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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q/A

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|[X]                                                                                                                                    | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
|-------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000                                                                                          
|OR                                                                                                                                    
|                                                                                                                                      
|[   ]                                                                                                                                  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934   
|                                                                                                                                      
|FOR THE TRANSITION PERIOD FROM



TO

 
COMMISSION FILE NUMBER: 000-25399
HEARME(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
|                                                                                                                                      

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

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

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

The number of outstanding shares of the registrant's Common Stock, $0.00005 par value, was 28,911,288 as of  August 10, 2000



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1

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HEARME

INDEX

PAGE

|PART I: FINANCIAL INFORMATION                                                        |   
|------------------------------------------------------------------------------------ | --
|Item 1. Financial Statements                                                         |   
|Consolidated Balance Sheets  June 30, 2000
    (unaudited)                          |   
|and December 31, 1999                                                                | 3 
|Unaudited and Condensed Consolidated Statements of Operations  Three Months and Six |   
|Months Ended June 30, 2000 and 1999                                                  | 4 
|Unaudited Condensed Consolidated Statements of Cash Flows Six Months                |   
|Ended June 30, 2000 and 1999                                                         | 5 
|Notes to Condensed Consolidated Financial Statements                                 | 6 
|Item 2. Management's Discussion and Analysis of Financial Condition                  |   
|and Results of Operations                                                            | 10
|Item 3. Qualitative and Quantitative Disclosure about Market Risk                    | 19
|                                                                                     |   
|PART II: OTHER INFORMATION                                                           |   
|Item 1. Legal Proceedings                                                            | 19
|Item 2. Changes in Securities and Use of
    Proceeds                                | 20
|Item 3. Defaults Upon Senior Securities.                                             | 21
|Item 4. Submission of Matters to a Vote of Security Holders                          | 21
|Item 5. Other Information                                                            | 23
|Item 6. Exhibits and Reports on Form
    8-K                                         | 23
|Signatures                                                                           | 24
|                                                                                     |   

2

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HEARME
CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                                        |  | June 30,    |          | December 31, |  
|----------------------------------------------------------------------- |  | ----------- | -------- | ------------ | -
|                                                                        |  | 2000        |          | 1999         |  
|                                                                        |  |             |          |              |  
|                                                                        |  | (Unaudited) |          |              |  
|                                                                        |  |             |          |              |  
|ASSETS                                                                  |  |             |          |              |  
|Current assets:                                                         |  |             |          |              |  
|Cash and cash equivalents                                               |  | $           | 35,243   |              | $
|Short-term investments                                                  |  |             | 11,701   |              |  
|Accounts receivable, net of allowance for doubtful accounts of $304 and |  |             |          |              |  
|$415, respectively                                                      |  |             | 7,874    |              |  
|Interest and other receivable                                           |  |             | 277      |              |  
|Prepaid expenses and other current assets                               |  |             | 1,726    |              |  
|                                                                        |  |             |          |              |  
|Total current assets                                                    |  |             | 56,821   |              |  
|Restricted cash                                                         |  |             | 208      |              |  
|Property and equipment, net                                             |  |             | 6,463    |              |  
|Intangible assets                                                       |  |             | 5,069    |              |  
|Goodwill                                                                |  |             | 119,628  |              |  
|Other assets                                                            |  |             | 589      |              |  
|                                                                        |  |             |          |              |  
|Total assets                                                            |  | $           | 188,778  |              | $
|                                                                        |  |             |          |              |  
|                                                                        |  |             |          |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                    |  |             |          |              |  
|Current liabilities:                                                    |  |             |          |              |  
|Accounts payable                                                        |  | $           | 2,149    |              | $
|Accrued payroll and related expenses                                    |  |             | 2,878    |              |  
|Accrued expenses                                                        |  |             | 3,112    |              |  
|Current portion of capital lease obligations                            |  |             | 435      |              |  
|Deferred revenue                                                        |  |             | 649      |              |  
|Notes payable                                                           |  |             | 102      |              |  
|Deferred rent                                                           |  |             | 134      |              |  
|                                                                        |  |             |          |              |  
|Total current liabilities                                               |  |             | 9,459    |              |  
|Deferred tax liability                                                  |  |             | 2,202    |              |  
|Capital lease and notes payable obligations, net of current portion     |  |             | 704      |              |  
|                                                                        |  |             |          |              |  
|Total liabilities                                                       |  |             | 12,365   |              |  
|                                                                        |  |             |          |              |  
|                                                                        |  |             |          |              |  
|Redeemable common stock                                                 |  |             | 2,000    |              |  
|Stockholders equity:                                                   |  |             |          |              |  
|Common stock warrants                                                   |  |             | 2        |              |  
|Common stock                                                            |  |             | 1        |              |  
|Additional paid-in capital                                              |  |             | 297,848  |              |  
|Unrealized gain                                                         |  |             | (8       | )            |  
|Deferred stock based compensation                                       |  |             | (7,634   | )            |  
|Notes receivable from stockholders                                      |  |             | (2,606   | )            |  
|Accumulated deficit                                                     |  |             | (113,190 | )            |  
|                                                                        |  |             |          |              |  
|Total stockholders equity                                              |  |             | 174,413  |              |  
|                                                                        |  |             |          |              |  
|Total liabilities, redeemable stockholders equity                      |  | $           | 188,778  |              | $
|                                                                        |  |             |          |              |  

