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SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549



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FORM 10-Q



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

For the quarterly period ended June 30, 2000
Commission File Number 000-26697

MP3.com, Inc.
(Exact name of registrant as specified in its charter)

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

(858) 623-7000
(Registrants telephone number, including area code)

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

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

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

Common Stock, $0.001 per share par value, 68,186,178 shares outstanding as of June 30, 2000.

This report contains 36 pages



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1



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MP3.COM, INC.

FORM 10-Q
For the Quarter Ended June 30, 2000

INDEX

|        |  |                                                                 |      |    | 
|------- |  | --------------------------------------------------------------- | ---- | -- | 
|        |  |                                                                 | Page
|        |  | PART I  FINANCIAL INFORMATION                                 
|       
|       
|       
|       
|Item 1. |  | Financial Statements                                            |      | 3  | 
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and |      |    | 
|       
|       
|       
|       
|        |  | Results of Operations                                           |      | 10 | 
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk      |      | 32 | 
|       
|       
|       
|       
|        |  | PART II  OTHER INFORMATION                                    
|       
|       
|       
|       
|Item 1. |  | Legal Proceedings                                               |      | 32 | 
|       
|       
|       
|       
|Item 2. |  | Changes in Securities and Uses of Proceeds                      |      | 34 | 
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Securities Holders           |      | 34 | 
|       
|       
|       
|       
|Item 5. |  | Other Information                                               |      | 35 | 
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                |      | 35 | 

2



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PART I  FINANCIAL INFORMATION

Item 1.Financial Statements

MP3.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)

ASSETS

|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |   |              |         |         |  | 
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | -------- | ----------- | - | ------------ | ------- | ------- |  | 
|                                                        |                                                                                                                                                                                                                |                            |                                      |          | June 30,    |   | December 31,
|                                                        |                                                                                                                                                                                                                |                            |                                      |          | 2000        |   | 1999        
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |   |             
|                                                        |                                                                                                                                                                                                                |                            |                                      |          | (Unaudited)
|Current assets:                                        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Cash and cash equivalents                                                                                                                                                                                      |                            | $                                    | 188,095  |             |   | $            | 193,192 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Marketable securities                                                                                                                                                                                          |                            |                                      | 115,278  |             |   |              | 220,039 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Short-term investments                                                                                                                                                                                         |                            |                                      | 12,100   |             |   |              | 14,750  |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts receivable, net                                                                                                                                                                                       |                            |                                      | 3,519    |             |   |              | 6,871   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Unbilled receivables                                                                                                                                                                                           |                            |                                      | 1,749    |             |   |              | 1,279   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Prepaid expenses                                                                                                                                                                                               |                            |                                      | 4,852    |             |   |              | 2,878   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other current assets                                                                                                                                                                                           |                            |                                      | 3,176    |             |   |              | 3,456   |        
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                | Total current assets       |                                      |          | 328,769     |   |              |         | 442,465 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, net of accumulated depreciation |                                                                                                                                                                                                                |                            | 19,346                               |          |             |   | 13,849       |        
|                                                       
|                                                       
|                                                       
|                                                       
|Strategic investments                                   |                                                                                                                                                                                                                |                            | 30,050                               |          |             |   | 11,983       |        
|                                                       
|                                                       
|                                                       
|                                                       
|Prepaid marketing and promotions expense                |                                                                                                                                                                                                                |                            | 4,633                                |          |             |   | 2,162        |        
|                                                       
|                                                       
|                                                       
|                                                       
|Other non-current assets                                |                                                                                                                                                                                                                |                            | 22,634                               |          |             |   | 1,423        |        
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                | Total assets               |                                      | $        | 405,432     |   |              | $       | 471,882 | 
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                |                            | LIABILITIES AND STOCKHOLDERS EQUITY
|                                                       
|                                                       
|                                                       
|                                                       
|Current liabilities:                                   
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts payable                                                                                                                                                                                               |                            | $                                    | 5,309    |             |   | $            | 5,659   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Line of credit                                                                                                                                                                                                 |                            |                                      | 799      |             |   |              | 1,234   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accrued expenses                                                                                                                                                                                               |                            |                                      | 18,844   |             |   |              | 5,019   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred revenues                                                                                                                                                                                              |                            |                                      | 27,733   |             |   |              | 42,361  |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Reserve for litigation dispute                                                                                                                                                                                 |                            |                                      | 121,482  |             |   |              |        |        
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                | Total current liabilities  |                                      |          | 174,167     |   |              |         | 54,273  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Other liabilities                                       |                                                                                                                                                                                                                |                            | 318                                  |          |             |   | 59           |        
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity:                                  
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, par value $0.001 per share; 15,000,000
authorized at June 30, 2000 and December 31, 1999;
none issued and outstanding at June 30, 2000 and
December 31, 1999.                                 |                            |                                      |         |             |   |              |        |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common stock, par value $0.001 per share; 300,000,000
authorized at June 30, 2000 and December 31, 1999;
68,186,178 and 68,620,913 issued and outstanding at
June 30, 2000 and December 31, 1999, respectively |                            |                                      | 68       |             |   |              | 69      |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid in capital                                                                                                                                                                                     |                            |                                      | 478,653  |             |   |              | 477,272 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Note receivable from stockholder                                                                                                                                                                               |                            |                                      | (258     | )           |   |              | (258    | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred compensation                                                                                                                                                                                          |                            |                                      | (8,108   | )           |   |              | (18,148 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated other comprehensive income (loss)                                                                                                                                                                  |                            |                                      | (1,364   | )           |   |              | 1,454   |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated deficit                                                                                                                                                                                            |                            |                                      | (238,044 | )           |   |              | (42,839 | )      
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                | Total stockholders equity |                                      |          | 230,947     |   |              |         | 417,550 | 
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  
|                                                        |                                                                                                                                                                                                                | $                          | 405,432                              |          |             | $ | 471,882      |        
|                                                        |                                                                                                                                                                                                                |                            |                                      |          |             |  

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

3



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MP3.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)

|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |            |        |         |        |            |       |       | 
|------------------------------------------------------ | ----------------------------------------------------------- | ------------ | ------------------------ | ---------- | ------------------ | ------- | ---------------- | ---------- | -------- | ----- | -------- | ---------- | ------ | ------- | ------ | ---------- | ----- | ----- | 
|                                                       |                                                             |              |                          |            | Three Months Ended |         | Six Months Ended
|                                                       |                                                             |              |                          |            |                    |         |                 
|                                                       |                                                             |              |                          |            | June 30,           |         | June 30,         |            | June 30, |       | June 30,
|                                                       |                                                             |              |                          |            | 2000               |         | 1999             |            | 2000     |       | 1999    
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |         
|Net revenues                                           |                                                             | $            | 20,178                   |            |                    | $       | 1,911            |            |          | $     | 37,673   |            |        | $       | 2,577  |           
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenues                                       |                                                             |              | 3,812                    |            |                    |         | 811              |            |          |       | 7,568    |            |        |         | 1,017  |           
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|                                                       |                                                             | Gross profit |                          |            | 16,366             |         |                  |            | 1,100    |       |          |            | 30,105 |         |        |            | 1,560 |      
|                                                      
|                                                      
|                                                      
|                                                      
|Operating expenses:                                   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing                                         |              |                          | 11,961     |                    |         |                  | 2,807      |          |       |          | 28,963     |        |         |        | 3,330      |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product development                                         |              |                          | 6,125      |                    |         |                  | 766        |          |       |          | 11,404     |        |         |        | 1,071      |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative                                  |              |                          | 6,597      |                    |         |                  | 1,305      |          |       |          | 14,359     |        |         |        | 1,764      |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Charge related to copyright claims                          |              |                          | 150,000    |                    |         |                  |           |          |       |          | 150,000    |        |         |        |           |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Costs related to acquisition activities                     |              |                          |           |                    |         |                  |           |          |       |          | 1,704      |        |         |        |           |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Amortization of deferred and other
stock-based compensation |              |                          | 1,934      |                    |         |                  | 2,811      |          |       |          | 6,336      |        |         |        | 3,463      |      
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|                                                       |                                                             |              | Total operating expenses |            |                    | 176,617 |                  |            |          | 7,689 |          |            |        | 212,766 |        |            |       | 9,628 | 
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|Loss from operations                                   |                                                             |              | (160,251                 | )          |                    |         | (6,589           | )          |          |       | (182,661 | )          |        |         | (8,068 | )         
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income, net                                   |                                                             |              | 5,016                    |            |                    |         | 246              |            |          |       | 10,794   |            |        |         | 319    |           
|                                                      
|                                                      
|                                                      
|                                                      
|Impairment of strategic investments                    |                                                             |              | (21,570                  | )          |                    |         |                 |            |          |       | (21,670  | )          |        |         |       |           
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|Loss before minority interest                          |                                                             |              | (176,805                 | )          |                    |         | (6,343           | )          |          |       | (193,537 | )          |        |         | (7,749 | )         
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in loss of unconsolidated subsidiary |                                                             |              | 263                      |            |                    |         |                 |            |          |       | 1,668    |            |        |         |       |           
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|Net loss                                               |                                                             | $            | (177,068                 | )          |                    | $       | (6,343           | )          |          | $     | (195,205 | )          |        | $       | (7,749 | )         
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|Net loss per share:                                   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic and diluted                                           |              | $                        | (2.71      | )                  |         | $                | (0.22      | )        |       | $        | (2.98      | )      |         | $      | (0.27      | )    
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           
|                                                       | Weighted average shares  basic and diluted                 |              |                          | 65,384,000 |                    |         |                  | 28,838,000 |          |       |          | 65,430,000 |        |         |        | 28,496,000 |      
|                                                       |                                                             |              |                          |            |                    |         |                  |            |          |       |          |           

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

4



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MP3.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)



|                                                                                    |                                              |                                                           |                                   |         |                  |         |          |       |        |        |  
|----------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------- | --------------------------------- | ------- | ---------------- | ------- | -------- | ----- | ------ | ------ | -
|                                                                                    |                                              |                                                           |                                   |         | Six Months Ended
|                                                                                    |                                              |                                                           |                                   |         |                 
|                                                                                    |                                              |                                                           |                                   |         | June 30,         |         | June 30,
|                                                                                    |                                              |                                                           |                                   |         | 2000             |         | 1999    
|                                                                                    |                                              |                                                           |                                   |         |                  |         |         
|Operating activities:                                                              
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net loss                                                                            |                                              | $                                                         | (195,205                          | )       |                  | $       | (7,749   | )    
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustments to reconcile net loss to cash used in operating
activities:            
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Depreciation                                 |                                                           |                                   | 2,741   |                  |         |          | 166   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Certain employee related costs               |                                                           |                                   | 7,195   |                  |         |          |      |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Amortization of stock based marketing        |                                                           |                                   | 417     |                  |         |          | 504   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Amortization of deferred compensation        |                                                           |                                   | 6,336   |                  |         |          | 3,094 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Loss from the sale of fixed assets           |                                                           |                                   | 91      |                  |         |          |      |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Impairment of strategic investments          |                                                           |                                   | 21,670  |                  |         |          |      |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Charge for copyright claims                  |                                                           |                                   | 150,000 |                  |         |          |      |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Changes in operating assets and liabilities:
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Accounts receivable                                       |                                   |         | 3,352            |         |          |       | (709   | )     
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Unbilled receivables                                      |                                   |         | (470             | )       |          |       | (114   | )     
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Prepaid expenses and other current assets                 |                                   |         | (1,690           | )       |          |       | (1,020 | )     
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Accounts payable                                          |                                   |         | (350             | )       |          |       | 1,612  |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Accrued expenses and accrued amounts for copyright claims |                                   |         | (15,229          | )       |          |       | 1,099  |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                              | Deferred revenue                                          |                                   |         | (14,628          | )       |          |       | 167    |       
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|                                                                                    |                                              |                                                           | Cash used in operating activities |         |                  | (35,770 | )        |       |        | (2,950 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Investing activities:                                                              
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchase of property and equipment                                                  |                                              |                                                           | (8,333                            | )       |                  |         | (3,895   | )    
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Maturities of marketable securities, net                                            |                                              |                                                           | 104,591                           |         |                  |         |         |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Purchases of strategic investments                                                  |                                              |                                                           | (39,737                           | )       |                  |         |         |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Issuance of loan receivable                                                         |                                              |                                                           | (4,000                            | )       |                  |         |         |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Other assets                                                                        |                                              |                                                           | (20,099                           | )       |                  |         | (63      | )    
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Cash provided by (used in) investing activities                                     |                                              |                                                           | 32,422                            |         |                  |         | (3,958   | )    
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Financing activities:                                                              
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Payments under capital lease obligation                                             |                                              |                                                           |                                  |         |                  |         | (14      | )    
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds from issuance of Series A, B, and C convertible
Preferred stock            |                                              |                                                           |                                  |         |                  |         | 60,618   |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds from exercise of stock options for common stock                            |                                              |                                                           | 1,084                             |         |                  |         | 2,057    |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Repurchase of unvested common stock                                                 |                                              |                                                           | (2,400                            | )       |                  |         |         |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds (payments) on line of credit                                               |                                              |                                                           | (435                              | )       |                  |         | 1,234    |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Translation adjustment                                                              |                                              |                                                           | 2                                 |         |                  |         |         |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Cash (used in) provided by financing activities                                     |                                              |                                                           | (1,749                            | )       |                  |         | 63,895   |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Increase (decrease) in cash and cash equivalents                                    |                                              |                                                           | (5,097                            | )       |                  |         | 56,987   |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cash and cash equivalents at beginning of period                                    |                                              |                                                           | 193,192                           |         |                  |         | 40       |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Cash and cash equivalents at end of period                                          |                                              | $                                                         | 188,095                           |         |                  | $       | 57,027   |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Supplemental disclosures of cash flow information:                                 
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Interest paid                                                                       |                                              | $                                                         | 51                                |         |                  | $       | 56       |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Taxes paid                                                                          |                                              | $                                                         |                                  |         |                  | $       | 58       |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Supplemental schedule of non-cash activities:                                      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Stock based compensation associated with the acceleration of stock
option vesting   |                                              | $                                                         | 6,400                             |         |                  | $       |         |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Unrealized loss on marketable securities, net                                       |                                              | $                                                         | 2,820                             |         |                  | $       |         |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Forfeiture of stock options                                                         |                                              | $                                                         | 3,704                             |         |                  | $       |         |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Common stock issued for notes receivable                                            |                                              | $                                                         |                                  |         |                  | $       | 338      |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Cancellation of stockholder notes receivable                                        |                                              | $                                                         |                                  |         |                  | $       | 78       |      
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Warrants for common stock and common stock issued
in exchange for prepaid marketing
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | costs                                        |                                                           | $                                 |        |                  |         | $        | 2,302 |       
|                                                                                    |                                              |                                                           |                                   |         |                  |        
|Donation of 100,000 shares of MP3.com common stock to the MP3                      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Foundation                                   |                                                           | $                                 |        |                  |         | $        | 767   |       
|                                                                                    |                                              |                                                           |                                   |         |                  |        

