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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

OR

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

FOR THE TRANSITION PERIOD FROM  TO
.

COMMISSION FILE NUMBER: 000-25399

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

DELAWARE(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)

94-3217317(IRS EMPLOYER IDENTIFICATION NO.)


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

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

The
number of outstanding shares of the registrant's Common Stock, $0.00005 par value, was 28,645,986 as of August 14, 2001

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HEARME

|Index to Condensed Consolidated Financial Statements                                                        |  | Page
|----------------------------------------------------------------------------------------------------------- |  | ----
|PART I: FINANCIAL INFORMATION                                                                               |  |     
|Item 1. Financial Statements                                                                                |  |     
|Condensed Consolidated Balance SheetsJune 30, 2001 (unaudited) and December 31, 2000                       |  | 3   
|Unaudited Condensed Consolidated Statements of OperationsThree and Six Months Ended June 30, 2001 and 2000 |  | 4   
|Unaudited Condensed Consolidated Statements of Cash FlowsThree and Six Months Ended June 30, 2001 and 2000 |  | 5   
|Notes to Condensed Consolidated Financial Statements                                                        |  | 6   
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations               |  | 11  
|Item 3. Qualitative and Quantitative Disclosures about Market Risk                                          |  | 21  
|PART II: OTHER INFORMATION                                                                                  |  |     
|Item 1. Legal Proceedings                                                                                   |  | 22  
|Item 2. Changes in Securities and Use of Proceeds                                                           |  | 22  
|Item 3. Defaults Upon Senior Securities                                                                     |  | 23  
|Item 4. Submission of Matters to a Vote of Security Holders                                                 |  | 23  
|Item 5. Other Information                                                                                   |  | 23  
|Item 6. Exhibits and Reports on Form 8-K                                                                    |  | 23  
|Signatures                                                                                                  |  | 24  

2

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HEARME        CONDENSED CONSOLIDATED BALANCE SHEETS        (in thousands)

|                                                              |                                                                                            | June 30,
2001                                                       |       | December 31,
2000 |       
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------- | ----- | ----------------- | ------
|
|ASSETS                                                        |                                                                                            |                                                                     |       |                   |       
|Current assets:                                               |                                                                                            |                                                                     |       |                   |       
|                                                              | Cash and cash equivalents                                                                  |                                                                     | $     | 7,145             |       
|                                                              | Short-term investments                                                                     |                                                                     |       | 6,612             |       
|                                                              | Accounts receivable, net of allowance for doubtful accounts of $350 and $686, respectively |                                                                     |       | 2,115             |       
|                                                              | Note receivable                                                                            |                                                                     |       | 4,521             |       
|                                                              | Interest and other receivables                                                             |                                                                     |       | 253               |       
|                                                              | Prepaid expenses and other current assets                                                  |                                                                     |       | 1,667             |       
|                                                              | Net assets of business held for sale                                                       |                                                                     |       |                  |       
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total current assets                                                |       |                   | 22,313
|Restricted cash                                               |                                                                                            |                                                                     | 170   |                   |       
|Property and equipment, net                                   |                                                                                            |                                                                     | 4,096 |                   |       
|Other assets                                                  |                                                                                            |                                                                     | 1,993 |                   |       
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total assets                                                        |       | $                 | 28,572
|                                                              |                                                                                            |                                                                     |       |                   |       
|LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY |                                                                                            |                                                                     |       |                   |       
|Current liabilities:                                          |                                                                                            |                                                                     |       |                   |       
|                                                              | Accounts payable                                                                           |                                                                     | $     | 600               |       
|                                                              | Accrued payroll and related expenses                                                       |                                                                     |       | 2,976             |       
|                                                              | Accrued expenses                                                                           |                                                                     |       | 576               |       
|                                                              | Accrued expenses relating to restructuring                                                 |                                                                     |       | 387               |       
|                                                              | Accrued expenses relating to sale of business                                              |                                                                     |       | 2,348             |       
|                                                              | Deferred revenue                                                                           |                                                                     |       | 750               |       
|                                                              | Current portion of notes payable and capital lease obligations                             |                                                                     |       | 781               |       
|                                                              | Deferred rent                                                                              |                                                                     |       | 126               |       
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total current liabilities                                           |       |                   | 8,544 
|Capital lease obligation, net of current portion              |                                                                                            |                                                                     | 439   |                   |       
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total liabilities                                                   |       |                   | 8,983 
|                                                              |                                                                                            |                                                                     |       |                   |       
|Redeemable common stock                                       |                                                                                            |                                                                     | 1     |                   |       
|Stockholders' equity:                                         |                                                                                            |                                                                     |       |                   |       
|                                                              | Common stock                                                                               |                                                                     |       | 1                 |       
|                                                              | Additional paid-in capital                                                                 |                                                                     |       | 294,104           |       
|                                                              | Deferred stock-based compensation                                                          |                                                                     |       | (1,366            | )     
|                                                              | Notes receivable from stockholders                                                         |                                                                     |       | (2,456            | )     
|                                                              | Accumulated deficit                                                                        |                                                                     |       | (270,702          | )     
|                                                              | Accumulated other comprehensive income                                                     |                                                                     |       | 7                 |       
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total stockholders' equity                                          |       |                   | 19,588
|                                                              |                                                                                            |                                                                     |       |                   |       
|                                                              |                                                                                            | Total liabilities, redeemable common stock and stockholders' equity |       | $                 | 28,572
|                                                              |                                                                                            |                                                                     |       |                   |       