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

3

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HEARME

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

|                                         |      | Three
      Months Ended |      |   | Six
      Months Ended |  
|---------------------------------------- | ---- | ------------------------ | ---- | - | ---------------------- | -
|                                         |      |                          |      |   |                        |  
|                                         |      | June 30,                 |      |   | June 30,               |  
|                                         |      |                          |      |   |                        |  
|                                         | 2000 |                          | 1999 |   | 2000                   |  
|                                         |      |                          |      |   |                        |  
|Net revenues:                            |      |                          |      |   |                        |  
|Live Communities                         | $    | 4,148                    |      | $ | 1,465                  |  
|HearMe Technology Products               |      | 4,362                    |      |   | 1,767                  |  
|                                         |      |                          |      |   |                        |  
|Total revenues                           |      | 8,510                    |      |   | 3,232                  |  
|                                         |      |                          |      |   |                        |  
|Cost of net revenues:                    |      |                          |      |   |                        |  
|Live Communities                         |      | 1,936                    |      |   | 842                    |  
|Live Communities  warrant expense       |      |                         |      |   |                       |  
|HearMe Technology Products               |      | 672                      |      |   | 293                    |  
|                                         |      |                          |      |   |                        |  
|Total cost of revenues                   |      | 2,608                    |      |   | 1,135                  |  
|                                         |      |                          |      |   |                        |  
|Gross profit                             |      | 5,902                    |      |   | 2,097                  |  
|                                         |      |                          |      |   |                        |  
|Operating expenses:                      |      |                          |      |   |                        |  
|Research and development                 |      | 3,429                    |      |   | 1,723                  |  
|Sales and marketing                      |      | 10,232                   |      |   | 3,468                  |  
|General and administrative               |      | 2,986                    |      |   | 1,615                  |  
|In-process research and development      |      | 550                      |      |   |                       |  
|Goodwill and intangibles amortization    |      | 12,645                   |      |   |                       |  
|Stock based compensation                 |      | 857                      |      |   | 962                    |  
|                                         |      |                          |      |   |                        |  
|Total operating expenses                 |      | 30,699                   |      |   | 7,768                  |  
|                                         |      |                          |      |   |                        |  
|Loss from operations                     |      | (24,797                  | )    |   | (5,671                 | )
|Interest and other income (expense), net |      | 1,137                    |      |   | 471                    |  
|                                         |      |                          |      |   |                        |  
|Loss before provision for income taxes   | $    | (
      23,660           | )    | $ | ( 5,200                | )
|                                         |      |                          |      |   |                        |  
|Provision for income taxes               |      |                         |      |   |                       |  
|                                         |      |                          |      |   |                        |  
|Net loss                                 | $    | (
      23,660           | )    | $ | ( 5,200                | )
|                                         |      |                          |      |   |                        |  
|                                         |      |                          |      |   |                        |  
|Other comprehensive income:              |      |                          |      |   |                        |  
|Unrealized gain or (loss) on investments | $    | (638                     | )    | $ | 91                     |  
|                                         |      |                          |      |   |                        |  
|Comprehensive loss                       | $    | (24,298                  | )    | $ | (5,109                 | )
|                                         |      |                          |      |   |                        |  
|                                         |      |                          |      |   |                        |  
|                                         |      |                          |      |   |                        |  
|Net loss per common share:               |      |                          |      |   |                        |  
|Basic and diluted                        | $    | (0.87                    | )    | $ | (0.34                  | )
|                                         |      |                          |      |   |                        |  
|Pro forma                                | $    | (0.87                    | )    | $ | (0.26                  | )
|                                         |      |                          |      |   |                        |  
|Weighted average shares outstanding:     |      |                          |      |   |                        |  
|Basic and diluted                        |      | 27,097                   |      |   | 15,283                 |  
|                                         |      |                          |      |   |                        |  
|Pro forma                                |      | 27,097                   |      |   | 19,718                 |  
|                                         |      |                          |      |   |                        |  

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

4

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HEARME

CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands) 
(Unaudited)

|                                                                                     | Six Months Ended
|------------------------------------------------------------------------------------ | ----------------
|                                                                                     | June 30,        
|                                                                                     |                 
|                                                                                     | 2000            
|                                                                                     |                 
|                                                                                     |                 
|Cash used in operating activities                                                    | $               
|                                                                                     |                 
|Cash flows from investing activities:                                                |                 
|Purchase of investments                                                              |                 
|Proceeds from sale of investments                                                    |                 
|Purchase of restricted cash                                                          |                 
|Payments for AudioTalk acquisition, net of
      cash acquired of $6,371             |                 
|Acquisition of property and equipment                                                |                 
|                                                                                     |                 
|Net cash provided by (used in) investing
      activities                            |                 
|                                                                                     |                 
|Cash flows from financing activities:                                                |                 
|Payments of notes payable                                                            |                 
|Payments under capital lease obligations                                             |                 
|Issuance of notes payable insurance premium                                          |                 
|Proceeds from repayment of stockholder notes                                         |                 
|Proceeds from term loan                                                              |                 
|Proceeds from exercise of common stock
      options and warrants, net of repurchase |                 
|Proceeds from employee stock purchase plan                                           |                 
|Proceeds from issuance of Series E preferred
      stock, net                        |                 
|Proceeds from initial public offering, net
      of issuance costs                   |                 
|                                                                                     |                 
|Net cash provided by  financing
      activities                                     |                 
|                                                                                     |                 
|Net increase in cash and cash
      equivalents                                      |                 
|                                                                                     |                 
|Cash and cash equivalents, beginning of
      period                                 |                 
|                                                                                     |                 
|Cash and cash equivalents, end of period                                             | $               
|                                                                                     |                 

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

5

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HEARME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2000Unaudited)

1.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements at June 30, 2000
and 1999 have been included.

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

Results for the three months ended June 30, 2000
are not necessarily indicative of results for the entire fiscal year or future
periods. These financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes included in the
Company's Form 10-K dated March 30, 2000 as filed with the Securities and
Exchange Commission.

Certain prior year and prior quarter amounts have
been reclassified for consistency with current year financial statement
presentation.

Net Loss Per Share

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

Pro Forma Net Loss Per Share

Pro forma net loss per share is computed using
the weighted average number of common shares outstanding, including the pro
forma effects of the automatic conversion of the Company's Series A, Series B,
Series C, Series D and Series E preferred stock into shares of the Company's
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred on January 1, 1999 for Series A, B, C
and D and on January 19, 1999 for Series E. Pro forma common equivalent shares,
comprised of unvested common stock, and incremental common shares issuable upon
the exercise of stock options and warrants, are not included in pro forma
diluted net loss per share because they would be anti-dilutive.

Accounting for Derivatives

In June 1998, the Financial Accounting Standard
Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. In July 1999, FASB issued SFAS No. 137 (SFAS 137),
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of
SFAS 133 until the first fiscal quarter

6

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beginning after June 15, 2000. The Company does
not believe the adoption of SFAS 133 and SFAS 137 will have a material effect on
the Company's consolidated results of operations or financial condition.

Revenue Recognition in Financial Statements

In December 1999, the Securities and Exchange
Commission Staff issued Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB No101), which pertains to guidance on the recognition
presentation and disclosure on revenue in financial statements. The Company is
currently evaluating the impact of SAB 101.

2.  Segment Information

Operating losses for the Company's two
segments, the Live Communities segment and the HearMe Technology Products
segment, were as follows:

|                                      |  | Three Months Ended June 30, |         | Six
      Months Ended June 30, |  
|------------------------------------- |  | --------------------------- | ------- | ------------------------------- | -
|                                      |  |                             |         |                                 |  
|                                      |  | 2000                        |         | 1999                            |  
|                                      |  |                             |         |                                 |  
|Live Communities                      |  | $                           | (9,416  | )                               | $
|HearMe Technology Products            |  |                             | (1,329  | )                               |  
|In-process research and development   |  |                             | (550    | )                               |  
|Goodwill and intangibles amortization |  |                             | (12,645 | )                               |  
|Stock based compensation              |  |                             | (857    | )                               |  
|                                      |  |                             |         |                                 |  
|Total loss from operations            |  | $                           | (24,797 | )                               | $
|                                      |  |                             |         |                                 |  
|                                      |  |                             |         |                                 |  

3.   Acquisition:

Resounding Acquisition:

On October 20, 1999, the
Company completed its acquisition of Resounding Technology, Inc ("RTI"), a
Delaware corporation. This acquisition was accomplished by the statutory merger
(the "Merger") of RTI Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of the Company, with and into Resounding. The acquisition is
being accounted for under the purchase method of accounting.

