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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

OR

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

FOR THE TRANSITION PERIOD FROM  TO
.

COMMISSION FILE NUMBER: 000-25399

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HEARME(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|DELAWARE(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | 94-3217317(IRS EMPLOYER IDENTIFICATION NO.)
|---------------------------------------------------------------------- |  | -------------------------------------------

685 CLYDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 429-3900(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

The
number of outstanding shares of the registrant's common stock, $0.00005 par value, was 28,402,181 as of November 14, 2001

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HEARME

|Index to Condensed Consolidated Financial Statements                                                              |  | Page
|----------------------------------------------------------------------------------------------------------------- |  | ----
|PART I: FINANCIAL INFORMATION                                                                                     |  |     
|Item 1. Financial Statements                                                                                      |  |     
|Unaudited Condensed Consolidated Balance SheetsSeptember 30, 2001 and December 31, 2000                          |  | 3   
|Unaudited Condensed Consolidated Statements of OperationsThree and Nine Months Ended September 30, 2001 and 2000 |  | 4   
|Unaudited Condensed Consolidated Statements of Cash FlowsNine Months Ended September 30, 2001 and 2000           |  | 5   
|Notes to Unaudited Condensed Consolidated Financial Statements                                                    |  | 6   
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                     |  | 12  
|Item 3. Qualitative and Quantitative Disclosures about Market Risk                                                |  | 21  
|PART II: OTHER INFORMATION                                                                                        |  |     
|Item 1. Legal Proceedings                                                                                         |  | 23  
|Item 2. Changes in Securities and Use of Proceeds                                                                 |  | 23  
|Item 3. Defaults Upon Senior Securities                                                                           |  | 24  
|Item 4. Submission of Matters to a Vote of Security Holders                                                       |  | 24  
|Item 5. Other Information                                                                                         |  | 25  
|Item 6. Exhibits and Reports on Form 8-K                                                                          |  | 25  
|Signatures                                                                                                        |  | 26  

2

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HEARME  CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands)  (unaudited)

|                                                              |                                                                | December 31,
2000                                            |       | September 30,
2001 |        | September 30,
2001
|------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------ | ----- | ------------------ | ------ | ------------------
|
|ASSETS                                                        |                                                                |                                                              |       |                    |        |                   
|Current assets:                                               |                                                                |                                                              |       |                    |        |                   
|                                                              | Cash and cash equivalents                                      |                                                              | $     | 22,096             |        | $                 
|                                                              | Short-term investments                                         |                                                              |       | 8,397              |        |                   
|                                                              | Accounts receivable, net                                       |                                                              |       | 3,383              |        |                   
|                                                              | Note receivable, net                                           |                                                              |       |                   |        |                   
|                                                              | Interest and other receivables                                 |                                                              |       | 227                |        |                   
|                                                              | Prepaid expenses and other current assets                      |                                                              |       | 2,404              |        |                   
|                                                              | Net assets of business held for sale                           |                                                              |       | 6,395              |        |                   
|                                                              | Patents and intellectual property                              |                                                              |       |                   |        |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total current assets                                         |       |                    | 42,902 |                   
|Restricted cash                                               |                                                                |                                                              | 220   |                    |        | 7                 
|Property and equipment, net                                   |                                                                |                                                              | 4,905 |                    |        | 286               
|Other assets                                                  |                                                                |                                                              | 1,309 |                    |        |                  
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total assets                                                 |       | $                  | 49,336 |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY |                                                                |                                                              |       |                    |        |                   
|Current liabilities:                                          |                                                                |                                                              |       |                    |        |                   
|                                                              | Accounts payable                                               |                                                              | $     | 1,536              |        | $                 
|                                                              | Accrued payroll and related expenses                           |                                                              |       | 2,839              |        |                   
|                                                              | Accrued expenses                                               |                                                              |       | 1,246              |        |                   
|                                                              | Accrued expenses relating to restructuring                     |                                                              |       |                   |        |                   
|                                                              | Accrued expenses relating to sale of business                  |                                                              |       | 6,732              |        |                   
|                                                              | Deferred revenue                                               |                                                              |       | 1,304              |        |                   
|                                                              | Current portion of notes payable and capital lease obligations |                                                              |       | 2,468              |        |                   
|                                                              | Deferred rent                                                  |                                                              |       | 129                |        |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total current liabilities                                    |       |                    | 16,254 |                   
|Capital lease obligation, net of current portion              |                                                                |                                                              | 187   |                    |        |                  
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total liabilities                                            |       |                    | 16,441 |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|Net assets in liquidation                                     |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|Redeemable common stock                                       |                                                                |                                                              | 1,939 |                    |        | 1                 
|Stockholders' equity:                                         |                                                                |                                                              |       |                    |        |                   
|                                                              | Common stock                                                   |                                                              |       | 1                  |        |                   
|                                                              | Additional paid-in capital                                     |                                                              |       | 295,906            |        |                   
|                                                              | Deferred stock-based compensation                              |                                                              |       | (3,504             | )      |                   
|                                                              | Notes receivable from stockholders                             |                                                              |       | (2,487             | )      |                   
|                                                              | Accumulated deficit                                            |                                                              |       | (258,975           | )      |                   
|                                                              | Accumulated other comprehensive income                         |                                                              |       | 15                 |        |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total stockholders' equity                                   |       |                    | 30,956 |                   
|                                                              |                                                                |                                                              |       |                    |        |                   
|                                                              |                                                                | Total liabilities, redeemable stock and stockholders' equity |       | $                  | 49,336 |                   
|                                                              |                                                                |                                                              |       |                    |        |                   

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

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HEARME  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)  (unaudited)

|                              |                                                                                                                                                                  | Three Months Ended
September 30,         |                                   | Nine Months Ended
September 30, |       
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------- | ------------------------------- | ------
|
|                              | Net revenues                                                                                                                                                     |                                          | $                                 | 3,065                           |       
|                              | Cost of net revenues                                                                                                                                             |                                          |                                   | 445                             |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  |                                          | Gross profit (loss)               |                                 |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|Operating expenses:           |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              | Research and development (including retention costs of $0, $0, $0 and $235 and non-cash compensation expense of $204, $118, $603 and $378, respectively)         |                                          |                                   | 2,765                           |       
|                              | Sales and marketing (including retention costs of $0, $441, $0 and $691 and non-cash compensation expense of $98, $58, $294 and $185, respectively)              |                                          |                                   | 4,211                           |       
|                              | General and administrative (including retention costs of $0, $1,310, $0 and $2,084 and non-cash compensation expense of $197, $112, $574 and $360, respectively) |                                          |                                   | 3,220                           |       
|                              | In-process research and development                                                                                                                              |                                          |                                   |                                |       
|                              | Amortization of goodwill and intangible assets                                                                                                                   |                                          |                                   | 12,645                          |       
|                              | Write-down of GameSpy note and investment                                                                                                                        |                                          |                                   |                                |       
|                              | Write-down of stockholder notes                                                                                                                                  |                                          |                                   |                                |       
|                              | Impairment of fixed assets                                                                                                                                       |                                          |                                   |                                |       
|                              | Restructuring costs                                                                                                                                              |                                          |                                   |                                |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Total operating expenses                 |                                   |                                 | 22,841
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  |                                          | Loss from continuing operations   |                                 |       
|                              | Interest and other income (expense), net                                                                                                                         |                                          |                                   | 531                             |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  |                                          | Loss from continuing operations   |                                 |       
|                              |                                                                                                                                                                  |                                          | Loss from discontinued operations |                                 |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  |                                          |                                   | Net loss                        |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|Other comprehensive earnings: |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Unrealized gains (losses) on investments |                                   |                                 | 18    
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  |                                          |                                   | Comprehensive loss              |       
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              | Net loss from continuing operations per common share:                                                                                                            |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Basic and diluted                        |                                   | $                               | (0.71 
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              | Net loss from discontinued operations per common share:                                                                                                          |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Basic and diluted                        |                                   | $                               | (0.07 
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              | Net loss per common share:                                                                                                                                       |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Basic and diluted                        |                                   | $                               | (0.78 
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       
|                              | Weighted average shares outstanding:                                                                                                                             |                                          |                                   |                                 |       
|                              |                                                                                                                                                                  | Basic and diluted                        |                                   |                                 | 27,898
|                              |                                                                                                                                                                  |                                          |                                   |                                 |       