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

5



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MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Note 1  The Company and Summary of Significant Accounting Policies

The Company

MP3.com, Inc. (MP3.com) is developing a revolutionary approach to the
promotion and distribution of music. MP3.com uses the Internet and file formats
that make music files smaller to enable a growing number of artists to
distribute and promote their music worldwide and to enable consumers to
conveniently access this expanding music catalog. Consumers can search for,
listen to and download music free of charge. In addition, MP3.com is developing
its role as the premier online Music Service Provider (or MSP), which allows
users to access, manage and listen to their personal music collections anytime,
anywhere, on any web-enabled device or application. MP3.com shares are traded
on the Nasdaq National Market System under the symbol MPPP. MP3.com was
incorporated in the state of Delaware on March 17, 1998 and commenced
operations on that date. MP3.com is headquartered in San Diego, California.

Basis of Presentation

The accompanying condensed consolidated financial statements as of June
30, 2000 and for the three and six months ended June 30, 2000 and 1999 are
unaudited and have been prepared by MP3.com pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The unaudited
consolidated financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the financial information included, in accordance with generally
accepted accounting principles. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such SEC rules and
regulations. The consolidated results of operations for the three and six
months ended June 30, 2000 are not necessarily indicative of the results which
may be reported for any other interim period or for the year ending December
31, 2000. Certain prior period amounts have been reclassified to conform to
the current period presentation.

Principles of Consolidation

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

Use of Estimates

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

Net Loss Per Share

MP3.com computes net loss per share following SFAS No. 128, Earnings Per
Share and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) available to common stockholders for the period
by the weighted average number of common shares outstanding during the period.

6



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Diluted net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of unvested restricted common shares, and incremental common shares
issuable upon the exercise of stock options are included in diluted net income
(loss) per share to the extent these shares are dilutive. Common equivalent
shares are not included in the computation of dilutive net loss per share for
the three and six months ended June 30, 2000 and 1999 because the effect would
be anti-dilutive.

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

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

|                                              |                                                                          |  |                    |            |                  |  |            |            |          |  |            |            |   |  |            |            |  
|--------------------------------------------- | ------------------------------------------------------------------------ |  | ------------------ | ---------- | ---------------- |  | ---------- | ---------- | -------- |  | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                              |                                                                          |  | Three Months Ended |            | Six Months Ended
|                                              |                                                                          |  |                    |            |                 
|                                              |                                                                          |  | June 30,           |            | June 30,         |  | June 30,   |            | June 30,
|                                              |                                                                          |  | 2000               |            | 1999             |  | 2000       |            | 1999    
|                                              |                                                                          |  |                    |            |                  |  |            |            |         
|Numerator:                                   
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss                                                                 |  | $                  | (177,068   | )                |  | $          | (6,343     | )        |  | $          | (195,205   | ) |  | $          | (7,749     | )
|                                              |                                                                          |  |                    |            |                  |  |            |            |          |  |            |           
|Denominator:                                 
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                      |  |                    | 68,249,000 |                  |  |            | 33,271,000 |          |  |            | 67,962,000 |   |  |            | 32,929,000 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject
to repurchase agreements |  |                    | (2,865,000 | )                |  |            | (4,433,000 | )        |  |            | (2,532,000 | ) |  |            | (4,433,000 | )
|                                              |                                                                          |  |                    |            |                  |  |            |            |          |  |            |           
|Denominator for basic and diluted calculation |                                                                          |  | 65,384,000         |            |                  |  | 28,838,000 |            |          |  | 65,430,000 |            |   |  | 28,496,000 |           
|                                              |                                                                          |  |                    |            |                  |  |            |            |          |  |            |           
|Net loss per share:                          
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                        |  | $                  | (2.71      | )                |  | $          | (0.22      | )        |  | $          | (2.98      | ) |  | $          | (0.27      | )
|                                              |                                                                          |  |                    |            |                  |  |            |            |          |  |            |           

Diluted common stock equivalents include common stock options, as if
converted, and restricted stock that has not yet fully vested. Potentially
dilutive securities total approximately 6,785,000 and 6,452,000 common shares
for the three and six months ended June 30, 2000, respectively, and were
excluded from historical diluted earnings per share because of their
anti-dilutive effect.

Comprehensive Income

MP3.com adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Net income (loss) and other comprehensive income (loss), including
foreign currency translation adjustments, and unrealized gains and losses on
investments shall be reported, net of their related tax effect, to arrive at
comprehensive income. There were no differences between MP3.coms net loss and
its total comprehensive loss for the three and six months ended June 30, 2000,
except for unrealized gain (loss) on investments of approximately $2,953 and
$(2,820), respectively. For the three and six months ended June 30, 1999, there were no
differences between net loss and comprehensive loss.

Segment Information

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

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

|            |  |                    |        |                  |  |      |       |      |  |   |        |  |  |   |       | 
|----------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ----- | 
|            |  | Three Months Ended |        | Six Months Ended
|            |  | June 30,           |        | June 30,        
|            |  |                    |        |                 
|            |  | 2000               |        | 1999             |  | 2000 |       | 1999
|            |  |                    |        |                  |  |      |       |     
|Advertising |  | $                  | 19,424 |                  |  | $    | 1,646 |      |  | $ | 36,254 |  |  | $ | 2,206 | 
|           
|           
|           
|           
|Merchandise |  |                    | 754    |                  |  |      | 265   |      |  |   | 1,419  |  |  |   | 371   | 
|            |  |                    |        |                  |  |      |       |      |  |   |        | 
|            |  | $                  | 20,178 |                  |  | $    | 1,911 |      |  | $ | 37,673 |  |  | $ | 2,577 | 
|            |  |                    |        |                  |  |      |       |      |  |   |        | 

7



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Note 2  Legal Proceedings

On January 21, 2000, ten major recording companies filed a copyright
infringement lawsuit against MP3.com in the United States District Court for
the Southern District of New York. The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleged that offering the new My.MP3.com
service, which allowed a user to listen, via the Internet, to the tracks of
certain commercial audio CDs of his or her choosing, constituted unauthorized
copying and willful infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from operating its
My.MP3.com service or any other service that uses reproductions of plaintiffs
copyrighted sound recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein, and the
plaintiffs moved for summary judgement on the issue of liability. On April 28,
2000 the court granted plaintiffs motion for summary judgement and held that
MP3.com was liable for infringing plaintiffs copyrights, and the litigation
proceeded with discovery on the issues of willfulness and damages. On May 10,
2000, MP3.com voluntarily disabled the plaintiffs content within the
My.MP3.com service. In June 2000, MP3.com entered into settlement and
licensing agreements with BMG Entertainment and Warner Music Group (see
discussion below), and the six (6) plaintiffs related to such parties agreed to
dismiss with prejudice their portion of the lawsuit. In July 2000, the
remaining four (4) plaintiffs moved for summary judgement on two issues: (i)
that the unit of measurement for statutory damages should be an individual
recording, or song (as opposed to a CD, regardless of the number of individual
recordings or songs embodied on that CD) and (ii) that MP3.com willfully
infringed plaintiffs copyrights. MP3.com simultaneously moved for summary
judgement on two issues: (A) that MP3.com did not willfully infringe
plaintiffs copyrights and (B) that plaintiffs are entitled to recover
statutory damages only for the infringement of those copyrights evidenced by
the twelve (12) copyright registrations actually produced by such plaintiffs
during the discovery phase of the litigation. A hearing on each of the
foregoing motions is scheduled to be heard on July 28, 2000, and a trial on the
issues of willfulness and damages is currently scheduled to commence on August
28, 2000.

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

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

On June 16, 2000, Teevee Toons, Inc. filed a copyright infringement
lawsuit against MP3.com for the same behavior at issue in the January 21, 2000
lawsuit discussed above. The suit was also filed in the United States District
Court for the Southern District of New York. Minimal discovery has transpired
to date. Plaintiffs in this case seek damages (including statutory damages of
up to $150,000 per violation).

Notwithstanding the courts liability ruling in the first litigation
mentioned above, MP3.com believes that it has meritorious defenses to the
plaintiffs claims, including the fair use doctrine, based in part on the
belief that these services augment the market for music and music CDs. We
intend to vigorously defend against such claims, including the motions for
summary judgement currently pending before the court in the litigation with the
major recording companies, and intend to utilize every possible recourse and
remedy available to us through the courts. However, we cannot assure you that
we will be successful in ultimately defending these lawsuits, and we may be
required to pay license fees or substantial damages, including statutory,
punitive or other damages that

8



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far exceed the resources and overall market
capitalization of our company, in which event we might have to significantly
limit or terminate our business operations, particularly because our business
is not yet profitable. At the maximum statutory rate of $150,000 per work, our
aggregate potential liability resulting from all of our litigation proceedings
could exceed tens of billions of dollars. If successful, any one of these
lawsuits could seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business severely by damaging
our reputation, requiring us to incur legal costs, lowering our stock price and
public demand for our stock, and diverting managements attention away from our
primary business activities in general.

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

MP3.com has pursued and continues to actively pursue settlement discussions
with the remaining major record company plaintiffs from the January 21, 2000
lawsuit, as well as other individuals and entities related to the additional
litigation matters mentioned herein. The decision whether to enter into
settlement and/or license agreements with each party will be based upon a
number of factors related to both the lawsuits and MP3.coms business in
general. We cannot guarantee that we will be able to enter into any additional
settlement agreements on terms favorable to MP3.com, if at all, or that any
settlement or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, MP3.com has recorded a
charge for copyright claims of $150.0 million. The charge for copyright claims
represents MP3.coms estimate of the total costs to be incurred in connection
with the resolution of the various copyright issues associated with the
My.MP3.com service, including the lawsuits filed by major recording companies
and other parties. Copyright issues associated with the My.MP3.com Service
also include but are not limited to publishing rights, non-major label content,
and legal and advisory fees. This charge does not reflect or include any
amounts paid or payable in connection with forward-looking licenses to use
music recordings or compositions in connection with the My.MP3.com service.
This charge reflects managements expectations as of the date of this quarterly
report and is based on currently available information as well as significant
assumptions made by management regarding the litigation, including but not
limited to the following: (i) that the copyright claims will be resolved by
settlement as opposed to a final judgement and award of damages by the court,
(ii) that such settlements will generally be consistent with the actual terms
and conditions of the settlement agreements entered into with Warner Music
Group and BMG Entertainment, (iii) that the actual unit of measurement for
damages is based upon the number of CDs in our system and not the number of
song tracks, (iv) that the economic terms and conditions of settlements with
music publishers will generally be consistent with those discussed in recent
negotiations with certain music publishers, and (v) that the ten major music
recording companies (and their affiliates) and certain publishing companies
represent a particular percentage of the total music recording and publishing
content, respectively, in our My.MP3.com service. Although we believe that the
expectations and assumptions reflected in this charge are reasonable, we cannot
guarantee that future events or results will conform to such expectations or
assumptions. If these expectations and significant assumptions prove to be
erroneous in light of future events, the actual amounts incurred by MP3.com to
resolve all related matters could be materially different than those recorded
as of June 30, 2000.