The Merger was
accomplished pursuant to an Agreement and Plan of Merger dated as of September
27, 1999, among the Company, Resounding and RTI Acquisition Corp. and a related
Certificate of Merger, following approval by the stockholders of Resounding and
satisfaction of other closing conditions. The acquisition was paid through the
issuance of 1,585,488 shares of the Company common stock, the assumption of
153,048 stock options and payment in cash to certain of Resounding's
stockholders in the amount of $175,000. The portion of the consideration in the
form of the Company stock was distributed using an exchange ratio of .331 for
each share or option of Resounding. Of the 1,585,488 shares of common stock,
317,085 shares are held by an escrow agent to serve as security for the
indemnity provided by certain shareholders of Resounding. [In July 2000, we
authorized the escrow agent to release 158,543 shares from the escrow fund.] The
Company accounted for this acquisition in the fourth quarter of fiscal 1999. The
purchase price of approximately $23,485,000 includes $22,601,000 of stock,
issued at fair value (fair value being determined as the average price of the
HearMe stock for a period three days before and after the announcement of the
merger) less a discount of $1,479,000 due to the restricted nature of the stock,
$1,908,000 in RTI stock option costs (being determined under the Black Scholes
formula), $175,000 in cash and $280,000 in estimated expenses of the
transaction. The purchase price was allocated as follows: $260,000 to the
estimated fair value of RTI net tangible assets purchases (as of September 27,
1999), $2,600,000 to purchased existing technology, ($1,840,000) to establish
deferred tax liabilities associated with certain intangibles acquired, $850,000
to purchased in-processed research and development, $700,000 to
workforce-in-place, $1,300,000 to non-compete agreements and $19,615,000
to goodwill. The allocation of the purchase price to intangibles was based upon
an independent, third party appraisal and management's estimate. The
intangible assets and goodwill acquired have estimated useful lives of 2 years.

7

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Pro forma condensed
results of operations for the combined company as if the transaction had
consummated at the beginning of the earliest period presented and carried
forward into 2000 are as follows:

HEARME
PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                     |   | Three Months Ended |         | Six Months
      Ended |  
|------------------------------------ | - | ------------------ | ------- | ---------------------- | -
|                                     |   | June 30,           |         | June 30,               |  
|                                     |   |                    |         |                        |  
|                                     |   | 2000               |         | 1999                   |  
|                                     |   |                    |         |                        |  
|                                     |   | (Actual)           |         | (Pro forma)            |  
|                                     |   |                    |         |                        |  
|Revenues                             |   | $                  | 8,510   |                        | $
|Cost of revenues                     |   |                    | 2,608   |                        |  
|                                     |   |                    |         |                        |  
|Gross profit                         | . |                    | 5,902   |                        |  
|                                     |   |                    |         |                        |  
|Loss from operations                 |   |                    | (24,797 | )                      |  
|Net loss                             |   | $                  | (23,660 | )                      | $
|                                     |   |                    |         |                        |  
|Net loss per common share:           |   |                    |         |                        |  
|Basic                                |   | $                  | (0.87   | )                      | $
|                                     |   |                    |         |                        |  
|Diluted                              |   | $                  | (0.87   | )                      | $
|                                     |   |                    |         |                        |  
|Weighted average shares outstanding: |   |                    |         |                        |  
|Basic                                |   |                    | 27,097  |                        |  
|                                     |   |                    |         |                        |  
|Diluted                              | . |                    | 27,097  |                        |  
|                                     |   |                    |         |                        |  
|                                     |   |                    |         |                        |  

There were no transactions between the Company
and RTI during the periods presented.

AudioTalk Acquisition:

On April 3, 2000,
the Company completed its acquisition of AudioTalk Networks, Inc. ("AudioTalk"),
a California corporation. The Merger Agreement provided for the merger of a
newly formed wholly owned subsidiary of HearMe with and into AudioTalk.
AudioTalk became a wholly owned subsidiary of HearMe. The acquisition is being
accounted for under the purchase method of accounting.

The Merger was
accomplished pursuant to an Agreement and Plan of Merger dated as of March 8,
2000, among the Company, AudioTalk and AT Acquisition Corp. and a related
Certificate of Merger, following approval by the stockholders of AudioTalk and
satisfaction of other closing conditions. The acquisition was paid through the
issuance of 4,520,327 shares of the Company common stock, the assumption of
297,601 stock options and payment in cash to AudioTalk stockholders in the
amount of $10,000,000. The portion of the consideration in the form of the
Company stock was distributed using an exchange ratio of .272 for each share of
AudioTalk. Of the 4,520,327 shares of common stock, 523,645 shares are held by
an escrow agent to serve as security for the indemnity provided by certain
shareholders of AudioTalk. The Company accounted for this acquisition in the
second quarter of fiscal 2000.

The purchase price of approximately $116,700,000
includes approximately $100,500,000 of stock, issued at fair value (fair value
being determined as the average price of the HearMe stock for a period three
days before and after the announcement of the merger), approximately $5,700,000
in AudioTalk stock option costs (being determined under the Black Scholes
formula), $10,000,000 in cash and $500,000 in estimated expenses of the
transaction. The purchase price was allocated as follows: $6,400,000 to the
estimated fair value of AudioTalk net tangible assets purchased (as of April 3,
2000), $580,000 to purchased existing technology, ($1,092,000) to establish
deferred tax liabilities associated with certain intangibles acquired, $550,000
to purchased in-process research and development, $900,000 to existing sales
contracts, $1,250,000 to workforce-in-place and $108,100,000 to goodwill. The
allocation of the purchase price to intangibles was based upon an independent,
third party appraisal and management's

8

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estimates. This information should be read in
conjunction with the Company's Form 8-K/A dated May 5, 2000 as filed with the
SEC.

Pro forma condensed
results of operations for the combined company as if the transaction had
consummated at the beginning of the earliest period presented and carried
forward into 2000 are as follows:

HEARME
PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                     |  | Three Months
      Ended |         | Six
      Months Ended |  
|------------------------------------ |  | ------------------------ | ------- | ---------------------- | -
|                                     |  | June
      30,           |         | June
      30,         |  
|                                     |  |                          |         |                        |  
|                                     |  | 2000                     |         | 1999                   |  
|                                     |  |                          |         |                        |  
|                                     |  | (Actual)                 |         | (Pro forma)            |  
|                                     |  |                          |         |                        |  
|Revenues                             |  | $                        | 8,510   |                        | $
|Cost of revenues                     |  |                          | 2,608   |                        |  
|                                     |  |                          |         |                        |  
|Gross profit                         |  |                          | 5,902   |                        |  
|                                     |  |                          |         |                        |  
|Loss from operations                 |  |                          | (24,797 | )                      |  
|Net loss                             |  | $                        | (23,660 | )                      | $
|                                     |  |                          |         |                        |  
|Net loss per common share:           |  |                          |         |                        |  
|Basic                                |  | $                        | (0.87   | )                      | $
|                                     |  |                          |         |                        |  
|Diluted                              |  | $                        | (0.87   | )                      | $
|                                     |  |                          |         |                        |  
|Weighted average shares outstanding: |  |                          |         |                        |  
|Basic                                |  |                          | 27,097  |                        |  
|                                     |  |                          |         |                        |  
|Diluted                              |  |                          | 27,097  |                        |  
|                                     |  |                          |         |                        |  

9

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

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

Overview

HearMe develops,
licenses and operates technologies that enable us and other Internet sites to
create and manage voice-enabled real time interactive experiences. We were
incorporated and commenced operations in January 1995. From inception through
September 1996, our activities primarily consisted of recruiting employees and
raising capital, performing product and technology development, engaging in
marketing activities and negotiating strategic relationships. In November 1995,
we entered into an agreement with PSINet, Inc. for the deployment of a
low-latency network, which provided a platform for launching and operating the Mplayer.com
service. Testing of the Mplayer.com service began in February 1996 and
the service was launched commercially in October 1996. In April 1996, we
licensed our Live Community software and network services to SegaSoft Networks,
Inc., which occurred concurrently with an equity investment by affiliates of
SegaSoft's parent, CSK Corporation. In January 1999, we launchedHearMe.com,
our second Live Community service. During the period from January 1995 to June
30, 1999, we raised gross proceeds of approximately $54.9 million from the sale
of equity securities to venture capital investors and strategic partners. The
proceeds from these financings were primarily used to finance our research and
development and the sales and marketing of our products and services. In May and
June 1999, we raised gross proceeds of approximately $80.7 million from the
sales of common stock through the initial public offering. A portion of the
proceeds from this offering is being used to finance research and development
and sales and marketing activities.