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

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HEARME  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)  (unaudited)

|                                               |                                                                      | Nine Months Ended
September 30, |       
|---------------------------------------------- | -------------------------------------------------------------------- | ------------------------------- | ------
|
|Cash flows from operating activities:          |                                                                      |                                 |       
|                                               | Cash used in continuing operating activities                         |                                 | $     
|                                               | Cash used in settlement of expenses of discontinued operations       |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|Cash flows from investing activities:          |                                                                      |                                 |       
|                                               | Purchase of short-term investments                                   |                                 |       
|                                               | Proceeds from sale of short-term investments                         |                                 |       
|                                               | Purchase of long-term investments                                    |                                 |       
|                                               | Proceeds from disposal of fixed assets                               |                                 |       
|                                               | Proceeds from sale of discontinued operations                        |                                 |       
|                                               | Purchase of certificates of deposit                                  |                                 |       
|                                               | Proceeds from redemption of certificates of deposit                  |                                 |       
|                                               | Payments for AudioTalk acquisition, net of cash acquired of $6,371   |                                 |       
|                                               | Acquisition of property and equipment                                |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|Cash flows from financing activities:          |                                                                      |                                 |       
|                                               | Principal payments under notes payable and capital lease obligations |                                 |       
|                                               | Repurchase of redeemable common stock                                |                                 |       
|                                               | Proceeds from repayment of stockholder notes                         |                                 |       
|                                               | Proceeds from term loan                                              |                                 |       
|                                               | Proceeds from exercise of common stock options and warrants          |                                 |       
|                                               | Proceeds from employee stock purchase plan                           |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|                                               |                                                                      |                                 |       
|Cash and cash equivalents, beginning of period |                                                                      |                                 | 28,363
|                                               |                                                                      |                                 |       
|Cash and cash equivalents, end of period       |                                                                      | $                               | 27,831
|                                               |                                                                      |                                 |       

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

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HEARME  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  September 30, 2001  (unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the rules of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the
financial statements as of September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 have been included.

The
unaudited condensed consolidated financial statements include those of HearMe (the "Company") and its wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.

Results
for the three months and nine months ended September 30, 2001 are not necessarily indicative of results for the entire fiscal year or future periods. These financial
statements should be read in conjunction with the consolidated financial statements, the accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Form 10-K/A dated April 24, 2001, as filed with the Securities and Exchange Commission.

Certain
prior year amounts have been reclassified for conformity with current year financial statement presentation.

2. Cessation Of The Business

On July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its
assets. On August 10, 2001, the Board of Directors unanimously adopted the Plan of Liquidation and Dissolution (the "Plan"). On October 22, 2001, the stockholders of the Company approved
the Plan. The accompanying unaudited condensed consolidated financial statements include adjustments that reflect the effects on the recoverability and classification of assets or the amounts and
classification of liabilities of the Company's decision to pursue an orderly wind down.

As
a result of the stockholder approval of the Plan and management's intention to sell the assets of the Company, the liquidation basis of accounting and financial statement
presentation will be adopted from October 22, 2001.

The
liquidation basis of accounting requires the Company to accrue an estimate for all liabilities related to expenses to be incurred during the wind down period. Additionally, assets
are stated at their estimated net realizable value and liabilities are stated at their anticipated settlement amounts. The estimated net realizable value of assets represents management's best
estimate of the recoverable value of the assets, net of selling expenses, and without consideration for the effect that the settlement of any litigation may have on the value of the assets. The assets
are held at their net realizable value until they are sold or liquidated. There can be no assurance, however, that the Company will be successful in selling the assets at the net realizable value.

The
following unaudited condensed consolidated pro forma balance sheet as of September 30, 2001 has been prepared to present the condensed financial information under the
liquidation basis of

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accounting, assuming that stockholder approval of the Plan of the Company had been granted on September 30, 2001.

The
unaudited pro forma financial information has been derived from the unaudited condensed consolidated balance sheet as of September 30, 2001. The unaudited pro forma
financial information and related notes are provided for information purposes only and does not purport to be indicative of the financial position that would have been reported had the events assumed
occurred on the date indicated, or purport to be indicative of financial results that may be achieved in the future.

HEARME  PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET  (Liquidation Basis of Accounting)  September 30, 2001  (unaudited)

|                          |                                   | Historical
HearMe |       | Adjustment |        | Pro Forma
HearMe
|------------------------- | --------------------------------- | ----------------- | ----- | ---------- | ------ | ----------------
|Assets                    |                                   |                   |       |            |        |                 
|                          | Cash and cash equivalents         |                   | $     | 4,900      |        | $               
|                          | Short-term investments            |                   |       | 2,542      |        |                 
|                          | Accounts receivable, net          |                   |       | 975        |        |                 
|                          | Note receivable                   |                   |       | 2,436      |        |                 
|                          | Interest and other receivables    |                   |       | 79         |        |                 
|                          | Prepaid expenses                  |                   |       | 633        |        |                 
|                          | Restricted cash                   |                   |       | 7          |        |                 
|                          | Property and equipment, net       |                   |       | 286        |        |                 
|                          | Patents and intellectual property |                   |       |           |        |                 
|                          |                                   |                   |       |            |        |                 
|                          |                                   | Total assets      |       |            | 11,858 |                 
|Liabilities               |                                   |                   |       |            |        |                 
|                          | Accounts payable                  |                   |       | 47         |        |                 
|                          | Accrued payroll expenses          |                   |       | 1,066      |        |                 
|                          | Accrued expenses                  |                   |       | 554        |        |                 
|                          | Accrued restructuring expenses    |                   |       | 619        |        |                 
|                          | Deferred revenue                  |                   |       | 1,261      |        |                 
|                          | Notes payable                     |                   |       | 232        |        |                 
|                          | Deferred rent                     |                   |       | 109        |        |                 
|                          |                                   |                   |       |            |        |                 
|                          |                                   | Total liabilities |       |            | 3,888  |                 
|                          |                                   |                   |       |            |        |                 
|Net assets in liquidation |                                   | $                 | 7,970 |            | $      | (5,185          
|                          |                                   |                   |       |            |        |                 

The
pro forma unaudited condensed consolidated balance sheet gives effect to the following pro forma adjustments:



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Cash
proceeds received from October 1, 2001 to November 12, 2001 from the sale of licenses, patents and other intangible assets aggregated $1,287,000. The Company also
collected $2,436,000 on the note receivable from GameSpy in October 2001 (see Note 15).

3. Net Loss Per Share

Historical basic and diluted loss per share are calculated using the average shares of common stock outstanding, reduced for shares subject to repurchase by
the Company. Stock options, warrants and unvested common stock are excluded from the calculation of diluted net loss per share since their effect would be antidilutive.