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

3

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

|                                                        |                                                                                                                                                              | Three Months Ended
June 30,    |                                   | Six Months Ended
June 30, |      
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | --------------------------------- | ------------------------- | -----
|
|Net revenues:                                           |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Technology Products                                                                                                                                          |                                | $                                 | 612                       |      
|Cost of net revenues:                                   |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Technology Products                                                                                                                                          |                                |                                   | 381                       |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              | Gross profit                   |                                   |                           | 231  
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Operating expenses:                                     |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Research and development (including retention costs of $314, $0, $314 and $0 and non-cash compensation expense of $127, $196, $260 and $399, respectively)   |                                |                                   | 2,156                     |      
|                                                        | Sales and marketing (including retention costs of $250, $0, $250 and $0 and non-cash compensation expense of $62, $96, $127 and $196, respectively)          |                                |                                   | 1,861                     |      
|                                                        | General and administrative (including retention costs of $774, $0, $774 and $0 and non-cash compensation expense of $121, $187, $248 and $382, respectively) |                                |                                   | 2,258                     |      
|                                                        | In-process research and development                                                                                                                          |                                |                                   |                          |      
|                                                        | Amortization of goodwill and intangible assets                                                                                                               |                                |                                   |                          |      
|                                                        | Restructuring costs                                                                                                                                          |                                |                                   | 701                       |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              | Total operating expenses       |                                   |                           | 6,976
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              |                                | Loss from continuing operations   |                           |      
|                                                        | Interest and other income (expense), net                                                                                                                     |                                |                                   | 276                       |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              |                                | Loss from continuing operations   |                           |      
|                                                        |                                                                                                                                                              |                                | Loss from discontinued operations |                           |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              |                                |                                   | Net loss                  |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Other comprehensive loss:                               |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              | Unrealized loss on investments |                                   |                           | (13  
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|                                                        |                                                                                                                                                              |                                | Comprehensive loss                |                           | $    
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Net loss from continuing operations per common share:   |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Basic and diluted                                                                                                                                            |                                | $                                 | (0.23                     | )    
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Net loss from discontinued operations per common share: |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Basic and diluted                                                                                                                                            |                                | $                                 |                          |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Net loss per common share:                              |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Basic and diluted                                                                                                                                            |                                | $                                 | (0.23                     | )    
|                                                        |                                                                                                                                                              |                                |                                   |                           |      
|Weighted average shares outstanding:                    |                                                                                                                                                              |                                |                                   |                           |      
|                                                        | Basic and diluted                                                                                                                                            |                                |                                   | 28,269                    |      
|                                                        |                                                                                                                                                              |                                |                                   |                           |      

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

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

|                                               |                                                                    | Six Months Ended
June 30,                            |       
|---------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------- | ------
|
|Cash flows from operating activities:          |                                                                    |                                                      |       
|                                               | Cash used in continuing operating activities                       |                                                      | $     
|                                               | Cash used in settlement of expenses of discontinued operations     |                                                      |       
|                                               |                                                                    |                                                      |       
|                                               |                                                                    | Net cash used in operating activities                |       
|                                               |                                                                    |                                                      |       
|Cash flows from investing activities:          |                                                                    |                                                      |       
|                                               | Purchase of investments                                            |                                                      |       
|                                               | Proceeds from sale of investments                                  |                                                      |       
|                                               | Proceeds from disposal of fixed assets                             |                                                      |       
|                                               | Proceeds from sale of discontinued operations                      |                                                      |       
|                                               | Purchase of certificates of deposit                                |                                                      |       
|                                               | Proceeds from redemption of certificates of deposit                |                                                      |       
|                                               | Payments for AudioTalk acquisition, net of cash acquired of $6,371 |                                                      |       
|                                               | Acquisition of property and equipment                              |                                                      |       
|                                               |                                                                    |                                                      |       
|                                               |                                                                    | Net cash provided by investing activities            |       
|                                               |                                                                    |                                                      |       
|Cash flows from financing activities:          |                                                                    |                                                      |       
|                                               | Payments under notes payable and capital lease obligations         |                                                      |       
|                                               | Repurchase of redeemable common stock                              |                                                      |       
|                                               | Proceeds from repayment of stockholder notes                       |                                                      |       
|                                               | Proceeds from term loan                                            |                                                      |       
|                                               | Proceeds from exercise of common stock options and warrants        |                                                      |       
|                                               | Proceeds from employee stock purchase plan                         |                                                      |       
|                                               |                                                                    |                                                      |       
|                                               |                                                                    | Net cash (used in) provided by financing activities  |       
|                                               |                                                                    |                                                      |       
|                                               |                                                                    | Net (decrease) increase in cash and cash equivalents |       
|Cash and cash equivalents, beginning of period |                                                                    |                                                      | 22,096
|                                               |                                                                    |                                                      |       
|Cash and cash equivalents, end of period       |                                                                    | $                                                    | 7,145 
|                                               |                                                                    |                                                      |       

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

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

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 the rules of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the
financial statements as of June 30, 2001 and for the three and six months ended June 30, 2001 and 2000 have been included.

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

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

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

On
July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets (See
Note 7). The accompanying unaudited financial statements do not include any adjustments to reflect the effects on the recoverability and
classification of assets or the amounts and classification of liabilities due to the Company's decision, subsequent to June 30, 2001, to cease operations.