In September 1999,
we announced that we would commence doing business under the name HearMe.

We generate our
revenues from two business units, Live Communities and HearMe Technology
Products. With respect to Live Communities, we derive the majority of revenues
from advertising fees. While theMplayer.comservices are free to all registered members, until September 1999, some users
also paid subscription fees to us in exchange for access to premium services
such as special events, rankings and ratings, contests, magazine subscriptions,
special features and exclusive games. We also had a subscription plan that
allowed the members to purchase a year's subscription up front at a discounted
rate. As of September 1999, we terminated the subscription fee program and
extended our services free to all of our members. Additionally, we have begun to
derive revenues from e-commerce activities, including fees from special event
promotions and merchandise sales and from opt-in e-mail programs. Advertising
revenue is recognized ratably over the term of each particular advertising
agreement. E-commerce revenue is recognized when notification of shipment has
taken place and the revenue has been earned. Subscription revenue through
September 1999 was recognized ratably over the related subscription period. Any
unearned but paid member subscription fees remaining at September 30, 1999 were
reimbursed to the members in October 1999. With respect to HearMe Technology
Products, we derive revenues from licensing fees for our technology, including
our Voice Server and Voice Network products and Pop.X product that
enables others to create real time interactive applications and related
services. We also derive incremental HearMe Technology Products revenues from
service, maintenance and upgrade fees. Service revenues are recognized over the
period in which services are provided. Development revenue is recognized at the
time

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services are completed or as development
milestones are achieved. License revenue is recognized in the period earned.
Deferred revenue consists primarily of monthly service revenue billed and paid
in advance.

Since we launched
our first Live Community service in October 1996 and began negotiating certain
license agreements through the HearMe Technology Products business unit, we have
generated $40.8 million in net revenues through June 30, 2000. For the period
from inception to June 30, 2000 we have incurred a cumulative net loss of $113.2
million, of which $14.5 million came from a one-time write-off of goodwill and
in-process research and development expenses associated with our acquisition of
Catapult, $9.6 million from a write-off of goodwill and in-process research and
development expenses associated with our acquisition of Resounding and $10.4
million from a write-off of goodwill and in-process research and development
expenses associated with our acquisition of AudioTalk.

Cost of net
revenues for Live Communities consists primarily of the cost of operating the
network infrastructure and royalties paid to third party content providers. Cost
of net revenues for HearMe Technology Products consists primarily of network
operating expenses in conjunction with providing hosted services to certain
HearMe Technology Products customers.

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

We have a limited
operating history upon which an evaluation of our current business and our
prospects can be based. In addition, our revenue model is evolving and relies
substantially upon the licensing of our technology and the sale of advertising
on ourMplayer.comservices. Our business must be considered in light of the risks, expenses and
problems frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
the Internet. Our results of operations and financial condition may be subject
to volatility in future periods.

Results of Operations

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

Net revenues.Our
total net revenues increased by 163% from $3.2 million for the three months
ended June 30, 1999 to $8.5 million for the three-month ended June 30, 2000.
Live Communities net revenues grew by $2.7 million or 183% from $1.5 million as
of June 30, 1999 to $4.1 million as of June 30, 2000. This increase was
primarily driven by growth in advertising revenues associated with an expanding
number of advertisers and the growth of traffic and usage time in our Live
Communities. HearMe Technology Products net revenues grew by $2.6 million or
147% from $1.8 million as of June 30, 1999 to $4.4 million as of June 30, 2000.
The increase was due to increased technology licensing fees earned from both new
and existing customers during the periods. During the quarter ended June 30,
2000, we added 23 new customers for HearMe Technology Products, as compared to
six for the period ended June 30, 1999.

Cost of net
revenues.Live Communities cost of net
revenues primarily consists of the cost of operating the network infrastructure
and royalties paid to third party content providers. Cost of net revenues for
HearMe Technology Products consists primarily of network operating expenses in
conjunction with providing hosted services to certain HearMe Technology Products
customers. Our cost of net revenues were $2.6 million for the period ended June
30, 2000, or 31% of net revenues, as compared to $1.1 million or

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35% of net revenues for the period ended June 30,
1999. Cost of net revenues decreased as a percentage of net revenues primarily
due to advertising revenues growing faster than the related server and network
costs within the Live Communities segment. The absolute increase in cost of net
revenues was due to the significant increase in Live Communities subscriber
usage and the resulting increase in server and network costs between June 30,
1999 and June 30, 2000. Technology Products cost of net revenues remained fairly
flat and was attributable to server costs associated with hosting services
provided to certain HearMe Technology Products customers.

Research and
development.Research and development
expenses were $3.4 million, or 40% of net revenues for the period ended June 30,
2000 compared to $1.7 million or 53% of net revenues for the period ended June
30, 1999. Research and development expenses consist primarily of employee
compensation relating to developing and enhancing the features and functionality
of HearMe's technology and consumer websites. The increase in research and
development expenses was primarily due to an increase in salary expense in 2000
as additional engineers were hired to support the development of our new Voice
Products, POP.X technology and enhancements to our Live Communities
websites and to additional consulting fees and software expenditures associated
with these projects. We believe that significant investments in product
development are required to remain competitive. Consequently, we expect to incur
increased product development expenditures in absolute dollars in future
periods. As a percentage of net revenues, we anticipate that research and
development expenses will range from 35% to 45% during 2000, however,
anticipated spending levels may vary as a results of acquisitions and future
business combinations.

Sales and
marketing.Sales and marketing
expenses were $10.2 million for the period ended June 30, 2000 or 120% of net
revenues compared to $3.5 million or 107% of net revenues for the period ended
June 30, 1999. Sales and marketing expenses consist primarily of advertising and
other marketing-related expenses, compensation and employee-related expenses,
sales commission and travel costs. Sales and marketing expenses increased as a
percentage of net revenues from 1999 to 2000 primarily due to the initiation of
outbound advertising and marketing campaigns to promote our brands. The absolute
increase in sales and marketing expenses was due to the cost of the one-time
outbound television, radio and print advertising and marketing campaigns to
promote the HearMe brand, an increase in headcount in the marketing group,
increases in advertising sales headcount and related commissions, travel
expenses and an increase in headcount of the HearMe Technology Products
marketing and sales force and related commissions. As a percentage of net
revenues, we currently anticipate that annual sales and marketing expenses will
range from 80% to 90% during 2000 due to announced sales and marketing plans and
the related headcount.