4. Comprehensive Income

Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. In the three-month periods
ended September 30, 2001 and 2000, the Company had unrealized gains on short-term investments of $12,000 and $18,000, respectively, resulting in a total comprehensive loss of
$14,154,000 and $21,743,000 in the respective periods. In the nine-month periods ended September 30, 2001 and 2000, the Company had unrealized gains on short-term
investments of $4,000 and a unrealized loss of $603,000, respectively, resulting in a total comprehensive loss of $25,890,000 and $57,467,000 in the respective periods.

5. Revenue and Revenue Recognition

The Company derives revenues from licensing fees for its technology products, including its VoiceSERVER product, which enables customers to create and deploy
next generation communication solutions. The Company also derives incremental revenues from service, maintenance and upgrade fees.

The
Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product
returns are reasonably estimable. For contracts with multiple obligations (e.g., maintenance, unspecified upgrades), the Company allocates revenue to each component of the contract based on objective
evidence of its fair value, which is specific to the Company, or for products not being sold separately, the price established by management.

The
Company recognizes revenue allocated to maintenance fees for ongoing customer support and unspecified upgrades ratably over the period of the maintenance contract or upgrade
period.

The
Company records deferred revenue for any amounts received in advance of the completion of the maintenance contract period and for any amounts received prior to their being earned.

During
the period ended September 30, 2001, the Company recognized gross revenues of $400,000, and recorded a sales return of $699,000 relating to a customer contract which was
cancelled and the software returned during the period.

6. Impairment of Long Lived Assets

During the three months ended September 30, 2001, as a result of announcing its plan to wind down operations, the Company performed an assessment of the
carrying value of its property and equipment. Based upon this review an impairment charge of $2,826,000 was recorded. Any recovery or gain related to these fixed assets will be recognized when it is
realized.

7. Notes Receivable from Stockholders

During the three months ended September 30, 2001, the Company performed an assessment of the carrying value of stockholder notes receivable. Based upon
this assessment a write down of $1,778,000

8

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was recorded. Any recovery or gain related to these notes will be recognized when it is realized. The Company intends to continue collection efforts as these notes come due.

8. Discontinued Operations

On December 13, 2000, the Company signed a definitive agreement to sell its Live Communities business unit ("Live Communities"), including the
Mplayer.com voice-enabled Internet games community and affiliated advertising network, to GameSpy Industries, Inc. ("GameSpy"), an online gaming company. The transaction was completed on
January 19, 2001, and the Company received $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock valued at an aggregate of
$1,400,000. On October 8, 2001, the Company entered into a definitive agreement with GameSpy, pursuant to which the Company received a cash payment of $2,436,000 from GameSpy in satisfaction of
all amounts due to the Company. In connection with this agreement the Company has agreed to transfer all of the shares of common stock of GameSpy held by the Company to GameSpy or its affiliates. In
September 2001, the Company wrote down the GameSpy note and investment by $3,485,000 to their realizable value of $2,436,000.

The
Company may be entitled to additional payments in the event that GameSpy engages in certain material transactions, such as an acquisition, asset sale or equity financing, prior to
December 31, 2001.

Prior
periods' financial statements have been restated to reflect the discontinuation of Live Communities, and the anticipated loss on disposition was recorded in 2000.

9. Retention and Restructuring Costs

On April 23, 2001, the Company announced that it was focusing the business operations to further increase operating efficiencies and address only the
most strategic market opportunities. To ensure financial flexibility, the Company outlined its plans to streamline operations with decreased spending in marketing and administrative expenses and a
reduction in headcount of about 50 employees. During the three months ended June 30, 2001, the Company recorded a charge of $0.7 million as a result of the announced restructuring plans
comprising of $0.1 million of legal costs, $0.2 million of assets to be retired, $0.3 million of severance costs and $0.1 million of costs to terminate agreements early.
All of these restructuring costs were paid by September 30, 2001.

Concurrent
with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating
$2.3 million. In addition, notes receivable from certain employees in connection with previous stock option exercises, together with associated interest and tax liabilities, aggregating
$2.4 million, would be forgiven. The employees were required to stay through either October 31 or November 30, 2001 in order to earn the bonuses and have their notes forgiven,
though these payments would be accelerated assuming the involuntary termination of the employees. As of September 30, 2001, the Company had paid $4,081,000 of the retention costs and has
accrued the remaining balance of $619,000, consisting of approximately $136,000 retention to be paid in October and November 2001 and $483,000 for taxes on forgiveness of notes.

In
September 2001, in connection with the liquidation process, the Company entered into additional retention agreements with certain key executives and employees. Among other
things, these agreements amended certain arrangements so that the bonus payments would be earned and paid in weekly installments rather than a lump sum. In addition, pursuant to these retention
agreements, in the event that more than an aggregate of $1.5 million is available for distribution to stockholders pursuant to the Plan, then certain officers of the Company will be entitled to
bonuses equal in the aggregate to 12% of the amount in excess of $1.5 million.

9

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10. Term Loan

In May 2000, the Company entered into a term loan with a financial institution whereby amounts borrowed under this agreement are collateralized by
substantially all the Company's assets, bear interest at the prime rate plus 1 percent and are scheduled to mature in September 2003. On August 2, 2001, the Company paid off the
remaining $0.8 million balance on its loan agreement.

11. Commitments and Contingencies

On May 30, 2001, eFront Media, Inc. filed a complaint against the Company and GameSpy Industries, Inc. in California Superior Court in
Orange County alleging breach of written contract and seeking damages of approximately $820,000. The Company was served with a copy of the complaint on June 16, 2001. The contract in question
was assigned to GameSpy as part of the sale of the Company's Live Communities business unit, which closed on January 19, 2001. The complaint alleges damages for failure to make payments under
the contract after the agreement was assigned to GameSpy. While the Company does not believe that it has breached the contract in question, it has tendered the defense of the matter to GameSpy under
GameSpy's indemnity obligations to the Company pursuant to the terms of the Asset Purchase Agreement for the sale of the Live Communities business. GameSpy has agreed to defend and indemnify the
Company against this claim and on June 29, 2001, counsel for the Company and GameSpy filed an answer to the complaint denying eFront Media Inc.'s allegations. As the litigation is in an
initial stage, we are not able at this time to estimate the possibility of loss or range of loss, if any that might result. While the outcome of this claim cannot be predict with certainty, the
Company does not believe that the outcome will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

On
June 29, 2001, the Company terminated the lease of one of its office facilities. The remaining operating lease agreements expire through 2005. The Company is in negotiations
with its leaseholders on the remaining operating lease agreements for an early termination of the leases, concurrent with a search for a suitable sub-lease tenant for its office
facilities.

12. Recent Accounting Pronouncements

FAS 143

In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. This Statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires, among other things, that
the retirement obligations be recognized when they are incurred and displayed as liabilities on the balance sheet. In addition, the asset's retirement costs are to be capitalized as part of the
asset's carrying amount and subsequently allocated to expense over the asset's useful life. The Company believes that the adoption of SFAS No.143 will not have a significant impact on its financial
statements.

FAS 144

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective
for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Statement develops one accounting model for long-lived assets that are to be
disposed of by sale, as well as addressing the principal implementation issues. The Company believes that the adoption of SFAS No.144 will not have a significant impact on its financial statements.