As mentioned above, on May 10, 2000, MP3.com voluntarily disabled the
major recording companies content within the My.MP3.com service. Although
MP3.com has obtained license agreements permitting the use of recordings from
BMG Entertainment and Warner Music Group, we cannot guarantee that MP3.com will
be able to secure similar license agreements from any other recording company.
Similarly, MP3.com has not yet secured any publishing license or other
affirmative clearance (whether by litigation or otherwise) to utilize within
the My.MP3.com service the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment and Warner Music Group), nor can
we guarantee that any such license or clearance will ever be obtained. If a
publishing license or other affirmative clearance to utilize such compositions
is not obtained, our ability to utilize in the My.MP3.com service recordings
from any recording company could be materially and adversely affected.
Further, because of the other litigation proceedings related to such content,
and the various issues related thereto, we cannot guarantee that such content
will be enabled in the near future, if at all.

9



---



Note 3  Acquisition

In April 2000, MP3.com agreed to purchase the remaining 53.5% ownership of
mp3radio.com, a joint venture with Cox Interactive Media, Inc., and
paid approximately $4 million in cash. During the transition period ending
June 30, 2000, the costs of relocating the joint ventures operations to San
Diego were shared pro rata based upon the parties existing ownership
percentages and included in minority interest in losses of unconsolidated
subsidiary. The acquisition of mp3radio.com will be accounted for under the
purchase method of accounting, and is expected to close during the third
quarter of 2000.

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

Forward-Looking Statements

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

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

The following discussion should be read in conjunction with our
consolidated financial statements and the related notes and the other financial
information appearing elsewhere in this Form 10-Q. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to describe some of the factors which affect our business and may cause such
material differences, including without limitation the disclosures made under
the caption Risk Factors, the audited financial statements and related
footnotes included herein and in our Form 10-K dated March 30, 2000.

Neither MP3.com nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements made in this
document. Also, MP3.com is under no obligation, and we assume no obligation, to
update any of the forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.

Overview

MP3.com, Inc. is pioneering a revolutionary approach to the promotion and
distribution of music. MP3.coms web site has grown into a premier online music
destination for Internet users around the world. MP3.com uses the Internet and
file formats that make music files smaller to enable a growing number of
artists to distribute and promote their music worldwide and to enable consumers
to conveniently access this expanding music catalog. As of June 30, 2000,
MP3.coms web site contained over 515,000 songs and audio files from over
81,000 artists, which we believe represents one of the largest collections of
digital music available on the Internet. Consumers can search for, listen to
and download music free of charge.

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

MP3.com generates revenue from online advertising, offline advertising and
electronic commerce. For the three months ended June 30, 2000, 96.3% of
MP3.coms revenues was from the sale of advertising. Advertising sales include
revenue from the sale of space on our website; sponsorship of contests and
sweepstakes, e-mail campaigns and greeting cards; and sponsorship of CD
samplers, which are distributed free of charge to consumers and contain
collections of music. MP3.com sells CDs online, both fully-packaged albums
created by artists sold through our Digital Automatic Music system, which we
call DAM CDs, and albums we compile featuring the work of multiple artists,
which we call compilation CDs. Although a substantial
portion of the My.MP3.com service is currently
free to our users, we currently charge customers a subscription or
access fee to particular portions of the service and may charge
subscription or access for the entire service in the future.

10



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Since the beginning of 1999, MP3.coms growth has been dramatic. The
number of employees increased from 143 on June 30, 1999 to 335 on June 30,
2000. In June 2000, MP3.com added an average of over 200 artists
and an average of over 1,400 new songs and
audio files each day. During June 2000, visitors to MP3.coms web
site viewed over 134 million web pages and listened to or downloaded over 34.6
million songs.

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

Results of Operations

Net Revenues

For the three months ended June 30, 2000, net revenues were $20,178,000,
which were derived from online advertisements on our web site; offline
advertisements through various promotions and events that were not hosted on
our web site; sponsorship of various contests, sweepstakes, e-mail campaigns,
and greeting cards; and the online sale of CDs and music-related merchandise.
This compares to $1,911,000 during the same period a year ago. The increase in
net revenues during the second quarter over the same period in 1999 was mostly
attributable to a significant increase in online and offline advertisements;
the introduction of various contests, sweepstakes, e-mail campaigns, and
greeting card advertisements; and a significant increase in CD sales on our web
site.

Revenue from online advertising.For the quarter ended June 30, 2000,
revenues from online advertising were $15,845,000 or 78.6% of net revenues
compared to $1,264,000 or 66.1% of net revenues for the same period a year ago.
Online advertising revenues primarily consist of banner, button, portal and
sponsorship advertisements on MP3.coms web site in addition to advertisements
placed in e-mail and greeting card campaigns. The duration of MP3.coms online
advertising commitments range from one month to approximately three years.
Banner, button and portal advertisements are impression based, requiring the
advertisement to be displayed a minimum number of times over the contract
period. Sponsorship advertising contracts involve static advertisements,
whereby the advertisement is continually displayed on a specified area of the
MP3.com web site during the contract period. E-mails containing various
advertisements are sent to MP3.coms artists and users of the MP3.com web site
on a regular basis. Greeting cards also contain advertisements and are sent
electronically whenever a user of the MP3.com web site requests that a card be
delivered to a person(s) of their choice. The increase in revenue from online
advertising for the three months ended June 30, 2000 as compared to the three
months ended June 30, 1999 was primarily due to a significant increase in
pageview volume resulting from significant increases in unique visitors,
MP3.coms advertiser customer base, and the introduction of new product lines
such as e-mail and greeting cards.

Revenue from offline advertising.For the three months ended June 30,
2000, revenues from offline advertising were $3,579,000 or 17.7% of net
revenues compared to $382,000 or 20.0% of net revenues for the same period a
year ago. During the second quarter of 2000, offline advertising revenues
primarily consisted of advertising sponsorships of CD sampler products,
contests and sweepstakes, and to a lesser extent an Internet music convention
called the MP3 Summit. CD Samplers are multi-media CDs containing
advertising, free software, videos and games as well as collections of music
from artists that have posted music on the MP3.com web site. These CDs are
sponsored by several different advertisers and distributed free of charge to
users of MP3.coms web site who register to receive the CD. MP3.com held
contests and sweepstakes during the quarter that were sponsored by various
advertisers and provided prizes to the winners of each contest. The increase in
revenue from offline advertising is primarily due to an increase in revenue
from CD sampler products and the inclusion of contests and sweepstakes during
the second quarter of 2000 that were not included in revenue during the same
period one year ago, and, to a lesser extent, an increase in revenue from the
MP3 Summit.

Revenue from online sales of CDs and other music-related merchandise.For
the three months ended June 30, 2000, revenues from online sales of CDs and
other music-related merchandise was $754,000 or 3.7% of net revenues compared
to $265,000 or 13.9% of net revenues for the same period a year ago. Online
e-commerce sales consist of DAM and compilation CDs and, to a lesser extent,
other music-related merchandise. The increase in revenues from online sales of
CDs and other music-related merchandise during the second quarter of 2000 as
compared to the second quarter of 1999 was primarily due to an increase in the
sales volume of DAM CDs (approximately 63,000 units, or a 265%
increase) resulting from
increased musical content available on MP3.coms web site as a result of
increased brand awareness and an increase in the average selling price of CDs.

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Revenue Concentration.We expect that most of our revenues will continue
to be derived from third party advertising agreements like those we have with
Groupe Arnault. In July 1999, MP3.com entered into an agreement with Groupe
Arnault, which committed to purchase an aggregate of $150,000,000 in
advertising, promotion and marketing services from MP3.com over a three-year
period beginning October 1999, including $5,000,000 in 1999, $40,000,000 in
2000, $70,000,000 in 2001 and $35,000,000 in the first half of 2002. Under this
agreement, MP3.com received pre-payments of $45,000,000 in July 1999
representing advertising, promotional and marketing services to be delivered by
MP3.com in the form of online and offline advertisements from October 1, 1999
through December 31, 2000. In January 2000, MP3.com
entered into an agreement with Visitalk, which, as amended, committed to purchase an
aggregate of $12,500,000 of advertising and promotional services. During the quarter ended June 30, 2000, MP3.com
recognized revenue of $8,500,000 and $2,038,000 associated with the Groupe
Arnault and Visitalk agreements, respectively. Groupe Arnault revenues will be
distributed between online and offline sources based on a changing percentage
from quarter to quarter. MP3.com is scheduled to provide the remaining advertising and promotion services to Visitalk
in 2001 and 2002.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2000 were $3,812,000
or 18.9% of net revenues compared to $811,000 or 42.4% of net revenues during
the same period a year ago, resulting in gross margins of 81.1% and 57.6%,
respectively. The increase in cost of revenues was primarily due to increases
in fulfillment costs associated with increased CD volume, bandwidth
requirements, royalties to artists, costs associated with CD sampler
production and costs related to contests and sweepstakes. The increase in
gross margins was primarily due to a significant amount of the Groupe Arnault
revenues allocated to online advertising, which has higher gross margins. CD
and other music-related merchandise sales typically have lower gross margins
which offset the higher gross margins from online and offline advertising
products. MP3.com anticipates that future gross margins will fluctuate
depending on changes in its revenue mix and the timing of expenditures in web
site and fulfillment operations. Additionally, future gross margins could
fluctuate depending on the amount of Groupe Arnault quarterly revenues
allocated between online and offline advertising products.

Cost of revenues in future periods may increase both in absolute dollars
and as a percentage of revenue as a result of the cost of certain royalty licensing
arrangements with certain major recording companies.

Sales and Marketing

During the three months ended June 30, 2000, sales and marketing expense
was $11,961,000 or 59.3% of net revenues compared to $2,807,000 or 146.9% of
net revenues during the same period a year ago. The increase in sales and
marketing expense, in absolute dollar amounts was primarily due to new and
increased marketing programs, substantial increases in sales and marketing
payroll and related expenses, amortization of prepaid marketing expenses in
connection with our arrangements with internationally known artists, the cost
of our Payback for Playback program, and costs associated with the growth of
our business. The decrease in sales and marketing costs as a percentage of
revenues is primarily due to the significant increase in net revenues. MP3.com
anticipates that overall sales and marketing expense will continue to increase
significantly in the foreseeable future; however, sales and marketing expense
as a percentage of net revenues may fluctuate depending on the timing of new
marketing programs and the addition of sales and marketing personnel.

In the future, MP3.com may enter into arrangements with additional artists
and creative talent agencies to secure their promotional and marketing services
and obtain rights to their music. Future expenses may include costs related to
promotional events, which will be expensed to sales and marketing in the period
the event is held. Proceeds from these events, if any, will be credited against
promotional expenses incurred. Depending upon the terms and timing of
promotional activities, substantial sales and marketing expenses may be
incurred in any quarterly or annual period.

Product Development

During the three months ended June 30, 2000, product development expense
was $6,125,000 or 30.4% of net revenues compared to $766,000 or 40.1% of net
revenues during the same period a year ago. The increase in the level of
product development expense in absolute dollar amounts was primarily due to
increased payroll and related expenses associated with increased headcount,
expensed computer supplies, increased computer equipment depreciation,
increased consulting and temporary labor, and costs associated with the growth
of MP3.coms business. The decrease in product development expense as a
percentage of net revenue is primarily due to the significant increase in net
revenues. MP3.com anticipates that overall product development expenses will
increase in the

12



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\

foreseeable future; however, product development expenses as a
percentage of net revenues may fluctuate depending on the level of future net
revenues and the timing of investments in product development and hiring.

General and Administrative

General and administrative expense was $6,597,000 or 32.7% of net revenues
during the quarter ended June 30, 2000 compared to $1,305,000 or 68.3% of net
revenues during the same period a year ago. The increase in general and
administrative expense in absolute dollar amounts was primarily a result of
increased finance and administrative payroll and related expense; legal,
accounting, and public relations expenses; facility-related cost; insurance
costs; and costs associated with the growth of MP3.coms business. General and
administrative expenses as a percentage of net revenue decreased primarily due
to increased net revenues. MP3.com anticipates that overall general and
administrative expenses will increase in the foreseeable future; however,
general and administrative expense as a percentage of net revenues may
fluctuate depending on the level of future net revenues and the timing of
additional investments in general and administrative infrastructure.