General and
administrative.General and
administrative expenses were $2.9 million, or 35% of net revenues for the period
ended June 30, 2000, compared to $1.6 million or 50% of net revenues for the
period ended June 30, 1999. General and administrative costs increased primarily
due to higher salary expenses resulting from additional headcount in the
finance, administrative and operations area required to support our expanded
infrastructure and additional costs relating to the costs of maintaining HearMe
as a public entity as well as higher legal expenses. We believe that the
absolute dollar level of general and administrative expenses will increase in
future periods, as a result of an increase in personnel and increased fees for
professional services. As a percentage of net revenues, we currently anticipate
that general and administrative expenses will approximate 30% during 2000,
however, anticipated spending levels may vary as a result of acquisitions and
future business combinations.

Amortization of
intangibles. As part of the Resounding
and AudioTalk acquisitions, we recorded amortization of intangible assets
consisting primarily of goodwill in the amount of $12.6 million for the period
ended June 30, 2000. The related assets are being amortized over a 2 or 3 year
period beginning October 1999 for Resounding and April 2000 for AudioTalk. In
addition, we recorded a one time in-process research and development write-off
of $550,000 in relation to the AudioTalk acquisition.

Stock based
compensation.Stock based compensation
expenses were $0.9 million, or 10% of net revenues for period ended June 30,
2000 as compared to $1.0 million, or 30% of net revenues for the period

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ended June 30, 1999. The slight decrease relates
to a decrease in the number of options outstanding as some of the earlier option
grants became fully vested, or the options were terminated.

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

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

Revenues.Net revenues increased 168% from approximately $5.4 million for the six
months ended June 30, 1999 to approximately $14.4 million for the six months
ended June 30, 2000. Net revenues from Live Communities increased 175% from $2.6
million to $7.1 million for the six months ended June 30, 2000. This increase
was primarily driven by growth in advertising revenues associated with an
expanding number of advertisers and the growth of traffic and usage time in our
Live Communities. Net revenues from HearMe Technology Products increased 162%
from approximately $2.8 million for the six months ended June 30, 1999 to
approximately $7.3 million for the six months ended June 30, 2000. The increase
was due to increased technology licensing fees earned from both new and existing
customers during the period.

Cost of
revenues.Cost of revenues increased 50%
from approximately $3.0 million, or 56% of net revenues, for the six months
ended June 30, 1999 to approximately $4.5 million, or 32% of net revenues, for
the six months ended June 30, 2000. Cost of revenues were higher as a percentage
of net revenues for the six month period ending June 30, 1999 primarily due to
the expense of $849,000 associated with a warrant to purchase 120,000 common
shares which was granted to an internet service provider in 1995, the terms of
which were finalized during the six months ended June 30, 1999. The absolute
increase in costs of revenues was due to the significant increase in Live
Communities subscriber usage and the resulting increase in server and network
costs between 1999 and 2000. Cost of revenues for Live Communities increased
from approximately $1.7 million for the six months ended June 30, 1999 to
approximately $3.6 million for the six months ended June 30, 2000 excluding the
warrant expense discussed above. Cost of revenues for HearMe Technology Products
increased from approximately $524,000 for the six months ended June 30, 1999 to
approximately $896,000 for the six months ended June 30, 2000. The increase was
attributable to server costs associated with hosting services provided to
certain HearMe Technology Products customers.

Research and
development.Research and development
expenses increased 90% from approximately $3.3 million, or 61% of net revenues,
for the six months ended June 30, 1999 to approximately $6.2 million, or 43% of
net revenues, for the six months ended June 30, 2000. The increase in research
and development expenses was primarily due to additional engineers hired to
support the development of our new Voice Products,POP.Xtechnology and enhancements to our Live
Communities websites and to additional consulting fees and software expenditures
associated with these projects.

Sales and
marketing.Sales and marketing expenses
increased 195% from approximately $5.8 million, or 108% of net revenues, for the
six months ended June 30, 1999, to approximately $17.1 million, or 119% of net
revenues, for the six months ended June 30, 2000. The increase in sales and
marketing expenses consist primarily of cost associated with the development and
placement of advertising and marketing campaigns to promote our brands, other
marketing-related expenses, compensation and employee-related expenses, sales
commission and travel costs. Increased Live Communities marketing headcount and
an increase in headcount of the HearMe Technology Products and Live Communities
sales forces.

General and
administrative.General and
administrative costs increased 92% from approximately $3.1 million, or 57% of
net revenues, for the six months ended June 30, 1999 to approximately $5.9
million, or 41% of net revenues, for the six months ended June 30, 2000. General
and administrative costs increased primarily due to higher salary expenses
resulting from additional headcount in the finance, administrative and
operations area required to support our expanded infrastructure and additional
costs relating to the costs of maintaining the Company as a public entity.

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Amortization of
intangibles. As part of the Resounding
and AudioTalk acquisition in late 1999 and early 2000, we recorded amortization
of intangible assets consisting primarily of goodwill in the amount of $15.4
million for the period ended June 30, 2000. The related assets are being
amortized over a 2 or 3 year period beginning October 1999 for Resounding and
April 2000 for AudioTalk. In addition, we recorded a one time in-process
research and development write-off of $550,000 in relation to the AudioTalk
acquisition.

Stock based
compensation.Stock based compensation
costs decreased from approximately $1.9 million or 35% of net revenues in the
six months ended June 30, 1999 to approximately $1.7 million or 12% of net
revenues in the six months ended June 30, 2000. The slight decrease relates to a
decrease in the number of options outstanding as some of the earlier option
grants became fully vested or were terminated.

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

Liquidity and Capital Resources

HearMe invests
excess cash in debt instruments that are highly liquid, of high-quality
investment grade and predominantly have maturities of less then one year with
the intent to make such funds readily available for operating purposes. At June
30, 2000, the Company had cash and cash equivalents and investments in
marketable debt securities totaling $47.0 million compared to $69.3 million at
December 31, 1999.

For the period ended June 30, 2000 net cash used in operating
activities was primarily a result of funding ongoing expansion of our research
and development and sales and marketing efforts and the resulting larger
infrastructure and support functions. For the period ended June 30, 1999, net
cash used in operating activities was primarily a result of funding ongoing
operations.

Net cash provided
by investing activities was $23.2 million for the period ended June 30, 2000
compared to $1.4 million for the period ended June 30, 1999. Net cash provided
consisted primarily of related to purchases of property and equipment. Capital
expenditures have generally been comprised of purchases of computer hardware and
software as well as leasehold improvements related to leased facilities and are
expected to increase in future periods. For the period ended June 30, 2000 net
cash used in investing activities includes the purchase of short-term
investments.

Net cash provided by financing
activities for the period ended June 30, 2000 was $1.9 million as compared to
net cash provided by financing activities for the period ended June 30, 1999 of
$89.3 million. The major sources of financing activities during the period ended
June 30, 2000 was proceeds from a new asset loan of $1.0 million as compared to
the period ended June 30, 1999 from which the sale of Series E preferred stock
generated net proceeds of approximately $18.8 million and the initial public
offering proceeds of $73.9 million.