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13. Listing and Trading of the Company's Common Stock

On July 10, 2001, the Company received a Nasdaq Staff Determination letter indicating that it had failed to comply with the minimum bid price
requirement for continued listing on the Nasdaq National Market (Nasdaq Marketplace Rule 4450 (a)(5)). In response, HearMe requested a hearing before the Nasdaq Listing Qualifications Panel to
appeal the Staff Determination. As part of this effort, HearMe asked the Panel to review the Staff Determination based on the Company's plan to achieve compliance with the minimum bid listing
requirement through a 1-for-10 reverse stock split that the Company had intended to submit to a vote of the stockholders at its Annual Meeting originally scheduled to be held
on July 31, 2001. On July 31, 2001, the Annual Meeting was adjourned until August 30, 2001 due to the Company's July 30, 2001 announcement that it intended to pursue an
orderly wind down and cessation of the Company's business operations and sale of its assets. On August 14, 2001, following the Company's announcement of the election not to pursue the
1-for-10 reverse stock split that the Company previously proposed to submit for stockholder approval and withdrawal of the Company's request for review of a NASD staff
determination to discontinue trading of the common stock on the Nasdaq National Market, the common stock was delisted from the Nasdaq National Market. On August 15, 2001, the common stock
commenced trading on the NASD's Over-the-Counter ("OTC") Bulletin Board.

The
Board of Directors has determined that its Final Record Date will be on or about November 26, 2001. On the Final Record Date, the Company will file a Certificate of
Dissolution with the Secretary of State of Delaware, and the Company's shares will cease trading on the NASD's OTC Bulletin Board. The Company will close its stock transfer books on the Final Record
Date.

14. Termination of Certain Employee Benefit Plans

On September 10, 2001, the Board of Directors of the Company terminated the Company's 401(k) Retirement Plan, effective September 15, 2001.

On
September 25, 2001, the Board of Directors of the Company terminated the Company's 1999 Stock Purchase Plan and the Section 125 Flexible Spending Account Plan, both
effective September 30, 2001.

On
November 26, 2001, the Company's 1999 Employee Stock Option Plan will terminate when the Certificate of Dissolution with the Secretary of the State of Delaware is filed.

15. Subsequent Events

On October 8, 2001, the Company entered into a definitive agreement with GameSpy, pursuant to which the Company has received a cash payment of
$2,436,000 from GameSpy in satisfaction of all amounts due to the Company from GameSpy in connection with a note receivable and an agreement between the parties. In connection with this agreement, the
Company has agreed to transfer all of the shares of common stock of GameSpy held by the Company to GameSpy or its affiliates. In September 2001, the Company wrote down the GameSpy note and
investment by $3,485,000 to their realizable value of $2,436,000. The Company may be entitled to additional payments in the event that GameSpy engages in certain material transactions, such as an
acquisition, asset sale or equity financing, prior to December 31, 2001.

As
described in Note 2, on October 22, 2001, the stockholders of the Company approved the Plan of Liquidation and Dissolution.

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

Management's Discussion and Analysis of Results of Operations and Financial Condition and other parts of this Form 10-Q contain
forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions identify forward-looking
statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or
forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Certain Business Risks", and those appearing elsewhere in this
Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no
obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

HearMe was a provider of VoIP application technologies that deliver increased productivity and flexibility in communication via next generation communications
networks. We were incorporated and commenced operations in January 1995. From inception through September 1996, our activities primarily consisted of recruiting employees and raising
capital, performing product and technology development, engaging in marketing activities and negotiating strategic relationships. In April 1999, we commenced licensing of our
real-time interactive voice-enabled technology.

Until
January 19, 2001,the Company generated our revenues from two business units, Technology Products (formerly known as Mpath Foundation) and Live Communities. On
December 20, 2000, we announced that we had signed a definitive agreement to divest the Live Communities business unit, including the Mplayer.com service and the affiliated advertising network,
to GameSpy Industries, Inc., an online games company. The sale of the business unit closed on January 19, 2001. As a result of the divestiture, the condensed consolidated financial
statements have been restated to present the results of the Live Communities business as discontinued operations since inception.

In
April 2001, the Company announced that HearMe was focusing its business operations to further increase-operating efficiencies and address only the most strategic market
opportunities.

On
July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. The Board of
Directors and Management were engaged in a concerted effort for the preceding several months to explore various strategic alternatives for the future of the Company, including its sale. The Company
contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The Board of
Directors concluded that an orderly wind down of the Company was the course of action that would most likely offer the highest return to stockholders and that to continue operations of the business
would reduce assets and cash that may ultimately be returned to the stockholders. However, no assurance can be given that the Company will be successful in pursuing a sale of its assets, or that an
orderly winding-down of the Company's operations would actually increase stockholder value or result in any remaining capital for distribution to stockholders. Moreover, the timing of any
possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will
decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. The Company has recognized little or no revenue following this
announcement, other than revenue recognized from the licensing of source code and the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors.
These include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties.

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On July 10, 2001, the Company received a Nasdaq Staff Determination letter indicating that it had failed to comply with the minimum bid price requirement for continued listing
on the Nasdaq National Market (Nasdaq Marketplace Rule 4450 (a)(5)). In response, HearMe initially requested a hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff
Determination based on the Company's plan to achieve compliance with the minimum bid listing requirement through a 1-for-10 reverse stock split.

On
August 10, 2001, the Board of Directors unanimously adopted the Plan of Liquidation and Dissolution ("Plan").

On
August 13, 2001, the Company announced that it was canceling its plans concerning a 10-for-1 reverse stock split in light of its decision to pursue
an orderly wind down and cessation of the Company's business operations. In addition, the Company withdrew its appeal of the Nasdaq staff's determination that the Company has failed to comply with the
minimum bid price required for continued listing on the Nasdaq National Market. On August 14, 2001, following this announcement, trading of the common stock on the Nasdaq National Market
stopped and on August 15, 2001, the common stock commenced trading on the NASD's Over-the-Counter ("OTC") Bulletin Board.

On
October 22, 2001, the stockholders of the Company approved the Plan.

The
Company had previously derived revenues from licensing fees for technology, including VoiceSERVER and SoftPHONE products.These
products were priced based upon the number of ports, or seats licensed. Through fiscal 2000, the Company also derived revenue from other real-time interactive products and related
services. The Company also derived incremental revenues from professional services, maintenance and upgrade fees. The Company recognized product revenue upon shipment if a signed contract exists, the
fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable. For contracts with multiple obligations (e.g., maintenance, unspecified
upgrades), the Company allocated revenue to each component of the contract based on objective evidence of its fair value, which is specific to the Company, or for products not being sold separately,
the price established by management. The Company recognized revenue allocated to maintenance fees for ongoing customer support and unspecified upgrades ratably over the period of the maintenance
contract or upgrade period.

Cost
of net revenues consists primarily of network operating expenses in connection with its customer support network.

HearMe's
operating expenses consist of research and development expenses, sales and marketing expenses and general and administrative expenses. Research and development expenses
consist principally of salaries and compensation paid to employees and consultants engaged in research and development activities and product testing. Sales and marketing expenses consist principally
of salaries paid to employees in sales and marketing activities, promotional materials and programs, public relations costs and travel. General and administrative expenses consist principally of
salaries and compensation paid to employees and consultants in the administrative departments including finance, human resources and legal and costs relating to facilities, infrastructure and related
depreciation, in-house and outside legal and accounting fees and related costs and travel. All operating costs are expensed as incurred.