Charge for Copyright Claims

On January 21, 2000, ten major recording companies filed a copyright
infringement lawsuit against MP3.com in the United States District Court for
the Southern District of New York. The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleged that offering the new My.MP3.com
service, which allowed a user to listen, via the Internet, to the tracks of
certain commercial audio CDs of his or her choosing, constituted unauthorized
copying and willful infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from operating its
My.MP3.com service or any other service that uses reproductions of plaintiffs
copyrighted sound recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein, and the
plaintiffs moved for summary judgement on the issue of liability. On April 28,
2000 the court granted plaintiffs motion for summary judgement and held that
MP3.com was liable for infringing plaintiffs copyrights, and the litigation
proceeded with discovery on the issues of willfulness and damages. On May 10,
2000, MP3.com voluntarily disabled the plaintiffs content within the
My.MP3.com service. In June 2000, MP3.com entered into settlement and
licensing agreements with BMG Entertainment and Warner Music Group (see
discussion below), and the six (6) plaintiffs related to such parties agreed to
dismiss with prejudice their portion of the lawsuit. In July 2000, the
remaining four (4) plaintiffs moved for summary judgement on two issues: (i)
that the unit of measurement for statutory damages should be an individual
recording, or song (as opposed to a CD, regardless of the number of individual
recordings or songs embodied on that CD) and (ii) that MP3.com willfully
infringed plaintiffs copyrights. MP3.com simultaneously moved for summary
judgement on two issues: (A) that MP3.com did not willfully infringe
plaintiffs copyrights and (B) that plaintiffs are entitled to recover
statutory damages only for the infringement of those copyrights evidenced by
the twelve (12) copyright registrations actually produced by such plaintiffs
during the discovery phase of the litigation. A hearing on each of the
foregoing motions is scheduled to be heard on July 28, 2000, and a trial on the
issues of willfulness and damages is currently scheduled to commence on August
28, 2000.

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

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

13



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enjoined from using plaintiffs names and
likenesses to promote downloading music over the Internet, and to receive
declaratory relief regarding plaintiffs rights in their pre- and post-1972
recordings.

On June 16, 2000, Teevee Toons, Inc. filed a copyright infringement
lawsuit against MP3.com for the same behavior at issue in the January 21, 2000
lawsuit discussed above. The suit was also filed in the United States District
Court for the Southern District of New York. Minimal discovery has transpired
to date. Plaintiffs in this case seek damages (including statutory damages of
up to $150,000 per violation).

Notwithstanding the courts liability ruling in the first litigation
mentioned above, MP3.com believes that it has meritorious defenses to the
plaintiffs claims, including the fair use doctrine, based in part on the
belief that these services augment the market for music and music CDs. We
intend to vigorously defend against such claims, including the motions for
summary judgement currently pending before the court in the litigation with the
major recording companies, and intend to utilize every possible recourse and
remedy available to us through the courts. However, we cannot assure you that
we will be successful in ultimately defending these lawsuits, and we may be
required to pay license fees or substantial damages, including statutory,
punitive or other damages that far exceed the resources and overall market
capitalization of our company, in which event we might have to significantly
limit or terminate our business operations, particularly because our business
is not yet profitable. At the maximum statutory rate of $150,000 per work, our
aggregate potential liability resulting from all of our litigation proceedings
could exceed tens of billions of dollars. If successful, any one of these
lawsuits could seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business severely by damaging
our reputation, requiring us to incur legal costs, lowering our stock price and
public demand for our stock, and diverting managements attention away from our
primary business activities in general.

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

MP3.com has pursued and continues to actively pursue settlement discussions
with the remaining major record company plaintiffs from the January 21, 2000
lawsuit, as well as other individuals and entities related to the additional
litigation matters mentioned herein. The decision whether to enter into
settlement and/or license agreements with each party will be based upon a
number of factors related to both the lawsuits and MP3.coms business in
general. We cannot guarantee that we will be able to enter into any additional
settlement agreements on terms favorable to MP3.com, if at all, or that any
settlement or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, MP3.com has recorded a
charge for copyright claims of $150.0 million. The charge for copyright claims
represents MP3.coms estimate of the total costs to be incurred in connection
with the resolution of the various copyright issues associated with the
My.MP3.com service, including the lawsuits filed by major recording companies
and other parties. Copyright issues associated with the My.MP3.com Service
also include but are not limited to publishing rights, non-major label content,
and legal and advisory fees. This charge does not reflect or include any
amounts paid or payable in connection with forward-looking licenses to use
music recordings or compositions in connection with the My.MP3.com service.
This charge reflects managements expectations as of the date of this quarterly
report and is based on currently available information as well as significant
assumptions made by management regarding the litigation, including but not
limited to the following: (i) that the copyright claims will be resolved by
settlement as opposed to a final judgement and award of damages by the court,
(ii) that such settlements will generally be consistent with the actual terms
and conditions of the settlement agreements entered into with Warner Music
Group and BMG Entertainment, (iii) that the actual unit of measurement for
damages is based upon the number of CDs in our system and not the number of
song tracks, (iv) that the economic terms and conditions of settlements with
music publishers will generally be consistent with those discussed in recent
negotiations with certain music publishers, and (v) that the ten major music
recording companies (and their affiliates) and certain publishing companies
represent a particular percentage of the total music recording and publishing
content, respectively, in our My.MP3.com service. Although we believe that the
expectations and assumptions reflected in this charge are reasonable, we cannot
guarantee that future events or results will conform to such expectations or
assumptions. If these expectations and significant assumptions prove to be
erroneous in light of future events, the actual amounts incurred by MP3.com to
resolve all related matters could be materially different than those recorded
as of June 30, 2000.

As mentioned above, on May 10, 2000, MP3.com voluntarily disabled the
major recording companies content within the My.MP3.com service. Although
MP3.com has obtained license agreements permitting the use of recordings from
BMG Entertainment and Warner Music Group, we cannot guarantee that MP3.com will
be able to secure similar license agreements from any other recording company.
Similarly, MP3.com has not yet secured any publishing license or other
affirmative clearance (whether by litigation or otherwise) to utilize within
the My.MP3.com service the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment and Warner Music Group), nor can
we guarantee that any

14



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such license or clearance will ever be obtained. If a
publishing license or other affirmative clearance to utilize such compositions
is not obtained, our ability to utilize in the My.MP3.com service recordings
from any recording company could be materially and adversely affected.
Further, because of the other litigation proceedings related to such content,
and the various issues related thereto, we cannot guarantee that such content
will be enabled in the near future, if at all.

Amortization of Deferred Compensation

During the quarter ended June 30, 2000, total deferred compensation of
$1,934,000 was amortized to expense compared to $2,442,000 during the quarter
ended June 30, 1999. Additionally, the second quarter of 1999 included
$369,000 of stock-based compensation of which there was none during the same
period of 2000. Deferred compensation is being amortized over the vesting
period of the relevant granted stock options, which is generally four years.

Interest Income, Net

Interest income (net of interest expense) during the quarter ended June
30, 2000 was $5,016,000 compared to $246,000 during the same period a year ago.
The interest income during the quarter ended June 30, 2000 is directly related
to interest income earned on cash, cash equivalent balances and marketable
securities associated with proceeds from the issuance of common stock in
connection with MP3.coms initial public offering in July 1999, the exercise of
stock options and a warrant for the purchase of common stock, and the issuance
of Series A, B, and C convertible preferred stock for an aggregate of
approximately $426,300,000 during 1999. Interest income during the same period
one year ago was due to interest income on the proceeds from the issuance of
Series A, B, and C convertible preferred stock during the first six months of
1999.

Impairment of Strategic Investments

During the quarter ended
June 30, 2000, MP3.com recorded a charge of
$21,570,000 for the estimated impairment of its strategic investment portfolio.
The impairment is associated with a decrease in the value of certain
investments within its portfolio, which is considered other than temporary.

Provision for Income Taxes

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

Minority Interest in Loss of an Unconsolidated Subsidiary

Minority interest in the loss
of an unconsolidated subsidiary during the quarter ended
June 30, 2000 was $263,000 compared to zero for the same period a year ago. The
increase in minority interest in the loss of an unconsolidated subsidiary is
directly related to mp3radio.com, our former joint venture with Cox Interactive
Media, Inc., and reflects expenses incurred to transition the mp3radio.com
business to San Diego, California.

In April 2000, MP3.com agreed to purchase the remaining 53.5% ownership of
mp3radio.com, a joint venture with Cox Interactive Media, Inc., and
paid approximately $4 million in cash. During the transition period ending
June 30, 2000, the costs of relocating the joint ventures operations to San
Diego were shared pro rata based upon the parties existing ownership
percentages and included in minority interest in losses of unconsolidated
subsidiary. The acquisition of mp3radio.com will be accounted for under the
purchase method of accounting, and is expected to close during the third
quarter of 2000.

The Six Months Ended June 30, 2000 Compared to June 30, 1999

Results of Operations

Net Revenues

For the six months ended June 30, 2000, net revenues were $37,673,000,
which were derived from online advertisements on our web site; offline
advertisements through various promotions and events that were not hosted on
our web site; sponsorship of various contests, sweepstakes, e-mail campaigns,
and greeting cards; and the online sale of CDs and music-related merchandise.
This compares to $2,577,000 during the same period a year ago. The increase in
net revenues during the first six months of 2000 over the

15



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same period in 1999
was mostly attributable to a significant increase in online and offline
advertisements; the introduction of various contests, sweepstakes, e-mail
campaigns, and greeting card advertisements; and a significant increase in CD
sales on our web site.

Revenue from online advertising.For the six months ended June 30, 2000,
revenues from online advertising were $29,408,000 or 78.1% of net revenues
compared to $1,824,000 or 70.8% of net revenues for the same period a year ago.
Online advertising revenues primarily consist of banner, button, portal and
sponsorship advertisements on MP3.coms web site in addition to advertisements
placed in e-mail and greeting card campaigns. The duration of MP3.coms online
advertising commitments range from one month to approximately three years.
Banner, button and portal advertisements are impression based, requiring the
advertisement to be displayed a minimum number of times over the contract
period. Sponsorship advertising contracts involve static advertisements,
whereby the advertisement is continually displayed on a specified area of the
MP3.com web site during the contract period. E-mails containing various
advertisements are sent to MP3.coms artists and users of the MP3.com web site
on a regular basis. Greeting cards also contain advertisements and are sent
electronically whenever a user of the MP3.com web site requests that a card be
delivered to a person(s) of their choice. The increase in revenue from online
advertising for the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999 was primarily due to a significant increase in
pageview volume resulting from significant increases in unique visitors,
MP3.coms advertiser customer base, and the introduction of new product lines
such as e-mail and greeting cards.

Revenue from offline advertising.For the six months ended June 30, 2000,
revenues from offline advertising were $6,846,000 or 18.1% of net revenues
compared to $382,000 or 14.8% of net revenues for the same period a year ago.
During the first six months of 2000, offline advertising revenues primarily
consisted of advertising sponsorships of CD sampler products, contests and
sweepstakes. CD Samplers are multi-media CDs containing advertising, free
software, videos and games as well as collections of music from artists that
have posted music on the MP3.com web site. These CDs are sponsored by several
different advertisers and distributed free of charge to users of MP3.coms web
site who register to receive the CD. MP3.com held contests during the quarter
that were sponsored by various advertisers and provided prizes to the winners
of each contest. The increase in revenue from offline advertising is due to the
introduction of contests and sweepstakes, and increased shipments of CD
samplers.

Revenue from online sales of CDs and other music-related merchandise.For
the six months ended June 30, 2000, revenues from online sales of CDs and other
music-related merchandise was $1,419,000 or 3.8% of net revenues compared to
$371,000 or 14.4% of net revenues for the same period a year ago. Online
e-commerce sales consist of DAM and compilation CDs and, to a lesser extent,
other music-related merchandise. The increase in revenues from online sales of
CDs and other music-related merchandise during the first six months of 2000 as
compared to the same period one year ago was primarily due to an increase in
the sales volume of DAM CDs (approximately 134,000 units or 450%) resulting
from increased musical content available on MP3.coms web site as a result of
increased brand awareness, an increase in the average selling price
of CDs.