In 1995, we entered into a capital
lease agreement with an investor group and drew down all available funds of
approximately $1.5 million. We entered into a Loan and Security Agreement with a
financial institution in July 1998. The agreement consisted of a term loan for
$1.5 million, an accounts receivable revolving line of credit for $1.5 million
and a capital equipment loan of $1.0 million. Amounts borrowed under these
agreements are collateralized by substantially all our assets, bear interest at
the prime rate plus two percent and were scheduled to mature on June 30, 1999.
By December 1998, we had drawn down $1.5 million against the term loan agreement
and approximately $1.0 million against the capital equipment agreement. In
January 1999, we fully repaid the term loan with a portion of the net proceeds
from the sale of our Series E Preferred Stock in January 1999. In May 1999 we
fully repaid the equipment loan from the proceeds of the IPO. In May 2000, we
entered into a term loan with a bank for an asset financing line of up to
$3,000,000, payable over a 36 monthly period at a interest rate of prime plus
1%.

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The agreement allows the company to draw down
advances through September 30, 2000. We have currently drawn down approximately
$997,000 and plans on drawing down the remaining line of credit by the September
30, 2000 deadline date. Amounts borrowed under this agreement are collateralized
by substantially all of our  tangible assets.

We currently
anticipate that the net proceeds of $73.9 million from the public offering which
we completed in May 1999 and from the issuance of the underwriters'
overallotment in June 1999, together with our existing lines of credit and
available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures for at least the next 12 months. We may need to
raise additional funds in the future in order to fund more aggressive brand
promotions and more rapid expansion, to develop newer or enhanced products or
services, to fund acquisitions, to respond to competitive pressures, or to
acquire complementary businesses, technologies or services. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all.

Certain Business Risks

We have a limited
operating history making it difficult or impossible for us to predict future
results of operations. As a result, you should not expect future revenue growth
to be comparable to our recent revenue growth. We believe that comparing
different periods of our operating results is not meaningful, as you should not
rely on the results for any period as an indication of our future performance.
We did not begin generating advertising or licensing revenues until October
1996. Some of the risks and difficulties that we face as an early stage company
in a new and rapidly evolving market include our ability to maintain and to
increase levels of traffic on our Live Communities, our ability to increase
demand for our products and services and our ability to develop and extend the HearMe
and Mplayer.com brands.

We have had
substantial losses since our inception and our operating losses may increase in
the future. Accordingly, we cannot assure you that we will ever become or remain
profitable. If our revenues fail to grow at anticipated rates, our operating
expenses increase without a commensurate increase in our revenues or we fail to
adjust operating expense levels accordingly, our business, results of operations
and financial condition will be adversely affected. As of June 30, 2000, we had
an accumulated deficit of $113.2 million. Although we have experienced growth in
net revenues, members, customers and Internet reach in recent periods, we cannot
be certain that our growth rates will continue at their current levels or
increase in the future.

We have not yet
become profitable on a quarterly or annual basis and we anticipate that we will
continue to incur net losses for the foreseeable future. The extent of these
losses will be contingent, in part, on the amount of growth in our revenues from
licensing, advertising and commerce. We expect our operating expenses to
increase significantly, especially in the areas of engineering, sales and
marketing and brand promotion and, as a result, we will need to generate
increased quarterly revenues to become profitable.

Our HearMe
Technology Products revenues have accounted for a significant portion of our
revenues to date. Historically, we have received most of our HearMe Technology
Products revenues from a limited number of sales and license agreements.
Therefore, any downturn in the business of these customers or potential
customers could have a material adverse effect on our revenues and quarterly
results of operations. The potential consolidation of the Internet industry, in
particular  involving businesses that rely primarily on consumers, could
also have a material adverse effect on our revenues and quarterly results of
operations. We believe that a customer's decision to license our technology is
relatively discretionary and, for large-scale users, often involves a
significant long-term commitment of resources. We currently have 59 HearMe
Technology Products customers.

Our HearMe
Technology Products customers often take a long time to evaluate our products
and services and many people are involved in the sales process. The long sales
and implementation cycles for our products and services and the timing of these
sales may cause license and service revenues and

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operating results to vary significantly from
period to period. We spend a lot of time educating and providing information to
our prospective customers regarding the use and benefits of our products and
services. Even after deciding to license our products, our customers tend to
deploy our products slowly and deliberately depending on the expertise of the
customer, the size of deployment, the complexity of the customer's system
architecture, the quantity of hardware involved and the degree of hardware and
software configuration necessary to deploy our products.

We derive a
significant portion of our revenues from the sale of advertising. If customers
cancel or defer existing advertising or commerce contracts or if we fail to
obtain new contracts in any quarter, our business, results of operations and
financial condition for that quarter and future periods will be adversely
affected. A significant number of these advertising sales are made under
short-term contracts that average two to three months in length. Consequently,
many of our advertising customers can cease advertising on our Web site quickly
and without penalty. As a result, our quarterly revenues and operating results
depend heavily on advertising revenues from contracts entered into within the
quarter and on our ability to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall.

Furthermore, our
advertising revenues are based in part on the amount of traffic onMplayer.com.Accordingly, if the amount of traffic on
our Live Communities falls below our expectations or those of existing or
potential advertisers, we may lose advertising customers. In addition,
substantially all of our advertising contracts require us to guarantee a minimum
number of impressions. In the event that we fail to deliver the minimum number
of impressions, we could be required to provide credit for additional
impressions and we may have to reduce advertising rates in order to maintain
existing advertisers and attract new advertisers.

Our quarterly
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. These fluctuations
make it difficult to predict our financial performance and may adversely affect
the trading price of our common stock. These factors include demand for and
market acceptance of our products and services and Web-based advertising,
budgeting cycles of advertisers, amount and timing of capital expenditures by
our customers and other costs relating to the expansion of our operations and
future acquisitions, engineering or development fees that we may pay for new Web
site development and publishing tools and general economic conditions.

As a strategic
response to changes in the competitive environment, we may from time to time
make certain pricing, service or marketing decisions or business combinations
that could have a material adverse effect on our business, results of operations
and financial condition. In order to accelerate the promotion of the HearMe
and Mplayer.com brands, we intend to significantly increase our marketing
budget. Such an increase in marketing expenditures may adversely affect our
results of operations for a number of quarterly periods.

Due to our
relatively short operating history, we have limited meaningful historical
financial data upon which to base our planned operating expenses. Accordingly,
our expense levels are based in part on our expectations as to future revenues
from advertising, software licensing fees, commerce revenue-sharing arrangements
and our anticipated growth in memberships and to a large extent are fixed. We
cannot be certain that we will be able to accurately predict our revenues,
particularly in light of the intense competition for the sale of Web-based
advertisements, revenue-sharing opportunities and new members, our limited
operating history and the uncertainty as to the broad acceptance of the Web as
an advertising and commerce medium. We also cannot be certain as to the broad
acceptance of Voice over the Internet. If we fail to accurately predict revenues
in relation to fixed-expense levels, our business, results of operations and
financial condition could be adversely affected.

