ | 275    |        
|                          
|                          
|                          
|                          
|                           | Q4 |                 | $ | 275    |        
|                           |    |                 |   |       
|                           |    | Total           |   | $      | 120,000 | 
|                           |    |                 |   |       

On October 18, 2000, Theodore W. Waitt resigned from our Board of
 Directors.

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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

|                |  |   |  |                                                                                                                                                                                     
|--------------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  10.17 |  |  |  | Amended and Restated Advertising, Promotion and Marketing
	Agreement dated September 29, 2000 between the Company and
	Montaigne Participations Et Gestion (formerly Groupe Arnault)
|Exhibit  10.28 |  |  |  | Settlement Agreement dated July 26, 2000 between the Company
	 and Capitol Records, Inc. (EMI)                                                                                    
|Exhibit  10.29 |  |  |  | License Agreement dated July 26, 2000 between the Company
	and Virgin Holdings, Inc. (EMI)                                                                                        
|Exhibit  10.30 |  |  |  | Settlement Agreement dated August 17, 2000 between the
	Company and Sony Music Entertainment Inc.                                                                                   
|Exhibit  27.1   |  |  |  | Financial Data Schedule.                                                                                                                                                            




| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   Confidential treatment has been requested with
	respect to certain portions of the exhibit. Omitted portions have
	 been filed separately with the Securities and Exchange
	Commission.

(b)  Reports on Form 8-K:

None

48



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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) 



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

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

Date: October 19, 2000

49