Revenue Concentration.We expect that most of our revenues will continue
to be derived from third party advertising agreements like those we have with
Groupe Arnault. In July 1999, MP3.com entered into an agreement with Groupe
Arnault, which committed to purchase an aggregate of $150,000,000 in
advertising, promotion and marketing services from MP3.com over a three-year
period beginning October 1999, including $5,000,000 in 1999, $40,000,000 in
2000, $70,000,000 in 2001 and $35,000,000 in the first half of 2002. Under this
agreement, MP3.com received pre-payments of $45,000,000 in July 1999
representing advertising, promotional and marketing services to be delivered by
MP3.com in the form of online and offline advertisements from October 1, 1999
through December 31, 2000. In January 2000, MP3.com
entered into an agreement with Visitalk, which, as amended, committed to purchase an
aggregate of $12,500,000 of advertising and promotional services. During the six months ended June 30, 2000, MP3.com
recognized revenue of $15,345,000 and $5,116,000 associated with the Groupe
Arnault and Visitalk agreements, respectively. Groupe Arnault revenues will be
distributed between online and offline sources based on a changing percentage
from quarter to quarter. MP3.com expects to realize the remaining Visitalk
revenue in 2001 and 2002.

Cost of Revenues

Cost of revenues for the six months ended June 30, 2000 were $7,568,000 or
20.1% of net revenues compared to $1,017,000 or 39.5% of net revenues during
the same period a year ago, resulting in gross margins of 79.9% and 60.5%,
respectively. The increase in cost of revenues, in absolute dollar amounts, was
primarily due to increases in fulfillment costs associated with increased CD
volume, bandwidth requirements, royalties to artists, costs associated with
CD sampler production, and costs related to contests and sweepstakes. The
increase in gross margins was primarily due to a significant amount of the
Groupe Arnault revenues associated with online advertising, which has higher
gross margins. CD and other music-related merchandise sales typically have
lower gross margins

16



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which offset the higher gross margins from online and
offline advertising products. MP3.com anticipates that future gross margins
will fluctuate depending on changes in its revenue mix and the timing of
expenditures in web site and fulfillment operations. Additionally, future gross
margins could fluctuate depending on the amount of Groupe Arnault quarterly
revenues allocated between online and offline advertising products.

Cost of revenues in future periods may increase both in absolute dollars
and as a percentage of revenue related to the cost of certain royalty licensing
arrangements with certain significant music recording companies.

Sales and Marketing

During the six months ended June 30, 2000, sales and marketing expense was
$28,963,000 or 76.9% of net revenues compared to $3,330,000 or 129.2% of net
revenues during the same period a year ago. The increase in sales and marketing
expense, in absolute dollar amounts was primarily due to new and increased
marketing programs, substantial increases in sales and marketing payroll and
related expenses, cash and non-cash charges related to certain employee costs,
amortization of prepaid marketing expenses in connection with our arrangements
with internationally known artists, the cost of our Payback for Playback
program, and costs associated with the growth of our business. The decrease in
sales and marketing costs as a percentage of revenues is primarily due to the
significant increase in net revenues. MP3.com anticipates that overall sales
and marketing expense will continue to increase significantly in the
foreseeable future; however, sales and marketing expense as a percentage of net
revenues may fluctuate depending on the timing of new marketing programs and
the addition of sales and marketing personnel.

In the future, MP3.com may enter into arrangements with additional artists
and creative talent agencies to secure their promotional and marketing services
and obtain rights to their music. Future expenses may include costs related to
promotional events, which will be expensed to sales and marketing in the period
the event is held. Proceeds from these events, if any, will be credited against
promotional expenses incurred. Depending upon the terms and timing of
promotional activities, substantial sales and marketing expenses may be
incurred in any quarterly or annual period.

Product Development

During the six months ended June 30, 2000, product development expense was
$11,404,000 or 30.3% of net revenues compared to $1,071,000 or 41.6% of net
revenues during the same period a year ago. The increase in the level of
product development expense in absolute dollar amounts was primarily due to
increased payroll and related expenses associated with increased headcount,
expensed computer supplies, increased computer equipment depreciation,
increased consulting and temporary labor, and costs associated with the growth
of MP3.coms business. The decrease in product development expense as a
percentage of net revenue is primarily due to increased net revenues. MP3.com
anticipates that overall product development expenses will increase in the
foreseeable future; however, product development expenses as a percentage of
net revenues may fluctuate depending on the level of future net revenues and
the timing of investments in product development and hiring.

General and Administrative

During the six months ended June 30, 2000, general and administrative
expense was $14,359,000 or 38.1% of net revenues compared to $1,764,000 or
68.5% of net revenues during the same period a year ago. The increase in
general and administrative expense in absolute dollar amounts was primarily a
result of increased finance and administrative payroll and related expenses;
increased legal, accounting, and public relations expenses;
increased facility-related cost; insurance costs; and costs associated with the growth of
MP3.coms business. General and administrative expenses as a percentage of net
revenue decreased primarily due to increased net revenues. MP3.com anticipates
that overall general and administrative expenses will increase in the
foreseeable future; however, general and administrative expense as a percentage
of net revenues may fluctuate depending on the level of future net revenues and
the timing of additional investments in general and administrative
infrastructure.

Charge for Copyright Claims

On January 21, 2000, ten major recording companies filed a copyright
infringement lawsuit against MP3.com in the United States District Court for
the Southern District of New York. The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleged that offering the new My.MP3.com
service, which allowed a user to listen, via the Internet, to the tracks of
certain commercial audio CDs of his or her choosing, constituted unauthorized
copying and willful infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting

17



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MP3.com from operating its
My.MP3.com service or any other service that uses reproductions of plaintiffs
copyrighted sound recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein, and the
plaintiffs moved for summary judgement on the issue of liability. On April 28,
2000 the court granted plaintiffs motion for summary judgement and held that
MP3.com was liable for infringing plaintiffs copyrights, and the litigation
proceeded with discovery on the issues of willfulness and damages. On May 10,
2000, MP3.com voluntarily disabled the plaintiffs content within the
My.MP3.com service. In June 2000, MP3.com entered into settlement and
licensing agreements with BMG Entertainment and Warner Music Group (see
discussion below), and the six (6) plaintiffs related to such parties agreed to
dismiss with prejudice their portion of the lawsuit. In July 2000, the
remaining four (4) plaintiffs moved for summary judgement on two issues: (i)
that the unit of measurement for statutory damages should be an individual
recording, or song (as opposed to a CD, regardless of the number of individual
recordings or songs embodied on that CD) and (ii) that MP3.com willfully
infringed plaintiffs copyrights. MP3.com simultaneously moved for summary
judgement on two issues: (A) that MP3.com did not willfully infringe
plaintiffs copyrights and (B) that plaintiffs are entitled to recover
statutory damages only for the infringement of those copyrights evidenced by
the twelve (12) copyright registrations actually produced by such plaintiffs
during the discovery phase of the litigation. A hearing on each of the
foregoing motions is scheduled to be heard on July 28, 2000, and a trial on the
issues of willfulness and damages is currently scheduled to commence on August
28, 2000.

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

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

On June 16, 2000, Teevee Toons, Inc. filed a copyright infringement
lawsuit against MP3.com for the same behavior at issue in the January 21, 2000
lawsuit discussed above. The suit was also filed in the United States District
Court for the Southern District of New York. Minimal discovery has transpired
to date. Plaintiffs in this case seek damages (including statutory damages of
up to $150,000 per violation).

Notwithstanding the courts liability ruling in the first litigation
mentioned above, MP3.com believes that it has meritorious defenses to the
plaintiffs claims, including the fair use doctrine, based in part on the
belief that these services augment the market for music and music CDs. We
intend to vigorously defend against such claims, including the motions for
summary judgement currently pending before the court in the litigation with the
major recording companies, and intend to utilize every possible recourse and
remedy available to us through the courts. However, we cannot assure you that
we will be successful in ultimately defending these lawsuits, and we may be
required to pay license fees or substantial damages, including statutory,
punitive or other damages that far exceed the resources and overall market
capitalization of our company, in which event we might have to significantly
limit or terminate our business operations, particularly because our business
is not yet profitable. At the maximum statutory rate of $150,000 per work, our
aggregate potential liability resulting from all of our litigation proceedings
could exceed tens of billions of dollars. If successful, any one of these
lawsuits could seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business severely by damaging
our reputation, requiring us to incur legal costs, lowering our stock price and
public demand for our stock, and diverting managements attention away from our
primary business activities in general.

18



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

MP3.com has pursued and continues to actively pursue settlement discussions
with the remaining major record company plaintiffs from the January 21, 2000
lawsuit, as well as other individuals and entities related to the additional
litigation matters mentioned herein. The decision whether to enter into
settlement and/or license agreements with each party will be based upon a
number of factors related to both the lawsuits and MP3.coms business in
general. We cannot guarantee that we will be able to enter into any additional
settlement agreements on terms favorable to MP3.com, if at all, or that any
settlement or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, MP3.com has recorded a
charge for copyright claims of $150.0 million. The charge for copyright claims
represents MP3.coms estimate of the total costs to be incurred in connection
with the resolution of the various copyright issues associated with the
My.MP3.com service, including the lawsuits filed by major recording companies
and other parties. Copyright issues associated with the My.MP3.com Service
also include but are not limited to publishing rights, non-major label content,
and legal and advisory fees. This charge does not reflect or include any
amounts paid or payable in connection with forward-looking licenses to use
music recordings or compositions in connection with the My.MP3.com service.
This charge reflects managements expectations as of the date of this quarterly
report and is based on currently available information as well as significant
assumptions made by management regarding the litigation, including but not
limited to the following: (i) that the copyright claims will be resolved by
settlement as opposed to a final judgement and award of damages by the court,
(ii) that such settlements will generally be consistent with the actual terms
and conditions of the settlement agreements entered into with Warner Music
Group and BMG Entertainment, (iii) that the actual unit of measurement for
damages is based upon the number of CDs in our system and not the number of
song tracks, (iv) that the economic terms and conditions of settlements with
music publishers will generally be consistent with those discussed in recent
negotiations with certain music publishers, and (v) that the ten major music
recording companies (and their affiliates) and certain publishing companies
represent a particular percentage of the total music recording and publishing
content, respectively, in our My.MP3.com service. Although we believe that the
expectations and assumptions reflected in this charge are reasonable, we cannot
guarantee that future events or results will conform to such expectations or
assumptions. If these expectations and significant assumptions prove to be
erroneous in light of future events, the actual amounts incurred by MP3.com to
resolve all related matters could be materially different than those recorded
as of June 30, 2000.

As mentioned above, on May 10, 2000, MP3.com voluntarily disabled the
major recording companies content within the My.MP3.com service. Although
MP3.com has obtained license agreements permitting the use of recordings from
BMG Entertainment and Warner Music Group, we cannot guarantee that MP3.com will
be able to secure similar license agreements from any other recording company.
Similarly, MP3.com has not yet secured any publishing license or other
affirmative clearance (whether by litigation or otherwise) to utilize within
the My.MP3.com service the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment and Warner Music Group), nor can
we guarantee that any such license or clearance will ever be obtained. If a
publishing license or other affirmative clearance to utilize such compositions
is not obtained, our ability to utilize in the My.MP3.com service recordings
from any recording company could be materially and adversely affected.
Further, because of the other litigation proceedings related to such content,
and the various issues related thereto, we cannot guarantee that such content
will be enabled in the near future, if at all.

Costs Related to Acquisition Activities

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

Amortization of Deferred Compensation

During the six months ended June 30, 2000, total deferred compensation of
$6,336,000 was amortized to expense compared to $3,094,000 during the same
period one year ago. The increase in amortization of deferred compensation is
primarily related to the increase in the granting of stock options to executive
management and employees hired after March 31, 1999 and prior to August 11,
1999. Deferred compensation is being amortized over the vesting
period of the relevant
granted stock options, which is generally four years. Additionally, there was
approximately $369,000 of stock-based compensation during the six months ended
June 30, 1999 which was not present during the same period of 2000.

19



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Interest Income, Net

Interest income (net of interest expense) during the six months ended June
30, 2000 was $10,794,000 compared to $319,000 during the same period a year
ago. The interest income during the six months ended June 30, 2000 is directly
related to interest income earned on cash, cash equivalent balances and
marketable securities associated with proceeds from the issuance of common
stock in connection with MP3.coms initial public offering in July 1999, the
exercise of stock options and a warrant for the purchase of common stock, and
the issuance of Series A, B, and C convertible preferred stock for an aggregate
of approximately $426,300,000 during 1999. Interest income during the same
period one year ago was due to interest income on the proceeds from the
issuance of Series A, B, and C convertible preferred stock during the first six
months of 1999.

Impairment of Strategic Investments

During the six months ended June 30, 2000, MP3.com recorded a reserve of
$21,670,000 for the estimated impairment of its strategic investment portfolio.
The impairment is associated with a decrease in the value of
certain investments within its portfolio, which is considered other
than temporary.