Although we view
our strategic relationships with media, Internet and technology companies as a
key factor in our overall business strategy, we cannot be certain that we will
be successful in developing new strategic relationships or that our strategic
partners will view such relationships as significant to their own business or
that they will continue their commitment to us in the future. Our business,
results of operations and financial condition and our stock price may be
materially adversely affected if any strategic partner discontinues its
relationship with us for any reason. Additionally, any party to a strategic
agreement with us

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may fail to perform its contractual obligations
and we cannot be certain that we could enforce any such agreement. We do not
generally establish minimum performance requirements for our strategic partners
but instead rely on their voluntary efforts. In addition, either party with
little notice may terminate most of these agreements. Therefore, we cannot be
certain that these relationships will be successful.

We have derived a
significant portion of our revenues to date from the sale of advertisements and
intend to continue to do so in the future. If the Web does not continue its
development as an effective advertising medium, this could have a material
adverse effect on our business, financial condition and results of operations.
Intense competition in the sale of advertising on the Web has resulted in a wide
variety of pricing models, rate quotes and advertising services, making it
difficult to project future levels of advertising revenues and rates. It is also
difficult to predict which pricing models, if any, will achieve broad acceptance
among advertisers. Our strategy is to continue to emphasize advertising as a
method of generating revenues. Our current business model is therefore highly
dependent on the amount of traffic on our Web site. This type of business model,
however, is relatively unproven. The Internet as an advertising medium has not
been available for a sufficient period of time to gauge our effectiveness as
compared with traditional advertising media. Many of our advertisers have only
limited experience with the Web as an advertising medium, have not yet devoted a
significant portion of their advertising budgets to Web-based advertising and
may not find such advertising to be effective for promoting their products and
services relative to traditional print and broadcast media. To date, advertising
on the Web represented a nominal portion of overall advertising revenues in the
United States. Our ability to generate significant advertising revenues will
also depend on, among other things, our ability to provide advertisers with a
large base of users possessing demographic characteristics attractive to
advertisers as well as our ability to develop or acquire effective advertising
delivery and measurement systems.

The process of
managing advertising within large, high-traffic Web sites such as ours is an
increasingly important and complex task. Any extended failure of, or material
difficulties encountered in connection with, our advertising management system
may expose us to "make good" on obligations with our advertisers, which, by
decreasing saleable advertising inventory would reduce revenues and have a
material adverse effect on our business, results of operations and financial
condition. We license our advertising sales and management system from
DoubleClick Inc. Any replacement of this system could disrupt our ability to
manage our advertising operations for a period of time. In addition, to the
extent that we encounter system failures or material difficulties in the
operation of this system, we could be unable to deliver banner advertisements
and sponsorships through our Web site.

As part of our
business strategy, we review acquisition prospects that would complement our
existing business or enhance our technological capabilities such as our recently
completed acquisition of Resounding Technology and AudioTalk. Future
acquisitions by us could result in potentially dilutive issuances of equity
securities, large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could materially and adversely affect our
results of operations. Furthermore, acquisitions entail numerous risks and
uncertainties, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which we have no or limited
prior experience and potential loss of key employees and customers of acquired
organizations. Other risks associated with acquisitions include those relating
to the correct assessment of the relative percentages of in-process research and
development expense which can be immediately written off as compared to the
amount which must be amortized over the appropriate life of the asset, the
failure to successfully develop and integrate acquired in-process technology
resulting in the impairment of amounts capitalized as intangible assets,
unanticipated expenses related to technology integration and the maintenance of
uniform standards, controls, procedures and policies. We may not be successful
in addressing these risks or any other problems encountered with such
acquisitions.

Our future success
depends in large part upon our ability to aggregate and deliver compelling
content over the Internet. If we fail to aggregate and deliver compelling third
party content to our users, Web traffic to our site might decrease and, as a
result, advertising revenue might decrease. This could have a material

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adverse effect on our business, results of
operations and financial condition. Although we create some of our own content
such as poker and chess, we also rely on third-party content providers, such as
game developers, for entertaining content. Our ability to aggregate and deliver
compelling content provided by third parties may be adversely impacted by a
number of factors, including the following: third-parties may increase the price
of the content they provide, many of our third-party content providers compete
with us for members and advertising and may decide not to provide us with
content, our contracts with third-party content providers are usually short-term
and may be canceled if we do not fulfill our obligations and our competitors and
many of our third-party content providers provide content that is similar or the
same as our content and may do so at a lower cost.

The performance of
our server and networking hardware and software infrastructure is critical to
our business and reputation and our ability to attract Web users, advertisers,
new members, technology partners and commerce partners to use our Websites and
hosting services. If system failures were sustained or repeated, our advertising
and hosting revenues, our reputation and the attractiveness of our brand name
could be impaired. Because we have incorporated third-party software into our
systems and we depend upon Internet service providers to provide consumers with
access to our products and services, we are limited in our ability to prevent
system failures. We have sustained system failures for significant periods of
time and may experience similar failures in the future. Users have also
occasionally experienced difficulties due to system failures unrelated to our
systems. These system failures caused an interruption in our Live Community
services resulting in less traffic.

Despite the
implementation of security measures, our networks may be vulnerable to
unauthorized and illegal access, computer viruses and other disruptive problems.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to users accessing our Web sites,
which could have a material adverse effect on our business, results of
operations and financial condition. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
our Internet operations. Internet service providers and online service providers
have in the past experienced and may in the future experience, interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. We may be required to expend significant
capital or other resources to protect against the threat of security breaches or
to alleviate problems caused by breaches. Although we intend to continue to
implement industry-standard security measures, we cannot be certain that
measures implemented by us will not be circumvented in the future.

Our future success
depends upon our ability to enhance our current products and services and to
develop and introduce new products and services that will achieve market
acceptance. If we do not adequately respond to the need to develop and introduce
new products or services, then our business, operating results and financial
condition will be adversely affected. The market for our products is
characterized by: rapid technological advances, evolving standards in the
Internet, communications and software markets, changes in customer requirements
and frequent new product and service introductions and enhancements. We cannot
be certain that we will be successful at integrating new technology into the
Live Communities and our HearMe Technology Products on a timely basis. In
addition, the integration of new technology may degrade the responsiveness and
speed of the Live Communities and our HearMe Technology Products and we cannot
be certain that, once integrated, the new technology will function as expected.
Major product enhancements and new products and services often require long
development and testing periods to achieve market acceptance. In addition, our
software products are complex and, despite vigorous testing and quality control
procedures, may contain undetected errors or "bugs" when first introduced or
updated. Any inability to timely deliver quality products and services could
have a material adverse effect on our business, results of operations and
financial condition.

We currently sell
the vast majority of our HearMe Technology Products and services through our
internal sales staff. If demand for our products and services increases,
however, we will need to enter into reseller arrangements with Web development
firms, enterprise applications resellers and OEM partners to distribute our
products and technologies. If we do not adequately develop and maintain a
network of resellers and OEMs, our business, results of operations and financial
condition could be adversely impacted. Resellers and OEMs frequently have
exclusive sales territories pursuant to individually

18

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negotiated contracts, which may limit our ability
to build and expand our network of resellers and OEMs. In addition, some
resellers and OEMs may offer products of one or more of our competitors and they
may emphasize our competitors' products at the expense of our products.