Net Loss Per Share

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

Comprehensive Income

Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. In the three-month period
ended June 30, 2001 and 2000, the Company had unrealized losses on short-term investments of $13,000 and $638,000, respectively, resulting in a total comprehensive loss of
$6,482,000 and $24,298,000 in the respective periods. In the six-month period ended June 30, 2001 and 2000, the Company had unrealized losses on short-term investments
of $8,000 and $621,000, respectively, resulting in a total comprehensive loss of $11,736,000 and $35,726,000 in the respective periods.

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Revenue Recognition

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

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

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

Impairment Of Long Lived Assets

During the six months ended June 30, 2001, the Company performed an assessment of the carrying value of some of its long-term
investments. Based upon this review a write down for "other than temporary impairment" of $760,000 was recorded within interest and other income (expense), net. Any recovery or gain related to these
investments will be recognized when it is realized or can be substantiated through other means.

2. Discontinued Operations

On December 13, 2000, the Company signed a definitive agreement to sell its Live Communities business unit ("Live Communities"), including the
Mplayer.com voice-enabled Internet games community and affiliated advertising network, to GameSpy Industries, Inc, an online gaming company. The transaction was completed on January 19, 2001,
and the Company received $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock valued at an aggregate of $1,400,000. Subsequent to
June 30, 2001, GameSpy has not made payment on the note receivable, which was due on July 19, 2001. The Company sent a demand for payment to GameSpy on July 20, 2001.

Prior
periods' financial statements have been restated to reflect the discontinuation of Live Communities, and the anticipated loss on disposition was recorded in 2000. The $7,510,000
loss on disposition of discontinued operations consists primarily of accrued expenses totaling $8,225,000 less the gain on the sale of $490,000 and the revenue generated from January 1, 2001
through January 19, 2001 of $225,000.

7

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3. Retention and Restructuring Costs

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

Concurrent
with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating
$2.3 million. In addition, notes receivable from certain employees in connection with previous stock option exercises, together with associated interest and tax liabilities, aggregating
$2.4 million, would be forgiven. The employees are required to stay through either October 31 or November 30, 2001 in order to earn the bonuses and have their notes forgiven,
though these payments would be accelerated assuming the involuntary termination of the employees. As of June 30, 2001, the Company has accrued approximately of $1.3 million relating to
the portion of the retention bonuses earned and the notes receivable forgiven during the period. As discussed in Note 8, the Company announced its decision, subsequent to June 30, 2001,
to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets, which will accelerate the payment of retention bonuses under the retention agreements and
cause the remaining outstanding notes receivable to be forgiven.

4. Redemption and Repurchase of Common Stock

As part of the Resounding acquisition that was completed in 1999, Common Stock Put Rights were granted to Resounding's employees to enable them to sell their
pro-rata portion of 200,000 shares of the Company's common stock back to the Company at a price of $10.00 per share. Such put rights expire in October 2001. During the
six-month period ended June 30, 2001, put rights for a total of 193,414 shares were exercised, whereby the Company repurchased the shares for a total of approximately $1,934,000. As
of June 30, 2001, put rights for 128 shares remain outstanding.

On
March 30, 2001, the Company entered into an agreement with one of its customers, which gave the customer the option to make payments on their account by transferring to the
Company all shares of HearMe common stock currently owned by the customer. For purposes of this transfer, such shares were valued at the closing price on the date of the agreement, which was $0.50 per
share. On April 4, 2001, the customer elected to exercise this option and transferred 313,551 shares of HearMe common stock to the Company at a value of $156,776 as part of the full settlement
of the outstanding balance.

5. Term Loan

In May 2000, the Company entered into a term loan with a financial institution whereby amounts borrowed under this agreement are collateralized by
substantially all the Company's assets, bear interest at the prime rate plus 1 percent and are scheduled to mature in September 2003. During the

8

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six months ended June 30, 2001, $1.8 million of this loan was repaid. The outstanding balance of this loan as of June 30, 2001 is $0.8 million.

6. Commitments and Contingencies

On May 30, 2001, eFront Media, Inc. filed a complaint against the Company and GameSpy Industries, Inc. in California Superior Court in
Orange County alleging breach of written contract and seeking damages of approximately $820,000. The Company was served with a copy of the complaint on June 16, 2001. The contract in question
was assigned to GameSpy Industries, Inc. as part of the sale of
the Company's Live Communities business unit, which closed on January 19, 2001. The complaint alleges damages for failure to make payments under the contract after the agreement was assigned to
GameSpy Industries, Inc. While the Company does not believe that it has breached the contract in question, it has tendered the defense of the matter to GameSpy Industries, Inc. under its
indemnity obligations to the Company pursuant to the terms of the Asset Purchase Agreement for the sale of the Live Communities business. GameSpy Industries, Inc. has agreed to defend the
Company against this claim and on June 29, 2001, counsel for the Company and GameSpy Industries, Inc. filed an answer to the complaint denying eFront Media Inc.'s allegations.
However, litigation is subject to inherent uncertainties and thus, there can be no assurance that this claim will be resolved favorably by the Company or that they will not have a material adverse
affect on the Company's consolidated financial position, results of operations or cash flows.

On
June 29, 2001, the Company terminated the lease of one of its office facilities. The remaining operating lease agreements expire through 2005.

7. Recent Accounting Pronouncements

FAS 141

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS
No. 141"), "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS No. 141 will not have a significant impact on its financial statements.

FAS 142

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after
March 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company believes that the adoption of SFAS No. 142 will not have a significant impact on its
financial statements.