Following
the sale of the Company's assets and satisfaction of its obligations, the Company intends to make liquidating distributions to its stockholders of net available assets.
Although significant uncertainties remain as to the precise net realizable value of the Company's assets and the ultimate settlement amount of certain liabilities, based on information currently
available to the Company, assuming no unanticipated claims or adverse events, the Company expects to be in a position to make an initial distribution to its stockholders of approximately $0.10 per
share. Due to these uncertainties, however, it is possible that the actual amount of such distribution could be significantly less than $0.10 per share, or even zero.

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The Company anticipates making an initial distribution to stockholders prior to the end of 2001, although it is possible that this initial distribution will occur in 2002. Additional
distributions may be made over the subsequent three-year period, either to the Company stockholders or to a liquidating
trust. All distributions will be made to stockholders of record based on their respective holdings as of the Final Record Date.

Results of Operations



Net revenues.Net revenues decreased from $3.1 million for the period ended September 30, 2000 to $(0.3)
million for the period ended September 30, 2001. The majority of our revenues were derived from licensing our VoiceSERVER platform, maintenance fees recognized on these and prior licensing
deals and licensing of discontinued product lines. During the period ended September 30, 2001, we recorded gross revenues of $0.4 million, but recorded a sales return of
$0.7 million relating to a customer contract which was cancelled and the software returned during the period. With the Company's approved Plan, revenues will no longer be recorded after
October 22, 2001. Subsequent to September 30, 2001, the Company has sold or upgraded licenses and sold patents and other intangible assets to 16 customers. The value that is expected to
be realized from the sale of licenses, patents and other intangibles is represented by the fair value presentation of such assets in the pro forma balance sheet included elsewhere herein.

Cost of net revenues.Our cost of net revenues was $0.8 million for the period ended September 30, 2001
as compared to $0.4 million for the period ended September 30, 2000. Cost of net revenues consists primarily of network operating expenses in conjunction with providing hosting services
to certain customers. The increase in cost of revenues resulted from the write-off of maintenance and software license contracts that will no longer be utilized by the Company due to its
wind down. With the Company's approved Plan, cost of net revenues will no longer be recorded after October 22, 2001. The estimated future costs that will be incurred are included in the
estimated future costs during the period of liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

Research and development.Research and development expenses were $1.2 million for the period ended
September 30, 2001 compared to $2.8 million for the period ended September 30, 2000. Research and development expenses consist primarily of employee compensation relating to
developing and enhancing the features and functionality of HearMe's VoIP technology. The decrease in research and development expenses was primarily due to a decrease in salary expense in 2001 as the
Company reduced the size of the engineering team as part of the restructuring effort announced in April 2001. With the Company's approved Plan, research and development expenses will no longer
be recorded after October 22, 2001. The estimated future costs that is expected to be incurred are included in the
estimated future costs during the period of liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

Sales and marketing.Sales and marketing expenses were $1.2 million for the period ended September 30,
2001 compared to $4.2 million for the period ended September 30, 2000. Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, compensation
and employee-related expenses, sales commission and travel costs. Sales and marketing expenses decreased in the period ended September 30, 2001 as compared to the period ended
September 30, 2000 primarily due to the outbound advertising and marketing campaigns that were developed and run during the early part of Fiscal 2000 to promote our technology products. The
absolute decrease in sales and marketing expenses was due to the discontinuation of the branding campaign in Fiscal 2000 and to a decrease in headcount in product marketing. With the Company's
approved Plan, sales and marketing expenses will no longer be recorded after October 22, 2001. The estimated future costs that are expected to be incurred are included in the estimated future
costs during the period of liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

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General and administrative.General and administrative expenses were $2.4 million for the period ended
September 30, 2001 compared to $3.2 million for the period ended September 30, 2000. General and administrative costs decreased primarily as a result of a lower headcount and
lower fees for professional services as a result of the restructuring to a smaller organization as announced in April 2001. With the Company's approved Plan, general and administrative expenses
will no longer be recorded after October 22, 2001. The estimated future costs that are expected to be incurred are included in the estimated future costs during the period of liquidation as
adjusted in the pro forma balance sheet included elsewhere herein.

Amortization of intangibles.As part of the AudioTalk and Resounding acquisitions, we recorded amortization of
intangible assets consisting primarily of goodwill in the amount of $12.6 million for the period ended September 30, 2000, together with the write-off of
in-process research and development relating to the AudioTalk acquisition of $550,000. There was no amortization of goodwill or intangibles during the period ended September 30,
2001 as the balances had been written off as impaired in a previous period.

Write-down of GameSpy Assets.On January 19, 2001, the Company completed the sale of our Live
Communities business unit, including the Mplayer.com voice-enabled Internet site and the affiliated advertising network, to GameSpy Industries. Consideration for the sale consisted of $500,000 in
cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock, valued at $1,400,000. On October 8, 2001, the Company entered into a definitive
agreement with GameSpy, pursuant to which the Company has received a cash payment of $2,436,000 from GameSpy in satisfaction of all amounts due to the Company. In connection with this agreement, the
Company has agreed to transfer all of the shares of common stock of GameSpy held by the Company to GameSpy or its affiliates. The Company may be entitled to additional payments in the event that
GameSpy engages
in certain material transactions, such as an acquisition, asset sale or equity financing, prior to December 31, 2001. In September 2001, the Company wrote down the GameSpy note and
investment by $3,485,000 to their realizable value of $2,436,000.

Write-down of Stockholder Notes.During the three months ended September 30, 2001, the Company
performed an assessment of the carrying value of stockholder notes. Based upon this review a write down of $1,778,000 was recorded. Any recovery or gain related to these notes will be recognized when
it is realized. The Company intends to continue collection efforts as these notes come due.

Impairment of Fixed Assets.During the three months ended September 30, 2001, the Company performed an
assessment of the carrying value of its property and equipment. Based upon this review a write down of $2,826,000 was recorded. Any recovery or gain related to these fixed assets will be recognized
when it is realized.

Interest and other income (expense), net.Interest and other income (expense), net includes interest income earned on
the short-term investment of cash offset by interest expense primarily related to capital lease and debt obligations.



Net revenues.Net revenues decreased from $10.3 million for the nine-month period ended
September 30, 2000 to $3.0 million for the nine-month period ended September 30, 2001. The majority of the Company's revenues were derived from licensing our
VoiceSERVER platform and maintenance fees recognized on these and prior licensing deals. During the nine-months ended September 30, 2001, we closed deals with 13 new customers. With
the Company's approved Plan, revenues will no longer be recorded after October 22, 2001. Subsequent to September 30, 2001, the Company has sold or upgraded licenses and sold patents and
other intangible assets to 16 customers. The value that is

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expected to be realized from the sale of licenses, patents and other intangibles is represented by the fair value presentation of such assets in the pro forma balance sheet included elsewhere herein.