Provision for Income Taxes

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

Minority Interest in Loss of an Unconsolidated Subsidiary

Minority interest in the loss
of an unconsolidated subsidiary during the six months ended
June 30, 2000 was $1,668,000 compared to zero for the same period a year ago.
The increase in minority interest in the loss of an unconsolidated subsidiary
is directly related to mp3radio.com, our former joint venture with Cox
Interactive Media, Inc., and reflects expenses incurred to grow the
mp3radio.com business and to transition the business to San Diego, California.

In April 2000, MP3.com agreed to purchase the remaining 53.5% ownership of
mp3radio.com, a joint venture with Cox Interactive Media, Inc., and
paid approximately $4 million in cash. During the transition period ending
June 30, 2000, the costs of relocating the joint ventures operations to San
Diego were shared pro rata based upon the parties existing ownership
percentages and included in minority interest in losses of unconsolidated
subsidiary. The acquisition of mp3radio.com will be accounted for under the
purchase method of accounting, and is expected to close during the third
quarter of 2000.

Liquidity and Capital Resources

Overview

To date, MP3.com has generated cash from internal operations, proceeds
from the sale of convertible preferred stock, the proceeds from its initial
public offering and, to a lesser extent, the exercise of stock options and
equipment financing through a line of credit. As of June 30, 2000, MP3.com had
approximately $303,373,000 in cash, cash equivalents and marketable securities.
Additionally, MP3.com has a line of credit of $4,766,000 to fund future capital
equipment purchases and working capital draws, with a sub-limit of $1,500,000
for credit cards; and a $799,000 17-month fully amortizing term loan
requiring monthly principal and interest payments expiring in May 2001.
Borrowings under the amended line of credit accrue interest at the banks prime
rate plus 1% (10.5% as of June 30, 2000) and convert into a term loan on
November 30, 2000, which shall provide for 30 equal principal payments plus
interest as evidenced in a promissory note. MP3.com is required to comply with
debt covenants, the most restrictive of which is a minimum liquidity ratio
which requires MP3.com to maintain a cash, cash equivalents and accounts
receivable balance of the greater of 1.5 times current liabilities plus all
bank debt or six months cash burn measured on a two-month rolling average
basis.

Operating Activities

Net cash used in operating activities during the six months ended June 30,
2000 was approximately $35,770,000, consisting primarily of the following:



| |  |  | net loss of approximately $195,205,000;
| | - |  | ---------------------------------------

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| |  |  | amortization of deferred compensation of approximately $6,336,000;                                           
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | depreciation of property and equipment of approximately $2,741,000;                                          
|
| |  |  | amortization of stock based marketing costs of approximately $417,000;                                       
|
| |  |  | certain employee costs of approximately $7,195,000;                                                          
|
| |  |  | impairment of strategic investments of $21,670,000;                                                          
|
| |  |  | a charge for copyright claims of $150,000,000;                                                               
|
| |  |  | a net decrease in accounts and unbilled receivables of approximately $2,882,000;                             
|
| |  |  | an increase in prepaid expenses and other assets of approximately $1,690,000;                                
|
| |  |  | a decrease in accounts payable of approximately $350,000;                                                    
|
| |  |  | a net decrease in accrued expenses and
accrued amounts for copyright claims of approximately $15,229,000; and
|
| |  |  | a decrease in deferred revenue of approximately $14,628,000.                                                 

Investing Activities

Net cash provided by investing activities during the six months ended June
30, 2000 was approximately $32,422,000, consisting primarily of net maturities
of marketable securities of $104,591,000 reduced by property and equipment
expenditures of $8,333,000, purchases of strategic equity investments of
approximately $39,737,000, issuance of a note receivable of $4,000,000, and
increases in other assets of $20,099,000 primarily associated with a prepaid
royalty license and the payment to CIM for their 53.5% of
mp3radio.com, which is expected to close during the third quarter of
2000.

Financing Activities

Net cash used in financing activities during the six months ended June 30,
2000 was approximately $1,749,000, consisting primarily of the repurchase of
common stock from an executive officer offset by the exercise of stock options.

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



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

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

21



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Future Capital Requirements

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

To the extent MP3.coms net revenues increase in the future, MP3.com
anticipates significant increases in its working capital requirements to
finance higher relative levels of associated accounts receivable, unbilled
receivables and other assets, offset by increases in accounts payable and other
liabilities. However, MP3.com does not expect that the increases in accounts
payable and other liabilities will offset the increases in accounts receivable,
unbilled receivables and other assets.

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

Risks Related To Our Business Model

We Are Currently Engaged In A Number Of Ongoing Lawsuits That May Result In
Monetary Damages Substantially Greater Than Our Overall Market Capitalization
And The Discontinuation Or Interruption Of Services To Our Consumers.

We are currently a named
defendant in a number of lawsuits, including an
action initially brought by ten major music recording companies, a lawsuit filed by two
major music publishing companies, a class-action lawsuit in which we are named
as co-defendants with several major recording companies and a lawsuit brought
by an independent record company. These lawsuits allege that, among other
things, portions of our My.MP3.com and related services violated their respective
copyrights and/or misappropriated artists names and likenesses.

As of June 30, 2000, we
have only reached settlement with two major recording companies,
which together represent six plaintiffs
in the lawsuit brought by the ten major music recording companies. We cannot
assure you that we will be successful in reaching settlements with
any additional parties
to such litigation proceedings or in defending these lawsuits, and we may be
required to pay license fees or substantial damages, including punitive,
statutory or other damages that far exceed the resources and overall market
capitalization of our company, in which event we might have to significantly
limit or terminate our business operations, particularly because our
business is not yet profitable. Moreover, MP3.com has not yet secured any
publishing license or other affirmative clearance to utilize within the
My.MP3.com service the compositions embodied in the recordings owned by any
recording company (including those with whom we have reached
settlement agreements), nor can we guarantee that any such license or clearance will
ever be obtained. If a publishing license or other affirmative clearance to
utilize such compositions is not obtained, our ability to utilize in the
My.MP3.com service recordings from any recording company could be materially
and adversely affected.

During the quarter ended June 30, 2000, MP3.com has recorded a
charge for copyright claims of $150.0 million. The charge for copyright claims
represents MP3.coms estimate of the total costs to be incurred in connection
with the resolution of the various copyright issues associated with the
My.MP3.com service, including the lawsuits filed by major recording companies
and other parties. Copyright issues associated with the My.MP3.com Service
also include but are not limited to publishing rights, non-major label content,
and legal and advisory fees. This charge does not reflect or include any
amounts paid or payable in connection with forward-looking licenses to use
music recordings or compositions in connection with the My.MP3.com service.
This charge reflects managements expectations as of the date of this quarterly
report and is based on currently available information as well as significant
assumptions made by management regarding the litigation, including but not
limited to the following: (i) that the copyright claims will be resolved by
settlement as opposed to a final judgement and award of damages by the court,
(ii) that such settlements will generally be consistent with the actual terms
and conditions of the settlement agreements entered into with Warner Music
Group and BMG Entertainment, (iii) that the actual unit of measurement for
damages is based upon the number of CDs in our system and not the number of
song tracks, (iv) that the economic terms and conditions of settlements with
music publishers will generally be consistent with those discussed in recent
negotiations with certain music publishers, and (v) that the ten major music
recording companies (and their affiliates) and certain publishing companies
represent a particular percentage of the total music recording and publishing
content, respectively, in our My.MP3.com service. Although we believe that the
expectations and assumptions reflected in this charge are reasonable, we cannot
guarantee that future events or results will conform to such expectations or
assumptions. If these expectations and significant assumptions prove to be
erroneous in light of future events, the actual amounts incurred by MP3.com to
resolve all related matters could be materially different than those recorded
as of June 30, 2000.

In May of 2000, we voluntarily disabled many features of our
My.MP3.com, Instant Listening and Beam-it services. We also may be
required at any time by the courts to cease all operations of the My.MP3.com,
Instant Listening, Beam-it or other services permanently, or until a full
settlement with all parties to our lawsuits is reached. Furthermore, our
insurance coverage and other capital resources may be inadequate to cover
anticipated costs of the lawsuit or any possible settlements or licenses. If
successful, any of these lawsuits could seriously harm our business by forcing
us to cease providing services to our consumers or requiring us to pay monetary
damages. Even if unsuccessful, these claims still can harm our business
severely by damaging our reputation, requiring us to incur legal costs,
lowering our stock price and public demand for our stock, and diverting
managements attention away from our primary business activities in general.

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

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



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

Since our business revenues may evolve rapidly, these sources of
revenues, including those derived
from the development of our My.MP3.com and other MSP services may change or increase or decrease in importance, as well. It is
uncertain whether a music-based web site that relies on attracting people to
learn about, listen to and download music, mostly from lesser-known artists,
can generate sufficient revenues to survive. In addition, our efforts to
exploit sources of revenue from the My.MP3.com and other MSP services in
development may not be successful or may meet significant consumer resistance.
We cannot assure you that our business model will succeed or will be
sustainable as our business grows. In order for our business to be successful,
we must not only develop services that directly generate revenue, but also
provide content and services that attract consumers to our web site frequently.
We will need to develop new offerings as consumer preferences change and new
competitors emerge. We cannot assure you that we will be able to provide
consumers with an acceptable blend of products, services, and informational and
community offerings that will attract consumers to our web site frequently. We
provide many of our products and services, including our My.MP3.com and MSP
services in development, without charge, and we may not be able to generate
sufficient revenue to pay for these products and services. Accordingly, we are
not certain that our business model will be successful or that we can sustain
revenue growth or be profitable.

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

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

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

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

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

We currently are experiencing a period of rapid expansion in our web site
traffic, personnel, facilities and infrastructure. For example, the number of
monthly page views on our web site increased approximately 38.2% from the
month of December 1999 to the month of June 2000. Our number of employees
increased from eight on December 31, 1998, to 276 on
December 31, 1999, to 335 on
June 30, 2000. We expect further significant expansion will be required to
address potential growth in our artist and consumer

23



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bases, the breadth of our
product and service offerings, and other opportunities. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. Our failure to manage growth
could disrupt our operations and ultimately prevent us from generating the
revenues we expect.

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

Although our business model contemplates multiple sources of revenue, we
anticipate that in the foreseeable future we will depend substantially on
revenue from advertising. During the second quarter of 2000, revenue from
advertising accounted for 96.3% of our net revenues, a higher
percentage than the same period the previous year. We currently depend on a
small group of customers for our revenue from advertising. During the second
quarter of 2000, two customers accounted for approximately 52.2% of net
revenues, and our top ten customers accounted for approximately 74.8% of net
revenues. We expect that most of our revenues will continue to be derived from
third party advertising agreements like those we have with Groupe Arnault,
Freeinternet.com, Buy.com and Voquette. If any of these important customers
were to leave us, our business could be harmed. If we do not increase revenue
from online advertising, our business may not grow or survive. Increasing our
revenue from online advertising depends largely on our ability to:



| |  |  | conduct successful selling and marketing efforts aimed at advertisers;                     
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | increase the size of our sales force;                                                      
|
| |  |  | increase the size of the MP3.com audience by increasing both our artist and consumer bases;
|
| |  |  | increase the amount of revenues per advertisement;                                         
|
| |  |  | target advertisements to appropriate segments of our audience; and                         
|
| |  |  | measure accurately the size and demographic characteristics of our audience.               

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

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

In July 1999, we entered into a three-year advertising, promotion and
marketing agreement with Groupe Arnault. We anticipate that for at least the
next two years a substantial portion of our revenues will come from sales of
our advertising, promotion and marketing services under this agreement.
Although payment for these services has been secured for the term of the
agreement by a $45,000,000 pre-payment and an irrevocable letter of credit for
the remaining $105,000,000 of services to be provided under the agreement,
Groupe Arnault is under no obligation to renew its relationship with us after
the current agreement terminates at the end of June 2002. Furthermore, we
anticipate that our revenue growth for the next two years will largely be due
to the scheduled growth in revenues under our agreement with Groupe Arnault.
Historically, most of our revenue sources have not provided for a
similarly-scheduled growth in revenues. If we do not develop significant
additional revenue sources in the future, our business will be substantially
dependent on the Groupe Arnault agreement. Moreover, if Groupe Arnault does not
renew its relationship after termination of the current agreement at the end of
June 2002, or renews the relationship but at a lower level of commitment, our
revenues or growth rate may decline in periods subsequent to the end of the
current agreement. In addition, if the parties agree to terminate or to
substantially modify the agreement prior to its scheduled termination, our
revenues, growth rate and stock price may also drop dramatically. We cannot
guarantee that we will be able to develop enough additional revenue to offset
the loss of revenues that would result in the absence or the significant
modification of our agreement with Groupe Arnault, or that the other revenue
sources we may develop will be sufficient to maintain our rate of revenue
growth. If any of the aforementioned risks causes our revenues or our revenue
growth rate to be substantially reduced, we may not have sufficient revenues to
support our business and the market price of our stock may fall.