9

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8. Subsequent Events

On July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its
assets. The Board of Directors and Management have been engaged in a concerted effort for the past several months to explore various strategic alternatives for the future of the Company,
including its sale. The Company contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or
acquire the Company. The Board of Directors has concluded that an orderly wind down of the Company is the course of action that most likely offers the highest return to stockholders and that to
continue operations of the business at this time would reduce assets and cash that may ultimately be available to be returned to the stockholders. The Company intends to develop and present to the
Board of Directors and stockholders a plan for the orderly wind down of the business, unless it receives a credible offer to purchase the Company. However, no
assurance can be given that the Company will be successful in pursuing a sale of its assets, or that an orderly winding-down of the Company's operations would actually increase stockholder
value or result in any remaining capital for distribution to stockholders. Moreover, the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its
assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets
in time to generate meaningful value. We expect to recognize little or no revenue following this announcement, other than revenue recognized from the licensing of source code and the sale of any
assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities
leases and business agreements with third parties. Estimated future costs of retention and severance resulting from the wind down are expected to be $4 million to $4.5 million.

On
July 10, 2001, the Company received a Nasdaq Staff Determination letter indicating that it had failed to comply with the minimum bid price requirement for continued listing
on the Nasdaq National Market (Nasdaq Marketplace Rule 4450 (a)(5)). In response, HearMe requested a hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff
Determination. As part of this effort, HearMe asked the Panel to review the Staff Determination based on the Company's plan to achieve compliance with the minimum bid listing requirement through a
10-for-1 reverse stock split that the Company had intended to submit to a vote of the stockholders at its Annual Meeting scheduled to be held on July 31, 2001. On
July 31, 2001, the Annual Meeting was adjourned until August 30, 2001 due to the Company's July 30, 2001 announcement that it intends to pursue an orderly wind down and cessation
of the Company's business operations and sale of its assets, as described above.

On
August 13, 2001, the Company announced that it was cancelling its plans concerning a 10-for-1 reverse stock split in light of its decision to pursue an orderly wind down and
cessation of the Company's business operations. In addition, the Company has withdrawn its appeal of the Nasdaq staff's determination that the Company has failed to comply with the minimum bid price
required for continued listing on the Nasdaq National Market. As a result, the Company's common stock will be delisted from the Nasdaq National Market.

On
July 30, 2001, the Company received notification from its bank that, based upon its June 30, 2001 financial statements, it was in violation of the Minimum Quick Ratio
and Minimum Revenue covenants of its loan agreement and due to the announcement of the wind down of the Company, it is in default of this agreement. As a result, the $0.8 million due under such
agreements became immediately due and payable. On August 2, 2001, the Company paid off the $0.8 million balance on its loan agreement.

10

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

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

Overview

HearMe develops and licenses next generation VoIP application technologies that deliver increased productivity and flexibility in communication by integrating
the capabilities of the telephone, mobile devices and the Internet. We were incorporated and commenced operations in January 1995. From inception through September 1996, our activities
primarily consisted of recruiting employees and raising capital, performing product and technology development, engaging in marketing activities and negotiating strategic relationships. In
April 1996, we commenced licensing of our real-time interactive voice-enabled technology.

During
the period from January 1995 to March 31, 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 sale of common stock through an initial public offering. A portion of the proceeds from this
offering is being used to finance research and development and to fund sales and marketing activities.

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

On
March 8, 2000, HearMe entered into a merger agreement (the "Merger Agreement") with AudioTalk. 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 merger was accounted for under the purchase method of accounting. The merger was consummated on
April 3, 2000 and the results of AudioTalk have been included with the results of the Company from the date of acquisition. The purchase price of approximately $124,100,000 included
approximately $107,900,000 of stock, issued at fair value (fair value being determined as the average price of the HearMe stock for the period three days before and after the announcement of the
acquisition), $5,700,000 for the fair value exchange of AudioTalk stock options with Company options (determined using the Black-Scholes option pricing model), $10,000,000 in cash and estimated
acquisition costs of $500,000.

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

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the consolidated financial statements have been restated to present the results of the Live Communities business as discontinued operations since inception.

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

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

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

On
July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. The Board of
Directors and Management have been engaged in a concerted effort for the past several months to explore various strategic alternatives for the future of the Company, including its sale. The
Company contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The
Board of Directors has concluded that an orderly wind down of the Company is the course of action that most likely offers the highest return to stockholders and that to continue operations of the
business at this time would reduce assets and cash that may ultimately be returned to the stockholders. The Company intends to develop and present to the Board of Directors and stockholders a plan for
the orderly wind down of the business, unless it receives a credible offer to purchase the Company. However, no assurance can be given that the Company will be successful in pursuing a sale of its
assets, or that an orderly winding-down of the Company's operations would actually increase stockholder value or result in any remaining capital for distribution to stockholders. Moreover,
the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its
intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. We expect to recognize little or no
revenue following this announcement, other than revenue recognized from the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors. These
include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties. Estimated future costs of retention and severance resulting
from the wind down are expected to be $4 million to $4.5 million.

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On July 10, 2001, the Company received a Nasdaq Staff Determination letter indicating that it had failed to comply with the minimum bid price requirement for continued listing
on the Nasdaq National Market (Nasdaq Marketplace Rule 4450 (a)(5)). In response, HearMe has requested a hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff
Determination. As part of this effort, HearMe has asked the Panel to review the Staff Determination based on the Company's plan to achieve compliance with the minimum bid listing requirement through a
10-for-1 reverse stock split that the Company intends to submit to a vote of the stockholders at its Annual Meeting originally scheduled to be held on July 31, 2001.
Subsequently, the Annual Meeting was adjourned until August 30, 2001 due to the Company's July 30, 2001 announcement that it intends to pursue an orderly wind down and cessation of the
Company's business operations and sale of its assets, as described above.