Also inherent in
our business are additional risks, which include, but are not limited to:
competition in the market for Internet users and for Live Community technology
and services; our ability to successfully manage our growth, our ability to hire
and retain personnel, our ability to protect our proprietary software and
intellectual property and patent, product liability and other litigation. In
addition, potential new government regulations could have an adverse effect on
our ability to target product offerings and attract advertisers and would have a
material adverse effect on our business, results of operations and financial
condition.

ITEM 3.  QUALITATIVE AND
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to
the impact of interest rate changes and changes in the market values of its
investments. To date all of our contracts have been denominated in U.S. dollars
and have not been subject to currency risks.

Interest Rate Risk

Our exposure to
market rate risk for changes in interest rates relate primarily to our
investment portfolio. We have not used derivative financial instruments in its
investment portfolio. We invest our excess cash in debt instruments of the U. S.
Government and its agencies and in high-quality corporate issuers and, by
policy, limits the amount of credit exposure to any one issuer. We protect and
preserve our invested funds by limiting default, market and reinvestment risk.

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

PART II:  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We have filed a
patent infringement suit against Lipstream Networks, Inc. and Lipstream
Networks, Inc., d.b.a. Delaware Lipstream Networks, Inc. in the United States
District Court, Northern District of California, San Jose Division. On October
13, 1998, we were issued United States Patent No. 5,822,523, entitled
"Server-Group Messaging System for Interactive Applications", which is the
subject of the patent infringement lawsuit. On January 26, 2000 we moved to
amend our patent infringement suit against Lipstream Networks, Inc. and
Lipstream Networks, Inc., d.b.a. Delaware Lipstream Networks, Inc. to include
United States Patent No. 6,018,766 entitled "Server-Group Messaging System for
Interactive Applications". Our action alleges that Lipstream infringes these
patents through the sale and licensing of its products. We are seeking a court
order to permanently enjoin Lipstream from further sale or licensing of
infringing products and is also seeking to recover damages, attorneys fees and
costs. Documents have been produced and discovery will progress during the third
quarter of 2000. Trial for this matter has been set for early 2001.

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

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c) Recent Sales of
Unregistered Securities.

We made the following unregistered sales of the
Company's Common Stock in the quarter ended June 30, 2000:

|Transaction
      Date | Amount of
      Securities
      Sold | Underwriter | Consideration
      Received | Persons or
      Class of Person
      to whom
      Securities were
      Sold | Exemption                                                       
|---------------------- | ------------------------------------- | ----------- | ---------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------
|April
      3, 2000    | 4,520,327
      (1)                   | None        | (1)                          | Shareholders
      of
      AudioTalk                                           | Section
      4(2) of
      the Securities
      Act, as amended

(1) Pursuant to the acquisition of AudioTalk on
April 3, 2000, we issued 4,520,327 shares of HearMe Common Stock to the
shareholders of AudioTalk. The resale of these shares has been registered on a
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on May 5, 2000.

(d) Use of Proceeds
from Sales of Registered Securities.

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

|                                                          | Amount Paid
|--------------------------------------------------------- | -----------
|                                                          |            
|Securities and Exchange
      Commission registration fee | $          
|NASD filing fee                                           |            
|NASDAQ National Market listing
      fee                  |            
|Printing and engraving expenses                           |            
|Legal fees and expenses                                   |            
|Accounting fees and expenses                              |            
|Blue Sky qualification fees and
      expenses            |            
|Transfer Agent and Registrar
      fees                   |            
|Miscellaneous fees and expenses                           |            
|                                                          |            
|Total                                                     | $          
|                                                          |            
|                                                          |            
|                                                          |            

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After
deducting the underwriting discounts and commissions and the offering expenses
described above, we received net proceeds from the offering of approximately
$73,900,000.  Prior to using the net proceeds from the initial public
offering of Common Stock, we have invested in interest bearing investment grade
instruments and are funding our general operations. We have used the net proceeds
primarily for working capital and general corporate purposes, including
approximately $6.0 million for funding product development and approximately
$17.0 million for expanding the sales and marketing organization over the last
two quarters. We may use a portion of the net proceeds for further development
of our product lines through acquisitions of products, technologies and
businesses. None of our net proceeds of the offering were paid directly or
indirectly to any director, officer, general partner of HearMe or their
associates, persons owning 10% or more of any class of equity securities of
HearMe or an affiliate of HearMe.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

At
our Annual Meeting of Stockholders of held on May 18, 2000, the following
proposals were adopted by the margins indicated below. There were 24,184,174
shares of Common Stock entitled to vote at the meeting and a total of 20,534,760
shares were present in person or by proxy.

1.     To
elect a Board of Directors to hold office until their successors are elected and
qualified.

|                         |  | Number of
      Shares
|------------------------ |  | ----------------------
|                         |  |                       
|Name of Director Nominee |  | In Favor              
|                         |  |                       
|Paul Matteucci           |  | 20,504,334            
|Brian Apgar              |  | 19,778,156            
|James W. Breyer          |  | 19,094,772            
|David Brown              |  | 20,504,209            
|Douglas Carlston         |  | 20,504,334            
|William McCall           |  | 18,211,742            
|Ruthann Quindlen         |  | 20,370,222            
|                         |  |                       

2.     To authorize an
amendment to the Company's 1999 Stock Incentive Plan to increase the number of
shares of Common Stock reserved for issuance under such plan from 1,200,000
shares to an aggregated of 3,700,000 shares.

|Number of Shares
|----------------
|                
|In Favor        
|                
|13,904,501      

3.     To
authorize an amendment to our 1999 Stock Incentive Plan to increase the number
of shares reserved for issuance on the first day of each of the fiscal years
from 2001 through 2009 equal to the lesser of (1) 1,500,000;
(2) 5% of our outstanding Common Stock on the last day of the immediately
preceding fiscal year; or (3) a lesser number of shares as determined by the
Board of Directors.

Number of SharesIn Favor
      
      Withheld
      
      Abstain13,627,274
      
      2,242,108
      
      84,502




21

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|4. |  | To authorize the appointment of
      PricewaterhouseCoopers, LLP as our independent auditors for the fiscal
      year ending December 31, 2000.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



Number of SharesIn Favor
      
      Withheld
      
      Abstain20,515,081
      
      10,160
      
      9,519




22

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ITEM 5. OTHER INFORMATION

None

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

(a) Exhibits

| | EXHIBIT NUMBER |  | DESCRIPTION                                                                                     
| | -------------- |  | ------------------------------------------------------------------------------------------------
| |                |  |                                                                                                 
| | 10.18          |  | Loan and Security Agreement dated May 2,
      2000 between the Company and Silicon Valley Bank.
| |                |  |                                                                                                 
| | 27.1           |  | Financial Data Schedule                                                                         

(b) Reports on Form 8-K

None

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.

23

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HEARME

|By: /s/
      LINDA R. PALMOR                      |  |  | Date: August 14, 2000
|-------------------------------------------------- |  |  | ---------------------
|                                                   |  |  |                      
|Linda R. Palmor                                    |  |  |                      
|Chief Financial Officer                            |  |  |                      
|(Principal Accounting and
      Financial Officer) |  |  |                      

24

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