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

Given the online nature of our business, without the continued development
and maintenance of the Internet infrastructure, we could fail to meet our
overall strategic objectives and ultimately fail to generate the web site
traffic and revenues we expect. This continued development of the Internet
includes maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products
including high speed modems, for providing reliable Internet access and
services. Because global commerce on the Internet and the online exchange of
information is new and evolving, we cannot predict whether the Internet will
prove to be a viable commercial marketplace in the long term. The success of
our business will rely on the continued improvement of the Internet as a
convenient means of consumer interaction and commerce, as well as an efficient
medium for the delivery and distribution of music. Our business will depend on
the ability of our artists and consumers to continue to upload and download mp3
and other music files, as well as to conduct commercial transactions with us,
without significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth and access to our web site. Our penetration
of a broader consumer market will depend, in part, on continued proliferation
of high speed Internet access. Even compressed in mp3 format, a typical three
minute song file can occupy more than three megabytes of storage space. This
file could take as much as two minutes to download over an xDSL or cable modem
compared to 10 to 20 minutes over a conventional 56Kbps modem. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, increased users or bandwidth requirements may harm
the performance of the Internet. The Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the future. These
outages and delays could reduce the level of Internet usage as well as the
level of traffic, and could result in the Internet becoming an inconvenient or
uneconomical source of music and music-related products and services. The
infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for the
products or services that we offer.

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

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

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

Although most of the artists that post music on our web site are not bound
by record contracts, some artists, including most internationally-recognized
artists, typically sign multi-year exclusive recording contracts that may
prevent them from posting music on our web site. To post music on our web site,
these artists must typically get permission from their record company. As a
result, our access to internationally-recognized artists and our ability to
distribute their music or place their music on our web site and on
our DAMs is
limited. For this reason, and because of the emphasis of our business model on
under-served artists, we expect our music to continue to concentrate
principally on lesser-known and local artists. If the music provided by these
lesser-known and local artists fails to meet consumer expectations, our brand
name could be damaged and our business may not generate sufficient revenues to
survive.

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

We currently rely on mp3 technology for both brand identity and as a
delivery method for the digital distribution of music. Mp3 is an open standard
adopted by the Moving Picture Experts Group that makes music files smaller. We
do not own or control mp3 technology. The onset of competing industry standards
for the electronic delivery of music could significantly affect the way we
operate our business as well as the publics perception of MP3.com as a
company. For example, some of the major recording studios have devoted
resources to develop a universal standard for the electronic delivery of music,
called the Secured Digital Music Initiative, or SDMI. This delivery method may
be available during 2000. In addition, major corporations including Microsoft
Corporation, IBM Corporation, AT&T Corp. and Sony Corporation have launched
efforts to establish proprietary audio formats that will compete with the mp3
format. Some competitive formats offer security and features that track the
number of copies made. The mp3 technology we currently use does not offer these
features. These features are especially popular among groups associated with
the traditional music industry, and are being promoted by some of our
competitors. Widespread industry and consumer acceptance of any of these audio
formats could significantly harm our business if we are unable to adapt and
respond to these changing standards. Although we are not tied exclusively to
the use of mp3 technology or to any other specific standard for the electronic
delivery of music, if a proprietary, or closed, music delivery format receives
widespread industry and consumer acceptance, we may be required to license
additional technology and information from third parties in order to adopt that
format. We cannot assure you that this third-party technology and information
will be available to us on commercially reasonable terms, if at all. Any
failure to obtain any of these technology and information licenses or to
successfully reconfigure our music library to support these technologies could
prevent us from making our music available in the most widely accepted formats,
which could make our offerings less popular or inaccessible to both consumers
and artists and thus harm our business.

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

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

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

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

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Financial Risks

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

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

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

In 1999 and the first six months of 2000, we had a net loss of
approximately $42.5 and $195.2 million, respectively. We expect substantial net
losses and negative cash flow for the foreseeable future. We believe it is
critical to our long term success that we continue to develop MP3.com brand
awareness and loyalty through marketing and promotion, expand our artist and
consumer networks, develop our online content and expand our other services. We
expect that our operating expenses will increase significantly during the next
several years, especially in sales and marketing and product development. With
increased expenses, we will need to generate significant additional revenues to
achieve profitability. As a result, we may never achieve or sustain
profitability and, if we do achieve profitability in any period, we may not be
able to sustain or increase profitability on a quarterly or annual basis.

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

Our available cash and equivalents and short and long-term investments in
marketable securities are expected to be sufficient to meet our cash
requirements for at least the next 12 months including certain
litigation settlement payments that may be required in connection
with claims related to our My.Mp3.com service to the extent we have
accrued such amounts as of June 30, 2000. However, we may need to raise
additional funds in order to:



| |  |  | satisfy any damage awards or unanticipated settlement costs related to our current or potential future litigation proceedings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | finance unanticipated working capital requirements;                                                                           
|
| |  |  | develop or enhance existing services or products;                                                                             
|
| |  |  | fund distribution relationships;                                                                                              
|
| |  |  | respond to competitive pressures; or                                                                                          
|
| |  |  | acquire complementary businesses, technologies, content or products.                                                          

We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take
advantage of unanticipated opportunities, develop or enhance services or
products or otherwise respond to competitive pressures would be significantly
limited. If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced, and
these securities may have rights, preferences or privileges senior to those of
our stockholders.

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

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



| |  |  | developments related to our current or future legal proceedings;              
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | actual or anticipated variations in quarterly and/or annual operating results;

27



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| |  |  | announcements of technological innovations;                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | new products or services offered by us or our competitors;                                                                        
|
| |  |  | changes in financial estimates and/or ratings by securities analysts;                                                             
|
| |  |  | announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments by us or our competitors;
|
| |  |  | additions or departures of key personnel;                                                                                         
|
| |  |  | sales of common stock;                                                                                                            
|
| |  |  | perceived and/or actual sales of our stock by company insiders; and                                                               
|
| |  |  | other events or factors, many of which are beyond our control.                                                                    

In addition, the stock market in general, and the Nasdaq National Market
and the stock prices of Internet-related companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of such companies.
These broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price
of a companys securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of managements attention and resources,
which could adversely affect our business, financial condition and the market
price of our common stock.

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

Sales of a large number of shares of our common stock in the public market
or the perception that such sales could occur could cause the market price of
our common stock to drop. As of June 30, 2000 we had 68,186,178 shares of
common stock outstanding, of which approximately 64,423,735 shares are freely
transferable without restriction or registration under the Securities Act of
1933, unless such shares are held by our affiliates, as that term is defined in
Rule 144 under the Securities Act. Sales of common stock by existing
stockholders in the public market, or the availability of such shares for sale,
could adversely affect the market price of the common stock.

In July 1999, we filed a registration statement on Form S-8 with the
Securities and Exchange Commission covering the 7,606,781 shares of common
stock reserved for issuance under our 1998 Equity Incentive Plan and 1999
Employee Stock Purchase Plan and for options issued outside such plans. In
February 2000, our board of directors approved our 2000 Equity Incentive Plan,
which includes a reserve of 1,100,000 shares available for grant. In May 2000,
our stockholders approved an amendment to the 1998 Equity Incentive Plan to
increase the aggregate number of shares of common stock authorized for issuance
under such plan from 12,750,000 to 22,500,000 shares. We plan to file a
registration statement on Form S-8 covering the additional shares from both the
1998 and 2000 equity incentive plans. Once issued, any shares registered on
such Form S-8 registration statement may be freely transferable without
restriction or registration under the Securities Act of 1933, with the
exception of certain shares held by our affiliates, as that term is defined in
Rule 144 under the Securities Act. Accordingly, sales of a large number of
shares could have an adverse effect on the market price for our common stock.

Holders of approximately 17,088,152 shares of our Common Stock have
certain registration rights. In addition, 10% of the 3,347,233 shares purchased
by Arkaro Holding B.V. in our initial public offering became available for sale
to the public market on January 21, 2000, with an additional 10% becoming
eligible on the 21st day of each of the five months thereafter. All of
Arkaros remaining shares became available for sale to the public market on
July 21, 2000. If such holders, by exercising either their registration rights
or their rights under Rule 144 or Rule 701, cause a large number of securities
to be registered and/or sold in the public market, such sales could have an
adverse effect on the market price for our common stock. If we were to include
in a company-initiated registration shares held by such holders pursuant to the
exercise of their registration rights, such sales may have an adverse effect on
our ability to raise needed capital.

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Risks Related To Sales, Marketing And Competition

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

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

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

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

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

We plan to use consumer data to expand, refine and target our marketing
and sales efforts. We collect most of our data from users who report
information to us as they conduct transactions on our web site. If a large
proportion of users impede our ability to collect data or if they falsify data,
our marketing and sales efforts would be less effective since advertisers
generally require detailed demographic data on their target audiences. In
addition, laws relating to privacy and the use of the Internet to collect
personal information, including strict laws relating to collecting
information from children, could limit our ability to collect data and utilize our
database. Failure to collect accurate and useful data could result in a
substantial reduction in advertising revenues, which represented 96.3% of our
total revenues during the first six months of 2000. Because we use e-mail for
direct marketing, any legislative or consumer efforts to regulate unsolicited
bulk e-mails, commonly referred to as spam, as well as other laws regulating
the use of e-mail, could significantly impair our sales and marketing efforts
and our associated advertising revenue.

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

The market for the online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low, and we expect competition to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors, many of which have longer operating histories, greater brand name
recognition, larger consumer bases and significantly greater financial,
technical and marketing resources than we do. We cannot assure you that web
sites maintained by our existing and potential competitors will not be
perceived by consumers, artists, talent management companies and other
music-related vendors or advertisers as being superior to ours. We also cannot
assure you that we will be able to maintain or increase our web site traffic
levels, purchase inquiries and number of click-throughs on our online
advertisements or that competitors will not experience greater growth in these
areas than we do. Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which could damage
the long-term or short-term prospects of our business.

Risks Related To Operations

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

Our future performance will be substantially dependent on the continued
services of our management and our ability to retain and motivate them. The
loss of the services of any of our officers or senior managers could harm our
business. We do not have long-term employment agreements with any of our key
personnel, other than our Chief Executive Officer, and we do not maintain any
key

29



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person life insurance policies except on our Chief Executive Officer.
Almost all of our management team joined MP3.com in 1999. Since the completion
of our initial public offering in July 1999, we have experienced turnover in
our management team, and we may continue to experience turnover. Most of these
individuals have not previously worked together and are currently being
integrated as a management team. If our senior managers are unable to work
effectively as a team, our business operations could be significantly
disrupted.

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

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

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

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

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

In the second quarter of 2000,
an average of approximately 43.2
gigabytes of musical content was added to our web site each week and
the number of monthly page views to our web site increased
approximately 38.2% from the month of December 1999 to the month of
June 2000. We must
continue to add hardware and enhance software to accommodate the increased
content and use of our web site. If we are unable to increase the data storage
and processing capacity of our systems at least as fast as the growth in
demand, our web site may become unstable and may fail to operate for unknown
periods of time. Unscheduled downtime could harm our business and also could
discourage users of our web site and reduce future revenues.

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

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

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

Since our data warehousing, web server and network facilities are all
located in California, an earthquake or other natural disaster could
affect all of our facilities simultaneously. An unexpected event like a power
or telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at either of our two Internet service providers
facilities could cause the loss of critical data and prevent us from offering
our services to artists and consumers. Our business interruption insurance may
not adequately compensate us for losses that may occur. In addition, we rely on
third parties to securely store our archived data, house our web server and
network systems, and connect us to the Internet. A failure by any of these
third parties to provide these services satisfactorily would impair our ability
to access archives and operate our web site.

30



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

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

Risks Related To Government Regulation, Content and Intellectual Property

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

The laws and regulations that govern our business change rapidly. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax laws and regulations. Because of this rapidly evolving
and uncertain regulatory environment, we cannot predict how these laws and
regulations might affect our business. In addition, these uncertainties make it
difficult to ensure compliance with the laws and regulations governing the
Internet. These laws and regulations could harm us by subjecting us to
liability or forcing us to change how we do business.

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

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



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

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

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

Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position,
and we try to protect it. However, our efforts may be inadequate. We do not
have a registered trademark for the MP3.com name and may not be able to
prevent others from using mp3 or MP3.com. Use of the MP3.com name by
others could dilute our brand identity and confuse the market. In addition, our
ability to conduct our business may be harmed if others claim we violate their
intellectual property rights. For example, Sightsound.com, Inc. has asserted
that many online music providers, including MP3.com, violate patent rights that
it allegedly owns covering the sale of music over the Internet through digital
downloads. If successful, these claims, or similar claims by others, could
seriously harm our business by forcing us to cease using important intellectual
property or requiring us to pay monetary damages. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to
incur legal costs and diverting managements attention away from our business.