Cost of net revenues.Our cost of net revenues was $1.7 million for the nine-month period ended
September 30, 2001 as compared to $1.3 million for the nine-month period ended September 30, 2000.
Cost of net revenues consists primarily of network operating expenses in conjunction with providing hosting to certain customers. The flattening in cost of revenues relative to increase in customer
base was attributable to the Company's move towards licensing our software to customers and third-party service providers who then host customers requiring support services. With the Company's
approved Plan, cost of net revenues will no longer be recorded after October 22, 2001. The estimated future costs that will be incurred are included in the estimated future costs during the
period of liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

Research and development.Research and development expenses were $6.2 million for the nine-month
period ended September 30, 2001 compared to $7.5 million for the nine-month period ended September 30, 2000. Research and development expenses consist primarily of
employee compensation relating to developing and enhancing the features and functionality of HearMe's VoIP technology. The decrease in research and development expenses was primarily due to a decrease
in salary expense in 2001 as we reduced the size of the engineering team as part of the restructuring effort announced in April 2001. With the Company's approved Plan, research and development
expenses will no longer be recorded after October 22, 2001. The estimated future costs that are expected to be incurred are included in the estimated future costs during the period of
liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

Sales and marketing.Sales and marketing expenses were $5.6 million for the nine-month period ended
September 30, 2001 compared to $15.4 million for the nine-month period ended September 30, 2000. Sales and marketing expenses consist primarily of advertising and
other marketing-related expenses, compensation and employee-related expenses, sales commission and travel costs. Sales and marketing expenses decreased as a percentage of net revenues in the
nine-month period ended September 30, 2001 as compared to the nine-month period ended September 30, 2000 primarily due to the outbound advertising and marketing
campaigns that were developed and ran during the early part of Fiscal 2000 to promote our technology products. The absolute decrease in sales and marketing expenses was due to the discontinuation of
the branding campaign in Fiscal 2000 and to a decrease in headcount in product marketing. With the Company's approved Plan, sales and marketing expenses will no longer be recorded after
October 22, 2001. The estimated future costs that are expected to be incurred are included in the estimated future costs during the period of liquidation as adjusted in the pro forma balance
sheet included elsewhere herein.

General and administrative.General and administrative expenses were $6.4 million for the nine-month
period ended September 30, 2001 compared to $9.5 million for the nine-month period ended September 30, 2000. General and administrative costs decreased primarily as a
result of a lower headcount and lower fees for professional services as a result of the restructuring to a smaller organization as announced in April 2001. With the Company's approved Plan,
general and administrative expenses will no longer be recorded after October 22, 2001. The estimated future costs that are expected to be incurred are included in the estimated future costs
during the period of liquidation as adjusted in the pro forma balance sheet included elsewhere herein.

Amortization of intangibles.As part of the AudioTalk and Resounding acquisitions, we recorded amortization of
intangible assets consisting primarily of goodwill in the amount of $28.1 million for the period ended September 30, 2000, together with the write-off of
in-process research and development relating to the AudioTalk acquisition of $550,000. There was no amortization of goodwill or intangibles
during the period ended September 30, 2001 as the balances had been written off as impaired in a previous period.

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Write-down of GameSpy Assets.On January 19, 2001, we completed the sale of our Live Communities
business unit, including the Mplayer.com voice-enabled Internet site and the affiliated advertising network, to GameSpy Industries. Consideration for the sale consisted of $500,000 in cash, a
short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock, valued at $1,400,000. On October 8, 2001, the Company entered into a definitive agreement
with GameSpy, pursuant to which the Company has received a cash payment of $2,436,000 from GameSpy in satisfaction of all amounts due to the Company from GameSpy pursuant to a note receivable and an
agreement between the parties. In connection with this agreement, the Company has agreed to transfer all of the shares of common stock of GameSpy held by the Company to GameSpy or its affiliates. The
Company may be entitled to additional payments in the event that GameSpy engages in certain material transactions, such as an acquisition, asset sale or equity financing, prior to December 31,
2001. In September 2001, the Company wrote down the GameSpy note and investment by $3,485,000 to their realizable value of $2,436,000.

Write-down of Stockholder Notes.During the nine months ended September 30, 2001, the Company
performed an assessment of the carrying value of stockholder notes. Based upon this review a write down of $1,778,000 was recorded. Any recovery or gain related to these notes will be recognized when
it is realized. The Company intends to continue collection efforts as these notes come due.

Restructuring Costs.On April 23, 2001, the Company announced that it was focusing the business operations to
further increase-operating efficiencies and address only the most strategic market opportunities. To ensure financial flexibility, the Company announced its plans to streamline operations with
decreased spending in marketing and administrative expenses and a reduction in headcount of about 50 employees. During the nine-months ended September 30, 2001, the Company recorded
a charge of $0.7 million of expenses for termination of leases and legal cost associated with the restructuring.

Interest and other income (expense), net.Interest and other income (expense), net includes interest income earned on
the short-term investment of cash offset by a write-off of certain of the Company's long-term investments and interest expense primarily related to capital lease
and debt obligations.

Liquidity and Capital Resources

HearMe invests excess cash in debt instruments that are highly liquid, of high-quality investment grade and predominantly have maturities of less
than one year with the objective of making such funds readily available for operating purposes. At September 30, 2001, the Company had cash and cash equivalents and investments in marketable
debt securities totaling $7.4 million compared to $30.5 million
at December 31, 2000. Subsequent to September 30, 2001, the Company converted all short-term investments into cash equivalents.

Net
cash used in operating activities was $19.1 million for the nine-month period ended September 30, 2001 compared to $25.1 million for the period
ended September 30, 2001. Net cash used in operating activities was primarily a result of funding ongoing operations of our research and development and sales and marketing efforts and the
payment of liabilities of $7.2 million incurred by the divestiture of the Live Communities business unit and $3.4 million as payment for retention packages. For the period ended
September 30, 2000, net cash used in operating activities was primarily a result of funding ongoing operations.

Net
cash provided by investing activities was $6.6 million for the nine-month period ended September 30, 2001 compared to $20.9 million for the period
ended September 30, 2000. Amounts provided in 2001 were primarily from the net sale of short-term investments offset by capital expenditures, which have generally been comprised of
purchases of computer hardware and software.

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Amounts provided in 2000 were primarily from the net sale of short-term investments offset by payments for the AudioTalk acquisition and purchases of property and capital equipment.

Net
cash provided in financing activities for the nine-month period ended September 30, 2001 was $4.7 million as compared to $3.7 million for the
period ended September 30, 2000. The major use of cash in financing activities during the period ended September 30, 2001 was for payments on the term loan of $2.8 million as a
result of the sale of Live Communities to GameSpy and $1.9 million for the repurchase of redeemable common stock subject to put rights. In May 2000, the Company entered into a term loan
with a financial institution and initially drew down funds of $2.9 million under this agreement. This amount was repaid during 2001.

On
April 23, 2001, the Company announced that it was focusing business operations to further increase operating efficiencies and address only the most strategic market
opportunities. To ensure financial flexibility, the Company announced its plans to streamline operations with decreased spending in marketing and administrative expenses and a reduction in headcount
of about 50 employees. During the nine months ended September 30, 2001, the Company recorded a charge of $1.0 million as a result of the announced restructuring plans comprising
$0.1 million of legal costs, $0.2 million of assets to be retired, $0.6 million of severance costs and $0.1 million of costs to terminate agreements early. The severance
costs were paid in April 2001 and the remaining costs were paid by September 30, 2001.

Concurrent
with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating
$2.3 million. In addition, notes receivable from certain employees in connection with previous stock exercises, together
with associated interest and tax liabilities, aggregating $2.4 million, would be forgiven. The employees were required to stay through either October 31 or November 30, 2001 in
order to earn the bonuses and have their notes forgiven, though these payments were in the most part accelerated due to involuntary termination of the employee. As of September 30, 2001, the
Company has paid the majority of this cost and has accrued approximately $619,000 of the remaining portion of the retention bonuses earned and the notes receivable forgiven during the period.

As
discussed previously, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets, which has
accelerated the payment of retention bonuses under the retention agreements for the majority of the employees and caused a portion of the remaining outstanding notes receivable to be forgiven. In
September 2001, in connection with the liquidation process, the Company entered into additional retention agreements with certain key executives and employees. Among other things, these
agreements amended certain arrangements so that the bonus payments would be earned and paid in weekly installments rather than a lump sum. In addition, pursuant to these retention agreements, in the
event that more than an aggregate of $1.5 million is available for distribution to stockholders pursuant to the Plan of Liquidation and Dissolution, then certain officers of the Company will be
entitled to bonuses equal in the aggregate to 12% of the amount in excess of $1.5 million.