On
August 13, 2001, the Company announced that it was cancelling its plans concerning a 10-for-1 reverse stock split in light of its decision to pursue an orderly wind down and
cessation of the
Company's business operations. In addition, the Company has withdrawn its appeal of the Nasdaq staff's determination that the Company has failed to comply with the minimum bid price required for
continued listing on the Nasdaq National Market. As a result, the Company's common stock will be delisted from the Nasdaq National Market.

Results of Operations



Net revenues.Net revenues decreased by 86% from $4.4 million for the period ended June 30, 2000 to
$0.6 million for the period ended June 30, 2001. The majority of our revenues were derived from licensing our VoiceSERVER platform, maintenance fees recognized on these and prior
licensing deals and licensing of discontinued product lines. During the quarter ended June 30, 2001, we closed deals with two new customers. With the Company's announced plans to wind down
normal business operations, we cannot estimate the level of our revenues in future periods.

Cost of net revenues.Our cost of net revenues was $0.4 million for the period ended June 30, 2001 as
compared to $0.7 million for the period ended June 30, 2000. Cost of net revenues consists primarily of network operating expenses in conjunction with providing hosting services to
certain customers. The decrease in cost of revenues was attributable to the lower server and bandwith costs resulting from the Company's move towards licensing our software to customers and
third-party service providers who then host customers requiring support services. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these
costs in future periods. Despite the 43% decrease in the cost of net revenues for the period relative to the prior year period, the gross margin for the period decreased to 38% from 85% in the prior
year period as a result of the significantly lower revenues recognized in the three months ended June 30, 2001.

Research and development.Research and development expenses were $2.2 million for the period ended
June 30, 2001 compared to $2.6 million for the period ended June 30, 2000. Research and development expenses consist primarily of employee compensation relating to developing and
enhancing the features and functionality of HearMe's VoIP technology. The decrease in research and development expenses was primarily due to a decrease in salary expense in 2001 as we reduced the size
of the engineering team as part of the restructuring effort in April 2001. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these
costs in future periods. Costs resulting from retention agreements will be accelerated by the wind down.

Sales and marketing.Sales and marketing expenses were $1.9 million for the period ended June 30, 2001
compared to $6.9 million for the period ended June 30, 2000. Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, compensation and
employee-related expenses, sales commission and travel costs. Sales and marketing expenses decreased

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in the period ended June 30, 2001 as compared to the period ended June 30, 2000 primarily due to the outbound advertising and marketing campaigns that were developed and run during the
early part of Fiscal 2000 to promote our technology products. The absolute decrease in sales and marketing expenses was due to the discontinuation of the branding campaign in Fiscal 2000 and to a
decrease in headcount in product marketing. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these costs in future periods. Costs resulting
from retention agreements will be accelerated by the wind down.

General and administrative.General and administrative expenses were $2.3 million for the period ended
June 30, 2001 compared to $3.3 million for the period ended June 30, 2000. General and administrative costs decreased primarily as a result of a lower headcount and lower fees for
professional services as a result of the restructuring to a smaller organization in April 2001. With the Company's announced plans to wind down normal business operations, we cannot estimate
the level of these costs in future periods. Costs resulting from retention agreements will be accelerated by the wind down.

Amortization of intangibles.As part of the AudioTalk and Resounding acquisitions, we recorded amortization of
intangible assets consisting primarily of goodwill in the amount of $12.6 million for the period ended June 30, 2000, together with the write-off of in-process
research and development relating to the AudioTalk acquisition of $550,000. There was no amortization of goodwill or intangibles during the period ended June 30, 2001. During the fourth quarter
ended December 31, 2000, we performed an impairment assessment of the identifiable intangibles and enterprise level goodwill recorded upon the acquisitions of AudioTalk and Resounding, which we
completed in April 2000 and October 1999, respectively. Our assessment was performed primarily due to the significant decline in our stock price since the date the shares issued in each
acquisition were valued. Goodwill significantly exceeded our market capitalization prior to the impairment charge, and the overall decline in our industry growth rates indicated that this trend may
continue for an indefinite period. As a result of our review, we recorded a $97.1 million impairment charge, net of the related deferred tax liability, to write off our remaining enterprise
level goodwill and intangible assets. The charge was determined based upon our estimated discounted cash flows using a discount rate of 25%. The assumptions supporting our cash flows (including the
discount rate) were determined using our best estimates.

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

Loss from discontinued operations.On December 13, 2000, the Company signed a definitive agreement to sell its
Live Communities business unit, including the Mplayer.com voice-enabled Internet games community and affiliated advertising network to GameSpy Industries, Inc ("GameSpy"), an online games company. The
transaction was completed on January19, 2001, pursuant to which the Company received $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common
stock valued at an aggregate of $1,400,000. Prior periods' financial statements have been restated to reflect the discontinuation of the Live Communities business unit.

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

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Net revenues.Net revenues decreased by 55% from $7.3 million for the six month period ended June 30,
2000 to $3.3 million for the six month period ended June 30, 2001. The majority of our revenues were derived from licensing our VoiceSERVER platform and maintenance fees recognized on
these and prior licensing deals. During the six months ended June 30, 2001, we closed deals with 12 new customers.