31



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Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain a portfolio of cash
equivalents and marketable securities, including U.S. government agencies,
corporate debt securities, commercial paper, and money market funds. As of June
30, 2000, approximately 97.3% of our total portfolio matures in one year or
less, with the remainder maturing in less than two years.

Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of interest sensitive
financial instruments at June 30, 2000.

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

|                                                     |                        |   |         |      |      |   |        |      |  
|---------------------------------------------------- | ---------------------- | - | ------- | ---- | ---- | - | ------ | ---- | -
|                                                     |                        |   | 2000    |      | 2001
|                                                     |                        |   |         |      |     
|Cash equivalents                                     |                        | $ | 185,737 |      |      | $ |       |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |   |         | 6.68 | %    |   |        |     |  
|                                                    
|                                                    
|                                                    
|                                                    
|Short term investments, excluding equity investments |                        | $ | 88,494  |      |      | $ | 26,784 |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |   |         | 6.25 | %    |   |        | 7.05 | %

As of June 30, 2000, we held one derivative financial instrument, a
warrant to purchase 1.5 million shares of Cinram International, Inc, and one
marketable equity investment. The deemed fair value of the warrant and equity
investment were $2,597,000 and $9,503,000, respectively. In addition, we had
outstanding debt as of June 30, 2000 of approximately $799,000.

Foreign Currency Risk

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

PART II  OTHER INFORMATION

Item 1.Legal Proceedings

On January 21, 2000, ten major recording companies filed a copyright
infringement lawsuit against MP3.com in the United States District Court for
the Southern District of New York. The complaint alleged that MP3.com, in
connection with certain content available in its My.MP3.com service, made
unauthorized copies of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleged that offering the new My.MP3.com
service, which allowed a user to listen, via the Internet, to the tracks of
certain commercial audio CDs of his or her choosing, constituted unauthorized
copying and willful infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to $150,000 per
violation) and injunctive relief prohibiting MP3.com from operating its
My.MP3.com service or any other service that uses reproductions of plaintiffs
copyrighted sound recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein, and the
plaintiffs moved for summary judgement on the issue of liability. On April 28,
2000 the court granted plaintiffs motion for summary judgement and held that
MP3.com was liable for infringing plaintiffs copyrights, and the litigation
proceeded with discovery on the issues of willfulness and damages. On May 10,
2000, MP3.com voluntarily disabled the plaintiffs content within the
My.MP3.com service. In June 2000, MP3.com entered into settlement and
licensing agreements with BMG Entertainment and Warner Music Group (see
discussion below), and the six (6) plaintiffs related to such parties agreed to
dismiss with prejudice their portion of the lawsuit. In July 2000, the
remaining four (4) plaintiffs moved for summary judgement on two issues: (i)
that the unit of measurement for statutory damages should be an individual
recording, or song (as opposed to a CD, regardless of the number of individual
recordings or songs embodied on that CD) and (ii) that MP3.com willfully
infringed plaintiffs copyrights. MP3.com simultaneously moved for summary
judgement on two issues: (A) that MP3.com did not willfully infringe
plaintiffs copyrights and (B) that plaintiffs are entitled to recover
statutory damages only for the infringement of those copyrights evidenced by
the twelve (12) copyright registrations actually produced by such plaintiffs
during the discovery phase of the litigation. A hearing on each of the
foregoing motions is scheduled to be heard on July 28, 2000, and a trial on the
issues of willfulness and damages is currently scheduled to commence on August
28, 2000.

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

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

On June 16, 2000, Teevee Toons, Inc. filed a copyright infringement
lawsuit against MP3.com for the same behavior at issue in the January 21, 2000
lawsuit discussed above. The suit was also filed in the United States District
Court for the Southern District of New York. Minimal discovery has transpired
to date. Plaintiffs in this case seek damages (including statutory damages of
up to $150,000 per violation).

Notwithstanding the courts liability ruling in the first litigation
mentioned above, MP3.com believes that it has meritorious defenses to the
plaintiffs claims, including the fair use doctrine, based in part on the
belief that these services augment the market for music and music CDs. We
intend to vigorously defend against such claims, including the motions for
summary judgement currently pending before the court in the litigation with the
major recording companies, and intend to utilize every possible recourse and
remedy available to us through the courts. However, we cannot assure you that
we will be successful in ultimately defending these lawsuits, and we may be
required to pay license fees or substantial damages, including statutory,
punitive or other damages that far exceed the resources and overall market
capitalization of our company, in which event we might have to significantly
limit or terminate our business operations, particularly because our business
is not yet profitable. At the maximum statutory rate of $150,000 per work, our
aggregate potential liability resulting from all of our litigation proceedings
could exceed tens of billions of dollars. If successful, any one of these
lawsuits could seriously harm our business by forcing us to cease providing
services to our consumers or requiring us to pay monetary damages. Even if
unsuccessful, these lawsuits still can harm our business severely by damaging
our reputation, requiring us to incur legal costs, lowering our stock price and
public demand for our stock, and diverting managements attention away from our
primary business activities in general.

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

MP3.com has pursued and continues to actively pursue settlement discussions
with the remaining major record company plaintiffs from the January 21, 2000
lawsuit, as well as other individuals and entities related to the additional
litigation matters mentioned herein. The decision whether to enter into
settlement and/or license agreements with each party will be based upon a
number of factors related to both the lawsuits and MP3.coms business in
general. We cannot guarantee that we will be able to enter into any additional
settlement agreements on

33



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terms favorable to MP3.com, if at all, or that any
settlement or license agreement will prove beneficial to our business or
stockholders. During the quarter ended June 30, 2000, MP3.com has recorded a
charge for copyright claims of $150.0 million. The charge for copyright claims
represents MP3.coms estimate of the total costs to be incurred in connection
with the resolution of the various copyright issues associated with the
My.MP3.com service, including the lawsuits filed by major recording companies
and other parties. Copyright issues associated with the My.MP3.com Service
also include but are not limited to publishing rights, non-major label content,
and legal and advisory fees. This charge does not reflect or include any
amounts paid or payable in connection with forward-looking licenses to use
music recordings or compositions in connection with the My.MP3.com service.
This charge reflects managements expectations as of the date of this quarterly
report and is based on currently available information as well as significant
assumptions made by management regarding the litigation, including but not
limited to the following: (i) that the copyright claims will be resolved by
settlement as opposed to a final judgement and award of damages by the court,
(ii) that such settlements will generally be consistent with the actual terms
and conditions of the settlement agreements entered into with Warner Music
Group and BMG Entertainment, (iii) that the actual unit of measurement for
damages is based upon the number of CDs in our system and not the number of
song tracks, (iv) that the economic terms and conditions of settlements with
music publishers will generally be consistent with those discussed in recent
negotiations with certain music publishers, and (v) that the ten major music
recording companies (and their affiliates) and certain publishing companies
represent a particular percentage of the total music recording and publishing
content, respectively, in our My.MP3.com service. Although we believe that the
expectations and assumptions reflected in this charge are reasonable, we cannot
guarantee that future events or results will conform to such expectations or
assumptions. If these expectations and significant assumptions prove to be
erroneous in light of future events, the actual amounts incurred by MP3.com to
resolve all related matters could be materially different than those recorded
as of June 30, 2000.

As mentioned above, on May 10, 2000, MP3.com voluntarily disabled the
major recording companies content within the My.MP3.com service. Although
MP3.com has obtained license agreements permitting the use of recordings from
BMG Entertainment and Warner Music Group, we cannot guarantee that MP3.com will
be able to secure similar license agreements from any other recording company.
Similarly, MP3.com has not yet secured any publishing license or other
affirmative clearance (whether by litigation or otherwise) to utilize within
the My.MP3.com service the compositions embodied in the recordings owned by any
recording company (including BMG Entertainment and Warner Music Group), nor can
we guarantee that any such license or clearance will ever be obtained. If a
publishing license or other affirmative clearance to utilize such compositions
is not obtained, our ability to utilize in the My.MP3.com service recordings
from any recording company could be materially and adversely affected.
Further, because of the other litigation proceedings related to such content,
and the various issues related thereto, we cannot guarantee that such content
will be enabled in the near future, if at all.

Item 2.Changes in Securities and Uses of Proceeds

Changes in Securities

In June 2000, MP3.com issued
to a consultant a warrant to purchase up to 75,000 shares of its
common stock at an exercise price equal to $13.45 per share. For the
issuance of the warrant, relied on the exemptions provided by Section
4(2) under the Securities Act.

Use of Proceeds

MP3.coms registration statement (No. 333-78545) under the Securities Act
for its initial public offering (the Registration Statement) was declared
effective by the SEC on July 20, 1999. Offering proceeds, net of aggregate
expenses of approximately $20.6 million, were approximately $360.4 million.
As of June 30, 2000, MP3.com has used the net proceeds of $360.4 million as follows: approximately $42.2
million of the net offering proceeds for working capital paid directly or
indirectly to third parties; approximately $2.8 million for the purchase or
installation of machinery and equipment; approximately $12.0 million for the
purchase of various strategic investments and issuance of a note receivable;
and approximately $303.4 million for the purchase of temporary investments in
corporate commercial paper and notes, U.S. government and agency notes, and
money market funds. No payments were made to
directors, officers, or affiliates of the Company or owners of 10% or
more of the ourstanding Shares of Common Stock of the Company, other
than compensation payments to officers of the Company.

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

The Companys annual meeting of stockholders was held on May 31, 2000.

The following nominees were elected as directors, each to hold office
until the 2003 Annual Meeting of Shareholders or his successor is elected and
qualified, by the vote set forth below:

|                         |  |           |            |               |  |  |           | 
|------------------------ |  | --------- | ---------- | ------------- |  |  | --------- | 
|Nominee                  |  | Votes
For |            | Votes
Against
|Mr. Michael L. Robertson |  |           | 57,945,705 |               |  |  | 3,443,692 | 
|                        
|                        
|                        
|                        
|Mr. Mark A. Stevens      |  |           | 57,991,940 |               |  |  | 3,397,457 | 

The following directors term of office continued after
the Annual Meeting: David E. Easterly, Lawrence F. Probest III, Robin
D. Richards, Theodore W. Waitt.

The proposal to approve an amendment to our Amended and Restated 1998
Equity Incentive Plan to increase the aggregate number of shares of our common
stock authorized for issuance under the Plan from 12,750,000 to 22,250,000 was
approved.

34



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There were 49,960,228 votes for the
proposal, 5,418,445 votes against the proposal, and 57,233 votes abstaining
from the proposal.

The selection of Ernst & Young LLP as independent
auditors of MP3.com, Inc. for the fiscal year ending December 31, 2000 was
ratified by the vote of the stockholders. There were 61,353,361 votes for the
proposal, 24,706 votes against the proposal, and 11,330 votes abstaining from
the proposal.

Item 5.Other Information

On July 24, 2000,
David E. Easterly resigned from our Board of Directors.

Item 6.Exhibits and Reports on Form 8-K

(a) Exhibits:

|                |  |   |  |                                                                                         
|--------------- |  | - |  | ----------------------------------------------------------------------------------------
|Exhibit 10.1    |  |  |  | Amended and
Restated 1998 Equity Incentive Plan, as amended.                            
|               
|               
|               
|               
|Exhibit 10.24   |  |  |  | 2000 Equity
Incentive Plan (the 2000 Plan).                                           
|               
|               
|               
|               
|Exhibit 10.25   |  |  |  | Form of Stock
Option Agreement pursuant to the 2000 Plan.                               
|               
|               
|               
|               
|Exhibit 10.26  |  |  |  | Settlement
Agreement dated June 8, 2000 between the Company and BMG Entertainment.      
|               
|               
|               
|               
|Exhibit 10.27  |  |  |  | Settlement
Agreement dated June 8, 2000 between the Company and Warner
Music Group, Inc.
|               
|               
|               
|               
|Exhibit 27.1    |  |  |  | Financial Data
Schedule.                                                                



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

(b) Reports on Form 8-K:

None

35



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SIGNATURES

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



|                    |  |                                                                                                                                        |                        
|------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|                    |  | MP3.COM, INC.
(Registrant)                                                                                                            
|                    |  |                                                                                                                                       
|Date: July 26, 2000 |  | By                                                                                                                                     | /s/    PAUL L.H. OUYANG
|                    |  | Paul L.H. OuyangExecutive Vice President and Chief Financial
Officer (Authorized Officer)
(Principal Financial and Accounting Officer)

36