The
Company has incurred significant losses since inception. In the period ended September 30, 2001, the Company incurred losses from continuing operations of
$14.2 million and used $11.9 million of cash in its continuing operating activities. With the Company's announced plans to wind down normal business operations, we cannot estimate the
level of these losses in future periods.

Certain Business Risks

The Company has announced its intent to wind down its business and may not be able to generate meaningful cash, or any cash, which
could be returned to stockholders.

On
July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. Prior to making
that decision, the

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Board of Directors and management had engaged in a concerted effort months to explore various strategic alternatives for the future of the Company, including its sale. The Company contacted over 30
prospects, of which the Company met with at least 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The Board of Directors
there-fore concluded that the orderly wind down of the Company was the course of action that most likely offered the highest return to stockholders and that to continue operations of the
business would reduce assets and cash that may ultimately be returned to the stockholders. In this regard, both the
Board of Directors and stockholders have approved the Plan. However, no assurance can be given that the Company will be successful in pursuing a sale of its assets, or that an orderly
winding-down of the Company's operations would actually increase stockholder value or result in any remaining capital for distribution to stockholders. Moreover, the timing of any possible
distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline
in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. The Company had recognized little or no revenue following this
announcement, other than revenue recognized from the licensing of source code and the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors.
These include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties. Estimated reserves for future costs during
liquidation are expected to be approximately $6.6 million.

Stockholders may not receive any distributions as part of the Company's wind down. Furthermore, if the Company's contingency reserve, established upon
dissolution, is inadequate to cover expenses and liabilities, stockholders may be liable to creditors of the Company for amounts previously received.

A
Certificate of Dissolution will be filed with the State of Delaware dissolving the Company. Pursuant to the Delaware General Corporation Law on or about November 26, 2001,
the Company will continue to exist for three years after the dissolution becomes effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits against it and enabling the Company gradually to close its business, to dispose of its property, to discharge its liabilities and to distribute to its stockholders any remaining
assets. The Company will establish a contingency reserve for payment of its expenses and liabilities during this three-year period. Under the Delaware General Corporate Law, in the event
the contingency reserve created by the Company is inadequate for payment of its expenses and liabilities during this three-year period, each stockholder could be held liable for payment to
the Company's creditors of such stockholder's pro rata share of amounts owed to creditors in excess of the contingency reserve. The liability of any stockholder would be limited to the amounts
previously received by such stockholder from the Company (and from any liquidating trust or trusts) as distributions. Accordingly, in such event a stockholder could be required to return all such
distributions previously made to such stockholder. In such event, a stockholder could receive nothing from the Company. Moreover, in the event a stockholder has paid taxes on amounts previously
received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder's repayment of an amount previously distributed does not cause a
commensurate reduction in taxes payable. There can be no assurance that the contingency reserve established by the Company will be adequate to cover any expenses and liabilities.

If
the Company were held by a court to have failed to make adequate provision for its expenses and liabilities or if the amount ultimately required to be paid in respect of such
liabilities exceeded the amount available from the contingency reserve and the assets of the liquidating trust or trusts, a creditor of the Company could seek an injunction against the making of
distributions under the Company's wind down on the ground that the amounts to be distributed were needed to provide for the payment of the Company's expenses and liabilities. Any such action could
delay or substantially diminish the cash distributions to be made to stockholders and/or interest holders.

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The Company has determined that it's Final Record Date will be on or about November 26, 2001, on which date the Company shall determine the
proportionate interest of each stockholder and after which it will be unable to record transfers of common stock on the Company's books.

The
Company intends to close its stock transfer books and discontinue recording transfers of common stock at the close of business on or about November 26, 2001, and will file
the Certificate of Dissolution. Thereafter, certificates representing the common stock will not be assignable or transferable on the books of the Company except by will, intestate succession or
operation of law. The proportionate interests of all of the stockholders of the Company will be fixed on the basis of their respective stock holdings at the close of business on the final record date,
and, after the final record date, any distributions made by the Company shall be made solely to the stockholders of record at the close of business on the final record date, except as may be necessary
to reflect subsequent transfers recorded on the books of the Company as a result of any assignments by will, intestate succession or operation of law.

The Company's common stock has been delisted from the Nasdaq Stock Market.

On
August 14, 2001, the common stock was delisted from the Nasdaq National Market, due to its low trading price per share. With this delisting, the ability of stockholders to
buy and sell shares may be materially impaired. On August 15, 2001, the common stock commenced trading on the NASD's Over-the-Counter ("OTC") Bulletin Board.

After the Company's wind down there may be no cash to distribute to the Company's stockholders and if there is cash to distribute, the timing of any such
distribution is uncertain.

Although
the Board of Directors has not established a firm timetable for distributions to stockholders, the Board of Directors intends, subject to contingencies inherent in winding up
the Company's business, to make such distributions as promptly as practicable. The liquidation is expected to be concluded prior to the third anniversary of the filing of the Certificate of
Dissolution in Delaware by a final liquidating distribution either directly to the stockholders or to a liquidating trust. The proportionate interests of all of the stockholders of the Company will be
fixed on the basis of their respective stock holdings at the close of business on the final record date, to be on or about November 26, 2001, and after such date, any distributions made by the
Company shall be made solely to stockholders of record on the close of business on the final record date, except to reflect permitted transfers. The Board of Directors is, however, currently unable to
predict the precise nature, amount or timing of this distribution or any other distributions pursuant to the Company's wind down. The actual nature, amount and timing of all distributions will be
determined by the Board of Directors, in its sole discretion, and will depend in part upon the Company's ability to convert its remaining assets into cash.

Uncertainties
as to the precise net value of the Company's non-cash assets and the ultimate amount of its liabilities make it impracticable to predict the aggregate net
value ultimately distributable to stockholders. Claims, liabilities and expenses from operations (including operating costs, salaries, income taxes, payroll and local taxes, legal and accounting fees
and miscellaneous office expenses) will continue to be incurred. These expenses will reduce the amount of assets available for ultimate distribution to stockholders. However, no assurances can be
given that available cash and amounts received on the sale of assets will be adequate to provide for the Company's obligations, liabilities, expenses and claims and to make cash distributions to
stockholders. If such available cash and amounts received on the sale of assets are not adequate to provide for the Company's obligations, liabilities, expenses and claims, the Company may not be able
to distribute meaningful cash, or any cash, to its stockholders.

The proceeds from any sale of the Company's assets may be less than anticipated.

Stockholder
approval of the Company's wind down plan constitutes approval of any sale of assets of the Company. Sales of the Company's assets will be made on such terms as are
approved by the

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Board of Directors and may be conducted by competitive bidding, public sales or privately negotiated sales. The prices at which the Company will be able to sell its various assets will depend largely
on factors beyond the Company's control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets, United States and
foreign regulatory approvals, public market perceptions, and limitations on transferability of certain assets. In addition, the Company may not obtain as high a price for a particular asset as it
might secure if the Company were not in liquidation.

The Company expects to recognize little or no revenue following the announcement of its intent to wind down.

Except
for revenue resulting from the licensing of source code and the sale of Company assets, the Company believes that it will be difficult to collect receivables and does not
expect to recognize significant additional revenue now that it has announced its intent to wind down its business.