Cost of net revenues.Our cost of net revenues was $0.9 million for the six month period ended June 30,
2001 as compared to $0.9 million for the six month period ended June 30, 2000. Cost of net revenues consists primarily of network operating expenses in conjunction with providing hosting
to certain customers. The flattening in cost of revenues relative to increase in customer base was attributable to the Company's move towards licensing our software to customers and third-party
service providers who then host customers requiring support services. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these costs in future
periods.

Research and development.Research and development expenses were $5.0 million for the six month period ended
June 30, 2001 compared to $4.8 million for the six month period ended June 30, 2000.
Research and development expenses consist primarily of employee compensation relating to developing and enhancing the features and functionality of HearMe's VoIP technology. The increase in research
and development expenses was primarily due to accrued retention bonuses for remaining employees, partially offset by a decrease in salary expense in 2001 as we reduced the size of the engineering team
as part of the restructuring effort in April 2001. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these costs in future periods.
Costs resulting from retention agreements will be accelerated by the wind down.

Sales and marketing.Sales and marketing expenses were $4.4 million for the six month period ended
June 30, 2001 compared to $11.2 million for the six month period ended June 30, 2000. Sales and marketing expenses consist primarily of advertising and other marketing-related
expenses, compensation and employee-related expenses, sales commission and travel costs. Sales and marketing expenses decreased as a percentage of net revenues in the six month period ended
June 30, 2001 as compared to the six month period ended June 30, 2000 primarily due to the outbound advertising and marketing campaigns that were developed and ran during the early part
of Fiscal 2000 to promote our technology products. The absolute decrease in sales and marketing expenses was due to the discontinuation of the branding campaign in Fiscal 2000 and to a decrease in
headcount in product marketing. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these costs in future periods. Costs resulting from
retention agreements will be accelerated by the wind down.

General and administrative.General and administrative expenses were $4.0 million for the six month period ended
June 30, 2001 compared to $6.3 million for the six month period ended June 30, 2000. General and administrative costs decreased primarily as a result of a lower headcount and
lower fees for professional services as a result of the restructuring to a smaller organization in April 2001. With the Company's announced plans to wind down normal business operations, we
cannot estimate the level of these costs in future periods. Costs resulting from retention agreements will be accelerated by the wind down.

Amortization of intangibles.As part of the AudioTalk and Resounding acquisitions, we recorded amortization of
intangible assets consisting primarily of goodwill in the amount of $16.0 million for the period ended June 30, 2000, together with the write-off of in-process
research and development relating to the AudioTalk acquisition of $550,000. There was no amortization of goodwill or intangibles during the period ended June 30, 2001. During the fourth quarter
ended December 31, 2000, we performed an impairment assessment of the identifiable intangibles and enterprise level goodwill recorded upon the

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acquisitions of AudioTalk and Resounding, which we completed in April 2000 and October 1999, respectively. Our assessment was performed primarily due to the significant decline in our
stock price since the date the shares issued in each acquisition were valued. Goodwill significantly exceeded our market capitalization prior to the impairment charge, and the overall decline in our
industry growth rates indicated that this trend may continue for an indefinite period. As a result of our review, we recorded a $97.1 million impairment charge, net of the related deferred tax
liability, to write off our remaining enterprise level goodwill and intangible assets. The charge was determined based upon our
estimated discounted cash flows using a discount rate of 25%. The assumptions supporting our cash flows (including the discount rate) were determined using our best estimates.

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

Loss from discontinued operations.On December 13, 2000, the Company signed a definitive agreement to sell its
Live Communities business unit, including the Mplayer.com voice-enabled Internet games community and affiliated advertising network to GameSpy Industries, Inc ("GameSpy"), an online games company. The
transaction was completed on January19, 2001, pursuant to which the Company received $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common
stock valued at an aggregate of $1,400,000. Prior periods' financial statements have been restated to reflect the discontinuation of the Live Communities business unit.

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

Liquidity and Capital Resources

HearMe invests excess cash in debt instruments that are highly liquid, of high-quality investment grade and predominantly have maturities of less
than one year with the objective of making such funds readily available for operating purposes. At June 30, 2001, the Company had cash and cash equivalents and investments in marketable debt
securities totaling $13.8 million compared to $30.5 million at December 31, 2000.

For
the six month period ended June 30, 2001, net cash used in operating activities was primarily a result of funding ongoing operations of our research and development and
sales and marketing efforts and the payment of liabilities of $4.9 million incurred by the divestiture of the Live Communities business unit. For the period ended June 30, 2000, net cash
used in operating activities was primarily a result of funding ongoing operations.

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Net
cash provided by investing activities was $2.1 million for the six month period ended June 30, 2001 compared to $23.2 million for the period ended
June 30, 2000. Amounts provided in 2001 were primarily from the net sale of short-term investments offset by capital expenditures, which have generally been comprised of purchases
of computer hardware and software. Amounts provided in 2000 were primarily from the net sale of short-term investments offset by payments for the AudioTalk acquisition and purchases of
property and capital equipment.

Net
cash used in financing activities for the six month period ended June 30, 2001 was $3.7 million as compared to net cash provided by financing activities for the
period ended June 30, 2000 of $1.9 million. The major use of cash in financing activities during the period ended June 30, 2001 was for payments on the term loan of
$1.8 million as a result of the sale of Live Communities to GameSpy and $1.9 million for the repurchase of redeemable common stock subject to put rights.

In
May 2000, the Company entered into a term loan with a financial institution and initially drew down funds of $2.9 million under this agreement. Amounts borrowed under
this agreement are collateralized by substantially all of its assets, bear interest at the prime rate plus 1 percent and are scheduled to mature in September 2003. $1.8 million of
this loan was repaid during the period ended June 30, 2001. On July 30, 2001, the Company received notification that, based upon its June 30, 2001 financial statements, it was in
violation of the Minimum Quick Ratio and Minimum Revenue covenants of its loan agreement and due to the wind down of the Company, it is in default of this agreement. As a result, the remaining
$0.8 million due under such agreements became immediately due and payable. On August 2, 2001, the Company paid off the $0.8 million balance on the loan agreement.

On
January 19, 2001, we completed the sale of our Live Communities business unit, including the Mplayer.com voice-enabled Internet site and the affiliated advertising network,
to GameSpy Industries. Consideration for the sale consisted of $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock. GameSpy has not
made payment on the note receivable, which was due on July 19, 2001. The Company sent a demand for payment to GameSpy on July 20, 2001.

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

Concurrent
with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating
$2.3 million. In addition, notes receivable from certain employees in connection with previous stock exercises, together with associated interest and tax liabilities, aggregating
$2.4 million, would be forgiven. The employees are required to stay through either October 31 or November 30, 2001 in order to earn the bonuses and have their notes forgiven,
though these payments would be accelerated assuming the involuntary termination of the employee. As of June 30, 2001, the Company has accrued approximately $1.3 million relating to the
portion of the retention bonuses earned and the notes receivable forgiven during the period. As discussed in Note 8, the Company announced its decision, subsequent to June 30, 2001, to
pursue an orderly wind down and cessation of the Company's business operations and sale of its assets, which will accelerate the payment of retention bonuses under the retention agreements and cause
the remaining outstanding notes receivable to be forgiven.

The
Company has incurred significant losses since inception. In the period ended June 30, 2001, the Company incurred losses from continuing operations of $6.5 million
and used $8.4 million of cash

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in its operating activities. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these losses in future periods. Management anticipates that
existing sources of liquidity and anticipated revenue will not be sufficient to satisfy projected working capital and other cash requirements through the second quarter of Fiscal 2002.

Certain Business Risks

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

On
July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. The Board of
Directors and Management have been engaged in a concerted effort for the past several months to explore various strategic alternatives for the future of the Company, including its sale. The
Company contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The
Board of Directors has concluded that the orderly wind down of the Company is the course of action that most likely offers the highest return to stockholders and that to continue operations of the
business at this time would reduce assets and cash that may ultimately be returned to the stockholders. The Company intends to develop and present to the Board of Directors and stockholders a plan for
the orderly wind down of the business, unless it receives a credible offer to purchase the Company. However, no assurance can be given that the Company will be successful in pursuing a sale of its
assets, or that an orderly winding-down of the Company's operations would actually increase stockholder value or result in any
remaining capital for distribution to stockholders. Moreover, the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore,
because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate
meaningful value. We expect to recognize little or no revenue following this announcement, other than revenue recognized from the licensing of source code and the sale of any assets. The Company may
not be able to negotiate a settlement of all of its obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities leases and business
agreements with third parties. Estimated future costs of retention and severance resulting from the wind down are expected to be $4 million to $4.5 million.

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

If
the Company's wind down is approved by the Board of Directors and the stockholders, a Certificate of Dissolution will be filed with the State of Delaware dissolving the Company.
Pursuant to the Delaware General Corporation Law, the Company will continue to exist for three years after the dissolution becomes effective or for such longer period as the Delaware Court of
Chancery shall direct, for the purpose of prosecuting and defending suits against it and enabling the Company gradually to close its business, to dispose of its property, to discharge its liabilities
and to distribute to its stockholders any remaining assets. The Company will establish a contingency reserve for payment of its expenses and liabilities during this three-year period.
Under the Delaware General Corporate Law, in the event the contingency reserve created by the Company is inadequate for payment of its expenses and liabilities during this three-year
period, each stockholder could be held liable for payment to the Company's creditors of such stockholder's pro rata share of amounts owed to creditors in excess of the contingency reserve. The
liability of any stockholder would be limited to the amounts previously received by such stockholder from the Company (and from any liquidating trust or trusts) as distributions. Accordingly, in such
event a stockholder could be required to return all such distributions previously made to such stockholder. In such event, a stockholder could receive nothing from the

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Company. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if
the stockholder's repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. There can be no assurance that the contingency reserve established by the
Company will be adequate to cover any expenses and liabilities.

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

The Company must affix a final record date on which it shall determine the proportionate interest of each stockholder and after which it will be unable to
record transfers of common stock on the Company's books.

The
Company intends to close its stock transfer books and discontinue recording transfers of Common Stock at the close of business on the final record date to be fixed by the Board of
Directors for filing the Certificate of Dissolution after approval by the Board of Directors and the Company's stockholders. The date of the special meeting of stockholders seeking their approval of
the certificate of dissolution has not yet been set. Thereafter, certificates representing the Common Stock will not be assignable or transferable on the books of the Company except by will, intestate
succession or operation of law. The proportionate interests of all of the stockholders of the Company will be fixed on the basis of their respective stock holdings at the close of business on the
final record date, and, after the final record date, any distributions made by the Company shall be made solely to the stockholders of record at the close of business on the final record date, except
as may be necessary to reflect subsequent transfers recorded on the books of the Company as a result of any assignments by will, intestate succession or operation of law.