The Company may not be able to settle all of its obligations to creditors.

The
Company has certain current and future obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities leases and
business agreements with customers and other third parties. As part of the wind down process, the Company has attempted to settle those long-term obligations with its creditors. The
Company cannot guarantee that it will be able to settle such obligations with each creditor. If the Company is unable to reach an agreement with a creditor concerning a long-term
obligation, that creditor may choose to bring a lawsuit against the Company. Such litigation could delay or even prevent the Company from completing its intended wind down plan. Moreover, amounts
required to settle such long-term obligations will reduce the amount of remaining capital available for any distribution to stockholders.

The Company will continue to incur the expenses of complying with public company reporting requirements.

We
have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting
requirements is economically burdensome. In order to curtail expenses, we intend to, after filing our Certificate of Dissolution, seek relief from the Securities and Exchange Commission from the
reporting requirements under the Exchange Act. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K to disclose material events
relating to our liquidation and dissolution along with any other reports that the Securities and Exchange Commission might require. However, there can be no assurances that such relief will be
granted.

Some of the provisions of our charter documents may have anti-takeover effects that could prevent a change in our control.

Some
of the provisions of our Amended and Restated Certificate of Incorporation and bylaws could make it more difficult for a third party to acquire us, even if a change of control
would be beneficial to our stockholders.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

HearMe is exposed to the impact of interest rate changes and changes in the market values of its investments. To date all of the Company's contracts have been
denominated in U.S. dollars and have not been subject to foreign currency risks.

Interest Rate Risk

The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company has not used
derivative financial instruments in its

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investment portfolio. The Company invests its excess cash in debt instruments of the U. S. Government and its agencies and in high-quality corporate issuers and, by policy, limit the
amount of credit exposure to any one issuer. HearMe protects and preserves its invested funds by limiting default, market and reinvestment risk.

Investments
in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in the interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment
income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have declined in market value due to changes in
interest rates.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 30, 2001, eFront Media, Inc. filed a complaint against the Company and GameSpy Industries, Inc. in California Superior Court in
Orange County alleging breach of written contract and seeking damages of approximately $820,000. The Company was served with a copy of the complaint on June 16, 2001. The contract in question
was assigned to GameSpy Industries, Inc. as part of the sale of the Company's Live Communities business unit, which closed on January 19, 2001. The complaint alleges damages for failure
to make payments under the contract after the agreement was assigned to GameSpy Industries, Inc. While the Company does not believe that it has breached the contract in question, it has
tendered the defense of the matter to GameSpy Industries, Inc. under its indemnity obligations to the Company pursuant to the terms of the Asset Purchase Agreement for the sale of the Live
Communities business. GameSpy Industries, Inc. has agreed to defend and indemnify the Company against this claim and on June 29, 2001, counsel for the Company and GameSpy
Industries, Inc. filed an answer to the complaint denying eFront Media Inc.'s allegations. As the litigation is in an initial stage, we are not able at this time to estimate the
possibility of loss or range of loss, if any that might result. While the outcome of this claim cannot be predict with certainty, the Company does not believe that the outcome will have a material
adverse effect on its consolidated financial position, results of operations or cash flows.

In
addition, from time to time we have been and expect to continue to be, subject to legal proceedings and claims by third parties, including claims of alleged infringement of
third-party trademarks and other intellectual property rights against our licensees or us, or claims related to the Company's dissolution. Third party claims like these, even if not meritorious, could
result in the expenditure of significant financial and managerial resources and could materially and adversely affect our business, financial condition, results of operations, cash flows and funds
available for distribution in a dissolution.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None



On
May 4, 1999, we completed an initial public offering of our common stock, $0.00005 par value. The managing underwriters in the offering were BancBoston Robertson Stephens,
Thomas Weisel Partners LLC, Warburg Dillon Read LLC and Wit Capital Corporation (the "Underwriters"). The shares of common stock sold in the offering were registered under the Securities Act of 1933,
as amended, on a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-72437) that was declared effective by the SEC on April 28,
1999. The offering commenced on April 29, 1999, on which date, 3,900,000 shares of common stock registered under the Registration Statement were sold at a price of $18.00 per share. The
Underwriters also exercised an overallotment option of 585,000 shares, which closed on June 2, 1999. All 585,000 overallotment shares were sold at a price of $18.00 per share. The aggregate
price of the offering amount registered and sold was $80,730,000. In connection with the offering, we paid an aggregate of $5,651,100 in underwriting

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discounts and commissions to the Underwriters. In addition, the following table sets forth the other material expenses incurred in connection with the offering.

Amount PaidSecurities and Exchange Commission registration fee

$
50,000NASD filing fee


5,500NASDAQ National Market listing fee


95,000Printing and engraving expenses


245,000Legal fees and expenses


361,500Accounting fees and expenses


189,700Blue Sky qualification fees and expenses


3,000Transfer Agent and Registrar fees


5,500Miscellaneous fees and expenses


233,800Total

$
1,189,000


After
deducting the underwriting discounts and commissions and the offering expenses described above, we received net proceeds from the offering of approximately $73,900,000. As of
September 30, 2001, $7.4 million of the net proceeds were invested in cash and cash equivalents and short term investments and approximately $66.5 million has been used for
working capital and general corporate purposes, including the funding of product development and expansion of its sales and marketing organization. None of our net proceeds of the offering were paid
directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning 10% or more of any class of equity securities of the Company or an affiliate of the
Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At
our Annual Meeting of Stockholders held on October 22, 2001, the following proposals were adopted by the margins indicated below. There were 28,820,813 shares of common
stock entitled to vote at the meeting and a total of 23,443,335 shares were present in person or by proxy.



Number of SharesIn Favor

Withheld

Abstain15,161,620

513,174

264,877




Number of SharesIn Favor

WithheldPaul Matteucci

22,000,927

1,442,408Brian Apgar

22,243,858

1,199,477James Schmidt

22,917,611

525,724Robert Csongor

21,959,624

1,483,711William McCall

22,955,483

487,852Jeremy Verba

21,961,868

1,481,467


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Number of SharesIn Favor

Withheld

Abstain23,131,418

175,352

136,565


ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.



2.4

Plan of Liquidation and Dissolution (incorporated by reference to Appendix A of the Company's definitive proxy statement as filed with the Securities and Exchange Commission on August 31, 2001).10.20

Settlement Agreement with GameSpy, dated October 8, 2001.10.21

Letter Agreement with Greg Mrva dated September 13, 2001.10.22

Letter Agreement with James Schmidt dated September 20, 2001.10.23

Letter Agreement with John Theodorakis dated September 10, 2001.10.24

Letter Agreement with Mike Cottle dated September 10, 2001.10.25

Letter Agreement with Joyce Keshmiry dated September 10, 2001.10.26

Letter Agreement with James Schmidt dated June 19, 2001.10.27

Letter Agreement with Greg Mrva data June 19, 2001.10.28

Letter Agreement with Mike Cottle dated June 19, 2001.10.29

Letter Agreement with Joyce Keshmiry dated May 8, 2001.10.30

Letter Agreement with John Theodorakis dated May 8, 2001.10.31

Letter Agreement with Robert Csongor dated June 19, 200110.32

Letter Agreement with Linda Palmor dated June 19, 200110.33

Letter Agreement with Frank Chu dated June 19, 2001






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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.

|HEARME |  |                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------
|By:    |  | /s/JOYCE KESHMIRYJoyce Keshmiry
Chief Financial Officer
(Principal Accounting and Financial Officer)

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