The Company's common stock will be delisted from the Nasdaq Stock Market.

The Company has received a delisting notice from the Nasdaq Stock Market due to its low trading price per share. The Company expects that it will be unable to
satisfy the requirements for continued listing of its Common Stock on the Nasdaq National Market. Moreover, rules of the Nasdaq Stock Market require that companies listed on the Nasdaq National Market
continue to have an operating business. If the Company completes its plans to conclude its business activities, it will no longer have an operating business. In addition, as the Company distributes
cash to its stockholders, certain other listing criteria may not be met. The Company expects that Nasdaq will delist its common stock from Nasdaq stock market, although the date of delisting has not
been determined. When Nasdaq delists the Company's Common Stock from the Nasdaq National Market, the ability of stockholders to buy and sell shares may be materially impaired.

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

Although
the Board of Directors has not established a firm timetable for distributions to stockholders if the Company's wind down is approved by the Board of Directors and
stockholders, the Board of Directors intends, subject to contingencies inherent in winding up the Company's business, to make such distributions as promptly as practicable. The liquidation is expected
to be concluded prior to the third anniversary of the filing of the Certificate of Dissolution in Delaware by a final liquidating
distribution either directly to the stockholders or to a liquidating trust. The proportionate interests of all of the stockholders of the Company will be fixed on the basis of their respective stock
holdings at

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the close of business on the final record date, as determined by the Board of Directors, and after such date, any distributions made by the Company shall be made solely to stockholders of record on
the close of business on the final record date, except to reflect permitted transfers. The Board of Directors is, however, currently unable to predict the precise nature, amount or timing of this
distribution or any other distributions pursuant to the Company's wind down, or whether the wind down will be approved by the Company's stockholders. The actual nature, amount and timing of all
distributions will be determined by the Board of Directors, in its sole discretion, and will depend in part upon the Company's ability to convert its remaining assets into cash.

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

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

No
sale of assets has been effected pursuant to the Company's intended wind down and no agreement to sell any of the assets of the Company has been reached. However, agreements for
the sale of assets may be entered into prior to stockholder approval of the Company's wind down and, if entered into, may be contingent upon the approval of the wind down. Stockholder approval of the
Company's wind down, if obtained, will constitute approval of any such agreements and sales. Sales of the Company's assets will be made on such terms as are approved by the Board of Directors and may
be conducted by competitive bidding, public sales or privately negotiated sales. The prices at which the Company will be able to sell its various assets will depend largely on factors beyond the
Company's control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets, United States and foreign regulatory
approvals, public market perceptions, and limitations on transferability of certain assets. In addition, the Company may not obtain as high a price for a particular asset as it might secure if the
Company were not in liquidation.

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

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

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

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

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

Whether
or not the Company's wind down is approved, we have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as
amended, even though compliance with such reporting requirements is economically burdensome. If the Company's wind down is approved, in order to curtail expenses, we will, after filing our Certificate
of Dissolution, seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act. We anticipate that, if such relief is granted, we would continue to file
current reports on Form 8-K to disclose material events relating to our liquidation and dissolution along with any other reports that the Securities and Exchange Commission might
require.

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

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

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company has not used
derivative financial instruments in its investment portfolio. The Company invests its excess cash in debt instruments of the U. S. Government and its agencies and in high-quality corporate
issuers and, by policy, limit the amount of credit exposure to any one issuer. HearMe protects and preserves its invested funds by limiting default, market and reinvestment risk.

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

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 30, 2001, eFront Media, Inc. filed a complaint against the Company and GameSpy Industries, Inc. in California Superior Court in
Orange County alleging breach of written contract and seeking damages of approximately $820,000. The Company was served with a copy of the complaint on June 16, 2001. The contract in question
was assigned to GameSpy Industries, Inc. as part of the sale of the Company's Live Communities business unit, which closed on January 19, 2001. The complaint alleges damages for failure
to make payments under the contract after the agreement was assigned to GameSpy Industries, Inc. While the Company does not believe that it has breached the contract in question, it has
tendered the defense of the matter to GameSpy Industries, Inc. under its indemnity obligations to the Company pursuant to the terms of the Asset Purchase Agreement for the sale of the Live
Communities business. GameSpy Industries, Inc. has agreed to defend the Company against this claim and on June 29, 2001, counsel for the Company and GameSpy Industries, Inc. filed
an answer to the complaint denying eFront Media Inc.'s allegations.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None



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

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

|                                                    |  | Amount 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                                               |  | $          
|                                                    |  |            

After
deducting the underwriting discounts and commissions and the offering expenses described above, we received net proceeds from the offering of approximately $73,900,000. As of
June 30, 2001, $13.8 million of the net proceeds were invested in cash and cash equivalents and short term investments and approximately $60.1 million has been used for working
capital and general corporate purposes, including the funding of product development and expansion of its sales and marketing organization. None of our net proceeds of the offering were paid directly
or indirectly to any director, officer, general partner of the Company or their associates, persons owning 10% or more of any class of equity securities of the Company or an affiliate of the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

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



| |  | 10.19 |  | Termination of Lease Agreement dated as of June 29, 2001 by and between Martin CBP Associates, L.P. and HearMe.
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------



On
August 1, 2001, the Company filed a report on Form 8-K with respect to Item 5 thereunder.

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

|HEARME | 
|------ | 
|By:    | 

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